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
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
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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
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.
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 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
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.

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(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 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
(i) Changing the requirement
of raw material (shifting
from present raw material
to some other raw
material)
(ii)Rehabilitation – For
reviving sick units and
making them viable to
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 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.
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
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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 PROJECT
✔ 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.

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 ✔ 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.
• 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.
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 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 :
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 economy
2. Big projects affecting at one sector of the
economy.
3. Medium size projects
4. Small size projects (depending on size,
investment & impact)
3. On the basis of Sector :
1. Industrial project
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 2. Agricultural Project
3. Educational Project
4. Health Project
5. Social Project
4. On the basis of objective :
1.Social objective project
2.Economic objective project.
5. On the basis of productivity :
1. Directivity productive project.
2. Indirectively productive project.
6. On the basis of nature of benefits :
1. Quantifiable project
2. Non-quantifiable project
7. On the basis of government priorities :
1. Project without specific priorities
2. Project with specific priorities
8. On the basis of dependency :
1. Independent project
2. Dependent project
9. On the basis of ownership :
1. Public sector project
2. Private sector project
3. 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 impact
2. Project with future impact
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12. On the basis of National Policy :
1. Project determined by inward looking policy
2. Project determined by outward looking policy
13. On the basis of risk involved in the project?
1. High risks project
2. Normal risks project
3. Low risks project
14. On the basis of economic life of the projects :
1. Long term project
2. Medium term project
3. Short – team project
15. On the basis of technology involved in the
project :
1.High sophisticated technology project
2.Advanced technology project
3.Foreign technology project
4.Indigenous technology project
16. On the basis of resources required by the
projects :
1. Project with domestic resources
2. Project with foreign resources

17. On the basis of employment opportunities

available in the project :
1. Capital intensive project
2. Labour intensive project
18. On the basis of management of project :
1. High degree of decision making attitude
2. Normal degree of decision making attitude
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 3. Low degree of decision making attitude
19. On the basis of sources of finance :
1. Project with domestic financing
2. Project with foreign financing
3. Project with mixed financing
4. Project with financial institutions
20. On the basis of legal entity :
1. Project with their own legal entity
2. Project without their own legal entity
21. On the basis of role played by the project :
1. Pilot project
2. Demonstration project
22. On the basis of speed required for execution
of the projects :
1. Normal projectCrash project
2. Disaster project
PROJECT LIFE CYCLE
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
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 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
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.

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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
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
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 • 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.
• 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.
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 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
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
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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
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.
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 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
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
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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
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.

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 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.
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.

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 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
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
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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,
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
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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
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
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balance between these interrelated variables or
constraints. Some common constraints that
influence a project are :
• Scope
• Quality
• Cost
• Time
• Resources
Scope
Scope is a brief and accurate description of the
end – products or deliverables to be expected from
the project that meet the requirements. Scope
describes all the activities that are to be performed,
resources that will be consumed and the end-
products from the successful completion of the
project, including quality standards. The scope also
includes the target outcomes, prospective customers,
outputs, work, financial and human resources
required to complete the project. The various issues
related to management of project scope are
discussed in Chapter 10.
Quality
Every project has to satisfy the quality
requirement at two levels – product quality and
process quality. The first quality requirement relates
to products resulting from the project and the second
relates to the management processes that have to be
in place to implement the project. A comprehensive
quality management system ensures effective
utilization of scarce resources to achieve the project
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objective of delivering products or services to the
clients satisfaction. The various tools and techniques
that are needed to ensure quality are discussed in
Chapter 19 (Project Quality Management).

Time
Time is one of the important resources available
to a project manager. At the same time, it is one of
the major constraints within which a project has to
be completed. Generally, the client of the sponsor of
the project specifies the time limit for the
completion of the project. The time required to
complete a project is inversely related to the cost of
the project. Therefore, the cost of a project increases
as the time available for its completion decreases.
Since time cannot be stored as inventory, it is the
duty of the project manager to manage time by
carefully scheduling the various activities in time.
Cost
Cost plays a major role in the various stages of
a project life cycle. Project cost include the
monetary resources required to complete the
activities mentioned in the scope of the project.
Project costs are cost associated with all the
activities in the planning and implementation
phases. The client or the sponsor of the project
activities, within which the project manager has to
deliver the product.
Resources

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 Resources include the people, finances and the
physical and information resources required to
perform the project activities.
PROJECT MANAGEMENT
Project management is a system of procedures,
practices, technologies and know-how that enables
the planning, organizing staffing, directing, and
controlling necessary to successfully manage a
project.
According to PMI, “Project Management is the
application of knowledge, skills, tools and
techniques to project activities in order to meet or
exceed stakeholder needs and expectations”
Project management is a carefully planned and
organized effort to accomplish a specific (and
usually) one-time effort, for example, constructing a
residential complex or implementing, a new
computerized banking system. Project management
includes developing a project plan that includes
defining project goals, specifying how the goals will
be accomplished, what resources are needed, and
relating budgets and time for completion. It also
includes implementing the project plan, along with
careful controls to ensure that the project is being
managed according to the plan, Project management
usually follows five major phases including
feasibility study, project planning, implementation,
evaluation and closing. These aspects of project
management will be discussed later in this book.

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PROJECT MANAGEMENT –
RELATIONSHIP WITH OTHER
MANAGEMENT DISCIPLINES
Although project management has derived most
of its knowledge from other management
disciplines, it has evolved as a specialized science
over a period of time. It has its own management
techniques such as critical path analysis and work
breakdown structures (discussed later) that are
unique to project management. Like general
management, project management also involves all
aspects of planning, organizing, implementing, and
controlling.
In many strategic projects, the function of
project management will involve disciplines like :
Finance : Preparing the financial statement
while sending the project proposal and managing
the costs of the project
Personnel : Identifying the skills required to
carry out the project, selecting the project team and
maintaining a good work environment.
Operations : Managing the activities /
operations that are repetitive in nature
Purchase and logistics : Identifying resources
(raw materials, equipments and services) required
for the project. Preparing a list of eligible suppliers
and negotiating with them for procuring the right
materials. Managing the logistics for a smooth
implementation of the project.

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 R & D : New product development, and quality
assurance
Marketing : Marketing the project idea to
internal and external sponsors.
RELATIONSHIP BETWEEN PROJECT
MANAGEMENT AND LINE MANAGEMENT
According to the definition of project
management, a project manager has to control
variables such as time, cost and other resources
allocated for the project. But in practice, he only has
indirect managers. Therefore the project manager
has to maintain good relations with line managers to
ensure a smooth flow of resources. Thus, a project
manager should exercise judicious control over the
resources (money, manpower, machinery, facilities,
materials, technology and information) allocated to
the project from various functional departments.
The success of a project depends on the various
aspects of project and line managers’ relations. The
characteristics of a good relationship are;
• Amicable working relations between the project
manager and the departmental heads who
allocate resources to the project.
• Functional project members ability to report to
the functional manager of the department from
where he come and the project manager for
whom he currently works.
Employees of various functional departments
who are selected tow work on a project usually face
27
difficulty in reporting to multiple bosses. The issue
of who should have control over the functional
employees becomes a source of conflict between the
line and the project managers. The relations can be
strained further if any one of them claims sole credit
for the success of the project or rewards for the
profits generated by the project. These conflicts can
be resolved when the managers understand their
distinct roles in achieving the overall objectives of
the organization.
PROJECT MANAGEMENT ENVIRONMENT
– AN OVERVIEW
Many project managers wonder why they
should be concerned about the project environment
when the objective of project management is to get
the project completed within scope, cost and
schedule. They fail to understand that a project
operates in an environment broader than the project,
and managing the day – to – day activities
efficiently will not alone guarantee the success of
the project. Today’s project managers need to be
aware of the cultural, organizational and
socioeconomic influences on projects,
Understanding these influences involves identifying
the project stakeholders and examining their ability
to influence the project’s success. This chapter
discusses various aspects of project management
like the role of project stakeholders, organizational
and socioeconomic influences and project time
environment.
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PROJECT STAKEHOLDERS
According to the Project Management
Institute’s (PMI) Guide to the Project Management
Body of Knowledge, project stakeholders are
‘individuals and organizations who are actively
involved in the project, or whose interest may be
positively or negatively affected as a result of
project execution or successful project completion’
Types of Stakeholders
The major stakeholders of any project include
•Project manager
•Customer
•Project team members
•Sponsor
•Parent organization.

ORGANIZATIONAL INFLUENCES
Projects are usually taken up by organizations
larger than the projects themselves. These
organizations can be business corporations,
government organization, professional associations,
research and development centers etc.,
Organizations that initiate a project will have an
influence on the implementation of the project.
These organizational influences even act on projects
that have been initiated by joint ventures or
partnerships. Some of the major aspects of large
organizations that influences projects are :
• Organizational systems
29
 • Organizational cultures and style
• Organization structure
Organizational Systems
Organizations, which primarily carry out
projects, are known as project – based
organizations. They earn revenues mainly by
undertaking projects. Some examples of project-
based firms are : consultancy firms, architecture
firms, software development firms, infrastructure
contractors etc.
Some organizations adopt a management by
project approach to manage their ongoing
operations. These organizations treat various aspects
of ongoing operations as projects and apply project
management principles to them.
Project-based organizations have well designed
management systems (such as financial systems,
control systems etc). to help them manage projects
effectively. These organizations have a number of
specifically designed systems in place to monitor
the progress of the activities of a project. For
example, finance systems are designed to take care
of accounting, tracking and reporting activities of
multiple projects.
Non-project-based organizations, such as
manufacturing firms, hotels etc., may not have any
management systems for addressing project needs.
Managing projects in these organizations is a
difficult activity. But some non-project-based
organizations will have separate divisions or sub-
30
divisions that work as project-based organizations
with project oriented management system. So, the
project management team should be capable of
understanding the influence of various management
systems on the project.
Organizational Culture and Style.
Each organization has its own culture, i.e., its
shared values, norms and beliefs. An organization’s
policies, procedures and attitude towards authority
also reflect its culture. Organizational culture and
management styles have a direct impact on the
functioning of the project team. As a result
organizations that have a aggressive, risk-taking
culture will not employ conservative, cautions
project managers.

Organizational Structure
Sometimes, the organization structure obstructs
the free flow of resources from the parent
organization to the project. The organizational
structure can be functional, matrix or project-based.
A functional organization has a hierarchical
structure. In such a structure, superior – subordinate
relationships are clear, i.e., the line of control is
clearly defined. The employees are grouped into
departments according to their areas of
specialization, e.g., mechanical, engineering,
electrical engineering, production, marketing,
accounting etc. Functional organizations also work
on projects, but their project activities are limited to
31
a single function. e.g., engineering, manufacturing,
marketing etc. For example, when a functional
organization takes up the project of new product
development, the engineering department will
handle the design development phase of the project.
The activities carried out by this department will be
strictly limited to the engineering function. If any
question arises concerning the manufacture of the
product, the question is passed on to the
manufacturing department for clarification, through
format communication channels.
In a project – based organization, the project
manager has the authority to assign priorities and to
direct the work of individuals assigned to the
project. Most of the organization’s resources are
allotted to various projects. These organizations also
have functional departments, but the groups
working in these departments report directly to the
project manager and help in the execution of various
projects. A project organization structure is shown
in Figure 2.1
A matrix organization structure combines some
of the characteristics of functional and project-based
organizational structures. In matrix organizations,
project managers and functional managers are
jointly responsible for assigning priorities and for
directing the work of individuals assigned to
projects. In this organizational setup project
managers have equal authority to functional
managers and the staff members report to functional
32
managers as well as project managers. A matrix
organization structure is shown in Figure 2.2. Every
organization has one of the above discussed
organizational structures, and they have an impact
on the projects initiated by them. For example, when
a project team is formed by a functional
organization, those teams have to form their own
operating procedures and reporting structures that
are similar to that of project – based organizations.
This organizational structure also has an impact on
the functioning of a project manager. (See Exhibit
2.1)
SOCIO-ECONOMIC INFLUENCES
A wide range of socioeconomic issues influence
projects. The project team should be aware of these
issues as even a minor change in the socioeconomic
environment can sometimes affect the success of a
project. Some of the socioeconomic factors that
influence projects are :
•Standards and Regulations
•Internationalization
•Culture
Standards and Regulations
Standards are measures for judging the quality
of products, Generally, standards are documented
and approved by a recognized agency / body. These
standards specify the rules and guidelines that
organization must observe when producing a
product of a service. Even when these standards are
33
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
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
34
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.
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
35
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
analysis. Technical analysis is concerned primarily
with :
• Material inputs and utilities
• Manufacturing process / technology
36
 • 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)
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.
37
 Ease of absorption. The ease with which a
particular technology can be absorbed can influence
the choice of technology. Sometimes a high-level
technology may be beyond the absorptive capacity
of a developing country which may lack trained
personnel to handle that technology.
Agriculture Products In studying agricultural
products the quality must first be examined. Then,
an assessment of quantities available, currently and
potentially, is required. The questions that may be
raised in this context are: What is the present
marketable surplus? What is the present area under
cultivation? What is the yield per acre? What is the
likely increase in the area of cultivation? What is the
likely increase in yield per acre?
Mineral Products In assessing mineral raw
materials, information is required on the quantum of
exploitable deposits and the properties of raw
materials. The study should provide details of the
location, size, and depth of deposits and the viability
of opencast or under ground mining. In addition,
information should be generated on the composition
of the ore, level of impurities,need for beneficiation,
and physical, chemical and other properties.
Livestock and Forest Products Secondary sources
of data on livestock and forest products often do not
provide a dependable basis for estimation. Hence, in
general, a specific survey may be required to obtain
more reliable daa on the quantum of livestock
produce and forest products.
38
Marine Products Assessing the potential
availability of marine products and the cost of
collection is somewhat difficult. Preliminary marine
operations, essential for this purpose, have to be
provided for in the feasibility study.
Processes Industrial Materials and Components
Processed industrial materials and components
(base metals, semi-processed materials,
manufactured parts, components, and sub-
assemblies) represent important inputs for a number
of industries. In studying them the following
questions need to be answered: In the case of
industrial materials, what are their properties? What
is the total requirement of the project? What
quantity would be available from domestic sources?
What quantity can be procured from foreign
sources? How dependable are the supplies? What
has been the past trend in prices? What is the likely
future behavior of prices?
Auxiliary Materials and Factory Supplies
In addition to the basic raw materials and
processed industrial materials and components, a
manufacturing project requires various auxiliary
materials and factory supplies like chemicals,
additives, packaging materials, paints, varnishes,
oils, grease, cleaning materials, etc. The
requirements of such auxiliary materials and
supplies should be taken into account in the
feasibility study.
Utilities
39
 A broad assessment of utilities (power, water,
steam, fuel, etc.)_ may be made at the time of input
study through a detailed assessment can be made
only after formulating the project with respect to
location, technology, and plant capacity. Since the
successful operation of a project critically depends
on adequate availability of utilities the following
questions should be raised while conducting the
input study. What quantities are required? What are
the sources of supply? What would be the potential
availability? What are the likely short ages /
bottlenecks? What measures may by taken to
augment supplies?
Manufacturing Process / Technology
For manufacturing a product / service often
two or more alternative technologies are available.
For example:
• Steel can be made either by the Bessemer
process or the open hearth process.
• Cement can be made either by the dry
process or the wet process.
• Soda can be made by the electrolysis
method or the medical method.
• Paper, using bagasse as the raw material,
can be manufactured by the kraft process
or the soda process or the simon cusi
process.
• Vinyl chloride can be manufactured by
using one of the following reactions;
40
 acetylene on hydrochloric acid or ethylene
on chlorine.
Choice of Technology
The choice of technology is influenced by a
variety of considerations:
• Plant capacity
• Principal inputs
• Investment outlay and production cost
• Use by other units
• Product mix
• Latest developments
• Ease of absorption
Plant Capacity Often, there is a close relationship
between plant capacity and production technology.
To meet a given capacity requirement perhaps only
a certain production technology may be viable.
Principal Inputs The choice of technology depends
on the principal inputs available for the project. In
some cases, the raw materials available influence
the technology chosen. For example, the quality of
limentones determines whether the wet or dry
process should be used for a cement plant. Here it
may be emphasized that a technology based on
indigenous inputs may be preferable to one based on
imported inputs because of uncertainties
characterizing imports, particularly in a country like
India.
Investment Outlay and Production Cost The
effect of alternative technologies on investment
41
outlay and production cost over a period of time
should be carefully assessed.
Use by Other Units The technology adopted must
be proven by successful use by other units,
preferably in India.
Product Mix The technology chosen must be
judged in terms of the total product = mix generated
by it, including saleable by - products.
Latest Developments The technology adopted must
be based on latest developments in order to ensure
that the likelihood of technological obsolescence in
the near future, at least, is minimized.
Acquiring Technology.
The acquisition of technology from some other
enterprise may be by way of (i) technology
licensing, (ii) outright purchase, or (iii) joint venture
arrangement.
Technology Licensing A popular method of
acquiring technology, the technology license gives
the licensee the right to use patented technology and
get related know-how on a mutually agreed basis.
Often suppliers of technology tend to provide a
technology package which may consist of some
elements which are not essential. Hence the
technology package should be disaggregated into its
component parts like the technology proper,
engineering services, supply of intermediate
products, supply of equipment by the licensor, use
of a trade name, etc. Efforts should be made to

42
acquire only the essential components of the
technology package offered by the licensor.
The contract for technology licensing should be
carefully scrutinized with respect to; (i) definition of
technology to be acquired, (ii) cost of technology
licensing, (iii) guarantees provided by the licensor,
(iv) duration of technology licensing, and (v)
purchase of intermediate products, components, and
other inputs.
Purchase of Technology. This mode of
acquiring technology may be used in certain kinds
of industries. It is appropriate when (i) there is no
possibility of significant improvement in technology
in the foreseeable future, and (ii) there is hardly any
need for technological support from the seller of
technology.
Joint Venture Arrangement. The supplier of
technology may participate technically as well as
financially in the project. Financial participation is
typically in the form of equity holding. It is argued
that financial participation may strengthen the
motivation of technology supplier to transfer
improvements promptly.
Appropriateness of Technology
Appropriate technology refers to those methods
of production which are suitable to local economic,
social, and cultural conditions. In recent years the
debate about appropriate technology has been
sparked off mainly by Schumacher and others. The
advocates of appropriate technology urge that the
43
technology should be evaluated in terms of the
following questions :
• Whether the technology utilizes local
raw materials?
• Whether the technology utilizes local
man power?
• Whether the goods and services
produced cater to the basis needs?
• Whether the technology protects
ecological balance?
• Whether the technology is harmonious
with social and cultural conditions?
PRODUCT MIX
The choice of product mix is guided by market
requirement. In the production of most of the items,
variations in size and quality are aimed at satisfying
a broad range of customers. For example, a garment
manufacturer may have a wide range in terms of
size and quality to cater to different customers. It
may be noted that variation in quality can enable a
company to expand its market and enjoy higher
profitability. For example, a toilet soap
manufacturing unit may by variation in raw
material, packaging, and sales promotion offer a
high profit margin soap to consumers in upper –
income brackets.
While planning the production facilities of the
firm, some flexibility with respect to the product
mix must be sought. Such flexibility enables the
firm to alter its product mix in response to changing
44
market conditions and enhances the power of the
firm to survive and grow under different situations.
The degree of flexibility chosen may be based on a
careful analysis of the additional investment
requirement for different degrees of flexibility.
PLANT CAPACITY
Plant capacity (also referred to as production
capacity) refers to the volume or number of units
that can be manufactured during a given period.
Several factors have a bearing on the capacity
decision.
• Technological requirement
• Input constraints
• Investment cost
• Market conditions
• Resources of the firm
• Governmental policy

Technological Requirement
For many industrial projects, particularly in
process type industries, there is a certain minimum
economic size determined by the technological
factor, For example, a cement plant should have a
capacity of at least 300 tonnes per day in order to
use the rotary kiln method, otherwise, it has to
employ the vertical shaft method which is suitable
for lower capacity.
Input Constraints
In a developing country like India, there may be
constraints on the availability of certain inputs.
45
Power supply may be limited, basic raw materials
may be scarce; foreign exchange available for
imports may be inadequate. Constraints of these
kinds should be borne in mind while choosing the
plant capacity.
Investment Cost
When serious input constraints do not obtain,
the relationship between capacity and investment
cost is an important consideration. Typically, the
investment cost per unit of capacity decreases as the
plant capacity increases. This relationship may be
expressed as follows :
C1 = C2 ( Q1
Q2 )
Where C1 = derived cost for Q1 units of
capacity
C2 = known cost for Q2 units of
capacity
α = 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
46
Market Conditions
The anticipated market for the product / service
has an important bearing on plant capacity. If the
market for the product is likely to be very strong, a
plant of higher capacity is preferable. If the market
is likely to be uncertain, it might be advantageous to
start with a smaller capacity. If the market, starting
from a small base, is expected to grow rapidly, the
initial capacity may be higher than the initial level
of demand – further additions to capacity may be
effected with the growth of market.
Resources of the Firm
The resources, both managerial and financial,
available to a firm define a 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
The choice of location and site following an
assessment of demand, size, and input requirement.
Though often used synonymously, the terms
47
“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
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
48
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
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
49
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.

