PROJECT MANAGEMENT - Anant Dhuri.pdf

7/22/2019 PROJECT MANAGEMENT - Anant Dhuri.pdf

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PROJECT MANAGEMENT Anant Dhuri

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PROJECT MANAGEMENT100 Marks

Course content:

1. INTRODUCTION:Concept of Project Management. Scope & Coverage. Project Function in an organization Layout of Project

Department. Role of Consultants in Project Management.

2. PROJECT IDENTIFICATION:Selection of product identification of market preparation of feasibility study/report Project formulation -Evaluation ofrisks preparation of Project report.

3. SELECTION OF LOCATION & SITE OF THE PROJECT:Factors affecting location policies of Central State Government towards location Legal aspects of projectmanagement.

4. FINANCIAL ANALYSIS:Profitability Analysis Social cost Benefit Analysis preparation of Budget and Cash Flows.4a) Materials Management in Project Planning Procurement storage disposal.

5. FINANCING OF THE PROJECT:

Source of Finance Cost implications thereof Financial Institutions Guidelines for funding projects, Risk Analysis Sensitivity Analysis.

6. QUANTITATIVE ASPECTS OF PROJECTS:PERT/CPM Network Analysis for monitoring of the project Other quantitative techniques for monitoring and Controlof project

7. COMPUTER APPLICATIONS:Selection of software packages for application to Project management.

Reference Text

PMP - Project Management Professional - Study Guide - By Kimi Heldman Project Management - By S. Choudhary

Text Book of Project Management - By P Gopalakrishnan, V. E. Ramamoorthy Project Management - ByPrasanna Chandra

Project Appraisal - By P. K. Mattoo Project Management - By Vasant Desai


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1. INTRODUCTION

Concept of Project Management. Scope & Coverage. Project Function in an organization Layout of Project Department. Role of Consultants in Project Management.

I. FUNDAMENTALS OF PROJECT MANAGEMENT

What is a project?

1. A specific, finite task to be accomplished

2. Can be of a long or short term duration

3. Can be large or small task

Project Definition

A project is a temporary endeavor undertaken to create a unique product or service.

Successful Project

Meets or exceeds the customers requirements

Is delivered on time Within Budget

Projects Vary in Size and Scope

NASA shuttle launch

Building a boat

Building a hospital

Building renovation and & space modification

Planning a party or wedding

Organizing the Olympic games

Developing a new software program

Getting a university degree

Company mergers

Project Characteristics

Constant communication across organizational

boundaries

Many people involved, across several functional

areas

Sequenced events

Goal oriented

Has an end product or service

Multiple priorities

Complex and numerous activities Unique, one-time set of events

Deadlines

Start and end dates

Identifiable stakeholders

Limited resources and budget

When is a Project a Project?

A task or set of work assignments may be done by one or more persons using a simple to do list A task become a

project when the characteristics of a project begin to dominate and overwhelm individuals.

Unable to meet deadlines, budgets and corporate expectations.

Project Management

Project management is a method and/or set of techniques based on the accepted principles of management used for

planning, estimating and controlling work activities to reach a desired result on time, within budget, and according to the

project specifications. Projects and project management are about people and teamwork and involves planning:

- Who does what?

- Who takes what risk?

- Who else is involved or interested/affected?

Its the application of knowledge, skills, tools, and techniques to project activities to deliver a successful project.

Tools/techniques

Processes and methodology

More than time, cost and scope

Hard and soft skills

A discipline evolving towards a profession

Business and Social Aspects of Project Management

Hard and soft skills


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Technical aspects of project management

Interpersonal skills

Influence

Politicking

Negotiation

4 Project Stages

1. Start Up2. Planning

3. Execution

4. Close Down

Project Management Challenges

Lack of a common understanding on the question What is project management???

Managing stakeholders, expectations, teams, projects, uncertainty

Measuring project management results

Methodology issues

Value of Project Management (Why are we doing this?)

Improve project / program / firm performance as measured by efficiency, effectiveness Competitive advantage through competency

Be more Successful

Proactive vs. reactive

Root out ill-conceived, directionless projects

Increase visibility by providing roadmaps

Project Management Team

Project Sponsor(s)- Decision maker, funder, champion

Project Manager- Manages the big picture

Project Leads- Manage parts of a project

Project Team- Work on specific tasks

Stakeholders - Vested interests. Many of them. Keep them happy

Major Causes of Project Failure

Projects fail for the following reasons:

The project is a solution in search of a problem

Only the project team is interested in the result

No one is in charge

There is no project structure

The plan lacks detail

The project has insufficient budget and/or

resources

Lack of team communication

Straying from original goal The project is not tracked against the plan

Major Causes of Project Success

Stakeholders are identified

Stakeholders expectations are known and met

Senior Management support

There is a clearly stated purpose and a sound plan

Goal and objectives are understood and

communicated

A constructive goal-oriented culture

Technically competent team

Effective (and committed) team

Excellent communication Trust


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Project to Development Relationship Model

Project Management Vs. Methodology

Methodologies give you templates of things to do. Project management applies them to this project.

Roles of a Project Manager

1. Coordinator

2. Communicator

3. Leader

4. Negotiator

5. Planner

6 Phases of a Project

1. Enthusiasm

2. Disillusionment3. Panic

4. Search for the Guilty

5. Punishment of the Innocent

6. Praise and Honors for the Non-Participants

Characteristics of Effective Project Management

Effectively plan the project

Accurately monitor and communicate the project progress

Ensure that all requirements are met

Ensure the project is on time and within budget

Schedule resources effectively

Manage changes to the project

II. TECHNICAL ASPECTS OF PROJECT MANAGEMENT

Project Management Knowledge Areas

A project manager juggles 9 + balls (knowledge areas) and many tools and techniques

Scope

Time

Cost

Human Resources

Communication

Procurement

Quality

Risk Management

Integration


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Project Management Functions

1. Integration Management

2. Scope Management

3. Risk Management

4. Communications Management

5. Schedule Management

6. Human Resource Management

7. Quality Management

8. Cost Management

9. Procurement Management

1) INTEGRATION MANAGEMENT1. Pulling all the knowledge areas together

2. As you go through the various project phases, consider the links between knowledge areas

Plan the plan

Execute the plan

- Project deliverables and project management outputs

3. Control the plan

2) SCOPE MANAGEMENT

Ensure that the project includes all the work required, and only the work required, to complete the project successfully.

1. Initiate the project

Feasibility, market, customer or business need

Environmental analysis, business case

Project selection practices and management decision practices

Project link to the firms strategy or corporate goals

Initiate the project

Identify the project manager

Develop a charter

- Formally recognize the existence of the project

- Include the business need and product description, constraints and assumptions

- Approval to proceed

Funding, authority, sponsor

2. Plan and define the scope in detail

Conduct a cost/benefit analysis, consider alternatives, get expert opinion and review historical databases,

brainstorm

What is in scope? What is out of scope? What are the criteria for completing phases?

Develop a work breakdown structure (WBS)

Create a scope statement with assumptions and constraints

- Project justification, product description, deliverables, success criteria, scope management plan

- Use for future project decisions

3. Verify the scope

What is the process and criteria for accepting the scope of work delivered?

Work results and documents

Inspection

Acceptance form

4. Control the scope

Performance reports, change requests, issues management form, scope management plan, corrective action,

lessons learned

Scope tips

1. Be inclusive involve stakeholders

Work on securing and maintaining their commitment to the project

Commitment: funding, approvals

2. Spend more time planning the projectthen follow it (with updates of course)

3. Define project success and communicate it

4. Steering committee with authority and decision making power Supportive and decisive sponsor


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Change control

Insure that changes are agreed upon. Determine when scope change is desired/has occurred. Managing the change

through all other processes (schedule, cost, quality).

3) RISK MANAGEMENT

The process of identifying, analyzing and responding to project risk. Risk is an uncertain event or condition that will have

an effect on the project. It has a cause and an effect and a consequence to cost, schedule, or quality.

