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Lecture 2 Fundamentals
1. Content presentation
1. PMI
2. Project, program & portfolio
3. Role of Project manager
4. Organization
5. Project selection
2. Workshop

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PMI Introduction
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PMI
A non profit professional organization dedicated to
effective project management.
More than 450,00 Members
More than 300,000 PMP worldwide
Advance and improve effectiveness of communications among
the technologies that are involved in managing projects

Key Initiative
Development of PMP certification
PMBOK
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So What - WIIFM
Establish project management as a profession
Glue it all together

Access to universally acceptable processes

Provide a common framework
Provide measurable visibility to your capability

Has been adopted by Fortune 500 Companies as

a valid project management framework

Do you need this ?

An individual choice ?
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 1.2 Project - Definition

• A temporary endeavor undertaken to create a

unique product, service, or result.
• Characteristic:
– Temporary
– Unique
– Progressive Elaboration

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 Project, Temporary
• A definite beginning and a definite end
– A starting point: defined
– A definite end: The project’s objectives
• have been achieved,
• will not or cannot be met, and
• the need for the project no longer exists.
– Temporary does not necessarily mean
short in duration.

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 Project, Unique
• Unique Product, Service, or Result
– has never been done before, or
– has not been done the same way, or
– not by the same group of people

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1.3 Project Management Definition
• The application of knowledge, skills, tools, and
techniques to project activities to meet project
requirements.
• Involves:
– Identifying Requirements
– Developing clear and achievable
objectives
– Balancing competing demands: scope,
time, cost, and quality
– Adapting specifications, plans, methods to
meet stakeholders differing needs and
expectations
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 The Project Management Team
• Includes all personnel involved in performing project
management
• Has professional responsibility to Stakeholders
• Understands/uses at least 5 areas of expertise:
– The PMBoK
– Application area knowledge, standards, and
regulations
– Understanding project environment
– General management knowledge and skills
– Interpersonal skills
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Progressive Elaboration
Ö Progressing in steps
Ö Continuing steadily by increments
Ö Increasing in detail
We as PMs are asked to commit to a project cost, schedule,
quality measure, and define the project team before the
customer has finalized the requirements – Progressive
Elaboration.
quality measure
cost, schedule,

Requirements High Level Detailed Build and

Analysis Design Design Test
Very High More More More
Level Detailed Detailed Detailed
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 Characteristics of Projects

• A single point of responsibility: PM

• Scope changes
• Loss of key people
• Costs are uncertain
• Conflicts occur regularly

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1.4.4 Project Management Office
(PMO)
• Also called ‘PSO’ (Project Support Office), ‘PO’ (Project Office), or
Program Office
• Support functions to project managers in the form of training,
software, templates, etc.
• Responsible for the results of the project depending on the roles
defined.

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Types or Roles of PMO

• Corporate wide organization
• Project Support
• PM methods, standards, templates
• Training in methods, processes, soft skills
• Home for PMs
• PM mentoring
• Internal Consulting
• Monitoring of Project Results
• Metrics collection and analysis
• PM Tools selection and roll-out
• Portfolio/Program Management

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 Multiple Project Management
• Project Portfolio Management and Multiple Project
Management

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Management Maturity
Scope Management
Baseline Quality Management
Time Management
Cost Management
Human Resource Management
Building a Team Contractor/Procurement Management
Communications Management
Building a Project Integration Management
Building Success Risk Management

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PMBOK Scope
Application Knowledge

Project Management

General Management Key GM Skills

Finance, Planning Leading Communicating
Negotiating Influence
Personnel administration Problem Solving
Personal management 15

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Project Drivers
Drivers of Business Operations

Stock price

New
Revenue Products
Or services

Business Sales
Earnings Growth Efficiency

New
Markets

Cost

Labor
Cost
Operating Fixed
Productivity Cost

Variable
Cost

R&D R&D
Investment

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33% less profit

Time is Money
Cost on budget
over five years
Time 6 months late

Possible Cost 50% over budget

4% less profit
Revenue Time on time
over five years
Planned
Revenue

Actual
Revenue
Revenues
Project

ACTUAL INVESTMENT TIME

Time
PLANNED INVESTMENT TIME
POSSIBLE Actual
INVESTMENT TIME
Completion

Project Possible ☛ How do your projects perform?

Start Completion
Planned
Completion
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Definitions
Operations Projects
Repetitive Temporary
Ongoing Beginning & End
Reset objectives & continue Unique
Product or Service

Performed by People
Constrained by limited resources
Planned, Executed, Controlled
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Differentiating
Project? Operation?

