Analysis of Project Risk

Types of Risk
Project Specific Risk
Cash flows not as per expectation. Estimation Error, poor management, poor
execution, over run on time and cost.
Competitive Risk
Revenues from sales and market share affected by unexpected competition in
the market.
Market Risk
Unexpected changes in macro economic factors like GDP growth rate, interest
rate fluctuation, inflation rate, political risk etc. that affects all projects alike.
Industry Specific Risk
Government policy towards the industry, regulatory environment , demand for products,
technological changes etc.
Measure of Risk
Risk refers to variability of expected returns
Important measures used are
Range
Standard Deviation
Coefficient of variation
Semi variance
Perspectives on Risk
Stand alone risk
Risk of a project when viewed in isolation.
Firm Risk ( Corporate Risk)
Contribution of the project to the total risk of the firm.
Market Risk or Systematic Risk
Risk of a project when viewed from the point of view of a diversified investor.
Tools for Risk Analysis
o Sensitivity Analysis,
o Break Even analysis,
o Simulation,
o Decision Tree Analysis,
o Scenario Analysis
Sensitivity Analysis
This involves evaluating the impact on cash flows or NPV if certain key variables are
changed from those values taken at the time of project evaluation The sensitivity of
returns from the project for small percentage changes in key variables allows the
managers to get good idea about Risk Profile of the Project. Key variables may be
Sales Qty, Price, RM cost, project Cost, market growth etc.
Break - even analysis
Break even analysis helps to know how much should be produced and sold at a minimum to
ensure that the project does not lose money.
The minimum quantity at which loss is avoided is called break even point.
May be defined in accounting and financial terms.
Accounting break even analysis
Break even level of sales will be:
FC+Depreciation / Contribution margin ratio.
Financial break even analysis
Focus is on NPV.
At what level of sales will the project have a zero NPV
Simulation Analysis
It may be used for developing the probability profile of a criterion of merit by randomly combining
values of variables which have a bearing on chosen criteria. Simulation consists of one or more trial runs
of a process to learn that its possible outcomes using a model that is as representative as is necessary
for the simulation of the realistic.
Procedure
1. Model the project.
2. Specify the values of the parameters and the probability distributions of the exogenous
variables.
3. Select a value, at random, from the probability distributions of each exogenous variables.
4. Determine the NPV corresponding to the randomly generated values of the exogenous
variables and pre-specified parameter values.
5. Repeat steps (3) and (4) a no. of times to get a large no. of simulated NPVs.
6. Plot the frequency distribution of the NPV.
Decision Tree analysis
A decision problem can be represented with the help of diagram in the form of a tree , for clear
and systematic idea. The alternative courses of action, states of nature , likely outcomes etc. are
graphically/ diagrammatically depicted as if they are branches and sub branches of a horizontal
tree. Hence this is known as a Decision Tree Diagram
The Decision Tree consists of a net work of nodes, probability estimates, pay offs. There are two
types of Nodes viz. Decision Nodes represented by a small square and Chance Nodes
represented by a small circle. Alternative courses of action originate from Decision Node in the
main branch.
At the terminal point of the decision node , chance node emanates as sub branches. Probability
and outcomes are shown along the sub branches. Each sub branch can form branch again so
that we can build a tree like structure representing all possible outcomes
Steps in Decision Tree Analysis
Identifying the problem and alternatives
Delineating the decision tree
Specifying probabilities and monetary outcomes
Evaluating various decision alternatives
Scenario Analysis
In sensitivity analysis, typically one variable is varied at a time. If variables are interrelated, as they are
most likely to be, it will be helpful to look at some plausible scenarios, each scenario representing a
consistent combination of variables
Procedure
Select the factor around which scenarios will be built. The factor chosen must be the largest
source of uncertainty for the success of the project.
Estimate the values of each of the variables in investment analysis for each scenario.
Calculate the NPV and/or IRR under each scenario.
Risk adjusted discount rate
It involves increasing cut-off rate or discount rate to reflect project risk by a certain % on account of risk
while calculating NPV. The projects which are more risky and which have greater variability in expected
returns should be discounted at a higher rate as compared to the projects which are less risky and are
expected to have lesser variability in returns and vice versa.
CLOSURE OF CONTRACTS
After the completion of project, the next step would be to finalise the closure of contract so as to make
both the parties ie employer and the contractor legally free. There are two types of closure physical
closure and financial closure.
Physical closure means completion of work in the contract as per the contractual terms.. Financial
closure means total closure ie end of the contractors liabilities.
NEED FOR CLOSURE OF CONTRACTS
To work out the completion cost of the projects.
To know the amount recoverable from the contractor.
To finalise the material accounts for materials issued to the contractor on cost recovery basis or
on free issue basis.
To close the financial liability in the contract and make the final payment to the contractor.
Identification of supplies and services yet to be completed by the contractor and ensuring
completion of the same.
To check whether all the spares as provided in the contract have been supplied.
To check whether contractor has fulfilled all his obligation as per the contract.
Issues of certificates.
Settlement of claims of the contractors.
Settlement of recovery of liquidated damages or payment of bonus for early successful
completion.
To finalise recoveries on account of hire charges, status dues and other charges if any.
Extension of validity of insurance policy,bank guarantee etc
Constitution of standing committee for finalisation of closure of contracts.
To organise the meeting of the standing committee members.
Finalisation of claims of the contractors and issues and by the committee.
Processing of recommendation of the standing closure committee for the approval of
competent authority.
COMPLETION OF COST OF CONTRACTS
Completion cost is worked out to compare with the approved cost and to find out the reasons for the
variation if any. completion cost is used for capitalisation of these projects after completion to convert
the same as a fixed asset in the books of accounts of the company.
Completion cost is worked out to meet the following requirements:
To work out the actual cost.
To capitalise in the books of accounts based on the actual cost.
To compare with the sanctioned cost and analyse the reason for the increase in the cost.
To create the data bank based on the actual costs for each item of work,
activity,rates,etc.
For MIS (Management Information System).
To obtain the approval from the competent authority in case the increase over the
sanctioned cost is beyond the persmissible limit.
Comparison of the actual cost with the sanctioned cost
After the completion cost has been complied, the same is compared with the sanctioned cost to find out
the increase or decrease in the total cost as well as under each activity or under each unit over the
sanctioned cost. If there is an increase, the reasons for the same are analysed to find out the
justification for the increase.
COMPLETION OF PROJECTS AND HANDING OVER TO OPERATION
Preliminary acceptance:-The agencies associated with the preliminary acceptance test are:--project
-operation
-consultants
-contractors
with the joint efforts cold tests are oraganised.
Cold tests are designed to conduct the systematic check of the components and the functional
operation.
Cold test shall comprise idle, no-load and underload tests. Cold tests shall be conducted by the
contractors under his sole responsibility and employing his own personnel. All discrepancies observed
either in the completion work or defective work, will be clearly indicated in the joint inspection report.
On liquidation of all discrepancies as indicated in joint inspection report,contractors will offer
equipment for preliminary acceptance tests, on retesting, if nothing is observed as incomplete or
defective, which may affect the normal operation of the plant, PAC(preliminary acceptance certificate)
will be issued immediately or within a specified period, from the date of retesting.
From the specified period,of the date of issue of PAC, the contractor shall start up and successfully
commission the unit in an integrated manner under his responsibilty. Commissioning unit is deemed to
be successful when:-
unit is ready to commence regular production or service
2)unit is able to produce as per specification and quality inthe contract
3) raw materials, energies and utilities are consumedas per contrated rates
4) the plant/unit has attained a level of output not below the rated capacity over a reasonable period of
time agreed.
Takeover
The unit shall be taken over by the purchaser when commissioning certificate has been given and the
contractor has submitted all final drawing and documents as per contract, contractor has supplied the
spares for operation and maintenance and the contractor has liquidated all the objections contained in
the PAC.
Immediately after successful commissioning of the plant/unit in terms of rate of production and quality
but not later than a specified period from the date of successful commissioning,the contractor will offer
the plant/unit for conducting performance guarantee test. Project dept/consultant with the contractor
will prepare the procedure to be followed in carrying out performance guarantee tests indicating the
period of tests.
On achieving rate of production, consumption norms and quality parameters as agreed in the contract ,
performance guarantee test will be deemed to be successfully completed. If the guarantee values are
not achieved , the contractor shall indicate when the second test shall be carried out & it should be done
in the same manner as the first test.
Final Acceptance Certificate
Final acceptance certificate shall be issued by the purchaser within a specified period when:-
1) Performance guarantee test in respect of the unit has been carried out and performance guarantee
values achieved as per the contract.
2) all other supplies and services have been completed as per the contract.
3) supply of spares has been completed.
4) final documentation incorporated with the latest modification has been submitted by the
contractor.
5) the contractor has rectified in a definitive manner all defects mentioned in the commissioning
certificate.
6) the contractor has fulfilled all other obligations as per the contract.
Declaration of completion by project department
Project shall be declared as completed when the project has been successfully commissioned.
