UNIT - I

WHAT IS A PROJECT?

The various scholars and practitioners dealt with the concept of “Project” in their own way. Simply stated, a project pre supposes commitment of task(s) to be performed within well defined objectives, schedules and budget. Webster New 20th

Century Dictionary refers it as a scheme, a design, a proposal of something intended or devised. The Dictionary refers it as a scheme, a design, a proposal of something intended or devised. The Dictionary of Management regards it as an investment project carried out according to a Plan in order to achieve a definite objective within a certain time and which will cease when the objective is achieved. Similarly, a project according to the Encyclopedia of Management is ‘an organized until dedicated to the attainment of a goal the successful completion of a development project on time, within budget, in conformance with pre-determined programme

specification.”

Another school of thought looks upon a project as a combination of interrelated activities to achieve a specific objective. For instance, a project according to Project Management Institute, USA, is a system involving the co-ordination of a number of

1

separate department entities throughout the organization, and which must be completed within prescribed schedules and time constraints. To Sinhas, a project is not a mere action or an activity or an attempt towards a particular aim; it is rather in integrated effort, including multifarious actions and activities, towards that aim.

One group of scholars emphasize that a project – a unique and non-repetitive activity – aims at systematically co-ordinating inputs in the direction of intended outputs. To quote Harrison, “a project can be defined as a non-routine, non-repetitive one-off undertaking, normally with discrete time, financial and technical performance goals. A development project, says Hirschman, connotes purposefulness, some minimum size, a specific location, the introduction of something qualitative, new, and the expectation that a sequence of further development moves will be set in motion.

These are still others whose primary emphasis is on appraising investment proposals form the economic Social profitability angles. According and to Little and Merles, “We mean by a project any scheme, or part of a scheme, for investing resources which can reasonably be analyzed and evaluated as an independent unit”. The Manual on Economic Development Projects too defines a project as the

2

compilation of data which will enable an appraisal to be made of the economic advantages and the disadvantages attendant upon the allocation of country’s resources to the production of specific goods and services. All the above definitions thus suggest that a project is an action – oriented enterprise.

Banks and financial institutions have to examine the viability of a project before providing financial assistance. They have to ensure that the project will generate sufficient return on the resources invested in it. With the shift form security – oriented lending to purpose-oriented lending, the study of viability of a project Disbursement of funds according to the requirements of the project and close supervision and follow-up are also equally essential to recover the financial assistance provided. In order to develop proper co-ordination with the entrepreneurs, many banks and financial institutions are not only providing financial assistance to viable projects but also assist the entrepreneurs during all phases of a project viz., identification, selection, appraisal, implementation and follow-up. All the phases are inter-related and the experience gained during appraisal and supervision of projects helps the banks and financial institutions to guide the entrepreneurs in identification and selection of new projects. The

3

projects which are coming to banks and financial institutions for financing may be divided into following categories: -

(i) New Projects – For setting up new units.

(ii) Expansion – For increasing the capacity of existing units.

(iii) Diversification Projects– For

manufacturing new products by existing units.

(iv) Backward Integration projects – For manufacturing certain products which are being used as raw material by the existing unit.

(v) Forward Integration Projects – For manufacturing certain products which require the products of the existing unit as raw material.

(vi) Modernisation Projects.– It can be for

4

any one or more than one of the following objects –

a)Changing obsolete machinery

b)Enlarging the product mix product range to meet changing requirements of the market.

c)Reducing the manufacturing cost or for improving the quality of the product

(vii) Changing the requirement of raw material (shifting from present raw material to some other raw material)

(viii) Rehabilitation – For reviving sick units and making them viable to complete with normal / healthy units.

DEFINITION OF PROJECT

A project is a one-shot, time limited, goal directed, major undertaking, requiring the commitment of varied skills and resources. It has also been described as a combination of human and non – human resources pooled together in temporary organization to achieve a specific purpose.

The purpose and the set of activities which can achieve that purpose distinguish one project from another.

5

Project Management Institute, U.S.A.

“We mean by a project any scheme, or part of a scheme, for investing resources which can reasonably be analyzed and evaluated as an independent unit. The definition in thus arbitrary. Almost any project could be broken down into parts for separate consideration, each of these parts would then by definition a project”

I.M.D. Little and J.A.Mirries.

“A specific activity with a specific starting point and a specific ending point intended to accomplish a specific objective. It is something you draw a boundary around at least a conceptual boundary and say this is the project”.

J. Price Gittinger.

“Compilation of data which will enable an appraisal to be made of the economic advantages and disadvantages attendant upon the allocation of country’s resources to the production of specific goods and services…

United Nations.

It may, therefore be summarized that a project in essentially a self contained, independent entity.

FEATURES OF A PROJECT6

A Project can be identified by its features. The special features of a project that would differentiate from any other on going activity are given below :

A Project fixed set of objectives. Once the objectives have been achieved the project ceases of exist.

It has a specific life span.

Project has a separate entity and normally entrusted to one responsibility centre.

Project calls for a teamwork.

Project has a life cycle reflected by growth, maturity and decline.

Uniqueness is a salient feature of any project. No two projects are exactly similar.

Change is an inherent feature in any project out its life.

Project is based on successive principle and hence it is difficult to learn fully the end results at any stage.

A project works for a specific set of goals with the complex set of diversified activities.

7

High level of sub-contraction of work can be done in a project.

Every project has risk and uncertainty associated with it.

Project needs feasibility any appraisal studies. So that the sponsors sweet dream becomes realizable.

TYPES OF PROJECTS

Much of what the project will comprise and consequently its management will depend on the category it belongs to. The location , type. Technology, size, scope and speed are normally the factors which determine the effort needed in executing a project. Though the characteristics of all projects are the same, they cannot be treated alike. Recognition of this distinction is important for management. Classification of project helps in graphically expressing and highlighting the essential features of the project.

Projects are often categorized in terms of their speed of implementation as follows :

NORMAL PROJECTS

Adequate time is allowed for implementation.

8

All the phases in a project are allowed to take their normal time.

Minimum requirement of capital. No sacrifices in terms of quality.

CRASH PROJECTS

Requires additional costs to gain time.

Maximum overlapping to phases in encouraged.

DISASTER PROJECTS

Anything needed to gain time is allowed in these projects. Round the clock work is done at the construction site. Capital cost will go up very high. Project time will get drastically reduced.

Besides that, projects in general are classified on several basis as given in the following illustrative list.

- United Nations Asian and Pacific Development Institute Categories of projects.

CLASSIFICATION OF PROJECT

The project can be classified on several bases. Major classifications of the projects are given below :

9

1. On the basis of Expansion :

1. Project expanding the capacity.2. Project expanding the supply of

knowledge.

2. On the basis of Magnitude of the resources to be invested :

1. Giant projects affecting total economy2. Big projects affecting at one sector of the

economy.3. Medium size projects4. Small size projects (depending on size,

investment & impact)

3. On the basis of Sector :

1. Industrial project2. Agricultural Project3. Educational Project4. Health Project5. Social Project

4. On the basis of objective :

1. Social objective project2. Economic objective project.

5. On the basis of productivity : 1. Directivity productive project.2. Indirectively productive project.

10

6. On the basis of nature of benefits :

1. Quantifiable project2. Non-quantifiable project

7. On the basis of government priorities :

1. Project without specific priorities2. Project with specific priorities

8. On the basis of dependency :

1. Independent project2. Dependent project

9. On the basis of ownership :

1. Public sector project2. Private sector project3. Joint sector project

10. On the basis of location :

1. Project with determined location 2. Project where location is open.

11. On the basis of social time value of the project :

1. Project with present impact2. Project with future impact

12. On the basis of National Policy :

11

1. Project determined by inward looking policy2. Project determined by outward looking policy

13. On the basis of risk involved in the project?

1. High risks project2. Normal risks project3. Low risks project

14. On the basis of economic life of the projects :

1. Long term project2. Medium term project 3. Short – team project

15. On the basis of technology involved in the project :

1. High sophisticated technology project2. Advanced technology project3. Foreign technology project4. Indigenous technology project

16. On the basis of resources required by the projects :

1. Project with domestic resources2. Project with foreign resources

12

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

1. Capital intensive project2. Labour intensive project

18. On the basis of management of project :

1. High degree of decision making attitude2. Normal degree of decision making attitude3. Low degree of decision making attitude

19. On the basis of sources of finance :

1. Project with domestic financing2. Project with foreign financing3. Project with mixed financing 4. Project with financial institutions

20. On the basis of legal entity :

1. Project with their own legal entity2. Project without their own legal entity

21. On the basis of role played by the project :

1. Pilot project2. Demonstration project

22. On the basis of speed required for execution of the projects :

1. Normal projectCrash project2. Disaster project

PROJECT LIFE CYCLE

13

Every programme, project or product has certain phases of development. The different phase of development in an investment proposal or project is called project life cycle. A clear understanding of these phases permits entrepreneurs, managers and executives to have better control over existing and potential resources in the achievement of the desired goals.

PHASES OF PROJECT LIFE CYCLE

Project life cycle is a complex process consisting of different steps arranged in a sequential order. Different authors have described these steps in different sequential manner but the concept of the cycle is almost similar in each case.

According to United Nations Guidelines for Rural Centre Planning, there are 7 steps in the project life cycle such as project identification and appraisal, pre-feasibility study, feasibility study, detailed design project implementation, operation maintenance, monitoring and evaluation.

Rondineli, Dennis & Apsy Palia in their book “Project Planning and implementation in Developing countries” identified the following 12 steps in the project life cycle. Project identification and definition, project formation. Preparation and feasibility analysis, project design, project analysis, project selection, project activation and

14

organization, project implementation and operation. Project supervision (monitoring and control) project completion or termination, output diffusion and transition to normal administration, projects, evaluation, follow-up and action.

World Bank Guidelines reveals the following six major steps in the project life cycle. Conception (identification). Formation (preparation). Analysis (appraisal). Implementation (Supervision), operation and evaluation.

All the steps given in different studies can be grouped into three main phases viz.,

Pre-investment phase

Implementation phase and

Operational phase

A brief description of each of these phases if given below :

PRE-INVESTMENT PHASE

The first phase of the cycle describes the preliminary evaluation of an idea. It consists of identification of investment opportunities, preliminary project analysis, feasibility study and decision-making. Project idea emanates from the priorities when planning is done by the government demand and supply projection of various goods and services; Pattern of imports and exports over a

15

period of time; natural resource which can serve as the base for potential manufacturing activity; scope of extending existing lines of activity consumption pattern in other countries at comparable stages of economic stage of economic development.

On the basis of the investment opportunities, it is possible to conceive a number of projects out of which a particular project may be consistent with development objectives of the area. During this phase, the following aspects of the project must be carefully designed so as to enabling services

Project infrastructure and enabling services

System design and basis engineering

package

Organisation and manpower

Schedules and budgets

Licensing and governmental clearances

Finance

Systems and procedure

Identification of project manager

Design basis, general condition for

purchase and contracts

Construction resources and materials.16

Work packaging

This phase is involved with preparation for the project to take out smoothly.

Once a project opportunity is conceived, it needs to be examined. Preliminary project analysis concerns with marketing, technical financial and economic aspects of the project. It seeks to determine whether the project is prima facie worth wide to justify a feasibility study and what aspects of the projects are critical to its viability and hence call for an in depth investigation.

More details, through and complete feasibility study results in a reasonably adequate formulation of the projects in terms of location, production capacity production technology and material inputs. The feasibility study contains fairly specific estimates of project cost, means of financing sales revenues, production costs, financial profitability and social profitability.

Based on the thorough feasibility study the project owner or sponsors of financiers can decide whether to accept or reject a particular project. In other words, the decisions whether investment on the project should be made or not has to be made at this stage.

IMPLEMENTATION PHASE

17

The implementation phase of an industrial project involves setting up of manufacturing facilities. After judging the worthiness, project needs to be designed for implementation. Drawings, blue prints and the sequences in which the various activities concerning the project need to be carried out. The main activities under this phase are :

Project and engineering design : It consists of site probing and prospecting; preparation of blue prints, plant design, plant engineering, selection of machinery, equipment.

Negotiations and contractions : It covers the activities like project financing, acquisition of technology, construction of building and civil works, provision of utilities supply of machine and equipment, marketing arrangement.

Construction : This step involves the activities like site preparation, construction of building, erection and installation of machinery and equipment. Training engineers, technicians and workers. Plant commissioning.

OPERATION PHASE

It is the longest phase in terms of time span. It begins when the project is commissioned and ends when the project is wound up. This is transition phase in which the hardware built with active

18

involvement of various agencies is physically handed over for production. This phase is basically a clean up phase for project personnel. The main concern of this phase is on smooth and uninterrupted operation of machinery and plant, development of suitable norms of productivity, establishment of a good quality for the product and securing the market acceptance of the product. It aims to realize the projections made in the project regarding sales, production, cost of profits. Project monitoring and project evaluation are two vital activities under this phase.

Project monitoring is a step towards achieving properly identified objectives through a carefully laid down strategy. Each activity in the project implementation should be carefully watched so that, the progress may be measured and any deviation from the expected progress be identified in time.

Project evaluation refers to post-investment analysis. It aims at finding out whether the project has achieved the objectives for which it was taken up and whether it has created the anticipated or intended impact. This helps in developing an insight for future investment and better planning.

PROJECT PLANNING

19

Project Planning is foreseeing with blue print towards some predicted goals or ends. Projects plan is a skeleton which consists of bundle of activities with its future prospects; it is a guided activity. It is a plan for which resources are allocated and efforts are being made to commence the project with great amount of preplanning, project is a way of defining what we are hoping to do about certain issue. The project alone is not responsible for what happens during the course of a planning. Project is a final form of written documents that guides us as to what steps need to be taken next.

NATURE OF PROJECT PLANNING

One cannot conceive a project in a linear manner. It involves few activities, resources, constrain and interrelationships which can be visualized easily by the human mind and planned informally. However, when a projects crosses a certain threshold level of size and complexities, informal planning has to be substituted by formal planning. Besides that it is an open system oriented planned change attempt which has certain parameters and dimension. So that, the need for formal planning is indeed much greater for project work than for normal operations. The pre-defined and outlined in detail plan of action helps than

20

managers to perform their task more effectively and efficiently.

There are always competing demands on the resources available in a region or a country because of the limited availability and ever expanding, human needs. Planning for the optimum utilization of available resources becomes a pre-requisite for rapid economic development of a country or a region. Project planning makes a possible to list out the priorities and promising projects with a view to exercising national choice among various alternatives available. It is a tool by which a planner can identify a good project and to make sound investment decision.

NEED FOR PROJECT PLANNING

One of the objectives of project planning is to completely define all work requested so that it will be readily identifiable to each project participant. Besides that there are four basic reasons for project planning.

To eliminate or reduce uncertainty.

To improve efficiency of the operation.

To obtain a better understanding of the

objectives.

21

To provide a basis for monitoring and

controlling work.

FUNCTIONS OF PROJECT PLANNING :

The following functions are to be performed carefully in the Project Planning process.

It should provide a basis for organizing the work on the project and allocating responsibilities to individuals.

It is a means of communication and co-ordination between all those involved in the project.

It induces the people to look ahead.

It instills a sense of urgency and time consciousness.

It establishes the basis for monitoring and control.

In planning a project, the project manager must structure the work into small elements that are :

Manageable, independent, integratable and also measurable in terms of progress. Planning must be systematic and flexible enough to handle unique activities, disciplined through reviews and controls and capable of accepting multifunctional inputs.

22

AREAS OF PROJECT PLANNING

Comprehensive project planning covers the following. Planning the project work : the activities relating to the project must be spelt out in detail. They should be properly scheduled and sequenced.

Planning the manpower and organizations; The manpower required for the project must be estimated and the responsibility for carrying out the project work must be allocated.

Planning the money; the expenditure of money in a time-phased manner must be budgeted.

Planning the information system. The information required for monitoring the project must be defined.

