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CLASSIFICATION OF PROJECT
The project can be classified on several bases. Major classifications of
the projects are given below :
1. On the basis of Expansion :
Project expanding the capacity.
Project expanding the supply of knowledge.
2. On the basis of Magnitude of the resources to be invested :
Giant projects affecting total economy
Big projects affecting at one sector of the economy.
Medium size projects
Small size projects (depending on size, investment & impact)
3. On the basis of Sector :
Industrial project
Agricultural Project
Educational Project
Health Project
Social Project
4. On the basis of objective :
Social objective project
Economic objective project.
5. On the basis of productivity :
Directivity productive project.
Indirectively productive project.
6. On the basis of nature of benefits :
Quantifiable project
Non-quantifiable project
7. On the basis of government priorities :
Project without specific priorities
Project with specific priorities
8. On the basis of dependency :
Independent project
Dependent project
9. On the basis of ownership :
Public sector project
Private sector project
Joint sector project
10. On the basis of location :
Project with determined location
Project where location is open.
11. On the basis of social time value of the project :
Project with present impact
Project with future impact
12. On the basis of National Policy :
Project determined by inward looking policy
Project determined by outward looking policy
13. On the basis of risk involved in the project?
High risks project
Normal risks project
Low risks project
14. On the basis of economic life of the projects :
Long term project
Medium term project
Short – team project
15. On the basis of technology involved in the project :
High sophisticated technology project
Advanced technology project
Foreign technology project
Indigenous technology project
16. On the basis of resources required by the projects :
Project with domestic resources
Project with foreign resources
Scope
Quality
Cost
Time
Resources
Scope
Scope is a brief and accurate description of the end – products or
deliverables to be expected from the project that meet the requirements. Scope
describes all the activities that are to be performed, resources that will be
consumed and the end-products from the successful completion of the project,
including quality standards. The scope also includes the target outcomes,
prospective customers, outputs, work, financial and human resources required to
complete the project. The various issues related to management of project scope
are discussed in Chapter 10.
Quality
Every project has to satisfy the quality requirement at two levels –
product quality and process quality. The first quality requirement relates to
products resulting from the project and the second relates to the management
processes that have to be in place to implement the project. A comprehensive
quality management system ensures effective utilization of scarce resources to
achieve the project objective of delivering products or services to the clients
satisfaction. The various tools and techniques that are needed to ensure quality
are discussed in Chapter 19 (Project Quality Management).
Time
Time is one of the important resources available to a project manager. At
the same time, it is one of the major constraints within which a project has to
be completed. Generally, the client of the sponsor of the project specifies the
time limit for the completion of the project. The time required to complete a
project is inversely related to the cost of the project. Therefore, the cost of
a project increases as the time available for its completion decreases. Since
time cannot be stored as inventory, it is the duty of the project manager to
manage time by carefully scheduling the various activities in time.
Cost
Cost plays a major role in the various stages of a project life cycle.
Project cost include the monetary resources required to complete the activities
mentioned in the scope of the project. Project costs are cost associated with
all the activities in the planning and implementation phases. The client or the
sponsor of the project activities, within which the project manager has to
deliver the product.
Resources
Resources include the people, finances and the physical and information
resources required to perform the project activities.
PROJECT MANAGEMENT
Project management is a system of procedures, practices, technologies and
know-how that enables the planning, organizing staffing, directing, and
controlling necessary to successfully manage a project.
According to PMI, “Project Management is the application of knowledge,
skills, tools and techniques to project activities in order to meet or exceed
stakeholder needs and expectations”
Project management is a carefully planned and organized effort to
accomplish a specific (and usually) one-time effort, for example, constructing a
residential complex or implementing, a new computerized banking system. Project
management includes developing a project plan that includes defining project
goals, specifying how the goals will be accomplished, what resources are needed,
and relating budgets and time for completion. It also includes implementing the
project plan, along with careful controls to ensure that the project is being
managed according to the plan, Project management usually follows five major
phases including feasibility study, project planning, implementation, evaluation
and closing. These aspects of project management will be discussed later in this
book.
PROJECT MANAGEMENT – RELATIONSHIP WITH OTHER MANAGEMENT DISCIPLINES
Although project management has derived most of its knowledge from other
management disciplines, it has evolved as a specialized science over a period of
time. It has its own management techniques such as critical path analysis and
work breakdown structures (discussed later) that are unique to project
management. Like general management, project management also involves all
aspects of planning, organizing, implementing, and controlling.
In many strategic projects, the function of project management will
involve disciplines like :
Finance : Preparing the financial statement while sending the project
proposal and managing the costs of the project
Personnel : Identifying the skills required to carry out the project,
selecting the project team and maintaining a good work environment.
Operations : Managing the activities / operations that are repetitive in
nature
Purchase and logistics : Identifying resources (raw materials, equipments
and services) required for the project. Preparing a list of eligible suppliers
and negotiating with them for procuring the right materials. Managing the
logistics for a smooth implementation of the project.
R & D : New product development, and quality assurance
Marketing : Marketing the project idea to internal and external sponsors.
RELATIONSHIP BETWEEN PROJECT MANAGEMENT AND LINE MANAGEMENT
According to the definition of project management, a project manager has
to control variables such as time, cost and other resources allocated for the
project. But in practice, he only has indirect managers. Therefore the project
manager has to maintain good relations with line managers to ensure a smooth
flow of resources. Thus, a project manager should exercise judicious control
over the resources (money, manpower, machinery, facilities, materials,
technology and information) allocated to the project from various functional
departments.
The success of a project depends on the various aspects of project and
line managers’ relations. The characteristics of a good relationship are;
Amicable working relations between the project manager and the departmental
heads who allocate resources to the project.
Functional project members ability to report to the functional manager of the
department from where he come and the project manager for whom he currently
works.
Employees of various functional departments who are selected tow work on a
project usually face difficulty in reporting to multiple bosses. The issue of
who should have control over the functional employees becomes a source of
conflict between the line and the project managers. The relations can be
strained further if any one of them claims sole credit for the success of the
project or rewards for the profits generated by the project. These conflicts can
be resolved when the managers understand their distinct roles in achieving the
overall objectives of the organization.
PROJECT MANAGEMENT ENVIRONMENT – AN OVERVIEW
Many project managers wonder why they should be concerned about the
project environment when the objective of project management is to get the
project completed within scope, cost and schedule. They fail to understand that
a project operates in an environment broader than the project, and managing the
day – to – day activities efficiently will not alone guarantee the success of
the project. Today’s project managers need to be aware of the cultural,
organizational and socioeconomic influences on projects, Understanding these
influences involves identifying the project stakeholders and examining their
ability to influence the project’s success. This chapter discusses various
aspects of project management like the role of project stakeholders,
organizational and socioeconomic influences and project time environment.
PROJECT STAKEHOLDERS
According to the Project Management Institute’s (PMI) Guide to the Project
Management Body of Knowledge, project stakeholders are ‘individuals and
organizations who are actively involved in the project, or whose interest may be
positively or negatively affected as a result of project execution or successful
project completion’
Types of Stakeholders
The major stakeholders of any project include
Project manager
Customer
Project team members
Sponsor
Parent organization.
ORGANIZATIONAL INFLUENCES
Projects are usually taken up by organizations larger than the projects
themselves. These organizations can be business corporations, government
organization, professional associations, research and development centers etc.,
Organizations that initiate a project will have an influence on the
implementation of the project. These organizational influences even act on
projects that have been initiated by joint ventures or partnerships. Some of the
major aspects of large organizations that influences projects are :
Organizational systems
Organizational cultures and style
Organization structure
Organizational Systems
Organizations, which primarily carry out projects, are known as project –
based organizations. They earn revenues mainly by undertaking projects. Some
examples of project-based firms are : consultancy firms, architecture firms,
software development firms, infrastructure contractors etc.
Some organizations adopt a management by project approach to manage their
ongoing operations. These organizations treat various aspects of ongoing
operations as projects and apply project management principles to them.
Project-based organizations have well designed management systems (such as
financial systems, control systems etc). to help them manage projects
effectively. These organizations have a number of specifically designed systems
in place to monitor the progress of the activities of a project. For example,
finance systems are designed to take care of accounting, tracking and reporting
activities of multiple projects.
Non-project-based organizations, such as manufacturing firms, hotels etc.,
may not have any management systems for addressing project needs. Managing
projects in these organizations is a difficult activity. But some
non-project-based organizations will have separate divisions or sub-divisions
that work as project-based organizations with project oriented management
system. So, the project management team should be capable of understanding the
influence of various management systems on the project.
Organizational Culture and Style.
Each organization has its own culture, i.e., its shared values, norms and
beliefs. An organization’s policies, procedures and attitude towards authority
also reflect its culture. Organizational culture and management styles have a
direct impact on the functioning of the project team. As a result organizations
that have a aggressive, risk-taking culture will not employ conservative,
cautions project managers.
Organizational Structure
Sometimes, the organization structure obstructs the free flow of resources
from the parent organization to the project. The organizational structure can
be functional, matrix or project-based.
A functional organization has a hierarchical structure. In such a
structure, superior – subordinate relationships are clear, i.e., the line of
control is clearly defined. The employees are grouped into departments according
to their areas of specialization, e.g., mechanical, engineering, electrical
engineering, production, marketing, accounting etc. Functional organizations
also work on projects, but their project activities are limited to a single
function. e.g., engineering, manufacturing, marketing etc. For example, when a
functional organization takes up the project of new product development, the
engineering department will handle the design development phase of the project.
The activities carried out by this department will be strictly limited to the
engineering function. If any question arises concerning the manufacture of the
product, the question is passed on to the manufacturing department for
clarification, through format communication channels.
In a project – based organization, the project manager has the authority
to assign priorities and to direct the work of individuals assigned to the
project. Most of the organization’s resources are allotted to various projects.
These organizations also have functional departments, but the groups working in
these departments report directly to the project manager and help in the
execution of various projects. A project organization structure is shown in
Figure 2.1
A matrix organization structure combines some of the characteristics of
functional and project-based organizational structures. In matrix organizations,
project managers and functional managers are jointly responsible for assigning
priorities and for directing the work of individuals assigned to projects. In
this organizational setup project managers have equal authority to functional
managers and the staff members report to functional managers as well as project
managers. A matrix organization structure is shown in Figure 2.2. Every
organization has one of the above discussed organizational structures, and they
have an impact on the projects initiated by them. For example, when a project
team is formed by a functional organization, those teams have to form their own
operating procedures and reporting structures that are similar to that of
project – based organizations. This organizational structure also has an impact
on the functioning of a project manager. (See Exhibit 2.1)
SOCIO-ECONOMIC INFLUENCES
A wide range of socioeconomic issues influence projects. The project team
should be aware of these issues as even a minor change in the socioeconomic
environment can sometimes affect the success of a project. Some of the
socioeconomic factors that influence projects are :
Standards and Regulations
Internationalization
Culture
Standards and Regulations
Standards are measures for judging the quality of products, Generally,
standards are documented and approved by a recognized agency / body. These
standards specify the rules and guidelines that organization must observe when
producing a product of a service. Even when these standards are not mandatory,
following them will enhance the marketability of the products produced by the
project organization.
Regulations are mandatory guidelines that lay down the necessary
characteristics of products or services. Building codes established by the Roads
; (i) raw materials. (ii) processed industrial materials and components, (iii)
auxiliary materials and factory supplies, and (iv) utilities.
Raw Materials
Raw materials (processed and / or semi – processed) may be classified into
four types : (i) agricultural products, (ii) mineral products, (iii) livestock
and forest products, and (iv) marine products.
Ease of absorption. The ease with which a particular technology can be
absorbed can influence the choice of technology. Sometimes a high-level
technology may be beyond the absorptive capacity of a developing country which
may lack trained personnel to handle that technology.
Agriculture Products In studying agricultural products the quality must first be
examined. Then, an assessment of quantities available, currently and
potentially, is required. The questions that may be raised in this context are:
What is the present marketable surplus? What is the present area under
cultivation? What is the yield per acre? What is the likely increase in the area
of cultivation? What is the likely increase in yield per acre?
Mineral Products In assessing mineral raw materials, information is required on
the quantum of exploitable deposits and the properties of raw materials. The
study should provide details of the location, size, and depth of deposits and
the viability of opencast or under ground mining. In addition, information
should be generated on the composition of the ore, level of impurities,need for
beneficiation, and physical, chemical and other properties.
Livestock and Forest Products Secondary sources of data on livestock and forest
products often do not provide a dependable basis for estimation. Hence, in
general, a specific survey may be required to obtain more reliable daa on the
quantum of livestock produce and forest products.
Marine Products Assessing the potential availability of marine products and the
cost of collection is somewhat difficult. Preliminary marine operations,
essential for this purpose, have to be provided for in the feasibility study.
Processes Industrial Materials and Components
Processed industrial materials and components (base metals, semi-processed
materials, manufactured parts, components, and sub-assemblies) represent
important inputs for a number of industries. In studying them the following
questions need to be answered: In the case of industrial materials, what are
their properties? What is the total requirement of the project? What quantity
would be available from domestic sources? What quantity can be procured from
foreign sources? How dependable are the supplies? What has been the past trend
in prices? What is the likely future behavior of prices?
Auxiliary Materials and Factory Supplies
In addition to the basic raw materials and processed industrial materials
and components, a manufacturing project requires various auxiliary materials and
factory supplies like chemicals, additives, packaging materials, paints,
varnishes, oils, grease, cleaning materials, etc. The requirements of such
auxiliary materials and supplies should be taken into account in the feasibility
study.
Utilities
A broad assessment of utilities (power, water, steam, fuel, etc.)_ may be
made at the time of input study through a detailed assessment can be made only
after formulating the project with respect to location, technology, and plant
capacity. Since the successful operation of a project critically depends on
adequate availability of utilities the following questions should be raised
while conducting the input study. What quantities are required? What are the
sources of supply? What would be the potential availability? What are the likely
short ages / bottlenecks? What measures may by taken to augment supplies?
Manufacturing Process / Technology
For manufacturing a product / service often two or more alternative
technologies are available. For example:
Steel can be made either by the Bessemer process or the open hearth process.
Cement can be made either by the dry process or the wet process.
Soda can be made by the electrolysis method or the medical method.
Paper, using bagasse as the raw material, can be manufactured by the kraft
process or the soda process or the simon cusi process.
Vinyl chloride can be manufactured by using one of the following reactions;
acetylene on hydrochloric acid or ethylene on chlorine.
Choice of Technology
The choice of technology is influenced by a variety of considerations:
Plant capacity
Principal inputs
Investment outlay and production cost
Use by other units
Product mix
Latest developments
Ease of absorption
Plant Capacity Often, there is a close relationship between plant capacity and
production technology. To meet a given capacity requirement perhaps only a
certain production technology may be viable.
Principal Inputs The choice of technology depends on the principal inputs
available for the project. In some cases, the raw materials available influence
the technology chosen. For example, the quality of limentones determines whether
the wet or dry process should be used for a cement plant. Here it may be
emphasized that a technology based on indigenous inputs may be preferable to one
based on imported inputs because of uncertainties characterizing imports,
particularly in a country like India.
Investment Outlay and Production Cost The effect of alternative technologies on
investment outlay and production cost over a period of time should be carefully
assessed.
Use by Other Units The technology adopted must be proven by successful use by
other units, preferably in India.
Product Mix The technology chosen must be judged in terms of the total product =
mix generated by it, including saleable by - products.
Latest Developments The technology adopted must be based on latest developments
in order to ensure that the likelihood of technological obsolescence in the near
future, at least, is minimized.
Acquiring Technology.
The acquisition of technology from some other enterprise may be by way of
(i) technology licensing, (ii) outright purchase, or (iii) joint venture
arrangement.
Technology Licensing A popular method of acquiring technology, the
technology license gives the licensee the right to use patented technology and
get related know-how on a mutually agreed basis. Often suppliers of technology
tend to provide a technology package which may consist of some elements which
are not essential. Hence the technology package should be disaggregated into its
component parts like the technology proper, engineering services, supply of
intermediate products, supply of equipment by the licensor, use of a trade name,
etc. Efforts should be made to acquire only the essential components of the
technology package offered by the licensor.
The contract for technology licensing should be carefully scrutinized with
respect to; (i) definition of technology to be acquired, (ii) cost of
technology licensing, (iii) guarantees provided by the licensor, (iv) duration
of technology licensing, and (v) purchase of intermediate products, components,
and other inputs.
Purchase of Technology. This mode of acquiring technology may be used in
certain kinds of industries. It is appropriate when (i) there is no possibility
of significant improvement in technology in the foreseeable future, and (ii)
there is hardly any need for technological support from the seller of
technology.
Joint Venture Arrangement. The supplier of technology may participate
technically as well as financially in the project. Financial participation is
typically in the form of equity holding. It is argued that financial
participation may strengthen the motivation of technology supplier to transfer
improvements promptly.
Appropriateness of Technology
Appropriate technology refers to those methods of production which are
suitable to local economic, social, and cultural conditions. In recent years the
debate about appropriate technology has been sparked off mainly by Schumacher
and others. The advocates of appropriate technology urge that the technology
should be evaluated in terms of the following questions :
Whether the technology utilizes local raw materials?
Whether the technology utilizes local man power?
Whether the goods and services produced cater to the basis needs?
Whether the technology protects ecological balance?
Whether the technology is harmonious with social and cultural conditions?
PRODUCT MIX
The choice of product mix is guided by market requirement. In the
production of most of the items, variations in size and quality are aimed at
satisfying a broad range of customers. For example, a garment manufacturer may
have a wide range in terms of size and quality to cater to different customers.
It may be noted that variation in quality can enable a company to expand its
market and enjoy higher profitability. For example, a toilet soap manufacturing
unit may by variation in raw material, packaging, and sales promotion offer a
high profit margin soap to consumers in upper – income brackets.
While planning the production facilities of the firm, some flexibility
with respect to the product mix must be sought. Such flexibility enables the
firm to alter its product mix in response to changing market conditions and
enhances the power of the firm to survive and grow under different situations.
The degree of flexibility chosen may be based on a careful analysis of the
additional investment requirement for different degrees of flexibility.
PLANT CAPACITY
Plant capacity (also referred to as production capacity) refers to the
volume or number of units that can be manufactured during a given period.
Several factors have a bearing on the capacity decision.
Technological requirement
Input constraints
Investment cost
Market conditions
Resources of the firm
Governmental policy
Technological Requirement
For many industrial projects, particularly in process type industries,
there is a certain minimum economic size determined by the technological factor,
For example, a cement plant should have a capacity of at least 300 tonnes per
day in order to use the rotary kiln method, otherwise, it has to employ the
vertical shaft method which is suitable for lower capacity.
Input Constraints
In a developing country like India, there may be constraints on the
availability of certain inputs. Power supply may be limited, basic raw materials
may be scarce; foreign exchange available for imports may be inadequate.
Constraints of these kinds should be borne in mind while choosing the plant
capacity.
Investment Cost
When serious input constraints do not obtain, the relationship between
capacity and investment cost is an important consideration. Typically, the
investment cost per unit of capacity decreases as the plant capacity increases.
This relationship may be expressed as follows :
C1 = C2 ( Q1
Q2 )
Where C1 = derived cost for Q1 units of capacity
C2 = known cost for Q2 units of capacity
a = a factor reflecting capacity – cost relationship.
This is usually between 0.2 and 0.9.
