Project Management

2020
PROJECT MANAGEMENT
Dr. Usama J. Naeem & Dr. Basil Jorani

Project Management Mechanical Engineering Dep.
INTRODUCTION TO PROJECT MANAGEMENT
What is a Project?
A project is a temporary and one-time exercise which varies in duration. It is

undertaken to address a specific need in an organization, which may be to create
a product or service or to change a business process. This is in direct contrast to
how an organization generally works on a permanent basis to produce their
goods or services. For example, the work of an organization may be to
manufacture trucks on a continual basis, therefore the work is considered
functional as the organization creates the same products or services over-and-
over again and people hold their roles on a semi-permanent basis.
What is Project Management?
A project is generally initiated by a perceived need in an organization. Being a

one off undertaking, it will have a start and an end, constraints of budgets, time
and resources and involves a purpose built team. Project teams are made up of
many different team members, for example, end users/customers (of a product
or service), representatives from Information Technology (IT), a project leader,
business analysts, trainers, the project sponsor and other stakeholders.
Project management is the discipline of managing all the different resources and
aspects of the project in such a way that the resources will deliver all the output
that is required to complete the project within the defined scope, time, and cost
constraints. These are agreed upon in the project initiation stage and by the time
the project begins all stakeholders and team members will have a clear
understanding and acceptance of the process, methodology and expected
outcomes. A good project manager utilizes a formal process that can be audited
and used as a blue print for the project, and this is achieved by employing a
project management methodology.
A simple definition of project management includes a handful of key premises:
❖ Project management is no small task.
❖ Project management has a definite beginning and end. It's not a

continuous process.
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❖ Project management uses various tools to measure accomplishments and

track project tasks. These include Work Breakdown Structures, Gantt
charts and PERT charts.
❖ Projects frequently need ad-hoc resources rather than dedicated, full-time

positions common in organizations.
❖ Project management reduces risk and increases the chance of success.
Often, a triangle, commonly called the "triple constraint", is used to summaries

project management (see Figure 1). The three most important factors are time,
cost and scope. These form the vertices with quality as the central theme.
Figure 1: The triple constraint
In words, the triple constraint has four core elements:
➢ Projects must be within cost.
➢ Projects must be delivered on time.
➢ Projects must be within scope.
➢ Projects must meet customer quality requirements.
More recently, the project management triangle has given way to a project
management diamond - with cost, time, scope and quality as the four vertices
and customer expectations as a central theme (see Figure 2).
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Figure 2: The project management diamond
Project Phases
A project goes through six phases during its lifecycle:
1) Project Definition: Defining the goals, objectives and critical success

factors for the project
2) Project Initiation: Everything needed to set up the project before work

can start
3) Project Planning: Detailed plans of how the work will be carried out,
including time, cost and resource estimates
4) Project Execution: Doing the work to deliver the product, service or

desired outcome
5) Project Monitoring & Control: Ensuring that a project stays on track

and taking corrective action to ensure it does
6) Project Closure: Formal acceptance of the deliverables and disbanding

of all the elements required to run the project
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COMMON PROJECT TERMS

• Deliverables :Tangible‘ things ’that the project produces
• Milestones :Dates by which major activities are performed.
• Tasks :Also called Actions .Activities undertaken during the project
• Risks :Potential problems that may arise
• Issues :Risks that have happened
• Gantt Chart :A specific type of chart showing time and tasks .Usually
created by a Project Management program like MS Project.
Stakeholder :Any person or group of people who may be affected by your

project
THE PROJECT MANAGER

A person with a diverse set of skills– management ,leadership ,technical,
conflict management ,and customer relationship who is responsible for:
• initiating,
• planning,
• executing,
• controlling,
• monitoring,
• and closing down a project.
What does it take to be a Good Project Manager?

Aside from understanding the methodology, there are other characteristics to
keep in mind for successful project management. Given that any project is
involved with a project team as well as the stakeholders, a good Project
Manager needs to have not only excellent time management skills but also good
people skills such as:
❖ Excellent communication skills
❖ The ability to be a team player
❖ Excellent interpersonal skills
❖ The ability to negotiate
Experienced Project Managers believe there are two key factors in determining
the success of a project:
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1. Recruitment and selection of suitably qualified project members to relevant

project positions is essential. Recruiting of project team members should be
handled with the same discipline and rigor as the recruitment of new employees
to fulfil the ongoing positions in the business.
2. A well-documented methodology that is kept simple and easily adaptable to

different sizes of projects is a critical foundation for ensuring project success.
This documented methodology needs to be communicated to project team
members as part of the initiation stage. This will ensure such things as everyone
having a clear understanding of how to progress and what is expected at each
stage and that the methodology is adapted to the specific needs of the project
being undertaken.
CHARACTERISTICS OF PROJECTS
• A project contains a well-defined objective .The project objective is
defined in terms of scope( or requirements ,)schedule ,and cost.
• A project is carried out via a set of interdependent tasks.
• A project uses various resources to carry out these tasks.
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• A project has a definite start date and an expected completion date. The
actual completion date may not always be the same as the expected date.
• A project is a one time or unique endeavor.
• A project has a customer.
So why do projects fail?
WHY DO PROJECTS FAIL?

1. Poor project and program management discipline
2. Lack of executive-level support
3. Wrong team members
4. Poor communication
5. No measures for evaluating the success of the project
6. No risk management
7. Inability to manage change
A project has a degree of UNCERTAINTY .In project planning many

assumptions are made regarding:
• access to resources.
• resource capability.
• impact of environmental factors.
• These assumptions are not always accurate.
• Requires project managers to re-assess and trade-offs between
requirements, costs ,and time .Above all ,be PRO-ACTIVE.
MEASURING PROJECT SUCCESS

We measure the success of a project using 4 major project constraints
specifically:
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– Project scope – Have all the project requirements (i.e., deliverables) been
completed?
– Project cost – Is the cost of the project close to the amount the customer
has agreed to pay?
– Schedule – Was the project completed on time?
– Customer satisfaction – Is the customer happy with the quality of the
project?
PROJECT SUCCESS 12 – Golden Rules

Rule1: Thou shalt gain consensus on project outcome.
Rule 2: Thou shalt build the best team possible.
Rule 3: Thou shalt develop a comprehensive ,viable plan and keep it up-to-date.
Rule 4: Thou shalt determine how much stuff you really need to get things
done.
Rule 5: Thou shalt have a realistic schedule.
Rule 6: Thou won’t try to do more than can be done.
Rule 7: Thou will remember that people count.
Rule 8: Thou will gain the formal and ongoing support of management and
stakeholders.
Rule 9: Thou must be willing to change.
Rule 10: Thou must keep others informed of what you’re up to.
Rule 11: Thou must be willing to try new things.
Rule 12: Thou must become a leader.
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PROJECT INITIATION
The Initiation phase of the project is the most important phase .The success of
the entire project depends on how clearly and completely the Terms of
References are established.
Project initiation is the first phase of a project’s life cycle. It is at this point
where the opportunity or reason for the project is identified and a project is
developed to take advantage of that opportunity.
during this phase of the project that a team is assembled, and a business case is
created to define the project in detail.
• Project Sponsor • Resources
• Lines of Authority • Deliverables
• Participants • Phases & Time Scales
• Objectives • Strategy
• Constraints • Risks
• Costs/Budget • Roles & Responsibilities
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PROJECT PLANNING
Project planning involves a series of steps that determine how to achieve a

particular community or organizational goal or set of related goals. This goal
can be identified in a community plan or a strategic plan. Project plans can also
be based on community goals or action strategies developed through community
meetings and gatherings, tribal council or board meetings, or other planning
processes. The planning process should occur before you write your application
and submit it for funding. Project planning:
• Identifies specific community problems that stand in the way of meeting

community goals.
• Creates a work plan for addressing problems and attaining the goals.
• Describes measurable beneficial impacts to the community that result from the
project’s implementation.
• Determines the level of resources or funding necessary to implement the
project.
Why is project planning important?
Project Planning helps us to: Project Planning helps to eliminate:

❖ think ahead and prepare for the
future
❖ clarify goals and develop a vision
❖ identify issues that will need to be
addressed ❖ poor planning
❖ choose between options ❖ overambitious projects
❖ consider whether a project is ❖ unsustainable projects
possible ❖ undefined problems
❖ make the best use of resources ❖ unstructured project work plans
❖ motivate staff and the community
❖ assign resources and
responsibilities
❖ achieve the best results
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The Project Cycle
The process of planning and managing projects follows a logical, continuous

cycle. Each phase of the project leads to the next.
• The identify stage includes a needs assessment process to determine the needs
and problems in a community.
• The design phase includes the actual planning and design of a project.
• The implement stage refers to the implementation of the project, whether it is
a single-year or multi-year implementation period.
• The evaluation of project results occurs at the end of a project and involves
determining whether the project’s goal and objectives were achieved. The
evaluation stage then leads to the identification of additional or persisting
problems, allowing the cycle to begin again.
• Project monitoring occurs throughout all stages allowing for small
adjustments in the project’s planning, design, and implementation in order to
ensure the project’s success involved in determining problems faced by its
members and in designing strategies for reducing or eliminating those problems.
The basic processes of project planning are:
❖ Scope planning – specifying the in-scope requirements for the project to

facilitate creating the work breakdown structure
❖ Preparation of the work breakdown structure – spelling out the
breakdown of the project into tasks and sub-tasks
❖ Project schedule development – listing the entire schedule of the
activities and detailing their sequence of implementation
❖ Resource planning – indicating who will do what work, at which time,
and if any special skills are needed to accomplish the project tasks
❖ Budget planning – specifying the budgeted cost to be incurred at the
completion of the project
❖ Procurement planning – focusing on vendors outside your company and
subcontracting
❖ Risk management – planning for possible risks and considering optional
contingency plans and mitigation strategies
❖ Quality planning – assessing quality criteria to be used for the project
❖ Communication planning – designing the communication strategy with
all project stakeholders
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Work Breakdown Structure (WBS)

Work breakdown structure is popular and widely used in managing large
rojects. But, do you know what the work breakdown structure is, how it works
and what exactly its main features are?
What is Work Breakdown Structure?

