EBTM3103 Project Management Capr13 (RS) (M) PDF

Faculty of Science and Technology
EBTM3103
Project Management
Copyright © Open University Malaysia (OUM)

EBTM3103
PROJECT
MANAGEMENT
Noraini Hamzah
Assoc Prof Ir Dr Arazi Idrus
Dr Christy P Gomez

Project Directors: Prof Dato’ Dr Mansor Fadzil
Assoc Prof Dr Norlia T. Goolamally
Open University Malaysia
Module Writers: Noraini Hamzah

Universiti Kebangsaan Malaysia
Assoc Prof Ir Dr Arazi Idrus

UNISEL
Dr Christy P Gomez
KUiTTHO
Moderator: Dr Christy P Gomez

KUiTTHO
Developed by: Centre for Instructional Design and Technology

Open University Malaysia
First Edition, September 2006

Second Edition, April 2013 (rs)
Copyright © Open University Malaysia (OUM), April 2013, EBTM3103

All rights reserved. No part of this work may be reproduced in any form or by any means
without the written permission of the President, Open University Malaysia (OUM).

Table of Contents
Course Guide ix–xiv
Topic 1 Introduction to the Fundamentals of Project Management 1

1.1 Project Characteristics 2
1.2 The Project Life Cycle 4
1.3 What is Project Management? 9
1.4 Fundamentals of the Management Process 10
1.4.1 Planning 11
1.4.2 Leading 14
1.4.3 Organising 14
1.4.4 Controlling 14
1.5 Integrated Project Management System 16
Summary 18
Key Terms 19
References 19
Topic 2 Organisation: Goals, Structure and People 20

2.1 Setting Missions and Goals 21
2.2 Organisation 23
2.3 Building Blocks of Organisations Principles for
Organisatonal Design 24
2.4 Organisational Designs 26
2.4.1 The Functional Organisation 26
2.4.2 The Division Organisation 28
2.4.3 The Matrix Organisation 30
2.4.4 The Network Organisation 32
2.4.5 The Virtual Organisation 34
Summary 35
Key Terms 36
References 37
Topic 3 Engineering Economics Analysis 38

3.1 Cash Flow 39
3.2 Cost Analysis 43
3.2.1 Time Value of Money 44
3.2.2 Rate of Return 48
3.2.3 Depreciation 50

iv TABLE OF CONTENTS
3.3 Which to Choose? 51

3.3.1 Net Present Value 51
3.3.2 Internal Rate of Return 53
3.3.3 Payback 53
3.3.4 Profitability Index 55
Summary 56
Key Terms 59
References 59
Topic 4 Cost Estimating and Budgeting 60

4.1 Planning of Resources 62
4.2 Cost Estimating and Budgeting 62
4.2.1 Definition 62
4.2.2 Estimating Accuracy 63
4.3 Basics for Preparation of Estimates 64
4.3.1 Cost Estimating Process 64
4.3.2 Factors Influencing Cost Estimates 65
4.4 Techniques for Cost Estimating 65
4.4.1 Expert Opinion 66
4.4.2 Analogous Estimate 66
4.4.3 Parametric Estimate 67
4.4.4 Analytical Estimating (Cost Engineering) 67
4.4.5 Worked Examples 68
4.5 Types of Costs 71
4.5.1 Direct Costs 71
4.5.2 Indirect Costs 72
Summary 72
Key Terms 73
References 73
Topic 5 Developing a Project Plan 74

5.1 Planning and Scheduling 75
5.1.1 What is Planning and Scheduling? 75
5.1.2 Why do We Need Planning and Schedulling? 77
5.1.3 Where Should We Use Planning and Scheduling? 78
5.1.4 Who are Involved? 80
5.1.5 When is Planning and Scheduling Needed? 81
5.1.6 How to do Planning and Scheduling 81
5.2 Gantt Chart 82
5.3 Network Programme 85

TABLE OF CONTENTS v
5.4 Critical Path Method 87

5.4.1 Terms and Definitions 88
5.4.2 The CPM Analysis Explained through Examples 90
5.5 Updating the Network 95
Summary 100
Key Terms 102
References 102
Topic 6 Scheduling Resources and Project Control 103

6.1 Resource Levelling 104
6.1.1 Steps in Resource Levelling 105
6.2 Project Control 108
6.3 Earned Value Techniques 114
6.3.1 Definitions 114
6.3.2 The Value of Money 115
6.3.3 Relationship Between EV and PLOC 116
6.3.4 Value of Work Done Control 117
6.3.5 EV Analysis Techniques 118
Summary 121
Key Terms 123
References 123
Topic 7 Managing Project Teams 124

7.1 Leadership 125
7.1.1 Leadership Style 126
7.2 Communication 130
7.3 Motivation 133
7.4 Delegation 135
7.4.1 Delegation of Authority and Responsibility 136
7.4.2 Task Delegation 137
7.5 Managing Participation, Working in Teams
and Conflict 140
7.5.1 Team Management 140
7.5.2 Conflict in Projects 142
7.6 Managing Change 143
Summary 146
Key Terms 148
References 148

vi TABLE OF CONTENTS
Topic 8 Risk 149

8.1 Risk and Projects 150
8.1.1 International Projects 150
8.1.2 Risk 151
8.2 Risk Management 153
8.2.1 Why is Risk Management Needed? 155
8.3 Risk Management Process 156
8.3.1 Risk Identification 156
8.3.2 Risk Analysis 157
8.3.3 Risk Response 159
8.3.4 Risk Review 160
Summary 161
Key Terms 162
References 162

COURSE GUIDE

COURSE GUIDE DESCRIPTION
You must read this Course Guide carefully from the beginning to the end. It tells
you briefly what the course is about and how you can work your way through
the course material. It also suggests the amount of time you are likely to spend in
order to complete the course successfully. Please keep on referring to Course
Guide as you go through the course material as it will help you to clarify
important study components or points that you might miss or overlook.
INTRODUCTION
EBTM3103 Project Management is one of the courses offered by the Faculty of
Science and Technology at Open University Malaysia (OUM). This course is
worth 3 credit hours and should be covered over 8 to 15 weeks.
COURSE AUDIENCE
This course is offered to all students taking the Bachelor of Technology
Management programme. This module aims to impart the fundamentals of
management skills to run a project efficiently.
As an open and distance learner, you should be able to learn independently and
optimise the learning modes and environment available to you. Before you begin
this course, please ensure that you have the right course materials, understand
the course requirements, as well as know how the course is conducted.

x COURSE GUIDE
STUDY SCHEDULE
It is a standard OUM practice that learners accumulate 40 study hours for every
credit hour. As such, for a three-credit hour course, you are expected to spend
120 study hours. Table 1 gives an estimation of how the 120 study hours could be
accumulated.
Table 1: Estimation of Time Accumulation of Study Hours
Study
Study Activities
Hours
Briefly go through the course content and participate in initial
5
discussions
Study the module 60
Attend 4 tutorial sessions 8

Online Participation 12
Revision 20
Assignment(s), Test(s) and Examination(s) 15
TOTAL STUDY HOURS 120
COURSE OBJECTIVES
By the end of this course, you should be able to:
1. Identify the concept and fundamental of project management holistically;
2. Describe the importance of organisation structure to determine the project
success;
3. Analyse project viability using quantitative approach;
4. Estimate project cost;
5. Develop and update a project plan using CPM method;
6. Perform resources levelling and controlling of the project using EVA
technique;
7. Explain the skills required to be an effective project manager; and
8. Identify and handle risks that may occur.

COURSE GUIDE xi
COURSE SYNOPSIS
This module has four major phases:
Conceptual understanding of project management.
Basic knowledge in engineering economic and costing.
Pre-work before project (i.e. setting up organisation, planning, resource
levelling).
During project (i.e. updating, monitoring and controlling).
The phases are then divided into eight topics as follows:
Topic 1 discusses the fundamentals of project management, definition of project,

phases involved in project life cycle, the key management functions and the
adoption of PLOC in integrated project management system.
Topic 2 provides the guidelines on how to develop good goals and objectives.
This topic also explains the organisational structure available and its strengths
and weaknesses.
Topic 3 outlines the importance of having basic economic knowledge in

evaluating a project. It shows how to develop a cash flow statement and methods
available to evaluate projects such as NPV, IRR, Payback Period and Profitability
Index.
Topic 4 covers the definition and the importance of cost estimates, project cost
and budget, types of costs, techniques available in cost estimating and budgeting,
and accuracy variation in estimation depending on project stages.
Topic 5 describes the steps in developing a project plan from using the simplest
method of Gantt Chart to the harder method of CPM. This topic also
demonstrates how to update the planning chart accordingly.
Topic 6 highlights how to schedule and control the required resources to each
activity through resource levelling process, as well as controlling and monitoring
the project using EV Analysis.
Topic 7 addresses the key aspects of management that are often considered as
„soft‰ issues. The soft skills are needed to become effective projects managers.
Topic 8 identifies the meaning of risk and steps on how to manage it.

xii COURSE GUIDE
TEXT ARRANGEMENT GUIDE

Before you go through this module, it is important that you note the text
arrangement. Understanding the text arrangement will help you to organise your
study of this course in a more objective and effective way. Generally, the text
arrangement for each topic is as follows:
Learning Outcomes: This section refers to what you should achieve after you
have completely covered a topic. As you go through each topic, you should
frequently refer to these learning outcomes. By doing this, you can continuously
gauge your understanding of the topic.
Self-Check: This component of the module is inserted at strategic locations

throughout the module. It may be inserted after one sub-section or a few sub-
sections. It usually comes in the form of a question. When you come across this
component, try to reflect on what you have already learnt thus far. By attempting
to answer the question, you should be able to gauge how well you have
understood the sub-section(s). Most of the time, the answers to the questions can
be found directly from the module itself.
Activity: Like Self-Check, the Activity component is also placed at various

locations or junctures throughout the module. This component may require you to
solve questions, explore short case studies, or conduct an observation or research.
It may even require you to evaluate a given scenario. When you come across an
Activity, you should try to reflect on what you have gathered from the module and
apply it to real situations. You should, at the same time, engage yourself in higher
order thinking where you might be required to analyse, synthesise and evaluate
instead of only having to recall and define.
Summary: You will find this component at the end of each topic. This component
helps you to recap the whole topic. By going through the summary, you should
be able to gauge your knowledge retention level. Should you find points in the
summary that you do not fully understand, it would be a good idea for you to
revisit the details in the module.
Key Terms: This component can be found at the end of each topic. You should go
through this component to remind yourself of important terms or jargon used
throughout the module. Should you find terms here that you are not able to
explain, you should look for the terms in the module.
References: The References section is where a list of relevant and useful

textbooks, journals, articles, electronic contents or sources can be found. The list
can appear in a few locations such as in the Course Guide (at the References

COURSE GUIDE xiii
section), at the end of every topic or at the back of the module. You are
encouraged to read or refer to the suggested sources to obtain the additional
information needed and to enhance your overall understanding of the course.
PRIOR KNOWLEDGE
No pre-requisite is required.
ASSESSMENT METHOD
Please refer to the myINSPIRE.
REFERENCES
As the topic of Project Management is a basic managerial knowledge, no single
text book is sufficient to equip you for this course. The following are
recommended although you are also strongly recommended to access materials
available in the internet. Just search under Project Management, Organisation,
Planning Network, Cost Estimating, Good Managerial Skills and the like. In
addition, you are recommended to access the OUM Library website and look
under the above topics.
Project Management Institute. (1996). A guide to the project management body of

knowledge. PMI.
The Association of Project Managers. (1996). Body of Knowledge. APM.
British Standards Institute. (1996). BS 6079: Guide to Project Management. BSI.
Turner, R. (1992). The handbook of project based management. London: McGraw

Hill.
Rustain, A.M., & Estes, W.E. (1995). What every engineer should know about
project management. New York: Marcel Dekker.
Wearne, S. H. (1973). Principles of engineering organisation. London: Edward

Arnold.
Chang, C. M. (2005). Engineering management challenges in the new

millennium. New Jersey: Prentice Hall.

xiv COURSE GUIDE
Frank WoodÊs. (2005). Business Accounting 1. (10th ed.). New Jersey: Prentice
Hall.
Popescu, C. M., & Charoenngam, C. (1995). Project planning, scheduling, and

control in construction: An encyclopedia of term and applications. New York:
Wiley.
Smith, N.J., Merna, T., & Jobling, P. (1999). Managing risk in construction
projects. Oxford: Blackwell Science.
Moodley, K. (2001). Notes from strategic management.
Institution of Civil Engineers, RAMP: risk analysis and management for projects;
Institution of Civil Engineers and the Faculty and Institute of Actuaries,
Thomas Telford Limited, 1998. Dale H. Besterfield (1998). Quality Control.
Prentice Hall.
TAN SRI DR ABDULLAH SANUSI (TSDAS) DIGITAL

LIBRARY
The TSDAS Digital Library has a wide range of print and online resources for
the use of its learners. This comprehensive digital library, which is accessible
through the OUM portal, provides access to more than 30 online databases
comprising e-journals, e-theses, e-books and more. Examples of databases
available are EBSCOhost, ProQuest, SpringerLink, Books24 7, InfoSci Books,
Emerald Management Plus and Ebrary Electronic Books. As an OUM learner,
you are encouraged to make full use of the resources available through this
library.

Topic Introduction to
the Fundamentals
1 of Project
Management
LEARNING OUTCOMES
By the end of this topic, you should be able to:
1. Describe the nature of projects;
2. Identify the project life cycle;
3. Define project management;
4. Describe the management process and the concepts involved;
5. Explain the characteristics of PLOC as consisting of key aspects of the
management process; and
6. Explain the adoption of PLOC in an integrated project management
system.
INTRODUCTION
As a future project manager, it is integral that you are acquainted with the
fundamentals of project management. Let us see how this topic can help you
in managing projects successfully. Topic 1 gives you an overview of the
fundamentals and basic definitions of Project Management as well as the general
features of a project. The topic also discusses and identifies the phases involved
in a project life cycle. You will come across a detailed explanation of the concepts
of management and project management. The basic management process
involving planning, leading, organising and controlling (PLOC) is emphasised.
Finally, the adoption of PLOC in an integrated project management system is
explained.

2 TOPIC 1 INTRODUCTION TO THE FUNDAMENTALS OF
PROJECT MANAGEMENT
1.1 PROJECT CHARACTERISTICS

A number of professional bodies and organisations have sought to define the
term „project‰, some of which are presented in Table 1.1 below:
Table 1.1: Definitions of „Project‰
Authors/Professional
Definition
Bodies/Organisations
The Project Management A temporary endeavour undertaken to create a unique

Institute (PMI), USA product or service.
The UK Association of A discrete undertaking with defined objectives often

Project Managers including time, cost and quality (performance) goals.
The British Standards A unique set of co-ordinated activities, with definite

Institute starting and finishing points, undertaken by an
individual or organisation to meet specific objectives
with defined schedule cost and performance parameters.
Turner (1992) An endeavour in which human, material and financial

resources are organised in a novel way to undertake
unique constraints of cost and time, so as to achieve
beneficial change defined by quantitative and qualitative
objectives.
From these definitions, we may conclude that a project has the following
characteristics as shown in Figure 1.1.

TOPIC 1 INTRODUCTION TO THE FUNDAMENTALS OF 3
PROJECT MANAGEMENT
Figure 1.1: Characteristics of „Project‰
Thus a project can be defined as a process to achieve a specific objective and

every project objective should be established at the initial stage of the project.
The uniqueness of a project comes together with its objectives.
For example, a companyÊs objective is to construct the tallest twin tower building
in the world. This will then make it unique, which is a non-routine activity to
carry out the specified objective. To complete the objectives, the project should
bear in mind the following aspects:
(a) A time limit stating when the project should start and when the project
should be completed. Time duration is crucial for project managers to plan
the work schedule.
(b) In addition, project managers also need to consider the resources needed.
For example human resources, as well as materials and financial resources
that are required for completing the schedule. Unlike most organisational
work that is divided according to functional specialty, a project typically
requires the combined efforts of a variety of specialists. Often, engineers,
marketing professionals, quality control specialists, and key specialists from
other engineering disciplines work closely together under the guidance of a
project manager to complete a project.

PROJECT MANAGEMENT
All projects are subject to uncertainty during the delivery process. In

consequence of this uncertainty, risks may be generated from factors external to
the project (e.g. political change, market demand) or internally from the project
activities (e.g. effects of delays due to defects, human resource constraints). The
nature of risk is that it can have both positive and negative effects on the project
which are termed as upside and downside risks.
SELF-CHECK 1.1
1. Explain „project‰ in your own words.
2. List down the SIX characteristics of a project. Using your own
words, explain each of the characteristics.
1.2 THE PROJECT LIFE CYCLE

Another way of illustrating the unique nature of project work is in terms of the
project having a definite life cycle. Because the project has a beginning and an
end, it is said to have a life cycle. A number of writers have sought to define this
life cycle in terms of a set of discrete phases through which the project passes. For
example, Rustain and Estes (1995) define a life cycle as commencing with a
concept phase and concluding with a post accomplishment phase as shown in
Figure 1.2, in which four intermediate stages are identified:
(a) Defining or Proposing Preparation Stage

The starting point begins the moment the project is given the go-ahead.
Project intensity (effort) as shown in Figure 1.2, starts slowly, builds to a
peak, and then declines to delivery of the project to the customer. In the
defining stage, specifications and project objectives are defined. Teams and
the roles and responsibilities for each member are established in this stage.
(b) Planning Stage

The level of intensity increases in the planning stage. Plans are developed
to determine 5WÊs, namely:
(i) What the project will consist of?
(ii) When it will be scheduled?
(iii) Whom it will benefit?

PROJECT MANAGEMENT
(iv) What quality level should be maintained? and

(v) What the budget will be?
(c) Executing Stage

Next, a major portion of the project work takes place at the executing stage.
Both physical and mental resources are needed at the executing stage to
produce a physical product. At this stage, control becomes crucial in terms
of time, cost and quality.
(d) Delivering Stage

The final stage is the delivering stage, which includes the two main
activities of delivering the product to the customer and redeploying project
resources.
Figure 1.2: Idealised project life cycle

PROJECT MANAGEMENT
Figure 1.3: Level of activity intensity for an ideal project life cycle
Source: Gray, C. F., & Larson, E. W. (2006). Project management the
managerial process (3rd ed.). McGraw Hill
In respect to the nature and scale of activities changing at each stage, Wearne
(1973) defines the life cycle as shown in Figure 1.4. He adds that whilst there are
discrete stages, there may be time delays between each stage or, indeed the
stages may overlap. The economic purpose of these stages is to contribute to a
useful result, so that each stage should not be considered for itself but as work to
enable the next to proceed.

PROJECT MANAGEMENT
Figure 1.4: Cycle stages of work for a project
SELF-CHECK 1.2
Draw the Level of Activity Intensity diagram for an ideal project life
cycle and briefly describe each of the activities.
All life cycle models have a common characteristic: each succeeding phase is
more concrete than the preceding one, as the project matures from an overall
concept to a set of tasks that in their totality accomplish the project. This point is
emphasised when considering the typical work content of each project stage. Let
us take a civil engineering project as an example. Table 1.2 illustrates an example
of the stages and typical activities in civil projects.

PROJECT MANAGEMENT
Table 1.2: Project Stages and Typical Activities in Civil Engineering Projects
Project Stages Activities
Assess alternative strategies for meeting needs

Appraisal Establish technical and economic feasibility
Derive master plan
Statement of project objectives

Conceptual design and associated cost estimates
Definition Design review
Arrange project funding
Sanction
Design Detailed design
Design review
Contract strategy report and definition of contract
packages
Detailed cost estimates
Procurement/ tendering
Contract award
Construction Site construction
Offsite construction and fabrication
Installation
Quality control
Expediting
Construction management
Contract administration
Engineering and performance tests

Commissioning
Acceptance
Operation Organisation and operation and maintenance
Project review

PROJECT MANAGEMENT
ACTIVITY 1.1
Give an example of project stages and the activities based on your own
field of expertise. Does it have the same stages as the example above?
Why? Discuss with your coursemates and tutor.
1.3 WHAT IS PROJECT MANAGEMENT?

The definition of project management stems from the definition of a project and
implies some form of control over the planned process of explicit change.
The following are several definitions that can give you a better idea of project
management.
Table 1.3: Some Definitions of „Project Management‰
Professional Bodies/
Definition
Organisations
The art of directing and coordinating human and material
resources through the life of a project by using modern
PMI, USA
management techniques to achieve predetermined goals of
scope, cost, time, quality and participant satisfaction.
UK Association of Project The planning, organising, monitoring and controlling of all
Managers aspects of a project and the motivation of all involved to
achieve the project objectives safely and within agreed time,
cost and performance criteria.
The British Standards The planning, monitoring and controlling of all aspects of a
Institute project and the motivation of all those involved to achieve
the project objectives on time, cost, quality and performance.
The common theme is that project management is the management of change,

but explicitly planned change. From an initial concept, the change is directed
towards the unique creation of a functioning system. In contrast, general or
operations management also involves the management of change, but its purpose
is to minimise and control the effects of change in an already constructed system.
Therefore, project management directs all the elements that are necessary to
reach the project objectives, and minimises the elements that will hinder the
development of the project.

