1 Project Management

PPROJECT ROJECT MMANAGEMENT ANAGEMENT AAND ND AAPPRAISALPPRAISAL

Unit IUnit I

Chandra Chandra Mohan Mohan SumraSumra

What is a Project?What is a Project?

• A Project can be defined as a non-routine, non-repetitive, one off undertaking, normally with distinct time, financial and technical performance goals.

• A Project is a single, non-repetitive enterprise. It is usually undertaken to achieve planned results within a time limit and a cost budget.

• Any scheme or part of a scheme, for investing resources, which can reasonably be analyzed and evaluated as an independent unit.

What is a Project?What is a Project?

• An investment carried-out according to a plan in order to achieve a definite objective, within a certain time and which will cease when the objective is achieved.

• An organized unit dedicated to the attainment of a goal- the successful completion of a development project in time, within budget, in conformance with a pre-determined programme specifications

• Project is a specific task, with well defined objectives, which requires certain time and resources for its implementation, which can be reasonably planned and appraised in advance and also can be evaluated as an independent work unit.

Characteristic Features of a ProjectCharacteristic Features of a Project

Project ManagementProject Management

Project management Vs General ManagementProject management Vs General Management

Project Management• Responsible for overseeing

change• Ever changing set of tasks• Dynamic organizational structure• Lines of authority defined but also

situational• Predominantly concerned with

innovation• Success determined by

achievement of project objectives• Requires long-term detailed

planning• Budgeting covers several periods

of time• Sequence of activities unique, as

per the requirement of tasks• Affected by risk and uncertainty

General management• Responsible for maintaining

status quo• Consistently similar set of tasks• Fixed organizational structure• Authority defined by management

structure• Tasks repetitive in nature. Almost

zero scope for innovation• Success determined by

achievement of targets• Involves both long-term and short-

term planning• Budgeting based on routine and

historical approach• Sequence of activities similar over

time• Limited decision variables

Evolution of Project Management Evolution of Project Management #1 of 3#1 of 3

• Evolution has been more of necessity driven than through desire

• In response to cope up with rapidly changing work environment in terms of technology, market place and other complexities in businesses

• 1900-1950s, Project management techniques were first used in Construction, Engineering, Defense. Major Contributors to Project management:–Henry Gantt, considered as forefather of Project

Management for his planning and control techniques gave the idea of Gantt Charts to keep track of project schedule

–Frederic Taylor: WBS, Piecemeal work


• 1950-1970s, Emergence of Mainframe digital computers made the processing and updating of critical path networks faster and easier. American defense industry and Du Pont were early users of this technology followed by many other companies in manufacturing and construction Industry. It was during this era that Project Management was first recognized as a separate specialized function/role. Two important mathematical methods were introduced– PERT: Program evaluation review technique– CPM: Critical Path Method

• 1970-1980s, this period saw rapid growth in Information technology and thus in Project Management applications and software. Job was still very tedious requiring too much manual feeding of data and interpreting it through large stacks of printouts. Project Managers were dependent on IT experts to use computers


• 1980-1990s, Project managers became far less dependent on IT experts. Now the changes in project schedules etc can be updated and implemented quickly. It was during this era that size and complexity in activities pushed organizations to look for better techniques to accomplish complex tasks. Thus techniques like PERT and CPM became very popular among Project Managers

• Post 1990s, globalization drastically changed the business environment across the world. Information Technology became the backbone of operations across industry. Emergence of easy to use and standardized Project management tools like Microsoft Project and many others helped developers develop industry specific customized tools of PM.

Project Life Cycle Project Life Cycle #1#1


• Level of Effort Vs Time-span during different phases of PLC– Slow start, Faster Implementation, Slow Finish– Project Planning (time < 15%), Project Implementation (time >

75%), Project Clearing (time < 10%)– J shaped chart, eg. Project Mars- Curiosity

• A Project is a group of activities (Phases) in sequence. Each of these having a work content are spread over a duration of time which is known as its life span. These phases provide a framework for budgeting, manpower & resource allocation, and for scheduling project milestones and project reviews. The entire duration which starts with the initiation of project and ends with the project closure is called a “Project Life Cycle”


• Project Life-cycle generally defines:–What technical work to do in each phase–When the deliverables are to be generated in each phase

and how are they reviewed, verified, and validated–Who is involved in each phase–How to control and approve each phase

• Phases in Project Life-Cycle:1)Conception or Initiation Phase2)Definition Phase3)Project Planning Phase4)Execution or Implementation Phase5)Commissioning, Closing Phase

Project Life Cycle (example of s/w project) Project Life Cycle (example of s/w project) #4#4

Project Life Cycle- (1) Initiation Phase Project Life Cycle- (1) Initiation Phase #5#5

1. Conception or Initiation Phase: In this Phase the idea of the project is explored and elaborated. Goal is to examine the feasibility of the project.