PROJECT CHARACTERISTICS

Organizational structures and processes are custom made to produce a specific product of service, organizations have to take up new tasks that they are not equipped to handle. These tasks are new to the organization as they are not preformed earlier or they may not be repeated in the future again. To perform such unique tasks, organizations adopt the project approach. The project approach is adopted when the existing systems in the parent organization are not equipped to handle the new task. Some of

23

the characteristics of the tasks that qualify to be projects are :

Unique activities Attainment of a specific goal Sequence of activities Specified time Interrelated activities

Unique Activities

Every project has a set of activities that are unique, which means it is the first time that an organization handles that type of activity. These activities do not repeat in the project under similar circumstances i.e. there will be something different in every activity or even if the activity is repeated, the variables influencing it change every time. For example, consider a ship building yard that builds ships for international clients. Even though the organization builds many ships, each time there will be a difference in some variable such as, the vessel’s design, time allowed for construction etc.

Attainment of a Specific Goal

Organizations take up projects to perform a particular task or attain a specific goal. These tasks differ from project to project. The projects in an organization could be constructing a new facility,

24

computerizing the accounts department or studying the demand for a new product that the organization plans to launch in the market. All these projects have a specific goal or result to attain and hence we can say that every project is goal – oriented.

Sequence of Activities

A project consists of various activities that are to be performed in a particular sequence to deliver the end-product. This sequence depends on the technical requirements and interdependency of each of the activities.

Specified Time

Every project has specified start date and completion date. This time limit is either self-imposed or it is specified by the client. The life span of a project can run from a few hours to a few years. A project comes a close when it delivers the product or service as per the clients requirements or when it is confirmed that it is no longer possible for the project to deliver the final product or services as required by the client.

Interrelated Activities

25

Projects consist of various technically interrelated activities. These activities are considered interrelated as the deliverable (output) of one activity becomes the input for another activity of the project. Consider the project of building a multistoried luxury hotel. This project consists of various activities such a making a building plan, landscaping, constructing the building, designing the interiors, furnishing the rooms etc., All these activities are interrelated and are equally important for the completion of the project.

PROJECT PARAMETERS

The primary aim of a project is to deliver a product or service to a client within the specified time, budget (resources and cost) and according to quality and performance specifications. The clients often ask for too much to be delivered within limited resources. Therefore, it is important for the project manager to make the clients aware of the limitations of time, budget, technical strategy etc, that he is working under. The success of a project depends on the project manager’s ability to strike a balance between these interrelated variables or constraints. Some common constraints that influence a project are :

Scope Quality

26

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

27

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.

28

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

29

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

30

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

31

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.

32

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

33

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 CustomerProject team membersSponsorParent 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 :

34

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.

35

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

36

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

37

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

38

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 RegulationsInternationalizationCulture

Standards and Regulations

Standards are measures for judging the quality of products, Generally, standards are documented and approved by a recognized agency / body. These standards specify the rules and guidelines that organization must observe when producing a product of a service. Even when these standards are not mandatory, following them will enhance the marketability of the products produced by the project organization.

Regulations are mandatory guidelines that lay down the necessary characteristics of products or services. Building codes established by the Roads and Buildings (R&B) department are an example of regulations. Usually, these regulations are drafted by various governmental regulatory agencies and are enforced by regulatory personnel. The project team

39

should be cautious enough to ensure that the project meets the standards and regulations. The early detection of deviations from standards and regulations can help reduce project costs and duration.

Internationalization

Many organizations have subsidiaries in different countries. The projects undertaken by such organizations generally cross many national boundaries. Project managers must therefore be familiar with the political and economic environment of the countries in which the projects are being executed. They must also design a communication plan that enables them to manage and coordinate the project activities that are being carried out in different countries.

Culture

The culture of an organization and the external environment of a project have a significant impact on the success of the project. The culture the organizational culture, work environment, and the culture of various stakeholders of the project. The project manager should have an in-depth understanding of the organizational culture as it has a direct influence on the functioning of the project.

40

The organizational environment and culture depend on.

The philosophy and managerial style of the top management.

The organizational structure of the project (functional, project – based or matrix form)

The character and maturity level of project team members i.e. achievement level, motivation level etc.

The size of the project.

The culture of the project team members (their values, beliefs and convictions) influences their attitudes towards ethics, achievement, training and supervision and their interpersonal, problem – solving and conflict resolution skills. It also determines their level of motivation. A good understanding of different cultural values, languages, and special business styles and techniques would be an asset for a project manager, especially when handling international projects.

ENVIRONEMENTAL AND LEGAL INFLUENCE

Environmental and legal concerns have a major impact on the successful completion of a project. Therefore, the impact of the environment on the

41

project should be assessed before and after a project has been undertaken. In addition, analyzing the impact of a future project on the environment will help the project manager define rational goals for the project and the organization.

The project manager should acknowledge these regulatory processes as a part of good planning, instead of regarding them as barriers to the achievement of project goals. The project manager should obtain the necessary clearances from environmental protection agencies before starting the project. If possible, he should integrate these regulations (legal, environmental, etc.) into the overall plan of the projects.

All the projects should comply with all aspects of the law, Organizations usually take the help of legal advisors to ensure that the activities of the project manager and his team are in compliance with the law. Legal advisors must also ensure that the project has applied for and received all the required permits and licenses.

Technical Analysis

Analysis of technical and engineering aspects is done continually when a project is being examined and formulated. Other types of analyses are dependent and closely inter-twined with technical

42

analysis. Technical analysis is concerned primarily with :

Material inputs and utilities Manufacturing process / technology Product mix Plant capacity Location and site Machineries and equipments Structures and civil works Project charts and layouts Work schedule

This chapter discusses these aspects of a project and emphasizes the need to examine alternatives.

MATERIAL INPUTS AND UTILITIES

An important aspect of technical analysis is concerned with defining the materials and utilities required, specifying their properties in some detail, and setting up their supply programme. There is an intimate relationship between the study of materials and utilities and other aspects of project formulation, particularly those concerned with location, technology, and equipments.

Material inputs and utilities may be classified into four broad categories ; (i) raw materials. (ii) processed industrial materials and components, (iii)

43

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

44

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

45

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

46

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:

47

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.

48

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

49

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

50

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

51

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 conditions52

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

53

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 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

54

market for the product is likely to be very strong, a plant of higher capacity is preferable. If the market is likely to be uncertain, it might be advantageous to start with a smaller capacity. If the market, starting from a small base, is expected to grow rapidly, the initial capacity may be higher than the initial level of demand – further additions to capacity may be effected with the growth of market.

Resources of the Firm

The resources, both managerial and financial, available to a firm define a limit on its capacity decision, Obviously, a firm cannot choose a scale of operations beyond its financial resources and managerial capability.

Government Policy

The capacity level may be influenced by the policy of the government. Traditionally, the policy of the government was to distribute the additional capacity to be created in a certain industry among several firms, regardless of economies of scale. This policy has been substantially modified in recent years and the concept of “minimum economic capacity” has been adopted in several industries.

LOCATION AND SITE

55

The choice of location and site following an assessment of demand, size, and input requirement. Though often used synonymously, the terms “Location” and “size” should be distinguished. Location refers to a fairly broad area like a city, an industrial zone, or a coastal area; site refers to a specific piece of land where the project would be set up.

The choice of location is influenced by a variety of considerations; proximity to raw materials and markets, availability of infrastructure, government policies, and other factors.

Proximity of Raw Materials Markets

An important consideration for location is the proximity to sources of raw materials and nearness to the market for final products. In terms of a basic locational model, the optimal location is one where the total cost (raw material transportation cost plus production cost plus distribution cost for the final product) is minimized. This generally implies that : (1) a resource – based project like a cement plant or a steel mill should be located close to the source of basic material (for example, limestone in the case of a cement plant and iron – ore in the case of a steel plant); (ii) a project based on imported material may be located near a port; and (iii) a project

56

manufacturing a perishable product should be close to the centre of consumption.

However, for many industrial products proximity to the source of raw material or the centre of consumption may not be very important. Petro – chemical units or refineries, for example. may be located close to the source of raw material, or close to the centre of consumption, or at some intermediate point.

Availability of Infrastructure

Availability of power, transportation, water, and communications should be carefully assessed before a location decision is made.

Adequate supply of power is a very important condition for location – insufficient power can be a major constraint, particularly in the case of an electricity – intensive project like an aluminum plant. In evaluating power supply the following should be looked into: the quantum of power availability, reliability, and cost of transportation for various alternative locations should be assessed.

Given the plant capacity and the type of technology, the water requirement for the project can be assessed. Once the required quantity is estimated, the amount to be drawn from the public utility system and the amount to be provided by the

57

project from surface or sub-surface sources may be determined. For doing this the following factors may be examined : relative costs, relative dependabilities, and relative qualities.

In addition to power, transport, and water, the project should have adequate communication facilities like telephone and telex.

Government Policies

Government policies have a bearing on location. In the case of public sector projects, location is directly decided by the government. It may be based on a wider policy for regional dispersion of industries.

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

58

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-

59

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

60

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.

61

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.

62

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

63

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

64

(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 :

1. 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 :

(a)The layout should seek to allow traffic flow in one direction to the extent possible, with a minimum of crossing.

65

(b) Godowns, workshops, and other services must be functionally situated with respect to the mail factory buildings.

2. 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.

3. Production Line Diagrams These show how the production would progress along with the key information for main equipments.

4. Transport Layout This shows the distances and means of transport outside the production line.

5. 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.

6. Communication Layout This shows how the various parts of the project will be connected with telephone, telex, intercom, etc.

7. Organizational Layout This shows the organizational set-up of the project along with

66

information on personnel required for various departments and their inter-relationship

8. 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 :

(a) Consistency with production technology

(b) Smooth flow of goods from one stage to another

(c) Proper utilization of space(d) Scope of expansion(e) Minimisation of production cost(f) 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 :

67

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,

68

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.

69

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

70

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.

71

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

72

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

73

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.

74

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.

75

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

76

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

77

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)

78

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?

79

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

80

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 :

81

1. 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.

2. 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.

3. 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

82

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.

4. 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

83

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.

5. 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.

6. Scrutinise the Information Gathered

Information gathered should be thoroughly scrutinized to eliminate data

84

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.

7. 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

85

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

86

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

87

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

88

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

89

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

90

difficulties that may encountered in marketing the proposed products.

Consumers

Consumers may be characterized along two dimensions as follows :

Demographic and sociological Attitudinal

Age PreferencesSex IntentionsIncome HabitsProfession AttitudesResidence ResponsesSocial 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

91

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

92

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.

93

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

94

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 PackagingTaxes and duties Transportationapplicable for the arrangementdomestic priceTrade margins / Channel of discounts distribution

95

Final price to the Role of distributors,domestic customer wholesalers, and retailersExport price

Promotion ServiceBranding InstallationAdvertising User educationPersonal selling WarrantiesPromotional effortsAfter-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, pre-operative 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

96

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

97

interest is paid for non - convertible debentures. In the case of Partially Convertible Debentures (PCDs), only a part of them are converted into equity shares; but in the case of fully convertible debentures, all the debentures are fully converted into equity shares as per pre-determined terms?

Elements of Project Cost

Costs of Building and Civil Works

Buildings for the main plant and auxiliary services like workshops, laboratory- etc.

Godowns and warehouses Garages and drainage systems

Costs of Land and Site Development

Costs of acquiring the facilities (land) comprising the project

Premium payable on leasehold, conveyance charges

Costs of the acquisition, clearing, and grading of land and laying approach roads

Costs of Plant and Machinery

Costs of machinery, equipment and related facilities acquired or purchased for inclusion in

98

the facilities and the cost of shipping, transportation and installation.

Cost of indigenous machinery, including sales tax, other taxes, if any. and transportation charges to site

Foundation and installation charges

Professional Service Costs

Costs of architects' and engineers' services related to the project prior to and during the period of acquisition.

Cost of financial consultant, and special services and legal advice.

Cost of services of foreign technicians

Miscellaneous Fixed Assets

Costs of office furniture and office machinery (like computers, printer, fire fighting equipment etc).

Expenses incurred for procurement or use of patents, copyrights, trademarks etc.

Deposits made to the electricity board, telecom board, water supply board etc.

Taxes or other municipal or governmental charges levied or lawfully assessed against the facilities acquired during the period of acquisition

Margin Money for Working Capital99

Part of working capital requirement funded from long term sources of finance.

Provisions for Contingencies

Unexpected increase of input rates and labor costs

Expenses for sudden machinery breakdown

Pre-operative Expenses

Mortgage and initial traveling expenses Costs of insurance premiums in connection

with acquisition of the facilities. Interest and commitment charges on

borrowings

Deferred Credit

Machinery and equipment suppliers often provide credit facilities to firms. This is referred to as deferred credit. This credit is repaid over a period of time, depending on the value of the machinery and the credit standing of the buyer. Normally, suppliers demand a bank guarantee equivalent to the value of the machinery.

Miscellaneous Sources

100

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:

101

• The aggregate permissible bank finance, as per the norms of lending, prescribed by the Tandon Committee.

• The amount of margin money a firm can provide against each current asset.

Initially, the Tandon Committee proposed a method for determining the maximum amount of money a project can obtain to meet its working capital requirements. According to that method, at least 25 percent of current assets must be supported by long term sources of finance. To provide greater freedom to borrowers to assess working capital requirements, this method (and similar methods) was withdrawn, effective 15 April, 1997. Banks were instructed to evolve their own methods to assess working capital requirements of projects.

The margin requirement varies with type of current asset. The ranges within which margin requirements lie for various types of current assets are:

However, there is no standard formula for determining the margin amount.

Current MarginRaw 10-25 Work-in- 20 - 40 Finished 30 - 50

102

Debtors 30 - 50

EVALUATION OF PROJECT INVESTMENTS

The project manager uses the following criteria to evaluate returns from project investments. They are:

• Non-discounting criteria• Discounting criteria

Non-Discounting Criteria

The non-discounting criterion does not consider the time value of money. Following are the two methods in non-discounting criteria:

• Average Rate of Return (ARR)• Payback period

Average rate of return (ARR)

This method estimates the relationship between the average annual profits earned by a project and the investments made in the project. This is expressed in percentage form.

Average Rate of Return

= Average Annual Profit x lOO Initial Investments

103

Assume there are two investment options. For Investment-1, the initial investment is Rs. 10,000 and the average profit is Rs.1250; for Investment-2, die initial investment is Rs. 10,000 and the average profit is Rs. 1800. Using the ARR method, die two proposals can be evaluated in the following manner.

Investment-1:

Average profit = Rs. 1,250 Initial investment = Rs. 10,000

ARR = Rs. 1,250 Rs. 10,000

Investment-2:

Average profit= Rs. 1,800 Initial investment = Rs. 10,000

ARR = Rs. 1800 Rs. 10,000

According to the ARR method, Investment-2 is better as it generates a higher average rate of return than investment-1.

Accept - Reject criterion

A project is accepted when the actual ARR is higher than the minimum desired ARR. The project manager can also rank all the alternative options in

104

descending order and choose the project with the highest ARR.

Advantages of ARR

• The method is simple to calculate, as it uses readily available accountinginformation.

• A quick decision can be taken comparing the ARR values of various projects.

Disadvantages of ARR

• It ignores the time value of money. Payback period method

Payback period is the time period in which a firm can recover its investments made in a project.

The payback period is calculated as:

Suppose a firm has two options, Option- A and Option- B. The initial outlay for both the options is Rs. 10,000. The expected cash flows for both options are as follows:

Option A:

Year Cash 1 40002 60003 40004 1000

105

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

Year Cash 1 10002 20003 50004 50005 6000

The payback period for option B is 3.4 years:

1000 (year 1) + 2000 (year 2) + 5000 (year 3) + 2000/5000 (40% of year 4)

For option- B, the total investment is recovered in 3.4 years.

