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Project management

1. Basic concepts and project lifecycle

a) Definitions
• POSDCORB – planning, organizing, staffing, directing, coordinating, reporting, budgeting
• IPECC – initiation, planning, execution, controlling, closing
• Demin cycle – PDCA – plan, do, check, act
• (PMI) — Project is a temporary endeavor undertaken to create a unique product, service or result.
• Little & Mirrless — a project is a scheme or part of a scheme for investing resources which can
reasonably be analyzed as an independent unit.
• Harison – a project is a non-routine, non-repetitive, one off undertaking normally with discrete time
with technical and financial performance goals.
• Business dictionary – a project is planed set of interrelated tasks to be executed over a fixed period of
time within the given budget and other limitations.
b) Characteristic of a project
• It is performed by people to bring about a change
• It is planned execution of activities to produce results.
• The execution of activities in a project is carried out under various constraints.
c) Progressive elaboration
• Is the evolution of project concept through project research and feasibility to plan and subsequent
execution. Also called as Rolling wave planning
d) Strategic plan:
• Project idea is a result of strategic plan of a company or corporate

legal
compulsions

technological
customer request
advancment

Corporate
strategy plan

corporate requirement market demand

e) Other characteristics of project are:

• SMART goals (specific, measurable, attainable, relevant, time-bound)
• Highly complex
• Resource optimality
• Customer driven or customer oriented
f) Project life cycle

Project charter Project management plan Acceptable deliverables

• Phase I: feasibility stage or conception stage/ initiation stage
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¨ It assesses the business case to confirm it is feasible to manufacture and implement. After the
feasibility study once, the objectives have been clearly defined then the appraisal of the solutions
is conducted in terms of risk, financial commitment and benefits.
• Phase II: Design stage (planning and scheduling stage)/ Definition
¨ This phase uses guidelines from the feasibility study to design the product, outline the build
method and develop detailed schedules and plans.
¨ Technical parameters are frozen and basic designing is completed and specifications for
equipment are finalized. Costs are estimated in details, a time schedule for the project is planned
and steps are taken for raising funds and resources.
¨ The output of design phase is called detailed project report (DPR)
• Phase III: Execution stage
¨ Here emphasis is given to give physical shape to the ideas presented in DPR. In this phase
procurement of resources, material, machinery starts. The intensity of activities further builds up
and reaches a peak in 3rd phase, however when execution approaches to completion the intensity
of activities start falling again.
• Phase IV: Termination
¨ This phase inspects and confirms the project has been made to the approved design and then
hand over the project to the client for operation.
g) Parameters of project management
• Time:
• Scope: it tells what need to be achieved and work that must be done to deliver a project.
• Cost: it is directly dependent on time and cost.
• Quality:
Time
Cost
Cost
Risk Resource

Quality Expectation Time

Quality
Scope Cost

Scope Time Scope Quality

Triple constraints Diamond constraints Sextuple constraints

h) Classification of project
• Nature of work
¨ Industrial (product based) ex: sugar mill, petrochemical refinery, development of manufacturing
plant, development of robot.
¨ Non-industrial (service based) ex: social service project, banking service, education, sales and
marketing, irrigation, residential complex.
• Duration
¨ Long duration > 5yrs
¨ Medium duration 3–5yrs
¨ Short duration 1–3yrs
¨ Special short duration <1yrs
• Value
¨ Mega value >1000 crore
¨ Large value 100–1000 crore
¨ Medium value 1–100 crore
¨ Small value <1crore
• Ownership
¨ Public sector
¨ Private sector
¨ Joint sector
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• Pace of work
¨ Normal track
¨ Fast track
§ Fast tracking: is doing concurrent activity, only critical activities are fast tracked. After fast
tracking rescheduling is done.
§ Crashing: supplying more resources to activities on critical path. Total cost of project
increases.
i) Features of a project
• Project sponsor: he is the key person behind the project, he funds the project and along with project
manager ensures that the objectives of the project are fully realized, he is also known as client, when
he provides the statement of work to the project manager. He writes business case document based on
corporate requirement, which contains a justification for the launch of a new product and the analysis
of potential financial benefits from the launch of a new product, he also writes the project charter and
signs it.
• Project charter: this is the first document that declares the presence of project, it is written during the
initiation phase of a project and is developed by the project sponsor. It contains aims and objective of
project and methodology for the development of project called its Build-method. It also contains—
assumptions and constraints, stakeholders list, statement of work, corporate requirements, customer
requirements, details of project sponsor and manager, a brief financial analysis.
• Project manager: he is a single point responsibility centre responsible for the delivery of project
deliverables to the client in accordance with the acceptance criteria.
¨ Deliverables: it is a tangible or intangible product or service to be handed over to the client in
accordance with desired outcomes of the project.
¨ Project manager is head of project team and PM office, he is appointed during the initiation
phase of the project and is responsible for implementing the project charter for the achievement
of the project objectives.
• Project team: a project is administered by a project team which is a group of professionals from
diverse areas, like finance, marketing personnel, heavy engineering, production, R&D, quality
assurance, design, testing and evaluation, internal audit etc. project team is headed by project
manager and works under his guidance and leadership.
• Project management office: it is an organization within the project, responsible for documentation,
training, standards, rules and regulations and their compliance. It is headed by the project manager.
• Project life cycle: the sequence of phases form conceptualization to disposal of a project is project
life cycle (PLC). For project manager PLC has got five distinct phases.
¨ Initiation phase: outcomes
§ Project charter
§ Stakeholders list
§ Feasibility report
§ Appraisal report
¨ Planning phase: outcome
§ Detailed project report
¨ Execution phase
§ Deliverables
§ Documents
§ Change requests
¨ Closing
§ Closing report
§ Lessons learnt
• Project procurement: the process of procuring various resources to achieve project objectives is
called project procurement, it is done through the mechanism of contracts, contracts are agreements
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enforced by law. Contracts contains general and specific clauses for the fulfillment of various terms
and condition of contract. Some of the important clauses are:
¨ Payment clause
¨ Delivery schedule clause
¨ Liquidated damage clause: if a contractor violates any of the terms and conditions of the
contract, resulting in damages to buyer/owner, then under the L.D. clause penalties can be
imposed on the contractor/seller.
¨ Force majeure: if the contractor suffers losses or meets with abrupt situation due to
uncontrollable causes like flood etc. then under this clause, relief or compensation can be given
to him by the buyer for the completion of the project.
¨ Integrity clause: this clause is generally applied in international contracts, if the contractor
indulges in any corrupt practices like bribing etc. then the contract can be cancelled penalties can
be imposed or even the company or the supplier can be blacklisted from further supply.
• Project stakeholders: any individual or organization affected directly or indirectly by the project or
its outcomes is called project stakeholders.
¨ Customer and beneficiaries, vendors/ suppliers, functional and operational managers, program
and portfolio manager, project team, project sponsor, project manager, government department,
banks and financial institutions.
¨ Stakeholder engagement process
§ Power / influence
§ Power / interest
§ Influence / impact
§ Salience model