Common Techniques used in this phase are:• Creativity• Brain Storming• Feasibility Tests

– A Business problem/opportunity is identified and various solution alternatives are defined.

– A Feasibility study is conducted for investigating the likelihood of each solution option

– After approval of solution, a Project is initiated to deliver the approved solution

• This forms a “Project Charter”, which outlines the Objectives, Scope & Structure of new Project, and a Project Manager is appointed

– From hereon Project manager recruits Project team– Setting up of Project Office


• Feasibility Analysis:– Technical Feasibility

• Appropriate technology• Availability of Plant and Machinery• Adoptability in the given conditions

– Financial Feasibility• Availability of Finance• Effective utilization of funds• Minimization of Costs

– Managerial Feasibility• Whether the management and staff have required abilities and

educational qualification• Experience of management and composition of staff

– Social Feasibility• Social Viable• Pollution Aspect• Urbanization• Environmental Degradation• Civic centric• Environmental Hazards


• For Identification and Screening of Project following points helps in arriving at a decision:–Scope and Potential of new enterprises–Performance of existing Industries–Report of input and output of different industries–Social and economic report–SWOT analysis

Project Life Cycle- (2) Definition Phase Project Life Cycle- (2) Definition Phase #8#8

• Definition Phase: Once the Project is approved, it enters definition phase. In this phase, the requirements that are associated with a project result are specified as clearly as possible. Requirements can be categorized as:–Precondition–Functional requirements–Operational requirements–Design limitations


• While defining project features the following aspects are considered:–Customer’s requirement:

•Needs, Trends, Tastes, Fashion, Capacity to Pay–Product Specifications

•Space & size, Quantity, Quality, Components pricing–Engineering/Technological aspects

•Design, Technology, Manpower, Architecture, R & D etc• In project definition phase, it is important for all

parties involved to collaborate and form Project Definition document


• Basic content and considerations in preparing a Project Definition Document are:–Raw materials–Location and Site–Plant Capacity–Plant Layout–Plant Technology–Plant and machinery–Manpower–Electrical and instrumentation–Civil engineering works–Utilities–Financial analysis–Project Implementation schedule

Project Life Cycle- (3) Planning Phase Project Life Cycle- (3) Planning Phase #11#11

• Once the Scope is defined in Project Charter, the project enters the detailed Planning Phase. By this stage, the benefits and costs of the project have been clearly documented, the objectives and scope have been defined, the project team has been appointed and a formal project office environment established. Planning is carried out regarding:– Project plan (WBS, outline of activities etc)– Resource plan– Financial plan– Quality plan– Risk plan– Acceptance plan– Communications plan– Procurement plan


• Project Appraisal is carried out in planning phase. It involves detailed in-depth analysis of the results of a project. Appraisal is carried out taking into consideration following aspects:–Technical Appraisal: To examine the technical

feasibility of the project based on technical parameters of the project as given under:

•Location•Site•Technology•Layout•Process of Production•Product Mix•Plant Capacity•Consultants


– Market Appraisal: To work out “estimates of demand” has been properly worked out and fall within the ‘acceptable limits’. In includes:• Estimates of present and future demand• Estimates of present and future price• Method of sale and distribution• Competitors and extent of competition• Prospective consumers, their social and economic

background, consumption habits etc– Managerial Appraisal: To test the suitability and compatibility of

the management with the project. Aspects to be examined include:• Type of management• Strengths of management in terms of background and

experience, integrity, reliability etc• Personnel policies like recruitment, training, compensation etc• Organizational set-up like authority, systems and procedures

etc


–Financial Appraisal: Objective is to ascertain whether adequate arrangement has been made to meet the financial requirement of the project, capital structure designed is appropriate, appropriate sources of funds have been identified. Funds shall be raised from appropriate sources, at appropriate time and at minimum cost. Various aspects of appraisal are:

•Proper estimation of project costs (land, rights, plant, machinery, working capital, contingencies etc)

•Suitability of Capital structure designed, considering the aspects of risk, return and control