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
50
state of industrial relations judged in terms of the
frequency and severity of strikes and lockouts and
the attitudes of labour and management.
The climatic conditions (like temperature,
humidity, wind, sunshine, rainfall, snowfall, dust,
flooding, and earthquakes) have an important
influence on location. They have a bearing on cost
as they determine the extent of air-conditioning, de-
humidification, refrigeration, special drainage, etc.,
required for the project.
General living conditions, judged in terms of
cost of living, housing situation, and facilities for
education, recreation, transport, and medical care,
need to be assessed at alternative locations.
Site Selection
Once the broad location is chosen, attention
needs to be focused on the selection of a specific
site. Two to three alternative sites must be
considered and evaluated with respect to cost of
land and cost of site preparation and development.
The cost of land tends to differ from one site to
another in the same broad location. Sites close to a
city cost more whereas sites away from the city cost
less. Sites in an industrial area developed by a
governmental agency may be available at a
concessional rate.
The cost of site preparation and development
depends on the physical features of the site, the need
to demolish and relocate existing structures, and the
work involved in obtaining utility connections to the
51
site. The last element, viz., the work involved in
obtaining utility connections and the cost associated
with it should be carefully looked into. It may be
noted in this context that the cost of the following
may vary significantly from site to site: power
transmission lines from the main grid, railway
siding from the nearest railroad, feeder road
connecting with the main road, transport of water,
and disposal of effluents.

MACHINERIES AND EQUIPEMENTS

The requirement of machineries and
equipments is dependent on production technology
and plant capacity. It is also influenced by the type
of project. For a process-oriented industry, like a
petrochemical unit, machineries and equipments
required should be such that the various stages are
matched well. The choice of machineries and
equipments for a manufacturing industry is
somewhat wider as various machines can perform
the same function with varying degrees of
refrigerators could take various forms. To determine
the kinds of machinery and equipment required for a
manufacturing industry, the following procedure
may be followed; (i) Estimate the likely levels of
production over time. (ii) Define the various
machining and other operations. (iii) Calculate the
machine hours required for each type of operation.
(iv) Select machineries and equipments required for
each function.
52
 The equipments required for the project may be
classified into the following types: (i) plant
(process) equipments, (ii) mechanical equipments,
(iii) electrical equipments, (iv) instruments, (v)
controls, (vi) internal transportation system, and
(vii) others.
In addition to the machineries and equipments,
a list should be prepared of spare parts and tools
required. This may be divided into : (i) spare parts
and tools to be purchased with the original
equipment, and (ii) spare parts and tools required for
operational wear and tear.
Constraints in Selecting Machineries and
Equipments
In selecting the machineries and equipments
certain constraints should be borne in mind: (i) there
may be a limited availability of power to set up to
an electricity – intensive plant like, for example, a
large electric furnace; (ii) there may be difficulty in
transporting a heavy equipments to a remote
location, (iii) workers may not be able to operate, at
least in the initial periods, certain sophisticated
equipments such as numerically controlled
machines, (iv) the import policy of the government
may preclude the import of certain machineries and
equipments.
Procurement of Plant and Machinery
For procuring plant and machinery, orders for
different items of plant and machinery may be
placed with different suppliers or a turnkey contract
53
may be given for the entire plant and machinery to a
single supplier. The factors to be considered in
selecting the supplier / s of plant and machinery are
the desired quality of machinery, the level of
technological sophistication, the relative reputation
of various suppliers, the expected delivery
schedules, the preferred payment terms, and the
required performance guarantees. If in house
technical expertise is inadequate, external
consultants / may be employed to select plant and
machinery and supervise the installation of the
same.

STRUCTURES AND CIVIL WORKS

Structures and civil works may be divided into
three categories : (i) site preparation and
development, (ii) buildings and structures, and (iii)
outdoor works :
Site Preparation and Development
This covers the following : (i) grading and
leveling of the site, (ii) demolition and removal of
existing structures, (iii) relocation of existing
pipelines, cables, roads, powerlines, etc., (iv)
reclamation of swamps and draining and removal of
standing water, (v) connections for the following
utilities from the site to the public network : electric
power (high tension and low tension), water for
drinking and other purpose, communications
(telephone, telex, etc.,) roads, railway sidings, and
(vi) other site preparation and development work.
54
Buildings and Structures
Buildings and structures may be divided into :
(i) factory or process buildings; (ii) ancillary
building required for stores, warehouses,
laboratories, utility supply centre, maintenance
services, and others; (iii) administrative buildings;
(iv) staff welfare buildings, cafeteria, and medical
service buildings, and (v) residential buildings,
Outdoor Works
Outdoor works cover (i) supply and distribution
of utilities (water, electric power, communication,
steam, and gas); (ii) handling and treatment of
emission, wastages, and effluents; (iii)
transportation and traffic arrangements (roads,
railway tracks, paths, parking areas, sheds, garages,
traffic signals, etc,); (iv) outdoor lighting; (v)
landscaping; and (vi) enclosure and supervision
(boundary wall, fencing barriers, gates, doors,
security posts, etc).
PROJECT CHARTS AND LAYOUTS
Once data is available on the principal
dimensions of the project – market size, plant
capacity, production technology, machineries and
equipments, buildings and civil works, conditions
obtaining at plant site, and supply of inputs to the
project – projects charts and layouts may be
prepared. These define the scope of the project and
provide the basis for detailed project engineering
and estimation of investment and production costs.

55
 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.
(b)Godowns, workshops, and other services
must be functionally situated with respect
to the mail factory buildings.
1. 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.
2. Production Line Diagrams These show how the
production would progress along with the key
information for main equipments.
3. Transport Layout This shows the distances and
means of transport outside the production line.
4. Utility Consumption Layout this shows the
principal consumption points of utilities
(power, water, gas, compressed air, etc.) and
their required quantities and qualities. These
56
 layouts provide the basis for developing
specifications for utility supply installations.
5. Communication Layout This shows how the
various parts of the project will be connected
with telephone, telex, intercom, etc.
6. Organizational Layout This shows the
organizational set-up of the project along with
information on personnel required for various
departments and their inter-relationship
7. 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
57
 as well as initial operation. The purpose of the
work schedule is :
• To anticipate problems likely to arise
during the installation phase and suggest
possible means for coping with them.
• To establish the phasing of investments
taking into account the availability of
finances.
• To develop a plan of operations covering
the initial period (the running in period).
Often, it is found that the required inputs like
raw material and power are not available in
adequate quantity when the plant is ready for
commissioning, or the plant is not ready when the
raw material arrives.
In the first case the plant remains idle and in
the second the material may tend to deteriorate
and / or pose problems of storge. To avoid losses
arising from idle capacity and deterioration of
stocks of material, work schedule should be
drawn up with care and realism so that the
commissioning of plant is reasonably
synchronized with the availability of the basic
inputs.
NEED FOR CONSIDERING ALTERNATIVES
The need for considering alternatives has
been touched upon earlier. This point, however,
needs to be emphasized. There are alternative
ways of transforming an idea into a concrete

58
project. These alternatives may differ in one or
more of the following aspects :
• Nature of project
• Production process
• Product quality
• Scale of operation and time phasing
• Location
Nature of Project The project may envisage
the manufacture of all the parts and components
in a vertically integrated unit or it may consist of
an assembly type unit which obtains the bulk of
the parts and components from outside suppliers.
The project may consist of processing up to the
finished stage or may stop at a semi-finished
stage. These alternatives are available with
respect to the nature of the project.
Production Process There may be several
alternatives with respect to the production
process. The availability and charachteristics of
raw materials, the cost structure, and the nature of
markets served are factors that have to be borne in
mind while deciding about the process.
Product Quality Barring a few products like
clinical thermometers where a certain standard
has to be maintained, the choice with respect to
quality is fairly wide. This is particularly true in
the case of consumer products like textiles,
footwear, etc. The quality and product range
decisions would depend on the characteristics of

59
 the market, the elasticity of demand, consumer
preferences, and the nature of competition.
Scale of Operation and Time Phasing In
many cases several scales of operation are
feasible technically and financially. The choice of
a particular scale would depend on the financial
resources available. The nature of competition,
the nature of demand, and the economies of scale.
Further, a given capacity may be installed in
one stage or in phases. The capital cost of
capacity installation is usually lower when it is
done in one stage. The cost of idle capacity,
however, is higher when it is built in a single
stage. The trade-off between these costs would
determine the optimal pattern of time phasing.
Location Location and size are closely
interrelated. Perhaps the same demand could be
satisfied by : (i) a single plant for the entire
market; or (ii) one large plant for the bulk of the
market with a few smaller plants for the
remaining market; or (iii) several plants of similar
size spread over the market areas. The choice
would depend mainly on the trade – off between
economies of scale in manufacturing and
economies of distribution.
Key Project inter-linkages
While evaluating various alternatives, the
inter – linkages among key facets of the project
like product (or service), demand, plant capacity,
production technology, location, investment
60
 outlay, financial resources, production costs,
selling price, and profitability must be borne in
mind. Exhibit 5.1 shows these inter-linkages
pictorially.
MARKET AND DEMAND ANALYSIS
SITUATIONAL ANALYSIS AND
SPECIFICATION OF OBJECTIVES
In order to get a “feel” for the relationship
between the product and its market, the project
analyst may informally talk to customers,
competitors, middlemen, and others in the
industry. Wherever possible, he may look at the
experience of the company to learn about the
preferences and purchasing power of customers,
actions and strategies of competitors, and
practices of the middlemen.
If such a situational analysis generates
enough data to measure the market and get a
reliable handle over projected demand and
revenues, a formal study need not be carried out,
particularly when cost and time considerations so
suggest. In most cases, of course, a formal study
of market and demand is warranted. To carry out
such a study, it is necessary to spell out its
objectives clearly and comprehensively. Often
this means that the intuitive and informal goals
that guide situational analysis need to be
expanded and articulated with greater clarity. A
helpful approach to spell out objectives is to
structure them in the form of question. Of course,
61
in doing so, always bear in mind how the
information generated will be relevant in
forecasting the overall market demand and
assessing the share of the market the project will
capture. This will ensure that questions not
relevant to market and demand analysis will not
be asked unnecessarily.
To illustrate, suppose that a small but
technologically competent firm has developed an
improved air cooler based on a new principle that
appears to offer several advantages over the
conventional air cooler. The chief executive of the
firm needs information about where and how to
market the new air cooler. The objectives of
market and demand analysis in this case may be
to answer the following questions:
• Who are the buyers of air coolers?
• What is the total current demand for air
coolers?
• How is the demand distributed temporally
(pattern of sales over the year) and
geographically?
• What is the break-up of demand for air
coolers of different sizes?
• What price will the customers be willing
to pay for the improved air cooler?
• How can potential customers be
convinced about the superiority of the
new cooler?

62
 • What price and warranty will ensure its
acceptance?
• What channels of distribution are most
suited for the air cooler? What trade
margins will induce distributors to carry
it?
• What are the prospects of immediate
sales?
COLLECTION OF SECONDARY
INFORMATION
In order to answer the question listed while
delineating the objectives of the market study,
information may be obtained from secondary and /
or primary sources. Secondary information is
information that has been gathered in some other
context and is already available. Primary
information, on the other hand, represents
information that is collected for the first time to
meet the specific purpose on hand. Secondary
information provides the base and the starting point
for market and demand analysis. It indicates what is
known and often provides leads and cues for
gathering primary information required for further
analysis. This section looks at the secondary
information and the following at the primary
information.
General Sources of Secondary Information
The important sources of secondary
information useful for market and demand
analysis in India are mentioned below :
63
Census of India A decennial publication of the
Government of India, it provides, inter alia,
information on population, demographic
characteristics, household size and composition,
and maps.
National Sample Survey Reports Issued from
time to time by the Cabinet Secretariat,
Government of India, these reports present
information on various economic and social
aspects like patterns of consumption, distribution
of households by the size of consumer
expenditure, distribution of industries, and
charachteristics of the economically active
population. The information presented in these
reports is obtained from a nationally
representative sample by the interview method.
Plan Reports Issued by the Planning Commission
usually at the beginning, middle, and end of the
five-year plans, these reports and documents
provide a wealth of information on plan
proposals, physical and financial targets, actual
outlays, accomplishment, etc.
Statistical Abstract of the Indian Union An
annual publication of the Central Statistical
Organisation, it provides, inter alia, demographic
information, estimates of national income, and
agricultural and industrial statistics.
India Year Book An annual publication of the
Ministry of Information and Broadcasting, it

64
provides a wide range of information on
economic and other aspects.
Statistical Year Book An annual publication of
the United Nations, it provides world statistics
relating various aspects like population,
demography, gross domestic publication,
industrial production, international trade, etc.,
Economic Survey An annual publication of the
Ministry of Finance, it provides the latest data on
industrial production, wholesale prices, consumer
prices, exports, agricultural production, national
income, etc.,
Guidelines to Industries This is an annual
publication of the Ministry of Industrial
Development.
Annual Survey of Industries An annual
publication of the Central Statistical Organisation,
it contains information on various aspects of
industry; number of units and state – wise
distribution, average number of working days,
employment, materials consumption, quantity of
products, etc.,
Annual Reports of the Development Wing,
Ministry of Commerce and Industry An annual
publication, it gives a detailed review of industries
under the purview of the wing. It also provides
information about new items manufactured for the
first time in India and the list of protected
industries.

65
Annual Bulleting of Statistics of Exports and
Imports An annual publication of the Ministry of
Commerce, it provides data on imports and
exports for a very large number of items and as
per international classification.
Techno-Economic Surveys The National
Council of Applied Economic Research has
conducted and published techno-economic
surveys for various states.
Industry Potential Surveys The Industrial
Development Bank of India in consortium with
other financial institutions has conducted and
published industrial potential surveys for several
backward areas.
The Stock Exchange Directory This directory,
published by the Bomb ay Stock Exchange,
provides a ten-year picture of performance and
financial statements for all listed companies and
other important companies. It contains very
valuable information for comparative analysis. It
is periodically updated.
Monthly Studies of Production of Selected
Industries A monthly publication of the Central
Statistical Organisation, it provides all – India
date on production, number of units installed,
capacity, state-wise break-up stock level, etc., for
several selected industries.
Monthly Bulletin of Reserve Bank of India This
provides information on production indices,

66
 prices, balance of payment position, exchange
rates, etc.,
Publications of Advertising Agencies. The
leading advertising agencies like Clarion,
McCann and Thompson have published test
markets, marketing rating indices of towns of
India, consumer index of markets, and other
studies which throw valuable light on Indian
markets.
Other Publications Among other publications,
mention may be made of the following : (i)
Weekly Bulletin of Industrial License, Import
License and Export Licenses (published by the
Government of India), (ii) Studies of the
economic division of the State Trading
Corporation; (iii) Commodity reports and other
studies of the Indian Institute of Foreign Trade;
(iv) Studies and reports of export promotion
councils and commodity boards; and (v) Annual
Report on Currency and Finance (issued by the
Reserve Bank of India)
Evaluation of Secondary information
While secondary information is available
economically and readily (provides the market
analyst is able to locate it) its reliability, accuracy,
and relevance for the purpose under consideration
must be carefully examined. The market analysis
should seek to know :
• Who gathered the information? What
was the objective?
67
 • When was the information gathered?
When was published?
• How representative was the period for
which the information was gathered?
• Have the terms in the study been
carefully and unambiguously defined?
• What was the target population?
• How was the sample chosen?
• How representative was the sample?
• What was the degree of sampling bias
and non – response bias in the
information gathered?
• What was the degree of
misrepresentation by respondents?
• How accurately was the information
edited, tabulated, and analysed?
• Was statistical analysis properly applied?
CONDUCT OF MARKET SURVEY
Secondary information, though useful, often
does not provide a comprehensive basis for
market and demand analysis. It needs to be
supplemented with primary information gathered
through a market survey, specific to the project
being appraised.
The market survey may be a census survey or
a sample survey. In a census survey the entire
population is covered. (The world “population” is
used here in a particular sense. It refers to the
totality of all units under consideration in a
specific study. Examples are: all industries using
68
milling machines, all readers of the Economic
Times). Census surveys are employed principally
for intermediate goods and investment goods
when such goods are used by a small number of
firms. In other cases, a census survey is
prohibitively costly and may also be infeasible.
For example, it would be inordinately expensive –
nay, impossible – to cover every user of Lifebuoy
or every person in the income bracket Rs.10,000 –
Rs.15,000.
Due to the above mentioned limitations of the
census survey, the market survey, in practice, is
typically a sample survey. In such a survey a
sample of the populations is contacted / observed
and relevant information is gathered. On the basis
of such information, inferences about the
population may be drawn.
The information sought in a market survey
may relate to one or more of the following :
• Total demand and rate of growth of
demand
• Demand in different segments of the
market
• Income and price elasticities of demand
• Motives for buying
• Purchaseing plans and intensions
• Satisfaction with existing products
• Unsatisfied needs
• Attitudes towards various products