Work breakdown structure (abbreviated as WBS) is the core step in project
management. It is put forward in 1993 aiming to make the big project more
manageable in details. To be more specific, WBS is a structural schematic
diagram that decomposes tasks layer by layer according to an internal structure
or an implementation process. It breaks down the project into several relatively
independent, single content and easy accounting work units. A great work
breakdown structure will lead to better team productivity and comprehensive
project management.
Following example is an outlined WBS:
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Main Uses of Work Breakdown Structure
Work breakdown structure is widely used for different occasions. Those uses
could be summarized as 3 tools as follow:
• WBS is a planning tool to describe thoughts and ideas. It helps project

managers and their teams identify and manage project work effectively.
• WBS is a structural design tool that clearly expresses the interconnections
between the various project tasks.
• WBS defines milestones that report project completion to senior
management teams and clients as a reporting tool for project status.
Benefits of Work Breakdown Structure
WBS graphical nature is tree diagrams which can help product managers predict
the outcomes layer by layer. Each layer may originate from a product, a data,
service, and any combination. There are many benefits of work breakdown
structure in a project. Here is what a product manager may gain from work
breakdown structure.
1. Clarify project responsibilities
WBS is a good way to help project managers focus on the goals and clarify the
responsibilities. Each responsibility has its direction to corresponding tasks
which can be easily confirmed.
2. Improve the accuracy of time, cost, and resources
WBC is detailed in the decomposition of tasks so that estimated time, cost, and
resources are covered concisely. All the resources related to tasks no matter it is
big or small will be broken down accurately.
3. Establish a framework for further projects
One complete WBS covers effective information for giving instructions to the
further projects. Other team members can get into the framework soon and
generate their own WBS easily so as to improve efficiency.
4. Analyze the initial risk of projects
In fact, WBS decomposition layer is not necessarily fixed, and the lowest level
of WBS can be determined according to the level of risk.
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5. Define a benchmark for performance management
WBS defines a concise standard for measuring the performances during the
whole project. You can monitor from the first layer of overall tasks to the
smallest work units.
6. Build project members commitment
As WBS is the foundation of information communication, you could use it as a

basis for budgeting, progressing and describing other aspects of the project
which enables all project-related personnel and groups. Thus they are able to
understand the work required to complete the project.
Gantt Charts
A Gantt chart is a type of bar chart that illustrates a project schedule and shows
the dependency relationships between activities and current schedule status.
In simpler words, Gantt charts are a visual view of tasks displayed against
time. They represent critical information such as who is assigned to what,
duration of tasks, and overlapping activities in a project. All in all, Gantt charts
are the perfect allies for planning, scheduling, and managing a project.
Why Use Gantt Charts?
When we set up a Gantt chart, we need to think through all of the tasks involved
in our project. As part of this process, we will work out who will be responsible
for each task, how long each task will take, and what problems our team may
encounter.
This detailed thinking helps us ensure that the schedule is workable, that the
right people are assigned to each task, and that we have workarounds for
potential problems before we start.
They also help our work out practical aspects of a project, such as the minimum
time it will take to deliver, and which tasks need to be completed before others
can start. Plus, we can use them to identify the critical path – the sequence of
tasks that must individually be completed on time if the whole project is to
deliver on time.
Finally, we can use them to keep our team and our sponsors informed of
progress. Simply update the chart to show schedule changes and their
implications, or use it to communicate that key tasks have been completed.
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Creating a Gantt chart
You can see an example in figure 1, below:
Figure 1 – A Gantt chart
To create one for your project, follow these steps, using our example as a
guide.
Step 1: Identify Essential Tasks
Gantt charts don't give useful information unless they include all of the
activities needed for a project or project phase to be completed.
So, to start, list all of these activities. Use a work breakdown structure if you
need to establish what the tasks are. Then, for each task, note its earliest start
date and its estimated duration.
Step 2: Identify Task Relationships
The chart shows the relationship between the tasks in a project. Some tasks will
need to be completed before you can start the next one, and others can't end
until preceding ones have ended. For example, if you're creating a brochure, you
need to finish the design before you can send it to print.
Step 3: Input Activities into Software or a Template
You can draw your charts by hand or use specialist software, such
as Gantto, Matchware, or Microsoft Project. Some of these tools are cloud-
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based, meaning that you and your team can access the document
simultaneously, from any location. (This helps a lot when you're discussing,
optimizing, and reporting on a project.)
Several Gantt templates have been created for Microsoft Excel, and you can
also find free templates with a quick search online.
Figure 2 – Example Gantt chart
Step 4: Chart Progress
As your project moves along, it will evolve. For example, in our scenario, if
quality assurance of core modules revealed a problem, then you may need to
delay training, and halt development of the management information system
until the issue is resolved.
Update your chart to reflect changes as soon as they occur. This will help you to
keep your plans, your team, and your sponsors up to date.
Advantages & Disadvantages
The ability to grasp the overall status of a project and its tasks at once is the key
advantage in using a Gantt chart tool. Therefore, upper management or the
sponsors of the project can make informed decisions just by looking at the Gantt
chart tool.
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The software-based Gantt charts are able to show the task dependencies in a
project schedule. This helps to identify and maintain the critical path of a
project schedule.
Gantt chart tools can be used as the single entity for managing small projects.
For small projects, no other documentation may be required; but for large
projects, the Gantt chart tool should be supported by other means of
documentation.
For large projects, the information displayed in Gantt charts may not be
sufficient for decision making.
Although Gantt charts accurately represent the cost, time and scope aspects of a
project, it does not elaborate on the project size or size of the work elements.
Therefore, the magnitude of constraints and issues can be easily misunderstood
Conclusion
Gantt chart tools make project manager's life easy. Therefore, Gantt chart tools
are important for successful project execution.
Identifying the level of detail required in the project schedule is the key when
selecting a suitable Gantt chart tool for the project.
One should not overly complicate the project schedules by using Gantt charts to
manage the simplest tasks.
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Introduction to CPM / PERT Techniques
CPM/PERT or Network Analysis as the technique is sometimes called, developed along two
parallel streams, one industrial and the other military.
CPM (Critical Path Method) was the discovery of M.R.Walker of E.I.Du Pont de Nemours
& Co. and J.E.Kelly of Remington Rand, circa 1957. The computation was designed for the
UNIVAC-I computer. The first test was made in 1958, when CPM was applied to the
construction of a new chemical plant. In March 1959, the method was applied to maintenance
shut-down at the Du Pont works in Louisville, Kentucky. Unproductive time was reduced
from 125 to 93 hours.
PERT (Project Evaluation and Review Technique) was devised in 1958 for the POLARIS
missile program by the Program Evaluation Branch of the Special Projects office of the
U.S.Navy, helped by the Lockheed Missile Systems division and the Consultant firm of
Booz-Allen & Hamilton. The calculations were so arranged so that they could be carried out
on the IBM Naval Ordinance Research Computer (NORC) at Dahlgren, Virginia.
The methods are essentially network-oriented techniques using the same principle. PERT
and CPM are basically time-oriented methods in the sense that they both lead to
determination of a time schedule for the project. The significant difference between two
approaches is that the time estimates for the different activities in CPM were assumed to be
deterministic while in PERT these are described probabilistically. These techniques are
referred as project scheduling techniques.
In CPM activities are shown as a network of precedence relationships using activity-on-node

network construction
– Single estimate of activity time
– Deterministic activity times
USED IN: Production management - for the jobs of repetitive in nature where the activity
time estimates can be predicted with considerable certainty due to the existence of past
experience.
In PERT activities are shown as a network of precedence relationships using activity-on-
arrow network construction
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– Multiple time estimates

– Probabilistic activity times
USED IN: Project management - for non-repetitive jobs (research and development work),
where the time and cost estimates tend to be quite uncertain. This technique uses probabilistic
time estimates.
Benefits of PERT/CPM
⚫ Useful at many stages of project management
⚫ Mathematically simple
⚫ Give critical path and slack time
⚫ Provide project documentation
⚫ Useful in monitoring costs
Limitations of PERT/CPM
⚫ Clearly defined, independent and stable activities
⚫ Specified precedence relationships
⚫ Over emphasis on critical paths
Applications of CPM / PERT
These methods have been applied to a wide variety of problems in industries and have found
acceptance even in government organizations. These include
• Construction of a dam or a canal system in a region
• Construction of a building or highway
• Maintenance or overhaul of airplanes or oil refinery
• Space flight
• Cost control of a project using PERT / COST
• Designing a prototype of a machine
• Development of supersonic planes
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Basic Steps in PERT / CPM

Project scheduling by PERT / CPM consists of four main steps
1. Planning
• The planning phase is started by splitting the total project in to small projects. These
smaller projects in turn are divided into activities and are analyzed by the department
or section.
• The relationship of each activity with respect to other activities are defined and
established and the corresponding responsibilities and the authority are also stated.
• Thus the possibility of overlooking any task necessary for the completion of the
project is reduced substantially.
2. Scheduling
• The ultimate objective of the scheduling phase is to prepare a time chart showing the
start and finish times for each activity as well as its relationship to other activities of
the project.
• Moreover the schedule must pinpoint the critical path activities which require special
attention if the project is to be completed in time.
• For non-critical activities, the schedule must show the amount of slack or float times
which can be used advantageously when such activities are delayed or when limited
resources are to be utilized effectively.
3. Allocation of resources
• Allocation of resources is performed to achieve the desired objective. A resource is a
physical variable such as labour, finance, equipment and space which will impose a
limitation on time for the project.
• When resources are limited and conflicting, demands are made for the same type of
resources a systematic method for allocation of resources become essential.
• Resource allocation usually incurs a compromise and the choice of this compromise
depends on the judgment of managers.
4. Controlling
• The final phase in project management is controlling. Critical path methods facilitate
the application of the principle of management by expectation to identify areas that
are critical to the completion of the project.
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• By having progress reports from time to time and updating the network continuously,
a better financial as well as technical control over the project is exercised.
• Arrow diagrams and time charts are used for making periodic progress reports. If
required, a new course of action is determined for the remaining portion of the
project.
The Framework for PERT and CPM
Essentially, there are six steps which are common to both the techniques. The procedure is
listed below:
I. Define the Project and all of its significant activities or tasks. The Project (made up of
several tasks) should have only a single start activity and a single finish activity.
II. Develop the relationships among the activities. Decide which activities must precede
and which must follow others.
III. Draw the "Network" connecting all the activities. Each Activity should have unique
event numbers. Dummy arrows are used where required to avoid giving the same
numbering to two activities.
IV. Assign time and/or cost estimates to each activity
V. Compute the longest time path through the network. This is called the critical path.
VI. Use the Network to help plan, schedule, and monitor and control the project.
The Key Concept used by CPM/PERT is that a small set of activities, which make up the
longest path through the activity network control the entire project. If these "critical"
activities could be identified and assigned to responsible persons, management resources
could be optimally used by concentrating on the few activities which determine the fate of the
entire project.
Non-critical activities can be replanned, rescheduled and resources for them can be
reallocated flexibly, without affecting the whole project.
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Five useful questions to ask when preparing an activity network are:
▪ Is this a Start Activity?