PROJECT MANAGEMENT
We can conclude that project management requires the application of

knowledge, skills, tools and techniques to manage project activities in order to
meet or exceed stakeholdersÊ needs and expectations. It involves balancing
competing demands for meeting the requirements of:
(a) Scope, time, cost and quality;
(b) Stakeholders with different needs and expectations;
(c) Identified requirements and unidentified requirements; and
(d) Risk.
In addition to that, we should remember that projects are managed with and
through people.
SELF-CHECK 1.3
In your own words, define project management.
1.4 FUNDAMENTALS OF THE MANAGEMENT

PROCESS
From the definitions of project management you have just learned, we can say
that managers give direction to their organisations, provide leadership and
decide how to use organisational resources to accomplish goals. Such
descriptions give you some idea of what managers do. In addition to those tasks,
managers today must deal with conflict resolution, create trust in an atmosphere
where trust has been badly shaken and help create balance between work lives
and family lives. Managers must also effectively and efficiently use
organisational resources such as employees, finances, information, machinery,
buildings, equipment, supplies, etc. to meet project objectives. Managers are
often required to look at the big picture and their decisions make a major
difference in organisations.

PROJECT MANAGEMENT
Figure 1.5: Process of Management
Figure 1.5 depicts the process of management being practised by managers in

any organisation regardless of whether it is profit or non-profit oriented. As is
evident from the figure, there are basic concepts or functions that you should
remember in the management process, namely:
Planning
Leading
PLOC
Organising
Controlling
1.4.1 Planning
Planning is the first and arguably the most important step in any project. It
includes anticipating trends and determining the best strategies and tactics
to achieve organisational goals and objectives. The need for good planning
may be self-evident, but in practice, it is often difficult to anticipate all the
areas in which forethought is essential.

PROJECT MANAGEMENT
There are four forms of planning for project management, as shown in Figure 1.6.
Figure 1.6: Planning for Project Management

Source: Nickels, McHugh & McHugh. (2005). Understanding business
(7th ed.). McGraw Hill
(a) Strategic Planning

In the strategic planning stage, broad and long range goal setting for the
construction project is done by the top managers (e.g. the president and the
vice president of the organisation). This stage provides the foundation for
the policies, procedures and strategies for obtaining and using resources to
achieve those goals.
(b) Tactical Planning

The tactical planning stage is where the specific short-range objectives or
identification for the project will be set by the lower-level managers (e.g.
project managers) to accommodate the plans of the top manager. Examples
under this planning stage are handling of human resources, project
execution, what equipment is needed, costing estimates etc.
(c) Operational Planning

Meanwhile, all work standards and schedules for the project will be set
during the operational planning stage. Gantt charts can be used herein to
represent the timing of tasks required to complete a project.
(d) Contingency Planning

Contingency planning on the other hand, is the preparation of backup plans
in the event that the primary plans fail.

PROJECT MANAGEMENT
Planning is a key management function because the other functions depend

heavily on having a good plan. Good planning for any project, even for managers
who have successfully completed previous projects, requires a large number of
decisions on questions, such as the ones shown in Figure 1.7.
Figure 1.7: Questions to consider in planning
This kind of planning is one of the most intellectually challenging of the project
tasks and may be time-consuming, but at least the planner has the tools to bring
together an expert group of staff and consultants and create an effective
framework within which they can work together.
ACTIVITY 1.2
1. List the FOUR forms of planning. From the list, choose one that
you were involved in previously at work and describe what you
did.
2. What is the difference among strategic, tactical and operational
planning?

PROJECT MANAGEMENT
1.4.2 Leading
Leading means creating a vision for the organisation and communicating,
guiding, training, coaching and motivating others to work effectively to achieve
the organisationÊs goal and objectives. Leaders must have vision, are able to set a
good example, as well as attract and retain good people. Managers and leaders
are two different entities. Managers derive their authority from occupying higher
positions within the organisation. Leaders on the other hand, have the power of
influence over people. Their power is attained by earning employeesÊ respect and
admiration. However, some leadership skills can be learnt. Managers with good
leadership qualities are the most valuable to their employers.
1.4.3 Organising
The process of organising includes designing the structure of the organisation
and creating conditions and systems in which everyone and everything works
together to achieve the organisational goal and objectives. Briefly, it is the
arrangement of resources in a systematic manner to fit with the project plan.
SELF-CHECK 1.4
What is the difference between leaders and managers? Give examples
based on your experience and discuss with your coursemates and
tutor.
1.4.4 Controlling
Controlling a project involves establishing clear standards to determine whether
an organisation is progressing towards its goals and objectives, rewarding people
for doing a good job and taking corrective action if they are not. It means
ensuring that all occurrences and activities related to the project meet the
organisationÊs goals.
(a) Controlling the Time

This refers to the timing and sequence of all tasks to be performed in the
project work. Scheduling gives a detailed picture of the step-by-step
progress and problems encountered, with a clear indication of the status
and its effect on future progress. It tracks and analyses the project by some
period (months, weeks or days) and by function to ensure the project is
progressing as planned, by measuring actual work done versus the
schedule. Schedule slippage is commonplace and should be a major

PROJECT MANAGEMENT
concern for project managers. Slippage occurs one day at a time and project
managers need to be alert to keep slippage from accumulating to an
unacceptable level. Slippage can be caused by complacency or lack of
credibility, incorrect or missing information, lack of understanding as well
as incompetence and conditions beyond oneÊs control, such as too much
work to do.
(b) Controlling the Cost

Cost of the project refers to the total cost of tasks undertaken to produce the
desired outcomes. However, cost control is the task of keeping the cost of
the project within the budget. Developing the project budget generally
means calculating the costs for labour, equipment and materials, as well as
budgets for staff training and retraining, project management task and
control functions, and space requirements for each task and subtask.
(c) Controlling the Quality

Every project should achieve its desired outcomes with minimum defects.
Quality is the conformance with set requirements and meeting or exceeding
a customerÊs expectations. Project managers must therefore determine what
level of human performance is required to achieve the quality desired for
the specific deliverable.
A written set of acceptance criteria for deliverables should be developed to keep

costs and schedules in line because they help clarify when tasks are completed.
Milestones and deliverables can be used to assess the quality of an end product at
several points during the life cycle of the project, and to ensure satisfaction with
the work being performed. The project management team partitions or divides
the project into manageable phases using milestones. At least one deliverable will
signal the completion of each milestone. The project management team will
document the milestones and the associated deliverables in the work plan. A
thorough understanding of a projectÊs deliverables is the key to effective project
management.
The lack of good project management principles can cause inefficiencies, delays
and higher costs. The Project Manager is constantly concerned with three aspects
of the project:
(a) Is the project delivering what it promised to deliver or more?
(b) Is it making delivery at or below the promised cost?
(c) Is it making delivery at or before the promised time?

PROJECT MANAGEMENT
These are the three basic components that need constant monitoring to achieve
Total Quality Control (TQC) as shown in Figure 1.8.
Figure 1.8: The Triangle of TQC
ACTIVITY 1.3
1. Describe the management process from your understanding of

Project Management in your field of work. Comment briefly on the
level of integration of the key aspects of the management process.
2. In your opinion, can PLOC be used/adopted in the Integrated
Project Management System? Discuss this in myVLE.
3. Other than minimising risks and fulfilling the expectations of
stakeholders, time, cost and quality are the most imporrtant aspects
that need to be balanced. Using the TQC triangle , explain how
time, cost and quality are interrelated.
1.5 INTEGRATED PROJECT MANAGEMENT

SYSTEM
The four functions of PLOC are the heart of management, so, let us further explore
how they can be integrated in the project management system. In project
management, aspects of quality, cost, time, information and risk should be
properly controlled or the project will face major problems. Therefore, an
integrated system in which all of the parts are interrelated is the best solution. This
means that a change in one part will influence the whole. Figure 1.9 explains how
the integrated project management system works by adopting the fundamentals of
PLOC. The integrated management of projects focuses on two areas:
(a) Aligning the projects with the strategic plan; and
(b) The integration of the management process of actual projects.

PROJECT MANAGEMENT
In the planning phase, the mission, objectives and strategies of the project are set
to meet the needs of customers or stakeholders. Development of mission,
objectives and project strategies depend on the external and internal
environmental factors. External refers to political, social, economical and
technological factors. Internal factors can be classified as strengths and
weaknesses, such as management, facilities, core competencies and financial
condition of the organisation.
Next comes the organising phase where resources and actions are prioritised
systematically to fit the project plan. During this phase, the manager should
possess good leadership skills to implement plans and strategies drafted in the
planning phase. Strategies are typically implemented throughout the duration of
the project. Prioritising and balancing between system and environment are
crucial in this phase to ensure that the projects run smoothly in the future. Once
the projects start to be implemented, controlling the project will be the main
focus for achieving the organisational goals and objectives.
Figure 1.9: Integrated Project Management System

PROJECT MANAGEMENT
ACTIVITY 1.4
What are the differences between internal and external factors?
Explain how these factors can influence project strategies in the
planning stage.
There are six basic features of a project:

It has specific objectives;
It is unique in some way;
It has a definite start and finish;
It requires the commitment of various resources: human, material
and financial;
It involves the management of diversity; and
It requires management of risks and uncertainty.
Ideally, a project consists of four work stages: defining, planning, executing

and delivering.
Each of the stages has different levels of activity intensity depending on the
duration of the project.
Project management is conceptually about managing an organisation using

internal and external resources to achieve the organisational goals and
objectives.
Four management functions in the management process are planning,

leading, organising and controlling (PLOC) and amongst them, planning is
the heart of the management process.
PLOC is the framework of an integrated project management system.

PROJECT MANAGEMENT
Integrated Project Management System PLOC

Level of Activity Intensity Total Quality Control (TQC)
Life Cycle Models
British Standards Institute. (1996). BS 6079: Guide to project management. BSI.

knowledge. PMI.
Rustain, A. M., & Estes, W. E. (1995). What every engineer should know about
project management. New York: Marcel Dekker.
The Association of Project Managers. (1996). Body of knowledge. APM.
Turner, R. (1992). The handbook of project-based management. London:
McGraw Hill.
Wearne, S. H. (1973). Principles of engineering organisation. London:
Edward Arnold.

Topic Organisation:
Goals, Structure
2 and People
LEARNING OUTCOMES
1. Identify the factors that need to be considered in setting out missions
and goals;
2. Develop missions and goals for a company;
3. Explain the principles involved in structuring organisations;
4. Describe and differentiate the various models of organisational
structure; and
5. Explain the strengths and weaknesses of each organisational structural
model.
INTRODUCTION
We have looked at how engineering projects evolve and develop. No project
operates in isolation and there is always interaction among the promoterÊs team
both external and internal, specialists and suppliers. The projectÊs missions and
goals need to be established beforehand and an appropriate organisation has to
be developed in order to function within the project environment and with
external parties so as to fulfil its goals and missions. This topic is concerned with
the manner in which projects and interacting organisations are structured as well
as how goals and project missions are established.

TOPIC 2 ORGANISATION: GOALS, STRUCTURE AND PEOPLE 21
2.1 SETTING MISSIONS AND GOALS

At the heart of organisational management is the accomplishment of goals. Any
activity we undertake involves achieving goals. A simple picnic has as its goals
the provision of relaxation and rest, while the Channel Tunnel has the goal of
contributing to a fast and efficient transport route to Europe. The task of the
manager therefore starts with the setting and establishing of goals which may
consist of a quantitative/numerical approach, for instance with regard to the
quality of a product or the level of service or reliability.
Setting goals in isolation is doomed to failure. Any goal that does not take into
account the possible impact on society or the environment is bound to suffer
adverse reactions. For example, roads that damage key environmental features,
refrigerators that produce CFCÊs and nuclear testing can result in negative reactions
because they do not relate adequately to society or the natural environment. The
role of the manager is to ensure that goals are developed with the external
environment in mind and to relate the activities of the firm to this environment. All
managers set their goals on the following basis shown in Figure 2.1.
Figure 2.1: Basis for all managers to set their goals
The direction that an organisation sets itself is dependent on the goals it sets for
itself. The process of setting these goals is not simple. The key question is often,
are the goals appropriate for the organisation? This question can only be

22 TOPIC 2 ORGANISATION: GOALS, STRUCTURE AND PEOPLE
answered when the complete process of strategic evaluation has been completed.
Even before we start the process of strategic evaluation, there are a number of
influences on the organisation that has an impact on the objectives of the
organisation. Among the influences on the organisationÊs goals are:
(a) Culture;
(b) Tradition;
(c) Leadership and management style;
(d) Structure and system of the organisation;
(e) The nature of the business (the market situation, the technology, the
products or service); and
(f) Stakeholders.
Together, all these factors provide a recipe or web that will eventually influence
the formation of the organisationÊs goals. It is a common practice for
organisations to have formally stated goals.
The goals and objectives are set by top management in conjunction with specific
shareholders. It is the expectations and aspirations of this group that provides the
focus for the organisational strategy. In some cases, the objectives are developed
from constraints set by stakeholders. All objectives have two clear features:
(a) They express the desired ends to be achieved.
(b) They express the formal aims of the organisation.
The objectives clearly provide a direction for the organisation to take. It sets a
target for the organisation to try and achieve, be it tangible or intangible. It also
sets the focus for all future actions.
ACTIVITY 2.1
1. Imagine that you are a senior partner of a new handphone

company in Malaysia and also head of marketing. Create your
own companyÊs mission, corporate objectives and marketing unit
objectives.
2. From your point of view, how can culture and tradition influence
the organisationÊs goals?

2.2 ORGANISATION
Now it is clear that the establishment of a project involves planning and the
setting of mission and goals to achieve the project objectives. So what do you
think will be the project managerÊs next step in order to achieve the project
objectives, assuming all necessary activities have been identified?
Once the organisationÊs mission and goals are clear, the work necessary to
achieve those goals must be divided up in the most productive way possible,
which is by organising the people.
Projects consume a large amount of resources, are often complex, unique and
vary in scale. It is therefore essential to adopt a systematic approach to managing
these activities. At the heart of all managerial activity is the creation of an
organisation to execute the managerial objectives and to establish how the people
within it relate and coordinate with each other.
Organisation is about creating a control and communication system that allows

management to achieve its objectives. It puts in place a structure that defines
roles, hierarchies, communication, coordination and control mechanisms.
For example as in the following two situations in Figure 2.2, interacting with
either type of organisation will have an impact on how the project organisation is
developed.
Figure 2.2: Difference between larger organisations and smaller organisations

The design of the project organisation has to serve two masters:

(a) Flexibility, speed and dynamism.
(b) Processes, planning and procedures.
This should allow it not only to interact with the existing organisation but also
fulfil its own goals.
ACTIVITY 2.2
Why do we need to have an organisation?
2.3 BUILDING BLOCKS OF ORGANISATIONS

PRINCIPLES FOR ORGANISATONAL
DESIGN
There is no universal system of organisation that suits all circumstances. Modern
attitudes to organisation design refer to the „contingency approach‰, which
suggests that the most appropriate form of organisation is contingent on the
influences on the organisation. As you know, project organisations are temporary
in nature but often have to interact with permanent external and internal
organisations. The manner in which these interactions take place will have an
influence on what the project organisation can achieve. Therefore, several
organisational principles need to be complied with, in order to have a strong
foundation for the organisation. They are:
(a) Hierarchy of Authority

Every organisation, large or small, is influenced by its approach to the
system of authority. This is commonly referred to as the hierarchy of the
organisation. Hierarchy relates to the number of levels of authority and
control, and where decisions are made. The hierarchy is influenced by the
senior managementÊs attitude towards control. The closer the control or
supervision of subordinates, the greater the number of levels in the
organisation. Since one person cannot keep track of thousands of workers,
the top level manager needs many lower-level managers to help. This is
what we call a chain of command. Chain of command is the line of
authority that moves from the top of the hierarchy to the lowest level,
which is best illustrated in a typical hierarchical organisation chart as
provided in Figure 2.3.

Figure 2.3: An example of a typical hierarchical organisation chart
(b) Role Definition

The next principle in organisation design is how the roles of the members of
the organisation are defined. As discussed earlier, at the end of subtopic 2.2,
a rigid system of role definition and responsibility creates a sense of
stability. Meaning that there is a place for everyone and everyone knows
their place. Bureaucracy was founded on the principle of having this sense
of order. This approach on the other hand may stifle flexibility, creativity
and prompt decision making. More recent approaches to role definition
tend to set more flexible parameters for the participants of the organisation.
Roles are defined to allow for more autonomy and scope for individual
innovation. The less rigid approach to role definition allows hierarchy to be
broken down and places more faith in the people in organisations.
(c) Clear Communication Channels

All workers should be able to reach others in the organisation quickly and
easily. An organisation that does not communicate effectively will face
difficulties. Communication should occur between up and down
hierarchies as well as between units at a horizontal level. The emphasis
on the need for communication should be built into the early thinking in
the organisation design. This pre-planned approach is becoming more
important as organisations become more temporary and use more external
sources for achieving goals.

(d) Good Level of Coordination

The design of organisations should also serve a coordinating function.
Traditionally, organisational design tended to use division of work as a
means of creating structures. This is a sound approach where projects and
products are simple and a high level of coordination is not required.
However, if you are involved in an organisation that has complex projects
and products, the need for an organisational design to help facilitate
coordination is essential. There is a move towards creating multi-
disciplinary teams and cross-functional groups that interact more freely
and are not constrained by specialist boundaries. In these situations, good
coordination has to be designed into the organisation.
(e) Degree of Centralisation

The amount of decision-making powers varies depending on the size and
complexity of the project. For small size organisations, it is possible to
centralise all decision-making power to the top-level manger. On the other
hand, for the large size organisation, some decision-making power should
be delegated to the lower level managers and specially trained employees
on both major and minor issues.
SELF-CHECK 2.1
Explain the organisational principles that you need to comply with.
2.4 ORGANISATIONAL DESIGNS

Although we have considered dimensions of organisational design, there are a
number of generic organisation designs that exist. These organisation forms have
been developed over time and are present in engineering organisations that
operate today. We will discuss the factors that underlie their creation, their
strengths and weaknesses and how they might influence projects that interact
with them.
2.4.1 The Functional Organisation

In engineering, jobs have become more specialised. Specialisation is an extension
of the principles of work division and specialists tend to group together and form
teams, units, sections and departments. In its simplest form, the grouping of
specialists give rise to the functional structure as illustrated in Figure 2.4.

Figure 2.4: Functional organisation structure

Source: Larson, G. (2006). Project management: The managerial process
(3rd ed.). McGraw Hill
Functional organisations arise out of the principles of division of work and are
built on specialist skills. These organisations are dominated by specialists.
Expertise and information are contained within each specialist function, group or
department. Projects operating within a functional environment are reliant on the
cooperation of specialist functions and communication with other departments.
According to Chang (2005), companies that favour this kind of organisational
structure include:
(a) Manufacturing operations, process industries and other organisations with
limited product diversity or high relative stability of workflow.
(b) Start-up companies.
(c) Companies with narrow product range, having a simple marketing pattern
and few production sites.
(d) Companies following the lead of their competitors.

The advantages and disadvantages of functional organisations are listed in Table 2.1.
Table 2.1: Advantages and Disadvantages of Functional Organisations
Advantages Disadvantages
May produce a high level of quality in the Different specialist departments often
product because all the expertise is in the guard their own expertise. They have their
team. own objectives and normally are not good
at integrating with other experts. This will
lead to lack of common interests.
Makes the management at departmental Lack of communication and understanding
level easier since each manager is an expert amongst specialists from different
in a narrow range of skills and specialisation. departments.
Allows the use of current technologies and Individual specialist interests are promoted
state-of-the-art equipment. ahead of project goals and the potential to
disrupt the project cycle is more likely.
Decision making is based on ensuring
functional performance. Projects operating in
a functional environment require project
managers to concentrate on integrating
activities and communication with specialists.
2.4.2 The Division Organisation

Some companies try to overcome the problems assocatiated with functional
organisations by creating organisational structures that have more focus and
facilitate communication between specialists. Such organisations design their
structure by focusing on the specialist nature of the work or project rather than
on individual expertise. This form of structure is known as the divisional
structure as illustrated in Figure 2.5 (a) (c).
Figure 2.5(a): Divisional organisation structure (Discipline based)

Figure 2.5(b): Divisional organisation structure (Region based)
Figure 2.5(c): Divisional organisation structure (Product based)
Divisional organisations are predominantly found in large companies. The aim of

the divisional form of structure is not to replicate specialist characteristics, but t
o focus on a final product through its specialist type, size, location, customer,
etc. Depending on the focus, there are normally three types of divisional
organisations:
(a) Discipline Based

Favoured by universities, governmental laboratories and other R&D
organisations (Figure 2.5(a)).
(b) Region Based

Favoured by large companies that may produce and market their products
to different customers in geographically dispersed locations (Figure 2.5(b)).
(c) Product Based

Favoured by companies which have different products that might require
different production, sales and business strategies to achieve success in the
marketplace (Figure 2.5(c)).

The advantages and disadvantages of divisional organisation structure are listed

in Table 2.2.
Table 2.2: Advantages and Disadvantages of Divisional Organisation Structure
Projects are easier to facilitate within a Projects are vulnerable where they are
division as all the components within the required to operate between the boundaries
organisation are geared to meeting the of divisions as inter-division rivalry might
divisionÊs goal. arise.
Promote innovative pursuits in individual Poor communication and inefficient
disciplines because the entire focus of information exchange may exist.
activity is on the division, and decision
making is based on divisional requirements
only.
Encourages management development of Requires project managers to be aware of
employees. divisional and corporate priorities and how
they may impact projects.
Focuses on end products or geographical High costs due to layers, need for autonomy
regions. or duplicated facilities.
SELF-CHECK 2.2
What are the relative advantages and disadvantages of the
functional and divisional approaches to managing projects?
2.4.3 The Matrix Organisation

The third predominant organisation form that has arisen developed out of the
problems with integrating projects into existing organisations. Projects by their
very nature are temporary and are difficult to integrate with permanent
organisational design. This problem is further exacerbated in organisations
that tend to manage largely by projects, which usually involves performing a
balancing act between permanent specialist functions and temporary project
structures.