Power Definitive
Keep Manage
satisfied closely •Dormant

Dangerous Dominant
Keep Urgency Legtimacy
Monitor
Dependant

informed
•Demanding •Discretionary

• Project scope: the exact outcome of the project as per the product or service desired is called project
scope.
¨ Work breakdown structure (WBS) is a scope definition technique. It is a top down tree like
hierarchical structure for the decomposition of entire project work, into small and manageable
work packages (it is smallest unit of WBS).
¨ Project work → sub project → phases/task → deliverables → workpackages
¨ Using WBS code statement of work paragraph is found.
• Project schedule: every project has a definite schedule, schedule is defined based on the project
network, when the network is ready we select the path of longest duration without any float that is
known as the critical path. If the project takes longer than the schedule time, in its completion, this is
called time over run and project is said to be behind schedule. If the project gets completed in less
than the scheduled time this is known as time under run and the project is said to be ahead of
schedule.
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• Project budget: every project has a pre-assigned budget, the estimated cost of the project budget. If a
project spends more than its budget is called overbudget (deficit). And if it is completed in less than
the allocated budget is called underbudget (surplus).
¨ Project budget is defined as budget at completion (BAC)
¨ on re-estimation of the budget during execution of the project is defined as estimates at
completion.
¨ If BAC>EAC — surplus, BAC<EAC — deficit
¨ Project manager should make every effort to complete the project within the allocated budget
without comprising quality.
¨ The budget is assigned to every work package of WBS and the progress of work package is
monitored based on the assigned budget.
• Project quality: quality means conformance with predetermined quality standards. Quality standards
of a project are decided by its stake holders. Every project has a quality management plan with
quality assurance and quality control as its components.
Quality control Quality assurance
Ø Quality control means testing the output Ø Assurance means ensuring the project
for defects and trying to minimize them. quality throughout the project lifecycle
Ø It is product oriented using systematic means.
Ø It is corrective in nature Ø It is process oriented
Ø It is preventive in nature
¨ In project management several techniques are used for quality control and quality assurance, this
includes: root cause analysis/fish bone diagram (why-why diagram), Paratto chart, flow chart,
scatter diagram, run chart, control chart.
• Project resources: every project uses a number of resources to achieve its objective. It is necessary
for a project manager to optimize the use of project resources by avoiding their over utilization and
underutilization. A perfect state of resource optimization is called resource optimality.
¨ Human resources, time resources, financial resources, mechanical resources, technological
resources, natural resources.
¨ To monitor the utilization of project resources, we use resource histogram.
• Project risk: risk is variability from expectation, risk can be both positive and negative, known and
unknown.
¨ Positive risk should be exploited, advanced and shared by the project manager, and negative risk
should be avoided, minimized and transferred.
¨ A project manager should adopt a path of minimum risk and try to eliminate all risk from
project.
¨ Every project maintains a risk register and develops a risk management plan, risk register
contains a list of all identified risks and potential actions to be taken if they occur. It also
contains risk description, risk category, risk priority, risk probability, risk impact, risk response,
risk trigger, risk ownership and contingency plan.
j) Corporate hierarchy
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Top management corporate owner