New product development

Executive reviews

March executive review

New model of a car

Customer service

Manufacturing line
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Example

New Chip
Projects

Better Cable Cost Reduction

Smaller Holes Program
No Paint

New Product
Projects

New Bands Introduction

New Features Program

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Product
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Project Manager’s Role

• Integrate everything & everybody
• Communications hub
• Conflict resolution - decision maker
•changes, resources, trade off
• Creates direction, commitment,
momentum
• Preacher - must believe
• Entrepreneur
• Visionary

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Critical Success Factors

(The Triple Constraint)
Scope
Performance Creep

Cost Time

Performance = Scope & Quality

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Project Tradeoffs
Performance
Required Performance
Target

Cost
Budget limit

Time Due Date

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Organizational Structures
Projectized Organization
Project
Coordination
Chief executive

Project Project Project

Manager Manager Manager

Staff Staff Staff

Staff Staff Staff

Staff Staff Staff

(Green Boxes represent staff engaged in project activities)

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Organizational Structures
FunctionalOrganization Project
Coordination
Chief executive

Functional Functional Functional

Manager Manager Manager

Staff Staff Staff

Staff Staff Staff

Staff Staff Staff

(Green Boxes represent staff engaged in project activities)

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Organizational Structures

Matrix organization
• Blend of Projectized/Functional organizations
• Weak matrices
• functional, PM is coordinator, expeditor
• Strong matrices
• projectized with functional support

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Organizational Structures
Weak Matrix Organization
Chief executive

Functional Functional Functional

Manager Manager Manager

Staff Staff Staff

Project
Staff Staff Staff Coordination

Staff Staff Staff

(Green Boxes represent staff engaged in project activities)

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Organizational Structures
Balanced Matrix Organization
Chief executive

Functional Functional Functional

Manager Manager Manager

Staff Staff Staff

Project
Staff Staff Staff Coordination

Project Manager Staff Staff

(Green Boxes represent staff engaged in project activities)

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Organizational Structures
Strong Matrix Organization
Chief executive

Functional Functional Functional Manager of

Manager Manager Manager Project Managers

Staff Staff Staff Project Manager

Staff Staff Staff Project Manager

Staff Staff Staff Project Manager

(Green Boxes represent staff engaged in project activities)

Project
Coordination 29
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The Balance of Matrices

Project Influence

Pure Projectized
Pure Functional

in Decision Making

Functional Influence
in Decision Making

Weak Matrix Strong Matrix

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Project Selection Techniques

There are several project selection techniques. The
most commonly used are:

• Payback or break-even point

• Return on Investment (ROI)
• Internal Rate of Return (IRR)
• Net Present Value (NPV)
• Benefit to Cost Ratio (B/C)

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Payback or Break-Even Point

One of the most commonly used “hurdle” rates today is the
Payback or Break-Even Point:
Payback: The point in a project when revenues equal costs.
How used:
‧ The payback period has to be equal to or less than
target set by senior management. Often used as an
early assessment of project viability.
Advantages:
‧ Fast
‧ Simple
Disadvantages:
‧ Assumes steady revenue stream
‧ Does not take into account the cost of money
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Payback Period
(sample calculation)
The estimated cost of a project is $10,000,000.
The project is expected to yield $2,000,000 per
year. What is the Payback Period?

Solution:
Payback = total cost/yearly revenues
= 10,000,000/2,000,000
= 5 years
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Return on Investment
Return on Investment (ROI), another very commonly used
selection technique, is a financial measure of how much
profit is likely from invested costs.
How used:
‧ Average profits are divided by the average costs
expected over the period of the project’s life. Hurdle
rate is set by the senior management; product ROI
must equal or exceed the hurdle rate
Advantages:
‧ Used by most companies as one viability measure
‧ Easily understood and calculated
Disadvantages:
‧ Does not take into account the cost of money
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Return of Investment
(sample calculation)
The average cost of a 6-years project is
estimated to be $6,000,000 per year, and the
estimated total returns are expected to be
$12,000,000. What is the ROI?

Solution:

The average return is 12 million/6 = $2 million per year

ROI = (Average Returns/Average Costs) x 100%
= (2 M/6 M) x 100%
= 33%
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Internal Rate of Return

Internal Rate of Return (IRR), is used to compare against
other strategic financial Goals. It is the interest rate that
makes the present value of all revenues equal to the present
value of all costs.
How used:
‧ Usually measured against the IRR of the organization
but may be an arbitrarily set “hurdle rate”
‧ Used by most organizations to determine project
viability
Advantages:
‧ Takes into account the cost of money
Disadvantages:
‧ Can’t be directly calculated; must be iterated from
tables or by spreadsheet software

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Preparing Data for an

IRR Calculation
The IRR is much more accurate than the Payback or ROI methods because
it accounts for the cost of money. It is used as a measure of a project’s
worth compared with the company’s cost of capital rate.
Question: You have estimated the following revenues and costs for
your project. If the corporate cost of capital is 18%, how does your
project compare?