1. Identify risks

- What could go wrong (harm, loss, opportunities and threats) Consider ALL knowledge areas

- Internal and external risks

- Sources of risk: product technology, people (misunderstandings, skills), project management etc.

2. Quantify risks

- Risk interactions, risk tolerance

- High, Medium, Low (HML) - qualitative

- Expected Monetary Value (EMV) quantitative

3. Develop risk response plan

Opportunities and threats to respond to and opportunities and threats to accept

- Avoid eliminate cause

- Mitigate reduce risk occurrence

- Accept contingency plans, accept losses

Its OK to do any of these

Insurance, contingency plans, procurement, alternative strategies, contracts

Risk management template

4. Control risk responses

Workarounds (defined as when it hits the fan unexpectedly and you need to deal with it then and there)

Ongoing process of risk management

- Corrective action

- Update risk management plan

Risk Management Tips

- Start Risk Management at the beginning of the project- Review risks throughout the project (e.g. weekly, monthly)

- Update and project schedules, budget, staffing etc. as risk management plans are changed

Risk quantification techniques

1. High, Medium, Low (HML)

- Probability of occurrence and impact

- High, Medium, Low grid

- Focus on HHs and less on LLs

- Keep it simple

2. Expected Monetary Value (EMV)

- EMV=risk event probability X risk event value

- 25% chance of rain X $1,000 impact of damage to convertible car interior = EMV of $250- 75% chance of rain X $1,000 impact of damage to convertible car interior = EMV of $750

4) COMMUNICATIONS MANAGEMENT

Ensure the timely and appropriate generation, collection, dissemination, storage, and ultimate disposition of project

information. Who needs to know what? When do they need to know it? How will it be communicated and by whom?

1. Develop the project communication plan

- Stakeholder analysis

- Information to be shared (to who, what, how, when, why)

- Technology

2. Distribute information

- Project databases, filing system, software / hardware

- Report up, down and across the firm3. Report performance

- Project plan, work results

- Project performance reports


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- Variance reports, trend analysis, change requests

- Report the Good, Bad & Ugly

4. Administrative closure

- Knowledge management

- Archives

- Acceptance forms

- Lessons learned

Sample communication formats

Status reports

Team meetings

Project files

PR initiatives

Newsletters

E-mail

Databases

Website

RACI

Posters

Coffee room chats

Milestone celebrations

Kickoff meeting

Close out meeting

Lessons learned sessions

Paraphrase & Validate

Drawings

Schedule update

If you think you have communicated enoughgo back and do it again. Use different formats. Frequently use modes of

communication that allow you to see the whites of their eyes

5) SCHEDULE MANAGEMENT

Ensure the timely completion of the project.

Identify the specific activities that must be performed to meet deliverables.

Document dependencies

Estimate the time to complete an activity

Schedule development (start and end dates

Schedule control

Klipsteins Second Law - The firmness of delivery dates is inversely proportional to the tightness of the schedule.

Time management1. Purpose: Create a realistic schedule with the team

2. Identify the activities (tasks)

Activities are action steps (HOW) and different from deliverables that are tangible results (WHAT)

Use the WBS and scope statement

Develop activity lists and revise the WBS

3. Sequence activities

Consider dependencies

4. Estimate durations (time)

Top down, bottom up estimates, Monte Carlo simulations

Estimating formulae (PERT estimates)

Expert opinion

Consider resource capabilities Look at similar projects

5. Develop the schedule (Gantt chart)

Document assumptions and decisions

Use project management scheduling software e.g. MS Project

6. Control the schedule

Performance reports, change requests, time management plan, corrective action, lessons learned. E.g. baseline

Gantt chart and then update

Frequency,

Roles and responsibilities

Control techniques e.g. meetings, 1:1

Estimating formulae - PERT Estimate (weighted average)

[Pessimistic + (4 x Likely) + Optimistic]/6

Pessimistic time to get to work = 30 min


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Optimistic time to get to work = 10 min

Likely time to get to work = 15 minutes

PERT Estimate = 30 + (4x15) + 10/6

100/6=16.6 = 17 min

6) HUMAN RESOURCES MANAGEMENT

Make the most effective use of the people involved in the project. Planning

Acquisition

Development

1. Organizational plan

Organizational chart, roles and responsibilities

Linkages between project and functional areas, and other business units.

Staffing needs

- Unions, human resources department/practices, constraints

- RACI+

- Staffing plan (training, orientation, job descriptions, performance evaluations, redeployment), project

organizational chart2. Get staff

- Assess experience, interests, personal characteristics, availability

- Negotiate

- Beg and borrow but dont steal

3. Develop the team

- Team building, reward and recognition program, support practices

4. Dont control people

- Managerial control is different from micromanaging

5. Listen to understand

6. Be responsive

- Provide positive feedback

- Act on problems in a timely manner

7. Deal with problems

- They wont go away, but will get BIGGER

8. Provide constructive criticism

9. Document appropriately

10. Take time to have FUN

RACI CHART

7) QUALITY MANAGEMENT

The processes required to ensure the project will satisfy the needs for which it was undertaken. Identify what to measure

periodically review the project. Monitor specific results to determine if they meet the relevant quality standards.

1. Plan for quality

Quality product and quality project management practices

Quality standards

- Conform to specifications (project produces what it said it would)

- Fitness for use (satisfy needs)- Prevention vs. inspection

- Plan, do, check, act

- Benchmark, checklists, flow charts, cause/effect diagrams


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2. Quality management plan

Organizational structure, processes, resources, procedures, responsibilities to ensure quality plan is implemented

Quality metrics

Checklists

3. Quality Assurance

Follow the quality management plan, audits, and improvements

4. Quality control

Process and product results Control charts, Pareto diagrams, trend analysis

QUALITY TIPS

Start with a clear view of quality in mind

What is quality?

Implications for ALL knowledge areas

8) COST MANAGEMENT

Ensure the project is completed within the approved budget

1. Plan resources(people, equipment, materials)

Consider WBS, scope statement, organizational policies, staff pool Identify resource requirements

2. Cost centers at Your Company?

Time is money

3. Cost budgeting

Resource leveling

Cost baseline

4. Control costs- Performance reports, change requests, cost management plan, corrective action, lessons learned,

e.g. budgeted, actual, variance (with explanation)

Time and cost tips

Its OK to ask. Talk to subject matter experts. Avoid single point estimates, use validated range estimates.

Factor in the learning curve, resource productivity, experience level etc. Use the appropriate tools, techniques, rules of thumb

Document assumptions for estimates

Negotiate

9) PROCUREMENT MANAGEMENT

Acquire goods and services to attain project activities from outside the performing organization. (aka Vendor

Management, Subcontractor Management, Supplier Management)

1. Plan procurement needs(goods and services external to the firm that you need to deliver the product)

Make or buy decisions

Contract type options (risk sharing)

2. Solicitation

Procurement management plan

Vendor selection process and criteria

Proposals, contracts, legal issues

3. Select and manage sources(vendors, partners)

Negotiations Manage

contracts

4. Close contracts

Formal acceptance and closure

Procurement Tips

1. Develop charters with vendors and partners

Rules of the game, conflict management guidelines, escalation process2. Take lead times into account

3. Do risk management on procurement (and all other knowledge areas)


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5-STEP PROJECT MANAGEMENT

STEP 1- DEFINE THE PROJECT

Agenda

- State the problem

- Develop project goal

- Develop project objectives

- Identify assumptions and risks

- Identify stakeholders

- Criteria for project success

- Project Charter/overview document

State the Problem/Opportunity1. Specific questions must be asked before a project begins:

What is the problem and what are the opportunities?

Do we really need the project?