Completion Time shall mean the period stated in the contract for the completion of works up to and
including successful commissioning &shall be calculated from the effective date of the contract.
When the project has been complete in terms of the contract provisions,project dept will declare the
completion and will handover the plant and equipment to operation dept.
a proper handing over and taking over document is executed duly signed by both project and
operation dept at the time of handing over of project to operation dept.
Computer Aided Project Management
For large projects the task of planning,scheduling,budgeting and controlling is made easier with the use
of computers. Computerised Project Management System are used for projects of bigger size and
complex nature . The advantages are
1.It can analyse the problem with a high speed as compared to manual analysis. Because of high speed
and number of combinations can be handled with ease which cannot be done manually.
2.Since computers can store and process large volumes of data,CPMS is best suited for large and
complex projects that require handling and analysis.
3.Accuracy of results produced by CPMS can be relied upon without any mistakes.
4.CPMS reduces human resources requirements considerably.
5.The project manager can get things done using computers rather than depending on too many
subordinates.
Essential requirements of Project Management Software
1.The project management software should be able to handle multiple projects together and produce
consolidated reports of all on-going projects.
2.It should support a variety of graphs and reports in different formats.
3.It should be compatible with the software currently being used by the organization.
4.It should be easy o learn and implement.
It should have the capacity to solve wide range of Problems.
5.It should have the capacity to produce reports required by the management and in the desired format.
6.It should have the facility to operate on the existing network environment.
Software Packages for CPMS
1.The first project management software tools were developed in the late 1960s which were developed
for mainframe computers. Though there are many softwares available today,only a few are widely used
.Some of the popular software projects are
1.Microsoft Project
2.Harvard Total Project manager
3.Project Planner
4.PRISM
5.YOGNA
6.INSTA PLAN
7.Quick Net
8.PC-projaks
9.Proman
10.Project scheduler 8
PRISM,the software package was developed by Tata Consultancy Services and INSTA PLAN,the package
developed by WIPRO are popular among Indian project managers.
PRISM determines the sequence of activities and the duration within which each activity must be
completed inorder to meet a given project schedule. INSTA PLAN provides project planning facilities and
also has presentation features. It provides 4 types of reports and 3 type of presentation charts.
MICROSOFT PROJECT 2000
It is the most popular among the available project managemnt software packages. Project 2000
software supports many management areas like scheduling,budgeting,resource
management,charting,risk management and communication. It also offers the facility to manage
multiple projects. The various features available in this software are
1.Gantt Chart
2.Project Baseline
3.Splitting task
4.Schedule processing
5.Project cost estimation
6.Monitoring the progress of project.
7.Resource leveling
8.Resource pool
9.PERT
10.Reports-Overview,current activity,assignment reports and work load reports,
Use of Spread Sheets
Spread sheet packages like lotus-123 and MS excel help in developing financial projections like
profitability estimates,cash flow estimates,break even estimates etc.It helps in carrying out sensitivity
analysis of financial projections. It also support in graphical views which can be used to depict the
financial projections in graphical form
Types of projects
Projects where only purchase activity is involved.
Projects which are of repetitive nature,such as replacement of equipment on like to like basis.
Projects requiring high skill of construction and technology.
Projects of high value and large size as well as long duration.
Projects requiring foreign technology.
Projects requiring the services of outside consultants or foreign consultants
Mode of execution and executing agency
1.If a project is of repetitive nature such as replacement,it would be a simple project involving only
procurement activities it can be executed by the operations department.
2.In case of a large size project with high technology,the execution requires the service of experienced
consultant.The whole project may also be divided into various packages on turnkey contract basis.
Sometimes it may also be a non-turnkey project with all procurement activities in charge of different
agencies controlled by in-house project management team.
3.Certain projects which require foreign technology may be handled by foreign consultants and
agreements will have to be executed for their services.
Finalisation of strategies for execution of projects
Decisions will have to be taken about
1.Agency to execute the project-project/operation department.
2.Mode of execution ie,turnkey or on nonturnkey basis.
3.Contacts on indigenous or on global basis.
4.Appointment of outside consultants-indigenous or foreign.
5.Technology-Indigenous or imported.
6.Financing mode.
Engagement of Consultants
Once a project is taken for execution,the first task will be to assess the requirement of the services of
outside consultants or in-house expertise.Projects which are repetitive in nature donot require the
service of outside consultant.
Need of Consultants-
1.When a project of new technology is undertaken.
2.When the in-house consultant in incapable of meeting the requirement of the project.
3.When there is no in-house facility available in the organisation.
4.When the project is executed on the basis of imported technology and knowhow.
5.To avail the advantage of expertise available with the outside consultants.
Type of consultants-
1.In-house consultants
2.Outside consultants(indigenous)
3.Foreign Consultants
Jobs of Consultants
Preparation of feasibility study reports
2.Techno-economic report
3.Preparation of detailed project report(DPR)
4.Detailed engineering and consultancy services.
5.Project monitoring and control
6.Supervision of erection and commissioning of project including providing designers supervisions.
7.To provide pre and post commisioning services.
Selection criteria of consultants
1.Job requirements
2.Facilities available in the organsiation.
3.expereince
4.Performance
5.Organisation structure(confidence)
6.FeesIf there are more than one consultant and technically all are competent then the amount of fees
demanded by them will be a criteria for selctiion.
7.Terms and conditions-should be acceptable
8.Pre and post commissioning services-It eliminates the defects during the post guarantee period.
Fees to the consultants-
It may be for
1.Preparation of fr
2.Preperation of DPR
3.Preparation of techno economic reports
4.Consultancy and detailed engineering services
5.Providing supervision for erection and commissioning work
Role of consultants
The consultants provide guidance as well as direction to the projects.From the formulation stage to the
completion and post project evaluaion stage,consultants services are available.In fact he is the part of
project management team,though as a paid member on contracted terms and conditions.Without the
assistance of the consultant,a project cannot be started unless it is a simple one.Consultant may be
inhouse or outside consultant.
The areas where consultants has significant contributions are
1.Appraisal
2.Evaluation
3.Cost estimate
4.Estimation of alternatives
5.Preparation of network,PERT chart,bar chart etc for project execution.
6.Approval for drawing
7.Technology of construction
8.Technology of operation
9.Recommending the names of suppliers and contractors
10.Contract finalisation
11.Monitoring and construction supervision.
TECHNICAL SPECIFICATION
The various requirments are thought in advance before action for execution is commenced.Specification
means complete description of the requirments related to execution and completion of projects.It may
be general and technical.But it needs to be very clearly communicated in writing to the agencies who do
the actual execution.
Contents of specifications
The requirmenst may be general or technical.Contents of specifications may change from project t
project and from organisation to organisation.General may cover-instructions for tenderer,scope of
supply,price bid,standars,erection and testing and testing,guarantee and penalty and delivery.The
technical details may cover technological,illumination,civil engineering,electrics and preferred
equipments.
Financial Analysis
Financial analysis seeks to ascertain whether the proposed project will be financially viable in the sense
of being able to meet the burden of servicing debt and whether the proposed project will satisfy the
return expectations of those who provide the capital.
Aspects looked into Financial appraisal
Cost of project
Means of financing
Estimates of sales & production
Cost of production
Working capital requirement & its financing
Profitability projections
Projected cash flow statements
Projected balance sheets
Cost of Project
The cost of project represents the total of all items of outlay associated with a project which are
supported by long-term funds. It is the sum of the outlays on the following:
Land and site development
Buildings & civil works
Plant & machinery
Technical know-how & engineering fees
Expenses on foreign technicians & training of Indian technicians abroad
Miscellaneous fixed assets
Preliminary & capital issue expenses
Pre-operative expenses
Provision for contingencies
Margin Money for Working capital
Initial cash losses
Means of finance
To meet the cost of the project the following means of finance are available.
Share capital
Term loans
Debenture capital
Deferred credit
Incentive sources
Miscellaneous sources
Share capital
There are two types of share capital
Equity capital
it represents the contribution made by the owners of the business, the equity shareholders, who
enjoy the rewards and bear the risks of ownership. Equity capital being a risk capital carries no fixed rate
of dividend.
Preference capital
it represents the contribution made by preference share holders and the dividend paid on it
generally fixed.
Term loans
Term loans provided by financial institutions and commercial banks. Term loans represent secured
borrowings which are a very important source for financing new projects as well as for the
expansion,modernisation and renovation schemes of existing firms.
There are two broad types of term loans available in India.
o Rupee term loans
o Foreign currency term loans
Debenture capital
Debentures are instruments for raising dept capital. There are two broad types of debentures: non
convertible debentures and convertible debentures.
Non convertible debentures are straight debt instruments. Typically they carry a fixed rate of interest
and have a maturity period of 5 to 9 years.
Convertible debentures are debentures which are convertible, wholly or party, into equity shares. The
conversion period and price are announced in advance
Deferred credit
Many time the suppliers of the plant and machinery offer a deferred credit facility under which payment
for the purchase of the plant and machinery can be made over a period of time
Incentive sources
The govt and its agencies may provide financial support as an incentive to certain types of promoters or
for setting up industrial units in certain locations. These incentives may take the form of seed capital
(provided at nominal rate of interest to enable the promoter to meet his contribution to the project), or
capital subsidy (to attract industries to certain locations) or tax deferment or exemption (particularly
from sales tax) for a certain period.