board of director

CEO

looks after strategic interests and

corporate requirements Portfolio manager

provides business case document,

project charter Programme manager

project sponsor

project manager

project team

• Portfolio manager
¨ Portfolio is a group of different programs and projects mostly unrelated to each other, which are
grouped to satisfy the strategic interest of the corporate.
¨ Program is a group of similar or related project, program management results in optimization
and economies of scale which are not possible within individual projects.
• Product life cycle from project sponsor’s point of view
¨ Strategy phase
§ Corporate vision: long term aim
§ Corporate requirement: to develop requirement for competitiveness
§ Business case: strategy and product conceptualization
¨ Project phase
§ Initiation
§ Planning
§ Execution
§ Closing
¨ Operation phase
§ Operational startup
§ Half-life upgrade
§ Disposal
2. Initiation process
a) Project formulation and development
• Pre-investment phase
¨ Identification/ conceptualization /opportunity study
¨ Pre-feasibility studies
¨ Feasibility studies
• Investment phase
• Operation phase
b) Project appraisal
• Technical appraisal
• Market and demand analysis
¨ Qualitative method
§ Collective opinion survey method
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§ Consumer survey method
§ Delphi method
§ Nominal group technique
¨ Quantitative method
§ Simple average method
§ Moving average method
§ Weighted moving average
§ Exponential smoothing method
• Financial Analysis/feasibility
¨ Criteria used for selection of investment opportunities
§ Average rate of return on investment (ARR): companies select projects where ARR
exceeds a predetermined value or they rank the alternative proposal in descending order of
magnitude of ARR
𝑎𝑣𝑒𝑟𝑎𝑔𝑒 𝑝𝑟𝑜𝑓𝑖𝑡 𝑎𝑓𝑡𝑒𝑟 𝑡𝑎𝑥 (𝐶𝐹𝐴𝑇)
𝐴𝑅𝑅 =
𝑎𝑣𝑒𝑟𝑎𝑔𝑒 𝑖𝑛𝑣𝑒𝑠𝑡𝑒𝑚𝑒𝑛𝑡
o Average investment
1
= [initial investement − salvage value] + salvage value + working cpital
2
o Working capital: it represents operating liquidity available to a business, if current
assets are less than current liabilities then working capital is deficit.
= 𝑐𝑢𝑟𝑟𝑒𝑛𝑡 𝑎𝑠𝑠𝑒𝑡𝑠 − 𝑐𝑢𝑟𝑟𝑒𝑛𝑡 𝑙𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠
§ Payback period: it is a traditional method and widely used for project evaluation, it is
measured in terms of time which will take to recover the cost of investment.
𝑖𝑛𝑖𝑡𝑖𝑎𝑙 𝑖𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡
𝑃𝐵𝑃 =
𝑢𝑛𝑖𝑓𝑜𝑟𝑚 𝐶𝐹𝐴𝑇
o Payback period is the period within which the entire initial investment is fully
recovered without taking time value of money into account
§ Discounted cash flow technique: traditional methods of project evaluation do not take into
account the total benefit from the entire life cycle of a project and they do not consider the
time value of money. This analysis uses free cash flow projections and discounts them to
arrive at present value estimates which is used to assess the potential of investment.
𝐶𝐹] 𝐶𝐹^ 𝐶𝐹`
𝐷𝐶𝐹 = + + ⋯+
(1 + 𝑟) ] (1 + 𝑟) ^ ( 1 + 𝑟 )`
o Net present value: money received today is worth more than the sum received in the
future. It has time value, this occurs because, potential for earning interest, impact of
inflation, effect of risk.
𝑁𝑃𝑉 = 𝑝𝑟𝑒𝑠𝑒𝑛𝑡 𝑣𝑎𝑙𝑢𝑒 𝑜𝑓 𝑐𝑎𝑠ℎ 𝑖𝑛𝑓𝑙𝑜𝑤 − 𝑝𝑟𝑒𝑠𝑒𝑛𝑡 𝑣𝑎𝑙𝑢𝑒 𝑜𝑓 𝑖𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡
o Internal rate of return: it is also known as yield on investment method, marginal
efficiency of capital method. It is a method of calculating rate of return, the term
internal means that the calculation does not incorporate environmental factors. (interest
rate or inflation)
Ø The IRR of an investment or project is the annualized effective or discount rate
that makes the net present value equal to zero, or
Ø It is the discount rate at which the present value of all future cash flows is equal to
the initial investment i.e. the rate at which investment achieve breakeven.
Ø Greater IRR are desirable, it give rate and is an indicator of
efficiency/quality/yield of an investment where as NPV is an indicator of value of
magnitude of investment.
𝐶`
e = 𝑝𝑟𝑒𝑠𝑒𝑛𝑡 𝑐𝑜𝑠𝑡
(1 + 𝑟)`
§ Opportunity cost: the cost of the rejected alternative is known as opportunity cost.
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§ Sunk cost: the irrecoverable expenditures made incurred into a project are called sunk cost.
Sunk cost is never considered while deciding the future of troubled project.
• Economic analysis: it is done form the view point of society or economy as a whole. The evaluation
is done from a wider angle not merely in financial terms. It should cover whether:
§ It fits into national priorities
§ It contributes to the development of the sector of economy
§ Benefits justify the consumption of scarce resources of the nation
§ The project has to be evaluated for its economic viability
• Social cost benefit analysis: A public project is deemed feasible only if sum-total of benefits to
whom-so-ever they may occur exceed the estimated costs, highlighting the social nature of
investment decisions. Approaches to SCBA
¨ UNIDO method (united nation industrial development organisation)
§ Used for projects in developing countries, measures cost benefits in terms of domestic
prices.
§ Calculation of financial profitability of the project measured at market prices.
¨ Little-Mirrless method (L-M method)
§ L-M’s approach measures costs and benefits in terms of international prices. The argument
in favour of using international price as shadow price is that it helps offset the fluctuations
in domestic price.
Shadow prices: when the price of a product or service is either not given or not known then the proxy price paid to
buy one unit of that product or service is called the shadow price.
¨ Indian financial institutions use following indicators for cost benefit analysis.
§ Economic rate of return (ERR): it measures the rate of return to the society. ERR is rate of
discount that equates the economic cost of the project to the economic benefits that would
occur during the life of the project. For calculation of ERR, shadow prices are used both for
input (costs) and output (benefits) instead of market prices.
§ Domestic resource cost: it measures the domestic resource cost of manufacturing a product
as against the cost of importing it.
𝑣𝑎𝑙𝑢𝑒 𝑎𝑑𝑑𝑒𝑑 𝑎𝑡 𝑑𝑜𝑚𝑒𝑠𝑡𝑖𝑐 𝑝𝑟𝑖𝑐𝑒𝑠
𝐷𝑅𝐶 = × 𝑒𝑥𝑐ℎ𝑎𝑛𝑔𝑒 𝑟𝑎𝑡𝑒
𝑣𝑎𝑙𝑢𝑒 𝑎𝑑𝑑𝑒𝑑 𝑎𝑡 𝑤𝑜𝑟𝑙𝑑 𝑝𝑟𝑖𝑐𝑒𝑠
𝑣𝑎𝑙𝑢𝑒 𝑎𝑑𝑑𝑒𝑑 = 𝑠𝑎𝑙𝑒𝑠 − 𝑖𝑛𝑝𝑢𝑡 𝑐𝑜𝑠𝑡
DRC may be taken as a measure of total rupees spent to save a unit of foreign currency.
Ø DRC < exchange rate (goods should be produced domestically)
Ø DRC > exchange rate (go for import)
§ Effective rate of protection: it measures the net protection offered to domestic projects.
𝑣𝑎𝑙𝑢𝑒 𝑎𝑑𝑑𝑒𝑑 𝑎𝑡 𝑑𝑜𝑚𝑒𝑠𝑡𝑖𝑐 𝑝𝑟𝑖𝑐𝑒 − 𝑣𝑎𝑙𝑢𝑒 𝑎𝑑𝑑𝑒𝑑 𝑎𝑡 𝑤𝑜𝑟𝑙𝑑 𝑝𝑟𝑖𝑐𝑒
𝐸𝑅𝑃 =
𝑣𝑎𝑙𝑢𝑒 𝑎𝑑𝑑𝑒𝑑 𝑎𝑡 𝑤𝑜𝑟𝑙𝑑 𝑝𝑟𝑖𝑐𝑒
ERP of zero indicates that the project does not enjoy any protection from international
trade, positive value of ERP indicates that the project enjoys protection from international
competition, higher the positive ERP, higher the protection enjoyed by the product.
c) Formulation of detailed project report
• DPR is a very detailed and elaborate plan for project, indicating the overall programme, different
roles and responsibilities and activities and resources required. Typically, about 10% of the total cost
of a project is spent on planning. The DPR is prepared by specialized agencies, they are known as
technical consultancy organisation such as EIL.
d) Project risk
• Risk is an event that has some degree of uncertainty attached to it. Risk management includes the
process of planning risk management, identifying risks, performing qualitative and quantitative
analysis of risk, planning responses to risk, and finally monitoring and controlling risk.
• Risk information gathering technique.
¨ Brain storming
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¨ Root cause analysis
¨ SWOT analysis
¨ Delphi technique
¨ Expert interviewing
• Difference between risk and uncertainty: if the probabilities of possible outcomes of a given problem
are known, we can conclude that the problem contains risk. If the probability of possible outcomes of
a given problem are not known we can conclude that the problem has an element of uncertainty.
• Risk measurement:
¨ Range: it is simplest to calculate; the range of a distribution is the difference between highest
value and lowest value.
¨ Standard deviation:
𝜎 = [∑𝑝k (𝑥k − 𝑥̅ )^ ]]/^
