Q1.
What are the phases of a Project Development Cycle? Give the salient tasks under each phase.
Solution : The Project Life Cycle refers to a logical sequence of activities to accomplish the project’s
goals or objectives. Regardless of scope or complexity, any project goes through a series of stages during
its life. There is first an Initiation or Birth phase, in which the outputs and critical success factors are
defined, followed by a Planning phase, characterized by breaking down the project into smaller
parts/tasks, an Execution phase, in which the project plan is executed, and lastly a Closure or Exit phase,
that marks the completion of the project. Project activities must be grouped into phases because by doing
so, the project manager and the core team can efficiently plan and organize resources for each activity,
and also objectively measure achievement of goals and justify their decisions to move ahead, correct, or
terminate. It is of great importance to organize project phases into industry-specific project cycles. Why?
Not only because each industry sector involves specific requirements, tasks, and procedures when it
comes to projects, but also because different industry sectors have different needs for life cycle
management methodology. And paying close attention to such details is the difference between doing
things well and excelling as project managers.
Diverse project management tools and methodologies prevail in the different project cycle phases. Let’s
take a closer look at what’s important in each one of these stages:
1) Initiation
In this first stage, the scope of the project is defined along with the approach to be taken to deliver the
desired outputs. The project manager is appointed and in turn, he selects the team members based on their
skills and experience. The most common tools or methodologies used in the initiation stage are Project
Charter, Business Plan, Project Framework (or Overview), Business Case Justification, and Milestones
Reviews.
2) Planning
The second phase should include a detailed identification and assignment of each task until the end of the
project. It should also include a risk analysis and a definition of a criteria for the successful completion of
each deliverable. The governance process is defined, stake holders identified and reporting frequency and
channels agreed. The most common tools or methodologies used in the planning stage are Business Plan
and Milestones Reviews.
3) Execution and controlling
The most important issue in this phase is to ensure project activities are properly executed and controlled.
During the execution phase, the planned solution is implemented to solve the problem specified in the
project's requirements. In product and system development, a design resulting in a specific set of product
requirements is created. This convergence is measured by prototypes, testing, and reviews. As the
execution phase progresses, groups across the organization become more deeply involved in planning for
the final testing, production, and support. The most common tools or methodologies used in the execution
phase are an update of Risk Analysis and Score Cards, in addition to Business Plan and Milestones
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Reviews.
4) Closure
In this last stage, the project manager must ensure that the project is brought to its proper completion. The
closure phase is characterized by a written formal project review report containing the following
components: a formal acceptance of the final product by the client, Weighted Critical Measurements
(matching the initial requirements specified by the client with the final delivered product), rewarding the
team, a list of lessons learned, releasing project resources, and a formal project closure notification to
higher management. No special tool or methodology is needed during the closure phase.
Q2.
What are the traditional methods of financial evaluation of the projects? Give a comparative
analysis of these methods.
Solution :
The project evaluation process involves more than just determining a project's expected revenues and
profitability; it also involves a study of the key factors that affect a project and their financial impact on
the project. In addition, a project evaluation includes strategic evaluation, economic evaluation and social
impact evaluation
FINANCIAL EVALUATION
The financial evaluation of a commercial project mainly involves estimating the return on investment and
the profitability of the project. However, the financial evaluation of non-commercial projects involve the
identification of the most efficient way of delivering the desired project outputs and ensuring that the
project outputs result in significant benefits to the community.
Financial appraisal includes the compilation of the list of alternative projects and the associated streams
of costs and benefits. The financial evaluation is conducted using the cash flow rather than accounting
profits method. The accuracy of the evaluation will ultimately depend on:
•The quality of the estimates on which the cash flows are based
•The identification of all relevant cash flows and
•The exclusion of all non-cash items.
FACTORS FOR MEASURING PROJECT CASH FLOWS
When calculating the financial costs and project cash flows, the following factors must be kept in mind –
incremental analysis, sunk costs, accrual accounting and cash flows, incidental effects and opportunity
costs.
INCREMENTAL ANALYSIS
According to this principle, the cash flows have to be measured in incremental terms. Only those revenues
or expenditures that are likely to occur as a direct result of the project should be included when
determining the cash flows. A project's incremental cash flows should be ascertained through the ‘with
and without principle, i.e. to determine the cash flows of the firm including and excluding the project.
Project Cash Flow Cash flow for the firm Cash flow for the firm for year (T) = with the project for year
without the project for the year (T)-(T)
The idea behind the incremental analysis concept is to illustrate only the additional impact created by a
project. Cash flows that would have occurred irrespective of the project are extraneous to the analysis and
should be excluded.
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Example
If a department currently owns a vehicle fleet and is considering selling it and leasing vehicles instead, the
incremental costs and benefits of doing so can be compared. If the net present value of the proposal is
positive, then the proposal should be accepted. If the current situation is being compared with more than
one alternative, the proposals can be ranked by dividing the net present value by the initial investment.
The proposal which should be accepted is that with the highest ratio of net present value to Investment.
SUNK COSTS
Sunk costs refer to non-recoverable costs incurred in the past or committed before the evaluation of a
project. These costs have to be ignored when conducting a financial evaluation of a project.
Example
Firm A has hired a consultant to assess the viability of outsourcing its credit collections and to list the
possible agencies to which it can outsource its collections. Firm A spent $121,000 on consultant's fees
prior to the evaluation of proposals. It further estimated that other costs like legal fees, stamp duty etc. for
setting up an outsourcing contract would be $240,500 and the present value of cost savings from
outsourcing will be $320,450. On the basis of the available information, the management of the company
argued that since it had already incurred $121,000 for assessing the viability of the project, it would be a
waste not to proceed with outsourcing, while the staff argued that the firm should not proceed further
because the project would never recover the initial outlay of $121,000. In this case, both the arguments
are invalid, as $121,000 is the sunk cost and thus irrelevant for calculating the project costs. The
outsourcing project will have an NPV of $79,950 ($320,450 – $240,500).
OPPORTUNITY COSTS
Each and every resource utilized by a project entails a cost, irrespective of whether the resource is
purchased for the project or already owned by the firm. If the resource is already owned by the firm, the
opportunity cost of the resource must be charged to the project. The opportunity cost of a resource is the
present value of net cash flows that can be derived from it if it were to be put to its best alternative use.
Suppose a project requires land that is already owned by the firm. Though the cost of the land is a sunk
cost and needs to be ignored, its opportunity cost, i.e., the income it would have generated had it been put
to its next best use must be considered.
ACCRUAL ACCOUNTING AND CASH FLOWS
All costs and benefits are to be measured in terms of cash flows than in terms of accrual accounting
whereby income and expenditure are recognized when the transaction is entered into rather than when
payment or receipt takes place. This implies that all non-cash charges like depreciation and provisions
that are deducted for the purpose of determining profit after tax must be added back to profit after tax to
arrive at the net cash flow.
INCIDENTAL EFFECTS
All incidental effects of a project on the rest of the firm's activities must be considered. The proposed
project may have a beneficial or detrimental effect on the revenue stream of other product lines of the
firm. Such impact must be quantified and considered when ascertaining the net cash flows.
POST TAX PRINCIPLE
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For the purpose of appraisal, the cash flows of a project must be defined in post tax terms. Cash flows can
be defined in three ways. Each of the methods of cash flow estimation depends on different viewpoints
regarding who provides the capital for a project whether it is only equity shareholders or both equity
shareholders and long term lenders or the total fund providers (including long term and short term). The
post tax cash flows under the three viewpoints would be different.
CASH FLOWS FROM LONG TERM FUNDS POINT OF VIEW
This method is based on the assumption that funds invested in a project come from both equity
shareholders and long term lenders. When calculating net cash flows using this method, the interest paid
on long term loans is excluded. The rationale for this approach is that the net cash flows are defined from
the viewpoint of suppliers of long term funds. Hence, the post tax cost of funds is used as the interest rate
for discounting. The post tax cost of long term funds obviously includes the post tax cost of long term
debt. Therefore, if the interest on long-term debt is considered for the purpose of determining net cash
flows, an error due to double counting would occur.
CASH FLOWS FROM LONG TERM FUNDS POINT OF VIEW Contd..
Example
Suppose a project has the following cash outlays and sources of finance:
(Rs. in millions) Plant & Machinery 230
Working Capital 126
Sources of Finance
Equity 135
Long term loans 120
Trade Credit 44
Commercial Banks 57
The life of the project is 8 years. Plant & Machinery is to be depreciated on a written down value method
at the rate of 15% per annum. Annual sales are expected to remain constant over the period at Rs. 340
million. Cost of sales (including depreciation but excluding interest) is expected to be Rs. 180 million a
year.
The company is under the 40% tax bracket. At the end of the 8 years, plant & machinery will fetch a
value equal to their book value and the investment in working capital will be fully recovered. The rate of
interest on long-term loans is 15% p.a. The loans are repayable in six equal installments starting from the
end of the third year. Short term advances from commercial banks which will carry an interest of 16%
p.a. will be maintained at Rs. 57 million. They will be fully liquidated at the end of 8 years. Trade credit
would also be uniformly maintained at Rs. 44 million and will be fully paid at the end of 8 years.
Operating flow = Profit after tax (PAT) + Depreciation + Other non cash charges +