Miscellaneous sources
A small portion of the project finance may come from miscellaneous sources like unsecured loans, public
deposits and leasing & hire purchase finance. Unsecured loans are typically provided by the promoters
to bridge the gap between the promoters contribution and the equity capital the promoters can
subscribe to. Public deposits represent unsecured borrowings from the public at large. Leasing and hire
purchase finance represent a form of borrowing different from the conventional term loans and
debenture capital.
Planning the means of finance
We have described the various means of finance that can be tapped for a project. The guidelines and
considerations that should be borne in mind for this purpose are as follows:
Norms of regulatory bodies and financial institutions
Key business considerations
Estimates of Sales & Production
Installed capacity
No. of working days
No. of shifts
Estimated production per day
Estimated annual production
Estimated output as % of plant capacity
Sales (qty.) after adjusting stocks
Value of sales (in '000 of Rs)
Cost of Production
Material cost
Utilities cost
Labour cost
Factory overhead cost
Working Capital Requirement & its financing
Working capital requirement consists of the following:- Raw materials & components, stocks of
goods-in-process, stocks of finished goods, debtors, operating expenses & consumable stores.
Principal sources of working capital finance are:- Working capital advances provided by commercial
banks, trade credit, accruals & provisions, and long term sources of financing
Profitability Projections
Given the estimates of sales revenues & cost of production, the next step is to prepare the profitability
projections or estimates of working results.
Projected Cash Flow Statement
The cash flow statement shows the movement of cash into and out of the firm and its net impact on the
cash balance within the firm
Projected Balance Sheet
The balance sheet, showing the balance in various asset & liability accounts, reflects the financial
condition of the firm at a given point of time.
Generation & Screening of Project Ideas
The objective is to identify investment opportunities which are prima facie feasible
and promising and which merit further examination and appraisal.
The discussion is divided into nine sections as follows:
Generation of ideas
Monitoring the environment
Corporate appraisal
Profit potential of industries
Scouting for project ideas
Preliminary screening
Project rating index
Sources of positive net present value
On being an entrepreneur
Generation of ideas
Stimulating the Flow of Ideas: Often firms adopt a somewhat casual and hazard approach to the
generation of project ideas, the following are helpful:-
SWOT Analysis It represents a conscious, deliberate & systematic effort by an organization to
identify opportunities that can be profitably exploited by it. Periodic SWOT analysis facilitates
the generation of ideas.
Fostering a Conducive Climate To tap the creativity of people & to harness their
entrepreneurial urges, a conducive organisational climate has to be fostered.
Clear Articulation of Objective Operational objectives of a firm may be one or more, cost
reduction, productivity improvement, increase in capacity utilisation, improvement in
contribution margin, expansion into promising fields. A clear articulation & prioritisation of
objectives helps in channelising the efforts of employees & to think more imaginatively.
Monitoring the Environment
The important aspects studied in monitoring the key sectors of the environment are as follows:
Economic sector
State of the economy
Overall rate of growth
Growth rate of primary, secondary, and tertiary sectors
Cyclical fluctuations
Linkage with the world economy
Trade surplus/deficits
Balance of payment situation
Governmental Sector
Industrial policy
Government programmes and projects
Tax framework
Subsidies, incentives, and concessions
Import and export policies
Financing norms
Lending conditions of financial institutions & commercial banks
Technological Sector
Emergence of new technologies
Access to technical know-how, foreign as well as indigenous
Receptiveness on the part of industry
Socio-demographic Sector
Population trends
Age shifts in population
Income distribution
Educational profile
Employment of women
Attitude towards consumption and investment
Competition Sector
Number of firms in the industry
Degree of homogeneity and differentiation among products
Entry barriers
Comparison with substitutes in terms of quality, price, appeal, and functional performance
Marketing policies and practices
Supplier Sector
Availability and cost of raw materials and sub-assemblies
Availability and cost of energy
Availability and cost of money
Corporate Appraisal
The broad areas of corporate appraisal and the important aspects to be considered under them are as
follows:
Marketing and Distribution
Market image
Product line
Market share
Distribution network
Customer loyalty
Marketing and distribution costs
Production and Operations
Condition and capacity of plant and machinery
Availability of raw materials, sub-assemblies, and power
Degree of vertical integration
Locational advantage
Cost structure
Research and Development
Research capabilities of the firm
Track record of new product developments
Laboratories and testing facilities
Coordination between research and operations
Corporate Resources and Personnel
Corporate image
Clout with governmental and regulatory agencies
Dynamism of top management
Competence and commitment of employees
State of industrial relations
Financial and Accounting
Financial leverage and borrowing capacity
Cost of capital, Tax situation
Relations with shareholders and creditors
Accounting and control system
Cash flows and liquidity
Profit Potential of Industries
PORTER MODEL
Michael Porter has argued that the profit potential of an industry depends on the combined
strength of the following five basic competitive forces:
Threat of new entrants
Rivalry among existing firms
Pressure from substitute products
Bargaining power of buyers
Bargaining power of sellers
LIFE CYCLE APPROACH:- Most products evolve through a life cycle which has four stages
Pioneering, Rapid, Maturity & Stabilisation, Decline.
THE EXPERIENCE CURVE :- It shows how the cost per unit behaves with respect to the
accumulated volume of production. AVP is the total no. of units produced cumulatively from the
very beginning.
Scouting for Project Ideas
Analyse the performance of existing industries
Examine the inputs and output of various Industries
Review imports and exports
Study plan outlays and Governmental guidelines
Look at suggestion of Financial Institutions and Developmental agencies
Investigate local materials and resources
Analyse economic and social trends
Study new Technological developments
Draw clues from consumption abroad
Explore the possibility of reviving sick units
Identify unfulfilled psychological needs
Attend trade fairs
Stimulate creativity for generating new product ideas
Preliminary Screening
Some kind of preliminary screening is required to eliminate ideas which prima facie are not promising.
For this purpose, the following aspects may be looked into:
Compatibility with the promoter
Consistency with governmental priorities
Availability of inputs
Adequacy of market
Reasonableness of cost
Acceptability of the risk level
Project Rating Index
The steps involved in determining the project rating index are as follows:
Identify factors relevant for project rating
Assign weights to these factors
Rate the project appraisal on various factors, using a suitable rating scale (e.g.: 5-pont scale, 7-
point scale etc)
For each factor, multiply the factor rating with the factor weight to get the factor score
Add all the factor scores to get the overall project rating index
Sources of Positive NPV
It appears that there are six main entry barriers that result in positive NPV projects which are as follows:
Economies of Scale
Product differentiation
Cost advantage
Marketing reach
Technological edge
Governmental policy
On being an Entrepreneur
The Questions Every Entrepreneur Must Answer
1. Are my goals well defined?
2. Do I have the right strategy?
3. Can I execute the strategy?
Qualities and Traits of a Successful Entrepreneur
Willingness to make sacrifices
Leadership
Decisiveness
Confidence in the project
Marketing orientation
Strong ego
Investment Analysis
The purpose of investment analysis is to ensure that a decision that management is about to undertake
truly does increase the value of the company. Proper investment analysis also provides other important
pieces of decision making information such as how much investment capital will be required and when,
what the risks are, and when the cumulative cash flow will become positive. This is vital information for
management when comparing alternate uses of investment capital.
Evaluation of project investments
Non-discounting criteria
Discounting criteria
Non-discounting criteria
Payback period
Average rate of return (ARR)
Payback period
It is the time period in which a firm can recover its investments made in a project
Average rate of return
This method estimate the relationship between the average annual profits earned by a project and the
investment made in the project
Average rate of return (ARR)
=average annual profit *100
Initial Investment
Discounted cash flow criteria
Net present value
Internal rate of return
Profitability index
Net present value
NPV of a project is the sum of the present values of all the cash flows positive as well as negative
that are expected to occur over the life of the project.
NPV=C
t/
(1+r)
t


Where, C
t
= cash flow at the end of year t
n = life of the project
r = discount rate
Internal rate of return (IRR)
The internal rate of return is the discount rate at which the present values of cash inflows and outflows
are equal. It is the discount rate that makes the NPV of the project equal to zero.
N C
t

(1+r)
t =0
t=1
Profitability index
The ratio of future cash benefits to the initial outflows is called as Profitability index.
PI=P V of future cash flows/Initial investment
L-M Approach (SCBA)
L-M (Little Mirrlees Approach)
I.M.D Little & J.A.Mirrlees developed an approach to SCBA in 1970s.
The L-M technique assumes that a country can buy & sell any quantity of a particular good at a
given world price.
The outputs & inputs of a project & their shadow prices are classified into the following :-
Traded goods
Non-traded goods
Labour
Traded goods
Shadow price of such goods is simply its border price. If a good is exported, its shadow price is its FOB &
if a good is imported, its shadow price is its CIF.