¨ Variance 𝜎 ^
m
¨ Coefficient of variation =
n
¨ Semi variance: 𝑥k < 𝑥̅ gives down side risk
𝜎 = [∑𝑝k (𝑥k − 𝑥̅ )^ ]]/^
¨ Mean absolute deviation
1
= [∑𝑝k |𝑥k − 𝑥̅ |]
𝑁
• Risk analysis: following are simple tools that come handy for analyzing small and medium sized
projects:
¨ Sensitivity analysis (what if analysis): this is the simplest of quantitative risk analysis method. In
this analysis we change only one input variable at a time while keeping the other variables at
their base value. Output is plotted against one input variable at a time, this way output is plotted
against different variables and the resultant diagram is known as tornado diagram.
¨ Scenario analysis: in this analysis, we generate a scenario for the output of the project, while all
input variables are simultaneously changing. Theoretically any number of scenario’s can be
generated but practically we generate 3 scenarios, this method is an improvement over
sensitivity analysis, because it considers variation in several variables together which is more
realistic.
§ Optimistic
§ Pessimistic
§ Most likely
¨ Simultaneous analysis (Montecarlo method): in this method we randomly assign any probability
distribution to input variables. Output is plotted against randomly selected values of input
variables from the assigned probability distributions. The output is also a probability distribution
from which an exact analysis of risk can be worked out. This is the most frequently and
popularly used method of risk analysis.
¨ Break even analysis: starts with dividing the costs into two broad categories
§ Fixed cost: all projects incur certain costs that are fixed in nature. These costs remain
constant irrespective of the changes in the volume of output. Ex: rent payable for land,
factory, office; insurance premium on fixed assets; interest payable on long term
borrowing; administrative expenses; annual maintenance charges, depreciation.
§ Variable cost: these are those costs that vary directly with the level of output. Raw material
cost is a variable cost since it depends on the level of output. Ex: consumable stores, power,
fuel, water charges, selling expenses.
§ Contribution: it is the difference between the sales realization and the variable cost. The
excess of selling price over variable cost is called by the term contribution, since it
contributes towards fixed cost and profit.
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𝑓𝑖𝑥𝑒𝑑 𝑝𝑟𝑖𝑐𝑒
𝐵𝐸𝑃 =
𝑐𝑜𝑛𝑡𝑟𝑖𝑏𝑢𝑡𝑖𝑜𝑛 𝑝𝑒𝑟 𝑢𝑛𝑖𝑡
¨ Decision tree analysis: Firms have some flexibility in the execution and when such flexibility
exists, decision tree analysis is a useful tool in valuing project flexibility. To analyse the
situation where sequential decision making has risk involved then decision tree analysis is a
useful tool.
§ Work out the decision alternatives
§ Chronologically arrange all the options of each alternative
§ Find the total expected monetary value of each option and therefore each alternative
𝐸𝑀𝑉 = 𝑣𝑎𝑙𝑢𝑒 × 𝑝𝑟𝑜𝑏𝑎𝑏𝑖𝑙𝑖𝑡𝑦
§ The alternative having highest EMV is selected
• Risk response:
¨ Avoidance – change plan/objective
¨ Acceptance – passive; active (contingency plan)
¨ Mitigation – reduction of risk to acceptable threshold
¨ Transfer – insurance
¨ If risk is more than 70% it becomes an issue.
• Risk reduction strategies
¨ Change the proportion of fixed and variable costs.
¨ Change pricing strategy
¨ Sequential investment– initially start with low production
¨ Reduce dependence on debt and increase equity
¨ Enter into long term agreement with vendors
¨ Gather more information about market and technology before taking a plunge
• Risk register: it is a document that contains information about identified project risks, analysis of the
risk severity and evaluations of the possible solutions to be applied. Presenting this in a spreadsheet is
often the easiest way to manage things, so that key information can be found and applied quickly and
easily. Risk register is a living document that needs continuous updates.
3. Project organization
a) Introduction
• Power and its use
¨ Power can be defined as the ability of an individual to influence the actions of others to achieve
a certain established goal. Legitimate power is called authority in organisation. The proper use
of power does not involve the use of force or the threat of force. There are five basic type of
power.
§ Legitimate power: this is the power invested in a person due to their position within the
company or project. It is usually associated with the title or chair or uniform of the person
and their duties and functions in the company.
§ Expert power: this is power gained by years of work experience or gaining of advance
educational qualifications in a particular area of work. Such people are called SMEs or
subject matter experts.
§ Referent power: this is power gained by using interpersonal skills and personal charisma to
attract and retain the loyalty of others and get them to think like you are thinking.
§ Reward power: this is the best kind of power to use if properly administered. Here a person
uses power for the benefit of their employees or team members and gives them bonuses,
rewards, new responsibilities, promotions etc. for doing their job well.
§ Penalty or coercive power: this is worst kind of power to use because prolonged or
continued use of only this kind of power results in a very negative work environment in the
company.
• Barriers to problem solving
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¨ Conformational bias: starting a problem-solving process with a solution already prepared in
mind
¨ Mental set: using method and solution that worked previously without checking their
compatibility with your current problem.
¨ Functional fixedness: resisting the ides of generating many alternatives to a problem and
sticking the most obvious or easy one. Here mentally we block new ideas by thinking only in
one way or assuming that an item has only one use.
• Conflict resolution
§ Confrontation – facing the issue head to head from front, also called problem solving.
Considered best technique by PMI.
§ Collaboration – in this method two parties come to same view point.
§ Compromise – Each side gives up something & everyone is dissatisfied, it’s a lose-lose
situation.
§ Forcing – one party is forced by use of power, considered worst by PMI
§ Smoothing – issue is not addressed directly, smoothens the conflict by various way such as
agreement
§ With drawing – issue avoided completely
• Stages of team formation
§ Forming: all the team members in this stage are highly dependent on project manager for
guidance and direction. Individual roles and responsibilities are not clear. Here they make
effort to know their work and colleagues.
§ Storming: this is a crucial stage and effectiveness of team fall very low. In this task and
responsibilities are decided. Some members might feel hard to adjust over their
responsibility may be because of their work style, lack of relation with other members etc.
§ Norming: in this stage people have set up relations with other members and they have a
hand on their tasks. Here differences are sort out easily and team begins to show rise in
performance.
§ Performing: in this stage effectiveness and performance are both high. Team members are
strategically aware of the situation and work, to achieve goal even without leader’s
guidance.
§ Adjourning: at this stage the team is dissolved as generally the goals are achieved.
b) Type of project organization
• Functional organisation: every department is headed by a specialist, therefore technically and
technologically it is very strong. It is the most stable form of organisation, it is also called
bureaucratic or classical organisation. It has large manpower base and strong lines of vertical
communication, but it suffers from lack of coordination as a result project planning and
implementation suffer and disorganize. It fails in case of product diversification and geographical
expansion. Lead time in approval are long and customer request cannot easily be accommodated.
• Product organisation: every product line is headed by a project manager. This organisation is also
called pure project or projectized organisation. Project manager has the highest authority in this type
of organisation, its response time is very fast. Lead time in approval is small and customer request