Example Suppose the known investment cost for 5,000 units of capacity for
the manufacture of a certain item is Rs.10,00,000. What will be the investment
cost for 10,000 units of capacity if the capacity – cost factor is 0.6
The derived investment cost for 10,000 units of capacity may be obtained as
follows :
C1 = 10,00,000 x (10,0000 / 5,000)0.6 = Rs.15,16,000
Market Conditions
The anticipated market for the product / service has an important bearing
on plant capacity. If the market for the product is likely to be very strong, a
plant of higher capacity is preferable. If the market is likely to be uncertain,
it might be advantageous to start with a smaller capacity. If the market,
starting from a small base, is expected to grow rapidly, the initial capacity
may be higher than the initial level of demand – further additions to capacity
may be effected with the growth of market.
Resources of the Firm
The resources, both managerial and financial, available to a firm define a
Other Factors
Several other factors have to be assessed before reaching a location
decision, ease in coping with environmental pollution, labour situation,
climatic conditions, and general living conditions.
A project may cause environmental pollution in various ways: it may throw
gaseous emissions; it may produce liquid and solid discharges; it may cause
noise, heat, and vibrations. The location study should analyze the costs of
mitigating environmental pollution to tolerable levels at alternative locations.
The labour situation at alternative locations may be assessed in terms of
: (i) the availability of labour, skilled, semi-skilled, and unskilled; (ii) the
past trends in labour rates, the prevailing labour rates, and the projected
labour rates; and (iii) the state of industrial relations judged in terms of the
frequency and severity of strikes and lockouts and the attitudes of labour and
management.
The climatic conditions (like temperature, humidity, wind, sunshine,
rainfall, snowfall, dust, flooding, and earthquakes) have an important influence
on location. They have a bearing on cost as they determine the extent of
air-conditioning, de-humidification, refrigeration, special drainage, etc.,
required for the project.
General living conditions, judged in terms of cost of living, housing
situation, and facilities for education, recreation, transport, and medical
care, need to be assessed at alternative locations.
Site Selection
Once the broad location is chosen, attention needs to be focused on the
selection of a specific site. Two to three alternative sites must be considered
and evaluated with respect to cost of land and cost of site preparation and
development.
The cost of land tends to differ from one site to another in the same
broad location. Sites close to a city cost more whereas sites away from the city
cost less. Sites in an industrial area developed by a governmental agency may be
available at a concessional rate.
The cost of site preparation and development depends on the physical
features of the site, the need to demolish and relocate existing structures, and
the work involved in obtaining utility connections to the site. The last
element, viz., the work involved in obtaining utility connections and the cost
associated with it should be carefully looked into. It may be noted in this
context that the cost of the following may vary significantly from site to site:
power transmission lines from the main grid, railway siding from the nearest
railroad, feeder road connecting with the main road, transport of water, and
disposal of effluents.
MACHINERIES AND EQUIPEMENTS
The requirement of machineries and equipments is dependent on production
technology and plant capacity. It is also influenced by the type of project. For
a process-oriented industry, like a petrochemical unit, machineries and
equipments required should be such that the various stages are matched well. The
choice of machineries and equipments for a manufacturing industry is somewhat
wider as various machines can perform the same function with varying degrees of
refrigerators could take various forms. To determine the kinds of machinery and
equipment required for a manufacturing industry, the following procedure may be
followed; (i) Estimate the likely levels of production over time. (ii) Define
the various machining and other operations. (iii) Calculate the machine hours
required for each type of operation. (iv) Select machineries and equipments
required for each function.
The equipments required for the project may be classified into the
following types: (i) plant (process) equipments, (ii) mechanical equipments,
(iii) electrical equipments, (iv) instruments, (v) controls, (vi) internal
transportation system, and (vii) others.
In addition to the machineries and equipments, a list should be prepared
of spare parts and tools required. This may be divided into : (i) spare parts
and tools to be purchased with the original equipment, and (ii) spare parts and
tools required for operational wear and tear.
Constraints in Selecting Machineries and Equipments
In selecting the machineries and equipments certain constraints should be
borne in mind: (i) there may be a limited availability of power to set up to an
electricity – intensive plant like, for example, a large electric furnace; (ii)
there may be difficulty in transporting a heavy equipments to a remote location,
(iii) workers may not be able to operate, at least in the initial periods,
certain sophisticated equipments such as numerically controlled machines, (iv)
the import policy of the government may preclude the import of certain
machineries and equipments.
Procurement of Plant and Machinery
For procuring plant and machinery, orders for different items of plant and
machinery may be placed with different suppliers or a turnkey contract may be
given for the entire plant and machinery to a single supplier. The factors to be
considered in selecting the supplier / s of plant and machinery are the desired
quality of machinery, the level of technological sophistication, the relative
reputation of various suppliers, the expected delivery schedules, the preferred
payment terms, and the required performance guarantees. If in house technical
expertise is inadequate, external consultants / may be employed to select plant
and machinery and supervise the installation of the same.
STRUCTURES AND CIVIL WORKS
Structures and civil works may be divided into three categories : (i) site
preparation and development, (ii) buildings and structures, and (iii) outdoor
works :
Site Preparation and Development
This covers the following : (i) grading and leveling of the site, (ii)
demolition and removal of existing structures, (iii) relocation of existing
pipelines, cables, roads, powerlines, etc., (iv) reclamation of swamps and
draining and removal of standing water, (v) connections for the following
utilities from the site to the public network : electric power (high tension and
low tension), water for drinking and other purpose, communications (telephone,
telex, etc.,) roads, railway sidings, and (vi) other site preparation and
development work.
Buildings and Structures
Buildings and structures may be divided into : (i) factory or process
buildings; (ii) ancillary building required for stores, warehouses,
laboratories, utility supply centre, maintenance services, and others; (iii)
administrative buildings; (iv) staff welfare buildings, cafeteria, and medical
service buildings, and (v) residential buildings,
Outdoor Works
Outdoor works cover (i) supply and distribution of utilities (water,
electric power, communication, steam, and gas); (ii) handling and treatment of
emission, wastages, and effluents; (iii) transportation and traffic arrangements
(roads, railway tracks, paths, parking areas, sheds, garages, traffic signals,
etc,); (iv) outdoor lighting; (v) landscaping; and (vi) enclosure and
supervision (boundary wall, fencing barriers, gates, doors, security posts,
etc).
PROJECT CHARTS AND LAYOUTS
Once data is available on the principal dimensions of the project –
market size, plant capacity, production technology, machineries and equipments,
buildings and civil works, conditions obtaining at plant site, and supply of
inputs to the project – projects charts and layouts may be prepared. These
define the scope of the project and provide the basis for detailed project
engineering and estimation of investment and production costs.
The important charts and layouts drawings are briefly described below :
General Functional Layout. This shows the general relationship between
equipments, buildings, and civil works. In preparing this layout, the primary
consideration is to facilitate smooth and economical movement of raw
materials, work-in-process, and finished goods. This means that :
The layout should seek to allow traffic flow in one direction to the extent
possible, with a minimum of crossing.
Godowns, workshops, and other services must be functionally situated with
respect to the mail factory buildings.
Material Flow Diagram This shows the flow of materials, utilities,
intermediate products, final products, by – products, and emissions. Along
with the material flow diagram, a quantity flow diagram showing the quantities
of flow may be prepared.
Production Line Diagrams These show how the production would progress along
with the key information for main equipments.
Transport Layout This shows the distances and means of transport outside the
production line.
Utility Consumption Layout this shows the principal consumption points of
utilities (power, water, gas, compressed air, etc.) and their required
quantities and qualities. These layouts provide the basis for developing
specifications for utility supply installations.
Communication Layout This shows how the various parts of the project will be
connected with telephone, telex, intercom, etc.
Organizational Layout This shows the organizational set-up of the project
along with information on personnel required for various departments and their
inter-relationship
Plant Layout The plant layout is concerned with the physical layout of the
factory. In certain industries, particularly process industries, the plant
layout is dictated by the production process adopted. In manufacturing
industries, however, there is much greater flexibility in defining the plant
layout. The important considerations in preparing plant layout are :
Consistency with production technology
Smooth flow of goods from one stage to another
Proper utilization of space
Scope of expansion
Minimisation of production cost
Safety of personnel
WORK SCHEDULE
The work schedule, as its name suggest, reflects the plan of work
concerning installation as well as initial operation. The purpose of the work
schedule is :
To anticipate problems likely to arise during the installation phase and
suggest possible means for coping with them.
To establish the phasing of investments taking into account the availability
of finances.
To develop a plan of operations covering the initial period (the running in
period).
Often, it is found that the required inputs like raw material and power
are not available in adequate quantity when the plant is ready for
commissioning, or the plant is not ready when the raw material arrives.
In the first case the plant remains idle and in the second the material
may tend to deteriorate and / or pose problems of storge. To avoid losses
arising from idle capacity and deterioration of stocks of material, work
schedule should be drawn up with care and realism so that the commissioning of
plant is reasonably synchronized with the availability of the basic inputs.
NEED FOR CONSIDERING ALTERNATIVES
The need for considering alternatives has been touched upon earlier.
This point, however, needs to be emphasized. There are alternative ways of
transforming an idea into a concrete project. These alternatives may differ in
one or more of the following aspects :
Nature of project
Production process
Product quality
Scale of operation and time phasing
Location
Nature of Project The project may envisage the manufacture of all the
parts and components in a vertically integrated unit or it may consist of an
assembly type unit which obtains the bulk of the parts and components from
outside suppliers. The project may consist of processing up to the finished
stage or may stop at a semi-finished stage. These alternatives are available
with respect to the nature of the project.
Production Process There may be several alternatives with respect to the
production process. The availability and charachteristics of raw materials,
the cost structure, and the nature of markets served are factors that have to
be borne in mind while deciding about the process.
Product Quality Barring a few products like clinical thermometers where
a certain standard has to be maintained, the choice with respect to quality is
fairly wide. This is particularly true in the case of consumer products like
textiles, footwear, etc. The quality and product range decisions would depend
on the characteristics of the market, the elasticity of demand, consumer
preferences, and the nature of competition.
Scale of Operation and Time Phasing In many cases several scales of
operation are feasible technically and financially. The choice of a particular
scale would depend on the financial resources available. The nature of
competition, the nature of demand, and the economies of scale.
Further, a given capacity may be installed in one stage or in phases.
The capital cost of capacity installation is usually lower when it is done in
one stage. The cost of idle capacity, however, is higher when it is built in a
single stage. The trade-off between these costs would determine the optimal
pattern of time phasing.
Location Location and size are closely interrelated. Perhaps the same
demand could be satisfied by : (i) a single plant for the entire market; or
(ii) one large plant for the bulk of the market with a few smaller plants for
the remaining market; or (iii) several plants of similar size spread over the
market areas. The choice would depend mainly on the trade – off between
economies of scale in manufacturing and economies of distribution.
Key Project inter-linkages
While evaluating various alternatives, the inter – linkages among key
facets of the project like product (or service), demand, plant capacity,
production technology, location, investment outlay, financial resources,
production costs, selling price, and profitability must be borne in mind.
Exhibit 5.1 shows these inter-linkages pictorially.
MARKET AND DEMAND ANALYSIS
SITUATIONAL ANALYSIS AND SPECIFICATION OF OBJECTIVES
In order to get a “feel” for the relationship between the product and
its market, the project analyst may informally talk to customers, competitors,
middlemen, and others in the industry. Wherever possible, he may look at the
experience of the company to learn about the preferences and purchasing power
of customers, actions and strategies of competitors, and practices of the
middlemen.
If such a situational analysis generates enough data to measure the
market and get a reliable handle over projected demand and revenues, a formal
study need not be carried out, particularly when cost and time considerations
so suggest. In most cases, of course, a formal study of market and demand is
warranted. To carry out such a study, it is necessary to spell out its
objectives clearly and comprehensively. Often this means that the intuitive
and informal goals that guide situational analysis need to be expanded and
articulated with greater clarity. A helpful approach to spell out objectives
is to structure them in the form of question. Of course, in doing so, always
bear in mind how the information generated will be relevant in forecasting the
overall market demand and assessing the share of the market the project will
capture. This will ensure that questions not relevant to market and demand
analysis will not be asked unnecessarily.
To illustrate, suppose that a small but technologically competent firm
has developed an improved air cooler based on a new principle that appears to
offer several advantages over the conventional air cooler. The chief executive
of the firm needs information about where and how to market the new air
cooler. The objectives of market and demand analysis in this case may be to
answer the following questions:
Who are the buyers of air coolers?
What is the total current demand for air coolers?
How is the demand distributed temporally (pattern of sales over the year)
and geographically?
What is the break-up of demand for air coolers of different sizes?
What price will the customers be willing to pay for the improved air cooler?
How can potential customers be convinced about the superiority of the new
cooler?
What price and warranty will ensure its acceptance?
What channels of distribution are most suited for the air cooler? What trade
margins will induce distributors to carry it?
What are the prospects of immediate sales?
COLLECTION OF SECONDARY INFORMATION
In order to answer the question listed while delineating the objectives of
the market study, information may be obtained from secondary and / or primary
sources. Secondary information is information that has been gathered in some
other context and is already available. Primary information, on the other hand,
represents information that is collected for the first time to meet the specific
purpose on hand. Secondary information provides the base and the starting point
for market and demand analysis. It indicates what is known and often provides
leads and cues for gathering primary information required for further analysis.
This section looks at the secondary information and the following at the primary
information.
General Sources of Secondary Information
The important sources of secondary information useful for market and
demand analysis in India are mentioned below :
Census of India A decennial publication of the Government of India, it
provides, inter alia, information on population, demographic characteristics,
household size and composition, and maps.
National Sample Survey Reports Issued from time to time by the Cabinet
Secretariat, Government of India, these reports present information on various
economic and social aspects like patterns of consumption, distribution of
households by the size of consumer expenditure, distribution of industries,
and charachteristics of the economically active population. The information
presented in these reports is obtained from a nationally representative sample
by the interview method.
Plan Reports Issued by the Planning Commission usually at the beginning,
middle, and end of the five-year plans, these reports and documents provide a
wealth of information on plan proposals, physical and financial targets,
actual outlays, accomplishment, etc.
Statistical Abstract of the Indian Union An annual publication of the Central
Statistical Organisation, it provides, inter alia, demographic information,
estimates of national income, and agricultural and industrial statistics.
India Year Book An annual publication of the Ministry of Information and
Broadcasting, it provides a wide range of information on economic and other
aspects.
Statistical Year Book An annual publication of the United Nations, it provides
world statistics relating various aspects like population, demography, gross
domestic publication, industrial production, international trade, etc.,
Economic Survey An annual publication of the Ministry of Finance, it provides
the latest data on industrial production, wholesale prices, consumer prices,
exports, agricultural production, national income, etc.,
Guidelines to Industries This is an annual publication of the Ministry of
Industrial Development.
Annual Survey of Industries An annual publication of the Central Statistical
Organisation, it contains information on various aspects of industry; number
of units and state – wise distribution, average number of working days,
employment, materials consumption, quantity of products, etc.,
Annual Reports of the Development Wing, Ministry of Commerce and Industry An
annual publication, it gives a detailed review of industries under the purview
of the wing. It also provides information about new items manufactured for the
first time in India and the list of protected industries.
Annual Bulleting of Statistics of Exports and Imports An annual publication of
the Ministry of Commerce, it provides data on imports and exports for a very
large number of items and as per international classification.
Techno-Economic Surveys The National Council of Applied Economic Research has
conducted and published techno-economic surveys for various states.
Industry Potential Surveys The Industrial Development Bank of India in
consortium with other financial institutions has conducted and published
industrial potential surveys for several backward areas.
The Stock Exchange Directory This directory, published by the Bomb ay Stock
Exchange, provides a ten-year picture of performance and financial statements
for all listed companies and other important companies. It contains very
valuable information for comparative analysis. It is periodically updated.
Monthly Studies of Production of Selected Industries A monthly publication of
the Central Statistical Organisation, it provides all – India date on
production, number of units installed, capacity, state-wise break-up stock
level, etc., for several selected industries.
Monthly Bulletin of Reserve Bank of India This provides information on
production indices, prices, balance of payment position, exchange rates, etc.,
Publications of Advertising Agencies. The leading advertising agencies like
Clarion, McCann and Thompson have published test markets, marketing rating
indices of towns of India, consumer index of markets, and other studies which
throw valuable light on Indian markets.
Other Publications Among other publications, mention may be made of the
following : (i) Weekly Bulletin of Industrial License, Import License and
Export Licenses (published by the Government of India), (ii) Studies of the
economic division of the State Trading Corporation; (iii) Commodity reports
and other studies of the Indian Institute of Foreign Trade; (iv) Studies and
reports of export promotion councils and commodity boards; and (v) Annual
Report on Currency and Finance (issued by the Reserve Bank of India)
Evaluation of Secondary information
While secondary information is available economically and readily
(provides the market analyst is able to locate it) its reliability, accuracy,
and relevance for the purpose under consideration must be carefully examined.
The market analysis should seek to know :
Who gathered the information? What was the objective?
When was the information gathered? When was published?
How representative was the period for which the information was gathered?
Have the terms in the study been carefully and unambiguously defined?
What was the target population?
How was the sample chosen?
How representative was the sample?
What was the degree of sampling bias and non – response bias in the
information gathered?
What was the degree of misrepresentation by respondents?
How accurately was the information edited, tabulated, and analysed?
Was statistical analysis properly applied?
CONDUCT OF MARKET SURVEY
Secondary information, though useful, often does not provide a
comprehensive basis for market and demand analysis. It needs to be
supplemented with primary information gathered through a market survey,
specific to the project being appraised.
The market survey may be a census survey or a sample survey. In a census
survey the entire population is covered. (The world “population” is used here
in a particular sense. It refers to the totality of all units under
consideration in a specific study. Examples are: all industries using milling
machines, all readers of the Economic Times). Census surveys are employed
principally for intermediate goods and investment goods when such goods are
used by a small number of firms. In other cases, a census survey is
prohibitively costly and may also be infeasible. For example, it would be
inordinately expensive – nay, impossible – to cover every user of Lifebuoy or
every person in the income bracket Rs.10,000 – Rs.15,000.
Due to the above mentioned limitations of the census survey, the market
survey, in practice, is typically a sample survey. In such a survey a sample
of the populations is contacted / observed and relevant information is
gathered. On the basis of such information, inferences about the population
may be drawn.
The information sought in a market survey may relate to one or more of
the following :
Total demand and rate of growth of demand
Demand in different segments of the market
Income and price elasticities of demand
Motives for buying
Purchaseing plans and intensions
Satisfaction with existing products
Unsatisfied needs
Attitudes towards various products
Distributive trade practices and preferences
Socio-economic characteristics of buyers
Steps in a sample Survey
Typically, a sample survey consists of the following steps :
Define the Target Population
In defining the target population may be divided into various segments
which may ously defined. The target population may be divided into various
segments which may have differing characteristics. For example, all
television owners may be divided into three to four income brackets.
Select the Sampling Scheme and Sample Size
There are several sampling schemes : simple random sampling, cluster
sampling, sequential sampling, stratified sampling, systematic sampling, and
non-probability sampling. Each scheme has its advantages and limitation. The
sample size, other things being equal, has a bearing on the reliability of
the estimates – the larger the sample size, the greater the reliability.
Develop the Questionnaire
The questionnaire is the principal instrument for eliciting
information from the sample of the respondents. The effectiveness of the
questionnaire as a device for eliciting the desired information depends on
its length, the types of questions, and the wording of questions. Developing
the questionnaire requires a thorough understanding of the product / service
and its usage, imagination, insights in to human behaviour, appreciation of
subtle linguistic nuances, and familitarity with the tools of descriptive
and inferential statistics to be used later with the tools of descriptive
and inferential statistics to be used later for analysis. It also requires
knowledge of psychological scaling techniques if the same are employed for
obtaining information relating to attitudes, motivations, and psychological
traits. Industry and trade market surveys, in comparison to consumer
surveys, generally involve more technical and specialized questions.