Non-traded goods
Shadow prices of such goods is defined in terms of marginal social cost & marginal social benefit.
Marginal social cost of a good is the value in terms of accounting prices of the resources required to
produce an extra unit of the good. The marginal social benefit is the values of an extra unit of the good
from the social point of view.
Labour
Shadow price of labour can be obtained by using social wage rate. It is the sum of the marginal
productivity of the labour + the cost associated with the urbanisation + cost of having an additional
amount committed to consumption when the consumption of worker increases as a result of the higher
income he enjoys in urban employment.
Market Demand & Situation Analysis
Concerned With Two Broad Issues
What is the likely aggregate demand for the product/service?
What share of the market will the proposed project enjoy?
The Seven Steps For Market Analysis
Situational Analysis and Specification of Objectives
Collection of Secondary Information
Conduct of Market Survey
Characterisation of the Market
Demand Forecasting
Uncertainties in Demand Forecasting
Market Planning
Situational Analysis
The informal talks with customers, competitors, middlemen and others in the industry
and the study of the experience of the company regarding the preferences and
purchasing power of customers, actions and strategies of competitors and practices of
middlemen sums up the situational analysis.
Specification of Objectives
If the situational analysis does not generate enough data to measure the market, a
formal study need to be carried out
Here, the intuitive and informal goals that guide the situational analysis need to be
expanded and articulated with greater clarity. For eg. spelling out objectives in the
form of questionnaires
Collection of Secondary Information
Secondary Information is information that has been in some other context and is
already available. It provides the base and starting point for market and demand
analysis
While it is available economically and readily, its reliability, accuracy and relevance for
the purpose under consideration must be carefully examined
Conduct of Market Survey
Primary information represents information that is collected for the first time to meet
the specific purpose on hand. It is gathered through a market survey
A market survey may be census survey or sample survey. Normally sample survey is
preferred to census survey as the latter is costly and infeasible
Steps in a Sample
Define the target population
Select the sampling scheme and sample size
Develop the questionnaire
Recruit and train the field investigators
Obtain the information as per the questionnaire
Scrutinize the information gathered
Analyze and interpret the information
Problems Being Faced By Market Researchers In India
Heterogeneity of the country
Multiplicity of languages
Design of questionnaire
Characterisation Of The Market
Based on the information gathered from both secondary sources and primary sources, the market for
the product may be described in the following terms:
Effective demand in the past and present
Breakdown of demand
Price
Methods of distribution and sales promotion
Consumers
Supply and competition
Government policy
Demand Forecasting
A wide range of demand forecasting methods is available to the market analyst. They may be broadly
classified in to:
Qualitative Methods
Time Series Projection Methods
Causal Methods
Qualitative Methods
These methods rely essentially on the judgment of exports to translate qualitative information into
quantitative estimates.
The important methods are:
Jury or Executive Method
Delphi Method
Time Series Projection Methods
These methods generate forecasts on the basis of an analysis of the historical time series. The
important time series methods are:
Trend Projection Method
Exponential Smoothing Method
Moving Average Method
Causal Methods
Causal methods seek to develop forecasts on the basis of cause-effect relationships specified in an
explicit, quantitative manner.

The important causal methods are:
Chain Ratio Method
Consumption Level Method
End Use Method
Leading Indicator Method
Econometric Method
Uncertainties In Demand Forecasting
Inadequacy of data about past and present market
Limitations of the methods of forecasting
Environmental changes
Market Planning
A marketing plan usually has the following components
Current marketing situation
Opportunity and issue analysis
Objectives
Marketing strategy
Action programme
Monitoring and Control
With the commencement of the execution of the project,there is a need to know if
1.The work on project is progressing as per the various schedules already agreed and finalised.
2.Procurement action for various material to be arranged by the company is taken.
3.All the contractors are doing as per schedule agreed in the contracts.
4.Consultants for the project is able to complete the aproval of the drawings and engineering
documents in time as and when submitted
By the contractors.
5.Cost of project is likely to be within the approved cost.
6.All agencies associated with the execution of the project.
Monitoring involves
1.Paramteres to be monitored and controlled
2.Various activities in projects.
3.Agencies associated(internal and external)in execution of the projects.
4.Review of progress-physical and monetary
5.Reports and reporting system.
Meaning of monitoring and control-
Monitoring involves
1.Follow up of the instructions,directives and guidelines given in the sanction letter aswell as follow up
of the best practices for construction activities and supervision thereof.
2.Review of progress on projects by various authorities for taking corrective action.
Parameters for monitoring and control
1.Objectives of the project as envisaged in the project report based on which sanction has been
accorded.
2.Sanctioned cost.
3.Schedule date of commissioning
4.Techno-economics
5.Various directives as per sanction letter:
on the scope of facilities in project
Mandatory review of cost of project
revised cost estimates
other points if any
Objective of the Project
Any factor which affect the objective of the project adversely,has to be detected immediately and
corrective action has to be taken immediately to eliminate the same.eg.If there is a likelihood of
reduction in the demand of a product against the original demand as envisaged in the project
report,causes of the same should be immediately investigated and all effort made for redemption either
through the original source or through an alternative.
Sanctioned Cost
Any increase in the sanctioned cost of the project will affect the profitability unless there is
corresponding favourable increase in the revenue items to be generated from the project.Therefore
there is a need to regularly monitor the cost of commitments being finalised.
Scheduled date of commissioning-Date of commissioing may be affected mainly due to contractors and
consultants.Contractors may delay the execution due to their own problems.
Consultants may also sometimes delay the project in approving the drawings and engineering
document.
Techno-economics
Techno-economics for the project is very important.The benefits envisaged should be achieved after the
completion Any deviation noticed during the execution stage should be immediately reviewed and
corrective measures has to be taken
Activities in Projects
1.To decide the mode of execution
2.Engagement of consultants
3.Preparation of technical specifications,tender schedules and documents.
4.Issue of tenders
5.Placement of order for supplies and execution of other contracts
6.Submission of basic engineering and detailed drawings by the contractor
7.Approval of basic engineering and detailed drawing by the consultants
8.Receipt of equipments and other materials.
9.Safe and proper storage of materials and equipment.
10.Issue of equipments and other material from stores to the site of erection work.
11.Completion of civil work.
12.Completion of structural work
13.Erection of structures and equipments.
14.Completion of testing
15.Conducting preliminary acceptance test(PAT)
16.Final commissioning
17.Performance guarantee test
18.Final acceptance certificate(FAC) of the plant and handing over to the operations
Process of Monitoring
1.Basic engineering and detailed drawing
2.Procurement work for brought out items
3.Manufacturing activities at the contractors and subcontractors works
4.Supplies
5.Activities at site
1.Basic engineering and detailed drawing-submitted by contractors and approved by consultants.
Monthly progress report on the submission and approval of design and engineering data shall be
submitted by the contractor.
2.Procurement work for bought items-For the procurement items,contractors will submit the position of
order placement on its sub-vendors,stating the details of items,total quantity,number of vendors,date of
supply etc.
3.manufacturing activities at the contractors and sub contractors works-checking the progress,quality.
Contractors should report the status on a monthly basis.Through a proper review and monitoring the
delays,defects can be detected and corrected.
4.Supplies-The contractors should despact report on despactes made as per the schedule and in case of
delays reasons should be specified.
5.Activities at site-The project monitoring and coordination section(PMC) makes a report on the
progress of pre-construction activities,receipt of materials and equipment at site and construction and
erection activities.In case of delay necessary actions have to be taken.
Project Management - Concept
Project is an organized unit dedicated to the attainment of goal the successful completion of a
development project on time, within budget, in conformance with pre-determined programme
specifications.
A temporary endeavor undertaken to create aunique product or service.
It is an organized venture for managing projects. It involves scientific application of modern tools and
techniques in planning, financing, implementing, monitoring, controlling & coordinating unique activities
or tasks to produce desirable outputs in accordance with the pre-determined objectives within the
constraints of time and cost.
Features
A one-time activity with a well-defined set of desired end results.
Divided into subtasks that must be accomplished to achieve project goals.
The subtasks require careful co-ordination & control in terms of timing, precedence, cost, &
performance.
It must be co-ordinated with other projects carried out by same organization.
Why Project Management?
Basic purpose for initiating a project is to accomplish specific goals.
Better control & customer relations.
Identify & correct problems at an early date.
Make timely decisions about trade-offs between conflicting project goals.
Ensures that managers of the separate tasks that comprise the project do not optimize the
performance of their individual tasks at the expense of the total project.
Sharper orientation toward results, better interdepartmental coordination and higher worker
morale.
Project Life-cycle
Project is born (its start-up phase) & a manager is selected, the project team & initial resources
are assembled, & the work program is organized.
Work gets under way & momentum quickly builds. Progress is made. This continues until the
end is insight.
Completing the final tasks seems to take inordinate amount of time, partly because team
members drag their feet for various reasons & avoid the final steps.
The pattern of slow-rapid-slow progress towards the project goal is common.