Figure 2.6: Matrix organisation structure
The matrix structure in Figure 2.6 attempts to resolve this problem by imposing
a temporary project structure (project based control) across the permanent
specialisation (functional control). The idea is to move groups of specialists to
projects as they are needed. Projects fall under the control of project managers
resulting in the situation that specialists are responsible to two managers;
which also means, a project manager can borrow people or staff from different
departments to help them. For example Employee A is required to report to both
Vice President of manufacturing as well as to Project Manager 2. However, this type
of organisation also has the advantages and disadvantages as listed in Table 2.3.

Table 2.3: Advantages and Disadvantages of Matrix Organisation Structure
Flexibility in system. Careful role definition and a clear authority
framework to prevent conflict.
Encourages inter-organisational cooperation Tendency of dual reporting caused by
teamwork. communication problems.
More efficient use of resources. Confusion in loyalty.
Allows project manager to focus on Severe conflicts among managers.
schedule and cost and functional managers
on quality/marketing/expertise.
Balanced work load. Requires good interpersonal skills and
cooperation among managers and
employees.
Excellent for employee development (to
achieve exposure and interactions).
SELF-CHECK 2.3
In your opinion, is the matrix organisation structure suitable for a new
company? Discuss with your coursemates and tutor.
2.4.4 The Network Organisation

There is a trend in engineering companies to concentrate on their core businesses
or activities that they have greatest competency in. However, some projects
cannot be sourced entirely from internal resources and so, external resource
inputs are needed. How are externally sourced projects structured?
The basic elements of designing an organisation, such as role definition and

hierarchy, still remain an essential part of structuring an external project. The
structural form that emerges is a network organisation as shown in Figure 2.7,
which places the project manager at the centre of the network. This formal
relationship consists of a firm that is engaged or bound through contracts in long
term relationships with external suppliers who bring expertise into the parent
company. Their roles and responsibilities are defined by the contracts. The main
responsibilities for the project manager is to plan, monitor and control these
relationships. The key to operating under this structural form is the power that is
vested in the project manager. This power will be largely derived from the nature
of the contracts set up between the project sponsor and the external specialists.

Figure 2.7: Network organisation structure
Table 2.4: Advantages and Disadvantages of Network Organisation Structure
Allows project manager to exercise Potential loss of control over the project.
authority within the project. For example the core firm depends on
other firms that they do not have direct
authority over.
Flexible and give organisations the Interpersonal conflicts can arise since the
opportunity to work beyond their different participants do not share the same
resources. They are no longer constrained values and priorities.
by their own resources but can go further
by combining their resources with other
specialist companies.
High level of expertise and technology can Requires project manager to have excellent
be brought to bear on the project. management skills because partners linked
by these networks may be from companies
with a different culture and business
background and divergent value systems
and perspectives.

SELF-CHECK 2.4
Explain why the writer says „The virtual organisation is taking
network organisation a step further‰.
2.4.5 The Virtual Organisation

The virtual organisation is a new form of working involving different
combinations of contractual and locational variables. This creates a working
environment that is more fluid and flexible. This organisation is difficult to
characterise in terms of work patterns, organisation structure, boundaries and
physical form. They are temporary organisations which produce results without
having a physical form as in traditional organisations. The virtual organisation
defines roles in terms of the task at the moment, rather than the role anchored by
the organisation or codified job descriptions. Time, space, tasks and shifting
group membership are the primary definers of responsibility. The virtual
organisation is taking network organisation a step further. They are a network of
people and activities that are brought together to fulfil particular tasks without
the boundaries of a traditional organisational form. The virtual organisation is an
exchange network and will continue to develop in an organisational form as we
improve communication technology.
Table 2.5: Advantages and Disadvantages of a Virtual Organisation Structure
Maximises the use of people and Relies excessively on the effectiveness of
knowledge rather than investing in the communication technology.
costs of permanent organisations.
Increases the quality of product since more Traditional project managers often have
specialists and experts are involved. trouble adapting to the speed of change
since this is a very new and different
concept compared to traditional forms.
Simple and flexible structure of Tough to manage because people are
organisation. moved in and out of the organisation as
and when they are needed.

ACTIVITY 2.3
1. Imagine you have a manufacturing company. Your company

manufactures automobile jacks, hubcaps and a variety of fittings.
These products are sold as replacement parts through chain
autosupply stores. Your business is growing with production
facilities located in rented buildings over various parts of the city.
The number of production staff is also expanding constantly. As a
president, you want to expand your company into the brass fittings
business. However, you realise after this latest expansion is
accomplished, that your company should consolidate to make its
production operations more efficient.
Which organisation structure do you think should be best adopted

in order to accommodate its current needs of business expansion
and also lay the foundation for anticipated consolidation thereafter?
What information is needed to set forth such an organisational
structure? What are the crucial variables that should be considered
in the design of such an organisation?
2. List out what factors should be taken into consideration in setting
out the missions and goals of a company. Elaborate on any of the
two factors.
Factors that influence an organisationÊs goals are culture, tradition, leadership

and management styles, the structure and system of the organisation, the
nature of the business (the market situation, technology, products or services)
and stakeholders.
Good goals and objectives must clearly express the: (a) desired ends to be
achieved; and (b) formal aims of the organisation.
An organisation is about creating a control and communication system that

allows management to achieve its objectives by putting in place a structure
that defines roles, hierarchies, communication, coordination and control
mechanisms.

At least five basic organisational principles need to be complied with in order

to have a strong organisational foundation, and they are:
Hierarchy of authority;
Role definition;
Clear communication channels;
A good level of coordination; and
A certain degree of centralisation.
The types of organisation structure that are commonly used in engineering

organisations are:
Functional
Division
Matrix
Network
Virtual
Each of the organisational structures listed above has its own characteristics,
strengths and weaknesses that differentiate it from the others.
The management of organisations requires a systematic approach in order

to create a sense of order and control. Therefore, choosing the best
organisational structure will determine the success of the company.
Discipline Based Principles for Organisational Design

Division Organisation Product Based
Functional Organisation Region Based
Matrix Organisation Virtual Organisation
Network Organisation


Gray, C. F., & Larson, E. W. (2006). Project management: The managerial process
(3rd ed.). Boston, MA: McGraw Hill.

Topic Engineering
Economics
3 Analysis
LEARNING OUTCOMES
1. Discuss the concept of cash flow and the use of cash flow statements
and cash flow diagrams;
2. Describe the factors of time value of money and accuracy in cost
analysis;
3. Describe the foundational concepts and formulas for cost analysis
including depreciation and rate of return;
4. Describe the four methods of evaluation available i.e. net present value,
internal rate of return, payback period and profitability index; and
5. Evaluate projects using these four methods.
INTRODUCTION
Engineering Economics Analysis is the quantitative approach of comparing
alternatives on the basis of their projected cash flows, properly accounting for the
time value of money. There are several rules of thumb in accounting that need to
be introduced first before you can start analysing. Additionally, basic terms and
definitions also need to be made familiar for better understanding of the
concepts.

TOPIC 3 ENGINEERING ECONOMICS ANALYSIS 39
3.1 CASH FLOW

Before you go on reading further about cash flow, letÊs look at the following
situation. Let us say you want to buy a used bicycle that costs you RM200. You
borrow RM200 from Zaki (your friend) and promise to pay him back at the end
of the week. In turn, you sell the bicycle to someone else for the price of RM250
and the buyer agrees to pay you in a week. Unfortunately, at the end of the week,
your buyer says that he does not have the money as promised and he asks for
another extension of time, till the end of the month. Meanwhile, Zaki desperately
needs his RM200 back.
What seemed like a great opportunity to make an easy RM50 profit is now a real
cause for concern. Right now you owe Zaki RM200 and you have no cash. What
do you do when Zaki shows up again and demands to be paid?
From the above situation, if you are in a business, this might cause you to default
on the loan and possibly go bankrupt even though you had the potential for
profit. In business, it is possible that a business can increase sales and increase
profit and still suffer greatly from cash flow problems. Cash flow simply
describes the movement of money coming into and going out of any business,
company or account as illustrated in Figure 3.1(a). Poor cash flow constitutes a
major operating problem for many companies. An analysis of cash flow provides
an insight into the operations and conditions of companies or projects. It is a
good barometer for measuring the cash position within companies or of projects.
Figure 3.1(a): Schematic cash flow description

40 TOPIC 3 ENGINEERING ECONOMICS ANALYSIS
A sample of a cash flow statement can be seen in Figure 3.1(b).
Figure 3.1(b): Example of a cash flow statement

The information can be found in cash flow statements. Besides that, cash
flow statements also show:
(a) Net cash flow from operating activities.
(b) Dividends from joint ventures and associates.
(c) Returns on investments and servicing of finance.
(d) Taxation.
(e) Capital expenditure and financial investment.
(f) Acquisitions and disposals.
(g) Equity dividends paid.
(h) Management of liquid resources.
(i) Financing.
Cash flow = the movement of money into and out of an account.
Example 1
Alia Machineries Sdn. Bhd. wishes to design and market an earth-moving
machine. During the first year, the companyÊs cash flow reflects the designersÊ
wages and overheads, say RM20,000. There is a net cash outflow in the first year
of RM20,000. (note that the sign is used to donate a flow out of the system.)
During the second year, sales are underway but the full manufacturing effort has
not yet been reached. Cash flow is RM100,000.
During the fourth year, sales revenue costs offset production costs but spares and
servicing network costs still generate a negative cash flow. Overall cash flow is
+RM50,000.
During years 5, 6, 7, sales take their market share and revenue exceeds
production and support costs.
Net cash flow year 5 = +RM250,000

Sales begin to fall in year 8 as competitors bring out new machines.

Manufacturing ceases at the end of year 9.


Instead of putting the data in a cash flow statement form, data can also be
represented in a diagram as shown in Figure 3.2.
Figure 3.2: Cash flow diagram for Example 1
Figure 3.2 shows cash flow for a 9-year period of a project. Note that the cash
flow is shown to take place at a specific time in the year. In reality, the cash is
moving continuously throughout the period but it is usual to show it occurring at
the end of a „tax‰ year.
SELF-CHECK 3.1
1. From Example 1, please help Alia to write the cash flow statement
for her company.
2. Which of the following is the most favourable cash flow when
considered at the rates of interests of 5%, 10% and 20%?
(i) RM1000 for the first year and RM200 for each of the next 4 years?
(ii) RM1000 for the first year, RM200 at the end of year 2 and
RM686 at the end of year 4?

3.2 COST ANALYSIS

It is important for all engineering managers to become well-versed in cost
accounting. Engineering firms and companies focus on making profit by way of
investing resources (money, equipment, manpower, time, brainpower, business
relationships, etc.) and satisfying the needs of its stakeholders (stockholders,
customers, employees, suppliers, and community). To do this, cost analysis is the
key management concept to be used. Numerous technology-based organisations
such as manufacturing, engineering, construction, product development, product
design, technology applications and services actively perform cost analysis. In
fact, you also perform simple cost analysis in your daily life, for example when
you intend to go shopping.
Two types of cost analysis can be performed depending on the two major factors
i.e. time and accuracy. The characteristics for both types of cost analysis can be
seen in Figure 3.3.
Figure 3.3: Characteristics of Single and Multiple Period Analysis

SELF-CHECK 3.2
Do you think this formula can be used to calculate the minimum

number of products in the case of breakeven? Using the GP = P N
(FC + VC N) formula, derive the new formula to calculate the
minimum number of products in the case of breakeven.
3.2.1 Time Value of Money

Money in hand may earn income through investment as in the case of money in
the bank, which may earn income through interest. Money of the same dollar
amount in different time periods have different values. This is called purchasing
power. The value of money changes with time because of the following reasons:
(a) Inflation that tends to erode the purchasing power (value) of money;
(b) Money in hand that could earn additional interest if deposited in the bank; and
(c) Money available in a future period that is less valuable because it is not
available for use at the present moment.
Since this topic is a little bit different from other technical engineering topics, you
will need to understand and remember a few basic terms and definitions as listed
in Table 3.1.
Table 3.1: Table of Terms and Definitions
Terms Definitions
Interest It represents a fraction of the principal amount, designated as a
reward to its owner.
Compound Interest When the interest earned in one interest period is added to the
principal.
Nominal Interest The interest rate quoted by banks or lenders on an annual
basis = Annual Percentage Rate (APR).
Effective Interest Rate The interest rate in effect for a given interest period (e.g. 1 month).
Nominal Dollar The actual dollar value at a given point in time.
Constant Dollar The dollar value that has a constant purchasing power with
respect to a given base year (e.g. Inf.).
Source: Chang, C. M. (2005). Engineering management. Challenges in the new

millennium. New Jersey: Prentice Hall

Three simple cases will be discussed to show how time value of money works
and as you go along, you will find other new terms and formulas as well. Do take
special note of these!
(a) Case 1: Single Payment Compound Amount Factor

Consider the case of investing RM100 in a bank account which produces
12% interest per annum over 3 years. How much money is accumulated at
the end of year 3?
SOLUTION
Deposit/Interest Amount (RM) Total (RM)

Capital 100.00
1st year interest 12.00
Total at the end of year 1 112.00
2nd year interest 13.44
3rd year interest 15.05
This process of calculating an accumulated interest is called

COMPOUNDING (also signified as S). The total Compound Interest on
RM100 at 12% over 3 years is RM40.49. For an interest of 12%, it can also be
said that RM100 today is equivalent to RM125.44 at the end of year 2, or
RM140.49 over 3 years.
Thus, this system can be expressed mathematically as:
S = P[1 + i]n
S = Compound Total
P = Original Sum
i = Interest rate
n = Number of periods
The reverse of compounding is called DISCOUNTING. This process is used

to determine the original sum, P, which will produce the compound total, S,
with a given rate of interest, i.

The Original sum, P, is said to be the „PRESENT WORTH, DISCOUNTED

CASH VALUE, or the PRESENT VALUE‰ of the compound total, S, at an
interest rate of, I, for a period of n years. So RM100 is the present value of
RM140.49 at 12% interest over a period of 3 years.
(b) Case 2: Present Worth Factor

A further refinement of the system is often used. The ratio of P/S is usually
described as the DISCOUNT FACTOR. This is generally written as:
1
P S n
S P/S, i, n
1 i
Example 2
Compare the two cash plans shown. Equipment is to be purchased. Two
identical models are available. B has higher initial outlay but lower long
term operational costs. A is initially cheaper but more expensive to run.
Cash flow for the purchase and operation of machines A and B are
calculated as follows:
Year Cash Flow A Cash Flow B

0 400 900
1 200 100
2 200 100
3 200 100
4 200 100
5 200 100
6 200 100

If the interest rate is 10%, which is the best option to choose?

Discounted Discounted
Cash Flow Cash Discount
Year Cash Flow Cash Flow
A Flow B Factor (DF)
(DCF)A (DCF)B
0 400 900 100 400.00 900.0
1 200 100 0.909 181.82 90.91
2 200 100 0.826 165.59 82.64
3 200 100 0.751 150.26 75.13
4 200 100 0.683 136.60 68.30
5 200 100 0.621 124.18 62.09
Total 1158.16 1279.08
*Where discount factor = 1/(1 + i)n
CONCLUSION
Buy machine A. It has the lower equivalent cost at year zero. Option A is
better and cheaper.
(b) Case 3: Uniform Series Compound Amount Factor

Defines the total future value of an account (e.g. retirement college
education) at the end of n periods, if a known annuity A is deposited into
the account at the end of every period.
This is generally written as:
S = A[(1 + i)n 1]/i

S/A = [(1 + i)n 1]/i
= (S/A, i, n)
Example 3
Mr Kamarul wishes to have an educational plan for his 5 year old son. He
allocates RM100 every month for this plan. Please help Mr Kamarul to
calculate how much he will get when his son reaches 21 years old. Assume
the annual interest for the plan is 8.5%.

SOLUTION
n = 21 years 5 years = 16 years; i = 0.085; A = 100 12 = 1200
(annual deposit)
S = A[(1 + i)n 1]/i

= 1200 [(1 + 0.085)16 1]/0.085
= RM37,958.41
3.2.2 Rate of Return

Rate of return (ROR) describes the interest you will receive by investing capital.
The term can also be used to describe the value of investments made on projects,
plants and equipment. ROR is a very important tool to evaluate the potential of a
project. If the acceptable ROR is not realised, then it is not worth making the
investment.
The formula used for ROR is:
Uniform series present worth factor/ROR
P/A = [(1 + i)n 1]/[i(1 + i)n]
Where: P = Present value i = Effective interest rate n = number of interest periods

A = Annuity (RM) periodical payments at the end of periods
If the problem is more complex or an accurate ROR is required, a graphical

solution is applied as shown in Example 4.
Example 4
The following table shows the cash flow for a contracting company. What is its RoR?
Working
Running Revenue Net Cash
Period Plant(RM)k Capital
Costs (RM)k RM)k Flow (RM)k
(RM)k
End year 0 280 10 0 290
1 90 155 579 600 224
2 10 185 112 298 9
3 0 51 1112 1300 175
4 0 51 1274 1500 175
5 0 82 810 1000 272
6 0 270 469 500 351

As first attempt, try interest rates of 16% and 20%
Net Cash
Period p/f @16% PV @ 16% p/f @20% PV @ 20%
Flow (RM)k
0 290 1000 290 1000 290
1 224 0.862 193 0.833 187
2 9 0.743 7 0.694 6
3 175 0.641 112 0.579 101
4 239 0.552 132 0.482 115
5 272 0.476 130 0.402 109
6 351 0.410 144 0.335 118

NPV 28 40
The tables show that the NPV for which the interest rate will be zero is between
16% and 20%. The calculation can be repeated to refine the solution or a graphical
method can be used.
The true ROR is defined as the interest rate for which NPV is zero. This is 18% for
this particular example.

3.2.3 Depreciation
Most assets decrease in value with use and time. This is referred to as
depreciation. It describes the decrease in the capital value of an asset and is
generally fixed at given rates or times by the taxing body. Take the simple
example of buying a car and running it. Purchase price RM60,000; sold after 1
year at RM55,000.
Three methods can be used to calculate depreciation:

(a) Straight Line.
(b) Declining Balance a common depreciation-calculation system that
involves applying the depreciation rate against the non-depreciated
balance. Instead of spreading the cost of the asset evenly over its life, this
system expenses the asset at a constant rate, which results in declining
depreciation charges for each successive period. For example, if an asset
that costs $1,000 is depreciated at 25% each year, the deduction is $250.00 in
the first year and $187.50 in the second year, and so forth.
(Source: http://www.investopedia.com/terms/d/decliningbalancemethod.asp)
(c) Unit-of-Production under the Units-of-Production method, the useful life
of the asset is expressed in terms of the total number of units expected to be
produced. The annual depreciation is computed in three steps. (Source:
http//en.wikipedia.org/wiki/Depreciation)
Straight line is the simplest way to calculate depreciation. It is a system which

calculates depreciation on the basis of a fall in value from purchase to scrap (see
Figure 3.4).
Figure 3.4: Straight Line Depreciation

3.3 WHICH TO CHOOSE?

Before making a decision, it would be wise to do some prioritising, comparing
and analysing of the alternatives available. Although there are many criteria for
selecting a project, these criteria can be typically divided into financial and non-
financial aspects. Some questions in Table 3.2 may help in the selection process.
However in this topic, we will focus on the economic aspects.
Table 3.2: Example of Economic and Financial Questions
Financial/economic Questions Non-financial Questions

Will the investment pay? Are the alternatives technically feasible?
Will return on the investment be adequate? Does the law constrain the choice of
alternatives?
Should the present consumption of capital Do political aspects influence the choice of
be sacrificed for the prospect of future alternatives?
benefits?
Etc. Is there sufficient capital available?
Will health or safety be at risk in any of the
alternatives?
Etc.
However, answering questions alone is not enough for project managers to make
a decision. Several standard methods are used in industry to evaluate a project.
These include net present value (NPV), internal rate of return (IRR), payback and
profitability index.
3.3.1 Net Present Value

In this method, the discount factor is of prime importance as it significantly
affects the results. The main use of this method is to measure the profitability of a
project. Basic information needed to calculate Net Present Value (NPV) are:
(a) Length of the project years.
(b) Value of cash flow years.
(c) Discount factor/cost of capital to the company.