2. If these questions cannot be answered, then:

Pick the wrong project

The project will probably not succeed

3. Document the need and the benefits to the organization for undertaking the project

Short, crisp and to the point

Descriptor for those who although not directly involved on the project team are indirectly involved in supporting

the project

A need that must be addressed

- New product, service, process, facility, or system- It may involve opening a new market

Example

Membership in PM Association has declined in the past four years and attendance at conference has declined in the

past three years. The viability and financial stability of the Association depends on maintaining membership and

successful annual conference.

State Project Goal

A statement of purpose and direction helps to direct the course of the project effort

Initiates the project

- Serves as a point of reference for settling disputes and misunderstandings

- Clarifies expectations- Helps in justifying requests for resources


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Goal Statements

1. Action oriented

2. Short and simple

3. Understandable

- Prepare and launch the International Space Station on April 21, 2000, from Cape Canaveral, Florida

- Connect France and England via a covered tunnel and railway under the English Channel, facility to be opened to

traffic no later than September, 1996

4. Design and complete pilot testing by March 2002, a product accounting software package that performs basicfinancial analyses for the company

5. Obtain a BSc degree in engineering from U of C by spring, 2004

Example

Reverse the downward trend in membership and annual conference attendance by organizing a highly successful

conference.

Develop Project Objectives

1. Objectives represent major components or milestones

- Objectives are sub-goals

2. Roadmap to aid decision makers understand the purpose of the project

3. Basis for determining project time line and resource requirements

4. To achieve the goal all objectives must be realized

Example

Develop the Program

Set the Conference Site and Date

Design and Implement the Marketing Plan

Criteria for Evaluating Project Success

Project expectations:

Project on time

Within budget

According to specifications

Happy client

Example

At least 200 of 450 PM Association membership will register to attend

At least 50 of previous years conferences attendees will attend

At least 1.5% of the non-members receiving conference brochure will attend

At least 5% of the non-member attendees will join PM Association

Identifying Assumptions and Risks

Each objective will have its own risks and assumptions

Helps think through the project process and issues associated with execution

Identifies resource needs and issues involving resource availability

Identifies potential delays and the impact of these delays Potential cost overruns can be predicted and resolved

Example

Interest in PM Association can be renewed through the annual conference

A quality professional program will attract members and non-members

Key speaker(s) fail to show up or submit written paper

Stakeholders

Individual or organisations actively involved in the project or directly or indirectly affected by its execution or results

Roles must be identified at the start of the project

Needs and expectations must be communicated and influenced in a positive and constructive manner so that

the project will be success for all How to find them?

- Ask who will decide on the success of your project

How to involve them?


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- Ask for (appropriate) advice

- Get their buy-in to project plans

How to work with them?

- Active listening

- Understand their interests and needs

- Keep everyone informed

How to keep them on side?

- Respond to concerns- Manage expectations and make adjustments

Who are the People Involved?

Owner, Contractor, Consultant (in-house and outside)

Sub-consultants, Subcontractors

Suppliers (Vendors)

Trade unions

End users

Operators

External Issues

Factors within a Project Managers sphere of responsibility, but which he or she has no formal control or authority over: Corporate interests

Operating priorities

Financial interests

Government interests and actions

Public interests

Economic conditions

Social priorities

Common Concerns

Political fallout

Social, cultural, economic impacts

Benefits:- Training

- Employment

- Business opportunity

Way of life Just go away!

Public Involvement - Right to know

Environmental protection and conservation

Loss of control Fear of change

Power and influence

Native land claims

STAKEHOLDER MANAGEMENT PROCESS

1. Monitoring

2. Analysis

3. Assessment

4. Applications

- Educate and communicate

- Mitigate- Compensate

5. Appraisal and feedback

Summary

Understand the role of the various stakeholders

Identify the real nature of each stakeholder and their interest in the project

Understand their motivation and behavior

Issues external to the project that can impact the outcome of a project

Project manager should:

- Understand what they are

- Consider them early

- Analyze their potential impact- Decide which to mitigate and have a plan

Assess how they will react to various approaches

Remember that projects managed in ignorance of External Influences:


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- Never get off the ground

- Mid-flight crash

- Technical success but commercial failure

Charter/Overview Document

1. The define phase focuses on producing a project Charter/Overview document which is used as:

- A tool in the initial go/no go decision by management

- A general information document for other managers- An early statement of the project goal and direction

- A statement of the problems and opportunities to be addressed by the project

2. Once the project is approved for go ahead, the Project Charter/Overview becomes the foundation for the detailed

planning activities which follow and:

- Provides a control point for reporting project progress and an audit point

- Reference base for addressing questions and conflicts

- Tool for building the team

3. When defining a project you should be able to:

Describe what is expected

Define the project characteristics

Develop a project Charter/overview

- Problem statement

- Project goal and objectives

- State the risks and assumptions

- State success criteria

STEP 2 - PLAN THE PROJECT

Agenda

Work Breakdown Structures (WBS)

Estimate Time and Cost

Work Breakdown Structure (WBS)

1. Reduces complex projects to a series of tasks that can be planned

2. WBS represents the project in the form of a hierarchy of goal, objectives and activities

- Identifies activities to be done from beginning to completion of the project

3. Foundation for the definition, planning, organising and controlling of the project


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Composition of a Project WBS

WBS

1. Activities in the WBS are broken-down until the entire project is displayed as a network of separately identified

activities

2. The breakdown of activities continues until there are no overlapping activities3. Each activity should be:

4. Status and completion are easily measured

- Of a specific time duration with defined beginning and end

- Easy to derive time and cost estimates

- Of a single purpose and have clearly understood deliverables

- Responsibility for completion clearly assigned

The 5-step procedure: Example

1. Partition the project into its major objectives

4.1 Develop the Program

4.2 Set the Conference Site and Date

4.3 Design and Implement the Marketing Plan

2. Partition the objectives into activities

1.1 Develop the Program

1.1.1 Establish Theme and Topics

1.1.2 Obtain Speakers

1.1.3 Prepare Handout Materials

1.2 Set the Conference Site and Date

1.2.1 Set Conference Date

1.2.2 Select and Commit Conference Site

1.2.3 Confirm Arrangements

1.3 Design and Implement the Marketing Plan

1.3.1 Develop and Print Conference Brochure

1.3.2 Obtain Label Sets for Direct Mail1.3.3 Mail Conference Brochures

1.3.4 Receive and Acknowledge Registrations

3. Check each activity for compliance with activity characteristics and further partition any that do not comply

1.1.3 Prepare Handouts

1.1.3.1 Obtain Handout Materials from Speakers

1.1.3.2 Prepare and Print Conference Notebook


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Estimating Activity Time

1. Time to complete a task is random:

Skill levels and knowledge of the individuals

Machine/equipment variations

Material availability Unexpected events

- Illness

- Strikes

- Employee turnover and accidents

- Changed soil/site conditions

2. We know unexpected events and occurrences will happen but are unable to predict the likelihood with any

confidence

- We must however account for the possibility of the occurrence of these events

3. Use a statistical relationship if you can estimate

4. Optimistic completion

5. Pessimistic completion time

- Most likely completion time- Can acquire this information from discussions with individuals that have first hand experience in projects

- Optimistic Completion Time - is the time the activity will take if everything goes right

6. Pessimistic Completion Time - is the time the activity will take if everything that can go wrong does go wrong but the

project is still completed

7. Most Likely Completion Time - is the time required under normal circumstances

8. It can also be the completion time that has occurred most frequently in similar circumstances

9. To compute the expected duration time the following formula is used:

E = (O+4M+P)/6

E = Expected duration time

O = Optimistic time

M = Most likely time

P = Pessimistic time

Estimated times for conference planning


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Sequencing Activities

Bar chart

Produce a Logical Network

- Critical Path Method

- Arrow Diagrams

Precedence Diagrams Identify Critical Activities

Locate the Critical Path

Floats

Bar Charts/Gantt Chart

Most projects, however complex, start by being depicted on a bar chart. The principles are very simple:

- Prepare list of project activities

- Estimate the time and resources needed

- Represent each activity by a bar

- Plot activities on a chart with horizontal time scale showing start and end

RACI Charts Responsibility - Action - Coordination - Information

Identify the roles of participants in each element of a project

Effective communications road map

4 to 8 weeks look ahead

Update weekly to:

Reset expectations

Ensure right people involved in detailed planning

Ensure everyone knows what needs to be done by whom


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CPM: Critical Path Method

1. Graphic network based scheduling technique

- Arrow Diagrams

- Precedence Diagrams

2. Use activities created by the WBS process

3. Analysis of timing and sequencing logic

- Aids in identifying complex interrelationship of activities

4. Allows for easy revision of schedule and simulation and evaluation of the impact of changes5. Also used as a control tool during execution of the project

Producing a Logical Network

The sequencing identifies activities that must be completed before another activity can start and which activities can

occur simultaneously. Different methods:

1. Low-tech approach: use post-it labels

- Each label has one activity written on it

- Through iterative process the labels can be arranged and rearranged

2. Ask yourself the following:

- Which activities must be completed before this activity starts?