▪ Is this a Finish Activity?
▪ What Activity Precedes this?
▪ What Activity Follows this?
▪ What Activity is Concurrent with this?
Network Diagram Representation
In a network representation of a project certain definitions are used
1. Activity
Any individual operation which utilizes resources and has an end and a beginning is called
activity. An arrow is commonly used to represent an activity with its head indicating the
direction of progress in the project. These are classified into four categories
1. Predecessor activity – Activities that must be completed immediately prior to the
start of another activity are called predecessor activities.
2. Successor activity – Activities that cannot be started until one or more of other
activities are completed but immediately succeed them are called successor activities.
3. Concurrent activity – Activities which can be accomplished concurrently are known
as concurrent activities. It may be noted that an activity can be a predecessor or a
successor to an event or it may be concurrent with one or more of other activities.
4. Dummy activity – An activity which does not consume any kind of resource but
merely depicts the technological dependence is called a dummy activity.
The dummy activity is inserted in the network to clarify the activity pattern in the following
two situations
• To make activities with common starting and finishing points distinguishable
• To identify and maintain the proper precedence relationship between activities that is
not connected by events.
For example, consider a situation where A and B are concurrent activities. C is dependent on
A and D is dependent on A and B both. Such a situation can be handled by using a dummy
activity as shown in the figure.
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2. Event
An event represents a point in time signifying the completion of some activities and the
beginning of new ones. This is usually represented by a circle in a network which is also
called a node or connector.
The events are classified in to three categories
1. Merge event – When more than one activity comes and joins an event such an event
is known as merge event.
2. Burst event – When more than one activity leaves an event such an event is known as
burst event.
3. Merge and Burst event – An activity may be merge and burst event at the same time
as with respect to some activities it can be a merge event and with respect to some
other activities it may be a burst event.
3. Sequencing
The first prerequisite in the development of network is to maintain the precedence
relationships. In order to make a network, the following points should be taken into
considerations
• What job or jobs precede it?
• What job or jobs could run concurrently?
• What job or jobs follow it?
• What controls the start and finish of a job?
Since all further calculations are based on the network, it is necessary that a network be
drawn with full care.
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Rules for Drawing Network Diagram
Rule 1
Each activity is represented by one and only one arrow in the network
Rule 2
No two activities can be identified by the same end events
Rule 3
In order to ensure the correct precedence relationship in the arrow diagram, following
questions must be checked whenever any activity is added to the network
• What activity must be completed immediately before this activity can start?
• What activities must follow this activity?
• What activities must occur simultaneously with this activity?
In case of large network, it is essential that certain good habits be practiced to draw an easy to
follow network
• Try to avoid arrows which cross each other
• Use straight arrows
• Do not attempt to represent duration of activity by its arrow length
• Use arrows from left to right. Avoid mixing two directions, vertical and standing
arrows may be used if necessary.
• Use dummies freely in rough draft but final network should not have any redundant
dummies.
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• The network has only one entry point called start event and one point of emergence
called the end event.
Common Errors in Drawing Networks
The three types of errors are most commonly observed in drawing network diagrams
1. Dangling
To disconnect an activity before the completion of all activities in a network diagram is
known as dangling. As shown in the figure activities (5 – 10) and (6 – 7) are not the last
activities in the network. So the diagram is wrong and indicates the error of dangling
2. Looping or Cycling
Looping error is also known as cycling error in a network diagram. Drawing an endless loop
in a network is known as error of looping as shown in the following figure.
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3. Redundancy
Unnecessarily inserting the dummy activity in network logic is known as the error of
redundancy as shown in the following diagram
Advantages and Disadvantages
PERT/CPM has the following advantages
• A PERT/CPM chart explicitly defines and makes visible dependencies (precedence

relationships) between the elements,
• PERT/CPM facilitates identification of the critical path and makes this visible,
• PERT/CPM facilitates identification of early start, late start, and slack for each
activity,
• PERT/CPM provides for potentially reduced project duration due to better

understanding of dependencies leading to improved overlapping of activities and tasks
where feasible.
PERT/CPM has the following disadvantages:
• There can be potentially hundreds or thousands of activities and individual

dependency relationships,
• The network charts tend to be large and unwieldy requiring several pages to print and
requiring special size paper,
• The lack of a timeframe on most PERT/CPM charts makes it harder to show status
although colours can help (e.g., specific colour for completed nodes),
• When the PERT/CPM charts become unwieldy, they are no longer used to manage the
project.
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Critical Path in Network Analysis
Basic Scheduling Computations
The notations used are

(i, j) = Activity with tail event i and head event j
Ei = Earliest occurrence time of event i
Lj = Latest allowable occurrence time of event j
Dij = Estimated completion time of activity (i, j)
(Es)ij = Earliest starting time of activity (i, j)
(Ef)ij = Earliest finishing time of activity (i, j)
(Ls)ij = Latest starting time of activity (i, j)
(Lf)ij = Latest finishing time of activity (i, j)
The procedure is as follows
1. Determination of Earliest time (Ej): Forward Pass computation

• Step 1
The computation begins from the start node and move towards the end node. For easiness, the
forward pass computation starts by assuming the earliest occurrence time of zero for the
initial project event.
• Step 2
i. Earliest starting time of activity (i, j) is the earliest event time of the tail end
event i.e. (Es)ij = Ei
ii. Earliest finish time of activity (i, j) is the earliest starting time + the activity
time i.e. (Ef)ij = (Es)ij + Dij or (Ef)ij = Ei + Dij
iii. Earliest event time for event j is the maximum of the earliest finish times of all
activities ending in to that event i.e. E j = max [(Ef)ij for all immediate
predecessor of (i, j)] or Ej =max [Ei + Dij]
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2. Backward Pass computation (for latest allowable time)
• Step 1
For ending event assume E = L. Remember that all E’s have been computed by forward pass
computations.
• Step 2
Latest finish time for activity (i, j) is equal to the latest event time of event j i.e. (Lf)ij = Lj
• Step 3
Latest starting time of activity (i, j) = the latest completion time of (i, j) – the activity time or
(Ls)ij =(Lf)ij - Dij or (Ls)ij = Lj - Dij
• Step 4
Latest event time for event ‘i’ is the minimum of the latest start time of all activities
originating from that event i.e. L i = min [(Ls)ij for all immediate successor of (i, j)] = min
[(Lf)ij - Dij] = min [Lj - Dij]
3. Determination of floats and slack times
There are three kinds of floats

• Total float – The amount of time by which the completion of an activity could be
delayed beyond the earliest expected completion time without affecting the overall
project duration time.
Mathematically
(Tf)ij = (Latest start – Earliest start) for activity ( i – j)
(Tf)ij = (Ls)ij - (Es)ij or (Tf)ij = (Lj - Dij) - Ei
• Free float – The time by which the completion of an activity can be delayed beyond
the earliest finish time without affecting the earliest start of a subsequent activity.
Mathematically
(Ff)ij = (Earliest time for event j – Earliest time for event i) – Activity time for ( i, j)
(Ff)ij = (Ej - Ei) - Dij
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• Independent float – The amount of time by which the start of an activity can be
delayed without effecting the earliest start time of any immediately following
activities, assuming that the preceding activity has finished at its latest finish time.
Mathematically
(If)ij = (Ej - Li) - Dij
The negative independent float is always taken as zero.
• Event slack - It is defined as the difference between the latest event and earliest event
times.
Mathematically
Head event slack = Lj – Ej, Tail event slack = Li - Ei
4. Determination of critical path
• Critical event – The events with zero slack times are called critical events. In other
words the event i is said to be critical if E i = Li
• Critical activity – The activities with zero total float are known as critical activities.
In other words an activity is said to be critical if a delay in its start will cause a further
delay in the completion date of the entire project.
• Critical path – The sequence of critical activities in a network is called critical path.
The critical path is the longest path in the network from the starting event to ending
event and defines the minimum time required to complete the project.
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Exercise
1. What is PERT and CPM?
2. What are the advantages of using PERT/CPM?
3. Mention the applications of PERT/CPM
4. Explain the following terms
a. Earliest time
b. Latest time
c. Total activity slack
d. Event slack
e. Critical path
5. Explain the CPM in network analysis.
6. What are the rules for drawing network diagram? Also mention the common errors
that occur in drawing networks.
7. What is the difference between PERT and CPM/
8. What are the uses of PERT and CPM?
9. Explain the basic steps in PERT/CPM techniques.
10. Write the framework of PERT/CPM.
Worked Examples on CPM

Example 1
Determine the early start and late start in respect of all node points and identify critical path
for the following network.
Solution
Calculation of E and L for each node is shown in the network
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Normal Earliest Time Latest Time