There are two ways in calculating NPV. It is either to use table or formula. The
formula for NPV is:
NCIF CR
NPV P+ m
(1 i) (1 i)n (m = 1 to n)
Where:
P = Present investment
NCIF (m) = Net cash in-flow (RM) in the period of m, which represents
revenue earned cost
i = Cost of capital rate
CR = Capital recovery (RM), which is the amount regained at the end
of the project through resale or other methods of dispositions
Once the calculation has been performed, projects with the largest NPV are to be
preferred.
Example 5
A company is considering the purchase of an earth-moving plant for RM10,000
which is expected to work for 4 years. The terminal value will be RM1,000. Net
cash inflows are expected to be RM3,000. The discount factor used for the
investment appraisal is 15%.
SOLUTION
(i) Using Table

Years Items Cash Flows DF (15%) DCF
0 Purchase 1000 1.0000 10000
1 Net inflow 3000 0.8696 2609
2 Net inflow 3000 0.7561 2268
3 Net inflow 3000 0.6575 1973
4 Net inflow 3000 0.5718 1715
5 Sale of machine 1000 0.4972 497
NPV 9.38

(ii) Using Formula
NCIF(m) CR
NPV=-P+
(1 i)m (1 i)n (m = 1 to n)
(300) (300) (300) (300) (300)

NPV 1000 + 1 2 3 4
(1 0.15) (1 0.15) (1 0.15) (1 0.15) (1 0.15)5
938
Therefore, the project option of purchasing the particular earth moving

plant is not preferred.
3.3.2 Internal Rate of Return (IRR)

The internal rate of return (IRR) is the average annual rate of return (usually
annual) realised by an investment with a zero NPV at the end of its project life
cycle. In other words, initial investment is fully compensated by the earnings and
capital recovery of the project.
Therefore the formula for IRR is:
NPV = 0
In NPV calculations and other similar techniques, it is necessary to know the

appropriate interest rate before calculations are made. Often however, the
decision to invest may change with the interest rate! On the other hand, this
method calculates an actual „internal rate of return‰ for a series of cash flows
rather than applying a set rate of return and interpreting the results obtained.
Projects with high IRR are preferable.
3.3.3 Payback
Payback period is defined as the number of years in which the initial investment
will be paid back with the annual earnings generated by the project. Basically this
is to answer the question of „How quickly do I get my money back?‰ To calculate
payback period, remember this simple formula:
PB = P/CF =(Capital Investment/Average Annual Cash Flow)

Projects with the least PB are preferred.
Example 6
Calculate the payback period for the following cash flows.
Project A Project B
Initial cash outflow 10000 10000
Yearly Net cash flow 1 6000 2000
2 3000 2000
3 1000 2000
4 1000 2000
5 1000 2000
6 2000
7 2000
8 2000
9 2000
10 2000
4.166667 5
PAYBACK 4 YEARS 5 YEARS
Using the payback criteria, A is selected but B is better because it has RM20,000
total cash inflow compared with RM12,000 total cash inflow for Project A.
So, here is the weakness of the system. It ignores cash flows after the cash flow
period. It also ignores the effects of the type of cash flow, meaning that we would
ideally like a large cash inflow early in the projectÊs life but this system ignores
that. Thus, is not recommended to be used as the sole project ranking tool.

3.3.4 Profitability Index

Profitability Index (PI) is applicable for projects with low capital recovery values.
Present value of all future benefits

PI
Initial investment
Projects with large PI values are preferable.
SELF-CHECK 3.3
1. Imagine that your brotherÊs company is currently pursuing three

cost reduction projects at the same time.
Project „ANTARCTICA‰ requires an investment of RM10
million. It is expected to yield a cost savings of RM30 million in
the first year and another RM10 million in the second year.
Project „BULAN‰ demands an investment of RM5 million. It is
expected to produce a cost savings of RM5 million in the first
year and another RM20 million in the second year.
Project „COMET‰ needs an investment of RM5 million. It is
expected to bring about a cost savings of RM5 million in the
first year and another RM15 million in the second year.
After the second year, there will be no receivable benefit or capital

recovery from any of these projects. Take the cost of capital (interest
rate) as 10%.
Help your brother to determine the ranking of these projects on the

basis of the evaluation criteria of NPV, IRR, payback and
profitability index.

2. Based on the following cash flow given and by using the

payback method, which is the better project, C or D? State the
reasons for your choice.
Year Project C Project D

6000 6000
1 1000 3000
Initial cash outflow
2 2000 2000
Yearly Net cash flow
3 3000 1000
4 2000 2000
5 2000 2000
Cash flow describes the movement of money coming into and going out of
the business, company or accounts. It can be presented in the form of a cash
flow statement or cash flow diagram.
Two types of cost analysis can be performed depending on two major factors
(time and accuracy). They are Single-Period Analysis and Multiple-Period
Analysis.
In cost analysis, the value of money changes with time. Responding to the
context of time value of money, several formulas depending on specific cases
are shown in Table 3.3.

Table 3.3: Table of Formula
Cases Formula Definitions
1. Single Payment S = P 1+i

n The total value of an investment
Compound S, with periodical returns added
Amount Factor to the principles to earn more
money at the end of n periods.
2. Present Worth 1 Defines the present value of a

Factor P S n sum that will be available in the
1 i future.
3. Uniform Series S = A 1+i

n
1 /i Defines the total future value of
Compound an account (e.g. retirement
Amount Factor college education) at the end of
n periods, if a known annuity A
is deposited into the account at
the end of every period.
4. Uniform Series Defines the total present value

Present Worth n n of an account to which an
P = A 1+i 1 / i 1+i
Factor/ Rate of annuity A is deposited at the
Return (ROR) end of each period.
Depreciation must be identified and considered in analysing cost.
The four standard methods used in industry to evaluate projects are listed in
Table 3.4.

Table 3.4: Methods of Evaluation
Method Definition Preferable Result
1. Net Present NCIF(m) CR The main use of this method is

NPV = P + +
Value (1+i)m (1+i)n to measure profitability of a
project.
Largest NPV are to be
preferred.
2. Internal NPV = 0 The IRR is the average annual

Rate of rate of return (usually annual)
Return realised by an investment with
a zero NPV at the end of its
project lifecycle.
High IRR are preferable.
3. Payback P/B = P/CF Payback period is defined as

Capital investment the number of years in which
= the initial investment will be
Average Annual Cash Flow
paid back by the annual
earnings generated by the
project.
Least PB are preferred.
4. Profitability Present value of all benefits Profitability Index is

PI =
Index Initial investment applicable for projects with
low Capital Recovery values.
Large PI values are
preferable.

Cash flow Net Present Value (NPV)

Cost analysis Payback
Depreciation Profitability Index (PI)
Internal Rate of Return (IRR)

Wood, F. (2005). Business Accounting 1 (10th ed.). New Jersey: Prentice Hall.

Topic Cost Estimating
and Budgeting
4
LEARNING OUTCOMES
1. Define cost estimate, project cost and budget;
2. Identify the importance of making cost estimation and budgetting
during the planning stage of a project;
3. Describe how accuracy of estimaton varies with the stages of the
project;
4. Describe the different types of costs in a project;
5. Describe the main techniques of cost estimating and budgeting; and
6. Apply the relevant estimating technique to make a simple cost estimate
of a project.
INTRODUCTION

TOPIC 4 COST ESTIMATING AND BUDGETING 61
The kind of dialogue above points out some of the important issues in
estimating. Firstly, notice how Joe tried to clarify what was being asked before
coming up with a guess. Secondly, note that guessing was not acceptable, it was
only when Joe exchanged his guess to an estimate that DatoÊ took it seriously.
We have seen from Topic 1 that a project is defined as an activity in which one
invests money, time and labour resources in the hope for a return. That means
before we embark on any project, we need to know as accurately as possible how
much money we are going to spend. This is what „Cost Estimating and
Budgeting‰ is all about. It allows us to make a good estimate of project costs
during the project planning stage. This information is particularly important to
project owners or stakeholders before they can approve the project. It is equally
important to project managers like us during the implementation stage, so that
we can control the expenditure within the approved budget.

62 TOPIC 4 COST ESTIMATING AND BUDGETING
4.1 PLANNING OF RESOURCES

In any engineering project, whether it is the construction of a multi-storey office
building, the production of a new car model or the development of a computer
software, we need to carefully plan the allocated resources so that the project will
be completed within the budget and time allowed. Resources refer to the money,
personnel, materials and equipment required for the project. These resources are
carefully planned, quantified and allocated so that specific work or tasks can be
carried out within the project's duration. Therefore, cost estimating or predicting
the quantity of monetary resources needed for the project is an integral part of
the project resource planning process.
4.2 COST ESTIMATING AND BUDGETING

As we have seen earlier, the purpose of cost estimating is to make an evaluation
of the anticipated cost of the project to be implemented. An estimation of the
project cost is submitted to the client as a „budget‰ for them to approve and
subsequently allocate. Project designers will also use the budget information as a
guide for them in designing the project. It will also be used by project managers
for controlling purposes during project implementation later.
ACTIVITY 4.1
It is important to make a good estimate of the project. What do you
think will happen when a project is (a) underestimated and (b) over-
estimated? Discuss with your coursemates.
4.2.1 Definition
We can define a cost estimate as a prediction made of the cost of doing a project
or „project cost‰.
A budget is the maximum amount of money allowed by the project owner to be

spent to complete the project.
Budgets and cost estimates are almost the same thing. The difference is that the
estimate comes first and is the basis for the budget. An estimate may have to be
refined many times but once approved, it becomes the budget. The project

management team will have to ensure that work will proceed according to the
approved budget. Budgets act as the baselines against which all expenditures are
compared for cost control purposes.
Project cost constitutes both direct and indirect costs (subtopic 4.5). The
definition of project cost can be different to different people in the project
organisation. Project cost to the owner or client means all possible costs to be
borne by him/her in implementing and completing the project. For example, in
the context of construction projects, these may include the main contractorÊs price
and profit, consultantsÊ fees, land costs, loan interests and any project-related
charges which the owner or client has to pay to the respective government
authorities. On the other hand, the cost of a project to a construction contractor
may only be the actual cost of constructing the project and the associated
„preliminaries‰ such as insurances, mobilisation and administrative costs.
4.2.2 Estimating Accuracy

Estimating, or specifically cost estimating, is all about forecasting the future.
Since forecasting the future is an uncertain business, it is not uncommon that an
estimate turns out to be inaccurate or wrong. For any engineering project, the
accuracy of cost estimates depends greatly on the amount of design information
available at the time of making the estimate and therefore at what stage the
project has progressed. This relates to the degree of uncertainty regarding the
project, which is highest at the beginning and declines as the project progresses.
Consequently, estimation accuracy is lowest at the beginning of the project and is
highest when all the design work has been completed. These relationships are
shown in Figure 4.1.
Figure 4.1: Accuracy and stages of project development

SELF-CHECK 4.1
1. Differentiate between „cost estimate‰ and „budget‰.

2. Explain the importance of making cost estimates as accurately as
possible. Why is it so difficult to obtain an accurate estimate of
your project during the conceptual design stage?
4.3 BASICS FOR PREPARATION OF ESTIMATES

Now, let us take a look at the basics for preparation of estimates.
4.3.1 Cost Estimating Process

Cost estimating is done by each member of the project team responsible for the
respective functions of the project and coordinated by the project manager. The
process begins by breaking the project down either into work phases such as
design, development, fabrication, testing, and so on, or into work packages (tasks
or activities) as commonly done in construction projects.
The project team will then identify the various work tasks associated with the
project and assign these tasks among themselves. The work tasks can be
classified into two types:
(a) New developmental work; or
(b) Adaptation work from existing (or off-the-shelf) designs, techniques or
procedures.
Developmental work, being unique, can be more difficult to estimate due to the
greater uncertainty about what needs to be done and the labour costs. On the
other hand, standard or off-the-shelf work, is more straightforward because it is
based on records of material, equipment and labour costs for similar tasks.

4.3.2 Factors Influencing Cost Estimates

In estimating project costs, we must be aware that certain factors do influence the
estimate, such as those shown in Figure 4.2.
Figure 4.2: Factors which influence cost estimates
ACTIVITY 4.2
1. Explain what „project cost‰ means to

(a) The project owner
(b) The project contractor.
2. With the help of a graph, describe how estimation accuracy

varies with the different stages of project development.
4.4 TECHNIQUES FOR COST ESTIMATING

There are a number of techniques which we can use to estimate project costs.
They vary in terms of accuracy as well as the time and effort to produce the
estimate. These are described as follows.

4.4.1 Expert Opinion

In this method, the cost estimate is based on the figure provided by an expert i.e.
somebody with vast experience and expertise in the subject.
It is based on the expertÊs intuition or „gut feeling‰, so that it can be given very
quickly. For example, an expert may say the cost of building such as size of
hospital at such a location is about RM150 million, or the cost of developing such
a design and specification of a computer system is roughly RM20 million and so
on. However, cost estimates from expertsÊ opinions (also called „ballpark
estimates‰) can be off by as much as 90%, so this method is usually called for
during the initial stages of the project development.
4.4.2 Analogous Estimate

An analogous estimate is developed by reviewing the costs from previous,
similar projects. We can use this method to get cost estimates at any level: an
overall project cost based on an analogous project, a specific work package cost
from other analogous work package, a task cost from an analogous task and so
on. In arriving at the estimate, we have to make certain adjustments with regard
to such factors as dates, project size, geographical location, site conditions and
access, etc. The last few factors are particularly true for construction projects
where work is carried out in the open and very much dictated by site location
and conditions.
To make a cost estimate using the analogy method, we may use the following
formula:
Analogous Cost Proposed Capacity

Proposed Cost 2
Analogous Capacity 3
(Here, „proposed‰ refers to the new facility to be built while, „analogous‰ refers
to an analogous or referenced facility. In practice, the exponent varies from 0.35
to 0.9 depending on the design or process as well as equipment used).
In order to use the analogous method, obviously we would require a good

database with information on previous projects. Some large companies would
have a well maintained and readily accessible cost data on previous projects.
However, if this is not possible, we may nowadays obtain such information
from the respective government institutions, professional bodies or industry
associations, either free-of-charge or at a reasonable price.

4.4.3 Parametric Estimate

This method makes use of mathematical relationships to produce a cost estimate.
We use parametric estimate when costs are a function of project „parameters‰.
The parameters are typically physical features such as area, volume, number of
rooms, population capacity, etc. In many cases, the estimate is obtained simply
by multiplying the parameter(s) with a known „cost per unit parameter‰ rate.
This rate is based on historical data from previous analogous projects. In some
cases, the estimate is found by using more complicated statistical relationships
between project cost and the parameter(s).
Parametric estimate is very widely used in construction projects where it is more

popularly known as the „Unit‰ or „Area‰ method. As an example, using the
„area‰ parameter, the cost of constructing a multi-storey office building can be
estimated by multiplying the total floor area of the proposed building with a
standard cost per unit area rate for such type of building.
4.4.4 Analytical Estimating (Cost Engineering)
Analytical estimating or „cost engineering‰ refers to the detailed cost analysis

of an individual work package, task or activity associated with the project.
In this method, we first break down the project into work packages or activities.
We then divide them further into „cost categories‰ of labour, materials, plant or
equipment.
In many industries especially construction, databases containing labour,

materials and equipment or plant costs have already been established and are
easily accessible. Based on these „standard‰costs, all the detailed work packages
or tasks are estimated and summed or „rolled‰ up to produce the total project
cost. This is why it is sometimes called „bottom-up‰ estimates. The method is
very widely used in construction projects.
Analytical estimating is the most accurate of all the estimating techniques but it
requires considerable effort and time to produce. Besides, it also requires detailed
information regarding the design of the project, the intended labour force and
productivity rates to be assigned. Therefore, we only employ this method after
the detailed design has been finalised, such as during the tendering or project
implementation stage.

4.4.5 Worked Examples

Let us now look a few examples.
(a) Example 1: Analogous Estimate

Suppose that you are proposing to build a petrochemical processing plant
having a capacity of 5 million cubic meters. Reference made to a previous
similar project, but with a size 2.5 million m3 shows that the cost is RM20
million. Estimate the cost of the proposed plant.
Answer:
Assuming an exponent of 2 3 ,
Analogous Cost Proposed Capacity

Proposed Cost RM 2
Analogous Capacity 3
2
20, 000, 000 5 / 2.5 3
RM31,740, 000
(b) Example 2: Parametric Estimate

A statistical model relates the material cost, in US Dollars, of constructing
an international-standard urban expressway by the following formula:
C = 8,937,237 + (83,987)N + (175,406)L
where
C = Material cost of constructing the highway, in US Dollars
N = Number of lanes in the carriageway (for single carriageway, = 2, for
double, n = 4 and so on)
L = Length of the proposed expressway, in km
Using the above formula, estimate the material cost of constructing a 20 km,
six-lane, international standard urban expressway.
Answer:
C = 8,937,237 + (83,987) N + (175,406)L
Given N = 6, L = 20
Therefore C, material cost in US Dollars = 8,937,237 + (83,987)6 + (175,406)20

= USD 12,949,279

(c) Example 3: Analytical Estimating

You are the project manager of Lebar Wang Sdn Bhd, a construction
company which is bidding for a three-storey office building project in the
city. Your company has instructed you to prepare a detailed cost estimate
for the construction of the in-situ (site-cast) reinforced concrete floor slabs
in your building and compare this with the option of purchasing and
installing factory-produced, precast concrete floor slabs. Use the method of
analytical estimating to estimate the cost of constructing the in-situ floor
slabs for the building.
Answer:
We first break the floor construction work into packages or tasks as shown
in Table 4.1. The figures given are for one storey of the building. Let us
assume that there are three categories of labour and the wage rate
(RM/hour) for each category is the same for each labour trade required to
construct the floor (carpenters, bar benders and concreters). We first decide
how many workers in each trade are required to carry out each of the tasks
in the floor construction and the number of work hours that are needed.
The direct labour cost for each task can be obtained by multiplying the total
labour hours grade with the respective wage rate in each and sum them up
for all the grades. For example, in the first activity, we assume only one
foreman (grade A) is needed to supervise the formwork operation which is
expected to be completed in 30 work hours (or equivalent to say, 3 days),
then the total labour hour here is 1 30 = 30. Similarly, two assistant
foremen (grade B) may be needed, so the labour hours would be 2 30 = 60
and similarly for the five general labourers (grade C), we get 150 labour
hours. We then multiply the labour hours for each grade with the
respective wage rate and sum up the product to give the direct labour cost
for that task, i.e. [(30 20) + (60 15) + 150 10)] = RM3000.

Table 4.1: Main Tasks/Activity and Costs for In-situ Floor Construction
Labour hours for each Direct labour

Direct non-labour cost
labour grade cost (Assume
Work wage rate in
package or RM/hour for
Task A,B and C are Sub-
A B C 20, 15 and 10 Material Equipment Other
contractor
respectively)
Erect 30 60 150 3000 5000 2000 1000 1500

formwork (1 30) (2 30) (5 30) [(30 20)+
(60 15)
+150 10)]
Install steel 60 60 240 5100 10000 1000 500

reinforcement (1 60) (1 60) (4 60)
bars
Pour 20 40 120 2200 8000 2000 500 500

concrete (1 20) (2 20) (6 20)
Dismantle 10 50 600 200

formwork (1 10) (5 10)
Curing 10 20 350 1000 200

(1 10) (2 10)
TOTAL 110 180 580 11250 24000 5400 1500 2500
Next we obtain the direct non-labour costs for each task by finding the
quantity of the materials associated with each task based on the design
drawings and multiplying this with cost per unit quantity. For example in
each task, we also allow for equipment rental, subcontractors and other
related expenses (if any).
The cost of floor construction for one storey of the building can be obtained
by summing up all the direct and indirect costs i.e. direct labour cost and
indirect labour cost.
Cost of in-situ floor construction per storey (RM)

= 11,250 + 24,000 + 5,400 + 1,500 + 2,500
= 44,650
Total cost of in-situ floor construction for the whole building

= 44,650 3
= 133,950

SELF-CHECK 4.2
Describe the four main techniques in cost estimating. At what stage
of project development is each technique best used?
4.5 TYPES OF COSTS

In project management, we can divide costs into two main types:
(a) Direct cost; and
(b) Indirect cost.
These are described as follows.
4.5.1 Direct Costs

Direct costs are costs attributed to a single task of work. These can be further divided
into „direct labour cost‰ and „direct non-labour cost‰ as shown in Table 4.2.
Table 4.2: Types of Direct Costs
Direct Labour Cost Direct Non-Labour Cost
Is usually associated with a work crew (or gang) Also known as „other
performing a task using specific materials, direct cost‰.
equipment and plant. Is the total non-labour
For each work package or task in the project, an cost applied to the task.
estimate is made of how many people in each class It includes costs of
or labour are required and for how long (hours or material, equipment,
days of work). plant, sub-contractors,
Classes of labour reflect the experience and skill of consultants, telephone
each worker in the gang. For example, in bills, transport, testing,
construction projects, we may have a concreting etc. associated with a
gang consisting of a foreman acting as the head specific task.
gang, an assistant foreman, a few skilled workers (or
concretors) and several non-skilled workers (or
general labourers).
We can obtain direct labour costs of a task by
multiplying the number of labour hours with the
various wage rates for each class of labour.

4.5.2 Indirect Costs

Indirect costs are those that cannot be attributed or charged to a single task
of work or even to a specific project. Rather, they are the costs of doing the
companyÊs business. These include overhead and administrative costs (office
rental and equipment, clerical assistance, workers insurance, EPF contribution,
utility bills, etc.), profit and loan charges.
Overhead and administrative charges are often computed as a percentage of the

direct labour cost, usually between 25% to 100%.
Profit is the amount of money left for the contractor, after all the project expenses
have been deducted from the contract price. It varies according to market
conditions with regard to the supply of contracts in a certain area. Profits and
loan charges are included in cost estimates of the project as a whole and are
therefore classified as indirect costs.
SELF-CHECK 4.3
1. What are direct costs?
2. What are indirect costs? Give the elements that constitute
indirect costs.
3. Explain what project cost means to the project owner.
Cost estimation and budgeting is an important activty conducted during the

planning stage of an engineering project.
Accuracy of estimation increases with the progress of the project development.
Direct and indirect costs are the two main types of project costs.
Methods commonly used to carry out project cost estimates are the Expert
Opinion, Analogous Estimate, Parametric Estimate and Analytical Estimating.
The suitability of these methods depends on the amount of design

information available and therefore the stage of the project development.