Total Project Life Cycle
Conceptualisation :- Idea, thought, initial plan, first stage of thinking by an entrepreneur,
manager or economic planner about his scheme, plan for eliminating the problems in the
existing operation or to avail of the opportunities prevailing.
Formulation :- Firming up of the concepts, ideas, thinking, etc. for putting them into a realistic
action plan.
Evaluation :- To examine all the aspects related with decision making for investments.
Feasibility Studies Report :- Technical, commercial, financial, economic aspects details are
collected.
Investment Decision :- Based on earlier action & studies, an investment decision is taken for
further processing.
Environmental Clearance :- Statutory clearances from State as well as Central Government level
pollution control boards are must.
Administrative Approval :- After the aforesaid actions, administrative approval from the
competent authority is processed.
Engagement of Consultants :- Either in house consultant / outside consultant / foreign
consultant are required. The projects are executed on turnkey contract basis or on EPC contract
basis.
Detailed Project Report :- DPR is prepared for all the items, equipment, work pertaining to the
project.
Technical specification :- specify the technical requirements & all other terms & conditions for
execution of the package.
Financial Closure :- Financing of project may be from external commercial borrowings, FDI, FI,
equity participation. Completion of all arrangements for financing modes of the project is
Financial Closure.
Contract Finalisation Contracts may be Turnkey, Non-turnkey, EPC, BOT, BOOT, BOOL, BOOS,
etc. Mode of execution of project on the basis of anyone of the mode is decided.
Execution of Contract / Project :- Project starts. It includes meetings with contractors, follow
up, progress, site activities, etc.
Monitoring and Control :- Physical progress, financial progress, quality control, performance
guarantee parameters to ensure successful execution & completion of the project.
Completion of Construction :- Physical completion of project in all respects i.e. Civil engg. Work,
structural fabrication, supply & installation of equipment.
Commissioning of Project :- To make commercial utilisation (commercial production) of the
project.
Performance Guarantee Test :- As per parameters envisaged in the contracts.
Handing over to Operation :- The commissioned plant is handed over to Operation Department.
Closure of Contracts :- All the contracts are finalised & closed.
Completion Cost & Capitalisation :- To work out the completion cost & capitalise the cost of
completed project in the books of accounts.
Post Project Evaluation & Audit :- The actual results, completion cost, profitability, etc. are
compared with the provisions made in the approved project.
Project Formulation
Project formulation is defined as taking a first look carefully and critically at a project
idea by an entrepreneur to build up an all round beneficial to project after carefully
weighing its various components
Stages in Project Formulation
Feasibility analysis
Techno-economic analysis
Project design and network analysis
Input analysis
Financial analysis
Social cost benefit analysis
Feasibility analysis
The project idea is examined from the point of view whether to go in for a detailed investment proposal
or not. As the project idea is examined in the context of internal & external constraints, three
alternatives could be considered :-
1) The project idea seems to be feasible.
2) The project idea is not a feasible one.
3) Unable to arrive at a conclusion due to inadequate data
Techno-economic analysis
Estimation of project demand potential and choice of optimal technology is made. As the project may
produce some goods or services, it is imperative to know about the market for such goods or service
produced. Techno-economic analysis gives the project a unique individuality and sets the stage for
detailed design development.
Project Design & Network analysis
This important step defines individual activities, which constitute the project and their interrelationship
with each other. The sequence of events of the project is presented. A detailed work plan of the project
is prepared with time allocation for each activity and presented in a network drawing. It is an essential
step in the development of the financial and the cost-benefit profile of the project.
Input analysis
The steps assesses the input requirements during the construction of the project and also during the
operation of the project. Inputs include materials, human resources. Input analysis, also considers the
recurring as well as the non-recurring resource requirements of the project and evaluate the feasibility
of the project as per the availability of these resources. Aid in assessing the project cost itself which is
necessary for financial analysis
Financial analysis
This stage involves the estimating the project costs, the operating costs & the fund requirements. Some
of the analytical tools are discounted cash-flow, cost-volume-profit relationship and ratio analysis.
Investment decisions made for the provision of goods or services involve commitment of resources in
future. Since, investment proposition has a long term horizon, it is necessary to exercise due care &
foresight in development project financial forecasts.
Cost-Benefit analysis
It will consider the project from the national viability point of view. Here, we not only take into account
the apparent direct costs and direct benefits of the project but also the costs which all entities
connected with the project have to bear and the benefits which will be enjoyed by all such entities.
Pre-investment analysis
The project proposal gets a formal & final shape at this stage. All the results obtained at the above steps
are consolidated and various conclusions arrived at to present a clear picture. At this stage, the project
is presented in such a way that the project-sponsoring body, project-implementing body & the external
consulting agencies are able to decide whether to accept the proposal or not.
Environment Appraisal and Clearance
To study the problems of the environment pollution and its management control 2 studies are made:
1) Environment Impact Assessment (EIA)
2) Environment Management Plan (EMP)
3) Environment Impact Assessment (EIA)
This document gives the details about the environment problems, pollution in the environment
air, water ,etcin the existing plant as well as to the further added due to the installation of the project
under consideration.
Environment Management Plan (EMP)
This document gives the details about the measures and facilities required to remove or reduce
the pollution to the minimum acceptable level as allowed by the pollution control board (central as well
as state level pollution controls boards).
Contents of the EIA and EMP Reports
1. Site location
Exact location of the project
Nearest place where it is situated
Rivers flowing nearby
Nearest road connections
Nearest towns, airport
Sea level at the site of project
Climate
Degree of temperature in summer , highest and lowest temperature
Annual rainfall level
3. Need for the project
the need and justification of the proposal project shall indicated under this para in the report for the
information of the authorities for granting the environmental clearance.
Objectives of EIA and EMP Reports
To assess the impact due to project of expansion under consideration (project may be expansion
or any other project, such as modernization addition, modification, replacement, diversification,
etc)
To suggest the measures to reduce the adverse impact and bring it down to the normal level or
under the allowable limit as prescribed by the pollution controls-central or state level
To include a detailed action plan to be implemented at the time of execution of project.
To suggest the monitoring programme from time to time from the time the equipment facilities
are installed and commissioned and are in continuous operation.
To work out the total facilities, volume of work and corresponding investments required for the
suggested environment monitoring and control plans.
The report will include:-
1.Project profile
Name of project
Need for project
Justification for the project
Details of facilities of the project including the facilities for pollution control
Capital cost estimates, techno-economies, mode of financing of the project including the cost of
pollution control equipment and facilities.
2. Identification of probable impacts- Under this para probable impacts under the different
areas causing pollution in the air, water, noise, working condition, etc shall be indicated.
3. Studies of existing environment and eco-systems.
4. Prediction of environmental impact due to the proposed plans.
5. Environmental Management Plan (EMP)- under this details of various about measures,
equipment and facilities for regulating the norms of the pollution under the various areas as
brought out in the earlier paras shall be indicated.
6. EMP implementation and monitoring-
the schedule of implementation of facilities, equipments proposed to be installed under the
EMP shall be indicated. It also indicates about
the monitoring programme / schedule.
7. Organisation and manpower- to facilitate proper implementation of EMP activities, it would
be necessary to have an efficient organisation with competent personnel in the dept. There
should be an independent in the organisation titled Environment Management Department
8. Investment required for the facilities /monitoring equipments envisaged- under this para,
capital cost estimates of the facilities, equipment and monitoring equipments are indicated. This
may be indicated that the capital cost estimates of the facilities, equipment and monitoring
systems is a part of the total cost estimates of the project under consideration.
9. Conclusion- Under this para , a brief of the entire EIA/EMP with the recommendation is
incorporated in a summarized manner.
Project Organisation
Project department is an important branch in a corporate organisation.It comprises of capable persons
with leadership and long experience,various departments,experts,designers etc.
In the large public and private sector organisations,project department is one of the departments in the
organisation structure.Thus it is considered as a part of
production,commercial,marketing,finance,personnel and administrative department.
Nowadays many companies are corporate based entities with multi units situated at different
locations.These units are managed with centralised and decentralised powers.Thus project departments
function at corporate levels and also in units.
Need of a project organisation
A project department is needed to supervise the construction work aswell as to look after the regular
needs of the latest technology,modernisation,automation etc.In the large organisation where the capital
expenditure is a major portion in the outlay of the company,it is advisable not to depend just
on the contractual agencies for the execution of projects.However there must be an inhouse project
management and control team for ensuring the quality of construction and timely completion of
projects.
Advantages of Project Organisation
1.Expertise-By a long experience,the company develops an expertise in the construction
activities.Eg,Project department in the steel plant in the construction of steel plant,power companies in
the field of power projects etc.
2.Quality-When a work is done or supervised by its own department,the workmanship is better.
3.Consultancy jobs-By long expereince in rpojects,company develops its people in different fields of
construction activities related to its area of operation.
Thus a company can diversify its activities in various fields like preparation of feasibility studies
reports,techno-economic reports,detailed project reports etc,detailed engineering work,construction
supervision for the procurement of equipments,commisioning etc.It also increases the revenue of the
organisation.