Since the quality of the questionnaire has an important bearing on the
results of market survey, the questionnaire should be tried out in a pilot
survey and modified in the light of problems / difficulties noted.
Recruit and Train the Field Investigators
Recruiting and training of field investigators must be planned well
since it can be time-consuming. Great care must be taken for recruiting the
right kind of investigators and imparting the proper kind of training of
them. Investigators involved in industry and trade market survey need
intimate knowledge of the product and technical background particularly for
products based on sophisticated technologies.
Obtain Information as per the Questionnarie from the Sample of Respondents
Respondents may be interviewed personally, telephonically, or by mail
for obtaining information. Personal interviews ensure a high rate of
response. They are, however, expensive and likely to result in biased
responses because of the presence of the interviewer. Mail surveys are
economical and evoke fairly candid responses. The responses rate, however,
is often low. Telephonic interviews, common in western countries, have very
limited applicability in India because telephone tariffs are high and
telephone connections few.
Scrutinise the Information Gathered
Information gathered should be thoroughly scrutinized to eliminate
data which is internally inconsistent and which is of dubious validity. For
example, a respondent with a high income and large family may say that he
lives in a one-room tenement. Such information, probably inaccurate, should
be deleted. Sometimes data inconsistencies may be revealed only after some
analysis.
Analyse and Interpret the Information
Information gathered in the survey needs to be analysed and
interpreted with care and imagination. After tabulating it as per a plan of
analysis, suitable statistical investigation may be conducted, wherever
possible and necessary. For purposes of statistical analysis, a variety of
methods are available. They may be divided into two broad categories;
parametric methods and non-parametric methods. Parametric methods assume
that the variable or attribute under study conforms to some known
distribution. Non-parametric methods do not presuppose any particular
distribution.
Results of data based on sample survey will have to be extrapolated to the
target population. For this purpose, appropriate inflationary factors, based on
the ratio of the size of the target population to the size of the sample
studied, will have to be used.
The statistical analysis of data should be directed by a person who has a
good background in statistics as well as economics.
It may be emphasized that the results of the market survey can be vitiated
by: (i) non-representativeness of the sample, (ii) imprecision and inadequacies
in the questions, (iii) failure of the respondents to comprehend the questions,
(iv) deliberate distortions in the answers given by the respondents, (v) inept
handling of the interview by the investigators, (vi) cheating on the part of the
investigators, (vii) slip-shed scrutiny of data, and (viii) incorrect and
inappropriate analysis and interpretation of data.
Some Problems
A market researcher in India has to contend with the following problems :
Heterogeneity of the Country Since it is well-nigh impossible to cover all
the states in an all – India survey, the country has to be divided into broad
territories going beyond the state boundaries. However, the heterogeneity of the
country makes the task difficult. Presently the research agencies seem to divide
the country the way they think it is a appropriate. This cause problems in
comparing the findings of different research agencies.
Multiplicity of Languages Scaling techniques, commonly recommended in
marketing research literature, involve a 5-point scale or a 7-point scale. Such
refined scales are not easily amenable to translation in regional languages.
More important, they are often not comprehensible to a vast majority of
respondents who may lack the education and sophistication to understand them.
Hence when refined scaling techniques are used, answers tend to be erratic and
inconsistent. It is perhaps desirable to rely more on open-ended questions and
less on pre-coded questions on definite scales.
CHARACTERISATION OF THE MARKET
Based on the information gathered from secondary sources and through the
market survey, the market for the product / service may be described in terms of
the following :
Effective demand in the past and present
Breakdown of demand
Price
Methods of distribution and sales promotion
Consumers
Supply and competition
Government policy
Effective Demand in the past and present
To gauge the effective demand in the past and present, the starting point
typically is apparent consumption which is defined as :
Production + Imports – Exports – Changes in stock level
The figure of apparent consumption has to be adjusted for consumption of the
product by the producers and the effect of abnormal factors. The consumption
series, after such adjustments, may be obtained for several years.
In a competitive market, effective demand and apparent consumption are equal.
How ever, in most of the developing countries, where competitive markets do not
exist for a variety of products due to exchange restrictions and controls on
production and distribution, the figure of apparent consumption may have to be
adjusted for market imperfections. Admittedly, this is often a difficult task..
Breakdown of Demand
To get a deeper insight into the nature of demand, the aggregate (total)
market demand may be broken down into demand for different segments of the
market. Market segments may be defined by (i) nature of product, (ii) consumer
group, and (iii) geographical division.
Nature of Product One generic name often subsumes many different products
: steel covers sections, rolled products, and various semi-finished products;
commercial vehicles cover trucks and buses of various capacities; so no and so
forth.
Consumer Groups Consumers of a product may be divided into industrial
consumers and domestic consumers. Industrial consumeners may by sub-divided
industrywise. Domestic consumers may be further divided into different income
groups.
Geographical Division A geographical breakdown of consumers, particularly
for products which have a small value-to-weight relationship and products which
require regular, efficient after-sales service is helpful.
Why is segmental analysis required? Segmental information is helpful
because the nature of demand tends to vary from one segment to another (the
demand from consumers in high income brackets may not be sensitive to price
variations whereas the demand from consumers in low income brackets may be very
sensitive to price variations) and different marketing strategies may be
appropriate to different market segments.
Price Price statistics must be gathered along with statistics pertaining
physical quantities. It may be helpful to distinguish the following types of
prices : (i) manufacturer’s price quoted as FOB (free on board) price or CIF
(cost, insurance, and freight) price, (ii) landed price for imported goods,
(iii) average wholesale price, and (iv) average retail price.
Methods of Distribution and Sales Promotion
The method of distribution may vary with the nature of product. Capital
goods, industrial raw materials or intermediates, and consumer products tend to
have differing distribution channels, Further, for a given product, distribution
methods may vary. Likewise, methods used for sales promotion (advertising,
discounts, gift schemes, etc.,) may vary from product to product.
The methods of distribution and sales promotion employed presently and
their rationale must be specified. Such a study may explain certain patterns of
consumption and highlight the difficulties that may encountered in marketing the
proposed products.
Consumers
Consumers may be characterized along two dimensions as follows :
Demographic and sociological Attitudinal
Age Preferences
Sex Intentions
Income Habits
Profession Attitudes
Residence Responses
Social background
Supply and Competition
It is necessary to know the existing sources of supply and whether they are
foreign or domestic. For domestic sources of supply, information along the
following lines may be gathered; location, present production capacity, planned
expansion, capacity utilization level, bottlenecks in production, and cost
structure.
Competition from substitutes and near – substitutes should be specified
because almost any product may be replaced by some other product as a result of
relative changes in price, quality, availability, promotional effort, and so on.
Government Policy
The role of government in influencing the demand and market for a product
may be significant. Governmental plans, policies, legislations, and fiats which
have a bearing on the market and demand of the product under examination should
be spelt out. These are reflected in: production targets in national plans,
import and export trade controls, import duties, export incentives, excise
duties, sales tax, industrial licensing, preferential purchases, credit
controls, financial regulations, and subsidies / penalties of various kinds.
DEMAND FORECASTING
After gathering information about various aspects of the market and demand
from primary and secondary sources, an attempt may be made to estimate future
demand. A wide range of forecasting methods is available to the market analyst.
These may be divided into three categories : qualitative methods, time series
projection methods, and causal methods. A brief description of these methods
follow. For a more detailed exposition, consult Appendix 4A at the end of this
chapter.
Qualitative Methods
These methods rely essentially on the judgment of experts to translate
qualitative information into quantitative estimate. The important qualitative
methods are as follows:
Jury of executive opinion method Very popular in practice, this method calls
for the pooling of views of a group of executives on expected future sales and
combining them into a sales estimate.
Delphi method This method involves converting the views of a group of
experts, who do not interact face – to – fact, into a forecast through an
iterative process.
Time Series Projection Methods
These methods generate forecasts on the basis of an analysis of the
historical time series. The important time series projection methods are as
follows :
Trend projection method Very popular in practice, the trend projection
method involves extrapolating the past trend onto the future.
Exponential smoothing method In exponential smoothing, forecasts are
modified in the light of observed errors.
Moving average method According to this method, the forecast for the next
period represents a simple arithmetic average or a weighted arithmetic average
of the last few observations.
Causal Methods
More analytical than the preceding methods, causal methods seek to develop
forecasts on the basis of cause – effect relationships specified in an explicit,
quantitative manner. The important methods under this category are as follows:
Chain ratio method A Simple analytical approach, this method calls for
applying a series of factors for developing a demand forecast.
Consumption level method Useful for a product that is directly consumed,
this method estimates consumpation level on the basis of elasticity
coefficients, the important ones being the income elasticity of demand and the
price elasticity of demand.
End use method Suitable for intermediate products, the end use method
develops demand forecasts on the basis of the consumption coefficient of the
product for various uses.
Leading indicator method According to this method, observed changes in
leading indicators are used to predict the changes in lagging variables.
Econometric Perhaps the most sophisticated forecasting tool, the econometric
method involves estimating quantitative relationship derived from economic
theory.
MARKET PLANNING
To enable the product to reach a desired level of market penetration, a
suitable marketing plan should be developed. Broadly, It should cover pricing,
distribution, promotion, and service. The details that need to be hammered out
are shown below :
Pricing Distribution
Ex-factory price Packaging
Taxes and duties Transportation
applicable for the arrangement
domestic price
Trade margins / Channel of
discounts distribution
Final price to the Role of distributors,
domestic customer wholesalers, and retailers
Export price
Promotion Service
Branding Installation
Advertising User education
Personal selling Warranties
Promotional efforts After-sales service
PROJECT COST
The project cost is the sum of all die costs of the activities associated
with the project. It includes all costs under die following heads: building and
civil works, land and site development, plant and machinery, expenses on foreign
technicians, miscellaneous fixed assets, margin money, far working, capital,
provision for contingencies, preoperative expenses and initial cash losses. Some
of the items that fall under these heads are listed in Exhibit 8.1.
MEANS OF FINANCING THE PROJECT
The project manager can finance die project in a number of ways: share
capital, term loans, debenture capital, deferred credit, and other miscellaneous
sources. Any one or a combination of two or more of these methods can be chosen
to finance die project.
Share Capital
Share capital is of two types: equity capital and preference capital.
Equity capital is the capital contributed by owners of the firm. Equity holders
enjoy the profits and bear die risks of the firm. Preference capital refers to
the contribution made by preference shareholders by investing in a firm s
preference shares.
Term Loans
Term loans are secured borrowings provided by financial institutions and
commercial banks. These loans help firms take up expansion, modernization, and
renovation projects. Term loans are available in both rupees and foreign
currencies. Companies take foreign currency term loans to meet their foreign
currency expenditures e.g. import of machinery, or consultation fees of foreign
technicians.
Debenture Capital
Debentures are issued by firms to raise debt capital, normally for a period
of 5 to 10 years. The debentures are secured against the assets of the issuing
firm. There are three types of debentures: non - convertible debentures,
partially convertible debentures, and fully convertible debentures. A fixed
interest is paid for non - convertible debentures. In the case of Partially
Convertible Debentures (PCDs), only a part of them are converted into equity
shares; but in the case of fully convertible debentures, all the debentures are
fully converted into equity shares as per pre-determined terms?
Deferred Credit
Machinery and equipment suppliers often provide credit facilities to firms.
This is referred to as deferred credit. This credit is repaid over a period of
time, depending on the value of the machinery and the credit standing of the
buyer. Normally, suppliers demand a bank guarantee equivalent to the value of
the machinery.
Miscellaneous Sources
Miscellaneous sources include unsecured loans, public deposits (as per the
rules of Central Government and RBI), incentive sources form government
agencies, and leasing and hire purchase finance. But these sources contribute
only a small part of the total project capital.
WORKING CAPITAL REQUIREMENTS AND FINANCING
The project manager considers the following points when estimating die
working capital requirements of a project:
Raw materials and components
Work-in-process
Stocks of finished goods
Operating expenses
The important sources of working capital are
Working capital advances from commercial banks
Long-term sources of financing
Trade credit
Accruals and provisions
The project manager should be aware of the limits for obtaining working capital
advances from commercial banks:
The aggregate permissible bank finance, as per the norms of lending,
prescribed by the Tandon Committee.
The amount of margin money a firm can provide against each current asset.
Initially, the Tandon Committee proposed a method for determining the
maximum amount of money a project can obtain to meet its working capital
requirements. According to that method, at least 25 percent of current assets
must be supported by long term sources of finance. To provide greater freedom to
borrowers to assess working capital requirements, this method (and similar
methods) was withdrawn, effective 15 April, 1997. Banks were instructed to
evolve their own methods to assess working capital requirements of projects.
The margin requirement varies with type of current asset. The ranges
within which margin requirements lie for various types of current assets are:
However, there is no standard formula for determining the margin amount.
The method is easy to understand and does not require complex calculations.
Disadvantages of payback period
It measures only the capital recovery of the projects, not their
profitability.
The method ignores cash flows beyond the payback period.
Discounted Cash Flow Criteria
In this criteria, the time value of money is considered when evaluating
the costs and cash flows of a project. There are three methods:
Net present value method (NPV)
Internal rate of return (ERR)
Profitability Index
Net present value method (NPV)
The net present value of a project is equal to the sum of all the cash
flows associated with the project. In this method, all the future cash flows are
converted into their present values, using the required rate of return. The
difference between the present value of cash outflows and the present value of
all cash inflows gives the net present value.
RISK ANALYSIS OF PROJECT INVESTMENTS
Every project is exposed to a certain amount of risk and the extent of
risk varies from project to project. So, the project manager should attempt to
estimate the possible level of risk his project is likely to be exposed to.
Suppose the project manager has a choice two between two alternatives, X
and Y, each involving the same investment, but offering different outcomes as
given below. ;
The expected outcome of Proposal X is (10,000 x 0.5 + 0 x 0.5) = 5,000;
Therefore, the expected outcome of both proposals are equal. If the project
manager does not want to take any risk, he prefers Proposal Y. The project
manager can also take up Proposal X, if he wants to take up some risk.
Proposal Possible Outcome Probability
X 10000 0.5
0 0.5
Y 5000 1
Normally, three types of project risks are studied for each project idea.
They are stand alone risk, corporate risk, and systematic risk.
Stand alone risk
Stand alone risk refers to the risk a project faces when it is considered
in isolation.
Corporate risk
This refers to the risk a firm faces because of a project.
Systematic risk
This risk is caused by the existing market situation. This risk is also
called market risk.
Techniques of Risk Analysis
Firms follow different techniques to protect their projects from risks.
Some of the techniques used by firms are Sensitivity Analysis, Scenario
Analysis, etc.
Sensitivity analysis
This technique is used to find out how sensitive the results of a
particular financial model are to changes in input variables. For example, the
net present value of a project depends on several factors like selling price of
the product, annual sales, project life period, income tax etc. Sensitivity
analysis aims at examining how net present value changes with changes in the
above factors. To carry out this analysis, the project manager establishes a
relationship between the net present value and factors that affect the net
present value. Then he studies the range of net present values with variations
in each of the factors affecting it. By understanding the affect of several
factors, the project manager estimates the possibility of achieving the project
objectives.
Scenario analysis
If the variables that affect the project output are inter-related, then
the project manager uses scenario analysis. This analysis identifies
combinations of inputs that lead to a change in output values. The project
manager develops each scenario that represents a combination of variables. For
example, the project can be evaluated under the three scenarios;
Scenario in which demand and price are normal
Scenario in which demand is high and price is low
Scenario in which demand is low and price is high.
This helps the project manager analyze how the project objectives can be
achieved under several scenarios.)
SOCIAL COST BENEFIT ANALYSIS (SCBA)
Since projects affect society, they should also be studied from the point
of view of society. So the project manager has to analyze the social and
economic benefits generated by the project and also the social costs of the
project.
Social costs refer to the harmful effects of a project to society like air
pollution, water pollution, soil erosion, deforestation, production of harmful
products, etc. Social benefit refers to the positive impact of a project on
society like increase in employment opportunities, rise in per capita income
etc. The objective of a Social Cost Benefit Analysis is to assess the positive
and negative effects of a project on society. The project manager finally
chooses the project that is socially beneficial.
Indicators of Social Desirability of a Project
There are several evaluation methods for testing the social desirability
of a project. Some of the important indicators of the social desirability of a
project are discussed below.
Employment opportunities
Unemployment is a major problem in developing countries like India. So, a
project with high employment potential is desirable. Since there is surplus
labor in these countries, labor intensive projects would generate more
employment opportunities.
Foreign exchange benefits
Countries that are experiencing a foreign exchange crunch give preference to
projects that earn foreign exchange. An import substitution project that saves
the country s foreign exchange is thus a desirable project.
Output per unit of capital
In countries where there is a dearth of capital, a project that gives a higher
output per unit of capital employed is preferred.
Value addition criterion
The Value addition of a project refers to the difference between the market
price of a project s output and the costs/price of the goods and services
bought from other firms for carrying out the project. According to this
approach, the value added per unit of capital is ascertained so that the
project that gives higher value can be chosen.
Cost benefit ratio
The social costs and social benefits associated with a project are calculated
and the project that provides more benefits than costs is selected and
implemented. Here, costs and benefits are ascertained based on the shadow
prices. The shadow price is the real price that would have prevailed had there
been no imperfections in the market. Then these costs and benefits are
discounted to the present value of social costs and benefits and the ratio of
benefits to the costs gives the cost benefit ratio.
UNIDO Approach
Social Cost Benefit Analysis is a useful tool for selecting a project.
However, it is not easy to quantify the social costs and social benefits. The
United Nations Industrial Development Organization (UNIDO) has therefore
developed a method for measuring social costs and social benefits.
The method consists of five steps:
Calculating financial profitability at market prices
Calculating net benefits at economic prices
Adjustment for project s impact on savings and investment
Adjustment for project s impact on income distribution
Adjustment for impact of project on merit and demerits goods
Calculation of Financial Profitability at Market Prices
In this step, the project manager assesses the net profitability of the
project on the basis of the market prices of all inputs and outputs. The profit
is obtained by subtracting the expenditure incurred from the firm s revenues.
The project manager calculates the profitability of the project as the
percentage of profit to the capital employed.
The role of the industry in the national economy and the national policies,
and priorities and targets related or assigned to the industry.
The approximate present size of demand, its past growth / graph major
determinants and / or indicators.
Sales forecast and marketing plan :
Anticipated competition for the project from existing and potential local and
foreign producers and suppliers.
Local market share for products and by – products.
Sales programme and distribution arrangements
Estimate annual sales revenues from products and by – products, from home
market and exports.
Estimated annual cost on marketing and sales promotion
Production programme
Products
By-products
Wastes
Estimated annual costs on waste
Production
Sales Administration
Management
service costs.
Production overheads
Depreciation and interest are sometimes treated as production overheads
depending on the practice.
Manpower :
Based on the determination of technology, plant capacity, marketing and
selling subsystems required, realistic assessment of the manpower required for
manning the plant and for its maintenance, should be made. So also the staff
required for management and administration of the enterprise should also be well
planned. This area has now become so vital and significant that no more it is
restricted as personnel department. Including the aspects or recruitment,
training including on-the-job training, it is now termed as Human Resource
Development. All plant and machineries may become idle if suitable technical and
other staff are not available. The number and level at which the manpower
required in technically specialized fields and the general administrations
should be accurately estimated. The cost of manpower including welfare measures
and incentives for optimal utilization should also be correctly worked out.