In project management, costs can be divided into two main categories: direct
costs and indirect costs. Direct costs are costs that are attributed or charged to
a single task of work, while indirect costs are those that cannot be attributed
to a single task of work.
Budget Indirect Cost

Cost Estimate Profit
Direct Cost Project Cost

knowledge. PMI.
Rustain, A. M., & Estes, W. E. (1995). What every engineer should know about
project managament. New York: Marcel Dekker.

Topic Developing a
Project Plan
5
LEARNING OUTCOMES
1. Distinguish between planning and scheduling;
2. Discuss the importance of planning;
3. Draw up a Gantt chart;
4. Differentiate between arrow network and node network;
5. Demonstrate a Critical Path Method (CPM) analysis with a proper node
diagram drawing; and
6. Update CPM accordingly.
INTRODUCTION

TOPIC 5 DEVELOPING A PROJECT PLAN 75
Planning is not aimless. It is compulsory; „a must‰ for everyone, be it for their

worklife or personal life. It drives people to achieve their goals and obtain
success in whatever they set out to do.
5.1 PLANNING AND SCHEDULING

This is a quote by British author, Rudyard Kipling, which goes:
Source: http://www.kipling.org.uk/pix/kipind1.jpg
Therefore, let us start our journey in this topic by answering the first question,
WHAT?
5.1.1 What is Planning and Scheduling?

Let us take a look at what planning and scheduling is all about, as shown in
Figure 5.1, Figure 5.2 and Figure 5.3.

76 TOPIC 5 DEVELOPING A PROJECT PLAN
Figure 5.1: Planning
Figure 5.2: Scheduling

The relation between planning and scheduling can be illustrated in Figure 5.3
below.
Figure 5.3: Planning vs scheduling
5.1.2 Why Do We Need Planning and Schedulling?

Now, let us look at the reasons why we need planning and scheduling in
carrying out a project. Figure 5.4 illustrates the seven reasons for doing so.
Figure 5.4: Reasons for Planning and Scheduling

On the other hand, planning also has its advantages as well as disadvantages, as
shown in Table 5.1.
Table 5.1: Advantages and Disadvantages of Planning
Helps managers to be future-oriented. An overemphasis on planning can take

Enhances decision coordination. up too much managerial time.
Emphasises organisational objectives.
In short, it is essential to remember the primary reason for planning, as shown in

Figure 5.5.
Figure 5.5: Planning as the foundation for organising, influencing and controlling a
projectÊs success

5.1.3 Where Should We Use Planning and Scheduling?

Planning is required at all stages of a project (appraisal, sanction, construction
etc.), as shown in Figure 5.6. However, for this particular topic, we are going to
discuss specifically on scheduled oriented planning as shown in Figure 5.7.
Figure 5.6: Elements of planning in project management

Figure 5.7: Flow of discussion
5.1.4 Who are Involved?

Planning is required by all parties namely clients, project managers and
contractors. However, in the context of project planning, only a directly related
person will closely be involved, as shown in Figure 5.8.
Figure 5.8: Parties involved in planning

ACTIVITY 5.1
Discuss why we need planning and scheduling.
5.1.5 When is Planning and Scheduling Needed?

Management planning begins with the start up of an organisation but project
planning takes place when the organisation commits itself to getting involved in
projects.
Project planning develops from all the creative ideas and experience available
while scheduling gets the go-ahead when the preliminary planning has been
done or is still in the discussion stage.
5.1.6 How to do Planning and Scheduling

There are two basic techniques for constructing a plan, namely:
(a) Bar Chart.
(b) Network diagrams.
However, the following are the basic steps or guidelines that have to be used
for both methods. (a) (b) are the backbone of planning, while (e) (i) are for
scheduling and monitoring.
(a) Determine the Work Activities

(i) Restrict the number of activities to simplify the project schedule.
(ii) Break the project down into small activities (WBS).
(b) Determine Activity Durations

Duration = Total quantity/Crew productivity.
(c) Determine Logical Relationships

(i) A logical relationship exists between two activities when the start of
one activity (or finish) depends physically on the finish (or start) of
another activity.
(ii) Resource constraint.
(iii) Other constraint such as approval from owner.

(d) Draw the Logic Network
(e) Review and Analyse the Schedule

(i) Wrong relationship.
(ii) Missing relationship.
(iii) Redundant relationship.
(iv) Logic loop.
(f) Implement the Schedule
(g) Monitor and Control the Schedule
(h) Revise the Database and Record Feedback
(i) Implement Resource Allocation and Leveling

(i) To link schedule with estimating and accounting.
(ii) To improve efficiency of resources used.
SELF-CHECK 5.1
1. What are the differences between planning and scheduling?

2. Describe what are the steps required to perform a project schedule.
5.2 GANTT CHART

Imagine that you are a director. In a short while, you are going to chair a
meeting. One of the meetingÊs agenda is a presentation from your PM regarding
a highway project at Tanah Rata, Cameron Highlands. The PM has been asked to
estimate the project timeline and details of duration for each of the activities

involved. As a director with a tight schedule, how would you prefer the PM to
present his work? Would you prefer it in a table form? Or written report form?
Or in a form that is easy to read and understand and allows for changes to be
made in future?
A bar chart is one of the ways to present the information or details of a project.
Popescu and Charoenngam, 1995, describe a bar chart as „a graphic representation
of project activities shown in a time-scaled bar line with no links shown between
activities‰.
Later, it was called a Gantt Chart named after the inventor, Henry L. Gantt in
1917. Since then, it has become the preferred information media of senior
managers, who usually find that the information portrayed in PERT charts is
overly detailed.
Gantt charts are simple to understand and easy to change; however, they only
provide a vague description of how the whole project is reacting as a system.
This means that Gantt charts serve as useful tools for representing a sequence of
activities, particularly for the production of weekly work schedules or monthly
targetted programmes. Gantt charts can also be used for summarising information
from more complex networks. On the other hand, complex relationships with
multiple dependencies are difficult to model.
Example 1
Activity Duration (weeks)
1. Design 6
2. Fabrication 9
3. Foundations 5
4. Installation 7
5. Commission 4

Gantt Chart Programme
Using the Gantt Chart Programme, we can read:
Overall duration = 26 weeks

The Critical Path = 1, 2, 4, 5
Float for Activity 3 = 4 weeks
Activity 3 Earliest Start = week 6
Activity 3 Earliest Finish = week 11
Activity 3 Latest Start = week 10
Activity 3 Latest Finish = week 15
SELF-CHECK 5.2
Now, try to present the following problem by using a Gantt Chart
Programme
Duration Immediately Preceding Activity
Activity
(weeks) (IPA)*
1. Design 6
2. Fabrication 9 Design allow 2 weeks overlap
3. Foundation 5 Design allow 1 week overlap
4. Cure Foundation 4 Foundation
5. Installation 7 Fabrication, Cure Foundation
6. Commission 4 Installation
* IPA = Dependency

5.3 NETWORK PROGRAMME

Network is a logical and chronological graphic representation of the activities
(and events) composing a project. Let us take a look at Table 5.2 which elaborates
on Arrow and Node networks.
Table 5.2: Arrow and Node Networks
Arrow Networks Node Networks
1. Also called Arrow Diagramming Method 1. Also called Activity On Node

(ADM), Activity on Arrow (AOA) network, (AON) Networks. Sometimes
I-J Method. also called the precedence
diagram method.
2. Components: Arrow and node. 2. Components: Arrow and node.
3. Nodes represent events: an event is a point 3. Nodes represent activities and

in time when an activity starts or ends. details of time.
4. Arrow represents the activity and linkages. 4. Arrow represents logical

linkages.
Ex: A
10 20
5. Reading: activities as time start time end 5. No dummy activities.

(eg. A as 10 20)
6. Problem: Some situations will create an 6. Easier to use.

identity problem. To solve this problem, use
dummy activity.
7. In practice, the AON has come to

dominate most projects, as well
as become the basic foundation
in developing CPM.

Example 2
This example shows the functions of arrow and node for both networks.
ID ACTIVITY IPA*
A Design
B Fabrication A
C Foundations A
D Installation B
E Commission C, D
Solution:
(a) Using Arrow Networks (Assume the duration is 10 weeks for each activity)
(b) Using Node Networks

ACTIVITY 5.2
1. Draw the Arrow and Node networks for the project given
below. Again, assume the duration for each activity is 10 weeks.
ID ACTIVITY (IPA)*
A Design
B Fabrication A
C Foundations A
D Installation B
E Commission B, C
2. Explain what are the disadvantages of the Arrow network that

made it lose credit, as compared to the Node network.
5.4 CRITICAL PATH METHOD

Precedence networks are the basic elements in building a Critical Path Method
(CPM). It is represented by nodes (boxes) and arrows. The node can take many
forms but recently, the node represented as a rectangle (box) as shown in Figure
5.9, has dominated. The dependencies among activities are represented by the
arrow between the rectangle. Activity nodes are linked (logically) by lines called
dependencies. As shown in Figure 5.9, the dependencies show that activity C
cannot start until activity A is complete.
Figure 5.9: Activities are represented by a rectangle

Some simple rules for compiling Precedence Networks need to be followed,

namely:
(a) Start and finish with a single activity.
(b) Plot activities horizontally along paper (and link activities in logical
sequence).
(c) Determine dependency of each activity on other activities and link as
necessary (link from end of one activity to start off the next activity).
(d) All activities should start at the earliest time possible.
(e) Once dependencies are complete, insert the activity duration.
(f) Examine the potential for overlap of activities as this will reduce overall
programme duration.
There are a few ways how you can draw the network diagram, but some
recommendations for proper node diagram drawing are illustrated in Table 5.3.
Table 5.3: Proper Node Diagram Drawing
5.4.1 Terms and Definitions

Every field has its jargon that allows you to understand what the writer wants to
say. Here are some terms used in building a CPM network.

(a) Early Start (ES) and Late

Start (LS) The earliest/latest date when an
(b) EarlyFinish (EF) and Late activity can start and finish.
Finish (LF)
(c) Forward Pass = process of navigating through a network from start to
finish and calculating the early dates for each activity and the completion
date of the project.
(d) Backward Pass = process of navigating through a network from finish to
start and calculating the late dates for all activities.
(e) Critical Path = the continuous chain of critical activities from the start to the
end of the project. The path that has no float.

5.4.2 The CPM Analysis Explained through Examples

Example 3
Example 3 shows the building of CPM and the logic network.
From the following table, draw the logic network and perform the CPM
calculations.
ID Activity Duration (weeks) Immediately preceding activity (IPA)
A Design 6
B Fabrication 9 Design
C Foundations 5 Design
D Installation 7 Fabrication, Foundations
E Commission 4 Installation
Solution:
Step 1: Determine the work activity and the duration and draw the logic network.

Step 2: Determine the expected completion dates using forward pass.
Lesson:
The forward pass starts with the first project activity up to the last project
activity. As you go through the end (your last activity), you add the activity
duration.
Forward pass may refer to earliest times in your network.
Step 3: Identify the critical path (bold arrow) and the float for all activities
using backward pass.
Lesson:
The backward pass starts with the last project activity down to the first
project activity. As you go through backward (to your first activity), you
substract the activity duration.
Backward pass may refer to the latest times in your network.
If the duration of the activites are overlapping, write the overlapping in
positive value (eg. 4). However, if there is a float or gap, write it in a negative
value (Eg. 4) as shown in the example above.

Step 4: Tabulate the result. Boldface activities are critical.
ID Duration (weeks) ES EF LS LF TF
A 6 0 6 0 6 0
B 9 6 15 6 15 0
C 5 6 11 10 15 4
D 7 15 22 15 22 0
E 4 22 26 22 26 0
SELF-CHECK 5.3
From the following table, draw the logic network and perform the
CPM calculations.
Duration
ID Activity IPA Notes
(weeks)
A Design 6
B Fabrication 9 A Fabrication can overlap
with A by 2 weeks
C Foundation 5 A Foundation can overlap
with A by 2 weeks
D Installation 7 B, C Fabrication, Foundation,
Installation cannot start
until 2 weeks after
Foundation is complete
E Commission 4 D Installation

Example 4
Example 4 shows the free float calculation from CPM.
From the following table, draw the CPM network and calculate the free float if
available.
ID Activity Duration (weeks) Immediately preceding activity (IPA)
A Design 6
B Fabrication 10 Design
C Foundations 5 Design
D Cure Foundation 4 Foundations
Installation Fabrication, Foundation and Cure

E 7
Foundations
F Commission 4 Installation
Step 1: Draw the CPM.

Step 2: Calculate the free float.

Free float is the difference between the earliest finish time of an activity
and the earliest start time of the succeeding activity given by formula:
FF i min(ES i 1) EF i
For activity D; (Case one-to-one activity)

FFD = min(ESD+1) EFD
= 16 15
= 1 week
For activity C; (Case one-to-more than one activity)

FFC = min(ESC+1) EFC
= min (16, 11) 11
= 0 week
Step 3: Tabulate the result. Boldface activities are critical.
Duration
ID ES EF LS LF TF FF
(weeks)
A 6 0 6 0 6 0 0
B 10 6 16 6 16 0 0
C 5 6 11 7 12 1 0
D 4 11 15 12 16 1 1
E 7 16 23 16 23 0 0
F 4 23 27 23 27 0 0
ACTIVITY 5.3
Explain how forward pass and backward pass work in CPM.

5.5 UPDATING THE NETWORK

The programme network is a live document and should be regularly updated
throughout the project to determine:
(a) Overall performance of the project i.e. anticipated completion date.
(b) If delays are occuring, use the network to investigate means of recovering
lost time.
(i) Reduce duration by increasing resources.
(ii) Re-sequencing of operations.
(iii) Increased overlap of activities.
(c) Reassessment of project criticality i.e advance/delay in activities may have
moved the critical path within the network.
(d) Monitor effect of delays to protect commercial position claims, EoT, etc.
Popescu and Charoenngam (1995) define updating schedule as „a revised

schedule reflecting project information at a given data date regarding completed
activities, inprogress activities and changes in the logistics, cost and resources
required and allocated at any activity level‰.
Date date as- of date status date.

Is the "as of date" used for reporting the progress of the project?
Data date current date time now because the word current or now
is moving with time and is not tied to a specific time or date.
It must reflect actual work and involves incorporating approved changes into the
the baseline schedule.
(a) Is a schedule prepared by the contractor, usually before the start of the
project.
(b) Used for performance comparison.
(c) If approved by the owner, the Baseline Schedule (BS) usually becomes a
part of the contract documents.
(d) Also called a target schedule.
(e) Used by the general contractor who will execute the work, the owner whose
work is being executed; PMC to monitor; sub-contractor, unofficially.

(f) The BS is a prediction. It is prepared on the basis of expectations and

previous experiences. Thus, it is advisable to keep an accurate recode
record of previous work for future estimation.
(g) BS must be reasonable and realistic. Must consider work and weather
conditions; size and complexity of the project; local codes and regulations;
the location of and access to the project site; the labour market; materials
and equipment availability, price and delivery and other issues.
(h) BS has strong linkages with the Baseline Budget.
Frequency of updating can be monthly, biweekly, weekly, or according to

another time interval. However, the most common frequencies are weekly and
biweekly. Waiting too long to update may eliminate the effectiveness of
updating, encourage procrastination and not well documented. Conversely, too
short may be costly in terms of time consumption and overhead and reporting
costs.
Example 5
Example 5 shows schedule updating.
ACTIVITY IPA* DURATION ACTIVITY IPA DURATION
A 2 H D 9
B A 7 I F, G 12
C A 10 J F 5
D A 4 K E, J 5
E B 6 L G, H 6
F B, C 5 M F, H 4
G C, D 8 I, K, L, M 3
(a) Using the schedule from the table above, you receive the following report
10 days after the project has started:
(b) Activities A and D are complete (actual start and finish dates are given).

(c) Activity B started on day 5. Remaining duration = 2 days.

(d) Activity C started on day 2. Some problems were encountered. Remaining
duration = 4 days.
(e) The duration for activity F was adjusted to 8 days.
(f) Activity J has been cancelled.
(g) The duration for new activity P is 4 days;
IPA + E;
ISA (immediately succeeding activity) = K
Q: Update the network.
Solution:
Step 1: Draw the CPM.
Step 2: Updating the schedule.

Step 3: The updated schedule.
SELF-CHECK 5.4
1. From the following table, draw the logic network and perform the
CPM calculations.
Duration
(weeks)
A Design 6
B Fabrications 9 A Fabrication can overlap
with A by 2 weeks
C Foundations 5 A Foundation can overlap
with A by 2 weeks
D Installation 7 B, C Fabrication,
Foundation,
Installation cannot start
until 2 weeks after
Update the network based on the following:

(a) Project is now at week 8.
(b) Design is complete.

(c) Fabrication has 4 weeks of work remaining.

(d) Foundations have 4 weeks of work remaining
2. Using the following information and the network information from the
table, determine which fabrication firm should be selected.
Note: Once commissioned, the plant can generate revenue at

RM5,000/week.
(a) Fabrication firm A offers to complete the work in a period of
7 weeks at a price of RM30,000.
(b) Fabrication firm B offers to complete the work in a period of
(c) Fabrication firm C offers to complete the work in a period of
Duration
(weeks)
A Design 6
B Fabrications 9 A Fabrication can overlap
with A by 2 weeks
C Foundations 5 A Foundation can
overlap with A by 2
weeks
D Installation 7 B, C Fabrication,
Foundation,
Installation cannot
start until 2 weeks after

3. From the following table, draw the logic network and perform
the CPM calculations.
ACTIVITY IPA* DURATION ACTIVITY IPA* DURATION

A 2 F B, C 5
B A 6 G C, D 3
C A 10 H E, F 5
D A 4 I G, H 2
E B 7
With planning, project managers can:

Monitor and schedule work progress.
Solve any technical and non-technical problems that may arise.
Report the physical progress of the project.
With scheduling, we can convert a general or outline plan for a project into a
time-based graphic presentation, given the information on available
resources and time constraints.
Steps to planning:
Determine the work activities.
Determine activity durations.
Determine logical relationships.
Draw the logic network.
Network analysis is used to evaluate programmes with complex or multiple

relationships. It imposes logic discipline for the planner.

Two basic techniques for constructing a planning programme:

Gantt Chart Simple to understand and easy to change.
Network diagram (also called precedence network) Is a logical and
chronological graphic representation of the activities.
Two types of basic networks are the arrow network and node network.
CPM is the enhancement of a precedence network. Each of the boxes in the

precedence networkÊs nodes has its key definition.
There are several types of float in a planning network but the two most
important that you need to know are:
Total float (TF) = Measure of the amount of time adjustment for an
activity start time of the succeeding activity without affecting the overall
duration of the project.
Free float (FF) = Float that will not delay its successor.
Updating a project is important in order to see:
Overall performance of the project i.e. anticipated completion date.
If delays are occuring, use the network to investigate means of recovering
lost time.
Reassessment of project criticality i.e advance/delay in activities may
have moved the critical path within the network.
Monitor effect of delays to protect commercial position claims, EoT, etc.
Arrow Network Gantt Chart

Critical Path Method (CPM) Node Network
Data Date Precedence Networks

Popescu, C. M., & Charoenngam, C. (1995). Project planning, scheduling, and

control in construction: an encyclopedia of terms and applications. New
York: Wiley.

Topic Scheduling
Resources and
6 Project Control
LEARNING OUTCOMES
1. Identify the resources that need to be levelled;
2. Perform a resource levelling process;
3. Define project control;
4. Describe the concept of a project control system;
5. Explain how the EV Technique is used in relation to cost planning and
progress monitoring; and
6. Perform EV Analysis technique using the S-curve.
INTRODUCTION
Managing resources is part of the work programme planning function or
network planning. Using the basis of planning network and bar chart, you will
learn how to schedule and control the required resources for each activity
through the resource levelling process. However, not all resources need to be
levelled. Therefore, you have to know what kinds of resources are available and
those that need to be levelled.
The next step of the four management functions as discussed in Topic 1 is

Controlling. Project Control is the process of comparing the actual performance
with baseline performance and identifying any deviation. The project
management team then deals with the deviation by analysing it and suggesting
solutions for bringing the schedule back on track, if possible. In other words, it

104 TOPIC 6 SCHEDULING RESOURCES AND PROJECT CONTROL
measures and evaluates the progress and performance of a project. An integrated

cost-schedule approach used to monitor and analyse the progress of a project is
called the Earned Value Analysis (EVA). This is just one of the tools that can be
used in controlling projects.
6.1 RESOURCE LEVELLING

If you are a project manager, how do you know that the assigned manpower or
equipment will be adequate and available during your project? And how much
flexibility do you have in using your resources?
Planning a project network schedule is not complete until resources have been
allocated. These resources need to be allotted and levelled accordingly to avoid
or to minimise the fluctuations in day-to-day resource use throughout the
project. Resources in the context of project management are classified as shown
in Figure 6.1.
Figure 6.1: Resources in the context of project management
This concept applies to resources that are hired or rented, namely, labour and
major construction equipment. The need for such resources may vary
significantly as some activities start (requiring new resources) and other activities
end (releasing their resources). In general, materials do not need to be levelled. In
this case, project managers mainly have to arrange small deliveries in an
economical way. Materials must be managed using a completely different
concept.
The main idea of resource levelling is to improve work efficiency and minimise
cost during the life of the project. It is a matter of trial and error. In all but the
most simple of cases, computer analysis will be required. Due to the complexity
of the problem, resource levelling is usually only undertaken for a limited
number of key resources. Now, let us see how this method works.