69
 • Distributive trade practices and
preferences
• Socio-economic characteristics of buyers
Steps in a sample Survey
Typically, a sample survey consists of the
following steps :
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
70
the desired information depends on its length,
the types of questions, and the wording of
questions. Developing the questionnaire
requires a thorough understanding of the
product / service and its usage, imagination,
insights in to human behaviour, appreciation
of subtle linguistic nuances, and familitarity
with the tools of descriptive and inferential
statistics to be used later with the tools of
descriptive and inferential statistics to be
used later for analysis. It also requires
knowledge of psychological scaling
techniques if the same are employed for
obtaining information relating to attitudes,
motivations, and psychological traits.
Industry and trade market surveys, in
comparison to consumer surveys, generally
involve more technical and specialized
questions.
Since the quality of the questionnaire has
an important bearing on the results of market
survey, the questionnaire should be tried out
in a pilot survey and modified in the light of
problems / difficulties noted.
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
taken for recruiting the right kind of
71
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
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
72
 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
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
73
respondents to comprehend the questions, (iv)
deliberate distortions in the answers given by the
respondents, (v) inept handling of the interview by
the investigators, (vi) cheating on the part of the
investigators, (vii) slip-shed scrutiny of data, and
(viii) incorrect and inappropriate analysis and
interpretation of data.
Some Problems
A market researcher in India has to contend with the
following problems :
Heterogeneity of the Country Since it is well-
nigh impossible to cover all the states in an all –
India survey, the country has to be divided into
broad territories going beyond the state boundaries.
However, the heterogeneity of the country makes
the task difficult. Presently the research agencies
seem to divide the country the way they think it is a
appropriate. This cause problems in comparing the
findings of different research agencies.
Multiplicity of Languages Scaling techniques,
commonly recommended in marketing research
literature, involve a 5-point scale or a 7-point scale.
Such refined scales are not easily amenable to
translation in regional languages. More important,
they are often not comprehensible to a vast majority
of respondents who may lack the education and
sophistication to understand them. Hence when
refined scaling techniques are used, answers tend to
be erratic and inconsistent. It is perhaps desirable to

74
rely more on open-ended questions and less on pre-
coded questions on definite scales.
CHARACTERISATION OF THE MARKET
Based on the information gathered from
secondary sources and through the market survey,
the market for the product / service may be
described in terms of the following :
• Effective demand in the past and present
• Breakdown of demand
• Price
• Methods of distribution and sales
promotion
• Consumers
• Supply and competition
• Government policy
Effective Demand in the past and present
To gauge the effective demand in the past and
present, the starting point typically is apparent
consumption which is defined as :
Production + Imports – Exports – Changes in
stock level
The figure of apparent consumption has to be
adjusted for consumption of the product by the
producers and the effect of abnormal factors. The
consumption series, after such adjustments, may be
obtained for several years.
In a competitive market, effective demand and
apparent consumption are equal. How ever, in most
of the developing countries, where competitive
markets do not exist for a variety of products due to
75
exchange restrictions and controls on production
and distribution, the figure of apparent consumption
may have to be adjusted for market imperfections.
Admittedly, this is often a difficult task..
Breakdown of Demand
To get a deeper insight into the nature of
demand, the aggregate (total) market demand may
be broken down into demand for different
segments of the market. Market segments may be
defined by (i) nature of product, (ii) consumer
group, and (iii) geographical division.
Nature of Product One generic name often
subsumes many different products : steel covers
sections, rolled products, and various semi-
finished products; commercial vehicles cover
trucks and buses of various capacities; so no and
so forth.
Consumer Groups Consumers of a product
may be divided into industrial consumers and
domestic consumers. Industrial consumeners may
by sub-divided industrywise. Domestic consumers
may be further divided into different income
groups.
Geographical Division A geographical
breakdown of consumers, particularly for products
which have a small value-to-weight relationship
and products which require regular, efficient after-
sales service is helpful.
Why is segmental analysis required?
Segmental information is helpful because the
76
 nature of demand tends to vary from one segment
to another (the demand from consumers in high
income brackets may not be sensitive to price
variations whereas the demand from consumers in
low income brackets may be very sensitive to
price variations) and different marketing strategies
may be appropriate to different market segments.
Price Price statistics must be gathered along
with statistics pertaining physical quantities. It
may be helpful to distinguish the following types
of prices : (i) manufacturer’s price quoted as FOB
(free on board) price or CIF (cost, insurance, and
freight) price, (ii) landed price for imported goods,
(iii) average wholesale price, and (iv) average
retail price.
Methods of Distribution and Sales Promotion
The method of distribution may vary with the
nature of product. Capital goods, industrial raw
materials or intermediates, and consumer products
tend to have differing distribution channels,
Further, for a given product, distribution methods
may vary. Likewise, methods used for sales
promotion (advertising, discounts, gift schemes,
etc.,) may vary from product to product.
The methods of distribution and sales
promotion employed presently and their rationale
must be specified. Such a study may explain certain
patterns of consumption and highlight the
difficulties that may encountered in marketing the
proposed products.
77
Consumers
Consumers may be characterized along two
dimensions as follows :
Demographic and sociological Attitudinal
Age Preferences
Sex Intentions
Income Habits
Profession Attitudes
Residence Responses
Social background

Supply and Competition

It is necessary to know the existing sources of
supply and whether they are foreign or domestic.
For domestic sources of supply, information along
the following lines may be gathered; location,
present production capacity, planned expansion,
capacity utilization level, bottlenecks in
production, and cost structure.
Competition from substitutes and near –
substitutes should be specified because almost any
product may be replaced by some other product as
a result of relative changes in price, quality,
availability, promotional effort, and so on.
Government Policy
The role of government in influencing the
demand and market for a product may be
significant. Governmental plans, policies,
legislations, and fiats which have a bearing on the
market and demand of the product under
78
 examination should be spelt out. These are
reflected in: production targets in national plans,
import and export trade controls, import duties,
export incentives, excise duties, sales tax,
industrial licensing, preferential purchases, credit
controls, financial regulations, and subsidies /
penalties of various kinds.
DEMAND FORECASTING
After gathering information about various
aspects of the market and demand from primary
and secondary sources, an attempt may be made to
estimate future demand. A wide range of
forecasting methods is available to the market
analyst. These may be divided into three categories
: qualitative methods, time series projection
methods, and causal methods. A brief description
of these methods follow. For a more detailed
exposition, consult Appendix 4A at the end of this
chapter.
Qualitative Methods
These methods rely essentially on the judgment
of experts to translate qualitative information into
quantitative estimate. The important qualitative
methods are as follows:
Jury of executive opinion method Very popular
in practice, this method calls for the pooling of
views of a group of executives on expected future
sales and combining them into a sales estimate.
Delphi method This method involves
converting the views of a group of experts, who do
79
 not interact face – to – fact, into a forecast through
an iterative process.
Time Series Projection Methods
These methods generate forecasts on the basis
of an analysis of the historical time series. The
important time series projection methods are as
follows :
Trend projection method Very popular in
practice, the trend projection method involves
extrapolating the past trend onto the future.
Exponential smoothing method In exponential
smoothing, forecasts are modified in the light of
observed errors.
Moving average method According to this
method, the forecast for the next period represents
a simple arithmetic average or a weighted
arithmetic average of the last few observations.
Causal Methods
More analytical than the preceding methods,
causal methods seek to develop forecasts on the
basis of cause – effect relationships specified in an
explicit, quantitative manner. The important
methods under this category are as follows:
Chain ratio method A Simple analytical
approach, this method calls for applying a series of
factors for developing a demand forecast.
Consumption level method Useful for a product
that is directly consumed, this method estimates
consumpation level on the basis of elasticity
coefficients, the important ones being the income
80
elasticity of demand and the price elasticity of
demand.
End use method Suitable for intermediate
products, the end use method develops demand
forecasts on the basis of the consumption
coefficient of the product for various uses.
Leading indicator method According to this
method, observed changes in leading indicators are
used to predict the changes in lagging variables.
Econometric Perhaps the most sophisticated
forecasting tool, the econometric method involves
estimating quantitative relationship derived from
economic theory.
MARKET PLANNING
To enable the product to reach a desired level of
market penetration, a suitable marketing plan
should be developed. Broadly, It should cover
pricing, distribution, promotion, and service. The
details that need to be hammered out are shown
below :

Pricing Distribution
Ex-factory price Packaging
Taxes and duties Transportation
applicable for the arrangement
domestic price
Trade margins / Channel of
discounts distribution
Final price to the Role of distributors,
domestic customer wholesalers, and retailers
81
 Export price
Promotion Service
Branding Installation
Advertising User education
Personal selling Warranties
Promotional 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,
preoperative expenses and initial cash losses. Some of
the items that fall under these heads are listed in
Exhibit 8.1.
MEANS OF FINANCING THE PROJECT
The project manager can finance die project in a
number of ways: share capital, term loans, debenture
capital, deferred credit, and other miscellaneous
sources. Any one or a combination of two or more of
these methods can be chosen to finance die project.
Share Capital

82
 Share capital is of two types: equity capital and
preference capital. Equity capital is the capital
contributed by owners of the firm. Equity holders
enjoy the profits and bear die risks of the firm.
Preference capital refers to the contribution made by
preference shareholders by investing in a firm's
preference shares.
Term Loans
Term loans are secured borrowings provided by
financial institutions and commercial banks. These
loans help firms take up expansion, modernization,
and renovation projects. Term loans are available in
both rupees and foreign currencies. Companies take
foreign currency term loans to meet their foreign
currency expenditures e.g. import of machinery, or
consultation fees of foreign technicians.
Debenture Capital
Debentures are issued by firms to raise debt
capital, normally for a period of 5 to 10 years. The
debentures are secured against the assets of the issuing
firm. There are three types of debentures: non -
convertible debentures, partially convertible
debentures, and fully convertible debentures. A fixed
interest is paid for non - convertible debentures. In the
case of Partially Convertible Debentures (PCDs),
only a part of them are converted into equity shares;
but in the case of fully convertible debentures, all the

83
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
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
84
 • 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 Capital
• 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
85
 • 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
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
86
 • Operating expenses
The important sources of working capital are
• Working capital advances from
commercial banks
• Long-term sources of financing
• Trade credit
• Accruals and provisions
The project manager should be aware of the limits
for obtaining working capital advances from
commercial banks:
• The aggregate permissible bank finance, as
per the norms of lending, prescribed by the
Tandon Committee.
• The amount of margin money a firm can
provide against each current asset.
Initially, the Tandon Committee proposed a
method for determining the maximum amount of
money a project can obtain to meet its working
capital requirements. According to that method, at
least 25 percent of current assets must be supported
by long term sources of finance. To provide greater
freedom to borrowers to assess working capital
requirements, this method (and similar methods)
was withdrawn, effective 15 April, 1997. Banks
were instructed to evolve their own methods to
assess working capital requirements of projects.
The margin requirement varies with type of
current asset. The ranges within which margin
87
requirements lie for various types of current assets
are:
However, there is no standard formula for
determining the margin amount.

Current Margin
Raw 10-25
Work-in- 20 - 40
Finished 30 - 50
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
88
 = Average Annual Profit x
lOO
Initial Investments
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 x 100 = 12.5%

Rs. 10,000
Investment-2:
Average profit= Rs. 1,800
Initial investment = Rs. 10,000
ARR =

Rs. 1800 x 100 = 18%

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

89
 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
descending order and choose the project with the
highest ARR.
Advantages of ARR
• The method is simple to calculate, as it uses
readily available accounting
information.
• 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 4000
2 6000
3 4000
4 1000

90
 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 1000
2 2000
3 5000
4 5000
5 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
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.
91
 • The method is easy to understand and does not
require complex calculations.
Disadvantages of payback period
• It measures only the capital recovery of the
projects, not their profitability.
• The method ignores cash flows beyond the
payback period.
Discounted Cash Flow Criteria
In this criteria, the time value of money is
considered when evaluating the costs and cash flows
of a project. There are three methods:
• Net present value method (NPV)
• Internal rate of return (ERR)
• Profitability Index
Net present value method (NPV)
The net present value of a project is equal to
the sum of all the cash flows associated with the
project. In this method, all the future cash flows are
converted into their present values, using the
required rate of return. The difference between the
present value of cash outflows and the present value
of all cash inflows gives the net present value.
RISK ANALYSIS OF PROJECT
INVESTMENTS
Every project is exposed to a certain amount of
risk and the extent of risk varies from project to
project. So, the project manager should attempt to
92
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

Propo Possib Probabi

X 10000 0.5
0 0.5
Y 5000 1
Proposal Y. The project manager can also take up
Proposal X, if he wants to take up some risk.

Normally, three types of project risks are studied

for each project idea. They are stand alone risk,
corporate risk, and systematic risk.
Stand alone risk
Stand alone risk refers to the risk a project faces
when it is considered in isolation.
Corporate risk
This refers to the risk a firm faces because of a
project.
93
 Systematic risk
This risk is caused by the existing market
situation. This risk is also called market risk.
Techniques of Risk Analysis
Firms follow different techniques to protect their
projects from risks. Some of the techniques used by
firms are Sensitivity Analysis, Scenario Analysis, etc.
Sensitivity analysis
This technique is used to find out how sensitive
the results of a particular financial model are to
changes in input variables. For example, the net
present value of a project depends on several factors
like selling price of the product, annual sales, project
life period, income tax etc. Sensitivity analysis aims at
examining how net present value changes with
changes in the above factors. To carry out this
analysis, the project manager establishes a relationship
between the net present value and factors that affect the
net present value. Then he studies the range of net
present values with variations in each of the factors
affecting it. By understanding the affect of several
factors, the project manager estimates the possibility of
achieving the project objectives.
Scenario analysis
If the variables that affect the project output are
inter-related, then the project manager uses scenario
analysis. This analysis identifies combinations of
inputs that lead to a change in output values. The
94
project manager develops each scenario that represents
a combination of variables. For example, the project
can be evaluated under the three scenarios;
• Scenario in which demand and price are normal
• Scenario in which demand is high and price is
low
• Scenario in which demand is low and price is
high.
This helps the project manager analyze how the
project objectives can be achieved under several
scenarios.)
SOCIAL COST BENEFIT ANALYSIS (SCBA)
Since projects affect society, they should also be
studied from the point of view of society. So the
project manager has to analyze the social and
economic benefits generated by the project and also
the social costs of the project.
Social costs refer to the harmful effects of a
project to society like air pollution, water pollution,
soil erosion, deforestation, production of harmful
products, etc. Social benefit refers to the positive
impact of a project on society like increase in
employment opportunities, rise in per capita income
etc. The objective of a Social Cost Benefit Analysis is
to assess the positive and negative effects of a project
on society. The project manager finally chooses the
project that is socially beneficial.
Indicators of Social Desirability of a Project
95
 There are several evaluation methods for testing
the social desirability of a project. Some of the
important indicators of the social desirability of a
project are discussed below.
Employment opportunities
Unemployment is a major problem in developing
countries like India. So, a project with high
employment potential is desirable. Since there is
surplus labor in these countries, labor intensive
projects would generate more employment
opportunities.
Foreign exchange benefits
Countries that are experiencing a foreign
exchange crunch give preference to projects that
earn foreign exchange. An import substitution
project that saves the country's foreign exchange
is thus a desirable project.
Output per unit of capital
In countries where there is a dearth of capital, a
project that gives a higher output per unit of
capital employed is preferred.
Value addition criterion
The 'Value addition' of a project refers to the
difference between the market price of a project's
output and the costs/price of the goods and
services bought from other firms for carrying out
the project. According to this approach, the value

96
 added per unit of capital is ascertained so that the
project that gives higher value can be chosen.
Cost benefit ratio
The social costs and social benefits associated
with a project are calculated and the project that
provides more benefits than costs is selected and
implemented. Here, costs and benefits are
ascertained based on the shadow prices. The
shadow price is the real price that would have
prevailed had there been no imperfections in the
market. Then these costs and benefits are
discounted to the present value of social costs and
benefits and the ratio of benefits to the costs
gives the cost benefit ratio.
UNIDO Approach
Social Cost Benefit Analysis is a useful tool for
selecting a project. However, it is not easy to quantify
the social costs and social benefits. The United
Nations Industrial Development Organization
(UNIDO) has therefore developed a method for
measuring social costs and social benefits.
The method consists of five steps:
• Calculating financial profitability at market prices
• Calculating net benefits at economic prices
• Adjustment for project's impact on savings and
investment
• Adjustment for project's impact on income
distribution
97
 • Adjustment for impact of project on
merit and demerits goods
Calculation of Financial Profitability at Market
Prices
In this step, the project manager assesses the net
profitability of the project on the basis of the market
prices of all inputs and outputs. The profit is obtained
by subtracting the expenditure incurred from the firm's
revenues. The project manager calculates the
profitability of the project as the percentage of profit to
the capital employed.

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
98
country. Taxation makes it difficult to calculate
shadow prices.
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.
The social cost benefit analysis is a tool for
evaluating the value of money, particularly of
99
 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.
(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.

100
 (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 :
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.
101
 (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
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.
102
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
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 :

103
 – Anticipated competition for the project from
existing and potential local and foreign
producers and suppliers.
– Local market share for products and by –
products.
– Sales programme and distribution
arrangements
– Estimate annual sales revenues from products
and by – products, from home market and
exports.
– Estimated annual cost on marketing and sales
promotion

• Production programme

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

• 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

104
 and foreign materials, under the following sub
headings)
• Raw materials / Feedstock
• 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
• Process / technology and equipment cost.

105
 – 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 proposed

ii) Production equipment
iii) Auxiliary equipment
iv) Service equipment
v) 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
ii)Buildings and special civil works
iii)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
106
 • 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
• 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)
107
 – Estimated fixed assets
– Estimated working capital requirements
– Total operating costs, classified by
i)Fixed costs
ii)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

– 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
108
○ Soil investigation report
○ Industrial licence / Letter of intent (if
applicable as pre Press Note No.9 of 1991)
○ 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.

○ Automatic permission or specific approval,

as the case may be, for foreing investment
as per Para 39B of the Industrial Policy
Statement, 1991.
○ Approval of appointment of foreign
consultant
○ Foreign exchange permission
○ Import licence or automatic permission of
import of capital goods and raw materials,
as per Press No.13 of 1991
○ Vetting of the draft prospectus for capital
issues by the Securities and Exchange
Board of India (SEBI)
○ Clearance from Pollution Control Board
○ International Airport Authority’s clearance
○ Electricity Authority / Board’s clearance

109
 ○ Clearance from the Chief Controller of
Explosives
○ Clearance from the Chief Conservator of
Forests
○ Clearance from the State Industries
Department
These details are also the basic information
required for TEFR but with a little more accuracy
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.
110
 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
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
In preparing the PFR

111
(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 red-tapism and
rigidity, and hence apply sufficiently in
advance to avoid delay.
112
 (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 :
➢ Materials
➢ Soil conditions
➢ Hydrology
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.
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

113
 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.
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 :
○ Demand pattern, size and market
○ Sales forecast and marketing plan
○ Production programme and

114
 ○ 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.
• 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
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 • 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
• 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
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 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
• 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
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• Cost of land and rent
• Climate and terrain
• 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

118
 The last two items are so important and if it is
not considered there will be excessive cost
overruns
5.Project Engineering and Investment Costs
In this part the following details should be
given in the TEFR
○ Definition of the scope of the project, with
charts and layouts
○ Justification for selection of technology.
○ Definition of the scope of the civil
engineering work.
○ 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.
• R & D and facility for updating.
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• 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.
• Define the scope of structural and civil
works
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 • 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
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.
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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.
1. Manpower :
Based on the determination of technology, plant
capacity, marketing and selling subsystems
required, realistic assessment of the manpower
required for manning the plant and for its
maintenance, should be made. So also the staff
required for management and administration of the
enterprise should also be well planned. This area
has now become so vital and significant that no
more it is restricted as personnel department.
Including the aspects or recruitment, training
including on-the-job training, it is now termed as
Human Resource Development. All plant and
machineries may become idle if suitable technical
and other staff are not available. The number and
level at which the manpower required in
technically specialized fields and the general
administrations should be accurately estimated.
The cost of manpower including welfare measures
and incentives for optimal utilization should also
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 be correctly worked out. Fringe benefits (UNIDO
calls it as surcharge) should also be considered
because it encourages the staff and family, A
detailed recruitment, training, and manning
schedule should be attached to the TEFR.
8. Implementation schedule
The stages of project work which starts after
approval of TEFR, until the commencement of the
of stabilized production and maintenance is called
implementation stage.
Implementation includes :
• Design
• Engineering
• Procurement
• Contracting
• Construction
• Start-up
• Stabilisation of operation and
maintenance :
All these activities should be scheduled in a
cogent and coherent manner so that there is
integrated coordination in the smooth movement of
the work schedule. Without loss of time. This
could be well presented in a network diagram or
bar charts.