- Which activity cannot start until this activity is completed?

- Which activities have no logical relationship with this activity and therefore take place at the same time

(concurrent activities)?3. Identify immediate predecessor activities,which are activities that must be completed before another activity can

begin

Steps in Producing Networks

1. List the activities

2. Produce a logical network of activities

3. Assess the duration of each activity

4. Produce a schedule - determine the start and finish times and the float available for each activity

5. Determine the time required to complete a project and the longest path on the network

- The longest path is the Critical Path

6. Assess the resources required

Activity sequencing


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Sample Network

Activity Times/Critical Path

Critical Path

1. Calculations for precedence diagrams and arrow diagrams are essentially the same

2. Critical path is where there is zero slack time

3. If an activity takes longer than estimated on the critical path then the project will be delayed

4. The critical path can change if there is a delay that make an alternative path longer

Float (Slack)

- Slack or float time is amount of delay that could be tolerated in the start or completion time without causing a delay in

completion of the project

- Total float or calculations to determine how long each activity could be delayed without delaying the project

- Total float = LF - ES - duration

Summary

- Critical path identifies the project time requirements

- Slack or float time is amount of delay that could be tolerated in the start or completion time without causing a

delay in completion of the project

- Zero slack time equals the critical path


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2. PROJECT SELECTION

A. General principles

Programme and Measure Objectives

Economic Impact taking account of Deadweight and Displacement

Financial Viability PPP and productive Sector Projects

Cost effectiveness

Environmental Impact Impact on equality of opportunity

Impact on poverty

Impact on rural development

B. Project Appraisal

Procedure

1. Idea

2. Initial contact

3. Business Plan / Formal Application

4. Site visit to project5. Appraisal by staff

6. Assessment by Evaluation Committee

7. Board decision

Criteria for Assistance - You must show:

that the project is commercially viable

That there is a market for the product or service

That adequate finance will be available to fund the project

That the promoter has the management and technical capacity to handle the project

That the promoters tax affairs are in order and proper company structure

Principal Appraisal Techniques

1. Financial Analysis

2. Cost Benefit Analysis

3. Cost Effectiveness

4. Scoring ; Weighting ; Ranking

5. Multi Criteria Analysis (M.C.A)

1) Financial Analysis

2) Cost Benefit Analysis

Application - Essential to demonstrate the economic costs and benefits of projects from the perspective of the

national economy or social welfare

Key features Comprehensive Comparison of costs and benefits, including non-market. Treatment of risk. Can

include estimation of multipliers Limitations - Impacts require common monetary numeracies. Data demands can be considerable Can have

inadequate political or social acceptability

3) Cost Effectiveness

4) Scoring, Weighting, Ranking (SWR)

The criteria against which projects will be appraised are identified. A weighting is assigned to each criteria based on

importance (no weighting = equal value). Each project receives numerical score against different criteria. Different project

applications ranked against each other.


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C. Transparency Issues

Public Promotion

Eligibility Criteria Published

Criteria for selection available

Weightings for criteria available

Decisions made by Committee

Conflicts of interest avoided (Declarations)

Information given to unsuccessful applicants

Competitive or queuing basis

Appeals system in place

D. Project Selection

Criteria

Included in Operational Programme Objectives

Measure specific objectives

Economic Impact

Financial Viability

Cost-Effectiveness

Horizontal Principles: Environment: rural development & Poverty: Equality

Scoring: Weighting: Ranking

Procedure

Initial call for applications 2 stage process

1. Assessment of Proposals

Initial review by Regional Tourism Organisation

Assessment and scoring of proposals by Filte Ireland

Assessed by Filte Ireland Assessment Committee

Considered and approved by Product Management Board

2. Short-listed applications complete detailed proposal form

3. Evaluation by Filte Ireland evaluation team

4. Assessment Committee review recommendations

5. Product Management Board consider approve, defer or reject

E. Procedure Monitoring & Evaluation

Monitoring of Programme at three levels

- Implementing Agency

- Monitoring Committee level

- National (NDP/CSF)

Grantee must retain all records and have available for inspection

Retain records of account for 6 years (Irish Law)

Retain records 3 years following closure of programme

Grantee must file annual financial statements

Grantee must file annual financial statements Grantee may have to provide evidence of satisfactory management and financial control procedures

Work must comply to all planning conditions

Regular progress reports on work


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Security Deed of Covenant or Mortgage

Grant paid in two installments Interim and Final

- Paid eligible expenditure

- Evidence matching funds

- Check no grant aid from other sources

F. Project Financing

1. Public Sector

- Project provision included in annual budget estimates of Central Government Department

- EU receipts also included

- Recouped in arrears by Exchequer following verification of expenditure

2. Private Sector

- Project Approved in advance of commencement

- Project payments made in arrears on basis of verified expenditure (stage payments allowed)

- Balance of funding provided by promoters own resources, borrowings or other equity investment

- Equity and loan finance also included

G. Tendering

Quotations and Tenders

- Up to 800 Two oral quotations

- 800 to 8,000 Two written quotations

- 8,000 to 16,000 Three written quotations

- 16,000 to 32,000 Four written tenders

- 32,000 to 160,000 Full tender in at least two regional newspapers and/or national newspapers

- 160,000 and over Advertisement in Official Journal of EU and national newspapers

H. Role of Implementing Body

- Design of overall scheme

- Seek applications by public advertisement

- Review and approval of project applications received from project promoters

- Ongoing monitoring of projects- Reviewing progress expenditure, final project costs and irregularity reports if applicable

- Review, approval and payment of project manager payment claims

- Prepare claims for Managing Authority on to Paying Authority

I. Project Management IT Based System

- Financial Control Systems

- Financial Tables

- Physical Indicators

- Annual Implementation Reports

- Other Reports by period county, field of intervention

- Actual expenditure reports

- Claims for draw down

- Payment details

- Report on receipts and outstanding claims

- Funds allocation, dispersal instructions

J. Project Reporting to Monitoring Committee

- Introduction description measure, commentary on progress

- Expenditure to date

- Performance Indicators progress to targets

- North/South Co-operation

- Information and Publicity Requirements

- Horizontal Issues Environment; Gender Equality; Poverty; Rural Development

- Future Prospects

- Adjustments required

- Annexes

K. Value for Money - Definitions

1. Additionality: Measure of economic output i.e. amount of project output compared to what would have occurredwithout intervention

2. Deadweight: Opposite to additionality i.e. could project have proceeded without State Aid


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3. Displacement: Activities that would or could have been financed by the private sector are displaced by publicly

subsidized activity

4. Cost-effectiveness: Projects selected contribute the largest amount possible to policy objectives at the minimum

possible cost.


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3. PROJECT FEASIBILITY STUDY

Feasibility vs Business Plan

FEASIBILITY BUSINESS PLAN

1. The feasibility study provides an investigating function 1. The business plan provides a planning function.

2. Answers the question: is the project viable? 2. Lays out the actions to be taken to bring the ideas to

reality.3. The feasibility study outlines and analyses several

alternatives or methods of achieving project success.