can be easily accommodated. Resources can’t be easily shared between different product lines. It is a
very expensive organisation. Since each product line also needs functional manager under the project
manager. Workers are under highest jeopardy of losing their jobs in this type of organisation. They
mostly earn their revenue from other organisation.
• Matrix organisation: it is also called hybrid organisation as it combines the good features of both
functional and product organisation. In this structure both the functional and project manager draws
their powers directly from the general manager. Functional managers are responsible for functional
responsibilities like resource allocation, training and technical matters. Project manager are
responsible for project responsibilities like policy coordination acceptance criteria and timely
 12
completion of the project. It is very expensive form of organisation and staff suffers from role
ambiguity syndrome as they report to multiple managers.
§ Strong matrix: when the command of technology is with project manager, project manager
Product
is either called programme manager.
strong matrix
balanced matrix § Weak matrix: when the project management is with functional manager. The matrix
weak matrix structure comes close to functional organisation.
functional
§ Balanced matrix: when both project manager and functional manger has balanced influence
on workers.
§ When a company desires a strong matrix, the project manager is generally promoted from
within the organisation and may have had assignments in several line functions throughout
the organisation
4. Planning process
a) Planning: In this phase you identify the general requirement of a project, break it down into discrete
activities determine the sequence and interdependence of these activities, estimate the resource
requirements and find the critical path.
b) Scheduling: this phase overlaps with the planning phase. Time estimates are made for each activity and
overall project completion time is calculated. Calculate early and latest, start and finish dates for each
activity.
c) Implementation and control: It begins when the project is undertaken. Here you employ a variety of
techniques to achieve optimization of resource usage, monitor progress and cost forecast, completion
dates and overall project cost.
d) Work break down structure: these are incremental and hierarchical decomposition of the project phases. It
is a tree like structure and it shows the description of job for completion of the project. These are also
called top down diagram.
e) Techniques used for scheduling:
• Bar charts: (Gant chart) given by Henry Gant in 1910. It is a pictorial chart which has two coordinate
axes, the horizontal coordinate represents the time elapsed and vertical coordinate represents the job
or activity to be performed.
¨ It doesn’t represent activity inter dependencies, it doesn’t show the uncertainty associated with
activity completion. It is difficult to watch the progress of the activities and find the critical path.
For large and complex projects having a large number of activities, it is difficult to draw the bar
chart and more difficult to find the critical path. Resource levelling and resource smoothing
cannot be done using bar chart. It is used as a scheduling technique and not very effective as a
control tool.
• Mile-stone charts: it is an improvement over the bar chart, as it provides extra information about,
completion of various sub activities taking place during the course of main activities.
¨ Completion of some activity is indicated by an inverted triangle or a vertical arrow along the
activity bars. A milestone chart is a scheduling as well as control tool.
• Line of Balance technique: it is an effective scheduling and control tool, in LOB both the location
and time are simultaneously indicated (Cyclograms) and that way sometimes it is considered as a
better control tool than even networks, which indicate only time. It is applicable to repetitive kind of
activities only.
• Network method: PERT, CPM, UNETICS, LESS, TOPS, SCANS
f) Network diagram
• Elements of a network
¨ Event
¨ Activity
¨ Dummy
• Fulkerson’s rule for numbering the events
¨ The single initial event is numbered 0,1,10 etc.
 13
¨ All arrows emerging out of the initial event are neglected. Doing so the created one or more new
initial events are numbered as 2,3,4 or 20, 30,40 etc.
¨ Step -2 is repeated unless all events are numbered.
• Errors in network
¨ Looping error
¨ Dangling error
¨ Wagon wheel error
g) Network scheduling technique
• Programme evaluation and review technique (PERT)
¨ In pert each activity is assumed to follow 𝛽 distribution curve of time. In this system cost is
directly proportional to time, hence efforts are made to minimize the time so as to result in
minimum cost. It is suitable for newer type of projects which have not been performed in the
past and no exact assessment of time and cost is available.
§ Mean time or expected time
𝑡u + 4𝑡w + 𝑡x
𝑡t =
6
§ Standard deviation of activity
𝑡x − 𝑡u
𝜎=
6
§ Variance 𝜎 ^
¨ Central limit theorem: it states that a project consists of a large number of activities, where each
activity has its own mean time, standard deviation, variance and also its own 𝛽 distribution
curve. The distribution of time for the project as a whole will approximately be a normal
distribution. i.e.
𝑡t = 𝑡t] + 𝑡t^ + ⋯
𝜎 ^ = 𝜎]^ + 𝜎^^ + ⋯
¨ Time computation of events:
§ Earliest expected occurrence time EOT: the time at which an event is expected to occur
earliest. An event occurs earliest when all the activities leading to it are completed. It is
{
generally denoted by 𝑇z – EOT of event j. it is calculated by forward pass.
§ Latest allowable occurrence time LOT: the latest allowable time at which an event must
{
occur to keep the project on schedule. It is generally denoted by 𝑇| – LOT of event j. it is
calculated through backward pass.
§ Slack: it is defined as the difference between latest allowable time 𝑇| and earliest expected
time 𝑇z of an event. Slack may be zero positive or negative.
o Slack > 0 it indicates project is ahead of schedule, such events are sub critical.
-1 – 15.87% o Slack = 0 it indicates work is on schedule and events are critical.
0 – 50.00%
1 – 84.13%
o Slack < 0 it indicates work is behind schedule and may cause delay in project
2 – 97.72% completion and activities are supercritical.
3 – 99.87% o The path having zero slack value is the critical path, which is also time was longest
path.
§ Probability of completion
~• €~•
o 𝑧= m
• Critical path method (CPM)
¨ This is based on deterministic approach in which only one, time estimate is made for activity
completion. Activity time
¨ Activity times in CPM
§ Earliest start time (EST): it is the earliest possible time at which an activity can be started.
For an activity i-j, earliest event time of i, is the EST.
 14
§ Earliest finish time (EFT): it is the earliest possible time by which an activity can be
completed.
𝐸𝐹𝑇 = 𝐸𝑆𝑇 + 𝑡k{ = 𝑇zk + 𝑡k{
§ Latest start time (LST): this is the latest possible time at which an activity can be started
without delaying the overall project.
{
𝐿𝑆𝑇 = 𝐿𝐹𝑇 − 𝑡k{ = 𝑇| − 𝑡k{
§ Latest finish time (LFT): this is the latest time by which an operation or activity must be
completed without delaying the project. For an activity i-j, latest allowable time of head
event j, is the EFT.
• Some other methods are:
§ Precedence diagram method (PDM)
§ Graphical evaluation and review technique (GERT)
• Float
¨ It is associated with activity times. It is analogous to slack of events in PERT. It is the range
within which start or finish time of an activity may fluctuate without affecting the project
completion time.
§ Total float: the time span by which starting or finishing of an activity can be delayed
without delaying the completion of the project. It is the maximum available time in excess
of the activity completion time.
{
𝐹~ = „𝑇| − 𝑇zk … − 𝑡k{
⇒ 𝐹~ = 𝐿𝐹𝑇 − 𝐸𝐹𝑇
⇒ 𝐹~ = 𝐿𝑆𝑇 − 𝐸𝑆𝑇
Total float constraints the finishing of preceding activity and starting of succeeding activity.
§ Free float: the delay which can be made without delaying succeeding activities. It affects
only preceding activities. It is total float minus head event slack.
{
𝐹‡ = „𝑇z − 𝑇zk … − 𝑡k{
𝐹‡ = 𝐹~ − 𝑆{
§ Independent float: it is the minimum excess available time which exists without affecting
any of succeeding or preceding activities.
{
𝐹ˆ‰ = „𝑇z − 𝑇|k … − 𝑡k{