123
 In order to get excellent implementation, each
and every substage should be meticulously planned
after having firsthand detailed discussions with the
concerned specialists / experts, or staff of the
organization. Discussion should also be held with
prospective suppliers and manufactures, financiers,
bankers and underwriters (in case of issue of equity
and other instruments). The time frame should be
accurately planned including sub-networks because
time involves costs. Based on the time and work
schedule, a cost budget should be prepared and
enclosed to the TEFR.
At the TEFR stage, the methods of guesswork
and rough estimation adopted at PFR stage should
never be applied. Even is details are not available
for a small part of the schedule, adequate efforts
should be taken to arrive at exact estimates as
otherwise the total schedule will be upset. So also
any stoppage or bottleneck in the middle would
have chain reaction.
In order to arrive at accurate estimates of time
and cost seek the assistance of
○Technology owner’s expertise
○Consultant’s experience
○Executive’s Competencies
○Your knowledge and understanding
○Other connected peoples promises and
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 ○Reliable statistics corroborated by test
checks.
9. Financial and Economic Evaluation
This section is the most crucial part of the
TEFR and needs arduous and meticulous efforts to
prepare all the schedules / statements
Financial and Economic Evaluation analyses
• Capital cost estimates
• Operating cost estimates
• Working capital estimate and cost
Distribution schedule
• Profitability and financial analysis
• Sensitivity Analysis (SA) and Risk
Analysis (RA)
• Project Balance Sheet and Income
Statement, and
• Social Cost – Benefits
Let us examine the details required under these
major heads.
Capital Cost Estimate
For preparing a realistic capital cost estimate
seek the cooperation And expertise of
knowledgeable of
○ Project Engineering department
125
 ○ Product line experts
○ Project management unit
○ Commercial and Contracting department
○ Planning department
○ Processing department
○ Construction
○ Finance and accounts
○ Human Resource and
○ Statistics and data processing
DETAILED PROJECT REPORT
DPR has to be approved by the Cabinet
Committee on Economic Affairs (CCEA) apart
from PIB. This shows the significance of DPR.
The firmed up estimates of DPR should confirm
to +/-15 percent accuracy (i.e) 85 percent validity)
it is better to go ahead with the documents listed in
the following checklist
Checklist of Documents and Data Necessary for
preparation of DCE, to accompany DPR
• Process / systems design
• Raw materials / feedstock and project
specification
• License fee for technology
126
• Engineering plan and engineering
manpower curves
• Final flow diagrams
• Piping and electrical layout drawings for
both underground and above ground
• Piping and instrumentation diagrams for
process and utilities
• Layout plans for buildings, equipment,
utilities and off – sites
• General project specifications
• Soil investigation report and foundation
requirement
• Site grading plan
• Single line electrical drawings
• Construction plan
• Environmental protection plan
• Specifications and data sheets for all major
equipment
• Quotations / proform a invoices and other
procurement costs for major equipment
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 • Equipment list
• Resources schedules
• Bulk materials take off sheets and price
schedules
• Construction labour wage rates and
productivity details
• Organisational charts and manpower
curves
• Construction equipment usage charts and
equipment prices
• Works contract tax basis and rates
• Any other Project – specific data.
You are permitted to submit DPR upto one year
after getting the clearance of TEFR but it is better
you do it as early as possible, of course without
haste inaccuracies and errors; when time lapses, the
escalation costs will be increasing.
If you are to delay beyond one year, you must
motify PIB and give reasons
How DPR is prepared
• Breakdown all project components, time
phase and schedule them with accurate cost
estimates. Explain how you have improved
from TEFR.
128
 • 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
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

129
 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
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
130
sq.m The same may be furnished in respect of
each structure.
4. Auxiliary plant structures – as above.
5. Welfare buildings (canteens, first – aid
centre, etc.)
Plinth area of each buildings, basis of arriving
at the plinth area and rate / 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
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
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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.
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

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 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
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.

133
 A good project network diagram should
answer the following questions:
• What is the estimated completion time
of a project?
• How does a delay in an activity affect
the expected completion time?
• How can the expected completion time
of a project be reduced, if additional
resources are available?
Activity and Node
The project network diagram is represented by
a series of activities and nodes. An activity is a
specific task or operation required to do a project. It
is depicted by an arrow. A node (also called an
event), is a time oriented reference point that
signifies the start or end of an activity. It is
represented by a circle.
The difference between an activity and a node is
that the activity represents the passage of time and the
nodes are points in time that denote the starting or
ending of a specific activity. In the diagram, activity
A is represented with i and j as the starting and
ending nodes. The activity can also be written as I -j.
Event i is called the tail event and event j is called
the head event.
Dummy activity: An activity of zero duration
that is used to represent the logical relationship in
134
 the network diagram is called a dummy activity.
Dummy activities do

Activity A <D

Tail Node Head Node

not consume any resources, but are used to maintain the

proper precedence relationship between the activities
that are not connected by the nodes. It is represented by
a dashed line headed by an arrow.

135
136
 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
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.

137
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
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.
138
 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.'
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

139
 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)
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
140
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.
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
141
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.
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

142
 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
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

143
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
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:
144
 • 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)
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
145
 A combination of the Delphi method and the three
point method is referred to as the Wide Band
Delphi method. In tins method, the members
are asked to give an optimistic time, a pessimistic
time, and the most probable time, instead of a
single estimate. Then the project manager follows
the Delphi method and determines the duration
estimate.
SCHEDULE DEVELOPMENT
Schedule development is concerned with
determining a realistic start and finish time for project
activities. It aims to match project resources like
machinery, materials and labor with project activities
over time. Good scheduling eliminates production
problems, facilitates timely procurement of raw
materials, and ensures project completion on time.
Otherwise, it may lead to delays in project activity,
loss of inventory and cost overruns.
The project manager should be aware of the
resources and the quantity of these resources needed at
every stage of the project. He has to prepare a 'resource
pool description' that contains details of all the project
resources and their allocation to project activities.
The project manager prepares two types of
calendars; project calendars and resource calendars to
schedule the project. Project calendars emphasize the
completion time of the project activities. Suppose it is
146
estimated that the project is to be completed in 7 200
hours in normal working conditions. Then schedules are
prepared based on the time estimates. The project
manager assumes that 60% of the project is
accomplished, if 4,320 hours are spent on the project.
Most of the projects are scheduled based on project
calendars.
Resource calendars schedule the project on the
basis of the resources used. The focus here is on
scheduling and utilizing specific resources effectively.
For example, a construction project requires 1200 bags
of cement. If 360 bags have been used, the project
manager can assume that 30% of the work has been
done. Here, the project manager concentrates on
whether the specific resources are being used
effectively or not. Project calendars are concerned with
how various project resources are consumed over a
period of time. Resource calendars deal with how a
specific resource or specific category of resources is
spent over a period of time.
TECHNIQUES FOR SCHEDULE
DEVELOPMENT
The project manager can use some of the following
methods for schedule development:
• Critical Path Method (CPM)
• Program Evaluation and Review Technique
(PERT)
147
 • Graphical Evaluation and Review Technique
These methods are used:
• To estimate the completion time of the
project
• To find out if the project is behind, ahead of
or on schedule.
• To compare the actual resources spent with
the planned resources at any stage of the
project.
• To study activities that are critical for
project completion and activities that can
be delayed without delaying project
completion.
The project network diagram is used in schedule
development.
Construction of a Network Diagram
Before assigning the duration estimates, the
project manager sequences all the activities and then
gives numbers to all nodes.
Numbering nodes
Step 1: Assign the starting event as '0'.
Step 2: Assign the next number to any unnumbered
event whose predecessor events are already
numbered.
Repeat Step 2 until all events are numbered.
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 The basic scheduling computations of a project can
be grouped under three heads: Forward pass,
backward pass, and calculation of floats.
Forward pass
The forward pass computation finds the earliest
start and earliest finish times for each activity; or
the earliest expected occurrence time for each node.
The computation starts with an assumed earliest
occurrence time of zero for the initial project event.
The earliest starting time for activity (i,j) is the
earliest event time of the tail event,
i.e. ESij = Ei.
The earliest finish time for activity (i,j) is the
earliest starting time plus the activity duration, tij
i.e., EFij = ESy + tij
Event is just a time oriented reference point.
Events will have only the earliest time and latest time.
The earliest time is obtained in the forward pass, and
the latest time is obtained in the backward pass. But
every activity will have earliest start time, earliest
completion time in forward pass and latest start time
and latest finish time in backward pass.
Suppose an activity A is connected between two
events i and j, and duration of the activity is 5 units of
time. Then the earliest start time of activity A is 0
and the earliest completion time is 5. Also, the
149
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.'

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
150
calculation starts at the 'end' node

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)>

151
Calculation of floats
There are three types of floats. They are:
• Total float
• Free float
• Independent float
Total Float
This is the amount of time by which the
completion of an activity can be delayed beyond its
expected earliest completion time without affecting the
overall project duration. It is calculated as the
difference between the latest start time and the earliest
start time of a project activity.
Total float = LSij – Esij
= (Lj – tij) – Esij
= (Lj – Ei) - tij
Free Float
This is the amount of time by which the
completion of an activity can be delayed beyond the
earliest finish time without affecting the earlies* start
of a subsequent activity.
Free float= Earliest event time of event j - Earliest
event time for event i - activity time (i,j)
= (Ej-Ei)- tij
Independent Flout

152
 This is the amount of time by which the start of an
activity can be delayed without affecting the earliest
start of any activities following immediately.
Independent float= (Ej - L,) – L
Event slacks
For an event, slack is the difference between the latest
event time and earliest event time. For an event i,
slack = L, - E,
For an activity (i, j), the slack of event j is called head
slack, and the slack of event i is called tail slack.
Head slack = L,- - Ej
Tail slack = L; - E,
The values of free float and independent float can be
expressed in terms of head and tail slacks.
Free float = Ej - E-, - f»
= LJ-EI-tij-(LJ-EJ)
= Total float - Head slack Independent float = (Ej -
L;) – u
= EJ-E1-tjj-(L1-Ei)
= Free float - Tail slack
Critical Path Method (CPM)
Critical Path Method is a network analysis
technique used to predict the project duration by
finding out which sequence of activities (the critical
153
path) has the feast amount of scheduling flexibility.
In this method, the project manager identifies the
critical activities of the project that constitute the
critical path of the project.
Critical activities are those activities whose total
float value is '0.' This means, any delay in the critical
activity results in a delay in the entire project to the
same extent. The project manager identifies a series
of critical activities from the beginning of the project
to its completion. The series of critical activities is
called the 'critical path' of the project.

Table 12.3: Floats of the Project Activities

Activi Durat Total Free Independe
Float Float
ty ion (L rEi)- (Total nt Float
ty Float
-Head (Free0Float
A 6 1 0
B 1 1 1 0
C 8 -.. 0 0 0
D 5 4 4 4
E 9 0 0 0
F 12 0 0 0
G 3 0 0 0
X - 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.

154
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.
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, based
on the expected time.
Step 4: Identify the critical path of the network
taking into consideration those activities whose

155
 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.
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)

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 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
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

157
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.
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.
158
 • 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)
• 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
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 In this technique, the project manager attempts to
reduce the project duration by doing ^~ project
activities in parallel. Suppose activity B can be started
only after the completion of activity A in normal
conditions. But the project manager can start both
activities at the same time, but makes modifications to
activity B as per the changes in activity A. This
ultimately reduces the duration of the entire project.
For example, software code is normally written
only after the design is approved. But both the
activities are started at the same time and the final code
is written only after the software design is approved by
the top management. But this technique requires
modifications, reworking, etc.
Resource Leveling
CPM and PERT techniques assume that the project
has unlimited resources, and*they can be assigned for
project activities. However, in reality, project resources
are usually limited. Sometimes activities may be
delayed because of the non-availability of resources.
So, the project manager sequences the project
keeping in mind the availability of resources, which
forces him to recalculate the activity schedules.
Normally, the project manager assigns the available
resources to the critical activities first as they play a
major role in determining the total completion time of a
project.
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SCHEDULE CONTROL
The project manager has to ensure that all the
project activities are being carried out as per the
schedules. Schedule control studies all the factors that
affect project schedules. Schedule control determines
the schedule changes and manages to complete them
within the desired duration. Based on the changes, tire
project manager updates the project schedules.

The project manager has to consider the project

schedule, performance reports, and change requests
while controlling the schedule. The project schedule
represents the planned start and expected finish dates
for each project activity. It provides a basis for the
project manager to measure the schedule performance.
Performance reports provide information about
schedule performance and point out whether the
activities are proceeding as per the planned schedule or
not. The project manager initiates controls to complete
all tire activities within the desired time. He considers
the change requests made by the project stakeholders,
which may be verbal or written. These change requests
may be for extension or acceleration of project
schedules.
The project manager uses techniques like schedule
change control system, and performance measurement
in controlling the project schedule. The schedule
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change control system describes the procedures by
which project schedules can be modified. The methods
include redrawing the project network diagrams, and
understanding the proposed changes. Performance
measurement systems assess the effective completion
of the project activity in the nomial duration. They
calculate the magnitude of variation that may occur for
each project activity.
Software packages like Project 2000 also help tire
project manager in controlling tire project schedules by
continuously studying the planned and actual time
periods of each project activity. Sometimes additional
planning is required when the project manager thinks
that it is important to incorporate certain changes in the
project. The project manager then revises the duration
estimates, modifies the sequence of activities and
analyzes alternative schedules.
Network Techniques – PERT and CPM
Network analysis is one of the most popular
techniques used for planning, scheduling monitoring
and coordinating large and complex projects
comprising a number of activities. It involves the
development of a network to indicate logical
sequence of work content elements of a complex
situation. It involves there basic steps:
1. Defining the job to be done.
2. Integrating the elements of the job in a
logical time sequence.
162
 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.
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.
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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
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.

164
 • 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
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
165
 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
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

166
 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.

• 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
167
 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.

• 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.
168
 • 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.
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

169
 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.
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
170
 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
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?

171
 • 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
• He should understand organizational
principles and the communication process

172
 • 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
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.

173
 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
• 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

174
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
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.

175
 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.
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

176
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
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.

177
 • 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.

• 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

178
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.
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
179
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."
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
180
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
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
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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
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.

182
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
 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
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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
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,

184
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
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;

185
 • 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.

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

186
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-
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
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 • 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,
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

188
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.
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.
189
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:
• 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
190
 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:
• 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

191
 operating rules. Building consensus helps test the
creativity of the team members and the team at
various stages of the project life cycle. It helps
team discover solutions to problems.
Brainstorming
Brainstorming sessions prove to be useful
when the team cannot arrive at a solution on a
particular issue. It helps project team discover
solutions. At a brainstorming session, all the
participants are free to come up with their ideas.
Discussion on the ideas starts only after all the
ideas have been listed. Considering each idea with
an open mind results in identifying the underlying
solution.
Team meetings
It is the responsibility of the project manage*
to decide the. frequency, duration and timings of
team meetings. He must prepare and distribute the
agenda, decide who will chair trie meeting and
assign icsponsiteiiity foi tecotdmg asnsk
dvstafowtvug, the vavautes.. The project manager
should ensure that all the team members
participate in all the meetings that are held at
various stages of the project life cycle. He should
also make sure that the team members understand
the rules and structure of team meetings. Team
meetings are held for solving problems, scheduling

192
 tasks, planning and discussing issues that affect
the performance of the project and for taking
decisions.
Advantages of Team Building
Team building is the most effective tool in
project management. Apart from helping the
project manager to simplify complex tasks and
solve problems, 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.

193
PROCESS OF COST MANAGEMENT
The process of cost management involves four steps:

• Resource planning
• Cost estimating
• Cost budgeting
• Cost control
Resource planning identifies the resources required
and the quantitieFrequired of each of these, for the
completion of die project. Cost estimating is
calculating the approximate costs of all project
activities, while cost budgeting is the assigning of
costs to each project activity. Cost control involves
taking necessary steps to keep project costs within
permissible limits.
RESOURCE PLANNING
Resource planning is the process of identifying
what project resources are required and in what
quantities. Resources normally include money,
manpower, machinery and: materials. For instance, the
construction of a cement plant requires skilled
workmen, some initial investment, machines like
concrete mixers and various construction materials.
The project manager should have a thorough knowledge
of all the project activities in order to allocate the
resources properly.