Float Time
Activity(i, j) Time Start Finish Start Finish
(Li - Dij ) - Ei
(Dij) (Ei) (Ei + Dij ) (Li - Dij ) (Li)
(1, 2) 10 0 10 0 10 0
(1, 3) 8 0 8 1 9 1
(1, 4) 9 0 9 1 10 1
(2, 5) 8 10 18 10 18 0
(4, 6) 7 9 16 10 17 1
(3, 7) 16 8 24 9 25 1
(5, 7) 7 18 25 18 25 0
(6, 7) 7 16 23 18 25 2
(5, 8) 6 18 24 18 24 0
(6, 9) 5 16 21 17 22 1
(7, 10) 12 25 37 25 37 0
(8, 10) 13 24 37 24 37 0
(9, 10) 15 21 36 22 37 1
Network Analysis Table
From the table, the critical nodes are (1, 2), (2, 5), (5, 7), (5, 8), (7, 10) and (8, 10)
From the table, there are two possible critical paths

i. 1 → 2 → 5 → 8 → 10
ii. 1 → 2 → 5 → 7 → 10
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Example 2
Find the critical path and calculate the float time for the following network
Solution
The earliest time and the latest time are obtained below
Normal Earliest Time Latest Time

Float Time
Activity(i, j) Time Start Finish Start Finish
(Li - Dij ) - Ei
(Dij) (Ei) (Ei + Dij ) (Li - Dij ) (Li)
(1, 2) 2 0 2 5 7 5
(1, 3) 2 0 2 0 2 0
(1, 4) 1 0 1 6 7 6
(2, 6) 4 2 6 7 11 5
(3, 7) 5 2 7 3 8 1
(3, 5) 8 2 10 2 10 0
(4, 5) 3 1 4 7 10 6
(5, 9) 5 10 15 10 15 0
(6, 8) 1 6 7 11 12 5
(7, 8) 4 7 11 8 12 1
(8, 9) 3 11 14 12 15 1
From the above table, the critical nodes are the activities (1, 3), (3, 5) and (5, 9)
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The critical path is 1 → 3 → 5 → 9
Project Evaluation and Review Technique (PERT)
The main objective in the analysis through PERT is to find out the completion for a particular
event within specified date. The PERT approach takes into account the uncertainties. The
three time values are associated with each activity
1. Optimistic time – It is the shortest possible time in which the activity can be finished.
It assumes that every thing goes very well. This is denoted by t 0.
2. Most likely time – It is the estimate of the normal time the activity would take. This
assumes normal delays. If a graph is plotted in the time of completion and the
frequency of completion in that time period, then most likely time will represent the
highest frequency of occurrence. This is denoted by tm.
3. Pessimistic time – It represents the longest time the activity could take if everything
goes wrong. As in optimistic estimate, this value may be such that only one in
hundred or one in twenty will take time longer than this value. This is denoted by tp.
In PERT calculation, all values are used to obtain the percent expected value.
1. Expected time – It is the average time an activity will take if it were to be repeated on
large number of times and is based on the assumption that the activity time follows
Beta distribution, this is given by
te = ( t0 + 4 tm + tp ) / 6
2. The variance for the activity is given by
σ2 = [(tp – to) / 6] 2
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Worked Examples
Example 1
For the project
Task: A B C D E F G H I J K
Least time: 4 5 8 2 4 6 8 5 3 5 6
Greatest time: 8 10 12 7 10 15 16 9 7 11 13
Most likely time: 5 7 11 3 7 9 12 6 5 8 9
Find the earliest and latest expected time to each event and also critical path in the network.
Solution
Greatest time Most likely time Expected time
Task Least time(t0)
(tp) (tm) (to + tp + 4tm)/6
A 4 8 5 5.33
B 5 10 7 7.17
C 8 12 11 10.67
D 2 7 3 3.5
E 4 10 7 7
F 6 15 9 9.5
G 8 16 12 12
H 5 9 6 6.33
I 3 7 5 5
J 5 11 8 8
K 6 13 9 9.17
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Expected Start Finish

Task Total float
time (te) Earliest Latest Earliest Latest
A 5.33 0 0 5.33 5.33 0
B 7.17 0 8.83 7.17 16 8.83
C 10.67 5.33 5.33 16 16 0
D 3.5 0 10 3.5 13.5 10
E 7 16 16 23 23 0
F 9.5 3.5 13.5 13 23 10
G 12 3.5 18.5 15.5 30.5 15
H 6.33 23 23 29.33 29.33 0
I 5 23 25.5 28 30.5 2.5
J 8 28 30.5 36 38.5 2.5
K 9.17 29.33 29.33 31.5 38.5 0
The network is
The critical path is A →C →E → H → K
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Example 2
A project has the following characteristics
Most optimistic time Most pessimistic time Most likely time
Activity
(a) (b) (m)
(1 – 2) 1 5 1.5
(2 – 3) 1 3 2
(2 – 4) 1 5 3
(3 – 5) 3 5 4
(4 – 5) 2 4 3
(4 – 6) 3 7 5
(5 – 7) 4 6 5
(6 – 7) 6 8 7
(7 – 8) 2 6 4
(7 – 9) 5 8 6
(8 – 10) 1 3 2
(9 – 10) 3 7 5
Construct a PERT network. Find the critical path and variance for each event.
Solution
te v
Activity (a) (b) (m) (4m)
(a + b + 4m)/6 [(b – a) / 6]2
(1 – 2) 1 5 1.5 6 2 4/9
(2 – 3) 1 3 2 8 2 1/9
(2 – 4) 1 5 3 12 3 4/9
(3 – 5) 3 5 4 16 4 1/9
(4 – 5) 2 4 3 12 3 1/9
(4 – 6) 3 7 5 20 5 4/9
(5 – 7) 4 6 5 20 5 1/9
(6 – 7) 6 8 7 28 7 1/9
(7 – 8) 2 6 4 16 4 4/9
(7 – 9) 5 8 6 24 6.17 1/4
(8 – 10) 1 3 2 8 2 1/9
(9 – 10) 3 7 5 20 5 4/9
The network is constructed as shown below
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The critical path = 1 → 2 → 4 → 6 → 7 →9 →10

Example 3
Calculate the variance and the expected time for each activity
Solution
te v
Activity (to) (tm) (tp)
(to + tp + 4tm)/6 [(tp – to) / 6]2
(1 – 2) 3 6 10 6.2 1.36
(1 – 3) 6 7 12 7.7 1.00
(1 – 4) 7 9 12 9.2 0.69
(2 – 3) 0 0 0 0.0 0.00
(2 – 5) 8 12 17 12.2 2.25
(3 – 6) 10 12 15 12.2 0.69
(4 – 7) 8 13 19 13.2 3.36
(5 – 8) 12 14 15 13.9 0.25
(6 – 7) 8 9 10 9.0 0.11
(6 – 9) 13 16 19 16.0 1.00
(8 – 9) 4 7 10 7.0 1.00
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(7 – 10) 10 13 17 13.2 1.36

(9 – 11) 6 8 12 8.4 1.00
(10 – 11) 10 12 14 12.0 0.66
Exercise
1. What is PERT?
2. For the following data, draw network. Find the critical path, slack time after
calculating the earliest expected time and the latest allowable time
Activity Duration Activity Duration
(1 – 2) 5 (5 – 9) 3
(1 – 3) 8 (6 – 10) 5
(2 – 4) 6 (7 – 10) 4
(2 – 5) 4 (8 – 11) 9
(2 – 6) 4 (9 – 12) 2
(3– 7) 5 (10 – 12) 4
(3 – 8) 3 (11 – 13) 1
(4 – 9) 1 (12 – 13) 7
[Ans. Critical path: 1 → 3 → 7 → 10 → 12 →13]
3. A project schedule has the following characteristics
Activity Most optimistic time Most likely time Most pessimistic time
(1 – 2) 1 2 3
(2 – 3) 1 2 3
(2 – 4) 1 3 5
(3 – 5) 3 4 5
(4 – 5) 2 5 4
(4 – 6) 3 5 7
(5 – 7) 4 5 6
(6 – 7) 6 7 8
(7 – 8) 2 4 6
(7 – 9) 4 6 8
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(8 – 10) 1 2 3
(9 – 10) 3 5 7
Construct a PERT network and find out

a. The earliest possible time
b. Latest allowable time
c. Slack values
d. Critical path
4. Explain the following terms