Fringe benefits (UNIDO calls it as surcharge) should also be considered because
it encourages the staff and family, A detailed recruitment, training, and
manning schedule should be attached to the TEFR.
8. Implementation schedule
The stages of project work which starts after approval of TEFR, until the
commencement of the of stabilized production and maintenance is called
implementation stage.
Implementation includes :
Design
Engineering
Procurement
Contracting
Construction
Start-up
Stabilisation of operation and maintenance :
All these activities should be scheduled in a cogent and coherent manner so
that there is integrated coordination in the smooth movement of the work
schedule. Without loss of time. This could be well presented in a network
diagram or bar charts.
In order to get excellent implementation, each and every substage should be
meticulously planned after having firsthand detailed discussions with the
concerned specialists / experts, or staff of the organization. Discussion should
also be held with prospective suppliers and manufactures, financiers, bankers
and underwriters (in case of issue of equity and other instruments). The time
frame should be accurately planned including sub-networks because time involves
costs. Based on the time and work schedule, a cost budget should be prepared and
enclosed to the TEFR.
At the TEFR stage, the methods of guesswork and rough estimation adopted at
PFR stage should never be applied. Even is details are not available for a small
part of the schedule, adequate efforts should be taken to arrive at exact
estimates as otherwise the total schedule will be upset. So also any stoppage or
bottleneck in the middle would have chain reaction.
In order to arrive at accurate estimates of time and cost seek the
assistance of
Technology owner’s expertise
Consultant’s experience
Executive’s Competencies
Your knowledge and understanding
Other connected peoples promises and
Reliable statistics corroborated by test checks.
9. Financial and Economic Evaluation
This section is the most crucial part of the TEFR and needs arduous and
meticulous efforts to prepare all the schedules / statements
Financial and Economic Evaluation analyses
Capital cost estimates
Operating cost estimates
Working capital estimate and cost Distribution schedule
Profitability and financial analysis
Sensitivity Analysis (SA) and Risk Analysis (RA)
Project Balance Sheet and Income Statement, and
Social Cost – Benefits
Let us examine the details required under these major heads.
Capital Cost Estimate
For preparing a realistic capital cost estimate seek the cooperation And
expertise of knowledgeable of
Project Engineering department
Product line experts
Project management unit
Commercial and Contracting department
Planning department
Processing department
Construction
Finance and accounts
Human Resource and
Statistics and data processing
DETAILED PROJECT REPORT
DPR has to be approved by the Cabinet Committee on Economic Affairs (CCEA)
apart from PIB. This shows the significance of DPR.
The firmed up estimates of DPR should confirm to +/-15 percent accuracy
(i.e) 85 percent validity) it is better to go ahead with the documents listed in
the following checklist
Checklist of Documents and Data Necessary for preparation of DCE, to accompany
DPR
Process / systems design
Raw materials / feedstock and project specification
License fee for technology
Engineering plan and engineering manpower curves
Final flow diagrams
Piping and electrical layout drawings for both underground and above ground
Piping and instrumentation diagrams for process and utilities
Layout plans for buildings, equipment, utilities and off – sites
General project specifications
Soil investigation report and foundation requirement
Site grading plan
Single line electrical drawings
Construction plan
Environmental protection plan
Specifications and data sheets for all major equipment
Quotations / proform a invoices and other procurement costs for major
equipment
Equipment list
Resources schedules
Bulk materials take off sheets and price schedules
Construction labour wage rates and productivity details
Organisational charts and manpower curves
Construction equipment usage charts and equipment prices
Works contract tax basis and rates
Any other Project – specific data.
You are permitted to submit DPR upto one year after getting the clearance of
TEFR but it is better you do it as early as possible, of course without haste
inaccuracies and errors; when time lapses, the escalation costs will be
increasing.
If you are to delay beyond one year, you must motify PIB and give reasons
How DPR is prepared
Breakdown all project components, time phase and schedule them with accurate
cost estimates. Explain how you have improved from TEFR.
Develop baselines for controlling time and cost during the implementation
and
Indicate your preparedness with all technical and resources requirements.
In short, the DPR will constitute, copy of the approved TEFR, firmed up DEC
with baseline calculations and additional data / information listed in the
following circular of BPE (Dec 12, 1969)
Additional data / Information to accompany DPR
1. Deviations from Feasibility Study
Deviations in cost, profitability analysis, technology, scope of work,
market demand, pricing and location to be indicated (Attach copy of the
Feasibility Report)
II. Drawings
Map / Index plan showing location of the project in relation to adjoining
towns, trunk roads, railways lines, etc.
Drawings showing detailed layout of factory, indicating roads, railway
lines, water supply, sewerage and power lines and installations.
III. Physical / Topograhical
General topographical features of the site
Soil characteristics of site
Average annual rainfall and maximum monthly rainfall
Maximumand minimum temperature
Prevailing direction of wind
IV. Rates
A copy of the schedule of Rates of the District based on which the estimate
has been prepared.
Cost of materials and labour at site. For materials, the cost at sources,
lead and carriage charges should be indicated.
V. Water and power Supply
An indication regarding the assurances from the state Government or local
authority concerned, guaranteeing supply of the required quantity of water and
power.
VI. Information to Accompany Estimate Provisions
1. Land
Total area to be acquired. Area required for immediate use and that required
for future expansion.
2. Levelling and Dressing
An indication of the extent and nature of work involved may be furnished in
justification of the rates provided.
3. Main plant structures
Plinth area, broad details of structure (RCC or steel), side cladding,
roofing, flooring, height of columns, number and capacity of gantry cranes;
basis of arriving at the plinth area; and rate per sq.m The same may be
furnished in respect of each structure.
4. Auxiliary plant structures – as above.
5. Welfare buildings (canteens, first – aid centre, etc.)
Plinth area of each buildings, basis of arriving at the plinth area and rate /
UNIT - II
FUNDAMENTALS OF PROJECT NETWORK DIAGRAMS
According to the Project Management Body of Knowledge (PMBOK), a pi
network diagram is a schematic representation of the project activities and the
Io relationships (dependencies) among them. The diagram helps the project
manager in j sequencing, scheduling and controlling the project. The diagram
represents all the project activities, the sequence in which they have to be
performed, the duration of each activity, the interdependencies among various
activities and the criticality (significance) of each activity.
The project network diagram helps the1 project manager in project
planning by detailing the project activities, estimating the required resources,
and displaying the interrelationships among activities. The diagram helps to
determine the start and end dates of each activity during scheduling and it also
provides insights into possible trade-offs while controlling the project.
A good project network diagram should answer the following questions:
What is the estimated completion time of a project?
How does a delay in an activity affect the expected completion time?
How can the expected completion time of a project be reduced, if
additional resources are available?
Activity and Node
The project network diagram is represented by a series of activities and
nodes. An activity is a specific task or operation required to do a project. It
is depicted by an arrow. A node (also called an event), is a time oriented
reference point that signifies the start or end of an activity. It is
represented by a circle.
The difference between an activity and a node is that the activity
represents the passage of time and the nodes are points in time that denote the
starting or ending of a specific activity. In the diagram, activity A is
represented with i and j as the starting and ending nodes. The activity can also
be written as I -j. Event i is called the tail event and event j is called the
head event.
Dummy activity: An activity of zero duration that is used to represent the
logical relationship in the network diagram is called a dummy activity. Dummy
activities do
Activity A
<D
Tail Node
Head Node
not consume any resources, but are used to maintain the proper precedence
relationship between the activities that are not connected by the nodes. It is
represented by a dashed line headed by an arrow.
Expected time
The project manager arrives at the expected time based on the above
estimates. The project manager calculates the estimate of duration of an
activity as,
t = (to + 4tm + tp) / 6
Wide band Delphi method
A combination of the Delphi method and the three point method is referred to
as the Wide Band Delphi method. In tins method, the members are asked to
give an optimistic time, a pessimistic time, and the most probable time,
instead of a single estimate. Then the project manager follows the Delphi
method and determines the duration estimate.
SCHEDULE DEVELOPMENT
Schedule development is concerned with determining a realistic start and
finish time for project activities. It aims to match project resources like
machinery, materials and labor with project activities over time. Good
scheduling eliminates production problems, facilitates timely procurement of raw
materials, and ensures project completion on time. Otherwise, it may lead to
delays in project activity, loss of inventory and cost overruns.
The project manager should be aware of the resources and the quantity of
these resources needed at every stage of the project. He has to prepare a
resource pool description that contains details of all the project resources
and their allocation to project activities.
The project manager prepares two types of calendars; project calendars and
resource calendars to schedule the project. Project calendars emphasize the
completion time of the project activities. Suppose it is estimated that the
project is to be completed in 7 200 hours in normal working conditions. Then
schedules are prepared based on the time estimates. The project manager assumes
that 60% of the project is accomplished, if 4,320 hours are spent on the
project. Most of the projects are scheduled based on project calendars.
Resource calendars schedule the project on the basis of the resources
used. The focus here is on scheduling and utilizing specific resources
effectively. For example, a construction project requires 1200 bags of cement.
If 360 bags have been used, the project manager can assume that 30% of the work
has been done. Here, the project manager concentrates on whether the specific
resources are being used effectively or not. Project calendars are concerned
with how various project resources are consumed over a period of time. Resource
calendars deal with how a specific resource or specific category of resources is
spent over a period of time.
TECHNIQUES FOR SCHEDULE DEVELOPMENT
The project manager can use some of the following methods for schedule
development:
Critical Path Method (CPM)
Program Evaluation and Review Technique (PERT)
Graphical Evaluation and Review Technique
These methods are used:
To estimate the completion time of the project
To find out if the project is behind, ahead of or on schedule.
To compare the actual resources spent with the planned resources at any
stage of the project.
To study activities that are critical for project completion and
activities that can be delayed without delaying project completion.
The project network diagram is used in schedule development.
Construction of a Network Diagram
Before assigning the duration estimates, the project manager sequences all
the activities and then gives numbers to all nodes.
Numbering nodes
Step 1: Assign the starting event as 0 .
Step 2: Assign the next number to any unnumbered event whose predecessor
events are already numbered.
Repeat Step 2 until all events are numbered.
The basic scheduling computations of a project can be grouped under three
heads: Forward pass, backward pass, and calculation of floats.
Forward pass
The forward pass computation finds the earliest start and earliest finish
times for each activity; or the earliest expected occurrence time for each
node. The computation starts with an assumed earliest occurrence time of zero
for the initial project event.
The earliest starting time for activity (i,j) is the earliest event time of
the tail event,
i.e. ESij = Ei.
The earliest finish time for activity (i,j) is the earliest starting time plus
the activity duration, tij
i.e., EFij = ESy + tij
Event is just a time oriented reference point. Events will have only the
earliest time and latest time. The earliest time is obtained in the forward
pass, and the latest time is obtained in the backward pass. But every activity
will have earliest start time, earliest completion time in forward pass and
latest start time and latest finish time in backward pass.
Suppose an activity A is connected between two events i and j, and
duration of the activity is 5 units of time. Then the earliest start time of
activity A is 0 and the earliest completion time is 5. Also, the earliest time
of event i is 0, and the earliest time of event j is 5.
Earliest event time for event j is the maximum of earliest finish time of
all activities leading into that activity.
Ej = Maximum {Ei + tij}.
Consider the network diagram, where three activities are leading into
event m.
and ends with the first node . The total project duration is taken as the
latest time of the end node.
Latest finish time for activity (i,j) is the latest event time of event j. i.e.,
LFjj = Lj
Latest starting time for activity (i,j) is the difference between the latest
completion time of (i,j) and the activity duration, i.e., LS , = LFy -1 ^
Latest event time for event i is the minimum of the latest start time of all
activities starting from that the event i.
L = Minimum {LFy -1 j:}.
Consider the network diagram, where three activities are beginning at the event
i.
The latest event time of event i is calculated as:
Minimum of {(LFy - %), (LF™ -t^), (LFa - t,i)>
Calculation of floats
There are three types of floats. They are:
Total float
Free float
Independent float
Total Float
This is the amount of time by which the completion of an activity can be
delayed beyond its expected earliest completion time without affecting the
overall project duration. It is calculated as the difference between the latest
start time and the earliest start time of a project activity.
Total float = LSij – Esij
= (Lj – tij) – Esij
= (Lj – Ei) - tij
Free Float
This is the amount of time by which the completion of an activity can be
delayed beyond the earliest finish time without affecting the earlies* start of
a subsequent activity.
Free float= Earliest event time of event j - Earliest event time for event
i - activity time (i,j)
= (Ej-Ei)- tij
Independent Flout
This is the amount of time by which the start of an activity can be
delayed without affecting the earliest start of any activities following
immediately.
Independent float= (Ej - L,) – L
Event slacks
For an event, slack is the difference between the latest event time and earliest
event time. For an event i, slack = L, - E,
For an activity (i, j), the slack of event j is called head slack, and the slack
of event i is called tail slack.
Head slack = L,- - Ej
Tail slack = L; - E,
The values of free float and independent float can be expressed in terms of head
and tail slacks.
Free float = Ej - E-, - f»
= LJ-EI-tij-(LJ-EJ)
= Total float - Head slack Independent float = (Ej - L;) – u
= EJ-E1-tjj-(L1-Ei)
= Free float - Tail slack
Critical Path Method (CPM)
Critical Path Method is a network analysis technique used to predict the
project duration by finding out which sequence of activities (the critical path)
has the feast amount of scheduling flexibility. In this method, the project
manager identifies the critical activities of the project that constitute the
critical path of the project.
Critical activities are those activities whose total float value is 0.
This means, any delay in the critical activity results in a delay in the entire
project to the same extent. The project manager identifies a series of critical
activities from the beginning of the project to its completion. The series of
critical activities is called the critical path of the project.
Table 12.3: Floats of the Project Activities
Crash a critical activity that has the least crashing cost and calculate the
new cost by adding the cost of crashing to the normal cost.
When the critical path duration is reduced by crashing, other paths may also
become critical. These are called parallel critical paths. So the project
duration can be reduced by crashing the activities of activities in the
parallel critical paths simultaneously.
The crashing process is continued till further crashing is not possible or
it does not result in the reduction of project duration.
For different project durations, the total cost is found. The optimal
project duration is found by the project duration corresponding to the
minimal total cost.
Fast tracking
In this technique, the project manager attempts to reduce the project
duration by doing ^~ project activities in parallel. Suppose activity B can be
started only after the completion of activity A in normal conditions. But the
project manager can start both activities at the same time, but makes
modifications to activity B as per the changes in activity A. This ultimately
reduces the duration of the entire project.
For example, software code is normally written only after the design is
approved. But both the activities are started at the same time and the final
code is written only after the software design is approved by the top
management. But this technique requires modifications, reworking, etc.
Resource Leveling
CPM and PERT techniques assume that the project has unlimited resources,
and*they can be assigned for project activities. However, in reality, project
resources are usually limited. Sometimes activities may be delayed because of
the non-availability of resources.
So, the project manager sequences the project keeping in mind the
availability of resources, which forces him to recalculate the activity
schedules. Normally, the project manager assigns the available resources to the
critical activities first as they play a major role in determining the total
completion time of a project.
SCHEDULE CONTROL
The project manager has to ensure that all the project activities are being
carried out as per the schedules. Schedule control studies all the factors that
affect project schedules. Schedule control determines the schedule changes and
manages to complete them within the desired duration. Based on the changes, tire
project manager updates the project schedules.
The project manager has to consider the project schedule, performance
reports, and change requests while controlling the schedule. The project
schedule represents the planned start and expected finish dates for each project
activity. It provides a basis for the project manager to measure the schedule
performance. Performance reports provide information about schedule performance
and point out whether the activities are proceeding as per the planned schedule
or not. The project manager initiates controls to complete all tire activities
within the desired time. He considers the change requests made by the project
stakeholders, which may be verbal or written. These change requests may be for
extension or acceleration of project schedules.
The project manager uses techniques like schedule change control system, and
performance measurement in controlling the project schedule. The schedule change
control system describes the procedures by which project schedules can be
modified. The methods include redrawing the project network diagrams, and
understanding the proposed changes. Performance measurement systems assess the
effective completion of the project activity in the nomial duration. They
calculate the magnitude of variation that may occur for each project activity.
Software packages like Project 2000 also help tire project manager in
controlling tire project schedules by continuously studying the planned and
actual time periods of each project activity. Sometimes additional planning is
required when the project manager thinks that it is important to incorporate
certain changes in the project. The project manager then revises the duration
estimates, modifies the sequence of activities and analyzes alternative
schedules.
Network Techniques – PERT and CPM
Network analysis is one of the most popular techniques used for planning,
scheduling monitoring and coordinating large and complex projects comprising a
number of activities. It involves the development of a network to indicate
logical sequence of work content elements of a complex situation. It involves
there basic steps:
Defining the job to be done.
Integrating the elements of the job in a logical time sequence.
Controlling the progress of the project.
Network analysis is concerned with minimizing some measure of performance of
the system such as the total completion time of the project, overall cost and so
on. By preparing a network of the system, a decision maker can identify (i) the
physical relationship (properties) of the system, and (ii) the
inter-relationships of the system components. Network analysis is specially
suited to projects which are not routine or repetitive and which will be
conducted only once or a few times. Thus, network analysis is the organized
application of systematic reasoning for planning, scheduling the monitoring
large and complex projects.
Float While slack is used for events, float is applied for activities. There
are various types of float, e.g. total float, free float, independent float.
the goals of both parties are important but not worth pushing too hard to
achieve
a quick solution is the need of the hour
a temporary settlement is needed
two parties with equal power are committed to mutually exclusive goals.
Building consensus
This is the most important part of all the team operating rules. Building
consensus helps test the creativity of the team members and the team at
various stages of the project life cycle. It helps team discover solutions to
problems.
Brainstorming
Brainstorming sessions prove to be useful when the team cannot arrive at
a solution on a particular issue. It helps project team discover solutions. At
a brainstorming session, all the participants are free to come up with their
ideas. Discussion on the ideas starts only after all the ideas have been
listed. Considering each idea with an open mind results in identifying the
underlying solution.
Team meetings
It is the responsibility of the project manage* to decide the. frequency,
duration and timings of team meetings. He must prepare and distribute the
agenda, decide who will chair trie meeting and assign icsponsiteiiity foi
tecotdmg asnsk dvstafowtvug, the vavautes.. The project manager should ensure
that all the team members participate in all the meetings that are held at
various stages of the project life cycle. He should also make sure that the
team members understand the rules and structure of team meetings. Team
meetings are held for solving problems, scheduling tasks, planning and
discussing issues that affect the performance of the project and for taking
decisions.
Advantages of Team Building
Team building is the most effective tool in project management. Apart
from helping the project manager to simplify complex tasks and solve problems,
An un-supportive top management and a faulty concept can affect the success
of a project team.
Inappropriate team members on the project team and an inappropriate project
manager can also lead to serious problems in the project, even if there is
strong team building process.
It is difficult to implement effective team-building practices in new
projects.
PROCESS OF COST MANAGEMENT
The process of cost management involves four steps:
Resource planning
Cost estimating
Cost budgeting
Cost control
Resource planning identifies the resources required and the
quantitieFrequired of each of these, for the completion of die project. Cost
estimating is calculating the approximate costs of all project activities, while
cost budgeting is the assigning of costs to each project activity. Cost control
involves taking necessary steps to keep project costs within permissible limits.