194
 Resource planning is done after considering the
Project Scope Statement, the Work Breakdown
Structure of the Project, Historical Information,
Description of the Resource Pool, and Organizational
Policies.
Project Scope Statement: The scope statement
allows all project stakeholders to gain an understanding
of the project. It explains why the project has been taken
up and what the main objectives of the project are. Both
these aspects have to be considered during resource
planning.
Work Breakdown Structure (WBS): The WBS is
a deliverable-oriented grouping of project elements.
Each descending level of WBS represents an
increasingly detailed description of a project
component (the component may be a product or
service). As it describes all the project activities, it
gives the project manager an idea of the resources
that will be required.
Historical Information: The project manager
studies similar projects that were successfully
implemented earlier. This gives him an idea of the
resources he will require to execute the current
project.
Description of Resource Pool: Here, the project
manager specifies what project resources he will
require and in what quantities. For example, the skill

195
levels of the workmen, and the kind of machinery
and materials to be used, are listed. The resource pool
description is specific to each project. It also varies
from one phase of the project to another. For
example, in the planning phase of an engineering
design project, only senior engineers are required.
While the project is being executed, junior engineers
can also be used for activities like inspection, quality
testing, etc.
Organizational Policies: The project manager
has to abide by the organizational policies while
developing resources plans. Policies regarding the
purchase of supplies and staffing should be
considered. For instance, if a firm has a long-term
contract with a specific supplier for the procurement
of raw materials, the project manager must go to the
same supplier.
While allocating resources for various project
activities, the project manager identifies the
alternative ways of completing each activity and
makes use of the opinions of experts in various fields.
Identification of Alternatives
There may be several ways of completing a
particular project activity. The resources required
vary with each method. The project manager uses
techniques like brainstorming, and focused group
interviews to identify different methods of

196
completing different activities. For example, the
project manager may hold discussions with his team
members to identify the suppliers in the market from
whom they can procure the required raw materials.
Expert Opinions
The project manager consults experts like
consultants and researchers, to determine what inputs
he will require to implement the project. The ideas
given by these experts help the project manager to
come up with better resource plans. Sometimes, the
project manager may get contradictory views about
resource allocation. When this happens, the project
manager should choose a suitable approach after a
careful analysis of his own constraints.
The 'Resource Planning' process thus specifies
the project resources required to execute a project.
The resource plan shows the type of resources
required and the quantities in which these are
required. These resources are obtained either through
staff acquisition or by procurement (discussed in
Chapter 20).
COST ESTIMATING
After the resource requirements are identified,
the project manager develops an estimate of the costs
of the resources required to execute the project. This
includes identifying and evaluating various cost
alternatives. The project manager considers the WBS,
197
resource rates, activity duration estimates, historical
information and the chart of accounts in estimating
the costs.
The WBS is used to ensure that cost estimates are
made for all the identified activities. The resource rates
show the cost of each unit of resource such as labor
cost per hour, the cost of one litre of lubricant oil, etc.
The project manager considers the activity duration
estimates for all the project activities to know by what
time the resources should be made ready.
The project manager also considers historical
information in estimating the cost of the project. He
studies project files, and commercial cost estimating
databases of past projects. A good overall
understanding of similar projects undertaken in the
past proves helpful. The chart of accounts is a
numbering system used to monitor project costs by
category (labor, supplies, materials, etc.) It is a coding
structure that the firm uses to report financial
information in its ledger.
Some of the techniques used by the project
manager to estimate costs are;
• Analogous estimating
• Bottom-up estimating
• Parametric modeling
• Computerized tools
Analogous Estimating
198
 In analogous estimating, the project manager
considers similar projects to estimate the costs of the
project. Based on the actual costs incurred in that
project, the project manager prepares the cost estimates
by considering the parameters like time value of money,
inflation rate, etc. Though this type of estimating is easy
and economical, but it is less accurate than the other
methods.
Normally, this technique can be used only in
consultation with an expert. The difficulty in using this
approach lies in finding a similar project and
determining its actual costs. This technique is also
called the top-down estimating.
Bottom-up Estimating
In bottom- up estimating, the cost of each
element of the project is calculated separately and all
these costs are added up to estimate the total project
cost. The smaller the work elements of the project, the
greater the accuracy of the estimate.
Parametric Modeling
In parametric modeling, cost estimates are made
using mathematical models. For instance, if, according
to the estimates of the project manager, the cost of
constructing a building is Rs.20,000 per square yard, a
sum of Rs. 2 crore is required for constructing a 1000
square yard building. Even if the estimates made with
these models are not exact, they give the project
199
manager a rough idea about the costs that are likely to
be incurred.
Parametric modeling provides reliable estimates
when;
• The model is developed on the basis of
accurate historical information
• All project parameters are quantifiable
• The model is scalable (can be applied to all
projects irrespective of their size).

Computerized Tools
The project manager can use computerized project
management software packages like Project 2000 to
estimate the project costs. These software packages
compute various costs once the relevant data is
provided. The project manager prepares the cost.
estimates, supporting details and the cost management
plan of the project on the basis of techniques discussed
above. The cost estimates for all the project resources
are expressed in terms of rupees dollors, etc.
The project manager provides supporting details
for the project cost estimates. He describes the work
estimated (based on the WBS), the basis of estimation,
specifies the assumptions made in the estimation and
calculates the range of possible estimates. The project

200
manager also prepares a cost management plan that
describes how cost variances can be managed. This
plan is highly detailed and prepared in such a way as to
meet the requirements of the project stakeholders. A
good cost management plan lets the stakeholders know
how the project manager is going to estimate project
costs.
COST BUDGETING
In the process of cost budgeting, the project
manager allocates the costs to individual work items,
based on the cost estimates made. The cost allocated
for each individual work become the cost baseline for
that work. These cost baselines are used to measure the
cost performance of the project. The Work Breakdown
Structure mid the cost estimates made (in the 'cost
estimating' process) help the project manager to
determine the amount of resources to be allocated for
each project work element. The project schedule helps
him to assign costs to the time period during which the
costs will be incurred.
The project manager can also use techniques like
Analogous Estimating, Bottom-up Estimating,
Parametric Modeling, and Computerized Tools
(discussed earlier) in cost budgeting.
Preparation of Cost Baseline

201
 The 'cost baseline', an output of cost budgeting, is
a time-phased budget that periodically measures and
monitors the cost performance of the project. It also
describes how costs are going to be incurred over a
period of time. It is usually displayed in the form of an
S-curve.
COST CONTROL
The project manager uses cost control to manage
the factors that bring about changt in the cost
baseline in such a way as to make sure that the
changes are beneficial. Co control also helps him to
determine whether the cost baseline has changed and
1 manage die changes whenever they occur.
The project manager tries to determine how cost
variances are likely occur. Some the steps that the
project manager can take to control project costs are :
• Defining the project scope precisely and
clearly
• Using a relevant and reliable database
• Designing an organization structure that is
appropriate for the current project
• Monitoring and controlling deviations from
the project plan
• Periodically evaluating and monitoring cost
performances:

202
 • Checking whether die changes are recorded
in the cost baseline
• Selecting vendors and project consultants
carefully
Cost Change Control System
The cost change control system describes the
procedures that bring about changes: the cost
baseline. The system includes the paper work, die
tracking systems, and the approval levels necessary
for authorizing changes. The system must be
integrated with the overall cost change control
system, if it is to be effective.
Performance Measurement
Techniques like variance analysis, trend analysis,
and earned value analysis help the project manager to
understand the cost performance. Variance analysis
compares the actual project results to the planned
results. The cost variations are measured at every
stage of the project and the causes of these variances
are determined. Trend analysis examines the project
results over a period of time to find out if the cost
performance is improving or not.
Earned value analysis is a technique that
measures the project performance by integrating the
scope, cost and schedule measures of the project.
203
According to this analysis, three values are important.
These are: Budgeted Cost Work Schedule, Actual
Cost Work Performed (ACWP) and Earned Value
(also called Budgeted Cost of Work Performed,
(BCWP)).
The Budgeted Cost Work Schedule is the
approved cost estimate planned for a project activity
for a given period. The Actual Cost Work Performed
is the total costs (both direct and indirect) incurred
while implementing an activity in a given period. The
Earned Value is a percentage of the total budget
equal to the percentage of work completed.
These three values along with certain measures
like Cost Variance (BCWP-ACWP), the Schedule
Variance (BCWP-BCWS) and the Cost Performance
Index (BCWP/ACWP) help the project manager to
determine whether the work is progressing according
to the schedule and whether it is within the budget.
The cumulative Cost Performance Index for the
entire project (total of BCWPs of all project activities
divided by total of all ACWPs) forecasts the project
cost at completion.
The project manager prepares revised cost
estimates, budget updates, and Estimates At
Completion (EAC) and decides what corrective
actions should be taken. The project manager
prepares revised cost estimates by making
204
modifications to the current cost information. These
revised cost estimates should be communicated to all
project stakeholders.
In budget updates, changes are made to the
approved cost baseline. The EAC is a forecast of the
total project costs on the basis of the project
performance. Here, the completion times are
estimated as actual work completed plus a new
estimate for remaining work. The project manager
also documents all the lessons he has learnt in
controlling project costs.
COST OVERRUNS AND THEIR
IMPLICATIONS
The extra costs incurred over the estimated costs
are called cost overruns. If the actual^ costs incurred
are less than the estimated costs, they are called cost
underruns. In; practice, this does not happen often as
the human tendency is to plan the costs at minimum
level and they continue to be raised as the project
progresses.
Factors that Cause Cost Overruns
The important factors that cause cost overruns
are described below. Figure 17.3 shows these factors.
Cost escalations

205
 The cost of a project usually increases due to the
time gap between the planning and implementation of
the project. The project manager prepares a 'cost
overruns analysis sheet' to determine the reasons for
cost overruns. Figure 17.4 shows a cost overruns
analysis sheet.
Cost escalations occur for many reasons. Some
of these are:
○ An increase in the unit price of materials,
machinery, labor costs and overheads
○ Change in scope of the project
○ Increase in statutory taxes and duties like
sales tax, customs tax, and excise duty
○ The impact of the adverse exchange rate
variations on import of machinery and
equipment
○ An increase in the cost of capital when the
project is not completed in the estimated
time
The project manager must arrange for forward
contracts with importers of n\achinery and equipment
to take care of cost overruns due to unfavorable
foreign exchange fluctuations. The project manager
should prepare contingency plans to effectively deal
with when the cost overruns occur.

206
 Time overruns
Poor planning and failure to meet time schedules
result in time overruns. The project manager
prepares a 'time overruns analysis sheet' to
understand where delays have occurred and the
reasons for delays. Figure 17.5 shows a time
overruns analysis sheet. Time overruns occur due
to;
• A change in the scope of the project
• Ineffective project time management
(which itself is the result of improper
planning and scheduling)
• Delays in starting and executing some of
the project activities
• Delays in subsequent projects as a result of
a delay in one project
• Use of outdated technology
• Bureaucratic/ political interference, and
poor administration
To complete the project on schedule, the project
manager must prepare realistic time schedules, select
capable vendors, carryout periodical monitoring of
project activities, and take quick decisions.
Scope Changes

207
Scope changes during the implementation of the
project, that were not envisaged during the
planning stage increase project costs. Inadequate
attention to detail at the time of project formulation
is the main cause of these scope changes.
Scope changes include the introduction of new
features to the project product, design
modifications, increased plant capacity and extra
construction works, updated technical versions, and
newly framed statutory requirements of the
government may necessitate changes in scope.
Proper assessment of the project requirements and
understanding the statutory conditions help the
project manager to avoid changes in the scope of
the project.
Budget under estimation/omission
If the budget prepared is not exact, extra costs are
incurred when the project is actually implemented.
This happens when the costs are estimated on the
basis of an incorrect project scope statement, or
when adequate technical information is not
available. Sometimes certain project elements
might be ignored while the budget is being
prepared. All these factors finally result in an
increase in the project costs. By preparing a
detailed, exhaustive checklist of all project

208
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
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
209
 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.
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
210
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
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

211
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
• 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

212
 • 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
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

213
 • 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
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
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 • 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
structure
The following are die disadvantages of a pure
product organizational structure;
• 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

215
 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.
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

216
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 project
affects work in the functional departments.
The Matrix Organizational Structure
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

217
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.
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;

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 • Enables die project manager to exercise
control over all die resources
• Each and every project has its own
independent set of policies and procedures
• Autiiorizes die project manager to commit die
company resources. This ensures that
scheduling does not clash with otiier projects
• Facilitates quick response to conflicts,
changes and other project needs
 Enables proper Human Resource
Development by enhancing die career
prospects of team, members personnel
 Facilitates cost minimization by sharing key-
personnel
 Facilitates spending more time to solve
complex problems
• Develops a strong technical base
• Eases solving of the problems that require top
management involvement
• Minimizes conflicts
• Ensures optimum balance among time, cost
and-peffoTTromsx
• Enables authority and responsibility sharing.
Since a matrix structure is complex, it is important to
note the preconditions for implementing such a

219
structure. The following are situations in which
implementation of a matrix structure is favorable;
• When the primary output of an organization
is a complex product
• When the organization serves multiple
customers in different geographical locations
• When a project with complex design that
requires innovation is to be finished on time
• When large amounts of data are required to
be processed
• When designing, developing and testing a
product requires sophisticated skills
• When resources have to be shared among
different projects
• When the market conditions demand rapid
changes in the product.
Selecting an Organizational Structure
The need for implementing complex and large
projects within the given time and cost along with
enhanced performance and profit, made the project
management discipline a specialized field. The
increasingly complex modern organizations have
proved the ineffectiveness of traditional
organizational structures. This made it necessary for
the organizations to identify an appropriate
organizational structure. Selection of a organizational
structure depends on;
220
 • The size of the project
• The duration of the project
• The experience of the organization in
managing projects
• Transparency at the senior-management
level
• The physical location of the project
• The availability of resources
• The uniqueness of the project.

All organizational structures have their own

advantages and disadvantages and the project
management approach proves to be an effective
alternative with minimum disadvantages.
Thus, changing from a traditional structure to a
project management structure is a big leap forward,
but once the project management structure is
adopted, it is not possible for the organizations to
revert to the traditional structure. Implementing a
project management structure always brings in an up-
gradation of jobs and job profiles. Even though a
state of the art project management structure is
incorporated, it is necessary to maintain a dynamic
state of equilibrium among its various functions.

221
 After selecting and incorporating an appropriate
organizational structure, it is necessary to select the
staff required to work on the project. This task is
significant and highly critical to the top management,
because they just cannot select the people to get the
job done. They have to select the right people for the
right jobs.
ORGANIZATIONAL CONSIDERATIONS
The single most important characteristic of the
present business environment is rapid change. The pace
and unrelenting nature of this change puts a lot of
pressure on middle managers, whose performance is
often evaluated on the basis of short-term
performance measures such as return on assets, and
contribution to profits. In this context, project
management is viewed as an important method for
training future, managers and executives to be cost
sensitive as well as profit oriented.
Basic business principles may need to be
reconsidered in the future, because of extent of changes
that are taking place. Even while technology is making
many operational tasks obsolete, companies are finding
it more and more difficult to operate profitably. If
organizations remain centralized even in the 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
222
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,
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
223
the future because computerization will compel the
functional departments in an organization to integrate
at a higher scale. Future organizations will adopt
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
224
exercise tighter control over all aspects of an
organization's operations, in the future. In such a
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

225
the project requirements to implement the action
plan.
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

226
organizations going supranational, he will have to
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
227
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
confronting collaborative project management is getting

228
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
• Immediate accessibility among team
229
 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.
Investment required to start the process is low.

230
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.
• Developing a decentralized system for
receiving feedback from project member
• Developing a document tracking system for
231
 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
management, stakeholder analysis and organizational
changes.
Customer Focus
The customer in today's business environment is
becoming increasingly significant. And his significance
232
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
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
233
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
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
234
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.
• 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
235
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
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
236
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
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
237
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
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
238
project management techniques. For instance, poor
planning, incorporating new technology, unclear '
objectives and requirements, poor business
commitment, changing requirements of business and
customer requirements and poor communication links
can be the major reasons for a project's failure to meet
cost and time targets. Hence it is very important , to
have effective techniques in place to manage software
and information systems projects.
Planning is the most crucial stage in an IS project
which also determines if the project will be a success
or a failure. If the project manager spends adequate
time on planning the project properly, the probability
of success is higher. The traditional approach of
planning a software project involves developing a
requirement configuration and conveying this to all
key stakeholders for evaluation and approval. During
the process of distributing the requirement
configuration, some key stakeholders may be missed
out, like the end-users of the product. So, if the
project manager is compelled to start the project
without the requirement configuration being approved
by all the key stakeholders, there is a greater
probability of failure.
In a software or information systems project, the
engineering aspect includes specifying the
requirement configuration, coding, testing etc., while
the project management aspect includes specifying
239
the process of setting project milestones, managing
change, risk management, quality management,
performance reporting and managing human
resources.
UNIQUE FEATURES OF SOFTWARE
PROJECT MANAGEMENT
Generally, the tasks of a project manager in the
IT industry and a project manager in any other
industry are similar. In both cases, their
responsibilities include planning, monitoring,
controlling and reporting. Planning in software
projects is extremely significant, and can be divided
into five stages:
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.
240
Decomposition of a Project into Small Tasks
Unlike managers in other projects, software
project managers spend a good proportion of their
time on basic design decisions. In most cases, they
are placed in the position of having to prepare
detailed task lists, even before all the major design
decisions have been finalized. In such a situation,
experienced project managers use a three step
approach to decomposing the project into tasks:
• Concept oriented decomposition
• Capability oriented decomposition
• Implementation oriented decomposition
Concept-oriented decomposition gives a
broad and general estimate of project
requirements.
Capability-oriented decomposition describes
the delivery of functionality to the client and is
prepared after finishing the analysis. But it does not
talk about the way in which the functionality is to
be achieved. It is the only stage at which the time
and budget estimates are valid within an
approximate plus or minus 25%.
Implementation-oriented decomposition:
Project managers go for this type of task
decomposition only when the software design is
almost finalized. At this stage of a software
project, the project manager knows how each of
241
 the tasks contribute towards the completion of the
final product (i.e., the software module). The cost,
time and budget estimates prepared at this stage are
near to being accurate.
Another difference between an IS project and
any other project is the complexity of identifying a
task as complete. In a non-IS project, it is easy to
identify a task as complete. For example,
procuring raw-materials within the cost and as per
the quality can be declared as completing the task
of procurement, but in an IS project, even tasks
that were declared completed need to be updated
with the changing needs of the client, or to
rectify latent defects, or to combine it with other
modules. In software projects, programming
constitutes a small portion of the whole project,
while the major challenge lies in integrating the
decomposed tasks into a single code and testing
it for performance.
Definition of Interdependencies Between
Decomposed Tasks
Generally, project tasks require atleast the
partial completion of a particular task before
starting the next task in the series. In software
projects, the sequence of activities is more
dependent on the economies resulting from
doing one particular activity before another
activity. Sometimes, this sequence also depends
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 on the client's preferences. Most of the
"dependencies" that decide the sequence of
performing tasks are more employee driven than
task driven i.e., the tasks are performed
according to the convenience and capabilities of
the employees working on it. At times, the tasks
are carried out in a sequence to facilitate partial
deliveries, prototyping of key areas, risk
reduction etc.
Estimation of Resources Required for Each Task
Estimation of resources required for every
task in a software project is complex and
different from non-IS projects. This is because
the pattern of costs in a software project is non-
linear. For instance, constructing a particular
type of building costs Rs.100 per square foot.
This figure can be used to estimate the cost of
constructing a 1000 square foot building or a
10000 square foot building just by multiplying
the number of square foot to be constructed with
the cost of construction per square foot. But for a
software project, the cost per line of code
increments roughly linearly as long as same
number of individuals can complete the task, but
it increments non-linearly if new project
personnel are added. The factors that
differentiate the resource estimation of a

243
 software project from that of any other project
are:
• Constantly changing software
requirements.
• Influence of latent factors like the
quality of the software.
• The cost of the project cannot be arrived
at an early stage because accurate scope
can be known only in the later stages of
the project.
• Lack of proper historical data will limit
the project manager's capability in
estimating the resource requirements.
• Individual productivity varies from person
to person in the team.
Although it is difficult to estimate the resources
required for a software project, expert project
managers often try to interpret the client's budget, and
use that as the basis to decide the extent to which the
software will be customized.
Risk Analysis
Analysis of risk is relatively more important to
an IS project managers than to other project
managers. The reason for high risk in software
projects is their uniqueness - no two projects are
similar in any fashion and every new project will
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have atleast one new state of the art technology in its
process. These unique features and state of art
technologies bring in a high degree of risk into the
projects. Successful project managers not only carry
out risk analysis for the whole project but also for
each and every task in the work breakdown structure.
Analyzing risk at the WBS level helps avoid risk.
There are five different types of risks that are
analyzed and reported by the project manager on each
and every task in the WBS. They are:
• Technical risk - failing to meet technical
specifications.
• Schedule risk - failing to deliver the task as
planned or scheduled.
• Cost risk - failing to complete the job within
the allocated budget.
• Network risk - risk arising from
interdependencies among the decomposed
tasks.
• Total risk - combination of all risks.