4.Check on cost and time over run-One of the main objective of Project Management and Control is to
reduce the cost and time overrun in the projects.
This is facilitatetd by the experienced project management team.
5.Better understanding between the operation and project department-The in-house project
department will have knowledge of the operational activities,existing facilities and entire infrastructure
throughout the plant or factory.This helps in the better understanding of the operational problems.This
advantage will not be available to the outside project consultants.
Organisation Structure at the corporate level
An organisation may have a corporate office at a central place and its units situated at various
locations.Corporate office functions as a corporate entity with its boards of directors and senior
officers.all units functions under the administrative control and guidance of corporate office.The
corporate office has a project directorate amongst other directorate and departments.All the
concerned departments and functions of corporate units/office are allocated to these directors.
There may be various officers below the directors say president,vice president or executive
directors,managers etc.
Functions of project directorate-
1.Planning of investment for the company as a whole and for the units seperately on long term aswell as
annual basis.'long term' may be for a period of 5 years or more depending upon companys planning
policy.
2.Processing of investment proposals received from the units for the approval by chariman or board of
directors or government.(case of government companies)
3.Monitoring the physical and financial progress of the projects.
4.Finalising the capital expenditure budget and fund requirment for long term(5 yr plan) period aswell
annually for the company as a whole and units seperately.
5.Providing corporate guidance in finalisation of major contracts including global contracts.
6.To guide the units from time to time on matters relating to formulation,appraisal,approval,execution
and monitoring of projects.
7.Coordination between the units and government departments on all the matters.(Government
companies)
8.Liaisoning between the units and various departments in corporate office for all the matters related to
projects.
Thus the functioning of project directorate can be broadly classified into 2
1.Evaluating and approvals
2.Budgeting,monitoring and control.
The departments associated with project department are
1.Finance
2.Operation
3.Marketing and commercial
4.Personnel and administration.
Functions of Project Department
1.Planning and approvals of investment proposals.
2.Finalisation of technical specifications with the help of consultants for the projects.
3.Finalisation of contracts.
4.Execution of contracts and construction work.
5.Planning and procurement of construction materials such as steel,cement etc.
6.Measurment of work done by the contractors and certification of the same for payments to the
contractors as per their bills submitted.
7.Project monitoring,coordinating and control
8.Provision of construction and temporary enabling facilities.
9.Manpower planning for construction work including training in consultation with personnel and
administration department.
10.Receipts,storage and issue of materials including plant and machinery for construction work.
11.Proper accountingof materials received and issued for ocnstruction work including materials issued
to the contractots on cost recovery or on free isue basis as per provisions of the contracts.
12.Capita; budgeting and plannng of fund requirements for the projects in consultation with finance
department.
13.Liasinong with various departments within the organization and with the agencies outside the
organisation.
14.Settlement of disputes with the contractors.
15.Completion of projects and handling over to operation department.
16.Finalisation and closure of contracts after the completion of projects.
17.Post project review and evaluation including post completion audit.
The entire work is distributed to various sections/zones headed by officers of the rank of chief engineer
or deputy chief enginer depending upon the complexity of jobs.
The zones are further grouped into bigger zones and placed under the supervisory charge of higher
officers of the rank of deputy general manager.(Diagram)
Project Admission
After the administrative approval of the project,it becomes necessary to consider the sanctioned
cost,schedule of completion,name of project coordinator,scheme number,code etc for its identification
and accounting,monitoring and reporting purposes then strategy for implementation of project ie,.to
decide its packaging,engagement of consultants,mode of tendering and finalisation of contracts etc.thus
after the approval of the project has been received
And before the activties for its implementation are planned to be commenced,there still remain
important aspects between the 2 cycles-sanction and execution.Project admission means 'acceptance of
project by the executing agency ie project department after its approval.The project department afterit
accepts the project will own the full responsibility for its completion without any cost and time overrun
and at the same time will ensure the quality of construction.
Communication of Sanction
The authorities who can approve the projects are
1.Chief executive of the unit
2.Chairman of the company in case of a corporate based entity having various units its control.
3.Board of directors
4.Government for public sector companies.
-Approval for the projects approved b the chief executive of the unit will be communicated by the
project planning and engineering department(a section in the project organisation at the unit level).
Approval for the projects approved by the chairman/board of directors of the company will be
communicated by the project directorate a department in the organisation structure at corporate
level.
-And for the proposals approved by the government in respect of public sector companies,approvals
shall be communicated through concerned ministry to the corporate office first and then to the unit to
which proposals related through corporate office.
Sanction Letter
Contents of sanction letter
1.Department/office issuing the sanction letter
2.Date of sanction
3.Name of proposal and unit to which it relates
4.Authority who has approved the proposal
5.Total cost with item-wise breakup including foreign exchange.
6.Base date
7.Conditions of sanction
a.zero date of project.(This will be from the date of sanction)
b.Project to be completed within the prescribed date from the zero date.
c.Mode of source of financing the cost of the project
d.dircetives to finalise the contracts and placement of orders.
e.Commitments not to exceed the sanctioned cost,immediate approval should be obtained for revised
cost.
f.The moment commitments exceed the sanctioned cost,immediate approval should be obtained for the
revised cost.
g.A mandatory review of the project to be carried when 50% commitments have been made or funds
spent,so as to know whther the sanctioned cost is likely to exceed and would require revision.The
results of review should be reported to higher authorities.
h.No change in the scope of approved project should be made.However if the same becomes
inevitbale.immediate action should be taken to process the revised cost estimates with justificstion for
the approval of higher authority.
i.Networks/milestone/Barcharts for the implemenetation of the project should be finalised immediately.
j.All steps ahould be taken to execute and complete the project without any time and cost overrun.
k.Progress reports on both physical and financial progress to be sent to all concerned authorities timely.
l.Post completion report should be submitted within one year after the completion of project to the
project directorate.
Project Report Preparation
A project report is a document wherein all the details obtained from technical analysis, financial
analysis, profitability analysis, economic analysis etc. are put together.
PR is a document with respect to any investment proposal based on certain information and
factual data for the purpose of appraising the project.
Scope Of Project Report
Economic aspects
Technical aspects
Financial aspects
Production aspects
Managerial aspects
Objectives
It facilitates project appraisal
It facilitate business planning and planning the future course of action.
It provides the framework for presenting the same to government authorities for fulfilling legal
requirements and for availing itself of the facilities and concessional aid etc. being made
available.
To take objective decision
Proceeding in the right direction
To compare different investment proposals and select the most suitable project
Importance
It highlights the practicability of a project in terms of different factors like economy, finance,
technology, and social desirability.
It is needed for carrying out expansion or starting a new production line.
Determining the profitability of the project.
Minimizing risk in the execution of the project
Detailed project Report
This contains a detailed analytical study of all matters concerning a project. DPR prepared after
feasibility report is studied by management and it is decided to implement the project. Usually
this is prepared by experts with proven capabilities.
Project report will contain all matters of Feasibility Report in greater and more accurate detail
and also fairly deterministic estimates of costs and schedules.
This is a document for reference and comparison of actual revenues, costs, schedules and other
matters during the implementation and post project review stages.
Contents of DPR
Introduction
Salient features of the project
Background information for formulation of the project
Collaboration and licensing agreements
Executive Summary
Gives a two or three page summary of key matters in the report
Project cost, products, capacities and production, sales, location key inputs
employment, profitability, economic & social benefits
General Information
About the organisation and its history, promoters, present activities, major products,
customers, trends in improvement in productivity and quality, technology updation,
history of implementation of earlier projects, contribution to economy.
Project Description and technical analysis
Location and project site
Plant size and scale and production of each product
Technology alternate technologies and technology selected
Process with flow diagrams , charts,
Capital equipments and machinery Production equipments, auxiliary equipments,
service equipments, spare parts, tools consumables etc. Give list as annexure with
source.
Inputs of materials, components, labour, utilities & availability and arrangements made
for meeting the requirements
Infrastructure needed and available
Environmental factors and plans for effluent disposal
Implementation schedule with PERT chart
Indigenisation and import substitution plans
Statutory and other Approvals needed and status
Contents of DPR
Manpower Requirements
Details of technical manpower Managerial, engineers
Details of other managerial administration, marketing, finance etc
Technical skilled, semi skilled and unskilled workers
Administrative staff
Training needs and proposals for imparting technical training to managers , workers and staff.
Market Analysis
Aggregate demand in future and details of market survey done
Growth in demand forecasts
Market size, Market share, stage of development
Competition and trends
Industry trends / driving forces
Industry attractiveness
Consumption trends, consumer preferences
Supply trends
Exports- imports
Demand supply gap
Demand elasticity
Marketing arrangement and Distribution channels
Government policies
Legal framework
Project Cost & Capital Expenditure
Details of all the components of project cost taken in Feasibility Report , with firm and
non- firm components , supported by agreements, firm orders etc.
It should cover all the aspects including provisions for contingencies, working capital
margin .
Means of Financing
Share Capital
Internal Generation
Term Loans
Debenture Issue
Deferred Credit
Incentive Sources
Others
Give the arrangements made for securing funds from the different sources and schedule of
availing funds.