Therefore it assists to narrow the scope of the project

to identify the best project scenario(s) to about two or

three.

3. The business plan focuses on only one alternative or

scenario.

4. The feasibility study is conducted before the business

plan.

4. A business plan is prepared only* after the business

venture has been deemed to be feasible.

5. It is a decision point; to continue or not based on the

outcome.

5. The outcome does not provide information to continue

or drop the project.

6. Feasibility provides information to choose the blue

print or roadmap.

6. The business plan provides a blue print or roadmap.

Some argue that:We know its feasible. An existing business is already doing it. Feasibility has been done a few years ago so there is no

need to do another one. Feasibility studies are just a way for consultants to make money. The business is too small for a

feasibility study. The market analysis has already been done by the business that is going to supply the equipment. By

hiring a general manager, the study can be accomplished. Feasibility studies are a waste of time. Money is to be spent

on building, tie up the site and bid on the equipment; why spend money on feasibility.

Reasons For Feasibility

Once decisions have been made about proceeding with a proposed business, they are often very difficult to change. An

entrepreneur may have to live with these decisions for a long time. Successful businesses thoroughly examine all of the

issues and assess the probability of business success first before going into it. Feasibility studies gives focus to the

project and outline alternatives and narrow project alternatives Feasibility studies bring to the fore new opportunities

through the investigative process. They identify reasons not to proceed. They enhance the probability of success byaddressing and mitigating factors earlier on that could affect the project. Feasibility studies provide quality information for

decision-making. They help to increase likelihood of finding funds and investors for the project. And provide

documentation that the business venture was thoroughly investigated.

Aspects of Project Preparation and Analysis

1. Technical

2. Institutional-Organisational

3. Managerial

4. Social

5. Commercial

6. Financial

7. Economic

1. Technical - Relates to underlying principles of knowledge where the product and or the method of the project. For a

crop production project, the concerns will be agronomy; knowledge of plants and crops, effects of weather, soil

conditions, seeds; generally, inputs and outputs. The relationship among the various factors; with the final product or

method in mind. Example: Internet caf project; the knowledge area is information and communications technology

(ICT).

Issues about computers,

Internet connectivity,

networking of computers

business management

The purpose is to assess the current status of the essentials with the view to identify gaps. The team to be selected

or put together depends on the technical areas involved.

2. Institutional, organisational.

How does the proposed project relate to the various levels of power as well as the existing institutions?


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What are the links of the projects and team with existing government departments and organisations are

considered here?

Within the project, what are the lines of authority, delegation, line of reporting, and organisational procedures?

Will the project keep and operate its own accounts?

3. Managerial

Assessment of availability of staff to manage the project; if there is a gap will there be the need to train or hire

others locally or for expatriate staff? Are the target groups equipped to use the product or adopt the technology or innovation being introduced?

4. Social

Social implications of projects are important. For public projects the social aspect vis--vis the objectives are crucial.

For non-public projects the review of social aspect is to assess the negative impact on society if the project is

implemented. Where positive influences they are often secondary in importance. The focus is on income distribution,

the response of the project to national objectives. Effect of project on employment, possible side effects on some

people, issues of quality of life. For the company, how does the project fit into the mission and vision of the

organisation? Environmental issues are social issues. Both locally and internationally, there are regulations and laws

on governing the effects of undertakings on the environment. For example, what are the possible effects of the

undertaking on the physical environment; water, air, soil. Noise pollution is to be considered. Projects in mining do

have tremendous adverse effects on the environment. The outcome of these considerations is to identify the enable

the planners to find ways of mitigating the environmental effects. At this stage environmental regulations have to be

reviewed to appreciate the requirements and limits within which the project can or cannot operate.

5. Commercial - This relates to the product.

The sale of the output produced, arrangements for sale, and pricing.

This stage is also referred to as market feasibility stage.

The demand of the product or service is needs to be assessed; the potential demand as well as the effective

demand, the size of the market, segments, and targets of the product.

What advertising means are available, media consumption habits of the target market or consumers?

Questions like what is the buying behaviour of the target market, income their income distribution and some

other characteristics of the customers.

On the input side what are the sources of the raw material, what are the pricing mechanisms, regularity of

supply etc.

6. Financial

Under the financial aspect, the totality of the financial dimension of the proposed project is examined. In social or

public projects, there are several participants. These participants in an agricultural project include; farmers, suppliers,

project agencies and customers. In a production and distribution project of a manufacturer, the participants are

customers, distributors, transporters, and finally the company or manufacturer. Financial effects must be examined

for each participant because participants are impacted differently. The financial effects of the participants in the

project are examined here. Their effect on them must be appropriately assessed. Separate budgets and accounts

(income and expenditure, balance sheet and cashflow) must be prepared. The aim is to make judgements of the

financial efficiency, incentives, creditworthiness and liquidity of the project and its participants. In private sectorprojects the proforma or projected final accounts (profit and loss, balance sheet, and cashflow) are prepared. And this

is from the perspective of the company initiating the project. It must be stated, that, several participants (suppliers,competitors, customers) are affected differently, but the company is mostly interested in effects on her. At this stage

what is most required to assess financial feasibility using the cashflow.

The others only serve as an input. Indeed, some approaches to building the cashflow do not use the income

statement and balance sheet. From the cashflow the feasibility of the project is established using measures such as

Net Present Value (NPV), Internal Rate of Return (IRR), and Benefit Cost Ratio (BCR) among others. The aim is to

find out if the project is viable or not. The issue of profitability does not arise here at all. If the project is viable, then, a

detailed project plan is prepared. In the case of projects with profit motive, a detailed business plan follows. The time

frame for considered fro projections in feasibility study is quite long, longer than that of the business plan which is the

magic five years. In unstable economies, this can be as short as three years.


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7. Economic

Economic aspects of project analysis use financial aspects as raw materials. Essentially, the financial analysis is

adjusted to accomplish economic analysis. The overarching goal of economic analysis is the determination of the

contribution of a proposed project to the total economy. The principal question is: does the level of contribution of the

project warrant the use of scare resources of the society to execute it? Despite the complementary nature of the

financial and economic analysis there are some differences.

Basis Financial Analysis Economic Analysis

1. Taxes Treated as costs to the projectPart of project benefit, treated as transferpayments and not to be considered ascost.

2. Subsidies Treated as returns to the projectCost to society because it is expenditureof resources by government thus fromsociety

3. Prices Market prices

Prices adjusted to reflect economic orsocial values; the prices are shadow oraccounting prices. Subsides and taxesare used in the adjustment.

4. Interest oncapital

Treated thus: interest paid to capital suppliersexternal to the economy is subtracted frombenefits. The result is what is available toowners of capital. Interest imputed to theentity from whose dimension analysis isbeing done is part of total return not cost

Used as quoted. It is total return tosociety

5. ViewpointPrepared from the viewpoint of an individual;person, company etc.

From the viewpoint of the economy orsociety as a whole.


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4. PROJECT RISK MANAGEMENT

A. Risk management

Risk management is concerned with identifying risks and drawing up plans to minimise their effect on a project.

A risk is a probability that some adverse circumstance will occur.

- Project risks affect schedule or resources

- Product risks affect the quality or performance of the software being developed

- Business risks affect the organisation developing or procuring the software

B. The risk management process

Risk identification

- Identify project, product and business risks

Risk analysis

- Assess the likelihood and consequences of these risks

Risk planning

- Draw up plans to avoid or minimise the effects of the risk

Risk monitoring

- Monitor the risks throughout the project

C. The risk management process

D. Risks and risk types

E. Risk

1. Identification

Technology risks

People risks


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Organisational risks

Requirements risks

Estimation risks

2. Analysis

Assess probability and seriousness of each risk

Probability may be very low, low, moderate, high or very high

Risk effects might be catastrophic, serious, tolerable or insignificant

F. Risk analysis

Risk Probability Effects

Organisational financial problems force reductions in the projectbudget.