𝐹ˆ‰ = 𝐹‡ − 𝑆k
§ Interfering float: it is similar to head event slack
𝐹ˆŠ~ = 𝑆{
¨ In CPM analysis, the path along which total float are zero or minimum is called critical path. All
the activities on this path are critical. There can be more than one critical path.
• Advantages of AON system over AOA system.
¨ Activity on node system eliminates the use of dummy activities. It is more helpful for projects
having more overlapping activities. It is self-sufficient and self-explanatory. All activity times
(EST, EFT, LST, LFT) are represented on the diagram. Revision and modifications are easier.
Pre-operation and post operations of activities under consideration are distinctly visible.
• Crashing
5. Execution process
a) Project control system
¨ Monitoring refers to: observe, collect, record and report
¨ Control means: to rectify/correct any deviation from PMP based on monitored data.
b) Tools used for project control
• Earned value analysis:
¨ Elements of earned value
§ Budgeted cost of work performed (BCWP) = Earned value (EV)
 15
§ Budgeted cost of work scheduled (BCWS) = Planned value (PV)
§ Actual cost of work performed (ACWP) = Actual cost (AC)
¨ Cost variance: it is difference between the actual expenditure made in the project till the date of
review to the value of work accomplished for the expanses incurred.
𝐶𝑉 = 𝐸𝑉 − 𝐴𝐶
¨ Cost performance: less than one indicates that the project is spending more than the scheduled
cost.
𝐸𝑉
𝐶𝑃k`‹tŒ =
𝐴𝐶
¨ Schedule variance: it is difference between the value of work that has actually be completed and
the value of the work schedule to have been completed. Negative value indicates that the project
is behind schedule.
𝑆𝑉 = 𝐸𝑉 − 𝑃𝑉
¨ Schedule performance index: less than one indicates that the progress of work is behind
schedule.
𝐸𝑉
𝑆𝑃k`‹tŒ =
𝑃𝑉
¨ Time variance: it gives the time lag at the date of review, by indicating the time equivalent of
value of work.
𝑇𝑉 = 𝑎𝑐𝑡𝑢𝑎𝑙 𝑡𝑖𝑚𝑒 − 𝑠𝑐ℎ𝑒𝑑𝑢𝑙𝑒 𝑡𝑖𝑚𝑒
¨ Estimated cost performance index:
𝐵𝑢𝑑𝑔𝑒𝑡 𝑎𝑡 𝑐𝑜𝑚𝑝𝑙𝑒𝑡𝑖𝑜𝑛
𝐸𝐶𝑃𝐼 =
𝐸𝑠𝑡𝑖𝑚𝑎𝑡𝑒 𝑎𝑡 𝑐𝑜𝑚𝑝𝑙𝑒𝑡𝑖𝑜𝑛
¨ Variance at completion
𝐵𝐴𝐶 − 𝐸𝐴𝐶
¨ To complete performance index
𝐵𝐴𝐶 − 𝐸𝑉 𝑤𝑜𝑟𝑘 𝑟𝑒𝑚𝑎𝑖𝑛𝑖𝑛𝑔
𝑇𝐶𝑃𝐼 = =
𝐵𝐴𝐶 − 𝐴𝐶 𝑏𝑢𝑑𝑔𝑒𝑡 𝑟𝑒𝑚𝑎𝑖𝑛𝑖𝑛𝑔
¨ Critical ratio
𝐶𝑜𝑠𝑡 𝑠𝑐ℎ𝑒𝑑𝑢𝑙𝑒 𝑖𝑛𝑑𝑒𝑥 = 𝐶𝑃𝐼 × 𝑆𝑃𝐼
Good performance project has SV, CV +ve and CPI, SPI greater than one.
• Outsourcing: any project consists of activities of diverse nature, requiring different skills and
resources. An organisation that is venturing upon a new project may not be having all the required
resources and skill in the house. The option is that it can outsource certain project tasks which has
following advantages. Task can be handled more effectively be experts. Recruiting involves cost and
time. Project personnel are freed of their time and they can focus on their core activities, this add
more value to the organisation.
• Monthly status report: this report is generated every month by the project management office
highlighting the status of important project performance areas concerned with project scope, schedule
cost and quality. This report is sent to various stakeholders for feedback and review.
• Review meetings: higher management conducts general review meetings of the projects where as
middle and lower management conducts specialized review of the project.
¨ Specialized review may be concerned with project finances, human resources or technical issues
of the project.
¨ Review meeting help in problem solving conflict resolution, improvement in project
performance and in bringing new ideas to the project. It is an effective control technique for all
round performance improvement of the project.
• Project change control management system:
¨ Changes are unavoidable during the execution of the project. These changes which are relevant
and documented and submitted to change control board (CCB) for approval, being approved
they are incorporated in the project management plan and executed. This is called PCCMS. This
 16
also includes control actions on deviations from project management plan during the course of
execution.
c) Project information system: it is an integrated multiuser software, which is used to schedule monitor and
control the projects. Ex: Harvard project management tool, MS project, SCADA, PIC project etc. the
criteria for a good project are:
• It should be user friendly
• It should be easy to understand and should provide information in a pictorial and graphical form.
• Stakeholders decide the requirements of PIS.
• It should indicate deviations in project performance from plan, it should suggest alternative solutions
to problems and corrective actions on deviations.
d) Resource allocation: it means the decision to allocate the resources for each activity. Due to limited
resources or limited project duration, it is required to allocate the resources such that more or less uniform
demand is generated throughout the project duration. It may be achieved by following two processes.
• Resource levelling: In any project, we must prevent overutilization and underutilization of resources
to optimize their use, in order to achieve the project objectives resource levelling is exercised under
conditions of unlimited resources and limited time.
¨ Resource levelling means achieving a constancy in the utilization of resource by avoiding under
and over utilization.
¨ Methods of levelling: Heuristic/trial and error method; trigger level method; multi ship-multi
shop, comprehensive method (EST method, Floats, Resource loading chart)
• Resource smoothing: when resources are limited but time is unlimited then we use resource
smoothing. The project manager has to maintain optimum balance between the need for resource
smoothing and pressing requirement of delivery of the project to the client.
e) Project cost control
• Indirect project cost
¨ These are those expenditures which cannot be apportioned or clearly allocated to the individual
activities of a project, but are assessed as a whole. This include expenditure related to
administrative and establishment charges, overhead, supervision, expenditure on central store
organisation, loss of revenue, loss of profit, penalty etc.
¨ Indirect cost rises with increased duration, considering only overhead and supervision. It is
represented by a straight line, with a slope equal to daily overhead. But when there is a loss in
profits, due to inability to meet demand or due to some penalty due to delay, a corresponding
cost increase must be added to the cost of overheads, producing the curve. Such loss is called
outage loss. The total indirect cost curve will thus be curved.
• Direct project cost
¨ It is the cost which is directly dependent on the amount of resource involved for completion of
activities. It includes labours, material, plants and machine etc. to get the same work done in less
time, we have to increase amount of labor, equipment and time saving material that too at extra
charges which simply means increase in direct cost.
¨ The project has highest direct cost corresponding to the crash duration, and has normal cost
corresponding to the normal duration.
•• €•‘
¨ Cost slope = ’‘ €’•
¨ Activity with minimum cost slope is crashed first.
6. Closing process
a) Project evaluation
• It is an attempt to determine if the overall status and progress of the project is acceptable as compared
to what was planned earlier and if the objectives are being achieved. The ultimate aim of project
evaluation is to bring about all round improvements in project planning and execution.
• Post project evaluation: it is also called post audit. It is carried out after project closer in two phases.
First immediately after closer and second after 2 to 3 years after closer, the purpose of post audit is to
 17
verify whether the assumptions made in project appraisal and project plan have been achieved or not
and whether the objectives of the project have been fully achieved or not and if not the reason of that
in details.
¨ Post audit data also helps in research and development and educational training. It also creates
standards for future reference. The purpose of 2nd phase of post audit is:
§ Market share of the product
§ Competitiveness of price
§ Price stability
§ Production capacity
§ Profitability
• Types of post audit
¨ Technical: it examines the project from quality and quantity perspective
¨ Financial: it examines the project from risk and profitability perspective including cash flow