• Identification of most appropriate sources of funds•Proper determination of costs of funds•Arrangement made for meeting the working capital

requirements etc


–Economic Appraisal: To ascertain its economic viability, i.e. adequacy of rate of return on capital employed as well as the cash flows to cover the cost of funds and provide for payment of dividend to shareholders and also maintain future growth of the enterprise. It includes:

•Estimation of sales revenue•Estimation of cost of production•Estimation of surplus generated from the above•Element of risk and uncertainty involved•Tax factor•Rate of return on investment•Expected cash flows

Commonly used techniques for economic appraisal include, pay-back period, accounting rate of return, IRR, NPV, net foreign exchange flow, risk and inflation adjusted rate of return etc


–Environmental Appraisal: Objective is to ensure that project meets the requirements of statutes, regulations and guidelines for the protection and preservation of environment. Particular care is required in this respect in case of projects using scarce natural resources and likely to cause pollution and environmental hazards.

–Social (Cost Benefit appraisal): To assess the desirability and utility of the project from social point of view. This appraisal is more important in case of projects related to development of rural or backward areas, social welfare (employment opportunities, provision of essential commodities, education, healthcare), exports oriented, projects involving significant usage of foreign exchange and technology.

–International development and financial institutions like World Bank, IMF, UNIDO etc insist on such appraisal for projects assisted by them.


• Project Clearance and Approval: Before a project can be taken for Implementation, it requires clearance and approval. Approval takes into consideration all the appraisal exercises undertaken.

Project Life Cycle- (4) Implementation Phase Project Life Cycle- (4) Implementation Phase #18#18

• This phase involves the execution of tasks and activities listed in project plan. During execution deliverables are checked for changes, risks and issues, the review of deliverable quality and measurement of deliverable against the acceptance criteria. In this phase deliverables are physically constructed and presented to client. A number of management processes are also undertaken to ensure that the project proceeds as planned:–Build deliverables: Different models my be used


–Monitor and control–Cost management–Quality management–Risk management–Issue management–Change management–Procurement management–Acceptance management–Communication management–Internal Authority–External Authority


• Preliminary preparation for Project Implementation:–Project Organisation should be setup–A network chart of project activity should be prepared for

effective monitoring and control over the activities–Project information team should be set up for monitoring

and supervision–Delegation of authority and responsibility at different levels

in project organisation

• Stages in Project Implementation:–Preparation of engineering design–Negotiation & contracting–Installation and construction work–Recruitment, Training of Personnel–Planned Commission

Project Life Cycle- (5) Closing Phase Project Life Cycle- (5) Closing Phase #21#21

• It involves releasing the final deliverables to the customer, handing over project documentation, terminating supplier contracts, releasing project resources and communicating the closure of the project to all stakeholders.

• This phase involves smooth transition of authority over project from project team to client team.

• Project audit and Ex-post evaluation of ever aspect and stage of project is carried out.

Project AppraisalProject Appraisal• An entrepreneur or a manager has to make a

decision whether to invest in a particular project or not. For that a thorough Project or Financial appraisal is required. This process is also called as:

•Capital expenditure decision methods•Long term decision methods•Long term investment decision methods•Capital expenditure planning methods•Capital Budgeting Methods

• These methods are applied to evaluate the projected return against the projected investment to determine financial viability of the projects under consideration

• Points of consideration under Project Appraisal:–Project reports are estimates–Risk and uncertainty factor–Unforeseen situation

Project AppraisalProject Appraisal

• Capital Budgeting: It is mainly a decision-making process for investment in assets that have long-term implication, affect the future growth and profitability of the firm, and basic composition and assets-mix of the firm. Basic objective of capital budgeting is to select those long-term investment projects that are expected to make maximum contribution to the wealth of shareholders in the long run.

• Problems in Capital Budgeting–Future Uncertainty–Time Element–Measurement Problem


• Principles of Project Appraisal (Capital Budgeting): –Search for investment opportunities–Long-term capital planning–Short-term capital planning–Ranking of investment proposals–Selection of investment proposals–Check on authorized outlays–Authorization–Ex-post evaluation–Retirement and disposal–Economics of capital budgeting


• Techniques of Project Appraisal: –Payback Technique: It measures the length of time it

takes a company to recover in cash its initial investment•Payback period = Initial investment/cash inflows•It is the length of the time period required by the

project to return the investment disregarding the salvage value

•Cash inflows in this method are usually after tax, hence PAT

•Helps in estimation of exposure to risk•This method is easy to calculate but ignores the timing

of the cash inflows. Also, it doesn’t take into account the duration of a project


• Example 1: ABC Inc. is considering a project with investment requirement of Rs 4,00,000. Estimated life of project is 8 years with no salvage value. Profit before depreciation and taxes is estimated to be Rs 1,50,000. Calculate the payback period if tax rate is 30%.