Low Catastrophic

It is impossible to recruit staff with the skills required for the project. High Catastrophic

Key staff is ill at critical times in the project. Moderate Serious

Software components that should be reused contain defects whichlimit their functionality.

Moderate Serious

Changes to requirements that require major design rework areproposed.

Moderate Serious

The organisation is restructured so that different management areresponsible for the project.

High Serious

G. Risk planning

Consider each risk and develop a strategy to manage that risk

Avoidance strategies

- The probability that the risk will arise is reduced

Minimization strategies

- The impact of the risk on the project or product will be reduced

Contingency plans

- If the risk arises, contingency plans are plans to deal with that risk

Monitor

- Assess identified risks regularly to decide whether or not it is becoming less or more probable

- Assess whether the effects of the risk have changed

H. Risk monitoring

Assess each identified risks regularly to decide whether or not it is becoming less or more probable

Also assess whether the effects of the risk have changed

Each key risk should be discussed at management progress meetings

Key points

Risks may be project risks, product risks or business risks

Risk management is concerned with identifying risks which may affect the project and planning to ensure that these

risks do not develop into major threats


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5. PROJECT SELECTION

In what steps of the methodology is financial feasibility analysis relevant?

STEP 4 FEASIBILITY ANALYSIS

Questions Management Will Ask

1. Is the project profitable?

Initial investment costs

Annual operating costs and savings

Cost of operating inputs

Cost of waste management Less tangible costs

Revenues


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2. Determine availability of internal investment funds for bigger projects

3. Obtain external financing for remaining projects

Capital Budgeting Process - Process by which organisation decides:

Which investment projects are

Needed

Possible

Special focus on projects that require significant up-front capital investment How to allocate available capital between different projects

If additional capital is needed

Capital Budgeting Practices

Vary widely from company to company. Vary from country to country

Larger companies tend to have more formal practices than smaller companies

Larger companies tend to make more and larger capital investments than smaller companies

Some industry sectors require more capital investment than others

Typical Project Types and Costs

Maintenance

Maintain existing equipment and operations

Improvement Modify existing equipment, processes, and management and information systems to improve efficiency, reduce

costs, increase capacity, improve product quality, etc.

Replacement

Replace outdated, worn-out, or damaged equipment or outdated/inefficient management and information systems

CASH FLOW

Cash Flow Concept

Common management planning tool. Distinguishes between

Costs: cash outflows

Revenues/savings: cash inflows

Types of Cash Flow

Outflow Inflow

One-time Initial investment cost Equipment salvage

value

Annual Operating costs & taxes Operating revenues

& savings

Other Working capital Working capital

Costs and Savings

Initial investment costs

purchase of the camera system, delivery, installation, start-up

Annual operating costs (and savings)

Operating input materials, energy, labour

Incineration fuel, fuel additive, labour, ash to landfill

Wastewater treatment chemicals, electricity, labour, sludge to landfill

Working Capital and Salvage Value

Working capital:total value of goods and money needed to maintain project operations

Raw materials inventory

Product inventory

Accounts payable/receivable

Cash-on-hand

Salvage Value:resale value of equipment or other materials at the end of the project


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Timing

Incremental Analysis

Needed for many CP or EE projects

Compares cash flow of implemented options to the business as usual cash flow Covers only the cash flows that change

PROFITABILITY INDICATORS

Definition:

a single number that is calculated for characterisation of project profitability in a concise and understandable form

Common indicators

1. Simple Payback

2. Return on Investment (ROI)

3. Net Present Value (NPV)

4. Internal Rate of Return (IRR)

1. Simple Payback - Number of years it will take for the project to recover the initial investments. Usually a rule of

thumb for selecting projects, e.g. payback must be < 3 years

2. Return on Investment - The percentage of initial investment that is recovered each year

3. Net Present Value - Money Loses its Value

Question:

If we were giving away money, would you rather have:

(A) $10,000 today, or

(B) $10,000 3 years from now

Explain your answer.

Inflation

Money loses purchasing power over time as product/service prices rise, so a dollar today can buy more than a dollar

next year


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Return on Investment

A dollar that you invest today will bring you more than a dollar next year having the dollar now provides you with an

investment opportunity

Time Value of Money

Money is worth more now than in the future because of

Inflation

Investment opportunity

Time value of money depends on

Rate of inflation

Rate of return on investment

Cash Flows from Different Years

Before you can compare cash flows from different years, you need to convert them all to their equivalent values

in a single year

It is easiest to convert all project cash flows to their present value now, at the very beginning of the project

Converting Cash Flows to Present Value

Converting Cash Flows to Present Value

Discount rate:

Converts future year cash flows to their present value

Incorporates:

Desired return on investment

Inflation

Reverse of an interest rate calculation

Discount Rate & Interest Rate

Invested at an interest rate of 20%, how much will $10,000 now be worth after 3 years?

$10,000 x 1.20 x 1.20 x 1.20 = $17,280

At a discount rate of 20%, how much do I need to invest if I want to have $17,280 in 3 years?

$17,280

1.20 x 1.20 x 1.20 = $10,000

Which Discount Rate? Equal to the required rate of return for the project investment, based on

A basic return - pure compensation for deferring consumption

Any risk premium for that projects risk


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Any expected fall in the value of money over time through inflation

At least cover the costs

At least cover the costs of raising the investment financing from investors or lenders (i.e. the companys cost of

capital)

A single Weighted Average Cost of Capital (WACC) characterises the sources and cost of capital to the company

as a whole

Calculating Present Value

The Value of a Future $1

Net Present Value (NPV)

Definition: sum of present values of all projects cash flows

Negative (cash outflows)

Positive (cash inflows)

Characterises the present value of the project to the company

If NPV > 0, the project is profitable

If NPV < 0, the project is not

More reliable than Simple Payback or ROI as it considers

Time value of money

All future year cash flows

Sensitivity Analysis

In business as usual scenario PLS Company needs waste water treatment plant in year 3: $150,000 investment

With QC project: $95,000

Savings: $55,000

Also consider taxes!

Pollution taxes / fees

Tax deductions for equipment depreciation

Tax deduction for environmental projects

4. Internal Rate of Return (IRR) Definition: discount rate for which NPV = 0, over the project lifetime

Tells you exactly what discount rate makes the project just barely profitable

Similar to NPV, considers


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Time value of money

All future year cash flows

Profitability Indicators Summary


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5. FINANCIAL ANALYSIS

Financial Analysis Defined:

Comparing the costs and benefits over time to determine whether a project is profitable or not. To achieve this the

following financial indicators are used:

Net Present Value (NPV)

Internal Rate of Return (IRR)


Steps in conducting a Financial Analysis:

1. Identify the costs

2. Identify the benefits

3. Enter the costs and benefits into the financial calculator

4. Assess the financial indicators to determine if the project is financially favourable.

Defining Costs

There are different ways of defining costs:

By type:

Capital costs

Operating costs

By function:

Development costs

Operational costs Maintenance costs

By behaviour:

Fixed costs

Variable costs

By time:

Recurring costs

Non-recurring costs

Capital Costs

Capital costs are the expenses incurred in purchase of items that are recorded as assets; their value is depreciated over

time and they are recorded in the Balance Sheet.

Identify the capital costs for the project for the following items:

Equipment

Non-consumable Materials*

Infrastructure* Non-consumable materials are capital costs because these are materials that persist (eg. furniture, bricks)

Operating Costs

Operating costs are expenses incurred in the execution of the project or in the operation of the business (after the

project) They are not depreciated over time and are recorded in the profit and loss statement.

Identify the operating costs for the project for the following:

Internal business resources

Internal IT resources

External resources

Office accommodation

Licenses

Support

Training

System administration

Equipment hire

Consumable materials*

Travel Accommodation

Identifying the Benefits

Identify the benefits that the project will provide, and the value that can be assigned to each benefit.