The project manager analyzes both the

probability and consequence of failure, for the above

245
risks. Obviously, tasks with high probability and
consequence of failure are most worrisome.
Scheduling Project Activities
Reviewing the initial schedule regularly helps
maintain an accurate schedule for a software project.
The major difference between scheduling an IS
project and a non-IS project is that the cost and
schedule of IS projects are dependent on each other.
The schedule of the software project determines its
cost. The cost of a project increases as the timeframe
is reduced.
Apart from the differences between IS and non-
IS projects during the planning phase, there are also
differences during the project monitoring and
controlling phases:
• IS projects demand more technical
knowledge than non IS projects. For a
project to be successfully implemented, the
project manager has to understand and
interpret all the crucial issues in
programming to communicate effectively,
schedule the project activities and make
decisions (design cost trade-offs).
• Quality control is one of the major
responsibilities of a project manager.
Software modules differ with respect to
latent defects and in-built functionality.
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 Therefore, it is the project manager's
responsibility to control the quality of the
code being produced to make sure that the
number of latent defects and in-built
functionality of the code are acceptable for
the particular project.
• The software project manager has to deal
with the client throughout the project life
cycle. Since no client has a clear idea of
what the software will look like when
delivered, the project manager should
manage the client's perceptions in a way that
it matches the software that will be finally
delivered
IMPACT OF BUSINESS TRENDS ON
INFORMATION SYSTEMS PROJECTS
Project management plays a significant role in
handling information systems projects, because of the
pressure on these projects to produce deliverables on
time, within cost, and meeting performance
standards. Failure to manage these projects
effectively poses a financial threat to the organization
because they involve huge investments. Computer
systems used by businesses in the past do not seem
appropriate now, because today's businesses demand
highly complex and bigger systems. Business
computing systems in the past were more focused on
automating the transaction processes of individual
247
departments like the payroll system for the human
resource department and the accounts handling
system for the accounts department. But now,
organizations can no longer afford to keep their
departments as watertight compartments.
Competitive market forces require functional
departments to share information among themselves
in order to control costs and maximize profit margins.
These market forces have raised the level of
interdependencies among the functional departments,
and consequently the need to share information. For
example, the human resource department can get the
sales target performance of the marketing department
so as to appraise their performance, to enhance their
efficiency and reward and motivate them for better
performance. In the same way, the finance
department may want information on the product
movement in the market, to allocate funds to the
production department for manufacturing additional
units.
This interdependency among the functional
departments has grown to an extent that the businessess
have started using strategic information systems that
facilitate information-sharing across the organisation.
Therefore, developing a human resource information
system is now not done independently, it will be
integrated with the information systems of marketing,
materials, purchasing, costing and accounts.

248
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.
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 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:
• Product Similarity

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 • 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
The life cycle stages of an IS project is quite similar
to that of a construction project. The first stage in the
251
life cycle of both the projects, deals with finding out
the feasibility of the project. In this stage, called
feasibility testing, costs are measured against the
expected results and the project ranking compared with
other projects to evaluate its contribution to the
organisation.
The planning stage in both projects is also similar.
In this stage, the scope of the project is defined to get
client's approval and objectives of the project along
with the techniques to accomplish them are also stated
in clear terms. The defining stage is similar to the
engineering stage in a construction project, wherein
the client's requirements are recorded and the existing
system is modified according to the objectives of the
new plan. The designing stage of an IS project is
similar to the detailed engineering stage of the
construction project. This includes describing the
requirements of the project in a detailed manner to
develop the final product. The final stage in the life
cycle of the information systems projects is the
implementation phase as against the building
construction in construction projects. This stage in the
information systems project involves programming and
testing the new system for integrating it with the
existing business system.
Management Function Similarity
The management functions in both IS projects and
construction projects are very similar. Though a
252
majority of IS projects employ a weak matrix
organization structure when compared to construction
projects, the project manager is responsible for
completing the project within the allocated budget and
time, and as per the specified performance and quality
standards. The management functions of project
managers in both projects are planning, organizing,
monitoring, controlling, leading, scheduling integrating,
progress reporting, negotiating and problem solving.
DIFFERENCES BETWEEN INFORMATION
SYSTEMS PROJECTS AND
PROJECTS IN OTHER INDUSTRIES
Traditional project management techniques
cannot be easily used to manage information systems
projects. The key challenges faced while managing
information systems projects is the complexity in
• Scope definition and management
• Handling multiple projects
• Rigid organizational structures and
• Fast-changing technologies and
methodologies.
According to traditional project management, it is
the definition of scope and its management that
determines the success of a project, from the perspective
of schedule, resource and cost management. Scope
definition in an IS project gives the details of all the
business functions that are to be taken up for
computerization. It is important to differentiate between
253
what should be considered for computerisation and
what is not. The scope of the project is usually not well
defined, while developing traditional IS projects. Some
reasons for unclear scope definition are:
• Interdependency among business
functions leads to higher computerization
of processes than is required or planned
for.
• Using text to define scope may lead to
misinterpretation of the content.
• Complexity in describing the end
product or service.
• Rapid changes in business requirements
over the project life cycle.
Handling Multiple Projects
In big organizations, it is quite common to find
people working on several projects simultaneously.
These projects are developed by the IS department of
the organization on the client's request. The most
challenging tasks in managing multiple IS projects are:
• Limited availability of resources.
• IS projects often require unique skill sets that
are rare to find and these skills, if procured,
have to be shared among all the projects being
carried out.
• Conflicts may arise due to resource sharing
across the projects and this may result in
254
 schedule slippage and budget overruns.
• Controlling project costs may require the
project manager to manage the resources
throughout the project on a real time basis.
Rigid Organizational Structures
Organizational structure is another key
differentiating factor between IS projects and any other
project. IS projects usually employ a matrix
organisational structure. The project manager in such a
situation has to perform two roles, one of a project
manager and the other of a functional manager. This
usually transforms a strong matrix structure into a
weaker one. Some of the charecteristics of such a
structure are:
• The project manager is also a functional
manager to his systems analysts and
programmers (project team members).
• The project manager may source the
manpower for the project from his own
functional department.
• Coordination becomes simpler because most
of the team members are functional
subordinates to the project manager.
• The pace of response to requisitions is high.
• Project managers have more control on
immediate subordinates.

255
 • The project manager's formal authority over
the team members enhances team
motivation because of his positional and
reward power.
• The project manager can resolve the conflicts
in the project team.
• The project manager may fail to do justice to
both his project and functional tasks, because
of lack of time.
• Problems in prioritizing project tasks and
functional tasks often affects the project.
Fast Changing Technologies and Methodologies
IS projects are labour intensive, i.e., they require a
number of experts to work on them. Generally, project
leaders get the list of requirements from the client and
use their expertise to transform these requirements into
functional software applications.
To reduce the labour intensiveness of information
systems development, a range of productivity
enhancing tools have been designed and developed.
These tools not only shorten the development lifecycle,
but also minimize the total cost of the project.
However, most management information systems fail to
keep pace with the rapidly emerging productivity
enhancing tools. This has resulted in software
organizations falling back on old and inefficient
processess of information systems development that
pose less risk and require more number of people. The
256
project management discipline is also being accepted
reluctantly, under the belief that it is also a part of the
emerging technology.
DEVELOPMENTAL PHASES IN
INFORMATION SYSTEMS PROJECTS
Exhibit 24.1 compares the developmental phases of
projects in the two industries -construction and IT.
Before starting the development of an IS project, it is
necessary to check the feasibility and justify the need for
development. Many projects fail to qualify at this level
itself. Some of the phases in software projects are
• Analysis
• Designing
• Coding and
• Installation
Analysis Phase
This phase involves analysis of business
requirements by the project manager. This analysis
describes the problem that is to be solved by the
software application. The analysis is conducted from
the client's perspective. It is advantageous to analyse
in a manner that is more inclined towards the
business angle and less towards the technical angle.
This analysis phase is further divided into three
stages, i) Preanalysis, ii) Partitioning analysis iii) Post
analysis.
257
 Preanalysis is the initial stage in the analysis. In
this stage, the confidence level of the project team,
members may be low, they may not know each other,
the client may fail to state his business requirements
clearly and the project manager may even find the
project to be totally out of control. Another major
problem in this phase is to identify the key
stakeholders of the project. This phase of the project
should be driven by priorities that are accepted by
both the client and the project organization.
The pre analysis phase is the result of attempts
to get a comprehensive view of the client's business
requirements. This phase tries to discover and solve
the problems before the analysis and design phases.
Identifying functional features and procedures is
essential to finish tasks successfully. Preanalysis also
helps eliminate issues that may become obstacles in
the future. Most of the existing software specification
procedures fail to identify and address questions like
who the client is, who is an important client and what
his most important requirements are. The most
significant aspect of preanalysis is that it helps
resolve conflicts in client priorities.
Partitioning analysis is used for analyzing large
and technically complex projects. Partitioning
analysis is further split into high-level analysis,
intermediate level analysis and detailed analysis.
High level analysis involves understanding the client
258
and his requirements and his priorities. Intermediate-
level analysis involves elaborating the high level
analysis. It develops a project management contract
and the project team tries to get a feel of the project
size. Detailed analysis involves a study of the
business problems and issues and this results in
defining the business requirements with more clarity
and gives a detailed specification list to be followed
through out the lifecycle of the project. It identifies
the factors that make the project a success.
Post analysis concludes the decisions on the
functions that are to be automated. This analysis also
determines the hardware and software components
required to automate the functional unit. It specifies
the total technical functions to be used for example,
whether to use batch or on-line processing,
distributed or centralised processing, databases and
other related issues. The domain of the analysis is not
finalized until the scope of the project is arrived
at.Therefore, the scope of the project is not truly
specified till all the phases of analysis are complete.
Designing Phase
This phase involves a change in the state of the
project. It progresses from the chosen solution in the
analysis phase to develop a credible and a quality
solution. This is obtained through the application of
appropriate software design procedures to the

259
selected solution. The designing phase is further
divided into three stages namely,": designing the
technical architecture, the external designing and the
internal designing.
Designing the technical architecture of the
system: Here the system is divided into different
parts that finally form a group of source code
instructions. These groups are generally called sub-
systems or programs. Sub-systems or programs are
further divided into modules, routines, sub-routines
and so on. The manner in which these groups interact
with each other is known as the technical architecture
of the system. The technical architecture defines the
basic system, control sub-systems and the data
structure control interfaces for intermodule
communication.
External design: External design takes design
inputs from external sources to the system without
considering internals of the modules, programs etc.,
addressing issues like designing input screens and
forms, sequence of screen menus and designing output
reports. In prototyping, a part of the external design is
carried out in the initial stages of the project itself. In
such cases, the remaining external design (that which
was not completed in the initial phases) is completed.
Most of the outputs of this sub-phase go as direct inputs
into the customer procedure guides and manuals. Since
external design is related closely to documentation
260
factors, it should be closely coordinated, with the,
members responsible for customer documentation.
Internal designing: Internal designing gives
detailed directions for designing modules, programs,
databases and so on. These internal specifications will
be used while coding in order to develop source codes
in one or more compiled programming languages.
Team members are given the responsibility of
designing a module each, which is usually less than or
equal to 100 source code instructions. They may also
be given the responsibility of developing a program
which is a group of modules, routines or subroutines.
The specifications contain die name, purpose, language,
calling parameters, call sequence, algorithms, module
logic, error routines, and recovery and restart
procedures. The database design is also finalized with
complete information on the names, fields, field
formats, descriptions, values, size, statistics of data
usage, difference between stored and retrieved data,
relationships, methods of access and back up and
retaining criteria.
The Coding or Construction Phase
The actual programming for developing the
software application happens at diis stage. This phase
involves writing a code based on the design
specifications of the subsystems and databases. The
language used and the various productivity enhancing
261
tools have a direct impact on die programming phase.
All individual sub-systems or modules developed
during diis phase are subjected to thorough screening
and testing process.
The Installation Phase
The most crucial and challenging task for tlie
project manager in this phase is the integration of all
the sub- systems and routine codes into tlie main
project. Integration in IS projects is not as simple as it
appears to be. It involves setting up hardware
components, documenting, testing, training end users
on die software application and communication. The
final phase of the IS project involves amalgamating the
output of the individual components into a meaningful
system. The effectiveness of integration is tested
during system testing and acceptance testing. It is only
after the confirmation of the effectiveness of
integration, that the project is given a go ahead for
implementation.
Input Requirements and Utilities
To evaluate a project idea, one must also consider
the availability and utility of the inputs. The project
manager should carefully assess the materials
required and their specifications. Material inputs for
any project are normally classified into four
categories : raw materials, processed industrial

262
materials and components, auxiliary materials and
factory supplies, and utilities.
Raw materials include agricultural products,
forest products, mineral products, livestock and
marine products, livestock and marine products. The
project manager has to determine the material inputs
by assessing the quality of the raw materials, their
costs and their availability.
While purchasing industrial materials and
components, the project manager makes use of some
testing equipment to measure parameters like quality,
quantity, and specifications. Pharmaceutical
companies may use some chemicals to test their
chemical inputs. A project manager should develop a
close relationship with the input suppliers to ensure
timely and economical inflow of required inputs.
Most firms make long term agreements with the
suppliers till the completion of the project.
The manufacturing process is also determined by
the availability and quality of raw materials. For
example, the quality of limestone decides whether
wet or dry process is to be used in a cement plant.
Proper assessment of availability of infrastructure
like power, water, steam, fuel etc should be made by
the project manager to effectively run the project. All
these utilities have to be evaluated in relation to the
location, type of technology, supplier’s capacity and
plant capacity. The project manager can also obtain
263
special permission from the local government to
ensure better availability and use of several utilities.
Product Mix
The project manager has the choice between a
broad range of products or a shortened product mix
from a study of market requirements and the firm’s
ability to offer a variety of products. For example, a
carpenter offers a wide range of furniture units with
different features and specifications. But a supplier of
electronic durables may offer only a limited range of
products. Similarly, Xerox offers of its products only
on a limited scale. The project manager increases the
product range when he adopts an expansion strategy
and reduces the product range with a retrenchment
strategy.
Plant Capacity and Functional Layouts
Plant capacity is the ability of the firm to
produce certain volumes or a certain number of units
in a given time period. It represents the production
capacity of the firm under normal working
conditions. This is determined on the basis of
installed capacity, machinery, and availability of
infrastructure and labor.
Input constraints, investments, market
conditions, government policies, technological up
gradations, and financial resources play a critical role
in determining the capacity of a plant. Availability of
skilled labor is also a crucial factor is evaluating the
capacity of a project.
264
Layouts are essential for setting up an effective plant.
The three types of layouts are :
• Product layout
• Process layout
• Fixed layout
Product layout
In this layout, machinery and equipment are
arranged according to the products. This layout is
also referred to as an assembly line or production
line. If the equipment is dedicated to continuous
production of a narrow product line. Suppose a firm
produces three products : A, B and C According to
this layout, each product is manufactured separately
and there will be no interferences in the production
lines of these three products.
Process layout
In this layout, all similar equipment or functions
are grouped together like all lathes in one area, and
all drilling machines in another area. Suppose a firm
uses three varieties of machines, say P,Q and R to
produce a product X. All P type machines are
grouped at one place, all Q type machines are
grouped at another place, and all R type machines in
another place.
Fixed layout
A fixed layout is used when the product is bulky,
large, heavy and remains stationary. For example, all
manufacturing and construction firms select a fixed
position for construction and all materials, machines,
265
sub contractors and workers are taken to the fixed
place. Best examples of such layout are ship building,
aircraft assembling, satellite assembling etc.
The project manager can choose any of these
layouts based on the requirements of the project,
Usually, no single type of layout can exactly fulfill
the purpose and the project manager may use a
combination of different types of layouts.
Location of the Project
Several of India’s space projects are conducted
in Sriharikota as the place is close to the Bay of
Bengal. Most thermal power projects are located
near rivers to meet the high requirements of water.
Airport projects are taken up in dry land areas so as
to minimize the land costs. From the above
examples, it is clear that the place of implementation
of a project should be located strategically to take
advantages of benefits like availability of necessary
inputs, necessary infrastructure, and nearness to the
markets.
The location of public sector undertakings is
decided by the government, which imposes certain
rules and regulations on the private projects. The
project manager should carefully ensure that the
location is as per the interests of the government.
The government also provides subsidies, and tax
reliefs if the projects are located in backward areas,
Study of climatic conditions like temperature,

266
 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
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
267
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.
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
268
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
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
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 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,
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.

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 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
• 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
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 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
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:

272
• Design specifications - that describe the physical
characteristics of the product that is to be delivered
by the project. Since the buyer specifics the design,
the vendor is
not responsible for its performance.

• Performance specifications - that describe the

required operational capabilities the end- product
should posses.

• Functional specifications - that form a part of the

performance specifications but it is identified only
when the vendor mentions the utility of the product
or service and its cost effectiveness.
Procurement Resources
Procurement resources gives a description of the
resources (systems and personnel) needed to procure
the products and services from the market as per the
specifications given in the product or service
description document. If the organization doesn't have
a formal procurement team, then it is the
responsibility of the project manager and his team to
manage the procurement process. However, when
projects are complex and technical in nature, and
depend heavily on the external market for sourcing
raw materials or services, then the presence of a
formal procurement team to manage the activities
would be extremely helpful.
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Market Conditions
Market conditions play a vital role in the process
of procurement planning. While planning for
procuring goods and services from vendors, the
project or purchase manager should be aware of the
products or services available in the market. He
should also be aware of the terms and conditions on
which various vendors supply these products or
services. Macro-economic factors like inflation rates,
interest rates and government regulations influence
procurement plans. And there are other factors that
need to be kept in mind while planning procurements,
such as quality management, cash flow statements,
risk management, staffing, initial ordering costs and
the work breakdown structure. There are certain
parameters that arc taken for granted while planning
procurement. But, at tire same time, there are some
aspects that confine the scope of the vendee's choices
and most often it is the financial constraint.
Make or Buy Analysis
Once the project manager has the required
information on the required product and the market
conditions, he has to decide whether to source these
products from within the organization or from outside
vendors. If the organization has free machine time
and infrastructure mat can satisfy the need of the
project in a cost effective manner, then it is better to
274
make the product from within the organization than
to source it from external vendors. But if the costs,
the infrastructure and other resources are not
appropriate, then it is better to buy it from external
vendors. The make-or-buy decision should consider
both direct and indirect costs. For instance, while
buying a product from external sources, the project
manager should take into account the indirect cost of
maintaining the procurement process apart from the
product cost, such as the ordering cost, transportation
cost and so on. The make-or-buy analysis document
should contain the project organization's point of
view and the immediate needs of the project.