Hence, option A is accepted

Accept-Reject criterion

The actual payback period of a project is compared with a pre-determined payback set by the firm's management. If the actual payback period is less than the predetermined payback period, the project can be accepted; otherwise, the project is rejected. The project manager can also rank alternative project proposals according to their

106

payback period and the project with shortest payback period is chosen.

Advantages of payback method

• The method favors the projects with substantial cash inflows in earlier years.

• The method is easy to understand and does not require complex calculations.

Disadvantages of payback period

• It measures only the capital recovery of the projects, not their profitability.

• The method ignores cash flows beyond the payback period.

Discounted Cash Flow Criteria

In this criteria, the time value of money is considered when evaluating the costs and cash flows of a project. There are three methods:

• Net present value method (NPV)• Internal rate of return (ERR)• Profitability Index

Net present value method (NPV)

The net present value of a project is equal to the sum of all the cash flows associated with the project. In this method, all the future cash flows are

107

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.

108

Propo Possib ProbabiX 10000 0.5

0 0.5Y 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 riskStand alone risk refers to the risk a project faces

when it is considered in isolation.

Corporate riskThis refers to the risk a firm faces because of a

project.

Systematic riskThis 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

109

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)

110

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 opportunitiesUnemployment 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

111

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

112

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

113

In this step, the project manager assesses the net profitability of the project on the basis of the market prices of all inputs and outputs. The profit is obtained by subtracting the expenditure incurred from the firm's revenues. The project manager calculates the profitability of the project as the percentage of profit to the capital employed.

Calculation of Net Benefits at Economic Prices

In this step, the project manager measures the net benefits of the project in terms of economic prices (also called shadow prices). These are calculated on the basis of impact of the project on the national economy.

If the project's product has an impact on consumption, then the price that the consumer is willing to pay for the product becomes the shadow price of the product. If the impact is on production, shadow price is the cost of production. If the impact of the product is on international trade, then the shadow price is the foreign exchange value of the product. In the case of pure tradable goods, the shadow price of a good is the international price of the good since there exists no opportunity cost in the country. Taxation makes it difficult to calculate shadow prices.

114

SOCIAL COST – BENEFIT ANALYSIS :

The foremost aim of all the individual firm of a company is to earn maximum possible return form the investment on their project. In this aspect project promoters are interested in wealth maximization. Hence the project promoters tend to evealuate only the commercial profitability of a project. There are some projects that may not offer attractive returns as for a s commercial profitability is concerned but still such projects are undertaken since they have social implication. Such projects are public projects, projects like road, railway, bridge and other transport projects, irrigation projects, power projects etc. for which socio-economic considerations play a significant part rather than mere commercial profitability. Such projects are analysed for their net socio economic benefits and the profitability analysis which is nothing but the socio-economic cost benefit analysis done at the national level.

All the projects imposes certain costs to the nation and produces certain benefits to the nation. The cost may be of two types i.e. direct cost and indirect cost. In this respect the benefit derived from any project will also be of two types i.e. direct benefits and indirect benefits.

115

The social cost benefit analysis is a tool for evaluating the value of money, particularly of public investments in many economies. It aids in decision making with respect to the various aspects of a project and the design programmes of closely interrelated project. Cost benefit analysis has become important among economists and consultants in recent years.

MAIN FEATURES OF SOCIAL COST – BENEFIT ANALYSIS :

(i) Assessing the desirability of projects in the public as opposed to the private sector

(ii) Identification of costs and benefits(iii) Measurement of costs and benefits(iv) The effect of (risk and uncertainly) time

in investment appraisal (v) Presentation of results – the investment

criterion.

STEPS INVOLVED IN SOCIAL – COST BENEFIT ANALYSIS :

(i) Estimates of costs and benefits which will accrue to the project implementing body.

(ii) Estimates of costs and benefits which will accrue to the community.

116

(iii) Estimates of cost and benefits which will accrue to the National Exchequer.

STAGES OF SOCIAL COST BENEFIT ANALYSIS :

(i) Determine the financial profitability of the project based on the market prices.

(ii) Using shadow prices for the resources to arrive at the net benefit and the project at economic process.

(iii) Adjustment of the net benefit for the projects impact on savings and investment.

(iv) Adjustment of the net benefit for the projects impact of income distribution.

(v) Adjustment of the net benefit for the goods produced whose social values differ from their economic values.

ECONOMIC INDICATORS OF SOCIAL COST BENEFIT ANALYSIS

(i) Economic Rate of Return(ii) Effective Rate of Protection(iii) Domestic Resource Cost.

LIMITATIONS OF SOCIAL COST BENEFIT ANALYSIS :

117

Social cost Benefit analysis suffer from the following limitations :

(i) The problems of Qualification and measurement of social costs and benefits are formidable. This is because many of these costs and benefits are intangible and their evaluation in terms of money is bound to be subjective.

(ii) Evaluation of social costs and benefits has been completed for one yield better results fro the social point of view.

(iv) The nature of inputs and outputs of projects involving very large investment and their impact on the ecology and people of the particular region and the country as a whole are bound to be differing from case to case.

COMMERCIAL OF FINANCIAL PROFITABILITY :

In order t o assess the operational efficiency of a project and its profitability most of the industrially advanced countries including India to employed various technique for the purpose of profitability analysis. Profit is the primary

118

objective of an enterprise. The word profit implies a comparison of the operations of business between two specific dates which are usually separated by an interval of one year.

The maximization of profit within a socially acceptable limit implies that a proper regard for public interest has been shown. Really it is the growth of profit which enables a firm to pay higher dividends to its ordinary shareholders.

PREFEASIBILITY REPORT

Basic Information in PFR

Based on the UNIDO and MPI guidelines and the guideline suggested by field experts like PK Joy and others, a detailed format has been prepared so that it could give all the information required for the PER clearances.

1. Project Background and Description

(i) Project enterprise, name and profile, detailing its experience and performance in project implementation

(ii) Project description(iii) Cost study / investigations already

carried out

2.Market Demand and Plant Capacity

119

Demand pattern, size and market- Existing size and capacities of the industry, who are the market leaders, its past growth, the projected size of future growth Government’s and private sector’s development programmes, the local dispersal of the industry, its major problems and prospects and general quality of goods, and product mix.

- Past / present imports and future trend of volume and prices

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

- The approximate present size of demand, its past growth / graph major determinants and / or indicators.

• Sales forecast and marketing plan :

- Anticipated competition for the project from existing and potential local and foreign producers and suppliers.

- Local market share for products and by – products.

120

- Sales programme and distribution arrangements

- Estimate annual sales revenues from products and by – products, from home market and exports.

- Estimated annual cost on marketing and sales promotion

• Production programme

- Products - By-products- Wastes- Estimated annual costs on waste

• Determinations of plant capacity

- Feasible normal capacity- Quantitative relationship between sales, plant

capacity and materials and other inputs.

3.Materials and Inputs

(Give the details of input requirements, their sources, present and potential supply positions and an estimate of annual costs of utilities and local and foreign materials, under the following sub headings)

• Raw materials / Feedstock121

• Processed industrial materials• Bought – out components• Auxiliary materials• Factory supplies / Captive manufacture• Power, water and other utilities• Transport service

(Attach a Note on the materials and components which the unit will farm out and procure from ancillary units. This is a social obligation)

4. Location and Site

• Alternative locations, descriptions and area of lands preselected (Indicate the number of families to be rehabilitated)

• Estimated and cost including its development, for each of the proposed alternatives.

• Schedule and soil investigation cost• Factors influencing the selection of each of the

alternatives proposed

5.Project Engineering and Investment Costs

(Show local and foreign amounts separately on CIF / delivery at site basis)

• Preliminary determination of scope of the

project

122

• Process / technology and equipment cost.

- Processes technologies that can be adopted, in

relation to capacity size

- Estimate of costs of local and foreign

technologies, if local ones are available

i) Layout of the proposedii) Production equipmentiii) Auxiliary equipmentiv) Service equipmentv) Major spare parts, wear and tear

parts and tools- Estimate of investment cost of equipment under

the above classification

KDJKDJKFJD

Civil engineering works :

DDFDFD

- Layout of civil engineering works, arrangement of buildings, and descriptions of construction materials to be used, classified as under

i) Site preparation and development

123

ii)Buildings and special civil worksiii) Outdoor works

- Estimate of investment cost of civil engineering works classified as above (indicate prices of bulk materials in a schedule)

6.Plant Organisation and Overheads

Organisation layout for

- Production - Sales Administration- Management

Name, profile and experience of the consultant

as pointed proposed for appointment

Estimated overhead costs on

- Factory- Administration- Financial items (interest, bank charges and

depreciation as per separate schedules)

7.Manpower (Local and Foreign)

(Show labour / staff classifications and broad skill – trade analysis of work-force)

Estimated manpower requirements

124

Estimated annual salaries and wages including allowances, fringe benefits and long-term social and statutory provision

Labour housing plan estimated cost

8.Implementation and Schedule

Proposed time schedule (attach a schedule of time frame indicating major activities)

Estimated implementation costs matching the implementation programme (attach cost budget)

9. Finance and Economic Evaluation

Total investment costs (attach estimate)- Estimated fixed assets - Estimated working capital requirements- Total operating costs, classified by

i)Fixed costsii) Variable costs

Project financing arrangement proposed - Proposed capital structure and finance plan - Loan / Borrowings planned- Interest rate / rates, and estimates of

interest amounts during construction

Operating costs (attached estimate)

Financial evaluation based on the estimates 125

- Profitability - Pay – back of investment- Cash flow

National economic evaluation (Not insisted in PFR)

- Effect on industrialisation (the unit’s role in infrastructure development or in providing up-stream product or as promotr of ancillaries)

- Estimate of employment generation- Estimate of foreign exchange earning or saving- Approximate social benefit – cost analysis

(SBCA), using estimate weights and shadow prices

10. Status of Clearances and Approvals from Various Central and State Government Department / Bodies Mentioned Below

o Soil investigation report

o Industrial licence / Letter of intent (if

applicable as pre Press Note No.9 of 1991)o Automatic permission or specific approval,

as the case may be, for foreign technical collaboration as per Para 39C of the Industrial Policy Statement of 1991.

126

o Automatic permission or specific approval,

as the case may be, for foreing investment as per Para 39B of the Industrial Policy Statement, 1991.

o Approval of appointment of foreign

consultant o Foreign exchange permission

o Import licence or automatic permission of

import of capital goods and raw materials, as per Press No.13 of 1991

o Vetting of the draft prospectus for capital

issues by the Securities and Exchange Board of India (SEBI)

o Clearance from Pollution Control Board

o International Airport Authority’s clearance

o Electricity Authority / Board’s clearance

o Clearance from the Chief Controller of

Explosives o Clearance from the Chief Conservator of

Forestso Clearance from the State Industries

Department

These details are also the basic information required for TEFR but with a little more accuracy

127

and realistic stastistics. Hence the crucial details that should be given under heads will be discussed in the next lesson on TEFR.

In fact all the 3 stages of reports have the same structure or outline, the difference is in the refinement or the level of accuracy in the date, information and figures, as more details are collected and the design advances in the later phases.

At the TEFR or DPR stages more detailed estimates, work sheets, graphs, quotations etc should be submitted.

The format 3.1 is only the skeleton. Any amount of additional information the form of supporting document, explanatory notes, sketches, diagrams, drawings etc may also be given, but it must contain the basic information on the items given in the format, so that the clearance agency could get a clear picture about the feasibility of the project. The PFR should not be vague and ambiguous.

As we all know, first impression is the best impression. If the PFR is able to convince the clearance agency, then it would be easier to prepare the next two stages of reports with

128

additional refinement and more details and corroborative evidences.

Viabilities looked for

In all the 3 stages of evaluation, the clearance agencies will look for the viabilities from the following angles because, these are the very objectives of their appraisal of the project :

1. Market demand for the end products of the project and the plant capacity

2. Availability of materials and other inputs.

3. Suitability and availability of the location and site

4. Viability of engineering and investment costs.

5. Mode of plant organization and the overhead cost required.

6. Whether Manpower in the required specialization, quality, and number will be available

7. Is the implementation schedule practicable

8. Financial and economic soundness.

DO’S AND DON’TS

129

In preparing the PFR

(a)Give the best available information (may not be very precise and accurate figures)

(b) Do not hide any adverse aspect.

(c)Do draw special attention to any favorable or unfavorable aspect which needs to be highlighted.

(d) Give correct details of cost of foreign process / technology, its age, obsolescence and the plan for Indianisation. (Normally foreign agencies dump the obsolete garbage on developing countries, of course, with cost reduction, but it may affect the marketability.

(e)If you are looking for foreign technology, do have a global search in that particular field and analyze the cost – benefits.

(f) Do not suppress any important material fact. Such omission may lead to dangerous failure

(g) While PFR is being processed, try to get other clearances to be obtained from other agencies

(h) Remember that state / central Government which have a crucial role, would take much time to process because of

130

red-tapism and rigidity, and hence apply sufficiently in advance to avoid delay.

(i) Whenever necessary, give even advance information also in specific cases, apart from submission of general application..

TECHNO – ECONOMIC FEASIBILITY REPORT

TERF should be prepared meticulously involving all specialists in the organization. No relevant detail should be omitted. Care should be taken not to give wrong information on the following :

MaterialsSoil conditionsHydrology

Take all efforts to choose right process, right size of plant and appropriate equipment, to make correct assessment of market demand and accurate calculation of costs, especially in large projects. Otherwise, any wrong judgement may lead to disastrous failure at the stage of implementation. The genuine efforts taken for the preparation of the TEFR would stand in good stead at the time of implementation.

131

Apart from guidelines of UNIDO / IDBI and Project Appraisal Division of the Central Planning Commission, any guidelines given by the Funding Agencies should also be carefully followed.

There is nothing wrong in giving additional information which would help the appraisal team to understand the project better but care should be taken to avoid irrelevant detail or providing information without any coherence.

With the general introduction, let us see more details on 10 major heads given in the format.

HIGHLIGHTS OF INFORMATION TO BE GIVEN UNDER MAJOR HEADS

1. Project Description and Background

Give details of major project parameters used for conducting the preliminary study. Potential of the project, specifications of the major and by – products.

Highlight the economic, sectoral project coverage

Details on how the project idea has been evolved to the level of the project, emphasizing the feasibility from socio-economic angles.

132

The business / entrepreneurial experience of the promoters should also be given

If the proposal is for modernization or expansion the performance history and profitability of the present unit should be given

2. Market and Plant Capacity

As indicated in format 3.1, the major sub-heads to be elaborated are :

o Demand pattern, size and market

o Sales forecast and marketing plan

o Production programme and

o Plant Capacity

Let us see important facts to be covered

• Determine correctly the size and composition of demand based on the possible degree of market penetration.

• Estimate sales revenue taking into account the technology / process used plant capacity, production programme and market strategy, for 10 to 15 years after stabilisation.

133

• Realistic pricing in comparison with competing products should be made.

• Only reliable demand projection and sales prospects can help to decide plant capacity

Significant points to be considered for detailed market study are :

• Customer base• Product mix in demand• Latest reliable statistics and projection on

demand and supply• Increase reliability by verification, text

checks and interview• All aspects of competition and their

strategies• Any government regulations or marketing

channel• Estimated distribution costs• Expert demand, past and present levels and

future projection• External marketing agencies and their

conditions• Tax concessions, subsidies, incentive if any• Selling price movement and relationship

with wholesale price index, consumer price index and prices of raw materials

134

• Sensitivity Analysis (SA)• Testing with a pilot plant• Consider latest R&D in the connected field• Market stability aspect – boom and

depression• Captive market – your output becoming

input of other plant-percentage• Uniqueness, if any • Company’s reputation and its reliability• Using your own products, know-hows,

services, R & D etc• Is your product hazard / polluction free• Take effective plant capacity considering

all aspects, shut down, maintenance etc.,• Relation among inputs, technology, output

and marketing considering waste / losses at every stage.