a. optimistic time
b. Most likely time
c. Pessimistic time
d. Expected time
e. Variance
5. Calculate the variance and the expected time for each activity
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Project Resource Analysis
In this Chapter, we’re going to look at all of the ways to measure the resources - check-in on
how our team is doing. Since we’re focused on our team as the main resources here, let’s
look at all of the ways that we can measure team progress and overall performance.
Earned Value Analysis
In advanced project management EVA is used as way to pulse check our projects - a way to
make sure our time and budget are on track. The only thing to keep in mind about this
particular metric is that it takes into account our entire project and does not look at the
individual contributions of each team member. It’s a good place to start, to see if everything
is on track. If it’s not, we can drill down and find out why.
Resource Utilization Rate
The resource utilization rate is a valuable little metric used to calculate how much of our
team’s time is spent working, expressed as a percentage. The good thing about this is that we
can calculate it for every team member individually.
It’s also really easy to figure out:
Resource utilization = Busy time / Available time
Though this looks pretty easy to compute, the question of “time” arises. What kind of ‘time’
should we be calculating. Planned time or recorded time? It all depends on what our goal is?.
The formula below will help us to see how under utilized or over utilized a resource is.
Resource utilization = Planned working hours / Available hours
If the percentage is low, it means that our team member doesn’t have enough work. On the
other hand if the percentage is too high or over 100, someone is overloaded and we need to
make adjustments asap.
Another way to look at this ( the preferred way) is with this formula:
Resource utilization = Recorded working hours / Available hours
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This uses actual time recorded by each team member to calculate the actual percentage of
resource allocation. The problem with this approach though is that it is done after the work
has already been done so you can’t really go back and make changes. What can do instead is
use this data for future planning.
Tracking metrics for our team can be tricky business. It tends to put people on edge because
it makes them feel like they are being micromanaged. Make sure that we have a team meeting
to discuss how progress will be tracked. It’s very important to be clear about this from the
beginning so that there are no misunderstandings and so that we get the best possible data for
the overall look at how our team is doing.
Taking Stock of Resources and Capabilities
Tangible Resources
Tangible resources are the easiest to evaluate since they are visible and quantifiable. Two key
questions underlie this procedure:
What opportunities exist for economizing on finance, inventories, and fixed assets?
What are the possibilities for employing existing assets more profitable?
Intangible Resources
Much of a company's worth comes from less defined assets such as reputation, technology,
or a particular set of cultural attributes within the company. Intel and American Express have
successfully protected their intangibles, while Xerox has repeatedly over-looked its core
40
assets. Brand is everything for Coca-Cola, and Gillette, while software and pharmaceutical
companies depend mosty on their technology and patents.
Human Resources
People in companies provide skills, knowledge, intuition, and reasoning (known as human
capital). Additionally, the culture inside an organization consists of relationships, values, and
routines, and companies that have a strong set of managerial values have a strategic
advantage over those that don't- through employees increased identity with corporation,
increased stability and consistency as well as a guide for appropriate behaviour.
Earned Value Analysis (EVA): Formulas, Calculation & Example
In advanced project management EVA is used as way to pulse check our projects - a way to
make sure our time and budget are on track. The only thing to keep in mind about this
particular metric is that it takes into account our entire project and does not look at the
individual contributions of each team member.
Definition
The earned value analysis (EVA) is a project controlling procedure and is one of the key
performance indicators of a project. With the EVA, the planned and current costs of a project
are identified on any desired reporting date, as well as the earned value, as well as other
figures like time and cost efficiency. Based on these values, the future course of the project
and the predicted completion cost can be calculated long before the end of the project.
For example, if we have made 5 widgets and each widget is worth $10 then we can say that
our EV is $50 (5 X $10).
In Earned Value Analysis (EVA) everything is measured and reported as money or monetary
equivalent. The project team determines an equivalence between Scope, Schedule, Cost to do
this. EVA provides a singular view of Scope, Schedule and Cost.
For example, the earned value analysis answers the following questions:
❖ Am I behind schedule if my actual costs are lower than the planned costs?
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❖ What will the project end up costing? Is that within the budget?
❖ Am I using the available time and resources efficiently?
❖ How high will the profit/return on investment (ROI) be at the end of the project?
Why do you need the earned value?

Thinking back to the triangle of project management, there are three values in a project:
workload or cost, time and scope. The scope is often called Result or Quality.
In comparison to other project controlling methods the earned value analysis doesn’t just
consider the time and workload through a comparison of the expected and actual situations,
but also takes the extent of the earned value into the analysis – so how many work results
have already been created. Through this, different questions – for example, about exceeding
the planned costs – can be answered: should that be assessed negatively, or has the work just
been done more quickly than expected?
How does the earned value analysis work?

The earned value is always calculated for activities or work packages. To evaluate the whole
project, just calculate the earned value of the top project activity. Lower activities can also be
calculated through the earned value analysis. As the basis for the earned value analysis, you
need the duration, the planned value and the actual cost of the activities.
How do you calculate the earned value?

The earned value (EV) of an activity is calculated with the costs or the workload. The basic
formula for this is always:
Earned value (EV) = planned value (PV) * percent complete (PC)
EV = PV * PC
Percent complete is the progress.
The course of the planned costs, the actual costs and the earned value up until the selected
analysis point can then be presented in an earned value diagram from which the first bits of
information about the project status can be read.
42
To interpret this diagram, we have to be familiar with the estimation of the other values that
can be calculated with the earned value analysis.
The CPI and SPI in the earned value analysis

With the help of the calculated completion value, further project values can be calculated: the
cost performance index (CPI) and the schedule performance index (SPI):
CPI (cost performance index): EV / AC
SPI (schedule performance index): EV / PV
The values answer the questions of whether you have been working cost efficiently and on-
schedule to a selected reporting day. If the value is 1, then you are within your plan. If it is
higher than 1, then don’t worry, because you are working more quickly and cheaply than
planned. If you are under 1, then you are not working time and cost efficiently.
Even these values can be presented in a diagram to get an overview of the efficiency of your
project.
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1 represents the strived-for planned value. In the figure the schedule performance is higher
than 1, and the cost performance is lower. This means that the project is being completed
behind schedule, but still within budget.
In addition to these values, the expected total costs or the expected total workload of the
project as it looks on the day of the analysis can be calculated:
EAC (Estimate at completion) = PV / CPI
Overview of EVA values Overview of formulas for the values
EV = PV * PC
AC: actual cost CPI = EV / AC
CPI: cost performance index SPI = EV / PV

EAC = PV / CPI
EAC: estimate at completion
EC = Duration / SPI
EC: estimated completion
CPI > 1 (within budget)
EV: earned value
CPI < 1 (over budget)
PC: percent complete SPI > 1 (within plan)
SPI < 1 (behind plan)
PV: planned value
SPI: schedule performance index
Earned Value Analysis Example
EX1: Suppose you are the project manager of a project that involves laying cables for 100
miles in 100 days i.e every day you are supposed to complete laying cable for 1 mile. The
total budget is $100 million ($1 million per mile).
Now let’s say that 50 days are over and you have the following information:
Work completed = 40 miles of cables

Money spent = $30 million
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Let’s analyze at the schedule first:
You were supposed to complete 50 miles in 50 days but you have completed 40. You are
behind.
Now we need an objective number to quantify this. That’s where Schedule Performance
Index (SPI) comes in.
SPI = Actual % Complete ÷ Planned % Complete
From the above formula, you can see that if you are:
Behind schedule (Actual % < Planned %), SPI < 1
Exactly on schedule (Actual % = Planned %), SPI = 1
Ahead of schedule (Actual % > Planned %), SPI > 1
In our case, SPI = 40/50 = 0.8 (less than 1, we are behind schedule)
The 0.8 means that we are proceeding at 80% of the planned rate. Hence we expect the
project to complete 20% slower than expected. (You can calculate that this translates to 25
days more. Enter your calculations in the comment section at the end of this article.)
Just one number of 0.8 quantifies the schedule status of the project. Pretty neat, right?
Now let’s analyze at the cost aspect:
You were supposed to spend $1 million per mile. You have completed laying cables for 40
miles; you were expected to spend $40 million. But you have spent only $30. This is great!
You have spent less than expected.
Again, we need an objective number to quantify this. That’s where Cost Performance Index
(CPI) comes in.
CPI = Planned Cost ÷ Actual Cost
Planned Cost is the planned spend to perform the actual work done.
So, Planned Cost = Actual % Complete x Budget
From the above, you can see that if you are:
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Over budget (Actual Cost > Planned Cost), CPI < 1
Exactly on the budget (Actual Cost = Planned Cost), CPI = 1
Under budget (Actual Cost < planned Cost ), CPI >1
In our case:
Planned Cost = 0.4 x 100 million = 40 million
Actual Cost = 30 million.
So, CPI = 40/30 = 1.33
1.33 means that we are spending 33% less than expected. Hence we expect the project to
complete with a saving of 33%.
EX2: Compute the Estimate At Completion (EAC) and Variance At Completion (VAC) if
both SPI and CPI influence the project work when given variables are
Budget At Completion (BAC) = $22,000
Earned Value (EV) = $13,000
Planned Value (PV) = $14,000
Actual Cost (AC) = $15,000
Solution :
EAC (if the both SPI and CPI influence the project work) = AC + [(BAC – EV) / (CPI x
SPI)]
Schedule Performance Index (SPI) = EV/PV = $13,000/$14,000 = 0.93 Since SPI is less than
1, this indicates that the project is behind schedule
Cost Performance Index (CPI) = EV/AC = $13,000/$15,000 = 0.87 Since CPI is less than 1,
this indicates that the project is over budget.
EAC = $15000 + [($22,000 – $13,000)/(0.93 X 0.87)] = $26,123
VAC = BAC – EAC = $22,000 – $26,123 = -$4,123 The project is experiencing a budget
overrun of -$4,123.
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EX3:For the following project calculate SV,CV, SPI and CPI at the end of second month.
Month 1 2 3 4
Planned Value $ 11,10,000 $ 6,00,000 $ 25,00,000 $ 8,00,000
Earned Value $ 10,00,000 $ 7,50,000
Actual Cost $ 12,50,000 $ 5,00,000
Solution :
First calculate cumulative data
Month 1 2 3 4
Planned Value $ 11,10,000 $ 6,00,000 $ 25,00,000 $ 8,00,000
(PV) cumulative $ 11,10,000 $ 17,10,000
Earned Value $ 10,00,000 $ 7,50,000
(EV) cumulative $ 10,00,000 $ 17,50,000
Actual Cost $ 12,50,000 $ 5,00,000
(AC) cumulative $ 12,50,000 $ 17,50,000
Schedule Variance (SV) = EV – PV = ($ 17,50,000 – $ 17,10,000) = $ 40,000
Schedule Performance Index (SPI) = EV / PV = ($ 17,50,000 / $ 17,10,000) = 1.0233918
Cost Variance (CV) = EV – AC = ($ 17,50,000 – $ 17,50,000) =$0
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Cost Performance Index (CPI) = EV / AC = ($ 17,50,000 / $ 17,50,000) =1
Since SV is positive and SPI is greater than zero the above project is ahead of schedule.
As CV is equal to zero and CPI is equal to one the project is on budget.
SOLVED PROBLEM:
You are managing a project which is into six months of its execution. You are now reviewing
the project status and you have ascertained that project is behind schedule. The actual cost of
Activity A is $ 2,00,000 and that of Activity B is $ 1,00,000. The planned value of these
activities are $ 1,80,000 and $ 80,000 respectively. The Activity A is 100% complete.
However, Activity B is only 75% complete. Calculate the schedule performance index and
cost performance index of the project on the review date.
Solution :
First tabulate the data provided in the problem
Tasks Planned Value (PV) Actal Cost (AC) % Completion
Activity A $ 1,80,000 $ 2,00,000 100%
Activity B $ 80,000 $ 1,00,000 75%
Since we have percentage completion data of each activity we can calculate the earned value.
In order to calculate earned value of each activity multiply % completion and the planned
value. Therefore, 100% x 1,80,000 = 1,80,000 and 75% x 80,000 = 60,000/-
Planned Value Actual Cost % Earned Value