Interest on long term (1 – T)
Terminal Flow = Net salvage value of fixed assets + Net recovery of working capital
Margin
CASH FLOWS FROM EQUITY FUNDS POINT OF VIEW
When cash flows are computed from the equity funds point of view, only the funds contributed by the
equity holders towards the project are considered as an initial investment. The operating cash flow
includes profit after taxes, depreciation, other non-cash charges and preference dividend. The terminal
flow will be equal to the net salvage value of fixed assets and the net salvage value of current assets
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minus repayment of term loans, redemption of preference capital, repayment of working capital advances,
and retirement of trade credit and other dues.
CASH FLOWS FROM TOTAL FUNDS POINT OF VIEW
When cash flows are computed from the total funds point of view, the funds contributed by all the
suppliers of funds towards the project are considered for the calculation of the initial investment. The
operating cash flows are calculated by adding profit after taxes, depreciation, non-cash charges, interest
on long term borrowing (1-T) and interest on short term borrowing (1-T). The terminal flow will be equal
to the net salvage value of fixed assets and net recovery of WC margin.
CHOICE OF DISCOUNT RATE
The next step in the financial evaluation phase is the determination of an appropriate discount rate. The
determination of an appropriate discount rate is necessary for establishing the financial feasibility of a
project. Most of the appraisal criteria used these days are time adjusted or discounted criteria, like net
present value (NPV), benefit cost ratio (BCR) and internal rate of return (IRR). All these require the use
of a risk-adjusted discount rate to determine the actual returns from the project (Refer Exhibit II). The
most commonly used method for determining the discount rate makes use of theoretical models like the
capital asset pricing model (CAPM)[6] and the weighted-average cost of capital (WACC) model.
The CAPM is used to ascertain the relevant cost of equity for a given level of risk. This is then combined
with the cost of debt funds in proportion to their respective weights in the total funds used to finance the
project. This combined approach is known as the WACC.
WACC =SVx Ke +DVx Kd x (1-Tc)
Where:
Ke = Cost of Equity
Kd = Cost of Debt
S = the market value of the firm's equity
D = the market value of the firm's debt
V=S+D
S/V = percentage of financing in terms of equity
D/V = percentage of financing in terms of debt
Tc = the corporate tax rate
APPRAISAL CRITERIA
After determining the cash flows of a project, one must assess its viability. This can be achieved through
the use of discounted criteria or non-discounted criteria.
Time adjusted or discounted criteria include
•Net present value.
•Internal rate of return.
•Benefit-cost ratio or profitability index.
Traditional or Non-discounted criteria include
•Accounting rate of return.
•Payback period.
Certain assumptions are made when appraising projects using the criteria given above. They are:
•The risk of all project proposals under consideration does not differ from the risk of the existing projects
of the firm.
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•The firm has certain criteria for evaluating the projects. Based on the criteria, the investment decision
will be either to accept or to reject the proposal.
DISCOUNTED CASH FLOW/TIME ADJUSTED TECHNIQUES
This method requires cash flows to be discounted at a certain rate known as the cost of capital. This
technique recognizes the fact that cash flows occurring at different time periods and in different amounts
can be compared only when they are expressed in terms of a common denominator i.e. present value.
Thus, in this method, all the cash inflows are discounted at an appropriate discount rate and the present
value so determined is compared with the present value of cash outflows.
NET PRESENT VALUE
Where,
NPV = Net present value
CFt = Cash flow at the end of year (t = 0……n)
(cash inflow has a positive sign and cash outflow has a negative sign)
n = Life of the project (number of years)
k = Discount rate
The decision rule associated with NPV criteria is to accept all proposals with an NPV greater than zero.
This indicates accepting all projects that add value after providing a return, consistent with the cost of
capital and risk. Where two or more projects are mutually exclusive, then the project with the highest
NPV should be chosen.
Merits of NPV criterion
The merits are:
•It recognizes the importance of the time value of money.
•It takes into consideration the benefits accruing over the entire life of the project.
•It follows the principle of shareholder's wealth maximization.
Demerits of NPV criterion
The main drawbacks of this method are:
•In some cases it may be difficult to determine the appropriate discount rate. The choice of an appropriate
discount rate is important because the relative desirability of the project will change with the change in
discount rate.
• This method favors the project with the higher NPV. In some cases, the project with a higher NPV may
involve a higher initial outlay which may exceed the budgeted investment outlay for the project.
•This method may not give satisfactory results when the two projects in question have different economic
lives.
One of the basic assumptions of NPV is that all the intermediate cash flows are re-invested at a rate equal
to the cost of capital. However, if this assumption is invalid, the net present value has to be modified
taking into account the re-investment rate.
The steps involved in the calculation of the Modified Net Present Value are given below.
a) The terminal value of intermediate cash flows calculated at the new re-investment rate:
Where,
TV = Terminal Value
CFt = Cash inflow at year end
r'= re-investment rate
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b) The Modified Net Present Value is calculated in the following manner:
Where,
NPVn = Modified net present value
TV = Terminal Value
k = Cost of capital
I = Investment outlay
NET PRESENT VALUE Contd..
The evaluation criteria used by the NPV method are:
•The project is accepted when the NPV is positive.
•The project is rejected when the NPV is negative.
•The project reaches the point of indifference when the NPV is zero.
For more than one mutually exclusive project, the one with the highest NPV must be selected.
BENEFIT-COST RATIO
The Benefit Cost Ratio (BCR) is a time-adjusted capital budgeting technique. Also known as the
profitability index, it measures the present value of returns per rupee invested. BCR is defined as the ratio
of the present value of benefits to the initial investment. It is represented as follows:
Where,
BCR = Benefit-cost ratio
PVB = Present value of benefits
I = Initial investment
The decision rule associated with BCR criteria is to accept all proposals with a BCR greater than one. If
the BCR is equal to one, the firm is indifferent to the project. If two or more projects are mutually
exclusive, then the project with the higher BCR should be chosen.
There is another measure - Net Benefit Cost Ratio (NBCR) linked to BCR. It is the ratio between NPV
and initial investment
Three decision rules associated with NBCR criterion are
• If NBCR is greater than zero, the project is accepted.
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• If the NBCR is equal to zero, the firm is indifferent to the project.
• If the NBCR is less than zero, the project is rejected.
Merits of BCR Criterion
BCR, like NPV criterion, also considers the time value of money when evaluating projects. It also takes
into account all the benefits accruing over the life of the project. It is superior to the NPV measure in the
sense that it evaluates the project in relative terms rather than absolute terms.
Demerits of BCR Criterion
This criterion may assign a similar ranking to two different projects.
The evaluation criteria used by the BCR method are:
• The project is accepted when the BCR is greater than one.
• The project is rejected when the BCR is less than one.
• The project reaches the point of indifference when the BCR is equal to one.
For more than one mutually exclusive project one with the highest BCR must be selected.
INTERNAL RATE OF RETURN METHOD
The second time-adjusted criterion for the appraisal of a project is the internal rate of return. This refers to
the rate of return that is earned by a project. It equals the present value of cash inflows with the present
value of cash outflows i.e. it is the discount rate at which the NPV of the project is zero.
If the IRR of a project is greater than the cost of capital, the project should be accepted. In this case, the
cost of capital is also called the hurdle rate. The IRR is represented by the following formula:
Where CFt = Cash inflows at different time periods
r = internal rate of return
n = Life of the project
To develop a better understanding of the calculation of the IRR, take a look at the following examples:
Firm XYZ Ltd. is planning to invest Rs 65,000 in its new project. This project is expected to last for 5
years. Its estimated cash flows are Rs 12,500, Rs 15,300, Rs 16,700, Rs 13,400 and Rs 14,300 for the year
one, two, three, four and five respectively.
The IRR can be calculated using the following formula:
Using the trial and error method, different rates are substituted in the formula to find out which value can
equalize the two sides of the formula. Let us first substitute “r” with 4%; then the left hand side of the
equation changes to:
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By using 4%, the value derived after solving the equation is less than Rs 65000. Hence, we take 3%.
By using 3%, the value derived after solving the equation is more than Rs 65000. It is therefore clear that
the actual IRR lies somewhere between 3% and 4%. Using interpolation, we find out a single value of
IRR. The actual IRR calculated using interpolation is 3.67%. When the payback period is given, the IRR
can be calculated as follows:
Where PB = Payback period
DFr = Discount factor for interest rate r
DFrL = Discount factor for lower interest rate
DFrH = Discount factor for higher interest rate.
NET PRESENT VALUE Contd..
Suppose a project's payback period is 3.52 years. Its initial investment is Rs 75000 and its average annual
cash flows are Rs 21300. Then discount factors closer to
3.52 are 3.605 at 12% and 3.517 at 13%. From this we can assume that the IRR is between 12% and 13%.
We can calculate the actual IRR with the help of the above formula.
The merits of this criterion are:
•It takes into account the time value of money.
•It considers all cash flows.
Drawbacks of this method are:
•It involves complicated calculations.
•It gives multiple rates of return when there is a series of changes in cash flows i.e. cash inflows and
outflows.
•In case of mutually exclusive projects, the IRR method might accept a project with higher IRR but with a
relatively low NPV. This is because the IRR assumes that all the cash inflows are again invested in the
project at the internal rate of return.
The evaluation criteria for the project using the IRR method are:
•The project is accepted when the IRR is greater than the cost of capital or required rate of return.
•The project is rejected when the IRR is less than the cost of capital or required rate of return.
•The project reaches the point of indifference when the IRR is equal to the cost of capital or the required
rate of return.
•When there are mutually exclusive projects, the one with the highest IRR must be selected.
MULTIPLE RATES OF RETURN
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Projects do not always have cash inflows every year. Sometimes, negative cash flows or cash outflows
occur, particularly when projects involve heavy investments or have long gestation periods. This situation
is the basic reason for the realization of multiple rates of return.
Let IRR be r. Equation to calculate internal rate of return for the cash flow streams given above will be