3.Materals and Inputs

Important points to be considered are :

• Definition of raw materials, feedstock, other inputs and utilities with reference to technology

• Sources, and the past and present supply position

135

• Future supply potential and annual cost.

Location and Sites

Appropriate site selection is a crucial factor in the success of the project. Therefore consider the following significant points

• Land clearnance and environment

clearance problems

• Have alternative sites and study their

comparable advantages

• Soil research with reference to earth work

and foundation

• Public policy in setting up industry in the

location

• Materials and Labour availability

• Market orientation

• Infrastructural facilities – water, power,

road, rail, transport

• Cost of land and rent

• Climate and terrain

136

• Construction facilities and living

conditions

• Ecology, waste disposal facility

• Maps (geographical and geodetical

descriptions

• Prescribed distance from cities for locating

industries (other than pollution – free units)

• 50 km for cities with population of 25

lakhs and more

• 30 km for cities with population more

than 15 lakhs less than 25 lakhs

• 15 km for cities with population more

than 7.5 lakhs less than 1.5 lakhs

(Distance measured from boundary of

urban area limit)

• Law and order situation

• Labour productivity

The last two items are so important and if it is not considered there will be excessive cost overruns

137

5.Project Engineering and Investment Costs

In this part the following details should be given in the TEFR

o Definition of the scope of the project, with

charts and layouts

o Justification for selection of technology.

o Definition of the scope of the civil

engineering work.

o Estimated costs of all these

If the technology selected is foreign, sufficient care should be taken to analyse the following aspects :

Is it necessary as compared to indigenous

technology? – Advantages and merits.

The source and technology owners

reputation

Is it already established? If so past

experience

Suitability to Indian conditions.

138

R & D and facility for updating.

Conditions of transfer

Plans for Indianisation

Any delegation of personnel is necessary

for procurement, training etc.

Terms of payment of license fee

Any export market exists.

Equipment selection should be based on

technology to be adopted

Process owner should also be involved in

selecting equipment

Over-capacity equipment should not-be

installed.

Meticulous care should be taken is

selecting the most appropriate

equipment.

Cost estimation should also be

considered in deciding the

appropriateness of the equipment.

139

Define the scope of structural and civil

works

Provide details on site preparation and

development, process buildings non

process buildings, employees township

and outdoor installations.

Give cost details as per prescribed format

Proposals with least financial outlay on

township construction are preferred.

Lay out drawings for site buildings, and

equipment must be submitted along with

TEFR.

6.Plant Organisation and Overhead Costs

Organisation

This section should contain details to convince the appraisers that the plant will be adequately manned by suitable personnel for efficient management and the overhead costs would be within the permitted limits. The materials, machines installed could give the expected results

140

if and only if the “men” are suitably employment and effective organization system is evolved.

It is the organization system which ultimately takes us towards the target or goal. Strong and efficient organizational plan is a must for project success and the details and technical aspects of organization will be discussed later in unit VI.

Overheads

Administrative overheads

Travel, security, communications, rent, taxes, royalties, property taxes, effluent disposal, legal charge, license and registrations fees, staff remuneration, welfare expenses, risk management and insurance and general office service costs.

Production overheads

Depreciation and interest are sometimes treated as production overheads depending on the practice.

8. 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

141

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

Engineering142

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.

143

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

o Technology owner’s expertise

o Consultant’s experience

o Executive’s Competencies

o Your knowledge and understanding

o Other connected peoples promises and

o 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 analyses144

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

o Project Engineering department

o Product line experts

o Project management unit

145

o Commercial and Contracting department

o Planning department

o Processing department

o Construction

o Finance and accounts

o Human Resource and

o 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

146

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

147

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.

148

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

149

1. Map / Index plan showing location of the project in relation to adjoining towns, trunk roads, railways lines, etc.

2. Drawings showing detailed layout of factory, indicating roads, railway lines, water supply, sewerage and power lines and installations.

III. Physical / Topograhical

1. General topographical features of the site

2. Soil characteristics of site

3. Average annual rainfall and maximum

monthly rainfall

4. Maximumand minimum temperature

5. Prevailing direction of wind

IV. Rates

1. A copy of the schedule of Rates of the District based on which the estimate has been prepared.

2. 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

150

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.

151

5. Welfare buildings (canteens, first – aid centre, etc.)

Plinth area of each buildings, basis of arriving at the plinth area and rate / sq.m. with broad specifications.

6. Administrative buildings, etc – as above

7. Roads and paved areas

Length and width of roads, areas to be paved within and outside the factory limits, specifications proposed and justification in relation to traffic, rates and basis for the same.

8. Railway lines

Total length of track including yards, within and outside the factory limits, rate per Km and basis of arriving at the same, and traffic load

9. Water supply

Basic on which the requirements have been arrived at, source of supply, details of headworks, mains purification plant, storage and distribution, and basis of costing.

10. Effluent disposal

152

Nature and quantify of effluent, system of disposal proposed to be adopted with brief details of alternative schemes examined, capacity of plant oxidation pond, details of sewers, and basis of costing.

11. Storm water drainage

Length and section of the drains, broad specification, details of outflow arrangements, and basis of costing.

12. Power supply

Plinth area of substation buildings, capacity of substation equipment, length of HT and LT lines, basis of costing.

13. Construction plant and equipment

Equipment of each type required and justification thereof

14. Compound wall / fencing

Length, height, specification and basis of costing.

15. Plant and equipment Layout

Layout of the various shops, and equipment to be installed in each.

153

16. Plant and machinery

For each group of plant and machinery, for both production and maintenance Equipment hours required for full production. Percentage efficiency Percentage allowance for failures, delays, and breakdowns.

17. Spares

Percentage of equipment to cover initial running spares, insurance spares and standly equipment

18 Foundation, erection and electrification

Cost of each item to be shown separately.

19. Material handling equipment

Numbers and type of equipment. Material handling analysis for imported and indigenous plant and machinery should be separately shown.

UNIT - II

FUNDAMENTALS OF PROJECT NETWORK DIAGRAMS

154

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

155

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

156

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.

157

For example, in a project, A and B are concurrent activities. Activity C is dependent on A and activity D is dependent on both A and B. Then the project manager uses a dummy activity X to represent the relationship between activity A and activity D.

Dependencies in the Project Network Diagram

A dependency is a relationship that exists between a pair of activities. There are four types of activity dependencies that describe the relationship between any pair of activities. They are: finish to start, start to start, start to finish and finish to finish.

Finish to start

Finish to start dependency states that activity A must be completed before activity B can begin. If activity A is obtaining raw material and activity B is inspecting the raw material, then activity B can be performed only after the completion of activity A. Therefore, the dependency is finish to start.

Start to Start

158

Start to start dependency states that activity B can be started only if activity A has begun. This can be explained with the help of the previous example - that is the inspection activity can be started and continued once the raw materials start coming. Subsequently, both activities go on in parallel.

Start to Finish

Start to finish dependency states that activity B must start before activity A can finish. For example, if a firm wants to develop a new information system to replace the existing one, the firm has to confirm that the new system is well operating. When the new system starts to work (activity A), the existing system can be discontinued (activity B).

Finish to Finish

Finish to finish dependency states that activity A must finish before activity B finishes! For example, data feed operation (activity B) cannot be finished until the collection oi data (activity A) is completed.

ACTIVITY SEQUENCING

Once the project activities are identified using the work breakdown structure, til project manager prepares an activity list of the project. He puts ail the activities down in a logical sequence to arrive at the project end-product. Several project management

159

software packages like Project 2000 provide sequencing of activities to achieve the project end product. While sequencing the activities, the project manager has to study various aspects such as the description of the end product, mandatory- and discretionary dependencies among the activities, external dependencies, other constraints and] assumptions of the project.

While analyzing the product description, the project manager has to consider the physical characteristics of the product and the logical sequencing of the activities to achieve the end product. The product description is generally less detailed in early] phases of the project and it is progressively elaborated later.

The project manager analyzes the mandatory and discretionary dependencies among the various project activities. Mandatory dependencies are those that are inherent in tie nature of project. Here, the dependency between activities is certain. For example, new machinery is erected only when the layout has been finalized. Therefore the dependency among the activities is mandatory. Discretionary dependencies are those dependencies of the project that are defined by the project team. Tins dependency is also called as 'preferred logic.'

160

The project manager also has to analyze the dependencies among project activities with external activities. For example, voter identity cards should be distributed before the elections. Therefore, the activity of holding elections is dependent on the distribution activity. The sequencing of activities is also affected by several other constraints and assumptions made by the project manager regarding the project.

Methods of Activity Sequencing

The project manager considers all the above issues to sequence the project activities. The project manager sequences all the project activities in an appropriate manner and represents them in the project network diagram. Some of the methods of activity sequencing are given below. Figure 12.1 represents the various activity relationships in ADM and PDM methods.

Arrow Diagram Method (ADM)

In this method, the network diagram is constructed using arrows to represent the activities and connecting them at nodes to show the dependencies. This method uses finish-to-start dependencies only to explain the logical relationships. This method is also called as Activity- On -Arrow (AOA) method.

Precedence Diagram Method (PDM)161

In this method, the network diagram is constructed using nodes to represent the activities and connecting them with arrows to represent the dependencies. Tin's method uses all four types of dependencies. This method is also called as Activity-On-Node (AON) method.

Conditional Diagramming Methods

The project manager also uses conditional diagramming methods like GERT (Graphical Evaluation and Review Technique) and system dynamics that represent non-sequential activities like loops (where activities are repeated again and again) or conditional branches (e.g. a design update is required only when errors are found in the inspection). PDM and ADM cannot represent loops and conditional branches.

ACTIVITY DURATION

After the project activities are sequenced, the project manager estimates the duration of each activity to calculate the duration of the entire project. The duration of an activity is the time period required to complete the activity. As it is not possible for a person to work continuously, the project manager may include some time allowance while estimating activity duration.

162

He assigns these allowances based on his experience, the difficulty involved in the activity, the ability of the workman to execute it, etc. It is assumed that an average performer completes an activity in the estimated duration with his normal performance.

The activity duration is not synonymous with work effort. Suppose an activity takes 30 days to complete, we cannot assume that the effort is made for 30 days, even though the activity duration is 30 days. For example, if the activity is to consult an external expert for the given problem, the actual consultation time is only about 3 hours, but the duration assigned for the activity will be about 30 days considering the time required to find the expert, discuss the matter and solve the problem.

Activity duration could also be influenced by the amount of resources allocated. Generally speaking, more the resources, the shorter the duration of the activity. For example, if more number of people are included to work on a project, then the project can be completed on or before time. However, it cannot be assumed that the relationship between activity duration and resources allocated is completely proportional. Thus, the project manager has to allocate more resources till the crash point is arrived at. Beyond this point, it is not possible to reduce the duration of an activity.

163

The actual duration of activities may vary from the estimates. Therefore, the project manager has to see to it that there is as little deviation as possible. The different skill levels of manpower employed, unexpected events like acts of nature, vendor delays, power failures, or misunderstanding the nature of work are some of the causes for variations of actual activity durations from the estimates.

Methods of Estimating Activity Duration

The project manager uses the techniques given below to estimate the appropriate duration of the project activities.

Similarity to other activities

Some project activities may be similar to activities in other projects. In such cases, the estimates of activity duration can be taken from those activities. This is normally followed in case of administration activities that are common for all projects.

Historical data

The actual durations of successful projects in the past can be used to estimate the duration of the activity. Larger firms maintain an extensive database of activity duration history that records the estimated time, actual time, reasons for time

164

overrun (if there was one), characteristics of the activity, the skill levels of the people, etc. Whenever firms wish to assign duration estimations, they refer to historical data and find the duration estimate and actual time.

Expert advice

In case of highly technical activities, the project manager can consult a technical expert to estimate the activity duration. He can also consider the advice of vendors and other non-competing firms to assign the duration estimates.

Delphi method

In this method, the project manager forms a group of people and asks them to estimate the duration of an activity, after describing the nature and characteristics of the activity. The estimates of each participant are then collected. Those participants whose estimations are very high or very low are asked to explain the reasons for their estimates.

The project manager then discusses with all the group members to know why their estimates are higher or lower than estimates of the other participants. He then asks the participants to write down new estimates of duration after the discussion. This process continues until the entire

165

group arrives at a particular estimate. In general, this method is followed when expert advice is not available.

Three- point method

The duration of an activity may vary even when the same activity is repeated in similar conditions. Therefore the project manager considers three types of estimates in this method.

They are:

Optimistic time Pessimistic time Most Likely time

Optimistic Time (to)

Optimistic time is the minimum amount of time within which an activity can be completed. It is possible to complete an activity within the optimistic time only when the external environment is extremely favorable.

Pessimistic Time (tp)

Pessimistic time is the maximum amount of time required to complete an activity. This happens when the external environment is unfavorable.

Most Likely Time(tm)

166

It is the time that is the best guess for an activity completion - neither optimistic nor pessimistic.

Expected time

The project manager arrives at the 'expected time' based on the above estimates. The project manager calculates the estimate of duration of an activity as,

t = (to + 4tm + tp) / 6

Wide band Delphi method

A combination of the Delphi method and the three point method is referred to as the Wide Band Delphi method. In tins method, the members are asked to give an optimistic time, a pessimistic time, and the most probable time, instead of a single estimate. Then the project manager follows the Delphi method and determines the duration estimate.

SCHEDULE DEVELOPMENT

Schedule development is concerned with determining a realistic start and finish time for project activities. It aims to match project resources like machinery, materials and labor with project activities over time. Good scheduling eliminates production

167

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

168

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

169

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.

170

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.'

171

Here, the earliest event time at 'm', is the maximum of the earliest finish times of all the activities ending into that activity.

Thus, Em is the maximum of

{(ESim+ tim), (ESjm + tjm), and (ESta + tkm)}

Backward pass

The backward computation finds the latest start and completion times of each activity without affecting the total project duration. Here the calculation starts at the 'end' node

172

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

173

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,

174

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

175

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 ActivitiesActivi

tyDuration

Total Float (LrEi)-ty

Free Float (Total Float -Head

Independent Float

(Free Float A 6 1 0 0B 1 1 1 0C 8 -.. 0 0 0D 5 4 4 4E 9 0 0 0F 12 0 0 0G 3 0 0 0X - 0 0 0

The critical path of the project is the longest path tlirough the network. The length of the critical path gives the shortest allowable time for the completion of the project. This helps the project manager to concentrate and prioritize critical activities while allocating project resources.

Program Evaluation and Review Technique (PERT)

The duration estimates in this technique are probabilistic. The project manager considers optimistic, pessimistic and the most likely completion time of each activity rather than a single estimate as in the Critical Path Method.

176

The project manager calculates the expected time for each activity as,

te= (to+tp+4tm)/6,

Where to, tp, and tm are the optimistic, pessimistic and most likely completion times of a project activity.

The methodology of PERT is explained below.

Step 1: Develop a list of project activities, and identify all their immediate predecessors.

Step 2: Calculate time estimates for each activity as te= (to+tp+4tm)/6

Step 3: Calculate the earliest start time and earliest finish time for each activity, basedon the expected time.

Step 4: Identify the critical path of the network taking into consideration those activities whose total float value is '0' and determine the expected project duration.

Step 5: Calculate the standard deviation of the project. The standard deviation is a square root value of project variance. The variance of a project activity is calculated as (tP - to )2/ 36, and the project variance is the sum of variances of all project activities.

177

Step 6: The square root value of project variance gives the standard deviation of the project. Calculate the value of z as,

z = (Due date - Expected date of completion) / (Standard deviation of the project).

Where, 'z' is the number of standard deviations the due date lies from the mean or expected date.

Step 7: Using the standardized normal distribution table, determine the probability of meeting a specific completion date for the obtained z value.

Step 8: Crash or compress the project to the extent possible.

Graphical Evaluation and Review Technique (GERT)

Graphical Evaluation and Review Technique is similar to PERT, except that it allows multiple project activities by the way of looping and branching project activities. Suppose an activity fails due to some unavoidable reasons, then the project manager has to look for alternative ways to obtain the end result.