TOPIC 6 SCHEDULING RESOURCES AND PROJECT CONTROL 105
SELF-CHECK 6.1
In resources levelling, not all resources need to be controlled. Identify

which needs and which does not need to be controlled. Match the
following items:
(a) Equipment
Needs to be levelled
(b) Material
Does not need to be levelled
(c) Labour
6.1.1 Steps in Resource Levelling

Below are the steps of resource levelling:
(a) Produce network and determine criticality and float.
(b) Identify key resources and produce a bar chart using network data.
(i) Plot activities at earliest start.
(ii) Show float and links.
(c) Plot a histogram of resource demand and determine if resource profile is
acceptable.
(d) Reschedule the timing of activities using float to obtain a more even
demand profile. Then redraw the resource demand profile and determine if
it is acceptable.
(e) Repeat the process for other key resources but note that adjusting the
timing of some activities may impact on the timing of other activities.
(f) If an acceptable solution cannot be found, it may be necessary to:
(i) consider the scope for adjustment of individual activity durations;
and
(ii) compromise time by allowing an extension to project end date.

Example 1
Based on Table 6.1, perform the resource levelling for the project.
Table 6.1: Flooring Project
Duration
Activity ID Activity Description IPA* Labour
(Days)
Purchase and deliver

A 5 2
materials
B Remove old vinyl tile 7 4
C Install ceramic tile A 3 3
D Install new vinyl tile A, B 5 3
E Clean up and inspect C, D 2 2
* Immediately preceding activity
Solution:
Step 1: Produce network and determine criticality and float.

Step 2: Identify key resources and produce bar chart using network data.
Step 3: Plot histogram of resource demand.
Step 4: Reschedule the timing of activities using float to obtain a more even
demand profile.

Step 5: Redraw the resource demand profile.
Step 6: Repeat the process for other key resources.
ACTIVITY 6.1
Using your own example, describe the steps to perform resource
levelling.
6.2 PROJECT CONTROL

As an OUM student, you have to complete 129 credit hours in 8 semesters to
graduate from your studies. You are now in semester 7 but you just finished
100 credit hours out of 129 credit hours. Do you think you can finish the

remaining 29 credit hours in 1 semester? What would you do to bring the

situation under control? Are you going to ask for an extension of time or speed
up your work by taking 29 credit hours in 1 semester?
The above situation refers to the concept of control in the case of your study
programme. If we can convert the analogy above, we can say that:
(a) Project = Your study.
(b) Baseline = Complete 129 credit hours in 8 semesters.
(c) Comparing = Actual performance (You are now in semester 7 but you have
only just finished 100 out of 129 credit hours).
(d) Corrective action = Options for action.
Project control actually starts with the process of comparing the actual
performance with the baseline performance and discerning any deviation. The
deviation will be analysed and solutions or corrective action put in place to bring
the schedule back on track, if possible. In other words, it measures and evaluates
the progress and performance of a project and devises necessary remedial
actions.
The baseline is developed as the best prediction based on historical records and
productivity; however, it contains tolerances that are provided to accommodate
deviations from this baseline during implementation.
Floats and contingencies are built in the programme to deal with such deviations.
The limits of acceptable differences between the baseline and work performed on
site serves as an indicator calling for closer examination if the tolerance crosses
that limit.
As in resources levelling, contingencies and floats are utilised to bring back the
project within the acceptable limits. In case this is not enough, acceleration is
required.
Now, let us look at the following conversation between Aiman and Zaihan, who
are discussing how control systems work. Aiman is an engineer from ABC Sdn.
Bhd. while Zaihan is a Project Manager from DEF Sdn. Bhd. and they have been
good friends since university. This conversation revolves around Aiman who has
been asked by the top management to take over the place of his colleague who
has resigned to further his studies. AimanÊs new task is to handle a highway
project which costs millions of Ringgit and he will act as the new project
manager.

Aiman : Hello Zaihan, how are you?

Zaihan : Hi Aiman. IÊm fine. Thank you. What about you?
Aiman : Great, thank you. Please have a seat.
Zaihan : Thanks. Hey, I heard that you have been promoted.
Congratulations.
Aiman : Yeah⁄ Thanks⁄ItÊs really an opportunity for me but I need to
learn more now. Especially on controlling projects.
(Pause)
Aiman : Hey⁄ you have been working as a project manager for a few
years right? Do tell me, how is it like? Is it difficult?
(Aiman looks very eager to know more)
Zaihan : Well, actually itÊs not so bad after all. The focus is more on your
skill of controlling and implementing certain techniques⁄EVA
for example.
Aiman : Sounds interesting. How do you actually control your project? Is
it really possible?
Zaihan : Yes, of course itÊs possible! But only with the determination, good
planning and co-operation of all members of the project team.
Aiman : In the context of project management, what are the main factors
that need to be controlled?
Zaihan : In a project, it is mainly budget in terms of cost, time and quality
which are the very top priorities. This is followed by scheduling,
and not forgetting safety, of course.
Aiman : Who is really in charge?
Zaihan : Project control requires that the person who is „really‰ in charge
to be the one dedicated to maintaining the project within bounds.
If we do not have the right person, the project will definitely run

into problems! Unfortunately, that person is not always the

„designated‰ project manager. That is known as delegated
„responsibility without authority‰. Anyone put in that position
should take action to get the situation corrected!
Aiman : Do you really mean „control‰? If I really „control‰ the project,
wouldnÊt that inhibit peopleÊs creativity?
Zaihan : Well⁄‰control‰ is a difficult word and to some it suggests
autocracy, which is certainly inhibiting. To me, it is better to
think of „control‰ in terms of „tracking and steering‰. Everyone
should recognise that a project needs this kind of „managing‰ if
it is to arrive at its intended destination.
Aiman : Wow⁄ now you talk about „managing‰. How is that related?
Zaihan : So, when we speak of „control‰, what we really mean is
„managing‰ by „tracking and steering‰.
Aiman : OK⁄ so what do I need then to be able to control a project?
Zaihan : What you need is a control system.
Aiman : Control system?
Zaihan : Yup! The essential components of a control system are:
1. A plan
A statement of what is to happen
2. Observations
Measurements of what is happening
3. Comparisons
Between the expectations and the actual
4. Corrections
Actions designated to redirect what is happening back to
what should happen
5. Updates
Of forecasts and/or plan as appropriate
Aiman : Hmm⁄ sounds difficult!
Zaihan : Uhhh⁄donÊt worry. ItÊs not so difficult. Come, I have this
concept presented graphically in my USB here. Let me show you
what I meant just now.
(Aiman sets up his laptop)
Aiman : Which file is it Zaihan?

Zaihan : Come, let me do it. Here you are.

(Figure 6.2)
Aiman : Can you give me an example Zaihan? I still donÊt get it.
Zaihan : Think of it like your household thermostat. You decide on the
temperature setting (this is your plan). The thermostat reads the
temperature and the setting (this will become your observation
and comparison). When the temperature falls below the setting,
the furnace kicks in (that action is called corrective action).
Further readings tell the furnace when to stop (updates).
However, the household thermostat is not the only type of

control. A simple on/off light switch is a case of absolute control.
The steering, accelerator and brake pedal controls of an
automobile are examples of incremental control. In the case of
project work, regular, periodic control is the most effective.
Aiman : Now I understand better. Zaihan, are there any important
requirements that we have to take note of?
Zaihan : Of course. To be an effective controller, this simple but powerful
feedback idea has some special requirements. The plan must be
expressed in terms that can be measured during project
execution. Otherwise it will not be possible to draw the required
comparisons. The observations during project execution must be
consistent with elements of the plan and vice versa, to make the
required comparisons.
Aiman : How frequent should we make the comparisons?
Zaihan : The comparisons must be made frequently and rapidly;
sufficiently frequent and rapid to enable corrective action while
time and resources still permit.
Aiman : Yeah, but how frequent is that ?
Zaihan : Well, it depends. The tighter the constraints that are imposed on
your project, the tighter the control required.

Aiman : How often is that?

Zaihan : I suggest typically around every 10% of the expected time for the
phase. For example, every month for a ten-month execution
phase or every quarter for a three year phase. But for tighter
control, maybe every 5%. Needless to say, the result must be
achieved as soon as possible for effective management control.
Aiman : So, I must have a plan?
Zaihan : You must definitely have a plan. In fact you need a firm baseline
plan. Otherwise, your control system has no basis for action.
Aiman : Is it really that simple?
Zaihan : No. In the case of a project, preparing a project plan is an art form
in itself. However in essence, the plan must be defined in terms
of scope, time, cost and quality. All of which must be mutually
compatible and in sufficient detail to be manageable.
Aiman : Which means you will probably need a „Work Breakdown
Structure‰?
Zaihan : Yes. But thatÊs another different story.
Aiman : Yes, of course. So, thank you very much for the explanation. LetÊs
go for lunch. DonÊt worry. IÊll pay.
Zaihan : Great. Thank you. LetÊs go!
(Aiman and Zaihan finish their discussion, shake hands and go
out for lunch together)
SELF-CHECK 6.2
Explain the essential components of a control system. How frequent

should project managers make comparisons between the actual work
and the baseline to monitor the project?

Figure 6.2: The Project Control Cycle
6.3 EARNED VALUE TECHNIQUES

In 1967, the United States Department of Defence published a set of Cost/
Schedule Control System Criteria, known as the C-Spec. This set of criteria
defines the minimum Earned Value Management control system requirements.
Previous management control systems assumed a direct relationship between
lapsed time, work performed and incurred costs. Here, I would like to describe
how the Earned Value system analyses each of these components independently,
comparing actual data to a baseline plan, which has been set at the beginning of
the project.
6.3.1 Definitions
Some terms and definitions as listed in Table 6.2 should be introduced before
explaining how earned value (EV) works.

Table 6.2: Table of Definitions
No. Term Definition
1. EV Analysis Compares the value of work done with the value of

work that was planned (should have been done).
2. Budgeted Cost of Work The value of work that should have been done at a
Scheduled (BCWS) given point in time. This takes the work planned to
have been done and the budget for each task,
indicating the portion of the budget planned to have
been used.
3. Budgeted Cost of Work The value of the work done at a point in time. This
Performed (BCWP) takes the work that has been done and the budget
for each task, indicating what portion of the budget
ought to have been used to achieve it.
4. Actual Cost of Work The actual cost of the work done.

Performed (ACWP)
6.3.2 The Value of Money

The S-curve is the basic tool in EV technique. Figure 6.3 illustrates a typical S-
Curve plot comparing budget and actual costs. S-curves examine the progress of
the project and forecast expenditure in terms of man-hours or money. This is
compared with the actual expenditure as the project progresses or the value of
work done. All projects, whatever their size, are plotted against the same
parameters and characteristic curve can be more readily seen.
Figure 6.3: S-curve

S-Curve is simply a tool for controlling the progress of the project and is to be
used proactively in the valuation of indirect costs associated when project
changes are introduced. The form of the S-curve is determined by the start date,
the end date and the manner in which the value of work done is assessed. Three
significant variables need analysing; time, money and the shape of the S (known
as the route). Since the expectation is that the route is fixed, then only two
variables are left. The route is as much a target as the final cost. If the movement
month to month is compared, then the trend can be derived.
If the axes are expressed as a percentage, then the percentage of what, must be
carefully defined. If review estimates are made at regular intervals, then the
value of work done will always be a percentage of the latest estimate. Revision of
the estimate automatically revises the route of the S-Curve.
SELF-CHECK 6.3
What is the difference between BCWS and BCWP?
6.3.3 Relationship between EV and PLOC

Controlling and monitoring can be described as identifying what is happening
and responding to it. Cost planning involves forecasting how money will be
spent on a project in order to determine whether the project should be sanctioned
and have sufficient money available when required.
Typically, there are three major areas of control:

(a) Commitments
(b) Value of Work Done
(c) Expenditure
These are all controlled in relation to their progress over time and may be
illustrated diagrammatically, as shown in Figure 6.4. It presents the typical S-
curve for the value of work done and similar S-curves may be developed for both
commitments and expenditure.

Figure 6.4: Project progress value of work done
Planning is primarily concerned with establishing the time target, both overall
and in detail. The primary, although not the only, task of project cost control is to
establish the exact position of the project from time period to time period in
terms of value of work done, and compare this with the targets for each time
period. Finance maintains expenditure records, working closely with project cost
control. Finance will be responsible for maintaining a record of the commitments,
since they have to ensure that payments are within the approved limits.
Project control can comment on the validity of planning work, by comparing

planned and actual progress via the value of work done.
SELF-CHECK 6.4
Describe the relationship between EV (project control) and project
planning.
6.3.4 Value of Work Done Control

Value of work done is not expenditure, although it eventually equates to
expenditure. It is often considered as the work in progress but is, most of the
time, greater than the expenditure. Figure 6.5 illustrates the relationship between
value of work done and expenditure as recorded over the life of a project.

Figure 6.5: Project progress value of work done vs expenditure
There is normally a considerable time lag between having a project ready for
start-up and the final payment of invoices and retention when the project is
completed in financial terms. The value of work done can be summarised as
design and head office costs, plus the value of material delivered to site and the
work done at site.
The technique for an approximation of value of work done from month to month
can be related to three major areas:
(a) Head Office
(b) Material Deliveries to Site
(c) Erection
6.3.5 EV Analysis Techniques

EV Analysis (or EVA) is often presented in the form of progress, productivity or
S-curve diagrams. Actual/estimated man-hours are made available to determine
the progress and productivity factors at any stage of the project. The productivity
factors are used by both client and contractor organisations to monitor the
progress of a project and forecast the outcome.
Productivity is the ratio between output and input and provides a measure of
efficiency. Ideally, productivity is always unity with both the output and the
input measured in the same units. Productivity factors are used to monitor the
variance and trends for individual activities.

In order to establish a trend, actual progress must be measured and compared

with forecasted progress, that being the baseline S-curve. Since the forecasted
progress depends upon the end target, revised targets will influence the progress
required to be made each month. Once it becomes evident that a work package is
going to cost more, or less, than the original (or earlier) estimate, then targets
should be revised and the potential influence on monthly progress evaluated and
a new target computed.
The information required from analysis of the curves will vary depending on its
end use. At project level, the aim will be to identify any areas where the project is
underachieving in order that action can be taken to improve the performance of
the problematic resource. This can be done by examining the BCWP and ACWP
curves as shown in Figure 6.6. Project managers can determine the Schedule
Variance (SV) and Cost Variance (CV) using the graph. Then, they can decide on
any appropriate action based on the results.
Figure 6.6: Determination of Cost and Schedule Variance
CV = Budgeted cost of work done to date Actual cost of work that should
have been done to date
= (BCWP ACWP)
A negative number implies a current budget overrun.

SV = Value of the work done Value of the work that should have been
done
= (BCWP BCWS)
A negative number implies that work is behind schedule.
Example 2
Zaqwan wants to complete three holes in three weeks. The cost for each hole is
RM10. However, it is already the end of week 2 but he has completed only one
hole. He has also spent RM30 by the end of week 2. Calculate the SV and CV for
Zaqwan. Suggest what he should do to control the situation.
Solution:
SV = BCWP BCWS CV = BCWP ACWP

= 10 20 = 10 30
= 10 (behind schedule) = 20 (cost overrun)
Suggested corrective action:

1. Perhaps the plan was not realistic. He may have to change the plan.
2. Perhaps he can change the work either in terms of the scope or method of
execution. For example, change the quality of work or seek an alternative.

SELF-CHECK 6.5
1. Describe how to perform EVA technique and explain how to get

the value of cost and schedule variance.
2. Explain how EVA can be used to measure and evaluate project
progress.
The main idea of resource levelling is to improve work efficiency and

minimise cost during the life of the project.
Resource levelling applies to resources that are hired or rented, namely

labour and major construction equipment, but not material.
The resource levelling steps are:

(a) Produce network and determine criticality and float.
(b) Identify key resources and produce bar charts.
(c) Plot histogram of resource demand.
(d) Determine if resource profile is acceptable.
(e) Reschedule the timing of activities using float to obtain a more even
demand profile.
(f) Redraw the resource demand profile.
(g) Repeat the process for other key resources.
Project Control:
The scheduler compares actual performance with baseline performance and
discerns any deviation. The project management team then deals with this
deviation, analyses it, and suggests solutions to bring the schedule back on
track, if possible.
Project Control comprises the following continuous process:

(a) Monitoring work process.
(b) Comparing it with the baseline schedule and budget (what it was
supposed to be).

(c) Finding any deviation. Determining where and how much, and
analysing them to discover the cause.
(d) Taking corrective action wherever and whenever necessary to bring the
project back on schedule and within budget.
Additionally:
To help identify areas in which to improve work efficiency.
To help accelerate the schedule.
To help reduce cost.
Aspects to be controlled are:

Budget
Schedule
Quality
Safety
EVA is often presented in the form of progress, productivity or S-curve

diagrams.
The EV technique efficiently helps the four management functions, but

mainly in planning because it can comment on the validity of planning work,
by comparing planned and actual progress via the value of work done.
In addition, EV technique also manages to diagrammatically present the

relationship between value of work done and expenditure as recorded over
the life of a project.
Project managers can evaluate and measure the progress of a project using
EVA by simply examining the BCWP and ACWP curves and determining the
Schedule Variance (SV) and Cost Variance (CV) to get a current status work
progress, and thereafter, taking appropriate action.

Actual Cost of Work Performed (ACWP) Earned Value Analysis (EVA)

Budgeted Cost of Work Performed (BCWP) Resource Levelling
Budgeted Cost of Work Scheduled (BCWS) S-curve
Earned Value (EV) Techniques
Popescu, C. M., & Charoenugam, C. (1995). Project planning, schedulling and

control in instruction: An encyclopedia of term and applications. New York:
Wiley.
Smith, N. J., Merna, T., & Jobling, P. (1999). Managing risk in construction

Topic Managing
Project Teams
7
LEARNING OUTCOMES
1. Identify the different leadership styles that are applicable in a project
environment;
2. Explain what constitutes effective communication for successful
completion of a project;
3. Describe the different approaches to understanding peoplesÊ needs in
order to motivate them to be committed members of a team;
4. Appreciate the importance of delegating authority and responsibility and
be able to retain control of a project through effective delegation of work;
5. Explain the importance of teambuilding;
6. Outline a strategy for conflict management; and
7. Distinguish the importance of managing change at the early stages of a
project.
INTRODUCTION
The sub-topics in this section address the key aspects of management that are
often considered as „soft‰ issues. However, in modern project management,
more importance is attached to managing the personnel as a vital resource and
this is considered to be the most critical work necessary for successful
management of projects. Project teams must be assembled to accomplish the
work necessary to complete projects, and as such team members are vital to the
success of the project. It is clear that project managers play an important role in
developing high-performance project teams. They:
(a) Recruit members;
(b) Conduct meetings;

TOPIC 7 MANAGING PROJECT TEAMS 125
(c) Establish a team identity;

(d) Create a common sense of purpose or a shared vision;
(e) Create and manage a reward system that encourages teamwork;
(f) Orchestrate decision making;
(g) Resolve conflicts that arise within the team; and
(h) Lead team-building sessions (see Figure 7.1).
Figure 7.1: Creating a High-Performance Project Team
In Topic 1 we looked at how engineering projects consist of a definite lifecycle

with the following stages:
(a) Defining or proposal preparation stage;
(b) Planning stage;
(c) Executing stage; and
(d) Delivering stage.
This section is concerned with the manner in which projects are managed. Each
of the above stages need to be managed by the project team, and for any team,
there must be a leader to guide the overall efforts.
7.1 LEADERSHIP
Organisations and groups have been led by people called „leaders‰, since the
development of organised society. These leaders often have varying leadership
styles to fit with the objectives and expectations of the groups or organisations
they lead, and their leadership can be considered to be of varying degrees of
effectiveness depending on the specific objectives and expectations of their
organisation or group. A project leader is clearly one who leads a project team
during the project life cycle and accomplishes the project objective on time and
within budget. There are many definitions of leadership, and there is no one
126 TOPIC 7 MANAGING PROJECT TEAMS
universally accepted definition. Within a project setting, „Leadership is a social

influence process in which the leader seeks the participation of individuals in an
effort to obtain organisational objectives‰ (Kezsbom and Edward, 2001).
Leadership is composed of several complex elements, the three most common

being:
(a) The person leading.
(b) The people being led.
(c) The situation (i.e. the project environment).
Project leadership requires involvement and empowerment of the project team.

The project manager (PM) should involve individuals in decisions affecting them
and should empower them to make decisions within their areas of responsibility.
The PM should establish clear guidelines, and if appropriate, any limits, e.g.
decisions taken should not result in budget or schedule overruns.
An important part of leadership is the „style‰ with which the leader carries out
the role. .
SELF-CHECK 7.1
Why do we need to have good leadership on a project team?
7.1.1 Leadership Style

In general, there are two leadership styles:
(a) People-centred which is oriented towards relationships described as
democratic, permissive, consensus-seeking, participative, follower oriented,
and considerate; and
(b) Task-centred which is oriented towards productivity described as
structured, task-dominated, restrictive, directive, autocratic, and socially
distant.