• Example 2: Crystal investors is considering a project costing Rs 10,00,000. The installation cost of the project is Rs 25,000. Life expectation of project is 7 yrs with salvage value of Rs 1,25,000. The estimated annual cash flows before depreciation and tax are Rs 2,00,000. Calculate the payback period if tax rate is 50%


• Techniques of Project Appraisal: –NPV (Net Present Value): This method takes into

consideration time value of money as well. It helps in comparison of projects with different costs, different cash flows, and different service lives. Calculation of NPV requires net cash inflows, cash outflows, and company’s required rate of return.

•Required rate of return is used as discount rate in NPV calculation

•Generally Cost of Capital is used as Req. rate of return•Sometimes required rate of return is calculated by

adding risk factor in cost of capital, to compensate for uncertainity

•Decision criteria in NPV method: – If NPV > 0, accept the project; – If NPV is < 0, reject the project


• NPV = C(0) + C(1)/(1+r) + C(2)/(1+r)2 + …. + C(n)/(1+r)n

• Example1: Find NPV of a Project with net investment of Rs 40,000 and net cash inflows as given under. Assume cost of capital for company to be 10%.

Year Net Cash Flows1 22,000

2 18,000

3 15,000


• Example2: A company is considering an investment proposal of capital outlay of Rs 1,00,000. The life of the project is 6 years. Tax rate is 40%. Expected cash flows before depreciation and Tax are as follows:

Year Cash Flow before Depreciation and Tax1 20,000

2 22,000

3 28,000

4 30,000

5 40,000

6 40,000


Year Cash inflow before D & T

Depreciation

Cash inflow before Tax

Tax Cash inflow after Tax

Total Cash Inflow

Discount factor

Discounted cash inflow

1

2


• Techniques of Project Appraisal: –IRR (Internal Rate of Return): It determines the

interest yield of the proposed capital project at which the net present value equals zero, or PV of net cash inflows equals the investment. If the IRR is greater than the company’s required rate of return, the project may be accepted.

– NPV = C(0) + C(1)/(1+r) + C(2)/(1+r)2 + … + C(n)/(1+r)n

IRR can be calculated by setting NPV as zero in above equation and thus finding value of ‘r’.


• Points of consideration for IRR:– It gives a comparitive ranking of projects by their overall rates of

return, rather than their NPV– IRR does not consider cost of capital, and cant compare projects

with different durations

• Example1: Assume Company XYZ must decide whether to purchase a piece of factory equipment for $300,000. The equipment would only last three years, but it is expected to generate $150,000 of additional annual profit during those years. Company XYZ also thinks it can sell the equipment for scrap afterward for about $10,000. Using IRR, Company XYZ can determine whether the equipment purchase is a better use of its cash than its other investment options, which should return about 10%

Managing Risks in ProjectManaging Risks in Project

• A Risk is an event that may happen, and if it does it has negative or positive impact on project. A risk must also have a probability above 0%

• Risk management planning is carried out in four stages. They are:–Risk Identification–Risk Quantification–Risk Response–Risk Monitoring and Control


1. Risk Identification: Identification of probable risks. Approach used is a combination of brainstorming and reviewing of standard probable risks. There may be business risks and generic risks. Risk is defined in two parts:

• Cause of the situation• Impact of the risk

2. Risk Quantification: Quantification is done along two dimensions; Probability of occurrence of a risk, and Impact of the risk.


• By using a Matrix, a priority can be established:


3. Risk Response: A risk can be handled in four ways:

–Avoid the risk–Transfer the risk–Mitigate the risk–Accept the risk

4. Risk Monitoring and Control: Final step is to continually monitor risks to identify any changes in the status, or if they turn into an issue. Regular risk reviews are held, to identify actions outstanding, risk probability and impact, remove risks that have passed, and identify new risks


• Benefits of identification in Projects:–Lowering cost and confusion–Prioritization and Stakeholder support–Input from portfolio management–Mitigation–Setting expectations and establishing reserves–Communication and Control

• Project Risk Planning: (Risk planning in project)–Risk should be primary driver for project selection–Project planning and definition are the foundation to

controlling risk–Risk management should be maintained in Project

Risk plan

Any Questions ???Any Questions ???

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