= – (1 + r)2 + 7(1 + r) – 12 = 0
=
=r2 – 5r + 6 = 0
= (r – 2)(r – 3) = 0
= r = 2 or 3
As there are changes in signs, there are two roots of the equation. So, there are two internal rates of return
for the project. Which one should be taken for the appraisal becomes difficult for appraiser to difficult?
MODIFIED INTERNAL RATE OF RETURN (MIRR)
Even though NPV is a better method conceptually than the IRR method, most managers prefer IRR over
NPV since IRR is a percentage measure. A percentage measure that overcomes the shortcomings of
regular IRR is known as modified internal rate of return (MIRR).
The procedure for calculating MIRR is given below:
Step 1: Calculate the present value of the costs (PVC) associated with the project, using the cost of capital
(r) as the discount rate:
Step 2: Calculate the terminal value (TV) of the cash inflows expected from the project:
Step 3: Obtain MIRR by solving the following equation:
PVC = TV/(1 + MIRR)n
The following examples demonstrate the calculation of MIRR.
Example I
Pentagon Limited is evaluating a project that has the following cash flows:
YEAR 0 1 2 3 4 5 6
Cash
Flow (Rs. in
million)
-120 -80 20 60 80 100 120
The cost of capital for Pentagon is 15 percent. The present value of costs is:
120 + 80/(1+0.15) = 189.6
The terminal value of cash inflows is:
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20(1.15)4 + 60(1.15)3 + 80(1.15)2 + 100(1.15)1+ 120
= 34.98 + 91.26 + 105.76 + 115 + 120 = 467
The MIRR is obtained as follows:
189.6 = 467/(1+MIRR)6
(1+MIRR)6 = 2.463
1 + MIRR = (2.463)1/6 = 1.162
MIRR = 0.162 = 16.2%
The MIRR method is superior to the IRR method. MIRR assumes that the project cash flows are
reinvested at the cost of capital whereas the regular IRR assumes that the project cash flows are
reinvested at the project's own IRR. Since reinvestment at the cost of capital (or some other explicit rate)
is more realistic than reinvestment at IRR, MIRR reflects the true profitability of a project. In addition,
the problem of multiple rates does not exist with MIRR. However, for choosing among mutually
exclusive projects of different size, the NPV method is better than the MIRR method because it measures
the contribution of each project to the value of the firm.
The evaluation criteria under the MIRR method are:
•The project is accepted when the MIRR is greater than the cost of capital or the required rate of return.
•The project is rejected when the MIRR is less than the cost of capital or the required rate of return.
•The project reaches the point of indifference when the MIRR is equal to the cost of capital or the
required rate of return.
•When there are mutually exclusive projects, the one with the highest MIRR must be selected.
TRADITIONAL OR NON-DISCOUNTED CRITERIA
When evaluating a project's viability, traditional or non-discounted criteria generally use accounting
profits rather than cash flows.
AVERAGE RATE OF RETURN METHOD
This method is also known as the accounting rate of return as it considers the accounting profits of a firm
over a period of time. ARR is represented as follows:
ARR = average annual income x 100/average investment throughout the life of the
Project
Consider the following example:
Two machines, P and Q, with an estimated salvage value of Rs 2500 have an initial cost of Rs 36500 and
an estimated life of 5 years. Depreciation is charged on the basis of the straight line method.
The merit of this criterion is that it is easy to calculate and understand. However, the demerit of this
method is that it uses accounting profits instead of cash flows.
The evaluation criteria using this method are:
•The project is accepted when the actual ARR is greater than the required ARR.
•The project is rejected when the actual ARR is less than the required ARR.
•When there are mutually exclusive projects, the one with the highest
ARR but more than the cut off ARR must be selected
PAYBACK PERIOD METHOD:
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This is the most commonly and widely used method for the appraisal of capital investment decisions
regarding projects. This criterion evaluates a project on the basis of the speed with which it recovers its
initial investment. It can be computed in two ways: When the cash inflows after tax (CFAT) are the same
every year the following formula is used:
Payback period = Initial investment /CFAT
The major advantages of this criterion are:
•Like ARR it is easy to calculate PB.
•It takes into account cash flows (and is hence superior to ARR).
•It helps identify projects which can earn quick returns (useful in industries where rapid technological
change is common).
This criterion has the following drawbacks:
•It does not consider the cash flows after the payback period.
•It does not consider the timing of cash flows.
•It does not show whether or not the project that has been accepted is going to maximize the wealth of the
stakeholders.
The evaluation criteria for this method are:
•The project is accepted when the actual payback period is less than the required or predetermined
payback period.
•The project is rejected when the actual payback period is greater than the required or predetermined
payback period.
•When there are mutually exclusive projects, the one with the lowest payback period but less than cut off
payback period must be selected.
DISCOUNTED PAYBACK PERIOD METHOD
Unlike the payback method, this criterion takes into account the discounted cash flows of a project. In this
method, cash flows are discounted at the cost of capital, which shows the time value of money as well as
the riskiness of the cash flows. The decision rule for this criterion is to accept the project with less
payback period or when the accumulated discounted cash flows are equal to the initial investment.
The discounted payback period is measured as follows:
The evaluation criteria for this method are:
•The project is accepted when the actual discounted payback period is less than the required or
predetermined payback period.
•The project is rejected when the actual discounted payback period is greater than the required or
predetermined payback period.
•Where there are mutually exclusive projects, the one with the least discounted payback period but less
than the cut off payback period must be selected.
APPRAISAL TECHNIQUES IN PRACTICE FOR VARIOUS TYPES OF PROJECTS
•The most commonly used method for conducting a financial appraisal of small projects requiring less
financial investments is the payback method.
•For larger projects, the average rate of return is commonly used as the principal criterion and the
payback period is used as a supplementary criterion.
•Discounted cash flow (DCF) techniques are now being increasingly used to evaluate large investments.
•Many other criterias are used for evaluating investments: profit per rupee invested (calculates the actual
profit earned in terms of each rupee invested); cost saving per unit of product (calculates the amount of
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savings on the cost of production per unit); and investment required to replace a worker (calculates the
additional amount required to replace an existing worker).
CAVEATS FOR IMPROVED FINANCIAL EVALUATION
•The appraisal criteria for evaluating projects should be standardized. The use of many methods makes
comparison between projects difficult.
•The approach followed for evaluating projects must be clearly defined. Vague qualitative phrases should
be substituted by quantitative measures wherever possible. This is necessary to promote understanding
and avoid confusion.
•Discounted cash flow techniques should receive greater emphasis. They are theoretically superior and
practically feasible.
•To sum up, the evaluation must be carried out in explicit, well defined, preferably standardized terms and
should be based on sound economic principles. Investment decision-making must be based on a careful
and sound evaluation of the available data.
CONCLUSION
The selection of a technique essentially depends on whether the projects are independent or mutually
exclusive and whether or not capital rationing is applied to them. Firms generally use the discounted cash
flow method as the primary evaluation technique and conventional methods as secondary techniques for
evaluating a single project. Project evaluation techniques help a firm maximize wealth by determining the
right project to be undertaken from the various alternatives available to the firm. The finance managers of
a firm are responsible for choosing a project evaluation technique that would best suit the organization's
requirements.
Q3.
Discuss the usefulness of matrix organization in project management. Also explain the recent
trend in organization design.
Solution : Matrix Management is a type of organizational management in which people with similar
skills are pooled for work assignments. For example, allengineers may be in one engineering department
and report to an engineering manager, but these same engineers may be assigned to different projects and
report to a project manager while working on that project. Therefore, each engineer may have to work
under several managers to get their job done.
The matrix
Some organizations fall somewhere between the fully functional and pure matrix. These organizations are
defined in the Guide to the Project Management Body of Knowledge (PMBOK) 4th Edition as composite.
For example, even a fundamentally functional or matrix organization may create a special project team to
handle a critical project.
Whereas project-centered organizations (like those in engineering, construction or the aerospace
industries) have structures built around project teams as their functional units, matrix organizations follow
the traditional structures, with some adjustments to their hierarchy to support project units
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There are a lot of different styles of matrix organizations. In each, the end goal is to create harmony
between all the needs of the manager, but the means to reach that end are different. The three main kinds
of matrix structures are the weak matrix, the strong matrix, and the balanced matrix. In this article, the
advantages and disadvantages of the weak matrix structure type will be examined.
Weak Matrix Organization Structure
When a project manager is assigned to oversee a group that is organized in this manner, it can be a
complicated task. The project manager has to facilitate all aspects of the project. They actively plan and
assess the project's progress, but don't really have any sway when it comes to the employees. Therefore
they must rely on the tools available to the actual managers to really control the workers.
Employees in this organization are not attached to temporary management staff, or to temporary projects,
because it is another manager entirely who is responsible for promotions. These "functional managers"
and the work they assign becomes the primary goal of employees, and any other projects and managers
take a back seat. This means that the project manager has to combat strong apathy from his workers in
order to be successful.
What's worse, since the project manager has no actual authority on the project, the only thing truly in his
power in the case of a failing project is to report the negative results to a functional manager. The project
manager hopes that the functional manager will straighten out and refocus the employees on the project,
but this doesn't always happen.
However, don't forget, functional managers must aspire to the responsibility for overseeing work
performance in his/her functional area. So that the workers engaged in the current project's tasks don't
decrease the productivity of the functional unit as a whole. A result this significantly occurs between
functional managers, project managers, and individual workers.
When this happens, the unfortunate loser is typically the project manager. In this kind of matrix
organization, the project manager is usually a weak figure that holds little sway over his crew.
Advantages and disadvantages
The advantages of a matrix include:

Individuals can be chosen according to the needs of the project.

The use of a project team which is dynamic and able to view problems in a different way as
specialists have been brought together in a new environment.

Project managers are directly responsible for completing the project within a specific deadline and
budget.
Whilst the disadvantages include:

A conflict of loyalty between line managers and project managers over the allocation of resources.
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14

Projects can be difficult to monitor if teams have a lot of independence.

Costs can be increased if more managers (ie project managers) are created through the use of project
teams.
Q3.
Elaborate the concept of Earned Value of the Budget in PERT/COST System.
Solution : Earned Value Management
Earned Value Management (EVM) is a systematic project management process used to indicate variances
in projects in an objective manner, based on the evaluation of the work performed compared to the work
planned. When properly applied to a project, EVM provides and early warning indication of project
performance issues.
EVM uses principles of Earned Value (EV), which is a project management tool used to measure project
performance. EV is essentially an approach for project managers to monitor the project plan, actual work,
and work completed to verify if the project is performing as expected.
In simple terms EV compares the actual project performance to the planned performance with respect to
budget and schedule at any point in time during the project.
Why Use Earned Value?
Earned Value can be a valuable project management tool, but the utility of it must be understood for it to
be used correctly. EV indentifies the variances in a project and informs a project manager on what is
occurring in a project, but does not identify the "source" or "cause" for the variance, nor does it address
the required action necessary for the "correction" of the variance.
Earned Value provides an objective assessment of project performance and once introduced can provided
a common understanding and perspective among project mangers regarding the metrics of project
performance.
The other major benefit to using EV is the ability to evaluate the performance of a project at any point
during the project's life cycle, not just at the completion of a project. How many times have you come to
the end of a project and learned that the project performance did not meet expectations? By the end of the
project it is too late to take any corrective action. Earned Value allows project managers to evaluate and
monitor their project through out the project life cycle, which will allow for better project control.
Key Components to Earned Value
There are three key components to EV that are used when evaluating projects for EVM.
• Project Budget - The budget has two values that are used for EV, which are;
o Budgeted Cost of Work Schedule (BCWS) - BCWS is the baseline cost up to the current date.
o Actual Cost of Work Performed (ACWP) - ACWP are the actual cost required to complete all or some
portion of the tasks to the current date.
o Project Schedule - The project schedule has two values that are used for EV, which are;
Scheduled Time for Work Performed (STWP)
Actual Time of Work Performed (ATWP)
o Value of Work Performed - This is the value earned (reported percent complete) by the work
performed and is referred to as the Budgeted Cost of Work Performed (BCWP).
Earned Value Graph
The final outcome of an EV analysis is a three line graph showing cost over time for a project, which
helps visualizes the key values used in EV. The three lines indicated are the BCWS, ACWP, and BCWP
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15
as described above. From reading the graph you can determine project variances as identified in Figure 1.
.
Figure
In this example looking at the data date the project is behind where it should be as indicated by the
variance between BCWP and BCWS, and the project is over budget as indicated by the variance between
the ACWP and BCWS.
Responding to Earned Value
Earned Value is great, but they are not more than performance indicators and don't tell the whole story,
make decisions, or take action on a project, so that is where the project manager must intervene and
regain control over the project. The project manager should not only question cost and schedule overruns,
but should also question cost and schedule underruns as identified below.
Cost / Budget Variances
• A positive variance indicates that the project is ahead of schedule or under budget. Positive variances
might enable you to reallocate money and resources from tasks or projects with positive variances to tasks
or projects with negative variances.
• A negative variance indicates that the project is behind schedule or over budget and you need to take
action. If a task or project has a negative CV, you might have to increase your budget or accept reduced
profit margins.
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16
Q4.
Explain the concept of CYBERNETICS applied to project management.
Solution:
In project management field, there are few things that can cause a project to require the control
performance, costs or time.
Performance:
− Unexpected technical problems arise.
− Insufficient resources are available when needed.
− Insurmountable technical difficulties are present.
− Quality or reliability problems occur.
− Client requires changes in system specifications.
− Inter functional complications arise.
− Technological breakthroughs affect the project.
Cost:
− Technical difficulties require more resources.
− The scope of the work increases.
− Initial bids or estimates were too low.
− Reporting was poor or untimely.
− Budgeting was inadequate.
− Corrective control was not exercised in time.
− Input price changes occurred.
Time:
− Technical difficulties took longer than planned to solve.
− Initial time estimates were optimistic.
− Task sequencing was incorrect.
− Required inputs of material, personnel, or equipment were unavailable when needed.
− Necessary preceding tasks were incomplete.
− Customer-generated change orders required rework.
− Governmental regulations were altered.
And these are only a few of the relatively “mechanistic” problems that project control can occur.
Actually, there are no purely mechanistic problems on projects. All problems have a human element, too.
For example, humans, by action or inaction, set in motion a chain of events that leads to a failure to
budget adequately, creates a quality problem, leads the project down to a technically difficult path, or fails
to note a change in government regulations. If, by chance, some of these or other things happen (as a
result of human action or not), humans are affected by them. Frustration, pleasure, determination,
hopelessness, anger and may other emotions arise during the course of a project. They affect the work of
the individuals who feel them – for better or worse. It is over this welter of confusion, emotion, fallibility,
and general cussedness that the PM tries to exert control.
All of these problems, always combinations of the human and mechanistic, call for intervention and
control by the project manager. There are infinite “slips” especially in projects where the technology or
deliverables are new and unfamiliar, and project managers, like most managers, find control is a difficult
function to perform. There are several reasons why this is so. One of the main reasons is that project
managers, again like most managers, do not discover problems. In systems as complex as projects, the
task of defining the problems is formidable, and thus knowing what to control is not a simple task.
Another reason control is difficult is because, in spite of an almost universal need to blame some person
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17
for any trouble, it is often almost impossible to know if a problem resulted from human error or from the
random application of Murphy’s Law.
Project managers also find it tough to exercise control because the project team, even on large projects, is
an “in-group”. It is “we” while outsiders are “they”. It is usually hard to criticize friends, to subject them
to control. Further, many project managers see control as an ad-hoc process. Each need to exercise control
is seen as a unique event, rather than as one instance of an ongoing and recurring process. Whitten offers
the observation that projects are drifting out of control if the achievement of milestones is threatened. He
also offers some guidelines on how to resolve this problem and bring the project back in control.
Because control of projects is such a mixture of feeling and fact of human and mechanism, of causation
and random chance, we must approach the subject in an extremely orderly way. This why we start by
examining the general purposes of control. Then we consider the basic structure of the process of control.
We do this by describing control theory in the form of a cybernetic control loop. While most projects
offer little opportunity for the actual application of automatic feedback loops, the system provides us with
a comprehensive but reasonably simple illustration of all the elements necessary to control any system.
From this model, we then turn to the types of control that are most often applied to projects.
The design of control systems is discussed as are the impacts that various types of controls tend to have
on the humans being controlled. The specific requirement of “balance” in a control system is also
covered, as are two special control problems: control of creative activities, and control of change.
The process of controlling a project (or any system) is far more complex than simply waiting for
something to go wrong and the, if possible, fixing it. We must decide at what points in the project we
will try to exert control, what is to be controlled, how it will be measured, how much deviation from plan
will be tolerated before we act, what kinds of interventions should be used, and how to spot and correct
potential deviations before they occur. In order to keep these and other such issues sorted out, it is helpful
to begin a consideration of control with a brief exposition on the theory of control, No matter what our
purpose in controlling a project, there are three basic types of control mechanisms we can use: cybernetic
control, go/no-go control and post-control. We will describe the first type and briefly discuss the
information requirements of each. While few cybernetic control systems are used for project control, we
will describe them here because they clearly delineate the elements that must be present in any control
system, as well as the information requirements of control systems.
Cybernetic control
Cybernetic or steering control is by far the most common type of control system.
The key feature of cybernetic control is its automatic operation. Consider the diagrammatic model of a
cybernetic control system shown in figure 1. As Figure 1 shows, a system is operating with inputs being
subjected to a process that transforms them into outputs. It is this system that we wish to control. In order
to do so, we must monitor the system output.
This function is performed by sensors that measure one or more aspects of the output, presumably those
aspects one wishes to control. Measurements taken by a sensor are transmitted to the comparator, which
compares them with a set of predetermined standards.
The difference between actual and standard is sent to the decision maker, which determines whether or
not the difference is of sufficient size to deserve correction. If the difference is
large enough to warrant action, a signal is sent to the effectors, which acts on the process or on the inputs
to produce outputs that conform more closely to the standard.
A cybernetic control system that acts to reduce deviations from standard is called a negative feedback
loop. If the system output moves away from the standard in one direction, the control mechanism acts to
move it in the opposite direction. The speed or force with which the control operates is, in general,
proportional to the size of the deviation from the standard. The precise way in which the deviation is
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18
corrected depends on the nature of the operating system and the design of the controller. Figure 2
illustrates three different response patterns. Response path A is direct and rapid, while path B is more
gradual. Path C shows oscillations of decreasing amplitude. An aircraft suddenly deflected from a stable
flight path would tend to recover by following pattern C.