RESOURCE PLANNING
Resource planning is the process of identifying what project resources are
required and in what quantities. Resources normally include money, manpower,
machinery and: materials. For instance, the construction of a cement plant
requires skilled workmen, some initial investment, machines like concrete mixers
and various construction materials. The project manager should have a thorough
knowledge of all the project activities in order to allocate the resources
properly.
Resource planning is done after considering the Project Scope Statement,
the Work Breakdown Structure of the Project, Historical Information, Description
of the Resource Pool, and Organizational Policies.
Project Scope Statement: The scope statement allows all project
stakeholders to gain an understanding of the project. It explains why the
project has been taken up and what the main objectives of the project are. Both
these aspects have to be considered during resource planning.
Work Breakdown Structure (WBS): The WBS is a deliverable-oriented
grouping of project elements. Each descending level of WBS represents an
increasingly detailed description of a project component (the component may be a
product or service). As it describes all the project activities, it gives the
project manager an idea of the resources that will be required.
Historical Information: The project manager studies similar projects that
were successfully implemented earlier. This gives him an idea of the resources
he will require to execute the current project.
Description of Resource Pool: Here, the project manager specifies what
project resources he will require and in what quantities. For example, the skill
levels of the workmen, and the kind of machinery and materials to be used, are
listed. The resource pool description is specific to each project. It also
varies from one phase of the project to another. For example, in the planning
phase of an engineering design project, only senior engineers are required.
While the project is being executed, junior engineers can also be used for
activities like inspection, quality testing, etc.
Organizational Policies: The project manager has to abide by the
organizational policies while developing resources plans. Policies regarding the
purchase of supplies and staffing should be considered. For instance, if a firm
has a long-term contract with a specific supplier for the procurement of raw
materials, the project manager must go to the same supplier.
While allocating resources for various project activities, the project
manager identifies the alternative ways of completing each activity and makes
use of the opinions of experts in various fields.
Identification of Alternatives
There may be several ways of completing a particular project activity. The
resources required vary with each method. The project manager uses techniques
like brainstorming, and focused group interviews to identify different methods
of completing different activities. For example, the project manager may hold
discussions with his team members to identify the suppliers in the market from
whom they can procure the required raw materials.
Expert Opinions
The project manager consults experts like consultants and researchers, to
determine what inputs he will require to implement the project. The ideas given
by these experts help the project manager to come up with better resource plans.
Sometimes, the project manager may get contradictory views about resource
allocation. When this happens, the project manager should choose a suitable
approach after a careful analysis of his own constraints.
The Resource Planning process thus specifies the project resources
required to execute a project. The resource plan shows the type of resources
required and the quantities in which these are required. These resources are
obtained either through staff acquisition or by procurement (discussed in
Chapter 20).
COST ESTIMATING
After the resource requirements are identified, the project manager
develops an estimate of the costs of the resources required to execute the
project. This includes identifying and evaluating various cost alternatives. The
project manager considers the WBS, resource rates, activity duration estimates,
historical information and the chart of accounts in estimating the costs.
The WBS is used to ensure that cost estimates are made for all the
identified activities. The resource rates show the cost of each unit of resource
such as labor cost per hour, the cost of one litre of lubricant oil, etc. The
project manager considers the activity duration estimates for all the project
activities to know by what time the resources should be made ready.
The project manager also considers historical information in estimating
the cost of the project. He studies project files, and commercial cost
estimating databases of past projects. A good overall understanding of similar
projects undertaken in the past proves helpful. The chart of accounts is a
numbering system used to monitor project costs by category (labor, supplies,
materials, etc.) It is a coding structure that the firm uses to report financial
information in its ledger.
Some of the techniques used by the project manager to estimate costs are;
Analogous estimating
Bottom-up estimating
Parametric modeling
Computerized tools
Analogous Estimating
In analogous estimating, the project manager considers similar projects to
estimate the costs of the project. Based on the actual costs incurred in that
project, the project manager prepares the cost estimates by considering the
parameters like time value of money, inflation rate, etc. Though this type of
estimating is easy and economical, but it is less accurate than the other
methods.
Normally, this technique can be used only in consultation with an expert.
The difficulty in using this approach lies in finding a similar project and
determining its actual costs. This technique is also called the top-down
estimating.
Bottom-up Estimating
In bottom- up estimating, the cost of each element of the project is
calculated separately and all these costs are added up to estimate the total
project cost. The smaller the work elements of the project, the greater the
accuracy of the estimate.
Parametric Modeling
In parametric modeling, cost estimates are made using mathematical models.
For instance, if, according to the estimates of the project manager, the cost of
constructing a building is Rs.20,000 per square yard, a sum of Rs. 2 crore is
required for constructing a 1000 square yard building. Even if the estimates
made with these models are not exact, they give the project manager a rough idea
about the costs that are likely to be incurred.
Parametric modeling provides reliable estimates when;
The model is developed on the basis of accurate historical information
All project parameters are quantifiable
The model is scalable (can be applied to all projects irrespective of their
size).
Computerized Tools
The project manager can use computerized project management software
packages like Project 2000 to estimate the project costs. These software
packages compute various costs once the relevant data is provided. The project
manager prepares the cost. estimates, supporting details and the cost management
plan of the project on the basis of techniques discussed above. The cost
estimates for all the project resources are expressed in terms of rupees
dollors, etc.
The project manager provides supporting details for the project cost
estimates. He describes the work estimated (based on the WBS), the basis of
estimation, specifies the assumptions made in the estimation and calculates the
range of possible estimates. The project manager also prepares a cost management
plan that describes how cost variances can be managed. This plan is highly
detailed and prepared in such a way as to meet the requirements of the project
stakeholders. A good cost management plan lets the stakeholders know how the
project manager is going to estimate project costs.
COST BUDGETING
In the process of cost budgeting, the project manager allocates the costs
to individual work items, based on the cost estimates made. The cost allocated
for each individual work become the cost baseline for that work. These cost
baselines are used to measure the cost performance of the project. The Work
Breakdown Structure mid the cost estimates made (in the cost estimating
process) help the project manager to determine the amount of resources to be
allocated for each project work element. The project schedule helps him to
assign costs to the time period during which the costs will be incurred.
The project manager can also use techniques like Analogous Estimating,
Bottom-up Estimating, Parametric Modeling, and Computerized Tools (discussed
earlier) in cost budgeting.
Preparation of Cost Baseline
The cost baseline , an output of cost budgeting, is a time-phased budget
that periodically measures and monitors the cost performance of the project. It
also describes how costs are going to be incurred over a period of time. It is
usually displayed in the form of an S-curve.
COST CONTROL
The project manager uses cost control to manage the factors that bring
about changt in the cost baseline in such a way as to make sure that the changes
are beneficial. Co control also helps him to determine whether the cost baseline
has changed and 1 manage die changes whenever they occur.
The project manager tries to determine how cost variances are likely occur.
Some the steps that the project manager can take to control project costs are :
Defining the project scope precisely and clearly
Using a relevant and reliable database
Designing an organization structure that is appropriate for the current
project
Monitoring and controlling deviations from the project plan
Periodically evaluating and monitoring cost performances:
Checking whether die changes are recorded in the cost baseline
Selecting vendors and project consultants carefully
Cost Change Control System
The cost change control system describes the procedures that bring about
changes: the cost baseline. The system includes the paper work, die tracking
systems, and the approval levels necessary for authorizing changes. The system
must be integrated with the overall cost change control system, if it is to be
effective.
Performance Measurement
Techniques like variance analysis, trend analysis, and earned value
analysis help the project manager to understand the cost performance. Variance
analysis compares the actual project results to the planned results. The cost
variations are measured at every stage of the project and the causes of these
variances are determined. Trend analysis examines the project results over a
period of time to find out if the cost performance is improving or not.
Earned value analysis is a technique that measures the project performance
by integrating the scope, cost and schedule measures of the project. According
to this analysis, three values are important. These are: Budgeted Cost Work
Schedule, Actual Cost Work Performed (ACWP) and Earned Value (also called
Budgeted Cost of Work Performed, (BCWP)).
The Budgeted Cost Work Schedule is the approved cost estimate planned for
a project activity for a given period. The Actual Cost Work Performed is the
total costs (both direct and indirect) incurred while implementing an activity
in a given period. The Earned Value is a percentage of the total budget equal to
the percentage of work completed.
These three values along with certain measures like Cost Variance
(BCWP-ACWP), the Schedule Variance (BCWP-BCWS) and the Cost Performance Index
(BCWP/ACWP) help the project manager to determine whether the work is
progressing according to the schedule and whether it is within the budget. The
cumulative Cost Performance Index for the entire project (total of BCWPs of all
project activities divided by total of all ACWPs) forecasts the project cost at
completion.
The project manager prepares revised cost estimates, budget updates, and
Estimates At Completion (EAC) and decides what corrective actions should be
taken. The project manager prepares revised cost estimates by making
modifications to the current cost information. These revised cost estimates
should be communicated to all project stakeholders.
In budget updates, changes are made to the approved cost baseline. The EAC
is a forecast of the total project costs on the basis of the project
performance. Here, the completion times are estimated as actual work completed
plus a new estimate for remaining work. The project manager also documents all
the lessons he has learnt in controlling project costs.
COST OVERRUNS AND THEIR IMPLICATIONS
The extra costs incurred over the estimated costs are called cost
overruns. If the actual^ costs incurred are less than the estimated costs, they
are called cost underruns. In; practice, this does not happen often as the human
tendency is to plan the costs at minimum level and they continue to be raised as
the project progresses.
Factors that Cause Cost Overruns
The important factors that cause cost overruns are described below. Figure
17.3 shows these factors.
Cost escalations
The cost of a project usually increases due to the time gap between the
planning and implementation of the project. The project manager prepares a cost
overruns analysis sheet to determine the reasons for cost overruns. Figure 17.4
shows a cost overruns analysis sheet.
Cost escalations occur for many reasons. Some of these are:
An increase in the unit price of materials, machinery, labor costs and
overheads
Change in scope of the project
Increase in statutory taxes and duties like sales tax, customs tax, and
excise duty
The impact of the adverse exchange rate variations on import of machinery
and equipment
An increase in the cost of capital when the project is not completed in the
estimated time
The project manager must arrange for forward contracts with importers of
n\achinery and equipment to take care of cost overruns due to unfavorable
foreign exchange fluctuations. The project manager should prepare contingency
plans to effectively deal with when the cost overruns occur.
Time overruns
Poor planning and failure to meet time schedules result in time overruns. The
project manager prepares a time overruns analysis sheet to understand where
delays have occurred and the reasons for delays. Figure 17.5 shows a time
overruns analysis sheet. Time overruns occur due to;
A change in the scope of the project
Ineffective project time management (which itself is the result of improper
planning and scheduling)
Delays in starting and executing some of the project activities
Delays in subsequent projects as a result of a delay in one project
Use of outdated technology
Bureaucratic/ political interference, and poor administration
To complete the project on schedule, the project manager must prepare
realistic time schedules, select capable vendors, carryout periodical monitoring
of project activities, and take quick decisions.
Scope Changes
Scope changes during the implementation of the project, that were not
envisaged during the planning stage increase project costs. Inadequate
attention to detail at the time of project formulation is the main cause of
these scope changes.
Scope changes include the introduction of new features to the project product,
design modifications, increased plant capacity and extra construction works,
updated technical versions, and newly framed statutory requirements of the
government may necessitate changes in scope.
Proper assessment of the project requirements and understanding the statutory
conditions help the project manager to avoid changes in the scope of the
project.
Budget under estimation/omission
If the budget prepared is not exact, extra costs are incurred when the project
is actually implemented. This happens when the costs are estimated on the
basis of an incorrect project scope statement, or when adequate technical
information is not available. Sometimes certain project elements might be
ignored while the budget is being prepared. All these factors finally result
in an increase in the project costs. By preparing a detailed, exhaustive
checklist of all project activities, the project manager can reduce overruns.
Ensure commitment by making team members spend full time on the project
Ensure quick conflict resolution
Ensure that the resources are negotiated widi function and project oriented
managers
Ensure die functioning of functional departments as individual entities.
The primary objective of a matrix organizational structure is to derive
synergy through shared responsibility between project and functional management.
Matrix structures can be categorized into strong and weak structures depending
on die influence of the project manager on functional resources. When the
project manager exercises more control on functional resources than the line
manager, then the matrix is said to be a strong one. But, when die line manager
has more control over functional resources than die project manager, dien the
matrix is said to be a weak one. Figure 13.1 represents a matrix organization
structure.
Advantages of a matrix organizational structure
The advantages of a matrix organizational structure are as follows;
Enables die project manager to exercise control over all die resources
Each and every project has its own independent set of policies and
procedures
Autiiorizes die project manager to commit die company resources. This
ensures that scheduling does not clash with otiier projects
Facilitates quick response to conflicts, changes and other project needs
Enables proper Human Resource Development by enhancing die
career prospects of team, members personnel
Facilitates cost minimization by sharing key-personnel
Facilitates spending more time to solve complex problems
Develops a strong technical base
Eases solving of the problems that require top management involvement
Minimizes conflicts
Ensures optimum balance among time, cost and-peffoTTromsx
Enables authority and responsibility sharing.
Since a matrix structure is complex, it is important to note the preconditions
for implementing such a structure. The following are situations in which
implementation of a matrix structure is favorable;
When the primary output of an organization is a complex product
When the organization serves multiple customers in different geographical
locations
When a project with complex design that requires innovation is to be
finished on time
When large amounts of data are required to be processed
When designing, developing and testing a product requires sophisticated
skills
When resources have to be shared among different projects
When the market conditions demand rapid changes in the product.
Selecting an Organizational Structure
The need for implementing complex and large projects within the given time
and cost along with enhanced performance and profit, made the project management
discipline a specialized field. The increasingly complex modern organizations
have proved the ineffectiveness of traditional organizational structures. This
made it necessary for the organizations to identify an appropriate
organizational structure. Selection of a organizational structure depends on;
The size of the project
The duration of the project
The experience of the organization in managing projects
Transparency at the senior-management level
The physical location of the project
The availability of resources
The uniqueness of the project.
All organizational structures have their own advantages and disadvantages
and the project management approach proves to be an effective alternative with
minimum disadvantages.
Thus, changing from a traditional structure to a project management
structure is a big leap forward, but once the project management structure is
adopted, it is not possible for the organizations to revert to the traditional
structure. Implementing a project management structure always brings in an
up-gradation of jobs and job profiles. Even though a state of the art project
management structure is incorporated, it is necessary to maintain a dynamic
state of equilibrium among its various functions.
After selecting and incorporating an appropriate organizational structure,
it is necessary to select the staff required to work on the project. This task
is significant and highly critical to the top management, because they just
cannot select the people to get the job done. They have to select the right
people for the right jobs.
ORGANIZATIONAL CONSIDERATIONS
The single most important characteristic of the present business
environment is rapid change. The pace and unrelenting nature of this change puts
a lot of pressure on middle managers, whose performance is often evaluated on
the basis of short-term performance measures such as return on assets, and
contribution to profits. In this context, project management is viewed as an
important method for training future, managers and executives to be cost
sensitive as well as profit oriented.
Basic business principles may need to be reconsidered in the future,
because of extent of changes that are taking place. Even while technology is
making many operational tasks obsolete, companies are finding it more and more
difficult to operate profitably. If organizations remain centralized even in the
UNIT-III
Project Management
Globalization and the growth of e-commerce have made software and
Information Systems (IS) projects indispensable today. Speed is of the essence
when it comes to information dissemination and this is precisely why companies
are now giving a lot of importance to IS projects. The difficulty lies in
integrating software and information systems engineering with project management
information systems. Information systems engineering deals with establishing a
system by coding and testing procedures, 1 while project management is about
planning and controlling tire engineering aspects to meet the project goals
i.e., cost, schedule and performance. This process is not as simple as it
appears to be. Most software and information systems projects fail to impress
the client either in terms of quality, performance, cost or time. A study on IS
projects found that almost 35% of the projects had more than double cost and
schedule overruns. These failures can be attributed to the lack of proper
project management techniques. For instance, poor planning, incorporating new
technology, unclear objectives and requirements, poor business commitment,
changing requirements of business and customer requirements and poor
communication links can be the major reasons for a project s failure to meet
cost and time targets. Hence it is very important , to have effective techniques
in place to manage software and information systems projects.
Planning is the most crucial stage in an IS project which also determines
if the project will be a success or a failure. If the project manager spends
adequate time on planning the project properly, the probability of success is
higher. The traditional approach of planning a software project involves
developing a requirement configuration and conveying this to all key
stakeholders for evaluation and approval. During the process of distributing the
requirement configuration, some key stakeholders may be missed out, like the
end-users of the product. So, if the project manager is compelled to start the
project without the requirement configuration being approved by all the key
stakeholders, there is a greater probability of failure.
In a software or information systems project, the engineering aspect
includes specifying the requirement configuration, coding, testing etc., while
the project management aspect includes specifying the process of setting project
milestones, managing change, risk management, quality management, performance
reporting and managing human resources.
UNIQUE FEATURES OF SOFTWARE PROJECT MANAGEMENT
Generally, the tasks of a project manager in the IT industry and a project
manager in any other industry are similar. In both cases, their responsibilities
include planning, monitoring, controlling and reporting. Planning in software
projects is extremely significant, and can be divided into five stages:
Decomposition of projects into smaller tasks
Definition of interdependencies among the different tasks.
Estimation of resources required for each task
Risk analysis
Scheduling project tasks
The difference between software project management and other project
management is often subtle. In a non-IS project, the focus is more on defining
the dependencies and schedules. But in an information systems project, the
emphasis is on estimating the resources required and analyzing the risk involved
in the project.
Decomposition of a Project into Small Tasks
Unlike managers in other projects, software project managers spend a
good proportion of their time on basic design decisions. In most cases, they
are placed in the position of having to prepare detailed task lists, even
before all the major design decisions have been finalized. In such a
situation, experienced project managers use a three step approach to
decomposing the project into tasks:
Concept oriented decomposition
Capability oriented decomposition
Implementation oriented decomposition
Concept-oriented decomposition gives a broad and general estimate of
project requirements.
Capability-oriented decomposition describes the delivery of
functionality to the client and is prepared after finishing the analysis. But
it does not talk about the way in which the functionality is to be achieved.
It is the only stage at which the time and budget estimates are valid within
an approximate plus or minus 25%.
Implementation-oriented decomposition: Project managers go for this type
of task decomposition only when the software design is almost finalized. At
this stage of a software project, the project manager knows how each of the
tasks contribute towards the completion of the final product (i.e., the
software module). The cost, time and budget estimates prepared at this stage
are near to being accurate.
Another difference between an IS project and any other project is the
complexity of identifying a task as complete. In a non-IS project, it is easy
to identify a task as complete. For example, procuring raw-materials within
the cost and as per the quality can be declared as completing the task of
procurement, but in an IS project, even tasks that were declared completed
need to be updated with the changing needs of the client, or to rectify latent
defects, or to combine it with other modules. In software projects,
programming constitutes a small portion of the whole project, while the major
challenge lies in integrating the decomposed tasks into a single code and
testing it for performance.
Definition of Interdependencies Between Decomposed Tasks
Generally, project tasks require atleast the partial completion of a
particular task before starting the next task in the series. In software
projects, the sequence of activities is more dependent on the economies
resulting from doing one particular activity before another activity.
Sometimes, this sequence also depends on the client s preferences. Most of the
"dependencies" that decide the sequence of performing tasks are more employee
driven than task driven i.e., the tasks are performed according to the
convenience and capabilities of the employees working on it. At times, the
tasks are carried out in a sequence to facilitate partial deliveries,
prototyping of key areas, risk reduction etc.