Similarly, some of the activities may not be carried out at all, some may be partially carried out and some

178

that may be repeated. PERT cannot show alternative plans in a single network diagram. GERT overcomes these problems as it shows alternative ways to continue the project.

Duration Compression Techniques

When the project manager finds that the expected completion time of the project is more than the desired time, he attempts to reduce the project duration using some duration compression techniques like crashing, fast tracking, etc.

Crashing

Crashing refers to decreasing the total project duration after analyzing a number of alternatives to determine how to get the maximum duration compression for the least cost. Here, the project manager reduces the project duration by allotting more resources, subcontracting some activities, using more labor, etc. The project manager considers the time-cost trade-offs for all project activities. These trade offs reveal how the duration of a project activity is reduced with additional costs. Normally, the project manager focuses on time-cost trade offs for the critical activities of the project as they play a major role in deciding the project completion time.

179

Some people argue that crashing may decrease the quality of a project. As all project activities cannot be completed just by adding more resources, the project manager should ensure that the quality of the project end product does not suffer as a result of crashing. Activities like planning and inspection are not crashed, in general, because they have an effect on the quality of the project output.

The following are the types of activities that are considered for crashing:

A critical activity of the project. An activity of longer duration. An activity that has low per unit crash cost. An activity that does not cause any quality

problems, if crashed An activity that is labor intensive.

The crashing procedure is explained below.

• Identify the sequence of activities and prepare a network diagram. Each activity should list the details of normal cost, normal time, crash cost and crash time.

• Compute the critical path of the project network.• Calculate the crashing cost for all project

activities using the formula, (Crash cost - Normal cost)(Normal time - Crash time)

180

• Rank all the project activities in the ascending order of their crashing cost.• Crash a critical activity that has the least

crashing cost and calculate the new cost by adding the cost of crashing to the normal cost.

• When the critical path duration is reduced by crashing, other paths may also become critical. These are called parallel critical paths. So the project duration can be reduced by crashing the activities of activities in the parallel critical paths simultaneously.

• The crashing process is continued till further crashing is not possible or it does not result in the reduction of project duration.

• For different project durations, the total cost is found. The optimal project duration is found by the project duration corresponding to the minimal total cost.

Fast tracking

In this technique, the project manager attempts to reduce the project duration by doing ^~ project activities in parallel. Suppose activity B can be started only after the completion of activity A in normal conditions. But the project manager can start both activities at the same time, but makes modifications to

181

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

182

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

183

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:

1. Defining the job to be done.2. Integrating the elements of the job in a

logical time sequence.

184

3. Controlling the progress of the project.

Network analysis is concerned with minimizing some measure of performance of the system such as the total completion time of the project, overall cost and so on. By preparing a network of the system, a decision maker can identify (i) the physical relationship (properties) of the system, and (ii) the inter-relationships of the system components. Network analysis is specially suited to projects which are not routine or repetitive and which will be conducted only once or a few times. Thus, network analysis is the organized application of systematic reasoning for planning, scheduling the monitoring large and complex projects.

Objectives of Network Analysis

Network analysis can be used to serve the following objectives :

Minimization of total time : Network analysis is useful in completing a project in the minimum possible time. A good example of this objective is the maintenance of production line machinery in a factory. If the cost of downtime is very high, it is economically desirable to minimize the maintenance time despite high resource costs.

185

Minimization of total cost. Where the cost of delay in the completion of a project exceeds cost of extra effort, it is desirable to complete the project in time so as to minimize total cost.

Minimization of time for a given cost. When a fixed sum is available to cover cost, if may be preferable to arrange the exis ting resources so as to reduce the total time for the project instead of reducing total cost.

Minimization of cost for a given total time. When no particular benefit will be gained from completing the project early, it may be desirable to arrange resources in such way as to give minimum cost of the project in the set time.

Minimization of idle resources. The schedule should be devised to minimize large fluctuations in the use of limited resources. The cost of having men / machines idle should be compared with the cost of hiring resources on a temporary basis.

Network analysis can also be employed to minimize production delays, interruptions and conflicts.

Managerial Applications of Network Analysis.

Network analysis can be applied to a very wide range of situations involving the use of time, labour

186

and physical resources. Some of the more common application of network analysis in project scheduling are as follows :

Assembly line scheduling. Installation of a complex new equipment,

e.g., computers, large machinery Research and Development. Maintenance and overhauling complicated

equipment in chemical or powr plants, steel and petroleum industries, etc.

Inventory planning and control. Shifting of manufacturing plant from one

site to another. Development and testing of missile system. Development and launching of new products

and advertising campaigns. Control of traffic flow in metropolitan cities. Long range planning and developing

staffing plans. Budget and audit procedures. Organization of international conferences. Launching space programmes, etc.

Advantages of Network Analysis

187

The network analysis offers the following benefits :

Network analysis is simple and easy to apply even by people without advanced knowledge of mathematics.

It is a powerful tool of planning, scheduling and control. In the planning stage, it helps to identify the tasks to be performed and the resources required. During scheduling, network analysis time and resources needed at each stage of activity can be calculated. In the monitoring phase, it is useful for measuring the actual against the planned performance.

Network analysis shows in a simple way the inter-relationship of the various activities constituting a project or a programme. This helps in bringing out clearly the technological interdependence of the various activities and so in integrating the project plan.

It helps the management to think through the project systematically ensuring that the sequence requirements are adequate and necessary. It also forces the management to prepare time estimates for individual portions

188

of the total project. This in turn helps to identify possible improvements in these portions or in their relationship to the whole project.

Network analysis reveals the critical path or the series of activities that require longest time. When it is necessary to reduce the project completion time, the network technique can identify those activities for which extra effort would not be beneficial. Extra time can he taken for some of these without lengthening the total project time.

It develops a discipline and a systematic approach in planning and scheduling which is not accomplished to this extent by older and traditional methods.

Network analysis identifies the earliest possible starting date and latest allowable completion date for each activity.

It provides a comprehensive view of the project and brings about better communication and coordination between the concerned departments.

189

Network analysis facilitates control by exception whereby management need act only when the situation is out of control.

It focuses attention on the critical elements of the project and suggest areas for increasing efficiency and reducing costs.

Network analysis provides up-to-date information on the progress of the project through frequent re porting and accurate analysis.

It lends itself easily to computers. Several computer manufacturers provide standard packages of network analysis routines with their equipment.

Limitations of Network Techniques

Network techniques suffer from the following shortcomings.

It is very often difficult, if not impossible, to construct an accurate network for complex projects. In real world projects interrelationships between activities and events are not clear cut and precise.

190

Network analysis based on the assumption that all the resources required to perform any number of activities simultaneously are available. In reality, resources are very often limited and less than those needed for the network.

What may appear to be a non-critical path in the network of a project may actually be a semi-critical path, In such cases it is quite easy for delays to occur causing the path to became truly critical even though network does not show it critical.

Several complexities are involved in calculating the project duration in the form of alternative critical paths, compression and relaxation occurring simultaneously and critical activities changing to non-critical ones.

Project networks involve a large number of activities and it is very difficult to calculate valid time estimates for them. This problem applies especially to PERT analysis where three time estimates are required for each and every activity.

When the network has hundreds of activities use of computer becomes necessary.

191

Network analysis becomes an expensive exercise.

Terminology of Network Analysis.

The basic concepts. Symbols and conventions common used in network techniques are described below :

Activity. An activity represents some action and as such it is a time consuming part of a project. It may be an operation, transportation or inspection. It consumes both time and resources. An activity is represented by an arrow. Each and every activity has a point of time where it begins and a point where it ends.

Event. An event represents the start (beginning) or completion (end) of some activity and as such it consumes no time. It has no time duration and does not consume any resources. It is also known as a node. An event is represented by a circle. An event is not complete until all the activities following into it are completed.

Network Diagram. It is a pictorial presentation of the various events and activities concerning a project. In a network diagram each arrow represents an activity and each circle an event.

192

The event which is the ending point of two or more activities is called node.

Critical Path. Critical path is the longest path in a network. It is the sequence of activities that requires the maximum time for completion. It is critical because its length determines the minimum time in which the project may be completed. If there is any delay in the critical path activities the project is also delayed. The critical path is denoted by darker or double lines to distinguish it from the other non – critical paths.

Critical Activities All the activities associated with the critical path are called critical or bottleneck activities. Such activities require special attention.

Stack. Stack is the time period for which an activity can be delayed without causing delay in completion of the project. Stack may be positive or negative. Positive slack represents idle time and resources whereas negative slack occurs when the project requires more resources than are normally available.

Float While slack is used for events, float is applied for activities. There are various types of

193

float, e.g. total float, free float, independent float.

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

SELECTIONG THE STAFF REQUIRED

Good leaders are essential for the successful management of projects. To effectively manage a project, these leaders require a group of dedicated individuals, committed to achieving project goals. While selecting a good staff is important, it is equally important to assign them the right jobs. The following are involved in project management :

The Project Manager The Project Team

To understand the staffing requirements of a project, it is necessary to answer the following questions:

What traits should an individual posses to be

a project manager?

Who should a project team comprise of?

Who should a project office comprise of?

194

What potential problems can arise while

recruiting staff?

What could be the consequences of losing

key members of the project team?

It is advantageous to plan for staffing only after these questions have been answered. Proper ground work has to be done before starting the selection process. This ground work involves understanding the characteristics of project management, its processes and the project environment.

Selecting the Project Manager

The project manager plays a key role in the success of a project. Project managers should be able to analyze project risk and uncertainty. Exhibit 13.2 gives the skills required for a project manager. The following are the desirable traits of a project manager;

He should be honest

He should understand the problems of the personnel

He should understand the technology invovled in the project

195

He should understand organizational principles and the communication process

He should be quick and alert in responding to problems

He should be versatile He should have very high energy levels He should possess good decision – making

skills

Generally, the project organizationa establishes a committee to screen candidates for the post of project manager. This committee;

Establishes a selection criteria apart from the professional qualifications of the project manager.

Acts according to the selection policy received

from top management

Involves senior management in the selection

process.

The following parameters are checked when screening a candidate:

Background and experience : The background and experience of the candidate should suite the

196

nature and need of the project. The selection committee should consider not only the candidates educational background, but also his conceptual, analytical, operational, technical and practical experience.

Leadership and strategic expertise: The committee should check the candidate's foresightedness i.e., the ability to visualize the final output while working out the details of the planning and implementation phases.

Technical expertise: Though technical knowledge is not a parameter for selecting a project manager, it can help a project manager direct, evaluate and make better decisions regarding the technical aspects of a project. The project manager should be able to understand:

• The technology involved in tire project• The various engineering tools and techniques

used• The requirements of the customers in specific

markets• The application of the product• The emerging trends in technology

People management skills: These skills are concerned with tire ability of the project manager to

197

• Motivate, inspire, lead and train the team members• Listen with patience and give feedback• Relate to feelings, needs and emotions• Resolve and prevent conflicts• Be sensitive and diplomatic while communicating tough decisions

Selecting the Core Team Members

This is the most important aspect of the whole selection process. Recruiting and selecting tire core team members is a challenging task for the project manager. Selecting the core team members at the beginning of the project initiation phase facilitates their participation in tire planning of the project. The following are expected of the core team members:

Commitment to project: Members of the core team should prioritize their duties and responsibilities, and be fully committed to the project.

Sharing responsibility: Team members should share responsibilities equally among themselves.

Adaptability: The team members should be able to adapt to tire unexpected situations.

Orientation towards the task: Team members should be result oriented because they will be

198

judged mainly by their ability to finish the task as per schedule.

Staying on schedule: Members should be able to finish tire task assigned within time, budget and quality specifications.

Trustworthiness and supportiveness: An effective team is characterized by trust and mutual support among team members.

Orientation towards team: The team members should have a strong sense of team spirit.

Open-mindedness: The team members should encourage each other and listen to each other's points of view, so as to come up with creative solutions to problems.

Flexibility to function across the structure and authority: The team members should learn to be adaptable, flexible and open minded while working with people from different backgrounds and with different experiences.

Usage of project management tools: Team members should make use of technology as far as possible, because knowledge of software tools will help them respond faster to the problems, prepare and deliver activity status and progress reports.

199

Selecting the Contracted Team Members

In some cases, some individuals from external agencies may be selected to work on a project for a limited period of time. Generally, organizations outsource because they do not have sufficient staff or lack the required expertise. For instance, many software development firms source tlieir project team members, on a contract basis, through manpower consultancies. To recruit a good contract team, a project manager must:

• Determine the skill set needed and the number of personnel required

• Identify the list of companies to be invited to submit proposals

• Set up criteria to analyze the proposals and select the consultants

• Shortlist vendors and invite them to make formal presentations

• Organize presentations on site• Enter into a contract after choosing the final

consultants.

Contracted team members work on a project only for a certain period of time. They leave the project after their work is over. Many problems arise due to the presence of contracted team members on the project. These problems arise since:

• They work in the project for only a short period of time, tlieir activities must be carefully integrated with the project

200

schedule.

• They have to be assigned a role in the project, and tlieir relationship with other activities must also be defined.

• They may have a low level of commitment, and quality standards may be violated.

• They may require greater supervision and monitoring, and the project manager will be forced to take on this additional responsibility.

The Project Office

The project office is the entity in an organization that helps the project manager carry out his tasks. The people in this office are dedicated to the achievement of the project goals. It is also their responsibility to maintain a good working relationship between the project and functional managers. The responsibilities of the project office are:

• To act as a center of information to both external and internal stakeholders.

• To follow contract requirements by controlling time, cost and performance.

201

• To document the tasks performed and communicate the same to all stakeholders.

• To ensure authorization of tasks accomplished and their funding through contract documents.

• To integrate work across functional departments of the organization.

Though the size of the project office is determined by the project IK pager basically dependent on factors like project size, need for internal support category of the project, level of technical expertise required, and the customer support needed.

The project manager should employ only those individuals in a project office who are interested in making a career in project management. The following guidelines help the project manager recruit staff for the project office:

• Select only those candidates who wish to become project managers by transforming themselves from technical champions to generalists.

• Select individuals who are suitable for being promoted vertically rather than horizontally.

202

TEAMS

A team is defined as a reasonably small group of individuals, who bring in a set of complementary and appropriate skills and who hold themselves mutually accountable for achieving a clear and identifiable set of goals. Teams have to accomplish performance goals and the team members are mutually accountable for achieving them.

Getting a group of individuals together to produce a synergistic output is the biggest challenge for the project manager. Though a major part of team-building is done in the project organization phase, it is a process that lasts throughout the project.

Need for Team Building

The ever increasing complexities associated with implementing a project raises the need for building teams that can address various problems. Solving these problems (technical, political or social) requires expertise of different kinds. Only multidisciplinary teams having members with diverse skills can solve all these problems.

Project Team Building

Team building can be defined as the "process of planning and encouraging working practices that are effective and which minimize the difficulties that obstruct the team's competence and resourcefulness."

203

In other words, it is the process of gathering a group of individuals with diverse skills and making them work together as a group. Like projects, teams too have a life cycle. Exhibit 13.3 describes the life-cycle of a team.

Complex projects involve multifunctional tasks that demand a high level of innovation and state-of-the-art teclmology. Such projects require teams of specialists with diverse skills.

Most of the project team building processes and methods that are commonly used today, were first used in the aerospace industry where temporary task forces were used to carry out short duration projects. This industry initially faced a lot of difficulty in getting individuals from different functional areas to work together. Many organizations found that bringing together specialists from varied disciplines and building an effective team is difficult. This made them recognize team building as a process that require considerable time.

The Process of Project Team Building

A basic project team consists of a project manager and a group of specialists recmited for the project. A project team has both managerial and non-managerial staff who work either full-time, or on a

204

contract basis. All the team members participate in decision making concerned with the team.