Give details of the cost of raising funds and the cost of capital
Financial Analysis
Give detailed projections for 7 to 10 yrs for Production, sales, costs , profits, cash flows
,financial position, funds flow analysis.
Give clearly the assumptions made in working out the projections and explain
rationality of the same.
Give working of Pay Back period , NPV,IRR
Give analysis of key ratios for profitability, efficiency, capital structure, DSIR , EPS; show
trends in ratios and give comparison s with industry average
Give analysis of risk in the project by Sensitivity analysis, BEP analysis, Simulation etc.
Project Implementation
Give detailed schedule
Mile stones and major activities
Schedule of completion of the activities with time estimates
PERT & GANTT Charts
Resource needed and arrangements for the same contracting/ sub contracting etc.
Project control system proposed
Project Organisation
Organisation Chart for the project groups
List of key personnel with their qualifications, experience etc.
Authority and responsibility attached with each position
System for information flow and control
Environmental Considerations
Environmental Impact Assessment study details Modeling for toxic release.
Details of effluents quantity , analysis
Proposal for effluent treatment and control
Details of plant , machinery, organisation for effluent management and safe disposal.
Economic and Social CostBenefit Analysis
Analysis of the project contribution to the economy as a whole. List the Direct and
indirect benefits in terms of employment , contribution to national economy , forex savings,
forex earnings etc.
Give social cost and benefits and the net benefits.
Give government policy with regard to the proposed industry .
Government policies and priorities
Describe how the project fits into the policy framework of the Central and State
governments
Give the details of relevant laws pertaining to the industry
Statutory approvals needed and status
CONCLUSION
Emphasize on the project contribution to the organisation , the locality, the state and
the country as a whole
Social Cost Benefit Analysis

SCBA or Economic analysis or simply cost-benefit analysis is a methodology developed for
evaluating investment projects from the point view of society or economy as a whole or national
feasibility.
It is concerned with tactical decisions making within the framework of broad strategic choices
defined by planning at the macro level.
The prospective & parameters provided by the micro level plans serve as the basis of SCBA
which is a tool for analyzing & appraising individual projects.
The purpose would be to ascertain all social costs & secondary benefits with a view to find out
the impact of the project on the society.
Prest & Turvey defined cost-benefit analysis as a practical way of assessing the desirability of projects,
where it is important to take a long view, in the sense of looking at repercussions in the future as well as
the near future and a wide view in the sense of allowing side-effects of many decisions relating to
industries, regions, etc, i.e. It implies the enumeration & evaluation of all the relevant cost & benefits
Features of SCBA
Assessing the desirability of projects in the public as opposed to the private sector
Identification of costs & benefits
Measurement of costs & benefits
The effect of (risk & uncertainty) time in investment appraisal
Presentation of results the investment criterion
SCBA Frame work
SCBA involves the following:
Measuring economic, social and environmental inputs and outputs of a project
Putting shadow prices on inputs and outputs of a project
Selecting appropriate social rate of interest
Computing social profitability of the project
SCBA Factors analysed
Project is viewed in the context of total national impact.
It is correlated to national planning priorities.
Considers effect on
output, employment.
Consumption, savings, FE earnings and outflow.
Distribution and things relevant to national objectives
Whether the consequences taken together are desirable in the light of objectives of
national planning
How SCBA differs from commercial evaluation
Soap Rs 10 per cake gives margin
needed and commercial viability proved
Cigarette Rs 15 per pack gives required
margin and commercially accepted
SCBA takes, in the case of soap, the benefit of increased hygiene and reduction in
incidence and spread of disease .
In the case of Cigarette, smokers probability for cancer or heart disease is taken into
account .
Social rate of discount used for evaluation
Each project affects employment and wage payments. How much of wage bill is
consumed and how much is saved?
Whether additional employment is out of unemployed labour pool or cutting down
employment somewhere.
Rationale or Need for SCBA
The principal sources of disagreements between the monetary & non-monetary values are as follows:
Market imperfections The common market imperfections founded in India are : Rationing of a
commodity, Prescription of min.wage rates, Foreign exchange regulation.
Externalities A project may have beneficial external effects. Likewise, a project may have
harmful external effect.
Taxes & Subsidies From the private point of view, taxes are definite monetary costs &
subsidies are definite monetary gains. From the social point of view, taxes and subsidies are
generally regarded as transfer payments.
Concern for Savings Social point Division of benefits between consumption & savings is
relevant. Private Does not put a differential valuation on savings & consumption.
Concern for Redistribution Society concerned about the distribution of benefits across
different groups. Private firms does not bother how its benefits are distributed across various
groups in the society.
Merit Wants goals & preferences not expressed in the market place, but believed by policy
makers to be in the larger interest, may be referred to as merit wants.
UNIDO Approach
United Nations Industrial Development Organisation approach developed in 1978, provides a framework
for SCBA in developing countries. Involves 4 stages of project appraisal to measure the desirability of
project from a different angle :-
Calculation of Financial Profitability of the project measured in market prices.
Obtaining the net benefit of project in terms of economic prices
Measurement of impact on distribution
Measuring the impact of project on merit goods & demerit goods whose social values differ
from their economic values
Calculation of financial profitability
Financial analysis when translated into economic prices -
1) some costs & benefits are excluded
2) the economic costs & benefits are priced at economic rates rather than market rates.
Obtaining the Net profit
Choice of Numeraire
Concept of Tradability
Sources of Shadow prices
Treatment of Taxes
Consumer willingness to pay
Measurement of the impact on distribution
Savings impact & its value
2) Income distribution impact & its value
Measurement the impact on merit & demerit goods
A merit good is one whose social value exceeds its economic or private value. A demerit good is just
opposite of merit good
Technical analysis
Technical analysis is done continually when a project is being examined and
formulated or it is carried out to ascertain whether the project is technically sound and
viable one.
Technical analysis of a project is essential to ensure that necessary physical facilities
required for production will be available and the best positive alternatives selected to
procure them.
Technical analysis includes the study of :-
1 Material inputs & utilities
2 Manufacturing process / technology
3 Plant capacity
4 Location & site of the project
5 Size of the project
6 Product mix
7 Factory design & layout
Material inputs & utilities
Inputs
Availability of raw materials at the right time in adequate quantity and quality at the
right price is an important factor in selection of a project.
Material inputs may be classified into four categories:-
1 raw materials
2 processed industrial materials &components
3 auxiliary materials
4 utilities
Utilities
1 power
2 water
3 steam
4 fuel
5 material handling
6 waste removal
7 storage
Manufacturing process / technology
Technology refers to the art of production or the skill required to manufacture a product in a factory
by using machineries, tools and equipments.
or
Technology simply refers to the manner in which a companies inputs are transformed into its outputs.
Factors influencing choice of technology
Plant capacity
2 Principal inputs
3 product mix
4 Use by the other units
5 Investment Outlay & Production cost
6 Latest developments
7 Ease of absorption
Plant capacity
Plant capacity refers to the volume or number of units that can be manufactured during a given
period. Plant capacity is also called production capacity
Types of plant capacity
There are two way of defining plant capacity:-
1 Feasible normal capacity:- refers to the capacity attainable under normal working
conditions. This may be established on the basis of the installed capacity.
2 Normal maximum capacity:-it is the capacity which is technically attainable and this
often corresponds to the installed capacity guaranteed by the supplier of the plant
Considerations for plant capacity
while deciding the plant capacity the following factors should be taken into consideration
1 Technological requirement
2 Input constraint
3 Investment cost
4 Market conditions
5 Resources of the firm
6 Government policy
Location & site
The location of the project has to be decided judiciously and objectively. A wrong selection of location
may cause difficulties in input requirements, non availability of competent technical personnel etc.
Factors to be consider while selecting a project location and site
1 Proximity to raw materials
2 Nearness to market
3 Availability of infrastructural facilities
4 Transport & communication facilities
5 Labour availability
6 Government policies
Size of the plant
The efficiency and profitability of a project are very much influenced by its size.
A large sized unit is more economical than a small sized unit.
Factors affecting size of the plant
1 Availability of raw materials
2 Capital investment needed
3 Size of the market
4 Technology / process to be adopted
5 Product mix
6 Location of the project
Product mix
Product mix is the total list of products which a firm offers to its buyers. It is the complete list of all the
products offered for sale by the firm. Selection of potentially profitable product is the first step
towards a successful venture. The product should have the foll. features
1 Serve the immediate need
2 Serve the existing market in which DD exceeds supply
3 Compete with similar product
Factory design & layout
Factory design refers to the plan for a particular type of building, arrangement of machinery and
equipment and provision of service facilities, lighting, heating, ventilation etc.
Technical arrangements
Satisfactory arrangements must be made to obtain the technical know-how needed for the proposed
manufacturing process.
Nature of support to be provided by the collaborators.
Process & performance guarantees in terms of plant capacity, product quality & consumption of
raw materials & utilities.
Price of technology in terms of one-time licensing fee & periodic royalty fee.