Types of cybernetic control systems
Cybernetic controls come in three varieties, or orders, differing in the sophistication with which standards
are set. Figure 1 show a simple, first order control system, a goal seeking device. The standard is set and
there is no provision made for altering it except by intervention from the outside. The common thermostat
is a time-worn example of a first order controller. One sets the standard temperature and the heating and
air-conditioning systems operate to maintain it.
Figure 3 show a second-order control system. This device can alter the system standards according to
some predetermined set of rules or program. The complexity of second-order systems can vary widely.
The addition of a clock to a thermostat to allow it to maintain different standards during day and night
makes the thermostat a second-order controller. Am interactive computer program may alter its responses
according to a complex set of pre-programmed rules, but it is still only a second-order system. Many
industrial projects involve second-order controllers – for example, robot installations, flexible
manufacturing systems, and automated record keeping or inventory systems.
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19
A third-order control system (Figure 4) can change its goals without specific preprogramming. It can
reflect on system performance and decide to act in ways that are not contained in its instructions. Thirdorder systems have reflective consciousness and, thus, must contain humans. Note that a second-order
controller can be programmed to recognize patterns and to react to patterns in specific ways. Such
systems are said to “learn”. Third order systems can learn without explicit preprogramming and therefore
can alter their actions on the basis of thought or whim. An advantage of third-order controllers is that they
can deal with the unforeseen and unexpected. A disadvantage is that, because they contain human
elements, they may lack predictability and reliability. Third order systems are of great interest to the PM
for reasons we now discuss.
Information requirements for cybernetic controllers
In order to establish total control over a system, a controller must be able to take a counter-action for
every action the system can take. This statement is a rough paraphrase of Ashby’s Law of Requisite
Variety. This implies that the PM\ controller is aware of the system’s full capabilities. For complex
systems, particularly those containing a human element, this is simply not possible. Thus we need a
strategy to aid the PM in developing a control system.
One such strategy is to use a cost\benefit approach to control – to control those aspects of the system for
which the expected benefits of control are greater than the expected costs. We are reminded of a firm that
manufactured saw blades. It set up a project to reduce scrap losses for the high-cost steel from which the
blades were made. At the end of the one year project, the firm had completed the project – cost $ 9700,
savings $4240. (Of course, if the savings were to be repeated for several years, the rate of return on the
project would be acceptable. The president of the firm, however, thought that the savings would decline
and disappear when the project ended.)
Relatively few elements of a project (as opposed to the elements of a system that operates more or less
continuously) are subject to automatic control. An examination of the details of an action plan will reveal
which of the project’s tasks are largely mechanistic and represent continuous types of systems. If such
systems exist, and if they operate across a sufficient time period to justify the initial expense of creating
an automatic control, then a cybernetic controller is useful.
Given the decisions about what to control, the information requirements of a cybernetic controller are
easy to describe, if not to meet. First, the PM must decide precisely what characteristics of an output
(interim output or final output) are to be controlled. Second, standards must be set for each characteristic.
Third, sensors must be acquired that will measure those characteristics at the desired level of precision.
Fourth, these measurements must be transformed into a signal that can be compared to a standard signal.
Fifth, the difference between the two is sent to the decision maker, which detects it, if it is sufficiently
large, and sixth, transmits a signal to the effectors that causes the operating system to react in a way that
will counteract the deviation from standard. If the control system is designed to allow the effectors to take
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20
one or more of several actions, an additional piece of information is needed. There must be built-in
criteria that instruct the effectors on which action(s) to take.
Knowledge of cybernetic control is important because all control systems are merely variants, extensions
or non-automatic modifications of such controls. Because most projects have relatively few mechanistic
elements that can be subjected to classic cybernetic controls, this concept of control is best applied to
tracking the system and automatically notifying the project manager when things threaten to get out of
control.
Q6.
The following information is given for a project
Activity
:
A
B
C
D
E
F
G
Immediate Predecessor
:
-
A
A
C
B,D
D
E,F
Time (Weeks)
:
6
3
7
2
4
3
7
a) Draw the network
b)
Identify Critical Path
c) Calculate the project completion time
d) Calculate the Float of each activity
solution :
The following information is given for a project
Activity
:
A
B
C
D
E
F
G
Immediate Predecessor
:
-
A
A
C
B,D
D
E,F
Time (Weeks)
:
6
3
7
2
4
3
7
c) Draw the network
(B,3)
(E,4)
3
(A,6)
1
2
6
(D1,0)
(C,7)
(F,3)
4
5
(D,2)
d) Identify Critical Path
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21
7
(G,7)
All possible paths are :
ABEG - sum of durations = 6+3+4+7 = 20
ACDFG – Sum of durations = 6+7+2+3+7 = 25
ACDD1EG – sum of durations = 6+7+2+0+4+7 = 26
Path with maximum duration = critical path = ACDD1EG
or
Activity
Duration
Earliest
Earliest
Latest
Latest
Slack
Start (ES)
Finish(EF)
start(LS)
Finish(LF)
(Float)
A
6
0
6
0
6
0
B
3
6
9
12
15
6
C
7
6
13
6
13
0
D
2
13
15
13
15
0
D1
0
15
15
15
15
0
E
4
15
19
15
19
0
F
3
15
18
16
19
1
G
7
19
26
19
26
0
For
critical
activities
LS = ES
/ Slack
=0 ;
i.e Critical Path = ACDD1EG
c ) Project Completion time = 26 weeks
d) Float for each activity ( last column from table above)
OTHER IMPORTANT QUESTIONS WITH ANSWERS:
Questions:
1.
Discuss in detail the various phases of a project development cycle.
2.
Bring out the importance of site selection for a new project. Is it an economic or personal issue?
3.
What are the different organization structures recommended for project organization? Discuss
their advantages and disadvantages.
4.
Elaborate the PERT/COST System as applied to project management.
5.
Discuss the method of ensuring quality in Project Management?
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22
6.
A network comprises of following activities
Activity Duration (weeks)
1-2
6
1-3
2
1-4
6
3-5
4
5-6
2
a) Draw the Network
Activity Duration (weeks)
2-7
4-8
6-8
7-8
4
6
8
8
b) Determine the project completion time
c) Identify the Critical Path
d) Calculate the total float and slack
Q1) Discuss in detail the various phases of a project development cycle.
The Project Model
Constraints:
•Financial
•Legal
•Ethical
•Environmental
•Logic
•Activation
•Time
•Quality
•Indirect effects
Input:
Want/need
Project
Mechanisms:
Advanced Project Management
•people
•knowledge & expertise
•capital
•tools & techniques
•technology
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23
Output:
satisfied need
Comparison of Characteristics of
Projects and Problems
Projects
 A supported purpose/
importance
 Specifications of
performance (form, fit,
function)
 Known solution
 Stages with finite due date
 Interdependencies
 Uniqueness
 Resource requirements
and tradeoffs
 Stakeholder conflict
Meredith & Mantel, 2005
Problems
 Intransparency – lack of
clarity of situation
 Polytely – multiple goals
 Complexity – large
numbers of items,
interrelations and
decisions
 Dynamism – time
considerations
Advanced Project Management
Three-stage Project Life Cycle
Source: Meredith
& Mantel, 2003,
Wiley
Advanced Project Management
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24
Four-stage Project Life Cycle
D1: Define the project
The brief
D2: Design the project process
Process &
product
knowledge
The proposal/PID
D4: Develop
the process
The outcomes
D3: Deliver
the project
Source: Maylor
Advanced Project Management
Maylor’s Four-phase Approach
Phase
Key issues
Key questions
Define the project
Organisational &
project strategy; goal
definition
What is to be done?
Why is it to be done?
Design the
project process
Modelling & planning;
estimating; resource
analysis; conflict
resolution; business
case
How will it be done?
Who will be involved in
each part?
When can it start and
finish?
Deliver the
project
Organisation; control;
leadership; decisionmaking; problemsolving
How should the project
be managed?
Develop the
process
Assessment of
process & outcomes;
evaluation; changes
for the future
How can the process
be continually
improved?
Advanced Project Management
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25
Developing a Project Strategy
Getting
started
Moving
forward
Bringing
it in
Handing
it on
Analysis
Commitment
Consultation
Preparation
Feasibility
trials
Doing
the work
Making the
change
Handover
Support
Review
Source: CIPS
Advanced Project Management
Five-stage Project Life Cycle
Stage 1
Weiss & Wysocki
Define
Stage 2
Plan
Stage 3
Changes
Corrective action
Organise
Stage 4
Stage 5
Control
Close Out
Advanced Project Management
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26
Solution)
2. Project Planning
Diverse project management tools and methodologies prevail in the different project cycle phases. Let’s
take a closer look at what’s important in each one of these stages:
1) Initiation
In this first stage, the scope of the project is defined along with the approach to be taken to deliver the
desired outputs. The project manager is appointed and in turn, he selects the team members based on
their skills and experience. The most common tools or methodologies used in the initiation stage are
Project Charter, Business Plan, Project Framework (or Overview), Business Case Justification, and
Milestones Reviews.
2) Planning
The second phase should include a detailed identification and assignment of each task until the end of
the project. It should also include a risk analysis and a definition of a criteria for the successful
completion of each deliverable. The governance process is defined, stake holders identified and reporting
frequency and channels agreed. The most common tools or methodologies used in the planning stage
are Business Plan and Milestones Reviews.
3) Execution and controlling
The most important issue in this phase is to ensure project activities are properly executed and controlled.
During the execution phase, the planned solution is implemented to solve the problem specified in the
project's requirements. In product and system development, a design resulting in a specific set of product
requirements is created. This convergence is measured by prototypes, testing, and reviews. As the
execution phase progresses, groups across the organization become more deeply involved in planning
for the final testing, production, and support. The most common tools or methodologies used in the
execution phase are an update of Risk Analysis and Score Cards, in addition to Business Plan and
Milestones Reviews.
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27
4) Closure
In this last stage, the project manager must ensure that the project is brought to its proper completion.
The closure phase is characterized by a written formal project review report containing the following
components: a formal acceptance of the final product by the client, Weighted Critical Measurements
(matching the initial requirements specified by the client with the final delivered product), rewarding the
team, a list of lessons learned, releasing project resources, and a formal project closure notification to
higher management. No special tool or methodology is needed during the closure phase.
Project Management Life Cycle
The Project Management Life Cycle has four phases: Initiation, Planning, Execution and Closure. Each
project life cycle phase is described below, along with the tasks needed to complete it. You can click the
links provided, to view more detailed information on the project management life cycle.