Estimation of Resources Required for Each Task
Estimation of resources required for every task in a software project is
complex and different from non-IS projects. This is because the pattern of
costs in a software project is non-linear. For instance, constructing a
particular type of building costs Rs.100 per square foot. This figure can be
used to estimate the cost of constructing a 1000 square foot building or a
10000 square foot building just by multiplying the number of square foot to be
constructed with the cost of construction per square foot. But for a software
project, the cost per line of code increments roughly linearly as long as same
number of individuals can complete the task, but it increments non-linearly if
new project personnel are added. The factors that differentiate the resource
estimation of a software project from that of any other project are:
Constantly changing software requirements.
Influence of latent factors like the quality of the software.
The cost of the project cannot be arrived at an early stage because
accurate scope can be known only in the later stages of the project.
Lack of proper historical data will limit the project manager s capability
in estimating the resource requirements.
Individual productivity varies from person to person in the team.
Although it is difficult to estimate the resources required for a software
project, expert project managers often try to interpret the client s budget, and
use that as the basis to decide the extent to which the software will be
customized.
Risk Analysis
Analysis of risk is relatively more important to an IS project managers
than to other project managers. The reason for high risk in software projects is
their uniqueness - no two projects are similar in any fashion and every new
project will have atleast one new state of the art technology in its process.
These unique features and state of art technologies bring in a high degree of
risk into the projects. Successful project managers not only carry out risk
analysis for the whole project but also for each and every task in the work
breakdown structure. Analyzing risk at the WBS level helps avoid risk. There are
five different types of risks that are analyzed and reported by the project
manager on each and every task in the WBS. They are:
Technical risk - failing to meet technical specifications.
Schedule risk - failing to deliver the task as planned or scheduled.
Cost risk - failing to complete the job within the allocated budget.
Network risk - risk arising from interdependencies among the decomposed
tasks.
Total risk - combination of all risks.
The project manager analyzes both the probability and consequence of
failure, for the above risks. Obviously, tasks with high probability and
consequence of failure are most worrisome.
Scheduling Project Activities
Reviewing the initial schedule regularly helps maintain an accurate
schedule for a software project. The major difference between scheduling an IS
project and a non-IS project is that the cost and schedule of IS projects are
dependent on each other. The schedule of the software project determines its
cost. The cost of a project increases as the timeframe is reduced.
Apart from the differences between IS and non-IS projects during the
planning phase, there are also differences during the project monitoring and
controlling phases:
IS projects demand more technical knowledge than non IS projects. For a
project to be successfully implemented, the project manager has to
understand and interpret all the crucial issues in programming to
communicate effectively, schedule the project activities and make decisions
(design cost trade-offs).
Quality control is one of the major responsibilities of a project manager.
Software modules differ with respect to latent defects and in-built
functionality. Therefore, it is the project manager s responsibility to
control the quality of the code being produced to make sure that the number
of latent defects and in-built functionality of the code are acceptable for
the particular project.
The software project manager has to deal with the client throughout the
project life cycle. Since no client has a clear idea of what the software
will look like when delivered, the project manager should manage the
client s perceptions in a way that it matches the software that will be
finally delivered
IMPACT OF BUSINESS TRENDS ON INFORMATION SYSTEMS PROJECTS
Project management plays a significant role in handling information
systems projects, because of the pressure on these projects to produce
deliverables on time, within cost, and meeting performance standards. Failure to
manage these projects effectively poses a financial threat to the organization
because they involve huge investments. Computer systems used by businesses in
the past do not seem appropriate now, because today s businesses demand highly
complex and bigger systems. Business computing systems in the past were more
focused on automating the transaction processes of individual departments like
the payroll system for the human resource department and the accounts handling
system for the accounts department. But now, organizations can no longer afford
to keep their departments as watertight compartments. Competitive market forces
require functional departments to share information among themselves in order to
control costs and maximize profit margins. These market forces have raised the
level of interdependencies among the functional departments, and consequently
the need to share information. For example, the human resource department can
get the sales target performance of the marketing department so as to appraise
their performance, to enhance their efficiency and reward and motivate them for
better performance. In the same way, the finance department may want information
on the product movement in the market, to allocate funds to the production
department for manufacturing additional units.
This interdependency among the functional departments has grown to an
extent that the businessess have started using strategic information systems
that facilitate information-sharing across the organisation. Therefore,
developing a human resource information system is now not done independently, it
will be integrated with the information systems of marketing, materials,
purchasing, costing and accounts.
the key stakeholders, the business is modeled for the analyst to understand the
user s perception of the business environment. In the construction industry, the
architect functions as the project manager. Once the business is modeled,
miniature models are developed to get the designer s perception. Just like an
architect constructs a miniature model of the whole plan as perceived by him, a
technology model is constructed in an IS project. Similar to the IS project s
requirement for a description of the parts of the system, construction projects
also require detailed plans that describe the parts to be used in building the
project. Since there is a similarity between the project management practices of
these two industries, the project managers in both industries perform similar
functions.
Life Cycle Similarity
The life cycle stages of an IS project is quite similar to that of a
construction project. The first stage in the life cycle of both the projects,
deals with finding out the feasibility of the project. In this stage, called
feasibility testing, costs are measured against the expected results and the
project ranking compared with other projects to evaluate its contribution to the
organisation.
The planning stage in both projects is also similar. In this stage, the
scope of the project is defined to get client s approval and objectives of the
project along with the techniques to accomplish them are also stated in clear
terms. The defining stage is similar to the engineering stage in a construction
project, wherein the client s requirements are recorded and the existing system
is modified according to the objectives of the new plan. The designing stage of
an IS project is similar to the detailed engineering stage of the construction
project. This includes describing the requirements of the project in a detailed
manner to develop the final product. The final stage in the life cycle of the
information systems projects is the implementation phase as against the building
construction in construction projects. This stage in the information systems
project involves programming and testing the new system for integrating it with
the existing business system.
Management Function Similarity
The management functions in both IS projects and construction projects are
very similar. Though a majority of IS projects employ a weak matrix organization
structure when compared to construction projects, the project manager is
responsible for completing the project within the allocated budget and time, and
as per the specified performance and quality standards. The management functions
of project managers in both projects are planning, organizing, monitoring,
controlling, leading, scheduling integrating, progress reporting, negotiating
and problem solving.
DIFFERENCES BETWEEN INFORMATION SYSTEMS PROJECTS AND
PROJECTS IN OTHER INDUSTRIES
Traditional project management techniques cannot be easily used to manage
information systems projects. The key challenges faced while managing
information systems projects is the complexity in
Scope definition and management
Handling multiple projects
Rigid organizational structures and
Fast-changing technologies and methodologies.
According to traditional project management, it is the definition of scope
and its management that determines the success of a project, from the
perspective of schedule, resource and cost management. Scope definition in an IS
project gives the details of all the business functions that are to be taken up
for computerization. It is important to differentiate between what should be
considered for computerisation and what is not. The scope of the project is
usually not well defined, while developing traditional IS projects. Some reasons
for unclear scope definition are:
Interdependency among business functions leads to higher computerization
of processes than is required or planned for.
Using text to define scope may lead to misinterpretation of the content.
Complexity in describing the end product or service.
Rapid changes in business requirements over the project life cycle.
Handling Multiple Projects
In big organizations, it is quite common to find people working on several
projects simultaneously. These projects are developed by the IS department of
the organization on the client s request. The most challenging tasks in managing
multiple IS projects are:
Limited availability of resources.
IS projects often require unique skill sets that are rare to find and these
skills, if procured, have to be shared among all the projects being carried
out.
Conflicts may arise due to resource sharing across the projects and this may
result in schedule slippage and budget overruns.
Controlling project costs may require the project manager to manage the
resources throughout the project on a real time basis.
Rigid Organizational Structures
Organizational structure is another key differentiating factor between IS
projects and any other project. IS projects usually employ a matrix
organisational structure. The project manager in such a situation has to perform
two roles, one of a project manager and the other of a functional manager. This
usually transforms a strong matrix structure into a weaker one. Some of the
charecteristics of such a structure are:
The project manager is also a functional manager to his systems analysts
and programmers (project team members).
The project manager may source the manpower for the project from his own
functional department.
Coordination becomes simpler because most of the team members are
functional subordinates to the project manager.
The pace of response to requisitions is high.
Project managers have more control on immediate subordinates.
The project manager s formal authority over the team members enhances
team motivation because of his positional and reward power.
The project manager can resolve the conflicts in the project team.
The project manager may fail to do justice to both his project and
functional tasks, because of lack of time.
Problems in prioritizing project tasks and functional tasks often
affects the project.
Fast Changing Technologies and Methodologies
IS projects are labour intensive, i.e., they require a number of experts
to work on them. Generally, project leaders get the list of requirements from
the client and use their expertise to transform these requirements into
functional software applications.
To reduce the labour intensiveness of information systems development, a
range of productivity enhancing tools have been designed and developed. These
tools not only shorten the development lifecycle, but also minimize the total
cost of the project. However, most management information systems fail to keep
pace with the rapidly emerging productivity enhancing tools. This has resulted
in software organizations falling back on old and inefficient processess of
information systems development that pose less risk and require more number of
people. The project management discipline is also being accepted reluctantly,
under the belief that it is also a part of the emerging technology.
DEVELOPMENTAL PHASES IN INFORMATION SYSTEMS PROJECTS
Exhibit 24.1 compares the developmental phases of projects in the two
industries -construction and IT. Before starting the development of an IS
project, it is necessary to check the feasibility and justify the need for
development. Many projects fail to qualify at this level itself. Some of the
phases in software projects are
Analysis
Designing
Coding and
Installation
Analysis Phase
This phase involves analysis of business requirements by the project
manager. This analysis describes the problem that is to be solved by the
software application. The analysis is conducted from the client s perspective.
It is advantageous to analyse in a manner that is more inclined towards the
business angle and less towards the technical angle. This analysis phase is
further divided into three stages, i) Preanalysis, ii) Partitioning analysis
iii) Post analysis.
Preanalysis is the initial stage in the analysis. In this stage, the
confidence level of the project team, members may be low, they may not know each
other, the client may fail to state his business requirements clearly and the
project manager may even find the project to be totally out of control. Another
major problem in this phase is to identify the key stakeholders of the project.
This phase of the project should be driven by priorities that are accepted by
both the client and the project organization.
The pre analysis phase is the result of attempts to get a comprehensive
view of the client s business requirements. This phase tries to discover and
solve the problems before the analysis and design phases. Identifying functional
features and procedures is essential to finish tasks successfully. Preanalysis
also helps eliminate issues that may become obstacles in the future. Most of the
existing software specification procedures fail to identify and address
questions like who the client is, who is an important client and what his most
important requirements are. The most significant aspect of preanalysis is that
it helps resolve conflicts in client priorities.
Partitioning analysis is used for analyzing large and technically complex
projects. Partitioning analysis is further split into high-level analysis,
intermediate level analysis and detailed analysis. High level analysis involves
understanding the client and his requirements and his priorities.
Intermediate-level analysis involves elaborating the high level analysis. It
develops a project management contract and the project team tries to get a feel
of the project size. Detailed analysis involves a study of the business problems
and issues and this results in defining the business requirements with more
clarity and gives a detailed specification list to be followed through out the
lifecycle of the project. It identifies the factors that make the project a
success.
Post analysis concludes the decisions on the functions that are to be
automated. This analysis also determines the hardware and software components
required to automate the functional unit. It specifies the total technical
functions to be used for example, whether to use batch or on-line processing,
distributed or centralised processing, databases and other related issues. The
domain of the analysis is not finalized until the scope of the project is
arrived at.Therefore, the scope of the project is not truly specified till all
the phases of analysis are complete.
Designing Phase
This phase involves a change in the state of the project. It progresses
from the chosen solution in the analysis phase to develop a credible and a
quality solution. This is obtained through the application of appropriate
software design procedures to the selected solution. The designing phase is
further divided into three stages namely,": designing the technical
architecture, the external designing and the internal designing.
Designing the technical architecture of the system: Here the system is
divided into different parts that finally form a group of source code
instructions. These groups are generally called sub-systems or programs.
Sub-systems or programs are further divided into modules, routines, sub-routines
and so on. The manner in which these groups interact with each other is known as
the technical architecture of the system. The technical architecture defines the
basic system, control sub-systems and the data structure control interfaces for
intermodule communication.
External design: External design takes design inputs from external sources
to the system without considering internals of the modules, programs etc.,
addressing issues like designing input screens and forms, sequence of screen
menus and designing output reports. In prototyping, a part of the external
design is carried out in the initial stages of the project itself. In such
cases, the remaining external design (that which was not completed in the
initial phases) is completed. Most of the outputs of this sub-phase go as direct
inputs into the customer procedure guides and manuals. Since external design is
related closely to documentation factors, it should be closely coordinated, with
the, members responsible for customer documentation.
Internal designing: Internal designing gives detailed directions for
designing modules, programs, databases and so on. These internal specifications
will be used while coding in order to develop source codes in one or more
compiled programming languages. Team members are given the responsibility of
designing a module each, which is usually less than or equal to 100 source code
instructions. They may also be given the responsibility of developing a program
which is a group of modules, routines or subroutines. The specifications contain
die name, purpose, language, calling parameters, call sequence, algorithms,
module logic, error routines, and recovery and restart procedures. The database
design is also finalized with complete information on the names, fields, field
formats, descriptions, values, size, statistics of data usage, difference
between stored and retrieved data, relationships, methods of access and back up
and retaining criteria.
The Coding or Construction Phase
The actual programming for developing the software application happens at
diis stage. This phase involves writing a code based on the design
specifications of the subsystems and databases. The language used and the
various productivity enhancing tools have a direct impact on die programming
phase. All individual sub-systems or modules developed during diis phase are
subjected to thorough screening and testing process.
The Installation Phase
The most crucial and challenging task for tlie project manager in this
phase is the integration of all the sub- systems and routine codes into tlie
main project. Integration in IS projects is not as simple as it appears to be.
It involves setting up hardware components, documenting, testing, training end
users on die software application and communication. The final phase of the IS
project involves amalgamating the output of the individual components into a
meaningful system. The effectiveness of integration is tested during system
testing and acceptance testing. It is only after the confirmation of the
effectiveness of integration, that the project is given a go ahead for
implementation.
Input Requirements and Utilities
To evaluate a project idea, one must also consider the availability and
utility of the inputs. The project manager should carefully assess the materials
required and their specifications. Material inputs for any project are normally
classified into four categories : raw materials, processed industrial materials
and components, auxiliary materials and factory supplies, and utilities.
Raw materials include agricultural products, forest products, mineral
products, livestock and marine products, livestock and marine products. The
project manager has to determine the material inputs by assessing the quality of
the raw materials, their costs and their availability.
While purchasing industrial materials and components, the project manager
makes use of some testing equipment to measure parameters like quality,
quantity, and specifications. Pharmaceutical companies may use some chemicals to
test their chemical inputs. A project manager should develop a close
relationship with the input suppliers to ensure timely and economical inflow of
required inputs. Most firms make long term agreements with the suppliers till
the completion of the project.
The manufacturing process is also determined by the availability and
quality of raw materials. For example, the quality of limestone decides whether
wet or dry process is to be used in a cement plant. Proper assessment of
availability of infrastructure like power, water, steam, fuel etc should be made
by the project manager to effectively run the project. All these utilities have
to be evaluated in relation to the location, type of technology, supplier’s
capacity and plant capacity. The project manager can also obtain special
permission from the local government to ensure better availability and use of
several utilities.
Product Mix
The project manager has the choice between a broad range of products or a
shortened product mix from a study of market requirements and the firm’s ability
to offer a variety of products. For example, a carpenter offers a wide range of
furniture units with different features and specifications. But a supplier of
electronic durables may offer only a limited range of products. Similarly, Xerox
offers of its products only on a limited scale. The project manager increases
the product range when he adopts an expansion strategy and reduces the product
range with a retrenchment strategy.
Plant Capacity and Functional Layouts
Plant capacity is the ability of the firm to produce certain volumes or a
certain number of units in a given time period. It represents the production
capacity of the firm under normal working conditions. This is determined on the
basis of installed capacity, machinery, and availability of infrastructure and
labor.
Input constraints, investments, market conditions, government policies,
technological up gradations, and financial resources play a critical role in
determining the capacity of a plant. Availability of skilled labor is also a
crucial factor is evaluating the capacity of a project.
Layouts are essential for setting up an effective plant. The three types of
layouts are :
Product layout
Process layout
Fixed layout
Product layout
In this layout, machinery and equipment are arranged according to the
products. This layout is also referred to as an assembly line or production
line. If the equipment is dedicated to continuous production of a narrow product
line. Suppose a firm produces three products : A, B and C According to this
layout, each product is manufactured separately and there will be no
interferences in the production lines of these three products.
Process layout
In this layout, all similar equipment or functions are grouped together
like all lathes in one area, and all drilling machines in another area. Suppose
a firm uses three varieties of machines, say P,Q and R to produce a product X.
All P type machines are grouped at one place, all Q type machines are grouped at
another place, and all R type machines in another place.
Fixed layout
A fixed layout is used when the product is bulky, large, heavy and remains
stationary. For example, all manufacturing and construction firms select a fixed
position for construction and all materials, machines, sub contractors and
workers are taken to the fixed place. Best examples of such layout are ship
building, aircraft assembling, satellite assembling etc.
The project manager can choose any of these layouts based on the
requirements of the project, Usually, no single type of layout can exactly
fulfill the purpose and the project manager may use a combination of different
types of layouts.
Location of the Project
Several of India’s space projects are conducted in Sriharikota as the place
is close to the Bay of Bengal. Most thermal power projects are located near
rivers to meet the high requirements of water. Airport projects are taken up in
dry land areas so as to minimize the land costs. From the above examples, it is
clear that the place of implementation of a project should be located
strategically to take advantages of benefits like availability of necessary
inputs, necessary infrastructure, and nearness to the markets.
The location of public sector undertakings is decided by the government,
which imposes certain rules and regulations on the private projects. The project
manager should carefully ensure that the location is as per the interests of the
government. The government also provides subsidies, and tax reliefs if the
projects are located in backward areas, Study of climatic conditions like
temperature, rainfall, floods, and seismic activity is very important while
choosing the location of a project.
Factors like integrating all departments of the organization, availability
of transport, safety requirements, site cost, political, cultural and economic
situation, geographical proximity to competitors are also to be considered by
the project manager in finalizing the location of a project.
be of three types:
Design specifications - that describe the physical characteristics of the
product that is to be delivered by the project. Since the buyer specifics the
design, the vendor is
not responsible for its performance.
Performance specifications - that describe the required operational
capabilities the end- product should posses.
Functional specifications - that form a part of the performance specifications
but it is identified only when the vendor mentions the utility of the product
or service and its cost effectiveness.
Procurement Resources
Procurement resources gives a description of the resources (systems and
personnel) needed to procure the products and services from the market as per
the specifications given in the product or service description document. If the
organization doesn t have a formal procurement team, then it is the
responsibility of the project manager and his team to manage the procurement
process. However, when projects are complex and technical in nature, and depend
heavily on the external market for sourcing raw materials or services, then the
presence of a formal procurement team to manage the activities would be
extremely helpful.