Continuing benefit of R&D work.
Period of the collaboration agreement.
Restriction to be imposed by the collaborator with respect to exports.
Termination of the agreement.
VALUE ANALYSIS
Characteristics of Value
it combines 4 main attributes:cost,quality,speed of delivery & flexibility
the importance of attributes of value differ for different customers
value of a good or service is ultimately defined and assessed by the customers.
it is dynamic
it is customer specific,not market or product specific.
Value = Performance
Cost
Performance describes what the good or service does for the customer.
It is described in terms of quality,speed of delivery and flexibility.
Cost represents all cost incurred
Approaches to Value Driven Competition
any time - reduce lead time
any place - reduce distance between customer and supplier
no matter change in the way customers view the firms product
mass customization
risk reduction in doing business
Types of Value
Use Value- Properties and features which accomplish the use of the product. Primary use value,
Secondary use value, Auxiliary use value
Esteem value
Cost value
Exchange value
Value Analysis
systematic analysis & evaluation of techniques & functions in the various areas of concern
with a view to exploring channels of performance improvement so that value attached to a
particular product or service may be improved.
tool for cost reduction
involves searching out new ideas
Value Engineering
concerned with production technology,product designing,fabrication & quality control.
an intensive appraisal of all the elements of the design,manufacture or construction,
procurement, inspection, installation and maintenance of a product and its components
including the applicable specifications and operational requirements inorder to achieve the
necessary performance,maintainability and reliability of the item at minimum cost.
study of the relationship of design, function and cost of any product
investigation of the performance in terms of its function and its unit price
it is an organized creative approach effective identification of unnecessary cost.
VA Team
Top Management
Suppliers
Purchasing
Design Engineering
Marketing
Production
Quality Control
Process Engineering
Areas of Application
Production:
Design For Manufacturing (DFM)
involves 2 approaches
simplification of products during design stage
standardisation and variety reduction
Purchasing
finding lowest cost an item that performs the intended function
Steps in Value Analysis
Establish the objectives
Consider a multi disciplinary team
Analyse the production process of the supplier company
Analyse the use of the product at the purchasers firm phase by phase
Decompose and analyse the various characteristics of the purchased product,applying a
weighting coefficient to each according to its importance.
Hold a creative brainstorming session to explore all alternative possibilities with the team
Sort the ideas to establish the cost
Select the best alternative
Develop a plan for implementing the change
Value analysis Process
General Phase:
use general human relations
inspire team work
work on specifics
overcome road blocks
apply good business judgement
Information Phase
secure facts
determine costs
fix the costs on specifications & requirements
Function Phase
define function
evaluate function relationship
Creation Phase
establish positive thinking
develop creative ideas
Evaluation Phase
refine & combine ideas
establish cost on all ideas
develop function alternatives
evaluate by comparison
Value analysis Process
Investigation Phase
Recommendation Phase
Value Analysis Techniques
design modification
Standardization of parts/components
use of alternative materials without affecting quality
Simplification & Variety Reduction
changing sources of supply
elimination of parts/components
modification of manufacturing process
waste reduction
Production Planning & Control
Better utilisation of resources
Project management
Objectives
l To explain the main tasks undertaken by project managers
l To introduce software project management and to describe its distinctive characteristics
l To discuss project planning and the planning process
l To show how graphical schedule representations are used by project management
l To discuss the notion of risks and the risk management process
Software project management
l Concerned with activities involved in ensuring
that software is delivered on time and on
schedule and in accordance with the
requirements of the organisations developing
and procuring the software.
l Project management is needed because software development is always subject to budget and
schedule constraints that are set by the organisation developing the software.
Software management distinctions
l The product is intangible.
l The product is uniquely flexible.
l Software engineering is not recognized as an
engineering discipline with the sane status as
mechanical, electrical engineering, etc.
l The software development process is not
standardised.
Many software projects are 'one-off' projects
Management activities
l Proposal writing.
l Project planning and scheduling.
l Project costing.
l Project monitoring and reviews.
l Personnel selection and evaluation.
l Report writing and presentations.
Management commonalities
l These activities are not peculiar to software
management.
l Many techniques of engineering project
management are equally applicable to software project management.
l Technically complex engineering systems tend
to suffer from the same problems as software
systems.
Project staffing
l May not be possible to appoint the ideal people to work on a project
Project budget may not allow for the use of highly-paid staff;
Staff with the appropriate experience may not be available;
An organisation may wish to develop employee skills on a software project.
l Managers have to work within these constraints especially when there are shortages of trained
staff.
Project planning
l Probably the most time-consuming project management activity.
l Continuous activity from initial concept through
to system delivery. Plans must be regularly revised as new information becomes available.
l Various different types of plan may be developed to support the main software project plan that
is concerned with schedule and budget.
Project planning process
Establish the project constraints
Make initial assessments of the project parameters
Define project milestones and deliverables
while project has not been completed or cancelled loop
Draw up project schedule
Initiate activities according to schedule
Wait ( for a while )
Review project progress
Revise estimates of project parameters
Update the project schedule
Re-negotiate project constraints and deliverables
if ( problems arise ) then
Initiate technical review and possible revision
end if
end loop
The project plan
l The project plan sets out:
The resources available to the project;
The work breakdown;
A schedule for the work.
Project plan structure
l Introduction.
l Project organisation.
l Risk analysis.
l Hardware and software resource requirements.
l Work breakdown.
l Project schedule.
Monitoring and reporting mechanisms
Activity organization
l Activities in a project should be organised to produce tangible outputs for management to judge
progress.
l Milestones are the end-point of a process activity.
l Deliverables are project results delivered to customers.
l The waterfall process allows for the straightforward definition of progress milestones.
Milestones in the RE process

Project scheduling
l Split project into tasks and estimate time and resources required to complete each task.
l Organize tasks concurrently to make optimal
use of workforce.
l Minimize task dependencies to avoid delays
caused by one task waiting for another to complete.
l Dependent on project managers intuition and experience.
The project scheduling process

Scheduling problems
l Estimating the difficulty of problems and hence the cost of developing a solution is hard.
l Productivity is not proportional to the number of people working on a task.
l Adding people to a late project makes it later because of communication overheads.
l The unexpected always happens. Always allow contingency in planning.
Bar charts and activity networks
l Graphical notations used to illustrate the project schedule.
l Show project breakdown into tasks. Tasks should not be too small. They should take about a
week or two.
l Activity charts show task dependencies and the the critical path.
l Bar charts show schedule against calendar time.
Activity network

Activity timeline
start
T2
M3
T6
Fi nish
T10
M7
T5
T7
M2
T4
M5
T8
4/ 7/ 03
8 days
14/ 7/ 03 15 da ys
4/ 8/03
15 da ys
25/ 8/03
7 days
5/ 9/03
10 da ys
19/ 9/03
15 da ys
11/ 8/03
25 days
10 days
20 days
5 days
25/ 7/ 03
15 days
25/ 7/ 03
18/ 7/ 03
10 da ys
T1
M1 T3
T9
M6
T11
M8
T12
M4

Staff allocation
4/ 7 11/ 7 18/ 7 25/ 7 1/ 8 8/ 8 15/ 8 22/ 8 29/ 8 5/ 9 12/ 9 19/ 9
T4
T1
T2
M1
T7
T3
M5
T8
M3
M2
T6
T5
M4
T9
M7
T10
M6
T11
M8
T12
St art
Fi nish

Risk management
l Risk management is concerned with identifying risks and drawing up plans to minimise their
effect on a project.
l A risk is a probability that some adverse circumstance will occur
Project risks affect schedule or resources;
Product risks affect the quality or performance of the software being developed;
Business risks affect the organisation developing or procuring the software.
The risk management process
l Risk identification
Identify project, product and business risks;
l Risk analysis
Assess the likelihood and consequences of these risks;
l Risk planning
Draw up plans to avoid or minimise the effects of the risk;
4/ 7 11/ 7 18/ 7 25/ 7 1/ 8 8/ 8 15/ 8 22/ 8 29/ 8 5/ 9 12/ 9 19/ 9
T4
T8 T11
T12
T1
T3
T9
T2
T6 T10
T7
T5
Fred
Jane
Anne
Mary
Jim
l Risk monitoring
Monitor the risks throughout the project;

Risk identification
l Technology risks.
l People risks.
l Organisational risks.
l Requirements risks.
l Estimation risks.
Risk analysis
l Assess probability and seriousness of each risk.
l Probability may be very low, low, moderate, high or very high.
l Risk effects might be catastrophic, serious, tolerable or insignificant.
Risk planning
l Consider each risk and develop a strategy to manage that risk.
l Avoidance strategies
The probability that the risk will arise is reduced;
l Minimisation strategies
The impact of the risk on the project or product will be reduced;
l Contingency plans
If the risk arises, contingency plans are plans to deal with that risk;
Risk monitoring
l Assess each identified risks regularly to decide whether or not it is becoming less or more
probable.
l Also assess whether the effects of the risk have changed.
l Each key risk should be discussed at management progress meetings.