statement, rate of return, profit and loss account and balance sheet.
¨ Economic: it examines the project from social perspective including its impact on society and
remedial steps taken by the project.
b) Network updating
• The process of redrafting the project network as a result of rescheduling of activities is called project
updation. Activities are neither added nor deleted in updation they are only rescheduled.
• When to update?
¨ Updating should be more frequent for shorter duration projects.
¨ For larger duration projects, frequency should be increased as project is near completion.
¨ Whenever major changes in the duration of any activity occurs then updating should be done.
¨ If change in estimated duration occurs updating is essential.
c) Termination
• According to Meredith and Mentel there are four methods of project termination.
¨ Termination by addition: when a project is highly successful. It is institutionalized by the parent
company and added to the parent organisation. Its staff is deployed to other places
¨ Termination by integration: the operations of a successful project are integrated with the existing
operations of the parent company and its staff is absorbed within the organisation.
¨ Termination by starvation: when the project cannot be closed due to political or other reasons its
funding is gradually reduced.
¨ Termination by extinction: when the activities of a project are suddenly stopped due to one
reason or the other it is called termination by execution.
• According to Gray & Larson project can be terminated in 5 different ways.
¨ Normal, premature, Perpetual, failed, changed priority.
7. Tender and contracts
a) Project contract
• A contract is a legal agreement. It is an exchange of promises by two or more persons/organisations.
• Types of contract
¨ Turnkey contract
§ In a turnkey contract, the entire responsibility of project execution is entrusted to the
contractor. It is as if the owner comes into the picture only when the project is completed
and he turns the key of the plant to start production.
§ Since the entire work is done by a single contractor, turnkey contract agreement invariably
has a clause on performance guarantee.
§ It is done for large value or mega value contracts.
¨ Non-turnkey contract
§ Lumpsum contract (fixed price)
 18
§ Unit price contract: in this type of contract the price is paid per unit of the work carried out.
There are various variations of this type of contract:
o Bill of quantities contract:
Ø In this type of contract owner provide the drawing, quantities of work to be done
and specification. The contractor bid based on the unit cost of the items of
construction.
Ø The contractor overhead, profit and other expanses can be included in the unit
cost of the item of work. The estimated quantities of the work to be done called
bill of quantities is fixed, minor variations in the quantities is admissible.
Ø The drawing of the work is not supposed to change. Although change and
deviations from original drawing could be accepted during construction but even
then, unit price does not change.
Ø This type of contract is usually followed in government sector for large
infrastructure construction. It provides owner a competitive bid but disadvantages
of the methods are, owner needs to measure the quantity of work done in the field,
hence presence is required. Final price is not known until the work is completed.
o Schedule of rate contract
Ø Many a times, the quantity of work to be executed is not known before. Contract
is signed based on the unit cost of the item of work. Generally more items are
inserted in the contract than to be executed because it becomes sometimes
difficult to exactly specify all the items.
Ø This type of contract is widely used in underground work, flood control and road
construction
o Cost plus contract
Ø In this contract, the payment is made based on the work carried out plus the fee
which includes overhead, profit etc. sometimes a cap is put on this type of
contract by providing maximum and minimum cost limit.
Ø Sometimes incentive clause is also included if the contractor bring the project
before certain specified limit.
Ø The advantage of this type of contract is that considerable overlap is provided
between design and construction. Hence the project can be executed in the fast-
tract basis. This contract is suitable for the work where it is difficult to define the
task to be done before the awarding of the contract.
§ Item rate contract
o A contractor undertakes the execution of work on an item rate basis. He is required to
quote rate for individual item of work on the basis of schedule of quantities furnished
by the department. The amount to be received by the contractor, depends upon the
quantities of work actually performed. The payment to the contractor is made on the
basis of the detailed measurements of different items of work actually executed by
him.
o It is most commonly used for all types of engineering works of the government
undertaking including railway department. It is suitable for work which can be
distinctly split into various items and quantities under each item can be estimated
accurately.
§ Hybrid contract
o Time and material contract: An arrangement under which a contractor is paid on the
basis of (1) actual cost of direct labor, usually at specified hourly rates, (2) actual cost
of materials and equipment usage, and (3) agreed upon fixed add-on to cover the
contractor's overheads and profit.
b) Project tender
• It is an offer in writing made by the tenderer for the supply of certain goods or services under given
terms and conditions.
 19
• Notice Inviting Tender (NIT): tender notice is a public notice and is published in leading newspapers
and e-portals. This is a popular method used by government departments and public sector
enterprises. It contains:
§ Name of organisation calling for tenders and the designation of the officer concerned who
is inviting tenders.
§ Nature of work, the place of work and estimated cost of work.
§ Expected time of work completion
§ Amount of earnest money deposit (EMD)
§ Amount of security deposit to be deposited by the successful tenderer.
§ Cost of tender documents and drawing plans
§ Last date and time of receipt of tender, place and availability of tender forms.
• Tender documents: are meant to keep the tenderers informed about the general and specific
conditions applicable for tenderers.
§ Letter of invitation
§ Specimen tender form
§ General instruction to the tenders
§ Details of civil/structural work along with complete set of civil/structural drawings.
§ Details and specifications of machinery/equipment to be supplied, if any.
§ Draft contract agreement
§ Arbitration authority who will decide in case of dispute
§ Time schedule for completion of work
§ Amount of earnest money to be deposited and the form in which it is to be deposited.
• Important Terms
¨ Pre-qualification of tenderers is done only in bigger and complex projects. The objective is to
ensure that only competent tenderers participate in the tenders. Information like financial
capacity, infrastructure and previous work experience is checked.
¨ Earnest money deposit: it is amount to be deposited by all tenderers when they submit their
tender. The amount varies from 1 to 3% of the tender value. Once the contract is finalized, the
EMD is returned back to all the unsuccessful tenderers. The EMD of successful tenderer is
retained as a measure of caution so that he will not withdraw his offer.
¨ Security deposit: it is amount deposited by the successful tenderer after the contract is finalized.
Normally it is about 15% of the total value of the contract. This amount is collected as safety
measure so that the contractor fulfills all the terms of the contract.
§ Security deposit amount is refunded to the contractor on completion of the work and after
observing the work for defects if any till the defects liability period, which is normally
around six months.
¨ Letter of Intent (LOI): this is a letter issued to the successful tenderer intimating about his offer
being accepted. LOI is issued before signing of contract. Issue of LOI by the project promoters
and acceptance of the same by the successful tenderer does not obviate the need for signing a
contract. Since LOI is not a legal document, the two parties have to necessarily execute the
contract by signing the contract agreement.