The process of team building is effective only when it is directed by a strong leader. The team building process is based on the type of the project, the leadership style of the project manager and on the type of individuals involved in the team. The project manager must undertake the following activities for building a team;

Team Life Cycle

Like projects, teams too have a life cycle. There are five stages in a team's life cycle: collecting, entrenching, accommodating, synergizing and decline. The team can be dissolved at any of these stages either because it is no longer feasible for it to work together, or the task has been accomplished. The project manager's knowledge on the team's life cycle helps him know the stage at which his or her team is operating.

Collecting is the process of grouping individuals to solve a problem collectively. At this stage, the members try to find out what their roles and responsibilities will be.

Entrenching as the team starts working, the members would evaluate themselves on various issues. Entrenching occurs when the members know the way

205

a project proceeds. In this phase the team members compete for power and the project goals are not clear. Hence this phase is usually unproductive and destructive.

Accommodating involves building mutual trust, harmony, self esteem and confidence by resolving disagreements. In mis stage the productivity of the team increases.

Achieving synergies a team achieves synergies when the performance of the total team is greater than the performance of all individual team members put together. This is the stage in which the team works most effectively.

Decline is a phase in wliich tire team starts witnessing a decline in its effectiveness. The decline in effectiveness can be due to the rigid nature of tasks or due to shifts in focus. Breakup is a situation in which the team is dissolved before finishing the task.

Make plans for building a team Negotiate for team members Organize team members Hold a kick-off meeting Get commitments from team members Establish communication links among team

members

206

Conduct team building exercises Induce team building into all project activities.

Make plans for building a team

The project manager usually starts the team building process from project planning stage. The basic aspects of project planning are important for team building because planning has a significant impact on team building. Planning gives the what? how? and when? aspects of a project. After organizing the team, jobs are assigned on the basis of these aspects. Writing a detailed project plan has a profound impact on the team building process.

What - Team goals and objectives are based on the project goals and objectives. There should be compatibility and consistency between the team goals and project goals.

How - Planning and documenting project procedures and controls should be done carefully. This aspect identifies the process of accomplishing the project goals in the best possible manner using team effort.

When - Project schedules should be prepared keeping in mind the abilities of the team members.

Who - Defining project roles carefully helps the project manager to select the right people for ever}' job. This is the phase in which decisions are taken on

207

the kind of individuals required to work on the project.

Negotiate for team members

This involves sourcing the most promising project team personnel from the available candidates. While selecting the team members, the project manager must consider what contributions each team member can make to the project and to the team.

Organize the project team

Organizing a group of diverse individuals into a team is the responsibility of the project manager. In this phase every individual is assigned with a specific job. While organizing the project team, it is essential to design work authorization for every work package in the WBS to be assigned to every individual in the team. After assigning work to every team member, a linear responsibility chart should be prepared and distributed among the team members.

Authority and responsibility

Authority and responsibility are usually two sides of the same coin. Having one without the other is futile. The project manager should have authority over the project and should be responsible for completion of the project within

208

the time, budget and according to specifications. Even though authority over the project can be delegated, it is the project manager who is ultimately responsible for completing the project.

Holde a kick-off meeting

The basic purpose of holding a kick-off meeting is to get the project started on the right note and to initiate the team-building process. The kick-off meeting helps the project manager bind everyone involved in the project under a unity of purpose to achieve the project goals. Though kick-off meetings do not have a specific structure, the following guidelines should be followed;

Introduce team members to each other

Establish working relationships and

communication channels

Set goals and objectives for the team

Review the project status

Identify the problem areas in the project

Specify responsibilities and accountability

of individuals as well as groups.

209

Get commitments from team members

The project manager must ensure that the team members are committed to the project. In the early stages of the project life cycle, individual team members may not be sure about how long they will work on the project. This gives rise to uncertainty and consequently lack of commitment. It is the project manager's responsibility to remove this uncertainty and to make sure that all the team members are deeply involved with the project.

Establishing communication links among team members

Teamwork is not possible without proper communication channel. It is the responsibility of the project manager to establish and maintain all the communication channels across the organizational hierarchy. A team cannot be effective unless there is effective communication among the team members.

Conducting team building exercises

Team building exercises enhance the efficiency of teams particularly in the initial phases of the project life cycle. Team building proves to be effective when integrated with the regular day-

210

to-day activities of the project. Once the project manager completes the team building process, he has to establish the operating rules for the team.

Establishing Operating Rules

Operating rules describe the functioning of a team -decision making, conflict resolution and progress reporting along with other administrative jobs. Exhibit 13.4 gives the parameters for effective functioning of teams. The different aspects to be considered for establishing operating rules are:

Decision making

Project managers take many decisions in their day-to-day operations. There are three types of decision making models. They are:

Directive model Participative model Consultative model

Directive model: In this model the project manager or the activity manager takes the decision. In this approach, it is only the decision maker's information that is available, which may or may not be sufficient or correct.

Participative model: In this model, every team member participates in decision making. Because, this model is participative in nature,

211

team members are more committed to the decisions taken in a participative approach than they are to decisions taken in the directive model.

Consultative model: This model combines the best of the participative and directive models. While the leaders make most of the decisions, they do so only after consulting all the members of the team.

The project manager selects the decision making model, which he thinks to be the most appropriate for the given situation. A few organizations have developed their own decision making models and tried to support their decisions with the help of financial parameters like Expected Monetary Value (EMV).

Resolving conflicts

Conflicts are inevitable in teams. Disagreements arise because individuals see, hear and interpret things differently. When conflicts focus on fault finding and fixing blame, they can cause frustration and stress. However, a lot depends on how the conflict is managed. While badly managed conflicts damage relationships, properly managed conflicts can lead to creative solutions, greater job satisfaction and better relationships.

212

When faced with a conflict, different people respond in different ways. Some of these approaches are

Avoiding - This approach focuses away from the conflict altogether. Unwillingness to talk things out, pretending that a conflict does not exist, making attempts to smooth things over when differences appear, are all characteristic of this approach. Many a time this approach can prove counter productive. After all, no problem can be solved by wishing it away. But this approach can be useful in the following situations;

When the project team needs time to gather facts or think abo^ a problem situation;"

When it is advisable to allow emotions to settle;

When the potential damage of confronting the conflict overweighs the benefit of resolution.

Accommodating - While avoiders shut themselves out, accommodators neglect fheir own concerns in order to satisfy the concerns of others. They are usually more concerned with being liked and getting along than with being right. As with avoidance, accommodation can sometimes prove disastrous. But this style is the best option when:

213

Members realize they were wrong;

Members want to make a goodwill gesture

when the issue is important to others:

Preserving relationship is more important

than the issue at hand.

Competing - A person who adopts this approach is committed to his own position or perspective and considers relationships as secondary issues. Though this approach does generate ill will that is costly and unpleasant, it does have its advantages in the following situations:

in emergencies when announcing unpopular decisions when the members have to protect

themselves against those who take advantage of a more cooperative approach.

Collaborating - This approach focuses on satisfying both parties to the greatest degree. It is cooperative in nature. Both parties work together to resolve conflicts ina way that meets the concerns of both. While a collaborative style is not appropriate in all cases, it is particularly effective when:

214

both parties' concerns are too important to be compromised;

a long-term relationship between the parties is important

Compromising - Though tins approach is also cooperative in nature, here the cooperation is dictated by self interest. Each party forgoes something that it is seeking in order to reach an agreement. Here the goal is an expedient, mutually acceptable solution that partially satisfies both the parties. A compromise is best when:

the goals of both parties are important but not worth pushing too hard to achieve

a quick solution is the need of the hour a temporary settlement is needed two parties with equal power are

committed to mutually exclusive goals. Building consensus

This is the most important part of all the team operating rules. Building consensus helps test the creativity of the team members and the team at various stages of the project life cycle. It helps team discover solutions to problems.

215

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.

216

Advantages of Team Building

Team building is the most effective tool in project management. Apart from helping the project manager to simplify complex tasks and solve problems, it offers the following advantages:

• Helps conflict resolution• Motivates team members• Improves creativity• Develops inter-dependency among team

members• Minimizes communication problems• Facilitates collective decision making• Enhances job satisfaction

Disadvantages of Team Building

The disadvantages of team building are as follows:

An un-supportive top management and a faulty concept can affect the success of a project team.

Inappropriate team members on the project team and an inappropriate project manager can also lead to serious problems in the project, even if there is strong team building process.

It is difficult to implement effective team-building practices in new projects.

PROCESS OF COST MANAGEMENT

The process of cost management involves four steps:

217

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

218

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

219

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

220

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

221

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

222

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

223

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.

224

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.

225

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

226

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

227

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

228

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

229

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:

o An increase in the unit price of materials, machinery, labor costs and overheads

o Change in scope of the projecto Increase in statutory taxes and duties like

sales tax, customs tax, and excise dutyo The impact of the adverse exchange rate

variations on import of machinery and equipment

230

o 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

231

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

232

If the budget prepared is not exact, extra costs are incurred when the project is actually implemented. This happens when the costs are estimated on the basis of an incorrect project scope statement, or when adequate technical information is not available. Sometimes certain project elements might be ignored while the budget is being prepared. All these factors finally result in an increase in the project costs. By preparing a detailed, exhaustive checklist of all project activities, the project manager can reduce overruns.

Rectifications and replacements

The project manager's lack of experience, wrong choice of technology, defective designs and flaws in the equipment purchased result in project cost overruns, as drawings have to be revised, or the machinery has to be repaired. By undertaking frequent inspections, setting up equipment carefully, ensuring that the equipment is not damaged during transportation, and standardizing some of die processes, the project manager can reduce diese cost overruns.

Unforeseen contingencies

233

Unexpected factors like natural calamities, lockouts, labor unrest, fires or accidents cause project cost overruns. The costs arising out of these contingencies cannot be controlled. However, die project manager can take some preventive measures to reduce their impact.

Other related factors

An ineffective organization structure, outdated systems, poor decision making, and the interference of stakeholders are other factors that push up die costs. The project manager should be aware of all these aspects in order to be able to minimize the cosl overruns that are likely to occur in the execution of a project. An evaluation of all the project activities, consultation witi\ outside experts, and a critical view of all related factors can minimize cost overruns.

ORGANISATIONAL PLANNING

An organization can be defined as a group of individuals who coordinate their activities in order to accomplish a business and/or social objective. Organizational planning is a process of identifying, documenting, and assigning project roles, responsibilities, and reporting relationships. Choosing an appropriate organizational structure facilitates the effective implementation of an organizational plan.

234

The structure of an organization is dependent on parameters like tire rate of change of technology, availability of resources, the product/services sold, competition and other decision making requirements. The primary objective behind developing an organizational structure is to control and direct the human and other resources that are crucial to the attainment of business objectives. Developing an organizational structure also helps in delegating tasks with responsibility and accountability. A project manager's choice of organizational structure depends on the nature of the project and the degree of control required for its implementation. Some of the organizational structures that a project manager can consider are:

• Traditional Organizational Structure

• Pure Product Organizational Structure

• Pure Project Organizational Structure

• Matrix Organizational Structure

The salient features and the advantages and disadvantages associated with each of the above organizational structures are discussed below.

Traditional Organizational Structure

235

Traditional organizational structure is developed around the functional aspects of the organization such as engineering, manufacturing, marketing, human resource and information systems. Projects in individual functional departments do not face any problems. But when different functional departments have to be coordinated, the project manager may have to assign, control and monitor the work through the functional manager, because of his lack of authority in the functional department. Traditional organizational structures are almost 200 years old and have undergone many changes during this period. Those changes can be attributed to the changing requirements pertaining to information, technology and the competitive environment. The increasing demands from the customers also led to changes in the traditional organizational structure.

Advantages of the traditional organization structure

A traditional organizational structure helps in;

Easy cost control and budgeting procedures

Improving control by i) sharing knowledge and responsibility, and ii) grouping

• Specialists

• Using manpower in a flexible manner

236

• Working with a broad manpower base

• Defining the lines of responsibility in an easy and

understandable maimer

• Establishing continuity in functional disciplines,

policies and procedures

• Taking up large scale production activities

within the specifications

• Providing a reporting structure that gives good

control over people

• Establishing vertical communication channels

• Reacting quickly to situations depending on the

functional managers' priority.

Disadvantages of the traditional organization

structure

A traditional organizational structure has the following

disadvantages;

• Lack of formal authority i.e., no single person is responsible for tire total project

• It does not provide project-oriented emphasis to

237

achieve the tasks• It is a complex coordinating system that

consumes more time in approving the decisions• There may be partiality in decision making, and

the strongest functional group• may be favoured• It lacks customer focus• It is slow in responding to customer needs• Lack of proper project-oriented planning and

authority that leads to difficulty in• pinpointing responsibilities• It reduces motivation and innovation• Ideas are function oriented rather than project

oriented.

Pure Product Organizational Structure

Pure product organizational structure is developed on the basis of managing individual products as functional departments. Each individual product is assigned a product manager who has functional specialists working under him. This kind of a structure is quite common today. Pure product organizational structure is a result of intra divisional expansion i.e., developing a division from within a division. The basic advantage of this structure is the individual line of authority, i.e. a single individual has the authority to

238

control the entire activity. Its narrow reporting structure helps develop a strong communication channel along with accelerated feedback.

Advantages of pure product organizational structure

A pure product organizational structure has the following advantages:

• Enables strong control because of a single project authority

• Identifies unprofitable product lines that can be eliminated easily

• Establishes a direct link between the project manager and other stakeholders

• Develops strong communication channels• Maintains project expertise without sharing

key personnel• Facilitates speedy reactions to situations• Facilitates loyalty of team members towards

project• Retains attention on customer relations• Enables flexibility in identifying time, cost

and performance trade-offs• Facilitates simple interface management

because of reduced unit size• Enhances decision-making efficiency of

senior management.

Disadvantages of pure product organizational structureThe following are die disadvantages of a pure product organizational structure;

239

• Duplication of efforts, facilities and personnel leads to prohibitive costs of maintenance in multi-product organizations

• Retains personnel in projects longer than they are required

• Firm's progress is hindered by the lack of strong functional groups and technology

• Controlling functional specialists requires top level coordination

• Technology is not shared among projects• No career prospects for the project team.

Pure Project Organizational Structure

Organizations working on large and long-term projects usually adopt pure project organizational structure. This type of organizational structure contains functional departments within the individual projects. In this structure, all die project team members are involved in the project on a full time basis. The team members report to the project manager directly or indirectly. This is a vertical organizational structure established to avoid conflicts and problems faced by traditional and product organizational structures. In this organizational structure, the project manager can freely access all die resources required for the project in Ms control.

240

Advantages of pure project organizational structure

• Pure project organizational structure has the following advantages;

• The project manager has complete auuiority over the project

• The project manager has the freedom to acquire the resources needed for the project's progress

• The project team reports directly to the project manager

• Project personnel are shared between the project and die project organization

• Facilitates unity of command• Develops a formal communication channel

between the project manager and his

Disadvantages of pure project organizational structure

The disadvantages of pure project organizational structure the following:

• Inefficiency in resource utilization• Duplication of facilities• Sourcing personnel from internal functional

departments to work on the projectaffects work in the functional departments.

The Matrix Organizational Structure

241

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

• Ensure commitment by making team members spend full time on the project

• Ensure quick conflict resolution• Ensure that the resources are negotiated widi

function and project oriented managers• Ensure die functioning of functional

departments as individual entities.

242

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

243

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

244

• 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

245

• 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

246

job done. They have to select the right people for the right jobs.

ORGANIZATIONAL CONSIDERATIONS

The single most important characteristic of the present business environment is rapid change. The pace and unrelenting nature of this change puts a lot of pressure on middle managers, whose performance is often evaluated on the basis of short-term performance measures such as return on assets, and contribution to profits. In this context, project management is viewed as an important method for training future, managers and executives to be cost sensitive as well as profit oriented.