Develop a Business Case

Undertake a Feasibility Study

Establish the Project Charter

Appoint the Project Team

Set up the Project Office

Perform Phase Review

Create a Project Plan

Create a Resource Plan

Create a Financial Plan

Create a Quality Plan

Create a Risk Plan

Create an Acceptance Plan

Create a Communications Plan

Create a Procurement Plan

Contract the Suppliers

Define the Tender Process
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28

Issue a Statement of Work

Issue a Request for Information

Issue a Request for Proposal

Create Supplier Contract

Perform Phase Review

Build Deliverables

Monitor and Control

Perform Time Management

Perform Cost Management

Perform Quality Management

Perform Change Management

Perform Risk Management

Perform Issue Management

Perform Procurement Management

Perform Acceptance Management

Perform Communications Management

Perform Project Closure

Review Project Completion
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29
Q2) Bring out the importance of site selection for a new project. Is it an economic or personal issue?
Setting up a site for your new Small Business unit is a vital task in the start up process. It covers the
following areas
Construction of Building
Getting the Utility Connections
Getting 3M's Right
Man
Machinery
Materials
Setting up an establishment is much more than putting a signboard up and waiting for customers to walk
in. It requires negotiating a favourable plot or shed purchase, organising for proper construction of
building, design of interiors and finding good deals for equipment and machinery.For many tiny units and
service-based units, the home is perhaps the best starting point.
Construction of Building
Once an industrial plot for the unit is secured, then the next job is that of finding a suitable architect.
Design of factory building has to be in consonance with the type of industry and have an appropriate
plant layout.
An architect's estimate of building construction is essential for loan applications. Further, architect's
certificate for money spent on building is needed for disbursement of loan.
Getting the Utility Connections
Among the utilities of prime importance are power and water. In many cases getting power connection
causes delay in setting up of plant. Therefore it is imperative to commence work on these aspects with
diligent follow up.
Water connection is also obtained likewise by applying in advance in formal forms. The water supply can
be augmented by installation of tubewell.
Getting 3M's Right
Men
Projections for manpower and staffing are made in the project report. However it is necessary to time the
induction of manpower in a planned manner. The engineers and operatives must be available before the
installation of the machinery.
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Machinery
Choosing and ordering of right machinery is also of paramount importance. In many cases technology or
process provides us with specifications which is not provided, then an extensive techno-economic survey
of machinery and equipment available must be carried out. International trade fairs and engineering fairs
are good places to look at available options. The entrepreneur must also consult experts, dealers /
suppliers as well as users, prior to making a selection of equipment and machinery. The advice of DIC,
MSMEI and NSIC can also be sought.
Materials
Materials procurement and planning are critical to success, of a start-up with a MSME unit. Inventory
management can lead to manageable cash flow situations; otherwise if too much is ordered too soon
considerable amount of working capital gets locked up. On the other hand, non-availability may result in
production hold-ups, and idle machine and manpower. For essential imported raw material whose leadtime is large proper planning is all the more essential.
It is very important for site selection advisory services firms and companies to thoroughly evaluate
quantitative and qualitative factors when evaluating communities and states. Often in today’s world, many
organizations tend to primarily focus on quantitative factors when deciding where to locate a new facility.
While quantitative factors have been and will continue to be very important in the site selection process,
qualitative factors are also critical in order to ensure that the company makes the best decision. This is
particularly true as the economies of the United States and the world become more knowledge-based.
What are the most important quantitative and qualitative factors evaluated by site selection advisors and
companies when making a decision regarding the location of a new or expanded operation? The list will
vary depending on type of facility (i.e. manufacturing, logistics, research & technology, office), but most
factors apply to all forms of projects. Please find below a summary of the most important quantitative and
qualitative factors considered by companies.
Quantitative Factors
1. Property Tax Rates
2. Corporate Income Tax Rates
3. Sales Tax Rates
4. Real Estate Costs
5. Utility Rates
6. Average Wage/Salary Levels
7. Construction Costs
8. Worker’s Compensation Rates
9. Unemployment Compensation Rates
10. Personal Income Tax Rates
11. Industry Sector Labor Pool Size
12. Infrastructure Development Costs
13. Education Achievement Levels
14. Crime Statistics
15. Frequency of Natural Disasters
16. Cost of Living Index
17. Number of Commercial Flights to Key Markets
18. Proximity to Major Key Geographic Markets
19. Unionization Rate/Right to Work versus Non-Right to Work State
20. Population of Geographic Area
Qualitative Factors
1. Level of Collaboration with Government, Educational and Utility Officials
2. Sports, Recreational and Cultural Amenities
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31
3. Confidence in Ability of All Parties to Meet Company’s Deadlines
4. Political Stability of Location
5. Climate
6. Availability of Quality Healthcare
7. Chemistry of Project Team with Local and State Officials
8. Perception of Quality of Professional Services Firms to Meet the Company’s Needs
9. Predictability of Long-term Operational Costs
10. Ability to Complete Real Estate Due Diligence Process Quickly
Another important part of the site selection evaluation process relates to the weighting of the key
quantitative and qualitative factors. Depending on the type of project, factors will be weighted differently.
As an example, for a new manufacturing facility project, issues such as utility rates, real estate costs,
property tax rates, collaboration with governmental entities, and average hourly wage rates may be
weighted more heavily. By contract, for a new office facility factors such as real estate costs, number of
commercial flights, crime statistics, climate and industry sector labor pool size may be more important.
When assisting clients, our firm weights the importance of each criterion. We then rate the risk level of
each factor. Finally, we input the weighted data into a formula to compute a score for each site. This
approach allows Ginovus to tailor the analysis to meet each client’s needs and to adjust the formula as
issues arise. We believe this allows us to provide the best possible recommendation to a client.
Every project is unique and must be evaluated based upon its own individual set of circumstances. By
identifying the key factors impacting a project, site selection advisors and companies can reach an
informed decision. Carefully designed methodology, when combined with thorough analysis, and
sometimes instinct, should lead to a successful outcome.
Site selection is important because, whether leased or purchased, the success or failure of a restaurant
depends on its location. Companies devote significant time and resources to analyzing each prospective
site. However, limited information is available on the relative importance of various site selection factors
for restaurants.
Established franchisors have expert real estate and property development staff and provide their
assistance to franchisees. The franchisors select the site for the franchisees or evaluate the site proposed
by the franchisees with the established site selection criteria. This study investigates the site selection
factors by the companies that have franchised units in the U.S. restaurant industry.
Choosing a location in retail is a strategic decision which is dificult to return. Enterprises has to be
sensitive while choosing location, especially features like population, economic and competition
difficulties must be considered. After coming of big supermarkets in our market, number of shopping
centers has increased. In this study, points that enterprises have to care about and some hypothetical
approaches used in practice are presented.
Q4) What are the different organization structures recommended for project organization? Discuss their
advantages and disadvantages.
THE PROJECT ORGANIZATION STRUCTURE
A project organization is a structure that facilitates the coordination and implementation of project
activities. Its main reason is to create an environment that fosters interactions among the team members
with a minimum amount of disruptions, overlaps and conflict. One of the important decisions of project
management is the form of organizational structure that will be used for the project. Each project has its
unique characteristics and the design of an organizational structure should consider the organizational
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32
environment, the project characteristics in which it will operate, and the level of authority the project
manager is given. A project structure can take on various forms with each form having its own
advantages and disadvantages. One of the main objectives of the structure is to reduce uncertainty and
confusion that typically occurs at the project initiation phase. The structure defines the relationships
among members of the project management and the relationships with the external environment. The
structure defines the authority by means of a graphical illustration called an organization chart. A properly
designed project organization chart is essential to project success. An organization chart shows where
each person is placed inthe project structure. An organization chart is drawn in pyramid form where
individuals located closer to the top of the pyramid have more authority and responsibility than members
located toward the bottom. It is the relative locations of the individuals on the organization chart that
specifies the working relationships, and the lines connecting the boxes designate formal supervision and
lines of communication between the individuals
Types of Project Organizations (Pure/Functional/Matrix)
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33
z
There are two fundamentally different ways of organizing projects within the parent organization
y
The project as part of the Functional Organization
y
The project as a free-standing part of the parent organization
z
A third type, called a Matrix Organization is a hybrid of the two main types
z
Each has advantages and disadvantages
The Project as Part of the Functional Organization
z
Advantages of using the functional elements of the parent organization as the administrative
home for a project include:
y
Maximum flexibility in the use of staff
y
Individual experts can be utilized by many different projects
y
Specialists in the division can be grouped to share knowledge and experience
y
The functional division also serves as a base of technological continuity when individuals
choose to leave the project
y
The functional division contains the normal path of advancement for individuals whose
expertise is in the functional area
There are also disadvantages to housing the project in a functional area:
y
The client is not the focus of activity and concern
y
The functional division tends to be oriented toward the activities particular to its function
y
Occasionally, no individual is given full responsibility for the project
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34
y
There are often several layers of management between the project and the client
y
There is a tendency to suboptimize the project
y
Pure Project Organization
z
z
z
z
Advantages of a pure project organization:
y
The project manager has full line authority over the project
y
All members of the project work force are directly responsible to the project manager
y
When the project is removed from the functional division, the lines of communication are
shortened
y
When there are several successive projects of a similar kind, the pure project
organization can maintain a permanent cadre of experts who develop skills in specific
technologies
Advantages of a pure project organization (cont.)
y
A project team that has a strong and separate identity and develops a high level of
commitment from its members
y
Because the authority is centralized, the ability to make a swift decision is enhanced
y
Unity of command exists
y
Pure project organizations are structurally simple and flexible, which makes them
relatively easy to understand and implement
y
The organizational structure tends to support a holistic approach to the project
Disadvantages of a pure project organization:
y
Each project tends to be fully staffed which can lead to a duplication of effort in every
area from clerical staff to technological support
y
There is a need to ensure access to technological knowledge and skills that results in an
attempt by project managers to stockpile equipment and technical assistance
y
The functional division is a repository of technical lore, but it is not readily accessible to
team members of the pure project team
Disadvantages of a pure project organization (cont.)
y
Pure project groups seem to foster inconsistency in the way in which policies and
procedures are carried out
y
In a pure project organization, the project takes on a life of its own
y
There tends to be concern among team members about “life after the project ends”
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35
The Matrix Organization
z
The matrix organization is a combination of functional and pure project
y
A matrix organization can take on a wide variety of specific forms
x
“Project” or “strong” matrix organization most resembles the pure project
organization
x
The “coordination” or “functional” or “weak” matrix most resembles the functional
form
x
The “balanced” matrix lies in between the others
z
Rather than being a stand alone organization, like the pure project, the matrix project is not
separated from the parent organization:
z
As with other organizational forms, the matrix organization has its own unique advantages:
z
y
The project is the point of emphasis
y
Because the project is overlaid on the functional divisions, the project has reasonable
access to the reservoir of technology in all areas
y
There is less anxiety about what happens when the project is completed
Advantages of a Matrix (cont.)
y
Response to client’s needs is as rapid as in the pure project organization
y
Matrix management gives the project access to representatives from the administrative
units of the parent firm
y
The matrix organization allows a better company-wide balance of resources to achieve
goals
y
There is a great deal of flexibility in precisely how the project is organized within the
matrix
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36
z
z
There are also disadvantages to using the matrix organization; most involve conflict between the
functional and project managers:
y
The balance of power between the project and functional areas is very delicate
y
The movement of resources from project to project may foster political infighting
y
Problems associated with shutting down projects can be as severe as in a pure project
organization
Disadvantages of a Matrix (cont.)
y
The division of authority and responsibility in a matrix organization is complex, and
uncomfortable for the project manager.
y
Matrix management violates the management principle of unity of command. Project
workers have at least two bosses, their functional heads and the project manager.
Mixed Organizational Systems
z
Divisionalization is a means of dividing a large organization into smaller more flexible units
z
This enables the parent organization to capture some of the advantages of small, specialized
organizational units while retaining some of the advantages that come with larger size units
z
Pure functional and pure project organizations may coexist in a firm
z
Advantages of a mixed organization:
z
y
The hybridization of the mixed form leads to flexibility
y
The firm is able to meet special problems by appropriate adaptation of its organizational
structure
Disadvantages include:
y
Dissimilar groupings within the same accountability center tend to encourage overlap,
duplication, and friction because of incompatibility of interests
y
Conditions still exist that result in conflict between functional and project managers
Choosing an Organizational Form
z
Selecting the organizational interface between the project and the firm is a difficult task
y
The choice is determined by the situation, but is also partly intuitive
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37
y
z
z
z
Must consider the nature of the potential project, the characteristics of the various
organization options, the advantages and disadvantages of each, the cultural preferences
of the parent organization, and then make the best compromise that can be made
Criteria for the selection of a project organization:
y
1. Define the project with a statement of the objective(s)
major outcomes desired
that identifies the
y
2. Determine the key tasks associated with each objective
and locate the units in
the parent organization that serve
as functional “homes” for these types of tasks
y
3. Arrange the key tasks by sequence and decompose them
into work packages
Criteria for the selection of a project organization (cont.):
y
4. Determine which organizational units are required to
carry out the work packages
and which units will work
particularly closely with which others
y
5. List any special characteristics or assumptions
project
y
6. In light of items 1-5, and with full cognizance of the
with each structural form,
choose a structure
associated with the
pros and cons associated
There are various organizational structures that can be used for projects including:
y
Projects within functional organizations, pure project, matrix, and mixed organizational
structures
z
Selecting the appropriate project organizational form is critical to the success of the project
z
A useful procedure for selecting an organizational form is:
z
z
Identify the specific outcomes desired
z
Determine the key tasks to attain these outcomes
z
Sequence the key tasks
z
Determine which project subsystems will be assigned which steps and which subsystems
must closely cooperate
z
Identify any firm or project characteristics
Consider all pros and cons, then make a decision
Q4) Elaborate the PERT/COST System as applied to project management.
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38
Q5) Discuss the method of ensuring quality in Project Management?
Various Dimensions of Quality
Safety – How much care
the company has taken to
make the product safe for
users
before,
during,
or
after use? For example, a
TV
having
features
to
protect
eyes
of
viewers
from harmful radiations.
Customer Service – How is the
behavior and treatment of the seller
with the customer before, during
and after the sale of the product?
E.g. the pleasant treatment given
by
the sales staff
prompted a
customer to buy another TV of the
same brand from the same dealer.
Appearance
–
How
pleasant
is
the
outward
look, smell, taste, feel, or
sound of the product to the
customers? For example, a
super-thin flat TV (which
can be hung on a wall like a
picture)
© Oxford
Performance
–
How well does the
product
perform
with respect to its
intended use? For
examplegood
picture and sound
effects of a TV.
Features
–
What
special
features
does
the
product
have? For example, 1200 watt
sound system, flat-picture tube,
picture-in-picture feature, etc.
in a TV.
Reliability – How much is the
probability of breakdowns, need
for adjustments, replacement of
parts, etc. in the product? For
example, a TV performing well
every time it is switched on.
Various
Dimensions
of Quality
Durability – How long
can the product perform
before
needing
any
repair or replacement of
parts? For example, a
TV
gives
best
performance for 10 years
without
needing
any
repair.
University
Press 2007.
Serviceability – How easily, cheaply,
and speedily can the product be
repaired and serviced? For example,
a
company
providing
on-the-spot
repairs of TV within one hour of
customer
complaint
at
nominal
charges.
All rights reserved.
3
Costs of Quality
Cost of prevention of
defects – training &
performing Acceptance
Sampling of raw
materials, SQC, Six
Sigma and other
techniques
Cost of warranty
claims – This
includes the loss of
goodwill on part of
customers
Cost of detecting defects
in the final productOutgoing inspection of
products before being
shipped to customers
Costs of
Quality
©
Cost of scrap and
rework of defective
products – this includes
the extra paper work,
delays, rescheduling
Oxford University
Press 2007. All rights reserved.
required etc.
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39
4
Overview
Every project should have a quality plan. In reality, very few do. It is something that has puzzled me for
some time. A few years back I had the opportunity to talk to a group of Project Managers about QA.
Surprisingly the two main reasons they didn't produce a plan were:


It was too complicated to do a plan
They were overwhelmed by the jargon of quality in
relation to compliance with standards, metrics and a
range of acronyms that left them confused
This white paper will provide a common sense approach, and
give you the basic tools you need to put together a quality
plan.
Quality Definition
So what is quality? There are numerous definitions of quality:
"Quality is fitness for use" - J.M. Juran
"[Quality is] meeting or exceeding customer expectations at a cost that represents a value to them." - H.
James Harrington
"Quality should be defined as surpassing customer needs and expectations throughout the life of the
product." - Howard Gitlow and Shelley Gitlow
A simple layman's definition is to make sure whatever is delivered is within the quality expectations of the
organisation. The expectations of the organisation are important to understand. If it is NASA building
rocket control systems, the expectations are likely to be higher than if it is a small retailer building a
marketing database...hopefully.
Another important component of the definition is the focus on what is being delivered. Quality of what is
not delivered is not necessarily important unless it will impact the ultimate deliverable. I know of one
organisation that checks the quality of all documentation including email and memos. The question needs
to be asked
"If I spend an extra 10 minutes on each email to ensure it has the standard layout, font etc. is it going to
significantly improve the quality of the project deliverables?"
The answer is that such an exercise cannot be cost justified.
Judging Quality
From a business perspective, project quality is usually judged on the following criteria:

Was the project completed on time?
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40



Was the project completed within budget?
Did the system meet my needs when it was delivered?
Is it stable?
From a technical perspective, project quality is usually judged as:



Does the system comply with corporate standards for such things as user interface,
documentation, naming standards etc.?
Is the technology stable?
Is the system well engineered so that it is robust and maintainable?
As you can see, the perspective of quality varies depending on who we are talking to. Generally speaking
however, the "fit for purpose" aspect of quality is the one we judge. Does the deliverable do the job it was
designed to do?
Project Quality v Deliverable Quality
The situation above illustrates the difference between judging the deliverables and judging the project.
You need to decide how much focus you put on the quality of the project, and how much on the quality of
the deliverables.


The project quality refers to things like applying proper project management practices to cost,
time, resources, communication etc. It covers managing changes within the project.
The deliverable quality refers to the 'fit for purpose' aspect mentioned earlier. It covers things like
how well it meets the user's needs, and the total cost of ownership.
A quality project may deliver low quality deliverables and vice versa. It is more likely however that a high
quality project will deliver high quality deliverables. You can see that if you were checking project quality
you would look at completely different things than if you were looking at the quality of the deliverables.
Quality Definitions
The following definitions will help us understand quality:
Term
Definition
Quality Materials
The artifacts used within an organisation to assist a Project Manager improve
quality in the project e.g. Templates, Standards, Checklists. These materials
are used in "Quality Events"
Quality Events
How the "Quality Materials" are applied to a project. They are the activities
undertaken using "Quality Materials" to validate the quality of the project.
Quality Plan
A plan as to how and when "Quality Events" and "Quality Materials" are
applied to a project.
Quality Control
The implementation of the "Quality Events" in the "Quality Plan"
Quality Assurance
QA is an umbrella term. It refers to the processes used within an
organization, to verify that deliverables are of acceptable quality and that they
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41
meet the completeness and correctness criteria established. QA does not
refer to specific deliverables.



The preparation of a "Quality Plan" for a project is part of QA
The development of standards is part of QA
The holding of a "Quality Event" is part of QA
Statistics captured during the various activities undertaken as part of "Quality
Assurance". Metrics are captured to:
Quality Metrics


Identify areas where quality improvements can be made
Measure the effectiveness of quality improvement activities
Use of captured metrics, and lessons learnt to continually improve quality.
They are the main reason for capturing statistics around quality. They are the
main reason for capturing statistics around quality.
Continuous Quality
Improvement
The purpose of quality assurance is to ensure outputs of an organisation are
both well engineered and correct.

Well Engineered versus
Correct

Well engineered means the construction is sound and reliable. It
does not necessarily mean it is correct.
Correct means the end results are an accurate reflection of the
requirements. It does not necessarily mean it is well engineered.
Many systems are well engineered but fail to meet the business need. On the
other hand, there are also systems that meet the business need, but are
unstable, unscaleable and expensive to run. Similarly a document can be well
constructed but the content is deficient. Alternatively, the information can be
there, but it is difficult to interpret.
Quality Materials
The following are examples of "Quality Materials" that might be used in a quality plan:
Quality Materials
Description
Standards
"Standards" are instruction documents that detail how a particular aspect of the
project must be undertaken. There can be no deviation from "Standards" unless a
formal variation process is undertaken, and approval granted.
Guidelines
Unlike "Standards", "Guidelines" are not compulsory. They are intended to guide a
project rather than dictate how it must be undertaken. Variations do not require formal
approval.
Checklists
"Checklists" are lists that can be used as a prompt when undertaking a particular
activity. They tend to be accumulated wisdom from many projects.
Templates
"Templates" are blank documents to be used in particular stages of a project. They
will usually contain some examples and instructions.
Procedures
"Procedures" outline the steps that should be undertaken in a particular area of a
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42
project such as managing risks, or managing time.
Process
A description of how something works. It is different to a "Procedure" in that a
"Procedure" is a list of steps - the what and when. A "Process" contains explanations
of why and how.
User Guides
"User Guides" provide the theory, principles and detailed instructions as to how to
apply the procedures to the project. They contain such information as definitions,
reasons for undertaking the steps in the procedure, and roles and responsibilities.
They also have example templates.
Example
Documents
These are examples from prior projects that are good indicators of the type of
information, and level of detail that is required in the completed document.
Methodology
A methodology is a collection of processes, procedures, templates and tools to guide
a team through the project in a manner suitable for the organisation.
Quality Events
Below is a list of "Quality Events" that typically are used to review the quality of deliverables. They tend to
have a different mix of reviewing the structure and reviewing the content. In other words they check to
see if the document is "Well Engineered" and/or "Correct" (see definitions):
Quality Events
Expert Review
Description
Review of a deliverable by a person who is considered an expert in the area. For
example, a review of a data model by a senior DBA. The person may not currently
hold a position (e.g. currently be a DBA) but has expert knowledge in the area.
This type of review is good when the focus is on accuracy of content (Correct)
rather than of structure (Well engineered).
Review of deliverables by one's peers.
Peer Review
Peer reviews are better suited where the emphasis is on structure rather than
content. A peer review will focus on ensuring the deliverable is well engineered.
Neither an "Expert Review" nor a "Peer Review" is exclusively focused on content
or structure. They each however, have a different emphasis.
A review carried out independently by several people is likely to pick up more points
however it does bring the difficulty of trying to reconcile different viewpoints. It is
best undertaken when the purpose is to gain agreement between different
Multi person Review stakeholders.
Time should be allowed to reach agreement of conflicting opinions. This may entail
a meeting or workshop to resolve differences.
A walk-through is a useful technique to validate both the content and structure of a
deliverable. Material should be circulated in advance.
Walk-through
Formal Inspection
If particular participants have not done their homework, they should be excluded
from the walk-through. Too much time can be wasted bringing one person up to
speed in a walk-through.
A formal inspection is a review of a deliverable by an inspector who would typically
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43
be external to the Project Team. The inspector captures statistics on suspected
defects. It is a useful technique for use with documentation.
Standard Audit
A "Standard Audit" is carried out be a person who is only focused on ensuring the
deliverable meets a particular standard(s).
In this case a defined "Business Process" is reviewed to ensure all necessary
actions are being undertaken, information recorded, and procedures followed. A
"Process Review" is useful to validate the existing processes in an organisation.
Process Review
For example, modification to an existing IT system may be based on the assumption
an existing business process is being followed. If the business process is either not
being followed or is different, the modification to the IT system may have
unexpected results.
For a project quality check, a "Process Review" may be carried out to ensure proper
change control procedures are in place. Typically someone like a Project Office or
Internal Audit would complete a "Process Review".
Planning Quality
A quality plan needs to cover a number of elements:





What needs to go through a quality check?
What is the most appropriate way to check the quality?
When should it be carried out?
Who should be involved?
What "Quality Materials" should be used?
What needs to be checked?
Typically what needs to be checked are the deliverables. Any significant deliverable from a project should
have some form of quality check carried out. A requirements document can be considered significant. A
memo or weekly report may not be significant.
For the project itself, it may be appropriate to have the project management practices reviewed for quality
once the project is initially established. This may be useful to give the Sponsor and Steering Committee a
level of confidence in the team.
What is the most appropriate way to check?
To answer this question requires thinking backwards. If the end result is that a particular deliverable
should meet a standard, then part of the quality checking should focus on compliance with the standard.
This would indicate a "Standard Audit" could be the best approach.
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44
You also need to differentiate between "correct" and "well engineered". A "well engineered" bridge may
never fall down. If it is doesn't cross the river at the right place, it is not "correct". Similarly a test plan may
be clear and easy to follow but not test everything it should. Alternatively it may cover all the testing but
cannot be clearly followed. Quality checking may be for either "correct" or "well engineered", or it may be
for both.
When should it be carried out?
Most "Quality Events" are held just prior to the completion of the delivery. If however there are long
development lead times for a deliverable, it might be sensible to hold earlier "Quality Events".
For example, if development of code for a particular module will take 10 weeks, it may be worth holding a
code inspection after 4 weeks to identify any problems early and reduce rework.
Who should be involved?
Obviously, the producers of the deliverable should be involved. The others involved will be dependant on
the type of quality event. It is also useful to have some representation from the receivers of the
information in order to ensure you are not using jargon that makes it clear to the producers, but unclear to
the receivers.
What Quality Materials should be used?
The materials used should be a prompt for the reviewers to ensure there are no gaps. The "Quality
Materials" will usually be self evident. It may be useful to reduce things like standards to checklists in
order to make them more manageable. If the reviewers know the specifications for xyz in standard abc,
they only need to be reminded to check xyz. They don't need the full standard as the primary piece of
"Quality Material". It can just be a reference.
Example Quality Plan
A typical quality plan for an applications project may look something like this:
Deliverable
Quality Event
Quality Materials
Template for
Business Case
Preliminary
Business Case
Expert Review
Final Business
Case
Formal Inspection Template for
by Sponsor
Business Case
Approved Business
Case for Project ABC
Project Definition Walk-through of
Purpose
Ensure the information is accurate and well
constructed prior to submission to Steering
Committee
Ensure the Business Case is in a fit state to
be submitted to the Finance Review
Committee
Template for Project Review early draft for completeness
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45
early draft
Definition
Peer Review of
final draft
Expert Review of
Database Design
physical model
Review final draft for completeness and
construction
Standard for
Database Design
Compliance with standard
General accuracy
Etc
Continuous Improvement
A good story I heard at a conference once referred to the difference between US and Japanese car
makers during the 70's. The speaker said in a US factory, if a car came off the production line with only
three wheels, everyone scrambled around to find a new wheel, put it on the car and get it out the door.
Probably a few days later another car would arrive with three wheels and the process would happen
again.
On the other hand if a car came off the production line in Japan with three wheels, they stopped the
production line, and found out how it happened. Once they found the cause it would be fixed, and no car
would ever come off the line with three wheels again.
The world is bigger than one project. What goes wrong in one project, is likely to go wrong in other
projects unless the cause is identified and fixed. If a template is missing a heading, don't just fix the
project document. Fix the template. If a standard has some aspect that cannot be complied with in your
environment, either change your environment, or get agreement that all projects are exempt from this part
of the standard. If there are no generally accepted availability criteria for business applications, don't just
add some to your requirements. Get them published as corporate criteria. This is what continuous
improvement is all about.
Quality Metrics
If we are improving quality, we need to measure progress. This means a baseline has to be established.
Quality metrics are a whole topic in themselves and are outside of the scope of this document.
Conclusion
Producing a quality plan is not complex. It involves identifying all the deliverables at the start of the project
and deciding how to best validate their quality. There is an overhead in undertaking quality checks but
this is offset by not having to fix things further down the line. Inevitably, the later you find a problem, the
longer it takes to fix.
It is also going to make your customers more comfortable if they see that quality is being addressed
during the project. It can even be a good PR exercise to bring them to a quality review. Not only do they
see that quality is being addressed, but it also exposes them to the complexity that usually exists in a
project.
Finally, having uncovered the quality issues, be sure you have a mechanism in place to fix the problems.
There must be some follow up process to allocate fixes to particular people and ensure they actually
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46
make the changes. This implies that time must be built into the schedule for rework following quality
events.
6
A network comprises of following activities
Activity
Duration (weeks)
1-2
6
1-3
2
1-4
6
3-5
4
5-6
2
e) Draw the Network
f)
Activity
2-7
4-8
6-8
7-8
Duration (weeks)
4
6
8
8
Determine the project completion time
g) Identify the Critical Path
h) Calculate the total float and slack
i)
PERT CHART
j)
What it is:
A PERT chart is a graphic representation of a project’s schedule, showing the sequence of tasks, which
tasks can be performed simultaneously, and the critical path of tasks that must be completed on time in
order for the project to meet its completion deadline. The chart can be constructed with a variety of
attributes, such as earliest and latest start dates for each task, earliest and latest finish dates for each task,
and slack time between tasks. A PERT chart can document an entire project or a key phase of a project.
The chart allows a team to avoid unrealistic timetables and schedule expectations, to help identify and
shorten tasks that are bottlenecks, and to focus attention on most critical tasks.
k) When to use it:
l)
Because it is primarily a project-management tools, a PERT chart is most useful for planning and
tracking entire projects or for scheduling and tracking the implementation phase of a planning or
improvement effort.
m) How to use it:
n) Identify all tasks or project components. Make sure the team includes people with firsthand
knowledge of the project so that during the brainstorming session all component tasks needed to
complete the project are captured. Document the tasks on small note cards.
o) Identify the first task that must be completed. Place the appropriate card at the extreme left of the
working surface.
p) Identify any other tasks that can be started simultaneously with task #1. Align these tasks either
above or below task #1on the working surface.
q) Identify the next task that must be completed. Select a task that must wait to begin until task #1(or a
task that starts simultaneously with task #1) is completed. Place the appropriate card to the right of the
card showing the preceding task.
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r)
Identify any other tasks that can be started simultaneously with task #2. Align these tasks either
above or below task #2 on the working surface.
s) Continue this process until all component tasks are sequenced.
Identify task durations. Using the knowledge of team members, reach a consensus on the most likely
amount of time each task will require for completion. Duration time is usually considered to be elapsed
time for the task, rather than actual number of hours/days spent doing the work. Document this duration
time on the appropriate task cards.
Construct the PERT chart. Number each task, draw connecting arrows, and add task characteristics such
as duration, anticipated start date, and anticipated end date.
Determine the critical path. The project’s critical path includes those tasks that must be started or
completed on time to avoid delays to the total project. Critical paths are typically displayed in red.
Note: Most commercially available project management software will routinely generate a PERT chart.
PERT Chart Example analyze feedback report 7 12d
Thu 5/1/97 Fri 5/16/97 finalize official report 9 5d
Mon 6/9/97 Fri 6/13/97 hold press conference 1 1 1d
Mon 6/16/97 Mon 6/16/97 hold summary management briefing 1 0 1d
Mon 6/16/97 Mon 6/16/97 end project 1 2 0d
Mon 6/16/97 Mon 6/16/97 start project 1 0d
Mon 3/3/97 Mon 3/3/97assemble team 2 10d
Mon 3/3/97 Fri 3/14/97 plan logistics and schedule 3 5d
Mon 3/3/97 Fri 3/7/97 prepare materials for site vi s i t 4 25d
Mon 3/3/97 Fri 4/4/97 prepare summary report of findings 8 15d
Mon 5/19/97 Fri 6/6/97 host site visit 5 3d
Mon 4/7/97 Wed 4/9/97 receive feedback report 6 15d
Thu 4/10/97 Wed 4/3
Example 2
02/03/2012
0.2
0.2
0.3
a
b
e
0.8
0.6
c
d
f
g
h
1.0
0.4
0.3
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ES=4
EF=6
ES=0
EF=2
ES=2
EF=3
ES=3
EF=4
A(2)
B(1)
C(1)
LS=0
LF=2
LS=2
LF=3
LS=3
LF=4
D(2)
LS=7
LF=9
ES=4
EF=9
Slack=(7-4)=(9-6)= 3 Wks
ES=9
EF=14
ES=14
EF=15
F(5)
G(1)
LS=9
LF=14
LS=14
LF=15
E(5)
LS=4
LF=9
02/03/2012
Duration=15 weeks
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