Generally, task-oriented leadership style is usually undertaken to enhance

productivity and often is dominant during the execution stage of the project. On
the other hand, people-oriented leadership tends to enhance group cohesiveness
and often is more widely practiced during the defining and planning stages of
the project.
Project managers are often selected or not selected because of their leadership
styles. The most common reason for not selecting an individual is his/her
inability to balance the technical and managerial project functions. A typical
example of this scenario is that of Project Manager Khairi Simon who has very
basic technical expertise in the productivity of plant and equipment used in the
manufacturing of steel fabricated components for the construction industry.
However, in attempting to improve the productivity, he generally tends to focus
on the improvement of the non-technical (administrative) project functions.
ACTIVITY 7.1
Identify two other characteristics of the above situation of a project

manager not being able to balance the technical and managerial project
functions. Discuss these characteristics during your tutorial.
However, in modern project management practice, the leadership style of leaders

is moving towards a greater emphasis on relationships and even the practice of
situational leadership.
Hersey and Blanchard (1979) developed a model for analysing leadership in a

project management environment. Their life-cycle theory of leadership is based
on the idea that leadership styles must change according to the readiness of the
employees, with „readiness‰ defined as job-related experience, willingness to
accept job responsibility, and desire to achieve. This is a form of situational
leadership style. As shown in Figure 7.2, the subordinates enter the organisation
in quadrant S1, which is high task and low relationship behaviour. In this
quadrant, the leadership style is almost purely task-oriented behaviour with an
autocratic approach, where the leaderÊs main concern is the accomplishment of
the objective, often with very little concern for the employees or their feelings.
The leader is very forceful and relies heavily on his/her own abilities and
judgement. Other peopleÊs opinions may be of no concern. In the initial stage
there is anxiety, tension, and confusion among new employees.

Figure 7.2: Systems Approach

Source: Paul Hersey, Situational Selling
(Escondido, California: Center for Leadership Studies, 1985). p. 35.
Reproduced by permission of the Center for Leadership Studies
In quadrant S2, employees begin to understand their tasks and the leader tries to
develop strong behavioural relationships. The development of trust and
understanding between the leader and subordinates becomes a driving force for
the strong behavioural relationships. This emphasis on the behavioural
relationship develops further in quadrant S3 with the leader more focused now
on gaining the respect of the team members, hence there is more delegation of
authority and responsibility, participative management and group decision-
making. In quadrant S4, the project members are experienced in the job,
confident about their own abilities, and trusted to handle the work themselves.
Hence, the leader demonstrates low task and low relationship behaviour as the
project members „mature‰ into a high degree of readiness. This model implies
that effective leadership in project management must be dynamic and flexible

rather than static and rigid. Effective leaders are neither pure task or relationship
oriented, but maintain a balance between them. However, in times of crisis, a
leader may be required to demonstrate a purely behavioural (relationship) style
or a purely task style.
Modern-day management is considered to be a more broadly based activity

including functions other than leading. Leaders are the ones who do the right
thing in order to be effective, i.e. selecting the objectives, goals, and strategies,
while managers are involved in doing things right, for the ultimate purpose of
maintaining efficiency, i.e. building the project team and making it work. This is
a useful way of looking at the differences between leadership and managership.
Some of the key leadership competencies of a project manager (PM) are:
(a) The PM should understand the technology involved in the project.
(b) A blend of interpersonal skills to build the project team and making it work
through a culture of loyalty, commitment, respect, dedication and trust.
(c) An understanding of the management process.
(d) An ability to see the systems context and strategic context of the project.
(e) Ability to make and implement decisions within the project context.
(f) An innate ability to produce results.
ACTIVITY 7.2
1. Based on Hersey and BlanchardÊs model, can you provide an
analysis of a project managerÊs style of leadership, based on your
personal experience? Discuss.
2. Provide a list of five characteristics of leadership and five

characteristics of managership that can help clarify the difference
between the leadership role and managerial role of project
managers.

7.2 COMMUNICATION
Communication is the process by which information is exchanged between
individuals through a common system of symbols, signs, or behaviour.
Communication is a two-way process: between the sender and the receiver(s).
Hence, it is important to consider the receiver not just as a passive recipient.
Proper communication is vital to the success of a project.
Most failures in communication can be traced to misunderstandings of the

symbols that play an important part in the process of human communication.
This is mainly due to inadequacies in creating, transmitting, and receiving these
symbols, both written and spoken. In most companies, executives are bombarded
with information communicated to them through frequent meetings and dozens
of weekly status reports provided by every functional area of the business. In
spite of that the quality and frequency of information moving down the
organisational chart is less consistent. Lack of quality assurance and control in
engineering documentation creates the opportunity for errors by those who use
the documentation in their work. However, in the engineering disciplines a great
amount of communication within project teams involves symbols that are more
precise in their meaning compared to the management disciplines.
Basically a project is linked together by its system of communications. The role of

the project manager (PM) is similar to that of the central server in the local area
network of a computer system. The PM is responsible for the continuous and
comprehensive flow of information to and from team members, whilst focusing
on communicating information and decisions that may influence the project
teamÊs work.
The project manager needs to maintain communication links with all project
stakeholders. However, certain stakeholders require direct and ongoing
communication, they are:
(a) Customers (owners, users).
(b) Project team members.
(c) General managers.
(d) Functional managers.
(e) Regulatory agencies.
(f) Subcontractors.

Effective project communication ensures that the right information gets to the
right person at the right time in a cost-effective manner. Communication that is
effective consists of:
(a) An exchange of information.
(b) A verbal or written message.
(c) An act or instance of transmitting information.
(d) A technique for expressing ideas effectively.
(e) A process by which meanings are exchanged between individuals through
a common system of symbols.
SELF-CHECK 7.2
1. What does effective communication consist of?
2. List down five elements of project communication.
Most project managers communicate laterally, whereas line managers

communicate vertically downward to subordinates. Much of the day-to-day
work on a project is accomplished by informal exchanges of information among
team members. Most project managers prefer to communicate verbally and
informally, one reason being that formal communication can be costly. Project
communication includes distributing and channelling information on decisions
made, work authorisations, negotiations, and project reports. Project managers in
excellent companies believe that they spend as much as 90 percent of their time
on internal interpersonal communication with members of their team. Figure 7.3
illustrates the communication channels used by a typical project manager.

Figure 7.3: Communication channels used by Project Manager
Project team members need to be proactive in initiating timely communication

with other team members and the project manager. Communications
management is the formal or informal process of conducting or supervising the
exchange of information either upward, downward, laterally or diagonally.
Communications management is vital for effective project performance. Project
members need to know and understand the action that is to be carried out on a
project. It is important to consider the following basic concepts of communication
theory and practice:
(a) Be as specific and clear as possible about the information to be conveyed.
(b) Know who the receiver is and what are the receiverÊs expectations.
(c) Design and develop the message with the receiver in mind, keeping in
mind the receivers role in the project.
ACTIVITY 7.3
The means and channels of information that exist on projects are

numerous. Based on your experience of working on projects, name a
few of these.

7.3 MOTIVATION
Each member of a project team provides an expertise that is needed to
accomplish a project. Often they are from various disciplines, and can be
reporting to individual department supervisors. Hence, the project manager as a
leader of a team has to motivate people using effective methods other than
resorting to the traditional methods of promotion in title or salary. Although it is
undeniable that money is the best motivator, there are, however, other factors
that influence motivation.
The capable project manager understands what motivates team members and
creates a supportive environment in which individuals work as part of a high-
performing team. The project manager must be careful not to create situations
that cause individuals to become discouraged and demotivated. Consider the
following example. On, Monday, the site supervisor, Dave excitedly offers
notification to the project manager that although there was a breakdown in the
filtration mechanism of the oil refinery, it had been resolved within ten minutes
by using an alternative part for the broken lever arm. However, the project
manager looked annoyed and exclaimed, „You must not allow this problem to
occur again. Either that, or you will have to worry about your bonus this year. If
it were not for my leadership, I donÊt know if we will ever get anything done in
this refinery!‰
The project manager can foster motivation through recognition of the project
team as a whole and of individual members, and this should be done throughout
the project, not just at the end. People want to feel that they are making a
contribution to the project and need to be recognised. Motivating project members
so that they feel secure on the job is not easy, especially since a project has a finite
lifetime. The guidelines for proper motivation by a project manager are:
(a) Adopt a positive attitude.
(b) Do not criticise management.
(c) Do not make promises that cannot be kept.
(d) Circulate customer reports.
(e) Give each person the attention he requires.
(f) Give assignments that provide challenges.
(g) Clearly defining performance expectations.
(h) Giving proper criticism as well as credit.
(i) Giving honest appraisals.

(j) Developing a team attitude.

(k) Providing a proper direction.
A. H. Maslow developed a theory of motivation called the hierarchy of needs

(see Figure 7.4). This theory has been used by managers and educators in order to
understand why people behave the way they do, how to motivate them and how
to secure their commitment. According to Maslow, humans have a hierarchy of
needs, and it is this quest to satisfy these needs that motivates people. It is
assumed that as the lower levels of need are satisfied, it is only natural for a
person to become motivated to achieve the next higher level. The needs begin
with basic physiological needs of comfort and basic survival, such as food,
clothing and shelter. Once this need is satisfied, it proceeds to the next level of
need, which is safety and security, and subsequently that of higher levels
regarding social needs, including belonging, ego, and finally self-fulfilment.
Figure 7.4: MaslowÊs Hierarchy of Needs
Using this theory, the project manager will then have to identify, based on the
individualÊs view, what stage of need they believe themselves to have achieved,
keeping in mind that the needs of people can change. For example, the personal

financial problems within a family can change the needs of an individual. Having
identified the needs, the PM can determine an appropriate method of motivation
utilising good people skills to undertake such an attempt.
Project managers must understand human behaviour in order to motivate people

towards successful accomplishment of project objectives. Douglas McGregor
proposed that workers can be categorised according to two theories. Theory X,
assumes that the average worker is fundamentally lazy and requires supervision,
and that this type of worker:
(a) Dislikes work and avoids work whenever possible.
(b) Needs to be threatened with punishment in order to induce him/her to
perform adequately.
(c) Avoids increased responsibility, preferring to be directed.
The manager who accepts this view of the average worker, normally exercises
authoritarian-type control and allows little participation in decision making.
However, for Theory Y average worker, it is assumed that he/she:
(a) Wants to be active, whilst finding physical and mental work to be
satisfying.
(b) Achieves greatest results through willing participation, without direction
and control being provided.
(c) Seeks opportunity for personal improvement and self-respect.
The manager who accepts this view normally advocates participation and
management-employee relationship.
SELF-CHECK 7.3
Motivating project members so that they feel secure on the job is not
easy. List down 8 guidelines for providing proper motivation.
7.4 DELEGATION
Delegation involves empowering the project team to achieve the project
objective. Delegation implies more than just assigning tasks to specific members
of the project team. It includes giving team members the responsibility to
accomplish job objectives and the authority to make decisions and take actions to
achieve the expected results. Thus, when a project manager delegates work, it is

often to be accompanied with the necessary results to be achieved in terms of

work scope, tangible results or products to be delivered, the necessary budget,
and the necessary time frame to accomplish the delegated piece of work. Project
managers consider authority and funding to be very important in gaining project
support.
7.4.1 Delegation of Authority and Responsibility

Some projects are directed by project managers who have only monitoring
authority. These project managers are called influence project managers.
Authority is the key to the project management process. However, the PM as
well as project team members may have a great level of delegated authority but
very little power. The project manager manages across functional and
organisational lines in order to bring together activities required to accomplish
the project objectives. Project authority is the key to unifying all organisational
activities for accomplishing the project. The amount of authority granted to the
PM varies according to the:
(a) Project size.
(b) Management philosophy.
(c) Management view of potential conflicts with functional managers.
Several key factors can affect the delegation of authority and responsibility,
both from upper-level management to project management and from project
management to functional management. These key factors include:
(a) The maturity of the project management function.
(b) The life cycle of the project.
(c) The size, nature and business base of the company.
(d) The size and nature of the project.
(e) The capabilities of management at all levels.
Authority is the right of an individual to make the necessary decisions

required to achieve his/her objectives or responsibilities.

Project managers often possess a great deal of delegated authority but very little
formal power. Hence, they need to get jobs done through the use of interpersonal
influences.
ACTIVITY 7.4
In performing the role of the project manager, can you think of a few
categories of interpersonal influences that can be useful in getting the
job done on a project?
There are five main interpersonal influences. They are:

(a) Legitimate power.
(b) Reward power.
(c) Penalty power.
(d) Expert power.
(e) Referent power.
ACTIVITY 7.5
Explain what the above five main interpersonal influences mean.
7.4.2 Task Delegation

Delegation is necessary for effective project management. Delegation involves
selecting the project team members who are best qualified to perform each task
and then empowering them to do it. Delegation provides an opportunity to give
challenging assignments to individuals in order to develop their existing
expertise and skills. Although personnel who are delegated with specific work/
task are often allowed to plan their own methods for accomplishing the desired
results and exercise control over the resources needed to do the work, ultimately
the project manager is responsible for achieving the project results. Effective
delegation requires effective communication skills. It is important that the task is
clearly defined and the expected or desired results outlined clearly, rather than
just say, „Rachel, you work on the initial design‰.

Delegation requires that individuals be accountable for achieving the expected

results. Effective delegation will ensure that empowered individuals accept their
accountability. To support team members in controlling their work efforts, the
PM needs to maintain a project management information and control system.
The following are some common barriers to effective delegation.
Figure 7.5 shows various degrees of delegation.
Figure 7.5: Degree of Delegation

Source: Gido & Clements. (2003). Successful project management.
Thomson South Western

Use the checklist in Table 7.1 to rate your effectiveness at delegation.
Table 7.1: Rating Effectiveness at Delegation
How Affective Are You at Delegating?

Not at all Some what Very Much
1 Does your team have a clear 1 2 3 4 5
understanding of the results expected?
2 Does your team have all the resources 1 2 3 4 5
needed to accomplish what was
delegated?
3 Do you focus on the results you expect 1 2 3 4 5
from team members, rather than on
details on how they do their work?
4 Do you have a system to follow up and 1 2 3 4 5
monitor progress?
5 Do team members understand how and 1 2 3 4 5
when they are to let you know how
they are progressing and when to seek
your advice?
6 Does your team understand how 1 2 3 4 5
progress will be measured and
evaluated?
7 Can your team speak freely to you 1 2 3 4 5
about problems, without fear of critism?
8 Do team members feel they have the 1 2 3 4 5
freedom to perform their work without
your over-managing them?
9 Do team members feel they can perform 1 2 3 4 5
their work without fear of making a
mistake?
10 Do you encourage team members to 1 2 3 4 5
make decisions within the level of
authority you delegated to them?
11 Do you provide coaching as needed? 1 2 3 4 5
12 Do you encourage and are you 1 2 3 4 5
supportive of your teamÊs suggestions?

7.5 MANAGING PARTICIPATION, WORKING

IN TEAMS AND CONFLICT
Being a member of a project team should be an enriching and satisfying growth
experience for each individual. Successful team management requires the team to
be an integral unit of the organisation. Working with project teams requires the
project manager to cross many boundaries in the organisational structure to
develop the project team into a cohesive group that is still very much part of the
whole organisation. The project manager must learn to combine administrative
and behavioural knowledge to work well with people. Project managers should
have good people skills and create a conducive environment for team members
to feel motivated. One additional task of a PM is to resolve conflicts between
team members besides organising, coordinating, and directing the project.
Another important responsibility of a project manager is decision making.

During team meetings, numerous decisions must be made. There are situations
when decisions can be made solely by the project manager (with input from one
or two relevant team members), however there are situations that need the
involvement of the entire team. It is necessary for the PM to establish a process
for decision making that is effective based on the type of decisions to be made.
For example, decision making in order to work out the best way to generate ideas
needs to be different from decision making in order to choose from alternative
designs or decisions for solving a problem with a definite solution.
Socialising among team members supports team building. The better the team
members get to know one another, the more team building is enhanced. Effective
team members help to create a positive, constructive project environment in
which there is no room for divisiveness. Effective team members participate and
communicate. Effective team members plan, control, and feel accountable for
their individual work efforts.
7.5.1 Team Management

Project teams are made up of all necessary participants in order to achieve the
objectives of the project. This will include at times, external consultants. Team
members report either part-time or full-time to their project manager. Managing
project teams is a fundamental skill within the area of human resource
management. The Project Management Institute defines human resource
management as the art and science of directing and coordinating human
resources throughout the life of a project by using administrative and
behavioural knowledge to achieve predetermined project objectives of scope,
cost, time, quality and participant satisfaction.

The role of each team member must be clearly defined. Each individual team
memberÊs needs must be understood in order to enable the PM to encourage
team participation. Team memberÊs careers must be given priority, and this
requires effective communication and feedback. Open and honest communication
is vital to instill integrity and support amongst the team members, whilst the
creation of an environment of understanding and teamwork is important for
creating a sense of trust.
For any temporary management structure to be effective, there must exist a

rational balance of power between functional and project management.
The following barriers to team building in project environment have been

identified by Thamhain and Wilemon (1979). They are:
(a) Differing outlooks, priorities, and interests team members have
professional objectives and interests that differ from project objectives.
(b) Role conflicts these can result due to ambiguity over scope of work and
task responsibility.
(c) Project objectives/outcomes not clear this makes it difficult to define roles
and responsibilities, leading to conflict and power struggles.
(d) Dynamic project environments many projects operate in a continual state
of change with regard to internal requirements, such as project scope,
resources and objectives; or external, such as regulatory changes or client
demands.
(e) Competition over team leadership this often occurs at the early stages of a
project as a covert challenge to a project leaderÊs ability.
(f) Lack of team definition and structure especially in dynamic,
organisationally unstructured work environments, the poorly defined
responsibility and reporting structures often impair teamwork.
(g) Team personnel selection the feeling of unfair treatment during staffing of
a project is often due to the lack of input by a project manager who is
focused on recruiting the best, whilst functional managers who undertake
the responsibility, often rely on what is available.
(h) Credibility of a project leader amongst team members or other managers
this can result from poor managerial skills, poor technical judgements, or
lack of experience.
(i) Lack of team member commitment differing professional interests, the
feeling of insecurity, unclear nature of rewards and severe interpersonal
conflicts can lead to a lack of commitment.

(j) Communication problems This is one of the critical barriers to team

development. This exists at four levels. They are problems of
communication:
(i) Among team members.
(ii) Between the project leader and team members.
(iii) Between the project team and top management.
(iv) Between the project leaders and the client.
(k) Lack of senior management support Often, PMs find senior management
support and commitment to be unclear and often fluctuating as the project
proceeds through its lifecycle. This effect can trickle down easily to team
members leading to a low level of commitment and enthusiasm amongst
team members.
ACTIVITY 7.6
Discuss with a partner and list down briefly how you would eliminate
or minimise the above barriers to effective teambuilding.
7.5.2 Conflict in Projects

Conflict in projects is inevitable. Differences of opinion are to be expected. The
aim of a PM should not be to suppress conflicts, as it can provide an opportunity
to gain new information, consider alternatives, develop better solutions to
problems, enhance teambuilding, and learn. However, conflicts should be
managed. To manage conflicts the PM must use techniques to deal with
disagreements, both technical and personal in nature. Withdrawal or giving up is
a poor way of managing conflicts.
Withdrawing only temporarily delays the inevitable future re-emergence of the

problem. Smoothing is a more active technique. However, smoothing only serves
to appease one or more parties without providing long-lasting solutions.
Compromising is one other approach that involves bargaining between the
parties concerned to reach an acceptable agreement. However, these trade-offs
do not result in a definite solution, leaving opportunities for a reoccurrence of the
conflicts. Using a confronting and problem solving approach for resolving

conflicts requires an open dialogue to identify the root problems and a joint effort
requiring active participation of all parties to use problem-solving techniques to
objectively resolve the conflict. However, in some situations it may be necessary
for the project manager to exercise his/her authority to force a resolution to a
conflict. This final approach can affect the teamÊs future performance as it can
create resentment towards the PM.
A consensus approach can also be used which is to be led by the PM. This,
however, requires a effort in organising discussions to clarify the facts or
alternatives to be considered before arriving at one „mutually agreed‰ best
solution. A voting, trading or averaging method is used.
7.6 MANAGING CHANGE

It is often said that if there is one thing that you can be sure of in any project, it
would be CHANGE. Every project is susceptible to change. The source of change
may be the owner, designer, contractor or installer. However, a project manager
should manage and control changes in order to minimise any negative impact on
the successful achievement of the project objective. It is not the trivial changes
that are important, but those that affect work scope, budget, or schedule. For
example, deciding a change in the colour of a building before painting
commences is a trivial change; however deciding to increase the number of
storeys of an apartment block after having completed the design and piling
works is a major change. Generally, the later in the project stage that changes are
identified, the greater their effect on accomplishing the project objective,
especially if work already completed needs to be „undone‰. If changes are made
much earlier in the project, it would be easier to accommodate them and it would
be less costly. Additionally, the management of changes can be more effective if
the changes can be predicted in advance.

Figure 7.6: Importance of Clear Project Definition during the Early Phases
of a Construction Project
Source: Adapted from Oberlender (2000)
SELF-CHECK 7.4
Explain briefly what you understand by the representation in
Figure 7.6 above.
In the case of construction, one approach to managing change during

construction is to request a list of anticipated change-orders on a monthly basis.
The PM then works with the relevant stakeholders (mainly workers) anticipating
the change, to evaluate the need for the change and the value of it. There must be
a thorough evaluation of every aspect of a change, because a change in any part
of a project affects other parts of a project. This effect is sometimes not clear early
on in the project, and can affect the cost greatly at later stages. This sort of change
that occurs later in the project due to earlier changes are termed as ripple-effect
changes.
At the start of a project, procedures need to be established regarding how

changes will be documented and authorised. Whenever a customer or client
requests changes, the PM should ensure that the appropriate project team
members estimate the effects on the project cost and schedule, after which
approval from the customer or client should be obtained before proceeding.