Enter the costs and benefits into the Financial Calculator

For each year enter the anticipated capital and operating expenses into the financial calculator spreadsheet.

For each year enter the anticipated benefits into the spreadsheet.

Adjust the discount rate if appropriate.

Enter sensitivity values (% cost increase and % revenue decrease values)

The spreadsheet will automatically calculate the financial indicators

Assess the Financial Indicators

Financial indicators used in the spread sheet are: Net Present Value (NPV)

Internal Rate of Return (IRR)



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The value of Money

The value of money changes over time.

With most projects, the financial benefits are realised at a different time to the costs.

Net present value (NPV) provides a means to compare these by adjusting the value to todays value.

This is achieved by modifying the future value by a factor that represents the change in value of money from todays

value.

This factor is called the discount factor. It is calculated as: 1 (discount rate / 100)

Investment Analysis

If the Net Present Value is less than zero then this indicates the project is not financially worthwhile.

Note: The discount factor is based on a discount rate of 13%. Hence at the end of the first year $1 is worth 87c, drops to

75.6c in the second year, 65.8c in the third year etc.

Internal Rate of Return

Is defined as the discount rate at which an investment has a zero net present value. The internal rate of return equates to

the interest rate, expressed as a percentage that would yield the same return if the funds had been invested over the

same period of time. Therefore, if the internal rate of return for the project is less than the current bank interest rate it

would be more profitable to put the money in the bank than execute the project


Projects do not always run to plan. Costs and benefits estimated at an early stage of a project may indicate a profitableproject, but this profit could be eroded by an increase in costs or a decrease in the value of the benefits (the revenue).

Sensitivity analysis provides a means of determining the financial impact of this type of fluctuation. By entering an

anticipated percentage increase in costs or decrease in revenue the financial impact on the project can be identified by

looking at the change to the NPV or IRR measures.


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7. PROJECT FINANCE MANAGEMENT

PROJECT LIFE CYCLE

Conceptualisation :Project Proposal

- Feasibility Study

Planning :Organisational Structure

- Resources

- Establishment of standards Implementation :Monitoring & Controlling

Termination

- Disposal & Redeployment

CONCEPTUALISATION includes

Project Proposal - prepared to set out clearly, the rationale, proposed methods, costs and benefits.

Feasibility Study - resulting from careful examination of practicability, costs, markets and associated costs.

Important Ps

Product / Project Identification

Process ( Manufacturing & Project management)

Place (Project site, Markets, Sourcing)

Partners (Financial, Commercial) Promoters (Equity holders)

Feasibility Studies

Evaluation of risks & returns

Managerial potential

Economic considerations

Commercial feasibility

Financial capability

Technical Feasibility

Social Factors

Marketability

Compliance with statutory regulations Insurance / Risk management

KEY FACTORS

1. Location of the project

- - raw material availability

- - infrastructure facilities, etc

2. Size & Capacity levels

- - large plants are more economical

- - idle capacity is a huge loss

3. Technological Aspects

- - Production process, machinery

4. Management policies

- - Personnel, Sales, etc.

PLANNING includes

Project Report - prepared formally after conceptualizing the project & consists of write-up on the fine-prints of

the project and financials of the project

Project Appraisal & Evaluation - for the purpose of acquisition of resources

PROJECT REPORT

A project report is a pre-investment and comprehensive study of investment proposals of an organisation.

Project report encompass a thorough investigation relating to economic, technical, financial, social, managerial and

commercial aspects

FEATURES OF A PROJECT

Separate Entity


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Specific Purpose & Objectives

Limited Duration

Target dates for Commencement & completion

Fine-prints of the Project Report

1. Data collection, capacity determination

2. Promoters Information

3. Locational Advantages4. Technical Arrangement

5. Marketing & Selling Arrangement

6. Schedule of Implementation

7. Project Cost & Means of Finance

8. Profitability

Essentials for drafting a Techno Economic Feasibility Report (TEFR)

1. Comprehensive

2. Clarity

3. Elaborate

4. Informative

5. Synchronized

6. User friendly

Preparation of TEFR

1. Detailed description of the project, product description and uses

2. Promoters background & management profile

3. Infrastructure

4. Analysis of the schedule of implementation

5. Manufacturing processes, technical arrangement and process flow chart

6. Marketing

7. Financial summary of the promoters, group companies

8. Organisation Structure

9. Basic assumptions underlying the preparation of the TEFR

10. Analysis of the project cost11. Structuring the means of finance

Components of Project Cost

Land & Land Development

Shed & Building

Plant & Machinery- imported & indigenous

Miscellaneous Fixed Assets

Electrical installation

Margin money for working capital

Preliminary & pre-operative expenses

Provisions & Contingencies

Prospective Means of Finance

Share Capital - Equity or Preference

Term Loans - Domestic/External Commercial Borrowings or FCNR (B)

Debentures

Unsecured Loans & Deposits

Lease

Internal Accruals

Sops & Incentives

Venture Capital

Grants & Subsidies

Seed Capital Assistance

Deferred Payment Guarantee

Debt Securitisation Forfaiting

Factoring


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Working Capital

Financial Projections

Sales Forecast

Material Costs

Labour

Power & Fuel

Freight

Interest Costs

Depreciation

Taxation

Pooling of Capital

Term Loan

Investment

Acquisition of Fixed Assets

Working Capital

Miscellaneous Expenditure

Deferred Revenue Expenditure

Dividend

RISK

1. Assumption of Capital Budgeting

2. The projected cash flows occur in the same quantum as forecasted by the appraiser.

3. Quantification of Risk

4. Variation of the actual return from what was expected during the time of projections.

Risk analysis1. STANDARD DEVIATION

2. PROBABILITY TREE METHOD

3. SIMULATION METHOD

4. SENSITIVITY ANALYSIS

5. CERTAINTY EQUIVALENTS

6. ADJUSTED DISCOUNT RATE

7. CAPITAL ASSET PRICING MODEL (CAPM)

SENSITIVITY ANALYSIS

GOAL - Identification of variables of a project which could have an adverse effect on the overall outcome of an

investment proposal. Variables commonly used -

- Selling Price

- Cost of Factors of Production

- Initial Outflow

- Project Life

Role of Financial Instructions

Critical Appraisal

Lending

Visits & Interactions

Conducting feasibility tests

Evaluation of credit worthiness

Structuring Finance

Period of Loan

Grant of Moratorium

Credit Rating

Monitoring & Follow-up

Interactions with Financial Institutions

Conviction Evaluation

Attitude

Credit worthiness of promoters

Knowledge of the project Detailed study of the TEFR

Cordial & Positive Approach


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Sanction & Disbursal by Financial Institutions

Clearance by legal department

Acceptance of terms & conditions

Documentation

Creation of Charges

Disbursal

Term Loan Procedure

Submission of loan application

Processing

Appraisal

Issue of sanction letter

Acceptance of terms & conditions

Execution of loan agreement

Disbursement of Loan

Creation of security

Monitoring

ANALYSIS OF FINANCIAL RESULTS

1. Profitability

2. Balance Sheet - portrayal & scrutiny

3. Cash Flows

4. Break-even Point and Margin of Safety

5. Debt Service Coverage Ratio6. Fixed Assets Coverage Ratio

7. Sensitivity Analysis

8. Pay-back period

9. Internal Rate of Return

Important Qualitative Ratios

- Return on capital Employed

- Profit Margin

- Assets Turnover Ratio

- Inventory Turnover Ratio

- Pay-out Ratios

- Liquidity Ratios

- Current Ratio

- Debt Equity Ratios

- Interest Coverage Ratios

- Debt - Service Coverage Ratios

ANALYSIS OF FINANCIAL & OPERATING LEVERAGE

Quantitative Ratios

Units sold or consumed as raw materials

Unit realisation price

Trends in key ratios like sales, fixed assets, working capital & operating margin