Expert Judgment
Expert judgment is used to analyze and judge the
inputs of the procurement process. It is provided by a
single individual or a group of individuals who are
experts in specific fields. The sources for seeking
professional and expert help are:
• Personnel within the departments of the
organization.
• Consulting firms
• Professional, technical and industrial
associations (All India Engineers Association,
275
 Society for Indian Automobile Manufacturers'
Association)
Selecting a Type of Contract
Selection of a contract type is influenced by the
project manager's level of uncertainty. While entering
into a contract, the vendee (the procuring
organization) would always like to transfer the
maximum risk of performance to the vendor and at
the same time reward him with perks for effective
and efficient performance. On the other hand, the
vendor would like to minimize his level of risk and
maximize his profit. Generally there are five major
categories of contracts namely:
• Fixed-Price (FP) contracts
• Cost-Plus-Fixed-Fee (CPFF) or Cost-
Pius- Percentage-Fee (CPPF) contracts
• Guaranteed-Maximum and Shared
Savings (GMSS) contracts
• Fixed-Price -Incentive-Fee(FPIF)
contracts
• Cost-Pius-Incentive-Fee (CPIF)
contracts
Fixed price (FP)
In this form of contract, the price of the goods
that are to be supplied by the vendor is fixed. The
vendor negotiates this price depending on his
expected target cost1. The target costs vary from
276
contract to contract in-spite of having the same
objectives. This form of contract is risky to the
vendor as he has to bear losses if the estimated target
costs are lower than the actual cost of production.
Although this type of contracting transfers
maximum risk to the vendor, it also has some
disadvantages for the vendee:
The contract increases procurement process
time: Since a contract value (price) has to be fixed in
advance, the vendor takes more time to calculate the
contract value. This makes the procurement process
time-consuming.
It increases contract value: Since the contract
value (price) is fixed in nature, vendors tend to
incorporate huge margins to cover-up any possible
risks arising in the future.
Thus, organizations should be very careful in
selecting this type of contracting as it will delay the
procurement process and at the same time inflate the
contract value.

Cost-plus-fixed-fee (CPFF)
In this type of contract, die vendee bears all the
costs of the product or service and die vendor is paid
a fixed fee for supplying diese goods. This fixed fee
is usually a percentage of the actual cost of the goods

277
supplied or the work done. This type of contract is
taken up only when there is no possibility of arriving
at an exact price for the contract. In these kinds of
contracts, the vendor is bound to finish the work
agreed upon in the contract. The vendor in diese
types of contracts carries a small degree of risk.
These contracts consume less time to execute and it
can be judged quickly by the project organization.
Take the example of construction projects where die
construction material and labor costs are borne by the
project organization and the vendor gets a fixed
amount as fees on die completion of the project or
contract. The project organization can reward the
vendor on the quick and successful completion of the
contract.
CPFF contracts ensure a cooperative work
culture between die organization and the vendor by
seeking mutual help in solving problems pertaining
to technical, commercial and financial aspects. The
only disadvantage of this type of contracting is that
the contractor may not minimize the costs of
administering the contract as he is assured of his fees.
The vendee can punish such vendors by keeping
them away from future contracts. The advantages of
this type of contracts are as follows;
• Makes the contract more flexible

for the procuring firm

278
 • 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.

279
Guaranteed maximum share savings (GMSS)
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:

280
 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 staff
Feasibility 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
altering the fee basing on a formula which compares
281
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 percentage
of 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 conducting
economic 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
carefully and prepare the procurement management

282
 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
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

283
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
judging the vendor. These documents support
solicitation.
Procurement Document

284
 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.
 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.
285
 Setting up and maintaining services in
case of machinery or software.
 Mode and time of payment.
 Span of insuring the products or services.
 Means of analyzing the proposals.
 Nature of confidential reports.
 Key people with authority and
responsibility to take decisions on areas
like change requisitions.
Procurement documents should contain a
format that should get out as much of
information as possible from eligible
vendors. The documents should seek the
depth, the accuracy and completeness of the
information provided. It should also contain
a statement of work, description of the
response sheet and any other additional
documents required like confidential
statements or agreements. There are strict
regulations pertaining to the format and
content of procurement document when it is
prepared by or for a government
organization. An ideal procurement
document should be balanced by two factors
i.e., on the one hand, it should be rigid in
seeking responses that are corresponding
and comparable but on the other hand, it
should be flexible to encourage suggestions

286
 from the vendor so as to enhance ways of
satisfying the need.
Criteria for Judging the Vendor
This involves evaluating the various proposals
received from different prospective vendors, by
rating them. The criteria can be objective or
subjective in nature and they have to be clearly
mentioned in a procurement document. When the
organization has the list of approved vendors from
whom the product can be readily sourced, then the
criteria for judgment is usually narrowed down to the
price of the product. But in the absence of such a
vendor list, cost effective and reliable criteria for
judgment should be developed and documented. The
following should be the factors to evaluate under such
circumstances:
• Need interpretation - as given by the vendor.
• Total cost of procurement (purchasing costs
+ operational costs).
• Can the particular vendor deliver the product
or service at the lowest possible cost?
• Technical expertise - Is the vendor technically
competent and can he adopt tire technology
needed to produce the required output?
• Management style - Does the vendor have the
substantial management practices to complete
the project?
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 • Financial position - Is die vendor financially
capable of carrying on with die procurement
project?
SOLICITATION
Solicitation is a process of obtaining quotations,
bids, offers or proposals from all prospective
vendors. The process involves handling the
procurement documents
• Shortlisted vendor list
• Vendor meetings
• Advertising and
• Accepting proposals.
Short listed Vendor List
The short listed vendor list contains all
information pertaining to their expertise in different
functional areas. These lists are usually available with
the organization. But in the absence of the list, it is
the project team's responsibility to develop their own
source. If it is general information that is required,
then it can be sourced from regional associations
(e.g., local management and engineering
associations), trade yellow pages etc., but if the
information required is specific, then die team has to
put in greater efforts to source it by visiting die sites,
getting in touch with old customers and so on.
Procurement documents can be presented to
prospective and potential vendors.

288
Vendor Meetings
These are meetings with prospective vendors
before they present the proposals. These are
conducted to make sure that all the vendors
understand the requirements from all perspectives.
Though it is a fact that the project organization gains
maximum advantage at this stage of the project,
judicious use of power and authority will result in a
win-win situation for both die vendor and the vendee.
All major issues in die negotiation should be
addressed towards the benefit of the project.
Negotiations can in negotiations when the project is of
high value. The negotiating team under such situations
comprises representatives from all functional
departments such as engineering, accounting,
marketing, human resources and so on, depending on
the type of the product or service being procured. The
team should plan for the meeting in advance and
should decide on the objective of the meeting and the
technical and financial issues. The crucial task is to
select a team leader and authorize him to commit the
company's resources. Because it is the procurement
department that has the power to commit the
company's resources, the team leader should be an
expert in these activities. To shield the project interest
and to ensure the correct understanding of the product
or service standards and specifications, it is advisable to
include the project manager in the team. The two parties
in a negotiation meeting have two different goals to
289
achieve. For instance, the organization requires a
particular product or service at the minimum price
possible, and the vendor desires to make as much of
profit as possible from the deal.
A negotiation meeting can be split into five phases
namely, introduction, identification, bargaining, closing
and acceptance. These phases of the meeting are
classified because of the convenience it offers in
analyzing the concept. However there is no demarcating
line between the phases. The parties involved in
negotiation should ensure that they do not skip any of
the phases in between without completing them.
The introduction
The introduction phase in a negotiation meeting is a
stage in which the parties involved are introduced to
each other. It is this stage that influences the total
climate of the meeting during the rest of the phases.
The identification
This phase in a negotiation meeting involves
exploring the competitor's strengths and weaknesses
and their focus areas. The issues are evaluated in order
to interpret the competitor's stand. This phase of
negotiation usually brings a change in the objective of
negotiation because of any information revealed by the
competitors in discussion.
The bargaining
The bargaining phase in a negotiation meeting is
the crux of the meeting. The actual discounting process
290
happens here. The bargaining between the vendors and
the vendee is basically because of time, cost and
performance expectations. The next phase of the
meeting begins only when the gap between the
expectations of the two parties is reduced.
The closing
The closing phase in a negotiation meeting
documents the final consensus oetween the two parties.
The acceptance
This phase in a negotiation meeting involves the
most complex tasks i.e., ensuring that the vendor and
the vendee interpret the consensus reached (terms in
final contract) similarly. Though this phase signals the
closing of the meeting, the parties have to sign a written
contract before calling off the meeting.
Negotiation is more of a human process than a
technical process, because several psychological factors
influence the outcome of negotiations. Therefore, the
team leader has to use certain techniques to ensure a
positive influence of human behavior on the outcome
of the meeting.
Negotiation and its Goals
The project manager likes to get the best price deal
along with the completion of the project on time and as
per the standards. The organization likes to exert some
degree of control over the vendors performance by
including some clauses in the contract. The project
291
organization should continuously seek vendor support
during the contract administration and at the same time
exercise control. Another important goal of the project
organization is to maintain a harmonious relationship
with the vendor. A harmonious and supportive
relationship at the beginning of the negotiation eases the
process of resolving potential problems or
disagreements arising in the future. A good relationship
between the vendor and vendee also enhances the
chances of the vendor gaining future contracts of the
project organization.
Advertising
Advertising is a tool used by the project
organization to invite proposals in the form of sealed
bids from prospective vendors. There is no bargaining
involved in this kind of solicitation. The vendors'
pricing is influenced by market forces and the contract
is bagged by the vendor quoting the minimum price.
Advertising updates the list of potential vendors
present with the organization and this list acts as a
databank for future use. The channels of advertising
could be regional newspapers, professional newsletters
or magazines. Advertising in mass media is mandatory
because of the regulations imposed by the government,
especially for all the subcontracts or contracts involving
govermnent agencies.
Accepting Proposals

292
 Once the procurement documents are prepared and
a vendor list is selected, the project organization takes
up the task of selecting the vendor. After reaching a
consensus with the procurement document, the vendor
presents his agreement to supply the required product or
service to the organization as per the specifications and
standards mentioned in the procurement document.
VENDOR SELECTION
Vendor selection is a process of receiving
quotations or proposals from prospective vendors and
evaluating these proposals to choose the right vendor.
Though this is a complex and difficult task, a properly
documented vendor proposal makes the process simple.
Although price is the primary selection factor for
readily available products, bidding at lowest possible
prices docs not guarantee the contract if the vendor fails
to supply the products on time. In order to simplify the
process, the proposals received are classified into two
disciplines namely technical and commercial to evaluate
each of these separately. Also it is advantageous to seek
proposals from multiple vendors if the nature of the
product is technically complex. The tools and
techniques used for selecting a vendor are as follows:
• Contract negotiation
• Weighing system
• Screening system
• Developing independent estimations

293
Contract Negotiation
Contract negotiation is a process aimed at
enhancing the clarity and ensuring mutual consensus
on the structural and procurement aspects mentioned
in the contract before signing the contract. The final
contract should clearly convey the agreements
reached between the two parties. The various topics
to be mentioned in the contract include the price of
procurement, technical approach, management style,
terms and conditions, legal bindings, responsibility
and authority of the people involved and other related
issues, depending on the nature of the product to be
sourced. While procuring highly technical and
complex product or service, the final contract may
take the shape of a Memorandum of Understanding
(MoU) which is independent with its own sources
and outcomes.
Weighing System
A weighing system is a process in which all the
information pertaining to the qualitative aspects of
the vendor is quantified. Weighing reduces the
impact of individual bias on vendor selection. The
process involves identifying and scoring all the
significant activities from the proposal, setting up a
range for qualifying them based on the significance
level and weighing diem against the total scores.

294
 If the range falls below the total score even with
a single percentage point, the vendor can be
disqualified. In general, the following approach is
used to arrive at a particular score value:
• Each and every parameter taken up for
evaluation should be given a numerical
weight.
• All potential vendors should be
ranked based on each of the evaluation ^
parameters.
• Multiply the numerical weight with the
rank of the vendor.
• Add all the output of the above
multiplication results in the total score.
Screening System
Screening is a process of establishing basic
performance standards for qualifying the proposals.
The vendor has to qualify in the performance
specification test developed by the screening system.
Developing Independent Estimates
This process is aimed at checking the
audienticity of the price quoted by the vendor. The
project organization develops its own estimations of
product pricing. If the gap between the vendor and
vendee's price estimates is high, it clearly means that
the data in the statement of work is insufficient or the

295
 vendor failed to correctly interpret the statement of
work.
CONTRACTING
After evaluating the quality of the prospective
vendors thoroughly, the project organization has to
sign a contract with the vendor to bind him legally to
deliver the specified product. Both the parties in the
contract are mutually accountable and legally bound.
The vendor is responsible for delivering the product
as agreed upon in the contract and the vendee is
responsible for paying die vendor the price that is
agreed upon in die contract on die successful
completion of delivery or in phases as per the terms
and conditions of payment. The nature of the contract
is legally binding on both parties, which makes the
approval process more stringent and mandatory. The
stress is on ensuring that die product or service
description in die contract has the potential to satisfy
the project requirements. In general, the following are
the parameters to be covered in a final contract:
The beginning of the contract should always start
with the definitions of the vendor, vendee or
description of other complex terms.
• An overview of the responsibilities of the vendor
and vendee.
• The type of contract being administered along
with die mode of payment.

296
• Change requisition process and the authorization
for its approval.
• Vendor's warranty on the products or services
being procured.
• Frequency of conducting inspections and its cost
distribution.
• Terms and conditions for closing the contract.
• Consequences for deviating from the agreement
for example, late delivery of the products.
CONTRACT ADMINISTRATION
According to PMBOK, contract administration is
the process of making sure that the
vendor's performance satisfies the project needs
mentioned in the contract. If the
project is so large that it requires multiple vendors to
satisfy its needs, then die major
area of concentration should be on handling die
interfaces among die multiple vendors.
Since die contracts signed are also the legal
documents, die project team should keep in
mind that any action taken by them makes diem
legally accountable. To be precise, contract
administration is about applying the project
management vendor-vendee relationship and
integrating the results of these practices back into the
project. The following are the project management
practices that are rejected into the contract:

297
 • Project planning and implementation - To
check whetger the vendor progressing as per die time
scheduled.
• Progress reporting - To check the vendor's
performance in technical aspects.
• Quality management - To check and constantiy
monitor the quality of the product being produced.
• Change management - To chepk the approval and
implementation of potential changes and
communicating die incorporated changes to the
people requiring it.
• Financial management - To ensure timely and
periodic payments as agreed in the contract.
In order to administer the contract in an effective
and efficient maimer, die project organization should
employ a contract administrator to manage the total
contract administration activities. It is his
responsibility to see to it that the end product or
sendee matches the performance expectations of the
project. His basic responsibilities involve:
• Managing change.
• Ensuring that the vendor understands
specifications completely.
• Ensuring conformance to quality.
• Managing warranty on the products being
procured.
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 • Managing die sub-contractors under the
vendors.
• Monitoring the manufacturing process.
• Handling deviations from the contract.
• Resolving conflicts.
• Managing payment schedules and contract
termination.

Job Status
Information collected during the project planning
and implementation phase gives the status of the
vendor's job such as the tasks that have been
completed and the ones that have not been, the degree
of quality being matched, the expenditure incurred
and so on.
Requisition for Change
Any changes to be made to the terms and
conditions of the contract or to the product or service
specifications are covered in the statement for change
request. Further, if the job done by the vendor fails to
impress the contract administrator and the project
manager, then the decision to terminate the contract
can also be treated as a requisition for change. But if
there is a disagreement between the vendor and the

299
vendee on accepting the change, then such a situation
can lead to conflicts and claims.
Vendor Billing Process
The vendor should ensure timely and periodic
submission of bills to the contract administrator for
payments for the completed work (or as agreed in the
contract). The billing documents should contain all
supporting statements as mentioned in the contract.
CONTRACT CHANGE MANAGEMENT
SYSTEM
This change management system is similar to the
overall change management system discussed in the
chapter on "Project Control". A contract change
management system is all about describing the
process of handling a requisition for change, i.e., it
involves the necessary documentation needed to
request for a change, authority required to approve
the change requisition and similar issues related with
change. Since any requested change can have a
significant impact on the contract i.e., it can bring in
new jobs or remove an existing one, all the guidelines
pertaining to change acceptance should be mentioned
in the contract before signing it. The contract should
mention the people who have the authority and power
to request and approve the changes so that any party
seeking change does not waste time by approaching
the wrong persons. The contract should also mention
the general conflict resolution techniques if possible.
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All the changes that are initiated are not
disadvantageous, but it is belter to control these
changes by setting up proper change management
practices in place. This helps evaluate the changes
that are initiated and then decide on whether to accept
the change or not depending on the results of
evaluation. And once it is approved, it is the contract
administrator's responsibility to see to it that the
changes are incorporated. While considering the
changes for implementation, the contract
administrator should evaluate the impact of the
changes on basic project parameters such as cost,
time and performance. It helps further if die project
manager and the contract administrator try to
integrate the contract change management system
with the project change management system.
Progress Reporting System
Progress reporting system is the process that
keeps the project organization updated on the
performance of the vendor i.e., the way in which he is
achieving the objectives of the contract. An effective
progress reporting system demands frequent
interaction between the contract administrator and the
project manager. To enhance the efficiency of the
project communication system, it is advisable for the
project manager and the contract administrator to
integrate the functions of contract progress reporting

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system with that of the project progress reporting
system.
Managing Vendor Payments
Once the vendor submits the bill, the contract
administrator has to check and revise all the
components of the billing system, as agreed upon in
the contract. And after seeking approval from the
contract administrator, the invoice should then be put
on to the accounts payable system of the project
organization. The project manager has to approve the
invoice.
CONTRACT CLOSING
Contract closing is a process involving
verification of the product along with updating all the
project documents with the final results and storing
all project information for future retrieval. The
contract closing procedure may also be mentioned in
the terms and conditions of the contract. The process
of contract closing usually involves four steps:
• Contract documentation - Tins contains the
complete contract as well as all the
supporting schedule documents, change
requisitions and approvals, technical
documents developed by vendors, vendor
performance reports, financial literature
such as invoices and payment records and
documents pertaining to any contract related

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 audits or inspections.
• Procurement audits - This is a process of
formally reviewing the procurement process
starting from procurement planning stage
till contract administration. The purpose of
this process is to determine the success and
failure that assures shift to other
procurement items on this project or to other
projects in the organization.
• Contract files - This is a total set of indexed
documents developed to include it in the
final project records.
• Formal acceptance and closing - This is a
process wherein the contract administrator
or the individual or the department
responsible for contract administration
submits a formal written notice to the
vendor saying that the contract is complete.
All the requirements for formal acceptance
and closing are usually specified in the
contract.
The project organization has the authority to put
an end to a continuing contract at any point of time
depending on the nature of the contract and the terms
and conditions. But when the contract has to be
terminated at a time which the vendor has already
incurred some expenditure in the process of
delivering the product, then the project organization
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has to reimburse the vendor the money spent on
contract activities. The following are the possible
reasons for the project organization closing a
contract:
• The product being procured is not
required any more.
• Technological advancement that can
by-pass the product requirement.
• Change in the allocation of funds.
• Availability of substitute products.
• Lack of profit expectancy.
The following could be the reasons behind termination
of a contract by the vendor:
• Failure to supply the product or service as per
die schedule.
• Lack of progress in die activities of the
contract (no positive performance).
• Failure to stick to the terms and conditions
of the contract - deviating from the contract
in terms of quality and performance
standards.
If there is a breach of contract from the vendor's
end, tiien the vendor may not even receive the payment
for the work being carried out and which is not been
approved. But it may also happen that the vendor has to
pay back if he was paid in advance for the same work.
Once the contract is being terminated, it is the
responsibility of the contract administrator to examine,
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approve and check the breach of contract. In case of a
disagreement between the products and the contract, the
contract administrator can:
• Refuse to accept the products.
• Refuse to accept defective products.
• Accept a portion of the total batch of
products.
The project manager should see to it that die
contract is not closed out financially immediately after
delivering the product, because there is always a
chance of the products coming back for repairs or
replacement for which tiiere can be extra charges or
reduction in the contract value. This problem increases
the burden on the contract administrator to control all
the performance, cost and time-related factors with a
high degree of perfection. Therefore^ terminating a
contract is the most challenging task for the project
manager to achieve.