Basic business principles may need to be reconsidered in the future, because of extent of changes that are taking place. Even while technology is making many operational tasks obsolete, companies are finding it more and more difficult to operate profitably. If organizations remain centralized even in the face of the changes in the environment, improved productivity can be achieved only through a project type of approach to management, involving shared and flexible resources. As project management organizations are more adaptable, than traditional ones, they seem to be the type of organizations that will become more prevalent in the future. Some functional positions would remain, while the number of staff positions would be reduced,

247

with the ones remaining becoming aligned into a more matrix type structure.

There is also likely to be a reduction in the number of layers between the project managers and the top management. One may also see a situation where many of the top positions are filled with people from the ranks of project management, who are conversant with the operations of the whole company, rather than being narrowly specialized.

NEW TRENDS IN PROJECT MANAGEMENT

Evolution of new technologies will have a significant impact on the future of project management. Emerging technologies of today can evolve as the most advanced tools in managing the projects in the future. Some of these trends could be concerned with role of computers, role of project managers and demographic and social changes.

Role of Computers

Successful installation of computer systems for individual projects requires cooperation from the functional departments in exchanging information, to accomplish the desired results. Data processing project management will emerge as a driving force in the future because computerization will compel the functional departments in an organization to integrate at a higher scale. Future organizations will adopt

248

higher matrix structures by taking the help of information technology to integrate various functional departments.

Projects in the future will face further scarcity of financial, human and raw material resources. This requires higher level of management control in prioritizing activities and more advanced methods of trade-off analysis. Evolution of network centric computer tools like emails, groupware, intranet and Internet will enhance the span of control.

Technological revolutions along with reducing costs of microprocessors and state-of-the-art terminals will mark the start of a new technological era. Project management software will be an essential tool for managing future projects. Computers and information will become vital to the success of projects in the future, and can replace many workers.

Role of Project Manager

The role of project manager in an organization is turning out to be increasingly complex and challenging. Competition among future organizations will be based more on management styles and technological advantage than on any other areas such as marketing or finance. The top management will exercise tighter control over all aspects of an organization's operations, in the future. In such a

249

situation, the project manager has to keep himself abreast of all internal and external developments. But unique projects will continue to require exceptional leadership skills from the project manager. Project managers may have to spend more time in planning operations for unique projects in the future. The following skills are expected of a project manager in the future:

• A global perception of project goals and effective planning to accomplish them with limited resources and within specified performance standards.

• Leadership skills to guide the efforts of the project team.

• Decision-making skills.

• Negotiation skills

Though computers and information technology can be used to develop a program, they cannot explore alternatives and analyze them in a larger business environment. Information technology may even fail to deliver an operational plan that can accomplish project objectives. The systems orientation of the project manager helps analyze the available alternatives and train the project team as per the project requirements to implement the action plan.

250

Recruiting, selecting, training, appraising and retaining project managers will become a complex and challenging task for HR managers. In the future, selection.of project managers will be mainly influenced by factors like personal history, past academic record, performance appraisals, psychometric tests and career development counseling.

Demographic and Social Changes

Demographics and environmental conditions are in for drastic and complex change, with increasing uncertainty. The project management discipline needs to be highly flexible and quick to respond to fast changing market conditions. To do this, the project management team should be aware of the changes taking place around them. Planning for uncertainties will become a significant issue.

More number of organizations will transform themselves into not just international but supranational organizations. Government interference in business will be low or even negligible. It may also happen that a few major players will have a disproportionate influence on the political and economic situation of a country. Amidst all this, the project manager's job will be increasingly tougher and complex, because with organizations going supranational, he will have to

251

coordinate the tasks of several people in different countries with different skill sets.

COLLABORATIVE PROJECT MANAGEMENT

Collaborative project management is the latest trend in project management. As far as the dictionary meaning goes, collaboration is the way of working together, especially in a joint intellectual effort. Collaborative project management is about working together in a uniform maimer towards achieving a common goal. If communication is a critical tool for the success of a project, uncontrolled communication will definitely limit the project members from working effectively. Communicating blindly without knowing what to communicate, when to communicate and whom to communicate with will not accelerate the delivery of the project. It is therefore better to determine the contents and tire medium of communication so that the communication tool used increases cooperation among team members.

In fact, the tools of collaborative project management address the issues that are far beyond the scope of traditional project management tools, i.e., they look beyond project scheduling, budgeting, uniform resource sharing and so on. The tools of collaborative project management provide solutions for document management, problem tracking, on-line chatting, structured e-mailing, risk analysis, distributive

252

schedule progressing and schedule reporting. For instance, an organization can think of collaborating its project report delivery system with the browser interface system so that all members who used to receive a hardcopy of the report will now be able to access it from their computer terminals. This will save time and paper cost. But such an attempt should be planned very carefully, especially in organizations whose reports convey meaning best when they are in print form. Moreover, collaboration should not lead to asking all members to print their own copies from their terminals. This makes the entire setup less effective because the top management will be in a position of having to print their own copies of reports, a job which would previously have been done by clerical staff in the pi eject management office.

Organizations that plan to adopt collaborative project management are in for a big change in their organizational culture. Usually, any change in the process is often resisted by people, irrespective of the advantages it can provide in the long run. For instance, sometimes even a slight change in the position of a computer for ergonomic reasons will be resisted by employees. Though collaborating is a process of integrating and automating different activities, these activities are represented by human elements that usually resist change. The most challenging issue

253

confronting collaborative project management is getting the acceptance of project managers to implement collaborative project management. Because it is usually the non-dependent, free drinking and result-oriented individuals who turn out to be project managers, it will be difficult to get their approval for collaboration which calls for information and knowledge sharing. Developing collaborative project management in an organization requires thorough planning that recognizes and takes care of all the fundamental components of collaboration namely;

• Mode and method of informing project members about the work to be done

• Mode and method of informing key stakeholders with crucial information as and when it is updated

• Process of communicating change management procedures to j stakeholder

• Mode of communicating with the project manager, in case the team me require some significant change at the operational leve

• Communication process between the project manager and the client on the r. statu

• Intra communication methods among the project team members

254

• Immediate accessibility among team membevs and its impact on their efficiency

• Methodology involved in updating team members on project progress

There are two approaches to incorporate change in organizations;

i) The big-bang approach and

ii) The phase-by-phase approach.

The big-bang approach starts by identifying processes that need to be changed, time is spent on selecting or preparing software that delivers the requirement. Pi are then asked to shift to the new process. This approach is very costly and usual not very successful because it is implemented rather suddenly.

The phase by phase approach tries to identify the most significant activities o entire process and starts implementing them one by one. The shortcoming of approach is that it may never get totally implemented. But this approach has r advantages like:

• Deriving benefits of the process immediately after activating the first function

• Refining the processes over a period of time with the help of the expert gained.

• Easy to impress the client and management as a result of the first few proce activated.

255

• Investment required to start the process is low.

• Minimum interruption to the ongoing organizational jobs because of the lc term nature of the implementation process.

It is also advantageous to find the changes that are the least expensive and s implementing them. If these succeed and offer good returns, some more comj changes can be identified for implementation with internal support.

The following are some of the frequently considered activities for collaborative pro management:

• Conveying project information to members, top management, clients, spons and several other external stakeholders.

• Setting up a centralized bulletin board for placmg information on project sta and progress.

• Setting up a base for defining and analyzing management process.

• Developing a distributed system for gathering information on project status.

• Developing a delivery system for all project reports and documents.

256

• Developing a decentralized system for receiving feedback from project member

• Developing a document tracking system for maintaining project documents.

Collaborative project management is so result oriented that considering any discipline for collaborating does not bring in any unwanted results. The disciplines to 1 considered for collaborating must be short listed, depending on business requirements and capacity, but only after proper budget allocation. Budgeting should consider the cost of installing, training, technical support and up-gradation costs. Once the list is finalized, it is better to select a specific discipline for collaboration that maximizes value both in terms of quality and return on investment. The project manager involved in collaboration is responsible for organizing regular review meetings with the stakeholders to discuss the ways of improving the ongoing systems.

CONTEMPORARY ISSUES IN PROJECT MANAGEMENT

The impact of modern technology on organizations and in the lives of people has led the project management discipline to focus on certain contemporary issues such as customer focus, program

257

management, stakeholder analysis and organizational changes.

Customer Focus

The customer in today's business environment is becoming increasingly significant. And his significance will be even higher in the future. Organizations have realized the importance of the customer and hence they have adopted programs like Customer Relationship Management (CRM). Irrespective of the type of the customer using the end product (process, product or service) of the project, successful organizations have always considered the customer to be a major stakeholder in projects. The need to seek total support from the project client has been highlighted often, and this is particularly necessary in software and information technology projects. The most advanced and best organizations place the client in the project manager's position. This practice brings in a greater level of responsibility to individuals in the programming function and even more responsibility on the systems analysts heading the project team. Bringing in the end user into the role of a project manager also adds to the responsibility of the client department. If the project is accepted because of the permissible cost/benefit ratios, then it would be the responsibility of the client's representative (who is in

258

the role of project manager) to prove it to the top management that those benefits have been received.

Program Management

Programs can be defined as projects whose activities themselves are projects. Hence, program managers are bound to have additional responsibilities that are more complex. This complexity in responsibility surfaces in situations where limited resources have to be shared among several projects. A classic example of this would be a systems development project in an information systems department. The systems analysts and programmers will be shared in multiple projects i.e., they are responsible for developing these projects.

Programs are of relatively longer duration than projects. This brings in another difficulty in program management - employee turnover, which is higher than in projects. Therefore it is the program manager's responsibility to take substantial care while selecting, training, developing and retaining employees, because high employee turnover will disrupt the flow of the program. It is also essential to include activities pertaining to the development of the team in the program network. All activities mentioned in the program network should be properly budgeted, including contingency operations. It is the program manager's responsibility to make sure that the activities

259

are effectively scheduled and managed, so that there is proper availability of human resource when required.

Stakeholder Analysis

Chapter 16 discussed the various implications of stakeholder analysis. This section covers the basic aspects of stakeholder analysis. Stakeholder analysis involves analyzing the role and information requirements of the various stakeholders involved in a project. According to Freeman and Weiss, stakeholder analysis is a strategic tool used by project managers in analyzing the plans, objectives and techniques while handling several clients, vendors, competitors, government bodies and other external agencies. Stakeholder analysis helps to map several groups having a stake in the project. Stakeholder analysis is conducted because it helps;

• Project managers identify the parties to communicate with, in order to achieve the objectives of the project.

• Develop strategies and techniques to be used while negotiating on competing goals and interests of different parties.

• Uncover vested interests of different parties in the project so as to negotiate for the common good of the project.

260

• Distribute resources effectively and efficiently, so as to handle different parties in a justified manner.

Most projects involve a certain amount of complexity although the degree of complexity varies from project to project. Successful completion of projects requires communicating with the external project environment. A proper stakeholder analysis significantly simplifies this complexity. Stakeholder analysis helps project managers understand external opportunities and threats and facilitates making strategic moves accordingly.

Organizational Changes

Revolutionary changes (technical, strategic, perceptual, demographic) in business has a significant impact on project management techniques and procedures. The rapid penetration of information technology and telecommunication systems has changed the way we work. Information technology today has a significant impact on the competitive advantage of organizations and nations. This impact has led to significant vertical and horizontal changes in the organizational structure and the functions of organizations. Particularly, project teams are formed for short periods with ad-hoc objectives. As organizations are becoming boundary less, the significance of project teams is increasing, as the

261

project team is instrumental in gathering resources from all functional and geographical areas.

Using information technology for easy access to information has its own advantageous and disadvantageous for a project manager. While it is advantageous in that it enables project managers to monitor, report progress, identify deviations and review better, it is disadvantageous in that even the project manager himself will be scrutinized by the top management. This close monitoring from senior management will keep the project manager on his toes i.e., not only the project manager should be aware of all the project activities but also be well prepared to give a quick response for the possible questions from the senior management.

The rapid growth of information technology has made information across the organizational hierarchy easily accessible for managers. In fact, access to information has become so simple that even a member of the top management can retrieve and interpret information without the help of an intermediary (clerical staff or supervisor). This easy access has created a situation in which the need for middle managers at several levels is questioned. It ultimately led to the elimination of several levels of management because they were seen to be no longer useful. Since many managers are now capable of

262

handling many routine, clerical tasks with the help of word processors and e-mail, clerical support staff have to justify their positions.

Organizations in the future may witness a completely new structure, namely task force, that contains the expertise and resources required to accomplish a project successfully. The project managers in the future will become task managers where they have one or more projects under their supervision. They will be provided with substantial authority and responsibility to manage daily decision making pertaining to regular project issues. Their responsibility is not just confined to completing the project on time, within the budget and as per performance standards, but it will extend to developing a versatile team to work effectively on multiple projects.

UNIT-III

Project Management

Globalization and the growth of e-commerce have made software and Information Systems (IS) projects indispensable today. Speed is of the essence when it comes to information dissemination and this is precisely why companies are now giving a lot of

263

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

264

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

265

projects is extremely significant, and can be divided into five stages:

1. Decomposition of projects into smaller tasks

2. Definition of interdependencies among the different tasks.

3. Estimation of resources required for each task

4. Risk analysis

5. 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:

266

• 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,

267

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

268

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.

269

• 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.

270

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.

271

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

272

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,

273

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.

274

IMPACT OF LATEST TECHNOLOGY ON INFORMATION SYSTEMS PROJECTS

Information systems projects are getting more complex because of their need to use new technology. The latest systems are more or less on-line systems that demand more specialized skills in the discipline when compared to batch systems. Latest technology also brings with it the task of distributing the job of data processing and storing between the desktop computer and the mainframe through cooperative and distributive processing. These tasks increase the complexity of projects and require people with unique skill sets, who are rare to find. This lias resulted in greater specialization of team members in particular disciplines. This situation demands better project planning and management from the project manager because resources are limited and they cannot be freely substituted. Earlier, database files could be designed by team members but now it requires database design specialists. Because developing these skills takes considerable training and experience, they are usually organized into groups that provides services to the project when needed. Personal computing, data processing, data security and communications have also become specialized skills, that have become indispensable for any software project.

275

The success or failure of an information systems project has a direct impact on the success or failure of the organization. Businesses now aim at deriving competitive advantage through information systems. The Indian retailing industry is a classic example of an industry trying to gain competitive advantage by using information systems. Shoppers' Stop, the retailing major has invested Rs.12 crore in a world class ERP package in an attempt to integrate its supply chain management with the purchasing department. The package will link all its stock keeping units with its warehouses and retail outlets.

Information systems projects are capable of making or breaking the company, due to the heavy costs involved and they are constantly under pressure to deliver the most advanced systems within a limited time. It can also be said that it is the use of good project management techniques that differentiates successes from failures.

SIMILARITY OF INFORMATION SYSTEMS PROJECTS WITH PROJECTS IN OTHER INDUSTRIES

Most of the project management techniques used in information systems projects are similar to the techniques used in projects in other industries. Some of the similarities are:

276

• Product Similarity• Life-cycle Similarity• Management Function Similarity.

Product Similarity

Let us compare the similarity between the products of the construction industry and the IT industry. Just like tire real estate industry, die project manager in the IT industry also has to describe the scope and goals of the project. After the scope and goals of the project are approved by the client and the key stakeholders, the business is modeled for the analyst to understand the user's perception of the business environment. In the construction industry, the architect functions as the project manager. Once the business is modeled, miniature models are developed to get the designer's perception. Just like an architect constructs a miniature model of the whole plan as perceived by him, a technology model is constructed in an IS project. Similar to the IS project's requirement for a description of the parts of the system, construction projects also require detailed plans that describe the parts to be used in building the project. Since there is a similarity between the project management practices of these two industries, the project managers in both industries perform similar functions.

Life Cycle Similarity

277

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.

278

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 ANDPROJECTS 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

279

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.

280

• 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.

281

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.

282

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

283

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

284

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,

285

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

286

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,

287

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

288

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

289

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

290

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

291

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

292

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

293

reliefs if the projects are located in backward areas, Study of climatic conditions like temperature, rainfall, floods, and seismic activity is very important while choosing the location of a project.