Prepration of
Selection of Issue og
Opening of comparative signing of
Issue of NIT the lowest letter of
tender statement of contract
bider intent
tenders

EMD Return of EMD Security deposit

c) Types payments to contractors

• First and final bill: this method of payment is suitable for very small, petty works. There is only a
single payment to the contractor on his completion of the work.
 20
• Running account bill: it refers to the account prepared at frequent and regular intervals for payment
for work done or supplies made at intervals. During the progress of work, contractor is paid from
time to time, while the final payment is made on completion of the work.
¨ Voucher is a written document as a proof of payment. Normally payment made to the contractor
is acknowledged by the contractor by putting his signature on the bill on a revenue stamp. A bill
thus becomes a voucher
¨ Liquidated damages: to ensure that the project implementation is carried out as per the original
schedule, a clause known as liquidated damages clause is incorporated in the contracts, which
stipulates deduction of certain percentage of payment due to contractor in case of delays. The
clause can have provisions to assess the delay on monthly, weekly or even on daily basis for
very critical projects and provide for deduction of payment from the RA bill for every
month/week/day of delay.
d) Project cost estimate
• To create an estimate of anticipated costs for individual activities on the project from beginning to
end, to create budget by aggregating the estimates for individual activities, to obtain funding for
project based on budget, and to use this budget as a management and control tool.
• Methods of cost estimation:
¨ Analogous estimate (Top-Down): it is based on past record and data and cost is estimated by
analogy so it has a high degree of inaccuracy.
¨ Bottom-Up estimate: No past data or record is available, then estimation is made for each work
package and summed up for the whole project this is most accurate method.
¨ Parametric estimate: based on past data, a formula is worked out for every parameter, is more
accurate than top down.
¨ Computerized/Monte Carlo estimate: Project cost is simulated using MC method and is more
accurate than parametric.
¨ Three-point-estimates: three estimates are made – optimistic, pessimistic and most likely and the
average of the three is taken.
e) Types of cost estimate
• Conceptual cost estimate: it is also known as rough estimate, primary estimate, feasibility estimate,
analogy estimate. It is generally considered as basis for all the cost estimate. Usually it is done by
owner, it is based on cost per unit item. It is done when construction details available are less than
30% and there may be error of 10 to 20%.
• Semi-detailed cost estimate: usually it is done by engineer to prepare tender notice. It is suitable
when 30% to 80% construction documents are available. It may have 5 to 10% error.
• Detailed cost estimate: It is done by contractor in which quantity of items is multiplied by the cost of
that item. It is suitable when 80 to 100% drawings and specifications are available. It may have 2 to
4% error. It is most accurate approach. Methods are:
¨ Individual wall method/separate wall method/short and long wall method
¨ Centre line method
f) Project sickness
g) Miscellaneous topics
h) Value analysis and value engineering
8. Notes
a) Key words
• Organizational process assets are the plans, processes, policies, procedures, and knowledge bases
specific to and used by the performing organization. They include any artefact, practice, or
knowledge from any or all of the organizations involved in the project that can be used to perform or
govern the project. The process assets also include the organization’s knowledge bases such as
lessons learned and historical information.
 21
• The Statement of work is the document that captures and defines all aspects of your project. You’ll
note the activities, deliverables and the timetable for the project. It’s an extremely detailed document
as it will lay the groundwork for the project plan.
• Enterprise Environmental Factors (EEF) are any or all environmental factors either internal or
external to the Project that can influence the Project’s success. EEF includes culture, weather
conditions, government regulations, political situation, market conditions, etc., which are usually out
of one’s control.
• Scope creep is uncontrolled changes in the project scope due to either interference of costumers or
due to misunderstanding of project team/manager.
• An issue log is a simple list or spreadsheet that helps managers track the issues that arise in a project
and prioritize a response to them. An issue is any roadblock or unintended impact that directly affects
your project’s timeline and or performance. It’s different than a risk, which can be defined as
a potential problem or future issue that might happen in your project. An issue is something that has
already come up in your project, and you need to identify and track that issue immediately.
Components of issue log are: Issue number, status, Issue description, category, priority, assigned to,
raised by, open date, closed date, comments.
• Lead and lag: the time by which the start of an activity is advance is called lead time. The time for
which an activity is waiting before it can be undertaken is called lag.
• What-if-scenario: in this analysis a cost-effective schedule is found out under the condition of
selectively changing inputs. Ex: what will happen if my critical equipment arrives late by two weeks.
• Gold plating: it is done generally to be appreciated by customer, no extra cost is charged for it. Gold
plating is very common in software programming and is done by team members to show their ability,
or by a project manager to make the client happy, though customer may or may not like these
changes.
• Project sickness: when the total accumulated loss of a company or project in a given financial year
exceed its net worth it is considered as a sick project or company.
• Enterprise resource planning: it is a multiuser integrated software which provides access to multiuser
data base to different branches of enterprise management.
• Overhead or overhead expense refers to an ongoing expense of operating a business. Overheads are
the expenditure which cannot be conveniently traced to or identified with any particular cost unit,
unlike operating expenses such as raw material and labor. Therefore, overheads cannot be
immediately associated with the products or services being offered, thus do not directly generate
profits.
• Project commissioning is the process of assuring that all systems and components of a building or
industrial plant are designed, installed, tested, operated, and maintained according to the operational
requirements of the owner or final client. A commissioning process may be applied not only to new
projects but also to existing units and systems subject to expansion, renovation or revamping
b) ABC analysis:
• It is based on the principle of vital few and trivial many. ABC segregates the material items that are
consumed in a production process/project into three groups.
¨ A –amount 5 - 10% – money spent 70 - 75%
¨ B – amount 10 -15% – money spent 10-15%
¨ C – amount 70 - 80% – money spent 5-10%
c) Capital expenditure
• Expenditure incurred in buying capital assets like heavy machinery etc. is called capital expenditure
or (CAPEX)
• Expenditure incurred in operating and maintaining project assets is called operating expenditure or
(OPEX)
d) Depreciation is an accounting method to allocate the cost of tangible assets over the period of its useful
life. Types of depreciation are
¨ Physical – due to wear and tear
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¨ Functional – due to functional backwardness
¨ Contingent – due to fire or other type of accidents
• Difference between depreciation and obsolesce
¨ Depreciation is physical in nature, obsolesce is functional in nature
¨ Depreciation depends upon physical condition age of asset, obsolesce doesn’t depend on that.
¨ Depreciation can be measured but obsolesce cannot be measured.
• Methods
¨ Straight line
§ Initial cost 𝑐k
§ Salvage value 𝑐“
§ Life of asset 𝑛
§ Book value of asset at the end of mth year 𝐵w
𝑐k − 𝑐“
𝐷=
𝑛
𝑐k − 𝑐“
𝐵w = 𝑐k − 𝑚 ” •
𝑛
Used for civil construction and civil appliances
¨ Declining balance
§ Depreciation is a constant % factor of declining balance (FDB), used for electronic goods
and taxation.
𝑐“ ]/`
𝐹𝐷𝐵 = 1 − – —
𝑐k
¨ Double declining balance
§ The double declining balance (DDB) method is an accelerated depreciation method. After
taking the reciprocal of the useful life of the asset and doubling it, this rate is applied to the
depreciable base, book value, for the remainder of the asset’s expected life. For example, an
asset with a useful life of five years would have a reciprocal value of 1/5 or 20%. Double
the rate, or 40%, is applied to the asset's current book value for depreciation. Although the
rate remains constant, the dollar value will decrease over time because the rate is multiplied
by a smaller depreciable base each period.
2
𝐹𝐷𝐷𝐵 =
𝑛
Twice of straight-line method.
¨ Sum of year digit method
§ The sum-of-the-year’s-digits (SYD) method also allows for accelerated depreciation. To
start, combine all the digits of the expected life of the asset. For example, an asset with a
five-year life would have a base of the sum of the digits one through five, or 1+ 2 + 3 + 4 +
5 = 15. In the first depreciation year, 5/15 of the depreciable base would be depreciated. In
the second year, only 4/15 of the depreciable base would be depreciated. This continues
until year five depreciates the remaining 1/15 of the base.
¨ Sinking fund method
§ The sinking fund method is a technique for depreciating an asset while generating enough
money to replace it at the end of its useful life. As depreciation charges are incurred to
reflect the asset's falling value, a matching amount of cash is invested. These funds sit in a
sinking fund account and generate interest.