UNIT – IV
PROJECT INTEGRATION
PMBOK defines project integration as all those
processes required to ensure that the various
elements of the project are properly coordinated.
Project integration involves.

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• Project Plan Development
• Project Plan Execution
• Overall Change Control
Project plan development involves examining all
the project processes and sequencing them in a
consistent and coherent manner so as to achieve the
project objectives. Project plan execution is the
carrying out of the project according to the project
plan. The final step, overall change control, aims at
coordinating changes across all the project
processes. Figure 5.1 shows the different steps in
project integration.
PROJECT PLAN DEVELOPMENT
Project plan development takes into account the
result of all other planning processes to develop a
consistent, coherent document, which is used as a
guide for project execution and control. This process
is repeated several times. Until a final plan emerges,
which specifies the resources to be used and the
time frame for the completion of the project.
The final document provides a baseline for
measuring the progress of the project for controlling
the project. It lists all assumptions made in the
project planning stage and documents the planning
decisions regarding the alternative chosen. The
document facilitates communication among the
project stakeholders. It specifies what issues should

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 be covered in management reviews and when these
reviews should be conducted.
The steps involved in project plan development
are :
• Collecting data
• Designing the Project Management
Information System (PMIS)
• Preparing project management
mythology.
Collection of Data
In the process of project plan development, the
project manager collects the following data.
Outputs of other planning processes : The project
manager considers the outcomes of the planning
processes of other knowledge areas such as scope
planning, activity definition, resource planning, cost
estimation and schedule development. These outputs
include the Work Breakdown Structure, Cost
Performance Baseline and other supporting details.
Historical information : Records and databases
relating to past projects are used in developing the
project plan. These records help the project manager
check the validity of assumptions and assess
alternatives as part of his project plan development.
Organizational policy : Every organization has a
set of format and informal policies that influence the
project plan development. These policies relate to
different areas like quality management, personnel
administration, and financial controls. Hiring and
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firing policies, accounting codes, and standard
contract provisions are some of the policies that the
project manager must keep in mind while framing
the plan.
Stakeholder skills and knowledge : Apart from
the project manager, all project stakeholders
contribute to the development of the project plan,
For example, while awarding a fixed – price
contract, the project cost engineer plays a major role
in determining the contract amount. In the case of
technical projects, the project client produces the
design of the project which becomes the basis for
developing the project plan.
Limitations : Limitations are factors that reduce
the number of options the project manager has in
developing the project plan, For example, when the
resources allocated by the top management for the
project are fixed, the project manager has to
complete the project within the given budget. This
budget limitation the project manager’s options
regarding quality, scope, cost etc. In the case of
projects performed under contract, contractual
norms become limitations.
Assumptions : Assumptions are factors that the
project manager consider to be real or true. While
preparing the project plan. For example, if the
project manager is not sure about the exact date on
which certain spare parts would be available, he
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assumes that they will be available by a specific date
and the plan is prepared accordingly. But the project
manager should make sure that he does not base his
plan on too many assumptions.
Designing PMIS
The project manager uses the project
Management Information System (PMIS) in order to
gather, integrate and disseminate the information
and outcomes of other project processes. The PMIS
supports all project management processes such as
initiation, planning, implementation, control and
closing. For complex projects, the PMIS helps in
identifying, sequencing, scheduling and tracking all
project activities. It shows the costs incurred,
variances, and earned values of the project at any
point of time.
The PMIS enables the project manager to
distribute the required information to the project
team members and other project stakeholders in the
form of reports. It allows the project manager to
regularly update all project schedules. By showing
up variations, the PMIS helps the project manager to
monitor the project processes. Based on the
performance of the current operations. PMIS shows
at what point of time the difference between the
actual and planned performance exceeds control
limits. This allows the project manager to take

309
initiatives to keep the difference (between the actual
and planned performance) within control.
The PMIS should be designed in such a way that
it facilitates the application of appropriate project
management standards and tools that work towards
achieving the client’s product quality and delivery
goals in the most economical manner.
Preparing a Project Planning Methodology
Any of the structured approaches used by the
project manager to guide the project team during
development of the project plan is referred to as
project planning methodology. The Structure can be
a standard form or a template. Project planning
methodologies use project management software
and simple tools like facilitated start-up meetings.
PROJECT PLAN
The PMBOK defines the project plan as ‘a
format, approved document used to manage and
control project execution’s It provides all relevant
details about every aspect of the project. The project
manager prepares the project plan on the basis of the
information obtained from the PMIS, project
planning methodology, and the stakeholder’s skills
and knowledge.
The project manager distributes the project plan
to all functional heads and top management. The
plan given to the top management gives an overview
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of all project activities, rather than the details of
every activity in the project plan. For functional
heads, the plan provides details of a specific
functional area. Figure 5.3 shows a model project
plan.
Changes are made in the project plan when more
information is available regarding the project.
Depending on the needs of an individual project, the
project plan also includes other project planning
outputs. For example, a project organizations chart
is included in the project plan for large projects.
Along with the project plan, the project manager
also provides supporting details like technical
documents (technical requirements, standards,
specifications, designs etc.), additional information
such as assumptions made in the development of the
project plan, and the outcomes of other planning
processes that are not included in the project.
PROJECT PLAN EXECUTION
In the execution stage implementation activities
included in the plan are carried out. To make sure
that the final product is of desired quality, the
project manager must ensure that the project
processes meet the schedules, estimates and
standards specified in the project plan. While
executing the project plan, the project manager and
his team should understand the various technical and

311
 organizational interfaces existing in the project and
ensure that all of them are properly coordinated.
Figure 5.4 depicts the project plan execution.
Inputs for Project Plan Execution
The project plan along with the supporting
details, organizational policies, corrective actions,
managerial skills, and product knowledge are some
of the inputs that the project manager requires to
execute the project plan.
The project manager analyzes the project plan,
and subsidiary management plans like the scope
management plan, quality management plan, etc.
and the performance measurement baselines to
execute the project plan. He must also make sure
that the project is in keeping with the organizational
policies. The project manager should know what
corrective action is to be taken when there is any
deviation from the project plan.
The project manager and his team must have
leadership, communication, motivation, delegation
and negotiation skills and the ability to motivate
others and delegate work, if they are to execute the
project plan successfully. The project team should
also have complete knowledge of the project
product and various alternative ways of producing
it.
Work Authorization System
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 This is a formal procedure followed by the
project manager to assign the project work to an
individual or a group of individuals so that the work
can be completed within the specified time and in
the given sequence. In general, a written
authorization is given to begin the work. For small
projects, verbal authorization is enough.
Status Review Meetings
The entire project team meets periodically in
order to review the project status. The project
manager and his team exchange information about
the execution of the project work. In general, these
meetings are held once a work, or once a month.
Sometimes, these meeting are conducted after the
completion of specific project milestones.
Outputs of Project Plan Execution
Work results and change request are the
important outcomes of project execution. Work
results are the outcomes of the various activities
performed to meet the project objective. Work
results provide information about the project
deliverables that are already produced and that are
yet to be produced. They also show whether the
deliverables meet and specified. (in the project plan)
quality standards and how much costs the
deliverables incurred. The entire information

313
collected about the execution of the project is
presented in the performance report.
The project manager also considers various
requests made by project stakholders to modify the
present execution process. Requests are sometimes
made to widen or narrow down the scope of the
projects, or to modify the time and cost estimates. If
these requests are practicable, the project manager
makes the requested changes.
OVERALL CHANGE CONTROL
Overall change control involves managing the
factors that bring about changes in such a way as to
make sure that the changes are beneficial to the
project. It is also concerned with identifying
changes in the project plan and managing them as
and when they occur.
Overall change control is considered to be
successful if it maintains integrity of all
performance measurement baselines. All the
changes should be reflected in the project plan.
Overall change control ensures that any of the
changes in the product scope are included in the
project scope (the changes made to the project scope
may not change the product scope.) Overall change
control coordinates the change made across all
functional areas.

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 The project manager studies the project plan,
performance reports, and change requests from
project stakeholders before starting the overall
change control process. The project plan specifies
what the project has to produce and what resources
are allotted for this purpose. The performance
reports provide information on how the project is
being executed. The project manager also studies
the changes in the project and product scope. Figure
5.5 shows how various changes are coordinated.
Techniques in Overall Change Control
Overall change control uses several techniques
like change control system, configuration
management, and performance measurement.
Change control system
The Project management Body of Knowledge
defines the change control system as’a collection of
formal documented procedures that defines the steps
by which the project document may be changed.
The system includes tracking systems and other
approval procedures necessary to authorize the
changes.
Big projects have independent boards called the
Change Control Boards (CCB) that approve or reject
change requests. The powers and responsibility of
the board are well defined. If the project is very big

315
and complex, multiple CCBs are set up. With
different responsibilities.
The change control system is allowed to make
changes without any approval in case of
emergencies. But all the changes that are made and
the situations because of which the changes had to
be made, should be documented for future use.
Configuration management
Configuration management is a documenting
procedure that is used to ensure the description of
the project product is accurate and complete. In
several projects, configuration management is
considered as a subsystem of overall change control.
It documents all physical and functional
characteristics of all the project products and
controls any changes to these characteristics. The
system records the changes made to characteristics
of any of the project items and confirms that the
changes are appropriate and reasonable.
Performance measurement
Performance measurement techniques like earned
value method help the project manager to assess
whether the variances are within specified limits or
not. Earned value is a useful technique which assess
the project performance by finding whether there is
any change in scope, cost and schedule for the
project.
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THE FUNDAMENTALS OF PROJECT
CONTROL
Project controls are tools developed to diagnose the
system for deviations from the actual plan and reset
them back with the actual plans/schedule. Project
controls are required to check whether the project is
progressing in accordance with the plans and standards
set during the planning phase. In fact, project controls are
measures taken by the project manager in order to
minimize the gap between the planned output and the
delivered output.
Answering the following questions will help us ir
designing an effective control system:
• Who sets the standards?
• How realistic are the set standards?
• How clear are the standards?
• Do these standards achieve the project's goals?
• What are the outputs and behaviour that need to be
monitored?
• Is monitoring of people required?
• What kind of sensors are to be used?
• Where should the sensors be placed?
• How frequently should the monitoring be done?
• What should be the tolerable gap between the
actual and the planned output before
taking the corrective measures?
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• What are the corrective measures available to
take corrective action if needed?
• How ethical are these corrective measures?
• What rewards and penalties can be used to get
the desired results?
• What kinds of actions are to be taken and by
whom?
An effective control system is one that appears
sensible and acceptable to those who use it and
those who are controlled by it.
Characteristics of an Effective Control System
For a control system to be effective and efficient
it should fulfill the following requirements:
Comprehensiveness: The control system should
give a detailed overview of the work to be
performed. It has to estimate the time, labor and
costs required to finish the project.
Communicability: The system should
communicate the scope of the project.
Authenticity: The system should reflect
budgetary discipline and authentic expense
tracking by accounting tangible progress and
cost expenditure in time.

318
Timeliness: The control system should be able to
frequently re-analyze the cost and time required
for the completion of the remaining work. This is
done by comparing the delivered output with the
actual/scheduled output in terms of performance,
cost and time thereby rendering the system cost
effective.
Simplicity: The system should be simple to
operate.
Flexibility: The system should be open to
extensions and alterations and it should also be
easy to maintain.
Morally sound: The system should conform to
all the ethical standards.
THE OBJECTIVES OF CONTROL
The primary objective of control is regulation.
The purpose is to monitor the delivered output
by comparing it with the actual/scheduled output
suggested in the planning phase. The regulatory
function of control helps in:
• Translating the objectives into
performance standards that are represented
by program activities and events.
• Formulating budgets in order to
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 compare the delivered output with the
actual/scheduled output.
The secondary objective of control is
conservation of resources. The project manager is
entrusted the responsibility of protecting the physical,
human and financial resources of the organization.
The process of guarding each of these three assets is
different. Resource control involves evaluating the
utilization factor of resources. Human resource
control tries to determine whether the individuals are
capable of the efforts required to finish the task on
time. It is hardly possible to dedicate the resources
totally to a specific project. When the human
resources are shared between the projects, some
projects may not be able to achieve its objectives due
to mismanagement or misallocation of their
personnel.
Physical asset control is the process of
controlling the use of physical assets. It includes the
preventive or corrective maintenance of the assets. A
project manager has to schedule the maintenance/
replacement plan in a way as to minimize
interruption to the work in progress and without
overlooking the quality aspect. Controlling the
inventory is/also a key aspect that involves receiving,
inspecting, storing and recording to ensure genuine
payment to vendors. This also involves proper
material handling techniques.

320
 Human resource control is the process of
controlling and maintaining the growth and
development of the human capital of the
organization. Unique projects enable people gain rich
experience within a short period of time. Conserving
human resource is therefore a significant aspect of
the control system.
Financial resource control is a combination of
regulatory and conservatory functions. The
conservatory function of control on capital
investments requires the meeting of certain
conditions before investments are made. The same
conditions also regulate capital flows for a higher
return on investment. The regulatory and
conservatory techniques of financial resource control
consist of a control on current assets and project
budgets along with capital investments. These
controls are implemented through a series of analysis
and audits by the controller or the project manager.
The tertiary- objective of project control is to
facilitate decision-making. Effective decision-making
by the management requires the following reports:
• A report comprising the plan, schedule and
budget made during the planning phase.
• Data consisting of the comparison between the
resources spent in order to achieve the delivered
output and the scheduled output. Tins report should
also include an estimation of the remaining work.
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• An estimate of the resources required for the
completion of the project.
• These reports that are submitted to the project
managers and team members are useful in the
following manner:
• They provide feedback to the management,
planners and team members.
• They identify the deviations from the scheduled
plan.
• They implement a contingency plan at an early
stage in order to protect the project from higher
losses due to cost, performance and time overruns.
Need to Control Performance, Time and Cost
Talking of control always brings three
parameters into the discussion: the performance, the
cost and the time of a project. These three aspects are
of utmost importance to any project manager because
he is answerable to the client. This makes the project
manager to check whether the project is progressing
as per the expectations and if it is operating within
the time frame and budget. The need to control the
performance, cost and time arises from this:
Controlling performance
It is necessary to control performance because;
• Technical problems may spring up any
moment
• Resources may become scarce
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 • Complicated teclmical snags may
develop
• Quality problems may arise
• The client may request for changes in
the system specifications
• Inter functional complications may arise
• Technological breakthroughs can also
affect the project.
Controlling costs
Some of the reasons that necessitate cost control are;
• More resources are required to solve the
technical problems
• Cost of the project increases
proportionately with the scope of the project
• Low estimations were given initially
• Poor reporting structures
• Inappropriate budgeting
• Failure to put a corrective measure in
place in time
• Change in the prices of inputs.
Controlling time
Some of the reasons that necessitate time control are;
• Solving a technical snag may require more
time than estimated
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 • Time estimations that were done initially
were very optimistic
• Tasks were inappropriately sequenced
• Shortage of material, personnel or
equipment when required
• Incomplete preliminary tasks that were
necessary to complete a series of activities
• Changing government regulations.
REASONS FOR MEASURING DURATION
AND COST DEVIATIONS
Before going into the reasons behind measuring
duration and cost deviations, it is necessary to talk
about variances and kinds of variances. Variances are
deviations from the actual plan. Based on the
parameters of time and cost, variances can be
classified into Positive variances and Negative
variances.
A positive variance is one in which the delivered
output is ahead of the planned schedule or the cost
incurred is less than the planned cost. Though
positive variances are good news for the project
managers, they can be as threatening as negative
variances. Positive variances are capable of
advancing the project completion date and allocating
lesser resources than estimated. However, these
variances can also occur as a „' /result of missing an
activity that was supposed to be completed during the

324
reporting period. It needs to be examined thoroughly
before reporting a positive variance.
A negative variance is one in which the
delivered output is behind schedule or the cost
--incurred is more than the planned cost. The project
manager would want a detailed report on the
schedule accomplished and the costs incurred, along
with the reasons /or the delay.
It is important to measure duration and cost
deviations because they play a significant role in the
project management life cycle. Though all the
parameters of project management have their own
levels of significance, time and cost share a special
place. Exhibit 15.1 gives the reasons behind cost
overruns during different phases in the project.
Identifying Deviations from the Curve Early
When the project manager plots the actual
performance or cost curve against the planned
performance or cost curve, he may observe some
deviation between the curves. This deviation between
the curves cautions the project manager about cost
and performance overruns. Tins enables the project
manager to initiate timely corrective measures to
minimize the deviations.
Dampen Oscillation
A constant, continuous and identical pattern
should be displayed by curves representing the actual

325
and the planned performance over time. Proiects with
high behind schedule, overspending during one phase
and going out of control in next corrective measures
that would nip problems in the bud.
Facilitate Early Corrective Action
A schedule or a cost problem is better reported to
the project manager at an early stage of its
development. The project manager has more
opportunities for a corrective action plan when the
problem is detected early.
Estimating Weekly Schedule Variance
Weekly reports on the work in progress have to be
made, to give the project manager enough time to take
corrective measures before the situation gets out of
control.
Determining Weekly Effort (Person Hrs/Day)
Variance
The variance between the planned/scheduled effort
and the delivered effort has a direct impact on the
planned cumulative cost and schedule. A lower
delivered effort than the scheduled effort indicates that
the potential has not been optimized i.e., a person
failing to enhance his/her effort in the following phases
of the project. However, if the delivered effort is more
than the scheduled effort, where progress is not in
proportion with the effort put in, may result in a cost
over run. It is very important to detect the out of
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control situations early. The longer one takes to detect a
problem, the harder it will be to put the project back on
track.
PROJECT REVIEW
IMPORTANCE OF PROJECT REVIEW
Once the project enters the implementation
phase, the project manager should take up the
responsibility of reviewing the status of the project in
a timely and phased manner. Project review
conducted at various stages of project
implementation play a major role in the success of a
project. The project manager conducts review to find
out;
• If the project can accomplish the business
goals.
• Whether the rules of the organization are
understood properly and implemented
• If it is worthwhile to take up the project all
the before entering into major contracts
• Whether the project is managed effectively
and the team members are sure of
completing the project, by following the
guidelines.
Reviews give the project manager and the
organization a chance to solve problems before they
get out of hand, or to improve the way in which the

327
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;
• 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

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 • Process reviews
PROJECT REVIEW STAGES
A review should always be conducted before taking
any major decisions that can affect the future of the
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.

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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
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.
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• Document the lessons learnt as these may be
helpful in die management of future projects.
Significance of Post Project Review
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?

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