The most difficult type of change to manage is with regard to the use of project
results, which requires the users to change the way they perform their work. One
example is that of converting from manual to computerised systems. Hence, to
implement any change and to gain a commitment to the change, it is important to
have open communication and a climate of trust in convincing the parties
concerned that they need a new system.
The most difficult projects to manage are those that involve the management of
change. There are four basic inputs needed to develop a project management
methodology for change management. They are:
(a) Identification of the most common reasons for change in project
management.
(b) Identification of the ways to overcome the resistance to change.
(c) Application of the principles of change management to ensure that the
desired project management environment will be created and sustained.
Most changes fall into three broad categories:

(a) Scope changes in the form of design or additions represent big changes.
(b) Implementation of contingency plans, when risk events occur, represent
changes in baseline costs and schedules.
(c) Improvement changes suggested by project team members.
Since changes are inevitable, a well-defined change review and control process
should be set up early in the project planning cycle. Change control systems
involve reporting, controlling, and recording changes to the project baseline. In
practice, most change control systems are designed to accomplish the following:
(a) Identify proposed changes.
(b) List expected effects of proposed change(s) on schedule and budget.
(c) Review, evaluate, and approve or disapprove changes formally.
(d) Negotiate and resolve conflicts of change, conditions, and cost.
(e) Communicate changes to parties affected.
(f) Assign responsibility for implementing change.
(g) Adjust master schedule and budget.
(h) Track all changes that are to be implemented.

ACTIVITY 7.7
1. Imagine that you are a project manager for a software business

solutions company, and your company has won the tender for
installing a credit card accounts management system that allows
for flexible service limit operations management. Your team
comprises two programmers, two system analysts and three
system designers. However, one of the system analysts is
presently working on two other projects which are due for
commissioning within a week, and the system designers are sub-
contracted from a strategic partnership arrangement with an
Indian multinational company. The installation and testing has
to be carried out within one-and-a-half weeks. Describe the
approach or methodology you would employ in:
(a) Managing change with respect to the users.
(b) Keeping the team highly motivated as the installation has
to be carried out during out of working hours during the
weekend, and there is little compensation for the odd hours
as the work has been designated simply in terms of man-
hours.
(c) Providing effective leadership and team management as
the system designers are only able to communicate
effectively through just one of their colleagues and are
unhappy as they find work being delegated in an ad-hoc
manner.
2. Explain what is meant by a change control system. Provide a

description of the impact of undertaking change at advanced
stages of a project.
There are many definitions of leadership, and there is no one universally

accepted definition. Project leadership requires involvement and
empowerment of the project team. In general, there are two types of
leadership styles:
(a) People-centred; and
(b) Task-centred.

In modern project management practice, the leadership style of leaders is

moving towards a greater emphasis on relationships and even the practice of
situational leadership.
Communication is the process by which information is exchanged between

individuals through a common system of symbols, signs, or behaviour.
Basically, a project is linked together by its system of communication.
Communications management is the formal or informal process of
conducting or supervising the exchange of information either upward,
downward, laterally or diagonally.
Delegation implies more than just assigning tasks to specific members of the
project team. It includes giving team members the responsibility to
accomplish job objectives and the authority to make decisions and take
actions to achieve the expected results.
Project managers often possess a great deal of delegated authority but very
little formal power. Hence, they need to get jobs done through the use of
interpersonal influences.
There are five main interpersonal influences. They are:

Legitimate power,
Reward power,
Penalty power,
Expert power,
Referent power.
Amongst the various tasks of a PM, one important task is to resolve conflicts
between team members. The project manager must learn to combine
administrative and behavioural knowledge to work well with people.
For any temporary management structure to be effective, there must exist a

rational balance of power between functional and project management.
If changes are made much earlier in the project, it would be much easier to
accommodate changes and it would be less costly.

Change Leadership
Communication Motivation
Conflict Team Management
Delegation
Cleland, D. I., & Ireland, L. R. (2002). Project management: Strategic design and
implementation (4th ed.). New York: McGraw-Hill.
Hersey, P., & Blanchard, K. (1979). Management of organizational behaviour.
New Jersey: Prentice Hall.
Kezsbom, D. S., & Edward, K. A. (2001). The new dynamic project management:
winning through the competitive advantage (2nd ed.). New York:
John Wiley.
Oberlender, G. D. (2000). Project management for engineering and construction
(2nd ed.). New York: McGraw-Hill.

Topic Risk
8
LEARNING OUTCOMES
1. Explain risk in your own words;
2. Discuss the importance of managing risk;
3. Describe the risk management process;
4. Identify the risks associated with your work; and
5. Explain the actions that can be taken in response to these risks.
INTRODUCTION
„Puan Haliza, IÊm sorry, your cat needs an operation. The fish bone is stuck
in its throat and it might be very risky if we were to pull it out manually,‰
said the vet to Mrs Haliza about her beloved cat.
Risk exists wherever the future is unknown. Since the beginning of time,
mankind has had to deal with risks and their unpleasant effects. As a result,
individuals, groups and societies have developed various ways for managing
risks. Because no one knows the future exactly, everyone is a risk manager.

150 TOPIC 8 RISK
8.1 RISK AND PROJECTS

Major projects, particularly those involving international organisations, pose
complex problems for the project manager and by their scale are inherently very
risky. However, as major projects also require significant financial investment,
they should have a very low risk of failure to remain viable. In your opinion,
what should the project manager do?
By looking at the first sentence of the topic, „major projects, particularly those
involving international organisations, pose complex problem for the project
manager and by their scale are inherently very risky‰, we first need to
understand what is meant by international projects, which invariably involves
international organisations. We also need to define risk, which will then give a
clearer picture of what can be classified as „inherently very risky‰.
8.1.1 International Projects

When we talk about major projects and the involvement of international
organisations, we would normally have to describe what international construction
means. International construction entails approaching a business in another
country for the purpose of expanding internationally in order to increase sales
and profits. New markets and consumers in international arenas represent the
potential for the creation of greater profits. Success in international construction
depends partly on marketing. Marketing is essentially assessing and meeting a
demand for products and services, and finding ways to ensure optimum use of
existing capital, equipment and skills. A few decades ago, limited technical skills,
concentration of purchasing power and transport difficulties were key regulators
of demand and production. But in many industrial countries, the essential
demand for all types of construction has now been met. Advancing technology,
rising discretionary incomes and easier communications have given rise to new
market conditions. However, while international construction and organisation
can bring excellent opportunities for industrial development, they can also be a
threat as well.

TOPIC 8 RISK 151
8.1.2 Risk
To explain what is risk, let us consider this situation. When you purchase
consumer or manufactured goods from the retailer, you are able to view the
goods prior to the purchase to ensure that they meet your requirements.
In other words, you are able to view the finished product prior to making your
investment. Do you think you have such an opportunity if you want to invest
your money in a project?
Unfortunately that kind of situation is not possible in projects where you or

clients are required to make the investment prior to receipt of the product.
Accordingly, projects are subject to uncertainty and consequent risk during the
project delivery process. Risk can have a number of different meanings based on
how you interpret it. Consider the following statements:
(a) There is an 80% risk of rain today
(b) There is a risk of getting wet if it rains today
(c) There is a real risk to motorists from the weather which is forecast for
today.
Each of these statements is using „risk‰ in a different sense. For a layman, risk is
commonly used as a synonym for „hazard‰, „danger‰ and „threat‰. In Managing
Risk In Construction Projects written by Nigel Smith, 1999, it says that, from John
AdamsÊ point of view, risk and uncertainty have a strong link. Risk and
uncertainty have assumed the role of technical terms in the risk and safety
literature since 1921, when Frank Knight pronounced in his classic work, „If you
donÊt know for sure what will happen, but you know the odds, that is risk and if
you donÊt even know the odds, that is uncertainty.‰ Uncertainty is defined by
Knight as inescapable. It is the realm not of calculation but of judgement. There
are problems where the odds are known or knowable with a bit more research,
but they are trivial in comparison with the problems posed by uncertainty.

152 TOPIC 8 RISK
Figure 8.1: The effect of delayed completion on the predicted project investment curve
The Study Group views risk as a probability that a particular adverse event
occurs during a stated period of time, or resulting from a particular challenge.
However, a number of authors stated that uncertainty should be considered as
separate from risk because the two terms are distinctly different. Risk can be
predicted on the basis of statistical probability. In most cases, project risk can be
identified from the experience gained when working on similar projects. On the
other hand, uncertainty can be regarded as the chance occurrence of some event
where the probability distribution is genuinely not known. The term risk and
uncertainty if used rigorously, have these different meanings but in terms of
construction projects, the distinction drawn between uncertainty and risk is of
little significance and the two terms will be used interchangeably.

TOPIC 8 RISK 153
Figure 8.2: The effect of market uncertainty on the predicted project investment curve
Accordingly, project management requires the quantification and management of

risks, a process referred to as risk management. Here, the potential effects of
uncertainty are quantified in terms of the effect on the project outcome, and plans
are made for the course of action to be taken if the risk materialises. Figures 8.1
and 8.2 provide examples of the effects of uncertainty on the project outcome.
SELF-CHECK 8.1
From your own understanding, define „risk‰.
8.2 RISK MANAGEMENT

Imagine that you want to build a bird table for the garden in the hope that it will
enable you to see many birds from your window. You do not know whether the
suitable timber may be difficult to obtain; you are not sure if it may cost you
more than expected, you do not know if your neighbours will complain about the
birds or unexpectedly, someone will offer to build it for you? You never know
until it happens. There are so many uncertainties; how will you handle them?

154 TOPIC 8 RISK
Risk management refers to the processes and structures that are directed towards
the effective management of potential opportunities and adverse effects. It is an
ongoing process applied to all aspects of your operations. A good project risk
management within an organisation has the following characteristics:
(a) Project risk management activities start at the initiation of the project; risk
management plans are developed and the actions continue throughout the
project life cycle.
(b) Project risk management is not isolated; instead, it is integrated with other
management functions as shown in Figure 8.3.
(c) All project stakeholders are actively involved in implementing risk
management.
Figure 8.3: Risk integrated in project management functions

TOPIC 8 RISK 155
8.2.1 Why is Risk Management Needed?

Figure 8.4 briefly illustrates the importance of risk management.
Figure 8.4: The importance of risk management
SELF-CHECK 8.2
Explain how risk is integrated with other management functions.

156 TOPIC 8 RISK
8.3 RISK MANAGEMENT PROCESS

The major components of risk management process are illustrated in Figure 8.5.
Each step will be discussed in more detail in the remainder of the topic.
Figure 8.5: Risk Management Process
8.3.1 Risk Identification

The risk management process starts firstly with identification of risks. Risk
identification determines what might happen that could affect the objectives or
outcomes of the project and how those things might happen.
The risk differs considerably in nature. They can arise before, during and after
the project. Some are quite likely but others are extremely unlikely. Some are
trivial in their effect, while others if they occurred would spell the end of the
project. Some are independent but many are dependent on others. So to minimise
the risks, we need to identify the risk sources and categorise them. Risk is
divided into three categories (RAMP, 1998):
(a) Known risk.
(b) Known unknowns.
(c) Unknown unknowns.

TOPIC 8 RISK 157
Known risk includes minor variations in productivity and swing in material

costs. These occur frequently and are an inevitable feature of all construction
projects. Known unknowns are the risk events whose occurrence is predictable.
Either their probability of occurrence or their likely effect is known. Unknown
unknowns are those events whose probabilities of occurrence and effect are not
predictable by even the most experienced staff. This is critical and usually called
as force majeure. If this situation happens, they need to identify the risk carefully
and analyse it intensively.
A number of techniques are available to identify risks, but brainstorming is a

preferred method because of its flexibility and capability. When appropriately
structured, it generates a wide and diverse range of risks. However, in most cases
risks can be identified from the experience gained when working on similar
projects.
ACTIVITY 8.1
1. Using the case of the bird table in your garden, identify what are
the risks that might occur.
2. In your opinion, what is the difference between risk and
uncertainty?
8.3.2 Risk Analysis

The second step in the risk management process order is analysing the risk; it is
important because it provides an understanding and awareness of the impact of
risk on decision making. Each project requires a risk analysis that suits the needs
of the parties involved. There are a number of factors that should be considered
when choosing an appropriate risk analysis technique:
(a) Type and size of project.
(b) The information available.
(c) Cost of analysis.
(d) Time provided for analysis.
(e) Experience and expertise of the analysis.

158 TOPIC 8 RISK
This analysis is done by evaluating both the likelihood of the risk being realised,
and of the impact if the risk is realised. A categorisation of high/medium/low in
respect of each may be sufficient, and should be the minimum level of
categorisation this results in a „3 3‰ risk matrix as illustrated in Figure 8.6.
Colour („Traffic Lights‰) can be used to further clarify the significance of risks.
Figure 8.6: Risk 3 3 Severity Matrix
A more detailed analytical scale may be appropriate, especially if clear

quantitative evaluation can be applied to the particular risk „5 5‰ matrices are
often used, with impact and likelihood on a scale of:
Impact Likelihood
1. Insignificant 1. Rare
2. Minor 2. Unlikely
3. Moderate 3. Possible
4. Major 4. Likely
5. Catastrophic 5. Almost
Truly, there is no absolute standard for the scale of risk matrices the
organisation should reach a judgement about the level of analysis that it finds
most practicable for its circumstances.
There are many quantitative techniques in analysing risk, such as:

(a) Elementary risk analysis, which is a single measurement or single process.
(b) Sensitivity analysis, which is very popular nowadays. It is looking at the
variation of risks in terms of the project variables and is treated
independently.

TOPIC 8 RISK 159
(c) Probability analysis. It is a computer-based analysis that is known as the

Monte Carlo approach.
The risk will be prioritised once it have been analysed. The less acceptable the
exposure in respect of a risk, the higher the priority which should be given to
addressing it. Similarly to the highest priority risks (the key risks), it should be
given regular attention at the highest level of the organisation, and should
consequently be considered regularly by the managers. The specific risk
priorities will change over time as specific risks are addressed and prioritisation
consequently changes.
ACTIVITY 8.2
Using the case of the bird table for your garden, analyse the risks that
you have listed.
8.3.3 Risk Response

After analysing the risks, we need to provide appropriate responses to them.
These include:
(a) Reducing the risk.
(i) Reduce the likelihood.
(ii) Reduce the consequences.
(b) Transferring the risk.
(c) Avoiding the risk.
(d) Accepting the risk.
Reducing the risk is usually the first alternative considered. There are basically
two ways to do this; either reducing the likelihood that the event will occur
and/or reducing the impact that the adverse event would have on the project.
Managers can also consider transferring the risk by passing it to another party.
This transfer does not change the risk. The risk will remain but will be handled
by a different party. For example, the client transferring the risk to the contractor
or designer; the contractor to the sub-contractor; and the client, contractor, sub-
contractor or designer, to the insurer.

160 TOPIC 8 RISK
Alternatively, managers can choose to make one big decision by taking risk
avoidance. Some risks will only be treatable, or containable to acceptable levels,
by terminating the activity. Avoiding risk means changing the project plan to
eliminate the risk. Although it is impossible to eliminate all risk events, but
hopefully some specific risks may be avoided before the project is launched.
Finally if the risk is so large (such as an earthquake or tsunami), to the extent that
it is not feasible to consider transferring, reducing or avoiding, you would just
have to accept it. Generally there are two conditions that will make you choose
this option. It is either because the exposure may be tolerable without any further
action needed; or even if it is not tolerable, the ability to do anything about some
risks may be limited, or the cost of taking any action may be worthless compared
to the potential benefit gained. This option, of course, may be supplemented by
contingency planning for handling the potential impact if the risk really happens.
8.3.4 Risk Review

Each response has a different impact which we would need to monitor .
Continuous monitoring and review of risks ensures new risks are detected and
managed, and that action plans are implemented effectively. Review processes
are often implemented as part of the regular management meeting cycle,
supplemented by a major review at significant project phases and milestones.
Monitoring and reviewing of activities connects risk management to other

management processes. This results in better risk management and continuous
improvement. With this step, we are able to come up with a watch list identifying
the major risks for risk treatment action. The positive outcomes are in the form of
revisions to the risk register, and a list of new action items for risk treatment.
Although we may have the solutions or responses, sometimes the risk might still
occur in other situations. The construction industry for example, cannot run
away from risks. The most challenging one is dealing with financial risks because
it involves many parties such as lenders from the government or private sectors,
sponsors, contractors, consultants and clients.
Why is financial risk so crucial? For an established company, it might finance its
new projects using its own cash resource. But if it involves an international
project, it might not be sufficient. The company might require funding. As we
discussed before, a project may face a number of risks, for example construction
delay, cost overruns, increase in interest rates, technological changes and tight
competition. This will make sponsors seek other sources of finance to limit his or

TOPIC 8 RISK 161
her risk from the project. By seeking partners to develop a project, the sponsor
does not only spread the risk of failure (and also the rewards of success) but also
achieves the best balance of expertise and contribution.
ACTIVITY 8.3
As a project manager, you have just been given the responsibility for
the completion of the construction and commissioning of an on-shore
process plant which has recently been bought from a company going
into liquidation. Nothing has been done on site for the last three
months and the original main contractor is now committed to another
site. However, the original Dutch & German sub-contract suppliers of
M&E equipment have a local agent. Your directors have indicated a
minimum time to make the plant operational as the primary objective.
1. What would your first actions be and why?
2. It is company policy for the Project Manager to prepare a Risk
Assessment for each project. Explain how this should be done.
Briefly outline the main risks associated with this project which
should be retained by the company and those which should be
transferred to the contractor. Give reasons for your choice.
All small or major projects are subject to risk.
Conceptually, risk refers to the probability that a particular adverse event

occurs during a stated period of time. Risk also needs to be managed.
The benefits of risk management generally are:

Project issues are clarified, understood and considered from the start
Decisions are supported by thorough analysis and the build-up of
historical data to assist future risk management procedures.

162 TOPIC 8 RISK
The risk management process starts with:

Risk identification Through brainstorming, identifying all the possible
risks.
Risk analysis using qualitative (the matrix) or/and quantitative method
(sensitivity analysis, Monte Carlo analysis, etc.) to analyse the level of
importance of the risk.
Risk response give response to the risk by choosing either to reduce,
transfer or avoid, or accept the risk.
Risk review monitor the implementation of the action taken towards the
risk.
A highly critical risk that always needs to be highlighted is financial risk.
Elementary Risk Analysis Risk Management

Known Risk Sensitivity Risk Analysis
Unknown Unknowns
Known Unknowns
Probability Risk Analysis
Institution of Civil Engineers. (1998). RAMP: risk analysis and management for
projects. Institution of Civil Engineers and the Faculty and Institute of
Actuaries. Thomas Telford Limited.
Kris Moodley. (2001). Notes from Strategic Management.
Nigel J. S., Tony Merna, & Paul Jobling. (1999). Managing risk in construction


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Faculty of Science and Technology

Copyright © Open University Malaysia (OUM)

Copyright © Open University Malaysia (OUM)

Module Writers: Noraini Hamzah

Assoc Prof Ir Dr Arazi Idrus

Moderator: Dr Christy P Gomez

Developed by: Centre for Instructional Design and Technology

First Edition, September 2006

Copyright © Open University Malaysia (OUM), April 2013, EBTM3103

Copyright © Open University Malaysia (OUM)

Topic 1 Introduction to the Fundamentals of Project Management 1

Topic 2 Organisation: Goals, Structure and People 20

Topic 3 Engineering Economics Analysis 38

Copyright © Open University Malaysia (OUM)

3.3 Which to Choose? 51

Topic 4 Cost Estimating and Budgeting 60

Topic 5 Developing a Project Plan 74

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5.4 Critical Path Method 87

Topic 6 Scheduling Resources and Project Control 103

Topic 7 Managing Project Teams 124

Copyright © Open University Malaysia (OUM)

Topic 8 Risk 149

Copyright © Open University Malaysia (OUM)

Copyright © Open University Malaysia (OUM)

Copyright © Open University Malaysia (OUM)

Table 1: Estimation of Time Accumulation of Study Hours

Study the module 60

Attend 4 tutorial sessions 8

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The phases are then divided into eight topics as follows:

Topic 1 discusses the fundamentals of project management, definition of project,

Topic 3 outlines the importance of having basic economic knowledge in

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TEXT ARRANGEMENT GUIDE

Self-Check: This component of the module is inserted at strategic locations

Activity: Like Self-Check, the Activity component is also placed at various

References: The References section is where a list of relevant and useful

Copyright © Open University Malaysia (OUM)

Project Management Institute. (1996). A guide to the project management body of

The Association of Project Managers. (1996). Body of Knowledge. APM.

British Standards Institute. (1996). BS 6079: Guide to Project Management. BSI.

Turner, R. (1992). The handbook of project based management. London: McGraw

Wearne, S. H. (1973). Principles of engineering organisation. London: Edward

Chang, C. M. (2005). Engineering management challenges in the new

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Popescu, C. M., & Charoenngam, C. (1995). Project planning, scheduling, and

Moodley, K. (2001). Notes from strategic management.

TAN SRI DR ABDULLAH SANUSI (TSDAS) DIGITAL

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Copyright © Open University Malaysia (OUM)

1.1 PROJECT CHARACTERISTICS

Table 1.1: Definitions of „Project‰

The Project Management A temporary endeavour undertaken to create a unique

The UK Association of A discrete undertaking with defined objectives often

The British Standards A unique set of co-ordinated activities, with definite

Turner (1992) An endeavour in which human, material and financial

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Figure 1.1: Characteristics of „Project‰

Thus a project can be defined as a process to achieve a specific objective and

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All projects are subject to uncertainty during the delivery process. In

1.2 THE PROJECT LIFE CYCLE