Annualizing numbers especially for companies changing accounting years

Inter & Intra firm companies

Guidelines for Project Appraisal

Provision for Cost Escalation

Scrutinise sources of finance

Profitability adjustments

Examine Financial viability

Project Preference

Appraisal & Evaluation

Qualitative Factors

Intuition

Vision

Intangible Benefits

Strategic Aspects

Linkage between business planning and capital budgeting

Approach to decision making Strategic Planning & Financial Analysis

Organisational Considerations


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Summarizing Appraisal & Evaluation

Marketing

Technical

Financial

Economical

Managerial

Quality Control & Improvements

SWOT Analysis

Monitoring includes

Periodical Review

Updating/Revision of plans

Monitoring during Implementation

Adequate formulation

Sound project organisation

Proper implementation planning

Advance Action

Timely availability of funds

Judicious equipment, tendering & procurement

- Better contract management- Effective monitoring

- Applying network techniques like CPM & PERT model

Disposal of Assets includes

Redeployment of resources having alternative usage

CAPITAL BUDGETING

Planning for investment in capital assets. It involves proper project planning and commercial evaluation of projects to

know in advance technical feasibility and financial viability of the project

Capital Budgeting Process depends on

Size of the organisation

Number of projects

Direct financial benefit

Composition of assets

Timing of expenditure

Process of Capital Budgeting


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Capital budgeting techniques

PROJECT CASH FLOWS

Defined as the financial costs and benefits associated with a project

Costs & benefits evaluation

Capital Costs

Operating Costs

Revenue

Depreciation

Residual Value

Principles used in developing Projected Cash Flows

Incremental principle

Long Term Funds principle

Exclusion of Financing Costs principle Post Tax principle

INFLATION

Inflation has the tendency to cause a major impact on the ultimate success or failure of capital projects. The timing of

project appraisal is significant from the point of view of appraisers. In the likelihood that the presumed normal conditions

seldom exist for a project, inflation is bound to affect the project appraisal and implementation process.

Effect of inflation

Change in Projected Statement of Profitability and Cash Flows

Increase in rate of interest by lending institutions.

Increase in all Expenditure heads:

- Labour, Raw Material, Fixed Assets, etc,

- Remuneration to technicians & managerial personnel

Dealing with Inflation

Build into each Cash Flow element estimated rate of inflation on the basis of information available

Role of Venture Capitalist

Venture Capitalist fills this gap by providing Value Added Finance

What is Venture Capital

Spirit of partnership

- Alignment of interest

Active participation and Value Addition

Long term perspective Returns linked to performance

Risk - Reward sharing

Investment and not Assistance


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Approaching Venture Capital

1. Evolve Long Term Growth Strategy

Strong Value Proposition

- High probability of Commercialization

Scalable Business Model

2. Prepare well thought-out Business Plan

Business Focus & Growth Strategy

Milestones Realistic Projections

Exit Options

3. Prepare to dilute

Owning Large Part of a Small Business or Small Part of a Large one

4. Select a Partner (Strategic / VC) that

Shares Vision and Objective

Provides Strategic Inputs & Complementary Relationship

BUSINESS PLAN - WHAT VCFs LOOK FOR

SIMPLE -CLEARLY HIGHLIGHTING :

CORE STRENGTHS

Promoters & Team Value Proposition, Competitive Advantage

Key Customers, Market, Growth Potential

GROWTH PLANS

STRATEGY & TIME FRAME TO ACHIEVE SET MILESTONES

FUND REQUIREMENTS & DEPLOYMENT PLAN

REALISTIC FINANCIAL PROJECTIONS

Exit Options

Investment criteria

a) Risk Analysis

1. Promoters Background / Quality of Management

Vision Experience

Ability to Innovate / Change Rapidly

Ability to Build Team

Marketing and Branding Skills

2. Product / Service / Idea

Product Concept / Value proposition

Stage of Development / Level of Acceptance

Competitive Advantage and its sustainability / Entry Barrier

Scalability

3. Valuation

Revenue Model

IPR

Customer Base

4. Exit Options

Trade Sale

Merger

IPO

b) Value Addition

Implementation of Business Plan

- Using Network

- Team Building

- Resource Planning

Implementation of systems

Evolving Growth Strategy Provide Outside View


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VC Expectation Post Investment

Transparency / Corporate Governance

Openness to Constructive suggestions

Growth Appetite

- Organic / Non Organic Growth

Build Team

Build System

Preparedness to dilute and facilitate Exit

Social Cost Benefit Analysis (SCBA)

Urgency to fulfill long-term interest of the nation

Planning Commission decided to include social rate of return in feasibility study in case of public sector projects

Private Sector projects may be easily acceptable to Govt. institutions while granting various licenses &

approvals

A project with monetary loss but social benefit may be acceptable.

Indicators of Social Desirability

Employment Potential Criterion

Capital Output Ratio

Value added per unit of capital

Foreign Exchange benefit criterion Cost benefit ratio criterion

Relationship

Among employees

Between management, executives and work force

With financial institutions, banks and suppliers of capital

- customers

- competitors

- government bodies

- suppliers of resources


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8. SOURCES OF FUNDING

Learning Objectives

Strategic policy objectives in setting up projects

Investment strategies

Tactical objectives

Sources of funding

Introductory Comments

Setting up a project typically requires substantial investment

financial implications must be addressed well in advance

we will look at the likely costs of such projects

focus on ideas which are most critical

I. INVESTMENT STRATEGIES

Private ventures range in size from large, vertically integrated firms to small backyard operations

single common element: profit

investment decisions vary depending upon scale

large companies usually look at long-term trends, look at product life cycles sometimes invest in unprofitable pilot projects in order to receive better future return

II. TACTICAL DEVELOPMENT OBJECTIVES

Often specified with respect to desired rate of return (ROI)

other criteria used: net profit before taxes, cash flows, net present value

returns reflect the sources of and cost of the capital employed:

the cost of risk venture capital or equity depends upon return expected by shareholders

1. DEBT: EQUITY

Cost of funds borrowed from a funding/loan institution vary according to interest rates, duration, size of

loan cost of loans is less than the cost of risk equity

average cost of capital is dependent upon gearing ratio (debt:equity ratio)

when interest rates are low, D/E ratio is high

equity-based companies do better when interest rates are high

2. RATE OF RETURN

What is an appropriate rate of return?

Projects represents risk and are more hazardous compared to other ventures

Hence higher returns needed to be worthwhile

most banks look at 20-25% ROI as favorable

other option is to assign a risk premiumof 5% over normal return

the higher the intensity or more untried the technology, the higher the risk premium

III. Sources of funding

There are two basic sources of funding:

1) Capital assistanceand

2) private investmentcapital assistance = loans, grant aid, cash grants for developing nations, this comes from

external loans (World Bank, Commonwealth Development Corporation, Banco International de Desarollo, etc.)

grant aid: USAID, UNIDO, WHO, Swiss, Japanese, Norwegians developed countries: subsidies and enterprise

grants

1) CAPITAL ASSISTANCE

Most loans provided are low interest rate, extended repayment, concessionary in nature high percentage of

Asian Development Bank loans are of this type. 10% of all such loans are via the World Bank grant-aid/grants

are not paid back, real benefit is in reducing trade imbalances (export promotion loans) assistance is oftenprovided in form of technology transfer from government


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2) CREDIT INSTITUTIONS

Typically accessed by small borrowers

Consist of state finance corporations, and cooperative credit societies with numerous branches

Provide small loans promptlyminimum bureaucracy

Some technical and marketing assistance also provided

Briefing to borrowers on purpose and use of credit should also be provided (not often done)

3) PRIVATE INVESTMENT Can be foreign or domestic

private or public sale of equity (shares/stock)

backed up by commercial financing

venture capital or private equity

venture capital avail

Documents

PROJECT MANAGEMENT - Anant Dhuri.pdf