Market Conditions
Market conditions play a vital role in the process of procurement
planning. While planning for procuring goods and services from vendors, the
project or purchase manager should be aware of the products or services
available in the market. He should also be aware of the terms and conditions on
which various vendors supply these products or services. Macro-economic factors
like inflation rates, interest rates and government regulations influence
procurement plans. And there are other factors that need to be kept in mind
while planning procurements, such as quality management, cash flow statements,
risk management, staffing, initial ordering costs and the work breakdown
structure. There are certain parameters that arc taken for granted while
planning procurement. But, at tire same time, there are some aspects that
confine the scope of the vendee s choices and most often it is the financial
constraint.
Make or Buy Analysis
Once the project manager has the required information on the required
product and the market conditions, he has to decide whether to source these
products from within the organization or from outside vendors. If the
organization has free machine time and infrastructure mat can satisfy the need
of the project in a cost effective manner, then it is better to make the product
from within the organization than to source it from external vendors. But if the
costs, the infrastructure and other resources are not appropriate, then it is
better to buy it from external vendors. The make-or-buy decision should consider
both direct and indirect costs. For instance, while buying a product from
external sources, the project manager should take into account the indirect cost
of maintaining the procurement process apart from the product cost, such as the
ordering cost, transportation cost and so on. The make-or-buy analysis document
should contain the project organization s point of view and the immediate needs
of the project.
Expert Judgment
Expert judgment is used to analyze and judge the inputs of the procurement
process. It is provided by a single individual or a group of individuals who are
experts in specific fields. The sources for seeking professional and expert help
are:
Personnel within the departments of the organization.
Consulting firms
Professional, technical and industrial associations (All India
Engineers Association, Society for Indian Automobile Manufacturers
Association)
Selecting a Type of Contract
Selection of a contract type is influenced by the project manager s level
of uncertainty. While entering into a contract, the vendee (the procuring
organization) would always like to transfer the maximum risk of performance to
the vendor and at the same time reward him with perks for effective and
efficient performance. On the other hand, the vendor would like to minimize his
level of risk and maximize his profit. Generally there are five major categories
of contracts namely:
Fixed-Price (FP) contracts
Cost-Plus-Fixed-Fee (CPFF) or Cost-Pius- Percentage-Fee (CPPF) contracts
Guaranteed-Maximum and Shared Savings (GMSS) contracts
Fixed-Price -Incentive-Fee(FPIF) contracts
Cost-Pius-Incentive-Fee (CPIF) contracts
Fixed price (FP)
In this form of contract, the price of the goods that are to be supplied
by the vendor is fixed. The vendor negotiates this price depending on his
expected target cost1. The target costs vary from contract to contract in-spite
of having the same objectives. This form of contract is risky to the vendor as
he has to bear losses if the estimated target costs are lower than the actual
cost of production.
Although this type of contracting transfers maximum risk to the vendor, it
also has some disadvantages for the vendee:
The contract increases procurement process time: Since a contract value
(price) has to be fixed in advance, the vendor takes more time to calculate the
contract value. This makes the procurement process time-consuming.
It increases contract value: Since the contract value (price) is fixed in
nature, vendors tend to incorporate huge margins to cover-up any possible risks
arising in the future.
Thus, organizations should be very careful in selecting this type of
contracting as it will delay the procurement process and at the same time
inflate the contract value.
Cost-plus-fixed-fee (CPFF)
In this type of contract, die vendee bears all the costs of the product or
service and die vendor is paid a fixed fee for supplying diese goods. This fixed
fee is usually a percentage of the actual cost of the goods supplied or the work
done. This type of contract is taken up only when there is no possibility of
arriving at an exact price for the contract. In these kinds of contracts, the
vendor is bound to finish the work agreed upon in the contract. The vendor in
diese types of contracts carries a small degree of risk. These contracts consume
less time to execute and it can be judged quickly by the project organization.
Take the example of construction projects where die construction material and
labor costs are borne by the project organization and the vendor gets a fixed
amount as fees on die completion of the project or contract. The project
organization can reward the vendor on the quick and successful completion of the
contract.
CPFF contracts ensure a cooperative work culture between die organization
and the vendor by seeking mutual help in solving problems pertaining to
technical, commercial and financial aspects. The only disadvantage of this type
of contracting is that the contractor may not minimize the costs of
administering the contract as he is assured of his fees. The vendee can punish
such vendors by keeping them away from future contracts. The advantages of this
type of contracts are as follows;
Makes the contract more flexible for the procuring firm
Minimizes profits for the vendor
Reduces the costs of negotiation and preliminary specification
Accelerates the initiation and completion of the project
Provides choice in selecting the most efficient vendor rather than selecting
the least bidder
Facilitates the involvement of the same vendor right from consultation till
the completion of the project.
However, this type of contracting has the following disadvantages;
Request For Proposal (RFP), Request For Quotation (RFQ), Invitation For
Negotiation (IFN) and Vendor Initial Response (VIR). Of all diese types of
procurement documents the RFP is die most expensive for the vendor, especially
when the contract involved is so large tfiat the proposal needs to present
different sections covering various factors like cost, technical performance,
background of the management, quality of the processes, infrastructure support,
management of subcontractors and so on. A typical RFP covers the topics as
mentioned below.
A brief overview of the project.
Scope of the request for proposal.
Product specifications pertaining to its performance, technical functions
and quality.
Provision for alternatives in case of anything going wrong.
Communication of information.
Mode of supply of products and services.
Setting up and maintaining services in case of machinery or software.
Mode and time of payment.
Span of insuring the products or services.
Means of analyzing the proposals.
Nature of confidential reports.
Key people with authority and responsibility to take decisions on areas
like change requisitions.
Procurement documents should contain a format that should get out as much of
information as possible from eligible vendors. The documents should seek the
depth, the accuracy and completeness of the information provided. It should
also contain a statement of work, description of the response sheet and any
other additional documents required like confidential statements or
agreements. There are strict regulations pertaining to the format and
content of procurement document when it is prepared by or for a government
organization. An ideal procurement document should be balanced by two
factors i.e., on the one hand, it should be rigid in seeking responses
that are corresponding and comparable but on the other hand, it should be
flexible to encourage suggestions from the vendor so as to enhance ways of
satisfying the need.
Criteria for Judging the Vendor
This involves evaluating the various proposals received from different
prospective vendors, by rating them. The criteria can be objective or subjective
in nature and they have to be clearly mentioned in a procurement document. When
the organization has the list of approved vendors from whom the product can be
readily sourced, then the criteria for judgment is usually narrowed down to the
price of the product. But in the absence of such a vendor list, cost effective
and reliable criteria for judgment should be developed and documented. The
following should be the factors to evaluate under such circumstances:
Need interpretation - as given by the vendor.
Total cost of procurement (purchasing costs + operational costs).
Can the particular vendor deliver the product or service at the lowest
possible cost?
Technical expertise - Is the vendor technically competent and can he adopt
tire technology needed to produce the required output?
Management style - Does the vendor have the substantial management practices
to complete the project?
Financial position - Is die vendor financially capable of carrying on with
die procurement project?
SOLICITATION
Solicitation is a process of obtaining quotations, bids, offers or
proposals from all prospective vendors. The process involves handling the
procurement documents
Shortlisted vendor list
Vendor meetings
Advertising and
Accepting proposals.
Short listed Vendor List
The short listed vendor list contains all information pertaining to their
expertise in different functional areas. These lists are usually available with
the organization. But in the absence of the list, it is the project team s
responsibility to develop their own source. If it is general information that is
required, then it can be sourced from regional associations (e.g., local
management and engineering associations), trade yellow pages etc., but if the
information required is specific, then die team has to put in greater efforts to
source it by visiting die sites, getting in touch with old customers and so on.
Procurement documents can be presented to prospective and potential vendors.
Vendor Meetings
These are meetings with prospective vendors before they present the
proposals. These are conducted to make sure that all the vendors understand the
requirements from all perspectives. Though it is a fact that the project
organization gains maximum advantage at this stage of the project, judicious use
of power and authority will result in a win-win situation for both die vendor
and the vendee. All major issues in die negotiation should be addressed towards
the benefit of the project. Negotiations can in negotiations when the project is
of high value. The negotiating team under such situations comprises
representatives from all functional departments such as engineering, accounting,
marketing, human resources and so on, depending on the type of the product or
service being procured. The team should plan for the meeting in advance and
should decide on the objective of the meeting and the technical and financial
issues. The crucial task is to select a team leader and authorize him to commit
the company s resources. Because it is the procurement department that has the
power to commit the company s resources, the team leader should be an expert in
these activities. To shield the project interest and to ensure the correct
understanding of the product or service standards and specifications, it is
advisable to include the project manager in the team. The two parties in a
negotiation meeting have two different goals to achieve. For instance, the
organization requires a particular product or service at the minimum price
possible, and the vendor desires to make as much of profit as possible from the
deal.
A negotiation meeting can be split into five phases namely, introduction,
identification, bargaining, closing and acceptance. These phases of the meeting
are classified because of the convenience it offers in analyzing the concept.
However there is no demarcating line between the phases. The parties involved in
negotiation should ensure that they do not skip any of the phases in between
without completing them.
The introduction
The introduction phase in a negotiation meeting is a stage in which the
parties involved are introduced to each other. It is this stage that influences
the total climate of the meeting during the rest of the phases.
The identification
This phase in a negotiation meeting involves exploring the competitor s
strengths and weaknesses and their focus areas. The issues are evaluated in
order to interpret the competitor s stand. This phase of negotiation usually
brings a change in the objective of negotiation because of any information
revealed by the competitors in discussion.
The bargaining
The bargaining phase in a negotiation meeting is the crux of the meeting.
The actual discounting process happens here. The bargaining between the vendors
and the vendee is basically because of time, cost and performance expectations.
The next phase of the meeting begins only when the gap between the expectations
of the two parties is reduced.
The closing
The closing phase in a negotiation meeting documents the final consensus
oetween the two parties.
The acceptance
This phase in a negotiation meeting involves the most complex tasks i.e.,
ensuring that the vendor and the vendee interpret the consensus reached (terms
in final contract) similarly. Though this phase signals the closing of the
meeting, the parties have to sign a written contract before calling off the
meeting.
Negotiation is more of a human process than a technical process, because
several psychological factors influence the outcome of negotiations. Therefore,
the team leader has to use certain techniques to ensure a positive influence of
human behavior on the outcome of the meeting.
Negotiation and its Goals
The project manager likes to get the best price deal along with the
completion of the project on time and as per the standards. The organization
likes to exert some degree of control over the vendors performance by including
some clauses in the contract. The project organization should continuously seek
vendor support during the contract administration and at the same time exercise
control. Another important goal of the project organization is to maintain a
harmonious relationship with the vendor. A harmonious and supportive
relationship at the beginning of the negotiation eases the process of resolving
potential problems or disagreements arising in the future. A good relationship
between the vendor and vendee also enhances the chances of the vendor gaining
future contracts of the project organization.
Advertising
Advertising is a tool used by the project organization to invite proposals
in the form of sealed bids from prospective vendors. There is no bargaining
involved in this kind of solicitation. The vendors pricing is influenced by
market forces and the contract is bagged by the vendor quoting the minimum
price. Advertising updates the list of potential vendors present with the
organization and this list acts as a databank for future use. The channels of
advertising could be regional newspapers, professional newsletters or magazines.
Advertising in mass media is mandatory because of the regulations imposed by the
government, especially for all the subcontracts or contracts involving
govermnent agencies.
Accepting Proposals
Once the procurement documents are prepared and a vendor list is selected,
the project organization takes up the task of selecting the vendor. After
reaching a consensus with the procurement document, the vendor presents his
agreement to supply the required product or service to the organization as per
the specifications and standards mentioned in the procurement document.
VENDOR SELECTION
Vendor selection is a process of receiving quotations or proposals from
prospective vendors and evaluating these proposals to choose the right vendor.
Though this is a complex and difficult task, a properly documented vendor
proposal makes the process simple. Although price is the primary selection
factor for readily available products, bidding at lowest possible prices docs
not guarantee the contract if the vendor fails to supply the products on time.
In order to simplify the process, the proposals received are classified into two
disciplines namely technical and commercial to evaluate each of these
separately. Also it is advantageous to seek proposals from multiple vendors if
the nature of the product is technically complex. The tools and techniques used
for selecting a vendor are as follows:
Contract negotiation
Weighing system
Screening system
• Developing independent estimations
Contract Negotiation
Contract negotiation is a process aimed at enhancing the clarity and
ensuring mutual consensus on the structural and procurement aspects mentioned in
the contract before signing the contract. The final contract should clearly
convey the agreements reached between the two parties. The various topics to be
mentioned in the contract include the price of procurement, technical approach,
management style, terms and conditions, legal bindings, responsibility and
authority of the people involved and other related issues, depending on the
nature of the product to be sourced. While procuring highly technical and
complex product or service, the final contract may take the shape of a
Memorandum of Understanding (MoU) which is independent with its own sources and
outcomes.
Weighing System
A weighing system is a process in which all the information pertaining to
the qualitative aspects of the vendor is quantified. Weighing reduces the impact
of individual bias on vendor selection. The process involves identifying and
scoring all the significant activities from the proposal, setting up a range for
qualifying them based on the significance level and weighing diem against the
total scores.
If the range falls below the total score even with a single percentage
point, the vendor can be disqualified. In general, the following approach is
used to arrive at a particular score value:
• Each and every parameter taken up for evaluation should be given a
numerical
weight.
All potential vendors should be ranked based on each of the evaluation ^
parameters.
Multiply the numerical weight with the rank of the vendor.
• Add all the output of the above multiplication results in the total
score.
Screening System
Screening is a process of establishing basic performance standards for
qualifying the proposals. The vendor has to qualify in the performance
specification test developed by the screening system.
Developing Independent Estimates
This process is aimed at checking the audienticity of the price quoted by
the vendor. The project organization develops its own estimations of product
pricing. If the gap between the vendor and vendee s price estimates is high, it
clearly means that the data in the statement of work is insufficient or the
vendor failed to correctly interpret the statement of work.
CONTRACTING
After evaluating the quality of the prospective vendors thoroughly, the
project organization has to sign a contract with the vendor to bind him legally
to deliver the specified product. Both the parties in the contract are mutually
accountable and legally bound. The vendor is responsible for delivering the
product as agreed upon in the contract and the vendee is responsible for paying
die vendor the price that is agreed upon in die contract on die successful
completion of delivery or in phases as per the terms and conditions of payment.
The nature of the contract is legally binding on both parties, which makes the
approval process more stringent and mandatory. The stress is on ensuring that
die product or service description in die contract has the potential to satisfy
the project requirements. In general, the following are the parameters to be
covered in a final contract:
The beginning of the contract should always start with the definitions of
the vendor, vendee or description of other complex terms.
An overview of the responsibilities of the vendor and vendee.
The type of contract being administered along with die mode of payment.
Change requisition process and the authorization for its approval.
Vendor s warranty on the products or services being procured.
Frequency of conducting inspections and its cost distribution.
Terms and conditions for closing the contract.
Consequences for deviating from the agreement for example, late delivery of
the products.
CONTRACT ADMINISTRATION
According to PMBOK, contract administration is the process of making sure
that the
vendor s performance satisfies the project needs mentioned in the contract. If
the
project is so large that it requires multiple vendors to satisfy its needs, then
die major
area of concentration should be on handling die interfaces among die multiple
vendors.
Since die contracts signed are also the legal documents, die project team should
keep in
mind that any action taken by them makes diem legally accountable. To be
precise, contract administration is about applying the project management
vendor-vendee relationship and integrating the results of these practices back
into the project. The following are the project management practices that are
rejected into the contract:
Project planning and implementation - To check whetger the vendor
progressing as per die time scheduled.
Progress reporting - To check the vendor s performance in technical aspects.
Quality management - To check and constantiy monitor the quality of the
product being produced.
Change management - To chepk the approval and implementation of potential
changes and communicating die incorporated changes to the people requiring
it.
Financial management - To ensure timely and periodic payments as agreed in the
contract.
In order to administer the contract in an effective and efficient maimer,
die project organization should employ a contract administrator to manage the
total contract administration activities. It is his responsibility to see to it
that the end product or sendee matches the performance expectations of the
project. His basic responsibilities involve:
Managing change.
Ensuring that the vendor understands specifications completely.
Ensuring conformance to quality.
Managing warranty on the products being procured.
Managing die sub-contractors under the vendors.
Monitoring the manufacturing process.
Handling deviations from the contract.
Resolving conflicts.
Managing payment schedules and contract termination.
Job Status
Information collected during the project planning and implementation phase
gives the status of the vendor s job such as the tasks that have been completed
and the ones that have not been, the degree of quality being matched, the
expenditure incurred and so on.
Requisition for Change
Any changes to be made to the terms and conditions of the contract or to
the product or service specifications are covered in the statement for change
request. Further, if the job done by the vendor fails to impress the contract
administrator and the project manager, then the decision to terminate the
contract can also be treated as a requisition for change. But if there is a
disagreement between the vendor and the vendee on accepting the change, then
such a situation can lead to conflicts and claims.
Vendor Billing Process
The vendor should ensure timely and periodic submission of bills to the
contract administrator for payments for the completed work (or as agreed in the
contract). The billing documents should contain all supporting statements as
mentioned in the contract.
CONTRACT CHANGE MANAGEMENT SYSTEM
This change management system is similar to the overall change management
system discussed in the chapter on "Project Control". A contract change
management system is all about describing the process of handling a requisition
for change, i.e., it involves the necessary documentation needed to request for
a change, authority required to approve the change requisition and similar
issues related with change. Since any requested change can have a significant
impact on the contract i.e., it can bring in new jobs or remove an existing one,
all the guidelines pertaining to change acceptance should be mentioned in the
contract before signing it. The contract should mention the people who have the
authority and power to request and approve the changes so that any party seeking
change does not waste time by approaching the wrong persons. The contract should
also mention the general conflict resolution techniques if possible. All the
changes that are initiated are not disadvantageous, but it is belter to control
these changes by setting up proper change management practices in place. This
helps evaluate the changes that are initiated and then decide on whether to
accept the change or not depending on the results of evaluation. And once it is
approved, it is the contract administrator s responsibility to see to it that
the changes are incorporated. While considering the changes for implementation,
the contract administrator should evaluate the impact of the changes on basic
project parameters such as cost, time and performance. It helps further if die
project manager and the contract administrator try to integrate the contract
change management system with the project change management system.
Progress Reporting System
Progress reporting system is the process that keeps the project
organization updated on the performance of the vendor i.e., the way in which he
is achieving the objectives of the contract. An effective progress reporting
system demands frequent interaction between the contract administrator and the
project manager. To enhance the efficiency of the project communication system,
it is advisable for the project manager and the contract administrator to
integrate the functions of contract progress reporting system with that of the
project progress reporting system.
Managing Vendor Payments
Once the vendor submits the bill, the contract administrator has to check
and revise all the components of the billing system, as agreed upon in the
contract. And after seeking approval from the contract administrator, the
invoice should then be put on to the accounts payable system of the project
organization. The project manager has to approve the invoice.
CONTRACT CLOSING
Contract closing is a process involving verification of the product along
with updating all the project documents with the final results and storing all
project information for future retrieval. The contract closing procedure may
also be mentioned in the terms and conditions of the contract. The process of
contract closing usually involves four steps:
Contract documentation - Tins contains the complete contract as well as all
the supporting schedule documents, change requisitions and approvals,
technical documents developed by vendors, vendor performance reports,
financial literature such as invoices and payment records and documents
pertaining to any contract related audits or inspections.
Procurement audits - This is a process of formally reviewing the procurement
process starting from procurement planning stage till contract administration.
The purpose of this process is to determine the success and failure that
assures shift to other procurement items on this project or to other projects
in the organization.
Contract files - This is a total set of indexed documents developed to include
it in the final project records.