Years Revenues Costs

0 0 $10,000
1 $12,000 $10,000
2 $16,000 $10,000
3 $20,000 $15,000
4 $40,000 $15,000
5 $60,000 $20,000 37

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IRR Sample Calculation

Solution: Use the equation
PV = present value of money
n
FV FV = future value of money
PV=å i = Internal rate of return
t=0 (1+i) t t = time period, i.e., 1st year, 2nd year
n = number of time periods
The PV of the revenues and costs are determined for
the project’s life cycle.
12,000 16,000 20,000 40,000 60,000
PV (Revenues) = 1 + 2
+ 3
+ 4
+ 5
(1+i) (1+i) (1+i) (1+i) (1+i)

10,000 10,000 10,000 15,000 15,000 20,000

PV (Costs) = 0
+ 1 + 2
+ 3
+ 4
+ 5
(1+i) (1+i) (1+i) (1+i) (1+i) (1+i)

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IRR Sample Calculation 2

Set the PV (Revenues) = PV (Costs)
=
12,000 16,000 20,000 40,000 60,000
1 + 2
+ 3
+ 4
+ 5
(1+i) (1+i) (1+i) (1+i) (1+i)

10,000 10,000 10,000 15,000 15,000 20,000

0
+ 1 + 2
+ 3
+ 4
+ 5
(1+i) (1+i) (1+i) (1+i) (1+i) (1+i)

The computer iterates to determine value of i that makes

the two sides of the equation equal. In this case,
i = 24%
Project i (24%) ＞company cost of capital (18%).
Therefore, pursue project.
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Net Present Value

Net Present Value is the difference between the Present
Value of the project revenues and costs.
How used:
‧ Uses the corporate IRR or another interest rate index
‧ “Goodness” is measured by whether NPV is positive
or negative
- NPV＞0, revenues greater than costs
- NPV＜0, revenues less than costs
- NPV＝0, revenues and costs the same
Advantages:
‧ Takes into account the cost of money
‧ Very accurate compared to other methods
Disadvantages:
‧ Not easily understood by everyone
‧Costs and revenues not always easy to quantify

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Set Up Data Table for NPV

Example: You have estimated the following
revenues and costs for your project. If the corporate
IRR is 18%, what is the Net Present Value of your
project?

Years Revenues Costs

0 0 $10,000
1 $12,000 $10,000
2 $16,000 $10,000
3 $20,000 $15,000
4 $40,000 $15,000
5 $60,000 $20,000

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NPV Sample Calculation

Solution: Use the formula for Present Value to
determine PV of revenues and costs.
n
FV
PV=å
t=0 (1+i) t
12,000 16,000 20,000 40,000 60,000
PV (Revenues) = 1 + 2 + 3 + 4 + 5
(1+.18) (1+.18) (1+.18) (1+.18) (1+.18)

= 10,169 + 11,491 + 12,173 + 20,632 + 26,227 = 80,691

10,000 10,000 10,000 15,000 15,000 20,000

PV (Costs) = 0
+ 1 + 2
+ 3
+ 4
+ 5
(1+i) (1+i) (1+i) (1+i) (1+i) (1+i)

= 10,000 + 8,475 + 7,182 + 9,129 + 7,737 + 8,742 = 51,265

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Solution to Sample NPV

Calculation
Net Present Value is the difference between the
Present Value of the Revenues and Costs.
Therefore,
NPV = PV (Revenues) – PV (Costs)
= 80,691 – 51,265
= 29,426

NPV is positive; pursue the project

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Benefit to Cost (B/C)

Benefit to Cost is a useful measure of the worth of a project
because it provides a comparison of the relative difference
between benefits and costs.

To calculate B/C, the Present Value (PV) of the

project’s benefits (Revenues) is divided by the (PV) of
the project’s costs.
Revenues and costs are estimated from
historical data or comparisons with similar
projects and their PVs are calculated.
B/C Interpretation:
B/C＞1; benefits greater than costs
B/C＜1; benefits less than costs
B/C＝1; break even (benefits and costs are equal) 44

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Set Up Data Table for B/C

Question: You have estimated the following
revenues and costs for your project. If the corporate
IRR is 18%, what is the B/C ratio for your project?

Years Revenues Costs

0 0 $10,000
1 $12,000 $10,000
2 $16,000 $10,000
3 $20,000 $15,000
4 $40,000 $15,000
5 $60,000 $20,000

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B/C Sample Calculation

Solution: The PV of the revenues and costs
Were calculated previously.

PV (Revenues) = $80,691

PV (Costs) = $51,265

B/C = 80,691/51,265
or B/C = 1.57
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