Factors like integrating all departments of the organization, availability of transport, safety requirements, site cost, political, cultural and economic situation, geographical proximity to competitors are also to be considered by the project manager in finalizing the location of a project.

Steps in the location and selection process

The size and scope of operations decide the approach to location and selection process. Following is a general procedure of making a location decision :

Defining multiple location objectives

The project manager formulates the broad location objectives based on the interests and preferences of the project promoters, availability of technicians, proximity to customers and suppliers, and other relevant factors.

Identifying relevant decision criteria

294

The project manager selects the project location on the basis of many economic factors such as labor and material costs, non-economic factors such as the impact of the plant on the environment and community.

Relating the objectives to the criteria

The relevance of criteria should be evaluated using decision-making, models / techniques such as break – even analysis, linear programming and qualitative factor analysis. Though firms prefer to use the aforesaid models for making the location decision, in practice it is difficult to quantify certain aspects such as the firm’s relationship with local channel members, market sentiments etc.,

Generating relevant data to evaluate the alternative locations

Alternative location choices are made that satisfy the location objectives of the firm. They are evaluated based on the data obtained.

Selecting the best location

Finally, a location that meets the organization’s objectives, best satisfies the criteria and benefits the community is selected.

295

Machinery and Equipment

Technical evaluation of a project idea should include the study of required machinery and equipment to run the project. The machinery and technology required depend on the plant capacity and type of process selected to implement the project. The project manager should study constraints like transportation of heavy equipment, import of foreign machinery, and after sales service from the sellers of the equipment, before selecting the necessary machinery and equipment. Machines should be installed in appropriate places and they should be sequenced to ensure continuous flow of the production process. Experiences of the existing users should also be taken into account to find out the practical difficulties in running different machines. Suggestions from external technical consultants and in-house experts are also helpful.

Consideration of Alternatives

No single criterion is exactly useful in transforming, a good project idea into a perfect project. A great idea might not be technically feasible. Some good ideas may be poor at gaining a market while others may require huge investments, which the firm may not have. All these constraints force the project manager to think of alternatives and

296

come upto with a workable project idea. Reconsideration of nature of the project also generates new ideas and makes the idea feasible.

Market characteristics also force the project manager to produce a high quality product at a premium price or a low quality item at a cheaper price. To meet the required market demand, the project manager has two options – either to construct a single plant to cover the entire market to construct multiple plants in different locations. As non of the choices may be perfect, the ultimate decision regarding the project will depend on the trade – off between economies of scale in manufacturing and the economies of distribution. The next chapter talks about how a project manager selects a project from the several alternatives, on the basis of the financial considerations.

PROJECT PROCUREMENT PLANNING

Project procurement planning is the process of discovering the needs of the project that can be satisfied by acquiring products and services from firms external to the project organization. The request for the products has to go through a procurement process, starting from solicitation planning to contract closure. The project manager should take the help of professionals in contracting and procurement,

297

if required. Procurement planning basically involves the how. what and when aspects of procurement, i.e. What to procure? How to procure? and when to procure? The procurement process is effective if it contributes to organizational profits through discounts on bulk purchases of quality products and services. If the procurement practices of an organization are centralized, then profitability is enhanced because centralization leads to standardization and minimizes the cost of paperwork involved. The primary objective of a procurement planning process could be any one of the following:

Acquiring all products and sendees from a single vendor.

Acquiring all products and services from different vendors.

Acquiring a part of the required resources from the external sources.

Acquiring no product and service from vendors.

Some of the inputs required to prepare the procurement plan are:

Scope statement Product or service description Procurement resources Market conditions Make or buy analysis

298

Expert judgment

Scope Statement

The scope statement gives all the relevant information on the needs and the strategics of a project that are to be kept in mind while planning the procurement activities. The project manager is expected to know when to procure a product or service from a vendor. The project manager usually employs networking techniques like Critical Path Method (CPM) and Program Evaluation and Review Technique (PERT) to estimate the timing of the requirements of products or services. The project manager has to specify the requirements with the help of specifications and drawings that define the schedule parameters in terms of delivery dates and evaluate the cost of products and services according to its life cycle stages. It is clear by now that defining the needs of the project is the most crucial task for the project manager.

Product or Service Description

This gives a detailed description of the project deliverables. It also provides information pertaining to the technical specifications of the products, which are lo be taken care of while planning procurement. A typical product description contains the relationship between the product or service being delivered by the

299

project and the factors (problems, opportunities etc.) that lead to the initiation of the project. The product description in the initial phase of the project contains less information and as the project progresses, the product description becomes elaborate. Some of the factors are:

• Market demand• Business requirement• Customer needs• Availability of state-of-the-art technology.• Legal needs

Though the content and format of a product or service description statement van from product to product and from project to project, it must be elaborate enough to support the latter stages of project planning. Usually, product or service specifications are a written or graphical representation of the product or service to be acquired from the vendors. These specifications can be of three types:

• Design specifications - that describe the physical characteristics of the product that is to be delivered by the project. Since the buyer specifics the design, the vendor isnot responsible for its performance.

300

• 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

301

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

302

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)

303

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

304

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

305

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

306

• Minimizes profits for the vendor

• Reduces the costs of negotiation and preliminary

specification

• Accelerates the initiation and completion of the

project

• Provides choice in selecting the most efficient vendor rather than selecting the least bidder

• Facilitates the involvement of the same vendor right from consultation till the completion of the project.

However, this type of contracting has the following disadvantages;

• The vendee cannot be assured of the final cost• There's no financial reward for the vendor if cost and time are minimized• It allows the members of the vendee's

organization to give specifications for costly features in the products

• It allows rapid changes in die design by the vendee's staff which inflates the cost and consumes more time to complete the project.

Guaranteed maximum share savings (GMSS)

307

These type of contracts are similar to cost-plus fixed fee contracts. The only difference is that in this contract, the reimbursement given to the vendor cannot exceed a limit ("guaranteed maximum"). The contract is not awarded by inviting tenders. The vendor has to complete the contract within this "guaranteed maximum" to get a share in the savings. Both the vendor and the vendee share the risk. The vendor has to bear any cost

overruns (above the guaranteed maximum.) The organization can check the risk of inflated project costs as the upper limit is fixed in the form of pre-negotiated "Guaranteed maximum". When the actual cost incurred is less than the Guaranteed maximum, then the vendor and the project organization have to share the differential amount between them. However, when actual costs go beyond the guaranteed maximum, the vendor has to absorb the cost overrun. This form of contract has the merits and demerits of the aforementioned two contracts. GMSS contracts are different from others in that the financial risk is absorbed by both the parties involved in the contract. The vendor is also rewarded for early completion of the contract and minimization of costs. The advantages of this type of contracts are as follows:

308

It provides assurance of final cost to the vendee at an early stage.Provides proper advice to the vendee pertaining to any delays and cost overruns due to changes.Provides mutual benefit to both parties if the project is completed in time and within the budget.Facilitates a conducive atmosphere for both parties in implementing the project.

The disadvantages are;It requires a thorough audit to be carried out by the vendee's staffFeasibility engineering tests have to be conducted before getting into price negotiation.

Fixed-p rice-incentive-fee (FPIF)

These type of contracts are similar to fixed-price contracts. The requirements of the project to be undertaken are set-up stringently, except altering the total profit with a formula according to the actual cost incurred by the completion of the project. This adjustment is mentioned in tire contract. In these contracts, if the vendor is able to minimize the costs, he is rewarded which adds to his profit. Both the risks and savings are absorbed by the vendor and vendee.

Cost-plus-incentive-fee (CP1F)These type of contracts are similar to that of

cost-plus contracts, except for the flexibility of

309

altering the fee basing on a formula which compares the total project costs with target costs. This formula is mentioned in the contract. Usually organizations handling long-tenn and R&D type of projects enter into these type of contracts. Here, vendors are the maximum risk takers and they also have to plan and minimize the costs. The advantages of these contracts are as follows:

• The vendor seeks maximum benefits because it fixes a slightly greater percentageof total cost.

• It minimizes the verification and evaluation of the vendors' services.The disadvantages are:

• The process can encourage the vendor to minimize his costs in conductingeconomic studies and description of maps and drawings which can finally lead lo higher operational, building and maintenance costs during the latter stages. It also has all the demerits of cost plus fee contracts.Selecting a proper contract type to carry on

procurement activities in a project organization is the most crucial and complex task on which tire total success of a project is dependent. It is therefore necessary for the top management and the project manager to plan procurement management very

310

carefully and prepare the procurement management plan and statement of work. Exhibit 20.1 talks about the factors influencing the type of contract selection.

Procurement Management Plan

This document details the manner in which other procurement processes will be managed i.e. starting from the solicitation planning till the contract closing. It contains answers related to:

• The type of contracts to be administered.• The person in charge of developing the independent estimates acting as evaluation criteria.• The kind of decisions that can be taken by the project team independently without consulting the procurement management team.• The place from where to access the standard procurement documents.

• Managing multiple vendors.• Effectively combining the procurement activities with scheduling.

The degree of detail and formal structure of a procurement management plan can change depending on the needs of the project.

Statement of Work

311

It is a detailed description of the product or service to be procured, for the vendor to decide on his potential to serve the project organization with the product or service that matches their expectations. The details vary depending on the nature of the product or service to be procured, the requirements of the project organization and the type of contract to be administered.

The statement of work is continuously reviewed and evaluated as it progresses across the procurement process because the vendor may suggest an alternative cost effective product or service to substitute the one planned originally. This document should be transparent, complete and precise. It should also mention its expectations from the vendor especially when it requires any special services like after-sales service of the product being procured. For some industries, there can be a specific detail and format for statement of work.

SOLICITATION PLANNING

According to PMBOK, solicitation planning is the process of developing the documents that are needed to support solicitation. It involves preparing the procurement management plan, the statement of work, standard forms and expert evaluation that forms the procurement documents and criteria for

312

judging the vendor. These documents support solicitation.

Procurement Document

This is a document that is used to invite proposals2 from eligible vendors. The procurement document uses terms like "bid" and "quotation," when the vendor selection is price sensitive, and the term "proposal" when the vendor selection is more dependent on non-financial aspects like technical skills. The term proposal is used while procuring die sendees of a consultant or an architect. The procurement documents are also known as Invitation For Bid (IFB), Request For Proposal (RFP), Request For Quotation (RFQ), Invitation For Negotiation (IFN) and Vendor Initial Response (VIR). Of all diese types of procurement documents the RFP is die most expensive for the vendor, especially when the contract involved is so large tfiat the proposal needs to present different sections covering various factors like cost, technical performance, background of the management, quality of the processes, infrastructure support, management of subcontractors and so on. A typical RFP covers the topics as mentioned below.

A brief overview of the project. Scope of the request for proposal.

313

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

314

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 315

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?

SOLICITATIONSolicitation 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 ListThe 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,

316

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 MeetingsThese 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

317

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.

318

The identificationThis 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 bargainingThe 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 closingThe closing phase in a negotiation meeting

documents the final consensus oetween the two parties.The acceptanceThis 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.

319

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

320

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.

321

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

322

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 numericalweight.

• All potential vendors should be ranked based on each of the evaluation ^ parameters.

• Multiply the numerical weight with the rank of the vendor.

323

• 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

324

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

325

According to PMBOK, contract administration is the process of making sure that thevendor's performance satisfies the project needs mentioned in the contract. If theproject is so large that it requires multiple vendors to satisfy its needs, then die majorarea 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 inmind 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

326

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.

327

• 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

328

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

329

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

330

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

331

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.

332

• 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.

333

• 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

334

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.

335

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

336

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.

337

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

338

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

339

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

340

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.

341

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

342

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.

343

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

344

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

345

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?

346

• 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 beforetaking 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

347

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

348

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

349

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

350

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.

351

• 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.

352

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.

353

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.

354

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

355

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

356

Once the project enters the implementation phase, the project manager should take up the responsibility of reviewing the status of the project in a timely and phased manner. Project review conducted at various stages of project implementation play a major role in the success of a project. The project manager conducts review to find out;

If the project can accomplish the business goals.

Whether the rules of the organization are understood properly and implemented

If it is worthwhile to take up the project all the before entering into major contracts

Whether the project is managed effectively and the team members are sure of completing the project, by following the guidelines.

Reviews give the project manager and the organization a chance to solve problems before they get out of hand, or to improve the way in which the projects are being handled. To derive the maximum benefit out of the review the project manager has to take follow-up action with an open mind. Reviews ensure that the project utilizes the available funds to gain business advantage. On the whole, a review helps the project manager;

357

Keep in mind the purpose of carrying out a project

Determine the appropriateness of the project activities from time to time

Gauge the way in which the objectives are being accomplished

Verify the completion of the project Evaluate the cost of the project Understand the project requirements.

Types of project reviews

A project manager has to conduct various reviews throughout the life of a project to ensure that it is progressing towards achieving the planned objectives. The manner in which these reviews are conducted decides the success of current and future projects.

In general, a project manager conducts three types of reviews;

Status reviews Design reviews Process reviews

PROJECT REVIEW STAGES

A review should always be conducted before taking any major decisions that can affect the future of the

358

project. Some of the important points or stages at which a review is conducted are as follows;

• In the initial stages of the project life cycle, i.e., after the project proposal has been submitted.

• At the stage when an in-depth evaluation is conducted i.e., after die primary business case has been accepted.

• During the implementation of the project, i.e., while the activities of the project are being carried out, particularly at die following points:

- Before entering into major contracts.- When the major output of die project

is to be delivered.- At points where die risk is

substantially high.- At points where major problems

occur.

• When the project is completed.

• When auditing has to be conducted.

Review after Submission of Project Proposal

A review at tiris point would help die project manger to know whether:

• The proposal is worth die resources on 359

undertaking an initial investigation.

• The proposal is in keeping witii die existing business strategy.

• The proposal is flexible, in case it does not comply with the existing business strategy.

Review in the Implementation Phase

There are different types of reviewing techniques to monitor the project in die implementation phase. Status reviews, design reviews and process reviews are carried out during this phase of die project.

Review at the Time of Completion of Project

A project is closed either when it accomplishes its objectives (successful project) or when it fails to do so. Closing a project is a formal activity aimed at discharging all the assets belonging to the project in a proper manner. The project manager conducts a review at this stage to

Evaluate the project efficiency by comparing the delivered output with the planned one, in terms of time, cost and performance standards.

Ensure that the benefits are well documented for use in future projects.

Document the lessons learnt as these may be helpful in die management of future projects.

Significance of Post Project Review

360

Project review is probably the most effective tool for improving project results and project management practices. An effective and thorough review of project performance can help the project manager find out what was right and what was wrong about the conduct of the project. Project reviews should be target oriented and realistic i.e.. they should be conducted efficiently and lay emphasis on overall project goals and objectives. To sum up, post project reviews should analyze the performance of the project so as to build on the project achievements and avoid problems in the future. Post project reviews help evaluate the performance of the project from various perspectives:

Was the project a total success? Was it a well defined project? Did the project deliver the expected results? Was the project implemented according to

established project management policies and procedures?

Was the progress of the project monitored and controlled properly?

Was the project a success from the stakeholder's point of view?

Is the project team happy with the performance of the project?

361

Even' project has some valuable lessons for improving future projects and developing professional skills. Post project reviews help uncover those valuable lessons

Review in the Post-implementation Stage

This kind of review is usually conducted any time between three to six months after the completion of the project. The project manager undertakes the review to judge whether the project was successful in meeting its goals or not. These reviews should;

Evaluate the benefits of the project and compare them with the benefits envisaged in the initial plan

Judge the effectiveness and efficiency of the delivered output of the project when it is put to use in real-life situations

Suggest corrective measures, if necessary Document the lessons, as these may

prove helpful in managing future projects Be conducted keeping in mind the

information requirements of the various stakeholders, like the sponsor of the project, the functional departments, the end-users and the clients.

Post project reviews have a special significance in project management as given in the above.

362