Formal acceptance and closing - This is a process wherein the contract
administrator or the individual or the department responsible for contract
administration submits a formal written notice to the vendor saying that the
contract is complete. All the requirements for formal acceptance and closing
are usually specified in the contract.
The project organization has the authority to put an end to a continuing
contract at any point of time depending on the nature of the contract and the
terms and conditions. But when the contract has to be terminated at a time which
the vendor has already incurred some expenditure in the process of delivering
the product, then the project organization has to reimburse the vendor the money
spent on contract activities. The following are the possible reasons for the
project organization closing a contract:
The product being procured is not required any more.
Technological advancement that can by-pass the product requirement.
Change in the allocation of funds.
Availability of substitute products.
Lack of profit expectancy.
The following could be the reasons behind termination of a contract by the
vendor:
Failure to supply the product or service as per die schedule.
Lack of progress in die activities of the contract (no positive
performance).
Failure to stick to the terms and conditions of the contract - deviating
from the contract in terms of quality and performance standards.
If there is a breach of contract from the vendor s end, tiien the vendor
may not even receive the payment for the work being carried out and which is not
been approved. But it may also happen that the vendor has to pay back if he was
paid in advance for the same work. Once the contract is being terminated, it is
the responsibility of the contract administrator to examine, approve and check
the breach of contract. In case of a disagreement between the products and the
contract, the contract administrator can:
Refuse to accept the products.
Refuse to accept defective products.
Accept a portion of the total batch of products.
The project manager should see to it that die contract is not closed out
financially immediately after delivering the product, because there is always a
chance of the products coming back for repairs or replacement for which tiiere
can be extra charges or reduction in the contract value. This problem increases
the burden on the contract administrator to control all the performance, cost
and time-related factors with a high degree of perfection. Therefore^
terminating a contract is the most challenging task for the project manager to
achieve.
UNIT – IV
PROJECT INTEGRATION
PMBOK defines project integration as all those processes required to ensure
that the various elements of the project are properly coordinated. Project
integration involves.
Project Plan Development
Project Plan Execution
Overall Change Control
Project plan development involves examining all the project processes and
sequencing them in a consistent and coherent manner so as to achieve the project
objectives. Project plan execution is the carrying out of the project according
to the project plan. The final step, overall change control, aims at
coordinating changes across all the project processes. Figure 5.1 shows the
different steps in project integration.
PROJECT PLAN DEVELOPMENT
Project plan development takes into account the result of all other planning
processes to develop a consistent, coherent document, which is used as a guide
for project execution and control. This process is repeated several times. Until
a final plan emerges, which specifies the resources to be used and the time
frame for the completion of the project.
The final document provides a baseline for measuring the progress of the
project for controlling the project. It lists all assumptions made in the
project planning stage and documents the planning decisions regarding the
alternative chosen. The document facilitates communication among the project
stakeholders. It specifies what issues should be covered in management reviews
and when these reviews should be conducted.
The steps involved in project plan development are :
Collecting data
Designing the Project Management Information System (PMIS)
Preparing project management mythology.
Collection of Data
In the process of project plan development, the project manager collects the
following data.
Outputs of other planning processes : The project manager considers the
outcomes of the planning processes of other knowledge areas such as scope
planning, activity definition, resource planning, cost estimation and schedule
development. These outputs include the Work Breakdown Structure, Cost
Performance Baseline and other supporting details.
Historical information : Records and databases relating to past projects are
used in developing the project plan. These records help the project manager
check the validity of assumptions and assess alternatives as part of his project
plan development.
Organizational policy : Every organization has a set of format and informal
policies that influence the project plan development. These policies relate to
different areas like quality management, personnel administration, and financial
controls. Hiring and firing policies, accounting codes, and standard contract
provisions are some of the policies that the project manager must keep in mind
while framing the plan.
Stakeholder skills and knowledge : Apart from the project manager, all
project stakeholders contribute to the development of the project plan, For
example, while awarding a fixed – price contract, the project cost engineer
plays a major role in determining the contract amount. In the case of technical
projects, the project client produces the design of the project which becomes
the basis for developing the project plan.
Limitations : Limitations are factors that reduce the number of options the
project manager has in developing the project plan, For example, when the
resources allocated by the top management for the project are fixed, the project
manager has to complete the project within the given budget. This budget
limitation the project manager’s options regarding quality, scope, cost etc. In
the case of projects performed under contract, contractual norms become
limitations.
Assumptions : Assumptions are factors that the project manager consider to
be real or true. While preparing the project plan. For example, if the project
manager is not sure about the exact date on which certain spare parts would be
available, he assumes that they will be available by a specific date and the
plan is prepared accordingly. But the project manager should make sure that he
does not base his plan on too many assumptions.
Designing PMIS
The project manager uses the project Management Information System (PMIS) in
order to gather, integrate and disseminate the information and outcomes of other
project processes. The PMIS supports all project management processes such as
initiation, planning, implementation, control and closing. For complex projects,
the PMIS helps in identifying, sequencing, scheduling and tracking all project
activities. It shows the costs incurred, variances, and earned values of the
project at any point of time.
The PMIS enables the project manager to distribute the required information
to the project team members and other project stakeholders in the form of
reports. It allows the project manager to regularly update all project
schedules. By showing up variations, the PMIS helps the project manager to
monitor the project processes. Based on the performance of the current
operations. PMIS shows at what point of time the difference between the actual
and planned performance exceeds control limits. This allows the project manager
to take initiatives to keep the difference (between the actual and planned
performance) within control.
The PMIS should be designed in such a way that it facilitates the
application of appropriate project management standards and tools that work
towards achieving the client’s product quality and delivery goals in the most
economical manner.
Preparing a Project Planning Methodology
Any of the structured approaches used by the project manager to guide the
project team during development of the project plan is referred to as project
planning methodology. The Structure can be a standard form or a template.
Project planning methodologies use project management software and simple tools
like facilitated start-up meetings.
PROJECT PLAN
The PMBOK defines the project plan as ‘a format, approved document used to
manage and control project execution’s It provides all relevant details about
every aspect of the project. The project manager prepares the project plan on
the basis of the information obtained from the PMIS, project planning
methodology, and the stakeholder’s skills and knowledge.
The project manager distributes the project plan to all functional heads and
top management. The plan given to the top management gives an overview of all
project activities, rather than the details of every activity in the project
plan. For functional heads, the plan provides details of a specific functional
area. Figure 5.3 shows a model project plan.
Changes are made in the project plan when more information is available
regarding the project. Depending on the needs of an individual project, the
project plan also includes other project planning outputs. For example, a
project organizations chart is included in the project plan for large projects.
Along with the project plan, the project manager also provides supporting
details like technical documents (technical requirements, standards,
specifications, designs etc.), additional information such as assumptions made
in the development of the project plan, and the outcomes of other planning
processes that are not included in the project.
PROJECT PLAN EXECUTION
In the execution stage implementation activities included in the plan are
carried out. To make sure that the final product is of desired quality, the
project manager must ensure that the project processes meet the schedules,
estimates and standards specified in the project plan. While executing the
project plan, the project manager and his team should understand the various
technical and organizational interfaces existing in the project and ensure that
all of them are properly coordinated. Figure 5.4 depicts the project plan
execution.
Inputs for Project Plan Execution
The project plan along with the supporting details, organizational policies,
corrective actions, managerial skills, and product knowledge are some of the
inputs that the project manager requires to execute the project plan.
The project manager analyzes the project plan, and subsidiary management
plans like the scope management plan, quality management plan, etc. and the
performance measurement baselines to execute the project plan. He must also make
sure that the project is in keeping with the organizational policies. The
project manager should know what corrective action is to be taken when there is
any deviation from the project plan.
The project manager and his team must have leadership, communication,
motivation, delegation and negotiation skills and the ability to motivate others
and delegate work, if they are to execute the project plan successfully. The
project team should also have complete knowledge of the project product and
various alternative ways of producing it.
Work Authorization System
This is a formal procedure followed by the project manager to assign the
project work to an individual or a group of individuals so that the work can be
completed within the specified time and in the given sequence. In general, a
written authorization is given to begin the work. For small projects, verbal
authorization is enough.
Status Review Meetings
The entire project team meets periodically in order to review the project
status. The project manager and his team exchange information about the
execution of the project work. In general, these meetings are held once a work,
or once a month. Sometimes, these meeting are conducted after the completion of
specific project milestones.
Outputs of Project Plan Execution
Work results and change request are the important outcomes of project
execution. Work results are the outcomes of the various activities performed to
meet the project objective. Work results provide information about the project
deliverables that are already produced and that are yet to be produced. They
also show whether the deliverables meet and specified. (in the project plan)
quality standards and how much costs the deliverables incurred. The entire
information collected about the execution of the project is presented in the
performance report.
The project manager also considers various requests made by project
stakholders to modify the present execution process. Requests are sometimes made
to widen or narrow down the scope of the projects, or to modify the time and
cost estimates. If these requests are practicable, the project manager makes the
requested changes.
OVERALL CHANGE CONTROL
Overall change control involves managing the factors that bring about
changes in such a way as to make sure that the changes are beneficial to the
project. It is also concerned with identifying changes in the project plan and
managing them as and when they occur.
Overall change control is considered to be successful if it maintains
integrity of all performance measurement baselines. All the changes should be
reflected in the project plan. Overall change control ensures that any of the
changes in the product scope are included in the project scope (the changes made
to the project scope may not change the product scope.) Overall change control
coordinates the change made across all functional areas.
The project manager studies the project plan, performance reports, and
change requests from project stakeholders before starting the overall change
control process. The project plan specifies what the project has to produce and
what resources are allotted for this purpose. The performance reports provide
information on how the project is being executed. The project manager also
studies the changes in the project and product scope. Figure 5.5 shows how
various changes are coordinated.
Techniques in Overall Change Control
Overall change control uses several techniques like change control system,
configuration management, and performance measurement.
Change control system
The Project management Body of Knowledge defines the change control system
as’a collection of formal documented procedures that defines the steps by which
the project document may be changed. The system includes tracking systems and
other approval procedures necessary to authorize the changes.
Big projects have independent boards called the Change Control Boards (CCB)
that approve or reject change requests. The powers and responsibility of the
board are well defined. If the project is very big and complex, multiple CCBs
are set up. With different responsibilities.
The change control system is allowed to make changes without any approval in
case of emergencies. But all the changes that are made and the situations
because of which the changes had to be made, should be documented for future
use.
Configuration management
Configuration management is a documenting procedure that is used to ensure
the description of the project product is accurate and complete. In several
projects, configuration management is considered as a subsystem of overall
change control. It documents all physical and functional characteristics of all
the project products and controls any changes to these characteristics. The
system records the changes made to characteristics of any of the project items
and confirms that the changes are appropriate and reasonable.
Performance measurement
Performance measurement techniques like earned value method help the project
manager to assess whether the variances are within specified limits or not.
Earned value is a useful technique which assess the project performance by
finding whether there is any change in scope, cost and schedule for the project.
THE FUNDAMENTALS OF PROJECT CONTROL
Project controls are tools developed to diagnose the system for deviations
from the actual plan and reset them back with the actual plans/schedule. Project
controls are required to check whether the project is progressing in accordance
with the plans and standards set during the planning phase. In fact, project
controls are measures taken by the project manager in order to minimize the gap
between the planned output and the delivered output.
Answering the following questions will help us ir designing an effective
control system:
Who sets the standards?
How realistic are the set standards?
How clear are the standards?
Do these standards achieve the project s goals?
What are the outputs and behaviour that need to be monitored?
Is monitoring of people required?
What kind of sensors are to be used?
Where should the sensors be placed?
How frequently should the monitoring be done?
What should be the tolerable gap between the actual and the planned output
before
taking the corrective measures?
What are the corrective measures available to take corrective action if
needed?
How ethical are these corrective measures?
What rewards and penalties can be used to get the desired results?
What kinds of actions are to be taken and by whom?
An effective control system is one that appears sensible and acceptable to
those who use it and those who are controlled by it.
Characteristics of an Effective Control System
For a control system to be effective and efficient it should fulfill the
following requirements:
Comprehensiveness: The control system should give a detailed overview of the
work to be performed. It has to estimate the time, labor and costs required to
finish the project.
Communicability: The system should communicate the scope of the project.
Authenticity: The system should reflect budgetary discipline and authentic
expense tracking by accounting tangible progress and cost expenditure in time.
Timeliness: The control system should be able to frequently re-analyze the
cost and time required for the completion of the remaining work. This is done
by comparing the delivered output with the actual/scheduled output in terms of
performance, cost and time thereby rendering the system cost effective.
Simplicity: The system should be simple to operate.
Flexibility: The system should be open to extensions and alterations and it
should also be easy to maintain.
Morally sound: The system should conform to all the ethical standards.
THE OBJECTIVES OF CONTROL
The primary objective of control is regulation. The purpose is to monitor the
delivered output by comparing it with the actual/scheduled output suggested in
the planning phase. The regulatory function of control helps in:
Translating the objectives into performance standards that are represented
by program activities and events.
Formulating budgets in order to compare the delivered output
with the actual/scheduled output.
The secondary objective of control is conservation of resources. The
project manager is entrusted the responsibility of protecting the physical,
human and financial resources of the organization. The process of guarding each
of these three assets is different. Resource control involves evaluating the
utilization factor of resources. Human resource control tries to determine
whether the individuals are capable of the efforts required to finish the task
on time. It is hardly possible to dedicate the resources totally to a specific
project. When the human resources are shared between the projects, some projects
may not be able to achieve its objectives due to mismanagement or misallocation
of their personnel.
Physical asset control is the process of controlling the use of physical
assets. It includes the preventive or corrective maintenance of the assets. A
project manager has to schedule the maintenance/ replacement plan in a way as to
minimize interruption to the work in progress and without overlooking the
quality aspect. Controlling the inventory is/also a key aspect that involves
receiving, inspecting, storing and recording to ensure genuine payment to
vendors. This also involves proper material handling techniques.
Human resource control is the process of controlling and maintaining the
growth and development of the human capital of the organization. Unique projects
enable people gain rich experience within a short period of time. Conserving
human resource is therefore a significant aspect of the control system.
Financial resource control is a combination of regulatory and conservatory
functions. The conservatory function of control on capital investments requires
the meeting of certain conditions before investments are made. The same
conditions also regulate capital flows for a higher return on investment. The
regulatory and conservatory techniques of financial resource control consist of
a control on current assets and project budgets along with capital investments.
These controls are implemented through a series of analysis and audits by the
controller or the project manager.
The tertiary- objective of project control is to facilitate
decision-making. Effective decision-making by the management requires the
following reports:
A report comprising the plan, schedule and budget made during the planning
phase.
Data consisting of the comparison between the resources spent in order to
achieve the delivered output and the scheduled output. Tins report should also
include an estimation of the remaining work.
An estimate of the resources required for the completion of the project.
These reports that are submitted to the project managers and team members are
useful in the following manner:
They provide feedback to the management, planners and team members.
They identify the deviations from the scheduled plan.
They implement a contingency plan at an early stage in order to protect the
project from higher losses due to cost, performance and time overruns.
Need to Control Performance, Time and Cost
Talking of control always brings three parameters into the discussion: the
performance, the cost and the time of a project. These three aspects are of
utmost importance to any project manager because he is answerable to the client.
This makes the project manager to check whether the project is progressing as
per the expectations and if it is operating within the time frame and budget.
The need to control the performance, cost and time arises from this:
Controlling performance
It is necessary to control performance because;
Technical problems may spring up any moment
Resources may become scarce
Complicated teclmical snags may develop
Quality problems may arise
The client may request for changes in the system specifications
Inter functional complications may arise
Technological breakthroughs can also affect the project.
Controlling costs
Some of the reasons that necessitate cost control are;
More resources are required to solve the technical problems
Cost of the project increases proportionately with the scope of the project
Low estimations were given initially
Poor reporting structures
Inappropriate budgeting
Failure to put a corrective measure in place in time
Change in the prices of inputs.
Controlling time
Some of the reasons that necessitate time control are;
Solving a technical snag may require more time than estimated
Time estimations that were done initially were very optimistic
Tasks were inappropriately sequenced
Shortage of material, personnel or equipment when required
Incomplete preliminary tasks that were necessary to complete a series of
activities
Changing government regulations.
REASONS FOR MEASURING DURATION AND COST DEVIATIONS
Before going into the reasons behind measuring duration and cost
deviations, it is necessary to talk about variances and kinds of variances.
Variances are deviations from the actual plan. Based on the parameters of time
and cost, variances can be classified into Positive variances and Negative
variances.
A positive variance is one in which the delivered output is ahead of the
planned schedule or the cost incurred is less than the planned cost. Though
positive variances are good news for the project managers, they can be as
threatening as negative variances. Positive variances are capable of advancing
the project completion date and allocating lesser resources than estimated.
However, these variances can also occur as a „ /result of missing an activity
that was supposed to be completed during the reporting period. It needs to be
examined thoroughly before reporting a positive variance.
A negative variance is one in which the delivered output is behind
schedule or the cost --incurred is more than the planned cost. The project
manager would want a detailed report on the schedule accomplished and the costs
incurred, along with the reasons /or the delay.
It is important to measure duration and cost deviations because they play
a significant role in the project management life cycle. Though all the
parameters of project management have their own levels of significance, time and
cost share a special place. Exhibit 15.1 gives the reasons behind cost overruns
during different phases in the project.
Identifying Deviations from the Curve Early
When the project manager plots the actual performance or cost curve
against the planned performance or cost curve, he may observe some deviation
between the curves. This deviation between the curves cautions the project
manager about cost and performance overruns. Tins enables the project manager to
initiate timely corrective measures to minimize the deviations.
Dampen Oscillation
A constant, continuous and identical pattern should be displayed by curves
representing the actual and the planned performance over time. Proiects with
high behind schedule, overspending during one phase and going out of control in
next corrective measures that would nip problems in the bud.
Facilitate Early Corrective Action
A schedule or a cost problem is better reported to the project manager at
an early stage of its development. The project manager has more opportunities
for a corrective action plan when the problem is detected early.
Estimating Weekly Schedule Variance
Weekly reports on the work in progress have to be made, to give the
project manager enough time to take corrective measures before the situation
gets out of control.
Determining Weekly Effort (Person Hrs/Day) Variance
The variance between the planned/scheduled effort and the delivered effort
has a direct impact on the planned cumulative cost and schedule. A lower
delivered effort than the scheduled effort indicates that the potential has not
been optimized i.e., a person failing to enhance his/her effort in the following
phases of the project. However, if the delivered effort is more than the
scheduled effort, where progress is not in proportion with the effort put in,
may result in a cost over run. It is very important to detect the out of control
situations early. The longer one takes to detect a problem, the harder it will
be to put the project back on track.
PROJECT REVIEW
IMPORTANCE OF PROJECT REVIEW
Once the project enters the implementation phase, the project manager
should take up the responsibility of reviewing the status of the project in a
timely and phased manner. Project review conducted at various stages of project
implementation play a major role in the success of a project. The project
manager conducts review to find out;
If the project can accomplish the business goals.
Whether the rules of the organization are understood properly and
implemented
If it is worthwhile to take up the project all the before entering into
major contracts
Whether the project is managed effectively and the team members are sure of
completing the project, by following the guidelines.
Reviews give the project manager and the organization a chance to solve
problems before they get out of hand, or to improve the way in which the
projects are being handled. To derive the maximum benefit out of the review the
project manager has to take follow-up action with an open mind. Reviews ensure
that the project utilizes the available funds to gain business advantage. On the