Tasks
(PV) (AC) Completion (EV)
Activity A $ 1,80,000 $ 2,00,000 100% $ 1,80,000
Activity B $ 80,000 $ 1,00,000 75% $ 60,000
Now, calculate the cumulative data for the period. Therefore add planned value, actual costs
and earned value of both the activities.
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Planned Value Actual Cost % Earned Value

Tasks
(PV) (AC) Completion (EV)
Activity A $ 1,80,000 $ 2,00,000 100% $ 1,80,000
Activity B $ 80,000 $ 1,00,000 75% $ 60,000
Cumulative $ 2,60,000 $ 3,00,000 – $ 2,40,000
Therefore, Schedule Performance Index (SPI) = EV/PV = 2,40,000/2,60,000 = 0.92
And, Cost Performance Index (CPI) = EV/AC = 2,40,000/3,00,000 = 0.8
Schedule Performance Index (SPI) = 0.92
Cost Performance Index (CPI) = 0.8
Since both SPI and CPI are less than one, the project is behind schedule and is experiencing
cost overrun.
H.W : You are managing a software project with an initial budget estimate of 2 million USD.
During interim cost and schedule performance analysis, you figured out that:
You should have spent $500,000 till now based on your initial plans and 1,000 man/days of
schedule activities
You spent $600,000 till now and completed 1,100 man/days of schedule activities which
should have cost $450,000 based on your initial plans.
You re-estimated the budget required for the remaining work to be done as $1,500,000.
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Q1 ) What is the CPI and SPI of the project respectively?
A-) CPI=0.9 and SPI=1.2 C-) CPI=0.75 and SPI=1.1
B-) CPI=1.2 and SPI=0.9 D-) CPI=1.1 and SPI=0.75
Q2 ) What is the CV and SV of the project respectively?
A-) CV= -$150,000 and SV=100 man/days C-) CV= -$100,000 and SV= -100 man/days
B-) CV= $150,000 and SV= -100 man/days D-) CV= $100,000 and SV=100 man/days
Q3 ) What is the Variance at Completion?
A-) -$100,000 C-) -$50,000
B-) $100,000 D-) $50000
Question 4-) What is the TCPI based on your new Estimate at Completion value?
A-) 1.11 C-) 1.03
B-) 0.90 D-) 0.97
Question 5-) What is the status of your project?
A-) Project is ahead of schedule, under budget, and it is easier to complete the project on new EAC
B-) Project is behind schedule, over budget, and it is harder to complete the project on new EAC
C-) Project is ahead of schedule, over budget, and it is easier to complete the project on new EAC
D-) Project is ahead of schedule, over budget, and it is harder to complete the project on new EAC
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Estimate project costs
Project costs are estimated through the data and information that the technical study shows
in addition to that information that was shown by the marketing study.
Estimating these costs should go in the direction of answering the following two questions:
❖ What is the cost required for establishing and implementing the project in order for
production and operation to begin?
❖ What is the cost of producing that expected volume of sales?
The answer to the first question means estimating the investment spending of the project,
while answering the second question is concerned with estimating the operating spending of
the project, or in other words, estimating both the investment costs and the annual
operating costs.
1. Investment costs:
The scope of investment costs can be determined in feasibility studies with those costs
needed to set up and equip the project until it is ready to start operating. Consequently, the
elements of investment costs are represented in those elements that are spent during the
period from the moment the idea of the project emerges and the preparation of its studies
until it conducts its operational experiments.
These costs include the following:
1. The costs of purchasing, obtaining and installing fixed assets. Examples include the costs
of purchasing machinery, equipment, transportation, and installation on site, purchasing
project land, erecting and equipping buildings, etc.
2. Working capital, which includes:
• Stocks of raw materials needed for a full production cycle. It includes the
stock of major and auxiliary primary materials, fuel, spare parts, equipment,
maintenance materials and packaging materials.
51
• Liquid cash that is sufficient to meet expenses such as wages, salaries, and
other elements of industrial, marketing, administrative, and other financial
expenses.
2. Establishment expenses, which include: the cost of forming the company, the cost of
preliminary and detailed studies, legal fees, transportation, travel and training expenses
for workers who will be entrusted with operating the project after its establishment, in
addition to expenses for experiments in operation ... etc.
2. Annual operating costs:
The process of determining the elements of operating costs during the first year in which the
productive activity reaches the level of full energy is a basis for measuring the profitability of
the project. The annual operating costs are the industrial cost of production as well as the
marketing and administrative cost.
Those studying and analyzing this part should highlight and clarify the following types of
costs in the framework of their analysis:
Fixed costs and variable costs The basis for this distinction that separates fixed and
variable costs is that they have nothing to do with changing the volume of production
and the costs that change that volume.
The costs that are fixed as long as the productive activity continues, but it can be
avoided if this activity stops. For example, the salaries of the employees supervising.
The costs that continue even if production stops but can be avoided if the project is
liquidated. For example, the salaries of the guards.
Unavoidable costs even if the project is liquidated and its assets are sold - for
example, the consumption of machinery and equipment, especially that does not have
a market value.
Costs that are not attributable to production but are subject to management disposal.
For example, advertising and research expenses, consultants' and legal fees.
Added costs, dumped costs, and added costs are those costs of a particular decision.
Such as the decision to use a machine for an additional number of hours entails
additional costs represented in the fuel needed to run this machine and its depreciation
costs as a result of operating this additional number of hours.
52
Pocket Costs and Book Costs. The first is those costs that require ongoing spending
for others, such as wages and salaries paid, while the second does not require current
spending, such as depreciation.
Direct costs, indirect costs, and the criterion for differentiation here is that the direct cost is
the one that can be allocated, while the indirect costs are those that cannot be allocated to a
specific commodity or department and it is also called (Overhead Costs).
Financial and economic evaluation of the project -

breakeven analysis
Equivalence analysis is best used in feasibility studies because it helps to know the lowest
production level and / or sales levels that a project can continue in the market without
deciding to stop production and exit the market.
Indeed, the break-even point for the project under study can be reached after the
completion of the sales estimate through the marketing study, and cost estimation through the
technical study. The lower the break-point, the higher the project's chances of achieving
profits and the lower the possibility of losses. The difference between the expected use of
project energy and the break-even point represents the safety zone, the larger the better. In
summary, the break-even point reflects the lowest level of production that can be allowed to
use the project's production capacity.
Therefore, it became important to know the volume of sales (in units of currency) in which
the revenues of this volume of sales are equal to its total cost without the project achieving
profit or loss.
Breakeven analysis is performed to determine the value of a variable of a

project that makes two elements equal, e.g. sales volume that will equate
revenues and costs.
53
Single Project
The analysis is based on the relationship:
Profit = revenue – total cost

= R – TC
At breakeven, there is no profit or loss, hence, revenue = total cost
or, R = TC
Note: It is to be noted that +ve sign is used for both the revenue and the costs. If
we are to use –ve sign for costs and +ve sign for revenue, then the above
relationships become:
Profit = R + TC and R + TC = 0 at breakeven.
With revenue and costs given in terms of a decision variable, the solution yields
the breakeven quantity for the decision variable.
Costs, which may be linear or non-linear, usually include two components:
Fixed costs (FC) : Includes costs such as buildings, insurance, fixed overhead,
equipment capital recovery, etc. These costs are essentially constant for all
values of the decision variable.
Variable costs (VC) : Includes costs such as direct labour, materials,
contractors, marketing, advertisement, etc. These costs change linearly or non-
linearly with the decision variable, e.g. production level, workforce size, etc.
For the analysis to be followed here, the variation will generally be assumed to
be linear.
Then, total cost, TC = FC + VC
Revenue also changes with the decision variable. Again, for the analysis, the
variation will generally be assumed to be linear.
The following diagram illustrates the basics of the breakeven analysis.
54
It can be seen that we have profit if the production level is above the breakeven
quantity and loss if it is below.
Examples:
1. The fixed costs at Company X are $1 million annually. The main product has
revenue of $8.90 per unit and $4.50 variable cost. (a) Determine the breakeven
quantity per year, and (b) Annual profit if 200000 units are sold.
Let QBE be the breakeven quantity.
8.9QBE = 1,000,000 + 4.5QBE
QBE = 1,000,000/(8.90-4.50) = 227,272 units
(b) Profit = R – TC
= 8.90Q – 1,000,000 - 4.5Q
At 200,000 units: Profit = 8.90(200,000) – 1,000,000 - 4.50(200,000)

= $-120,000 (loss)
SOLVED PROBLEMS
1. A defense contractor has been able to summarize its total annual fixed costs as $100,000
and the total variable cost per unit of production as $33. (a) If only 5000 units is all that is
expected to sell to the government this year what should the per unit selling price be to make
a %25 profit this year? (b) If foreign sales of 3000 units per year is to be added to the 5000
units government contract above and a %25 profit is acceptable for this contractor again,
what could be the new selling price per unit?
a) Total costs = 100000 + 5000(33)

= 265000
% profit = 100(revenue – cost)/cost
Therefore, 25 = 100(revenue – 265000)/265000
or, revenue = 265000(1.25) = 331250
Selling price = 331250/5000

= $66.25 / unit.
b) Total cost = 100000 + 8000(33) = 364000

Revenue for 25% profit = 364000(1.25) = 455000
New selling price = 455000/8000
= $56.875 per unit.
55
2. Machine A has a fixed cost of $40000 per year and a variable cost of $60 per unit.
Machine B has an unknown fixed cost, but with this process 200 units can be produced each
month at a total variable cost of $2000. If the total costs of the two machines break even at a
production rate of 2000 units per year, what is the fixed cost of machine B?
Let FCB = fixed cost for B.

Variable cost for B = 2000/200 = $10/unit
Total costs are equal at 2000 units per year. Then,
40,000 + 60(2000 units) = FCB + 10(2000 units)
FCB = $140,000 per year
3. A product currently sells for $12 per unit. The variable costs are $4 per unit, and 10,000
units are sold annually and a profit of $30,000 is realized per year. A new design will
increase the variable costs by %20 and Fixed Costs by %10 but sales will increase to 12,000
units per year. (a) At what selling price do we break even, and (b) If the selling price is to be
kept same ($12/unit) what will the annual profit be?
Profit = revenue – costs
30000 = 10000(12) – [10000(4) + FC] FC = fixed costs
FC = 50000
(a) New variable cost = $4(1.2) = $4.8 per unit.

New fixed costs = 50000(1.1) = $55000
Let x = breakeven selling price per unit, then
12000x = 55000 + 12000(4.8)

or, x = $9.38/unit
(b) Profit = 12000(12) – 12000(4.8) – 55000

= $314
56
Risk Management
Risks
➢ No construction project is risk free
➢ It cannot be ignored
➢ Risk can be managed, minimized, shared ,transferred ,or accepted
Due To
Poor Quality
Project Constraints Delays
Quality
Risk Management
➢ A major step in project planning
➢ A complex process since the variables are dynamic and dependent on variety of
conditions such as :project size, project complexity ,location ,season of the year… ,etc.
➢ A Time and/or Cost contingency should be added to cover unforeseen occurrence
Why Risk Analysis?

➢ Minimize management by crisis
➢ Minimize surprises and problems
➢ Increase probability of project success or control
➢ Better handling of true costs and schedules by properly estimating contingencies
57
Terms and Definitions

Risk
❖ Risk has to do with PROBABILITY + IMPACT

❖ We need to differentiate between Cause ,Event & Impact.
❖ A box of chocolate with 15 pieces .All sugar-free except ONE.
▪ Cause :Having a non sugar-free chocolate in the box
▪ Event :Selecting that particular piece
▪ Impact :Gaining Weight!
Risk may be defined as:
➢ Any event which is likely to affect (adversely )the ability of project to achieve the
defined objectives
➢ Undesirable extra cost or delay due to factors having uncertain future outcome
➢ Risk can be characterized in terms of its Severity where:
Severity = Likelihood of Occurrence x Magnitude of the Impact
➢ An outcome different from what you expected estimated…Or …different from what you
bid!
➢ Risks that are not well-managed may lead to project failure
➢ Risks are always in the future
➢ If it occur ,it has an effect on at least one of the project objectives (Scope, Schedule,
Cost ,Quality).
➢ Risk may has one or more causes and it has one or more impacts.
Risks :Known Vs .Unknown
➢ Known Risks are those that have been identified and analyzed
➢ Unknown Risks can not be managed, may be addressed by contingency plan
58
Project Risk
Uncertain event or condition that, if occurs, has an effect (impact) on any of the project
objectives (Time ,Cost, Quality ,Scope) Impact could be +ve or– ve
Cause Event Impact
Need to have a permit Permit is delayed Schedule slippage
Buying in $ FOREX rate change Budget slippage
Cable on floor Someone trips & falls Schedule slippage
Buying in € FOREX rate change Budget gain (savings)
No lessons learned Facing a new problem Reinventing the wheel
Technology is new System becomes unstable Customer dissatisfaction
Term Definition
Risk Averter Not likely to take a risk that is considered a high risk
Risk Taker Prefers an uncertain outcome and may be willing to pay a penalty to
take a high risk
Risk Neutral Tolerance to risk is proportional to the amount of money at stake

(Financial markets, IRR, Interest)
59
Risk Management The process for identifying, analyzing, and responding to risk events to
Process obtain the acceptable degree of risk elimination or control
Risk Analysis The process of identifying risk factors and the quantification of those
factors (estimating likelihood and magnitude of impacts)
Risk Mitigation The process of developing a plan to respond or deal with risk on a
project
The Impact of Uncertainty

Consider the following small project
➢ Basic Assumption of CPM : Deterministic Estimating

➢ What is the impact if you are uncertain about the durations?
➢ Consider small uncertainty in durations ;durations + = or – one day from given or
any other change
Activity Optimistic Most Likely Pessimistic

A 9 10 11
B 8 9 10
C 9 10 11
D 9 10 11
HW: Calculate the duration of this project using any three of the activities time given in the
table for 10 times . Then draw the relation between the trail number and the duration found.
Discuss the impact of the results
60
Risk Management Process
The processes whose objective is to increase the PROBABILITY & IMPACT of

positive events and decrease the probability and impact of events adverse to the project
Risk Identification
❖ Determining which risks might affect the project and determining their characteristics
Qualitative Risk Analysis
❖ Prioritizing risks for further analysis by assessing and combining their probability of
occurrence & impact
❖ Numerically analyzing the effect of identified risks on overall project objectivities
Risk Response Planning
❖ Developing options and actions to enhance opportunities and reduce threats
Risk Monitoring & Control
❖ Tracing identified risks, monitoring residual risks, identifying new risks, executing
risk response plans, and evaluating their effectiveness throughout the project life
61
Plan Risk Management
❖ Deciding how to conduct risk management activities for the project

❖ Enhances chance of success to the other five risk processes
❖ Ensure that proper risk management is in place as per the importance of a given
project
❖ Resources and budget are planned
❖ We agree to how to deal with risks !Not according to personal preference
❖ Start & complete early in PLANNING
Risks Identification
❖ Identify every possible event or issue that may cause harm to the project
❖ Risk identification is not a one time event, but it is to be performed on a regular basis
throughout the project
❖ Risk factors can be stated in the form:
• “…… may happen during the execution of …. which may impact ……”, or
• “ If …… occurs, then an impact to ….. will be realized.”
• e.g. “If rock discovered during excavation then production rates will be low.”
Tools and techniques
A number of approaches can be used including:
➢ Documentation Review (a structured review of all project documents)

➢ Information gathering techniques (Brainstorming, Delphi technique, interviewing,
Root-cause identification)
➢ Standard Checklists (based on historical information)
➢ Learning from previous projects
➢ Expert Interviews
➢ Diagramming Techniques (cause-and-effect diagram, Flowcharts, Influence
diagrams)
62
Check Lists
Category Examples
Delay in possesses of site Limited working hours Troubles
Administrative
with public services
Shortage or late supply of resources Site remoteness
Logistical
problems Communications
Construction Ground problems Limited work space Equipment breakdown
Placing fill in dry season High tides, temperature ,etc.

Physical
River diversion in time of low flow.
Design Incompleteness Design changes Design errors
Inflation
Financial Exchange rate fluctuation Availability of funds Delay
payments by client
Space congestion Scheduling errors
Management
Estimating based on standards Errors in B.O.Q.
Contract type Liability to others
Contractual
Co-ordination of work
Change in local laws Import restrictions Use of local
Political
resources
Disasters Floods, fire, landslip ,earthquakes ,etc.
Outputs
➢ List of identified risk

➢ List of potential responses
➢ Root causes of risk
➢ Update risk categories
Outputs: Risk Register
63
1- Inputs and Tools

➢ Includes methods for prioritizing the identified risks for further action such as
Quantitative Analysis or Risk response planning
➢ Assess the priority of identified risks using their probability of occurrence and their
corresponding impact on project objectives if they occur
➢ Tools: Interviews or meetings
2- Assess Risk Probability and Impact
➢ Risk probability investigates the likelihood that a risk will occur, while risk impact
investigates the effect on project objectives if the risk event occurs
➢ Risks with obviously low ratings of probability & impact will not be rated, but will
be included on a watch list for future monitoring
Probability and Impact Matrix
Evaluation of each risk's importance and, hence, priority for attention can be
done using a probability and impact matrix as shown:
64
This specifies combinations of probability and impact that lead to rating the
risks as low, moderate, or high priority. The type of management response
should be:
1) Threats
High-risk (shown in dark gray boxes) are priority and need a hard
lineresponse.
Low-risk (mid-gray boxes) need to have a contingency made for them &
monitored
2) Opportunities
Dark gray boxes show ones to pursue first as they offer the most benefit
& are more easily achieved.
Mid-gray boxes indicate the ones to be monitored.
1- Risk Register Update
2- Tools and Outputs
➢ Performed on risks that have been prioritized during the Qualitative Risk Analysis
➢ Analyzes the effect of those risk events and assigns a numeric rating to those risks
➢ Tools & Techniques: Monte Carlo Simulation and PERT Quantify the possible
outcomes for the project & their probabilities
➢ Identify project cost, schedule, quality and scope given the project risks
3- Data Gathering
➢ Interviewing
➢ Probability Distribution
➢ Three point estimate
65
4- Probability Distribution
➢ Probability :likelihood of occurrence

➢ Mean :average of the values of the event
➢ Range :difference between upper and lower limit
➢ Variance :Average of the squared deviations from the mean
➢ Standard deviation :square root of the variance
5- Quantitative Risk Modeling Techniques
➢ Expected Monetary Value

➢ Sensitivity Analysis
➢ Decision Trees
➢ Modeling and Simulation
Expected Monetary Values (EMV)
Expected Monetary Value = Probability x Consequence ($)
66
Task/Action/Event Probability Consequence Value Expected
A %20 100,000 $
B %10 2,000,000 SR
C %50 200,000 - LE
Payoff
Status Probability
Market Good %15 80000
Market Good %45 50000
Market Poor %25 20000
Market Poor %15 -20000
(EMV( Good market= 0.15 * 80000 + 0.45 * 50000
(EMV( Overall= 0.15 * 80000 + 0.45 * 50000 + 0.25 * 20000 – 0.15 * 20000
Plan Risk Responses
Objectives
➢ Increase the opportunity of success by reducing the probability and / or

consequences of high probability risks
➢ Identify and address the most critical risk categories and cost / schedule
elements
➢ Provide a way – forward plan for mitigating risks that includes actions
items, responsibilities and dates
➢ To translate risk information into decisions and mitigating action plans
67
Risk Monitoring & Control
Process
➢ Is the process of responding to identified and unforeseen risk. It involves

tracking identified risk, identifying new risks, implementing risk
response plans, and monitoring their effectiveness
Project Risk response Audit
➢ An examination of the effectiveness of risk response plans and the performance of

the risk owner
➢ May be conducted by a third party, the project’s risk officer, or other qualified
personnel
➢ Project Risk Response Audit Process
• Gather relevant project data regarding work results including risk database
• Review the risk response plans and implementation of the plans
• Prepare a report of the findings and distribute to the project team and key
stakeholders
• Unplanned responses to emerging risks that were previously unidentified or
unexpected
68
Net Present Value (NPV)

Net present value is the present value of net cash inflows generated by a
project including salvage value, if any, less the initial investment on the
project. It is one of the most reliable measures used in capital budgeting
because it accounts for time value of money by using discounted cash
inflows.
Net Present Value (NPV) is the value of all future cash flows (positive and
negative) over the entire life of an investment discounted to the present.
NPV analysis is a form of intrinsic valuation and is used extensively across
finance and accounting for determining the value of a business, investment
security, capital project, new venture, cost reduction program, and anything
that involves cash flow.
Before calculating NPV, a target rate of return is set which is used to

discount the net cash inflows from a project. Net cash inflow equals total
cash inflow during a period less the expenses directly incurred on generating
the cash inflow.
Why is Net Present Value (NPV) Analysis Used?
NPV analysis is used to help determine how much an investment, project,

or any series of cash flows is worth. It is an all-encompassing metric, as it
takes into account all revenues, expenses, and capital costs associated with
an investment in its Free Cash Flow (FCF).
In addition to factoring all revenues and costs, it also takes into account the
timing of each cash flow that can result in a large impact on the present
value of an investment. For example, it’s better to see cash inflows sooner
and cash outflows later, compared to the opposite.
69
Negative vs. Positive Net Present Value
If the net present value of a project or investment, is negative it means the

expected rate of return that will be earned on it is less than the discount rate
(required rate of return or hurdle rate). This doesn’t necessarily mean the
project will “lose money.” It may very well generate accounting profit (net
income), but since the rate of return generated is less than the discount rate, it
is considered to destroy value. If the NPV is positive, it creates value.
Calculation Methods and Formulas
The first step involved in the calculation of NPV is the determination of the
present value of net cash inflows from a project or asset. The net cash flows
may be even (i.e. equal cash inflows in different periods) or uneven (i.e.
different cash flows in different periods). When they are even, present value
can be easily calculated by using the present value formula of annuity.
However, if they are uneven, we need to calculate the present value of each
individual net cash inflow separately.
In the second step we subtract the initial investment on the project from the
total present value of inflows to arrive at net present value.
Thus we have the following two formulas for the calculation of NPV:
When cash inflows are even:
1 − (1 + 𝑖)−𝑛
𝑁𝑃𝑉 = 𝑅 × − 𝐶𝑎𝑠ℎ 𝑜𝑢𝑡𝑓𝑙𝑜𝑤 𝑖𝑛 𝑡𝑖𝑚𝑒 0
𝑖
(𝑖. 𝑒. 𝑡ℎ𝑒 𝑝𝑢𝑟𝑐ℎ𝑎𝑠𝑒 𝑝𝑟𝑖𝑐𝑒 / 𝑖𝑛𝑖𝑡𝑖𝑎𝑙 𝑖𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡)
In the above formula,
R: is the net cash inflow expected to be received each period;
i: is the required rate of return per period;
n: are the number of periods during which the project is expected to operate and
generate cash inflows.
When cash inflows are uneven:

𝑅1 𝑅2 𝑅3
𝑁𝑃𝑉 = ⌊ + + + ⋯ ⌋ − 𝑖𝑛𝑖𝑡𝑖𝑎𝑙 𝐼𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡
1 + 𝑖 (1 + 𝑖)2 (1 + 𝑖)3
Where,
i ; is the target rate of return per period;
70
R1 ; is the net cash inflow during the first period;

R2 ; is the net cash inflow during the second period;
R3 ; is the net cash inflow during the third period, and so on ...
Decision Rule
Accept the project only if its NPV is positive or zero. Reject the project
having negative NPV. While comparing two or more exclusive projects
having positive NPVs, accept the one with highest NPV.
Advantage and Disadvantage of NPV
Advantage: Net present value accounts for time value of money. Thus it is
more reliable than other investment appraisal techniques which do not discount
future cash flows such payback period and accounting rate of return.
Disadvantage: It is based on estimated future cash flows of the project and
estimates may be far from actual results
If... It means... Then...

the investment would
NPV > 0 the project may be accepted
add value to the firm
the investment would
NPV < 0 subtract value from the project may be rejected
the firm
We should be indifferent in the decision
whether to accept or reject the project.
the investment would This project adds no monetary value.
NPV = 0 neither gain nor lose Decision should be based on other
value for the firm criteria, e.g., strategic positioning or other
factors not explicitly included in the
calculation.
71
Example of Net Present Value (NPV)
Example 1: Even Cash Inflows

Calculate the net present value of a project which requires an initial investment
of $243,000 and it is expected to generate a cash inflow of $50,000 each month
for 12 months. Assume that the salvage value of the project is zero. The target
rate of return is 12% per annum.
Solution
We have,
Initial Investment = $243,000
Net Cash Inflow per Period = $50,000
Number of Periods = 12
Discount Rate per Period = 12% ÷ 12 = 1%
Net Present Value

= $50,000 × (1 − (1 + 1%)^-12) ÷ 1% − $243,000
= $50,000 × (1 − 1.01^-12) ÷ 0.01 − $243,000
≈ $50,000 × (1 − 0.887449) ÷ 0.01 − $243,000
≈ $50,000 × 0.112551 ÷ 0.01 − $243,000
≈ $50,000 × 11.2551 − $243,000
≈ $562,754 − $243,000
≈ $319,754
72
Example 2: Uneven Cash Inflows

An initial investment on plant and machinery of $8,320 thousand is expected to
generate cash inflows of $3,411 thousand, $4,070 thousand, $5,824 thousand
and $2,065 thousand at the end of first, second, third and fourth year
respectively. At the end of the fourth year, the machinery will be sold for $900
thousand. Calculate the present value of the investment if the discount rate is
18%. Round your answer to nearest thousand dollars.
Solution
PV Factors:
Year 1 = 1 ÷ (1 + 0.18)^1 ≈ 0.8475
Year 2 = 1 ÷ (1 + 0.18)^2 ≈ 0.7182
Year 3 = 1 ÷ (1 + 0.18)^3 ≈ 0.6086
Year 4 = 1 ÷ (1 + 0.18)^4 ≈ 0.5158
The rest of the problem can be solved more efficiently in table format as show
below:
Year 1 2 3 4
Net Cash Inflow $3,411 $4,070 $5,824 $2,065
Salvage Value 900
Total Cash Inflow $3,411 $4,070 $5,824 $2,965
× Present Value Factor 0.8475 0.7182 0.6086 0.5158
Present Value of Cash Flows $2,890.68 $2,923.01 $3,544.67 $1,529.31
Total PV of Cash Inflows $10,888
− Initial Investment − 8,320
Net Present Value $2,568 thousand
73

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2020

Dr. Usama J. Naeem & Dr. Basil Jorani

INTRODUCTION TO PROJECT MANAGEMENT

A project is a temporary and one-time exercise which varies in duration. It is

What is Project Management?

A project is generally initiated by a perceived need in an organization. Being a

A simple definition of project management includes a handful of key premises:

❖ Project management is no small task.

❖ Project management has a definite beginning and end. It's not a

❖ Project management uses various tools to measure accomplishments and

❖ Projects frequently need ad-hoc resources rather than dedicated, full-time

❖ Project management reduces risk and increases the chance of success.

Often, a triangle, commonly called the "triple constraint", is used to summaries

Figure 1: The triple constraint

In words, the triple constraint has four core elements:

➢ Projects must be within cost.

➢ Projects must be delivered on time.

➢ Projects must be within scope.

➢ Projects must meet customer quality requirements.

Figure 2: The project management diamond

1) Project Definition: Defining the goals, objectives and critical success

2) Project Initiation: Everything needed to set up the project before work

4) Project Execution: Doing the work to deliver the product, service or

5) Project Monitoring & Control: Ensuring that a project stays on track

6) Project Closure: Formal acceptance of the deliverables and disbanding

COMMON PROJECT TERMS

Stakeholder :Any person or group of people who may be affected by your

THE PROJECT MANAGER

What does it take to be a Good Project Manager?

❖ Excellent communication skills

❖ The ability to be a team player

❖ Excellent interpersonal skills

❖ The ability to negotiate

1. Recruitment and selection of suitably qualified project members to relevant

2. A well-documented methodology that is kept simple and easily adaptable to

So why do projects fail?

WHY DO PROJECTS FAIL?

A project has a degree of UNCERTAINTY .In project planning many

MEASURING PROJECT SUCCESS

PROJECT SUCCESS 12 – Golden Rules

Project planning involves a series of steps that determine how to achieve a

• Identifies specific community problems that stand in the way of meeting

Why is project planning important?

Project Planning helps us to: Project Planning helps to eliminate:

The Project Cycle

The process of planning and managing projects follows a logical, continuous

The basic processes of project planning are:

❖ Scope planning – specifying the in-scope requirements for the project to

Work Breakdown Structure (WBS)

What is Work Breakdown Structure?

Following example is an outlined WBS:

Main Uses of Work Breakdown Structure

• WBS is a planning tool to describe thoughts and ideas. It helps project

Benefits of Work Breakdown Structure

1. Clarify project responsibilities

2. Improve the accuracy of time, cost, and resources

3. Establish a framework for further projects

4. Analyze the initial risk of projects