Korps Menwa Modul korps project management

MODUL KORPS PROJECT MANAGEMENT

KORPSMENWAINDONESIA

WidyaCastrenaDharmaSidha

HUMANCAPITALDIVISION

2016

Contents

ii

CONTENTS

Chapter 1: Project Management Introduction ............................................................................. 4

1 What is a project?........................................................................................................................................................................... 5

2 The project manager ..................................................................................................................................................................... 8

3 The project team ......................................................................................................................................................................... 12

4 Project stakeholders ................................................................................................................................................................... 19

5 Organisational context for projects ..................................................................................................................................... 21

6 Why is project management important? .......................................................................................................................... 23

7 Project success factors .............................................................................................................................................................. 24

8 A project-oriented organisation (‘POO’) ........................................................................................................................... 26

9 Projects and strategy ................................................................................................................................................................. 27

10 Structure ....................................................................................................................................................................................... 31

11 Types of projects ....................................................................................................................................................................... 33

Chapter 2: Project Feasibility Studies .......................................................................................... 39

1 Investment in project ................................................................................................................................................................. 40

2 Steps in project appraisal......................................................................................................................................................... 41

3 Methods of project appraisal ................................................................................................................................................. 51

4 Non-financial factors in a capital investment decision ............................................................................................... 52

5 The accounting rate of return (ARR) method .................................................................................................................. 53

6 The payback method ................................................................................................................................................................. 57

7 The payback and ARR methods in practice ..................................................................................................................... 60

8 Investment appraisal and cash flows .................................................................................................................................. 61

9 The time value of money ......................................................................................................................................................... 67

10 Discounted cash flow .............................................................................................................................................................. 69

11 The net present value method of project appraisal ................................................................................................... 71

12 Discounted payback ................................................................................................................................................................ 76

13 The internal rate of return method of project appraisal .......................................................................................... 79

14 NPV and IRR compared ......................................................................................................................................................... 83

15 The feasibility study report ................................................................................................................................................... 85

Chapter 3: The Project Life Cycle ................................................................................................. 87

1 The project life cycle .................................................................................................................................................................. 88

2 Management tools and techniques..................................................................................................................................... 97

3 Project management software............................................................................................................................................. 104

4 Documentation and reports ................................................................................................................................................. 106

5 Risk management...................................................................................................................................................................... 112

6 Managing stakeholders .......................................................................................................................................................... 119

7 Project resources – skills and people ................................................................................................................................ 122

Contents

iii

Chapter 4: Methods of Project Management........................................................................... 127

1 Project management approaches ...................................................................................................................................... 128

2 Core project management methodologies .................................................................................................................... 129

3 Choosing a methodology ...................................................................................................................................................... 131

4 Project management plan ..................................................................................................................................................... 132

Chapter 5: Project Management Tools and Techniques ......................................................... 142

1 Management tools and techniques................................................................................................................................... 143

2 Determining the work breakdown structure ................................................................................................................. 144

3 Sequencing work ....................................................................................................................................................................... 150

Chapter 6: Project Control and Evaluation ............................................................................... 165

1 Project monitoring .................................................................................................................................................................... 166

2 Reporting progress ................................................................................................................................................................... 167

3 The project termination decision ........................................................................................................................................ 171

4 The project report ..................................................................................................................................................................... 173

5 The outcome matrix ................................................................................................................................................................. 174

6 The post-completion audit ................................................................................................................................................... 175

7 Benefits realisation.................................................................................................................................................................... 176

8 The project scorecard .............................................................................................................................................................. 178

Chapter 1: Project Management Introduction

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Topics covered in the chapter:

Definition of project, project management

Responsibilities of a project manager

Management of the project team

Organisational context for projects

Projects management challenges

Project success factors

Project managing strategy

Strategic project management

The project-structured organisation

Project management vs. Operations management

Managing conflict in project

Project stakeholders

Types of projects


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1 What is a project?

To understand project management it is necessary to first define what a project is.

A Project is 'an undertaking that has a beginning and an end and is carried out to meet

established goals within cost, schedule and quality objectives'. (Haynes, Project Management)

A project often has the following characteristics:

A defined beginning and end

Resources allocated specifically to them

Intended to be done only once (although similar separate projects could be undertaken)

Follow a plan towards a clear intended end-result

Often cut across organisational and functional lines.

Alternatively a project can be defined as a series of activities aimed at bringing about clearly

specified objectives within a defined time-period and with a defined budget.1

A project should also have:

Clearly identified stakeholders, including the primary target group and the final

beneficiaries;

Clearly defined coordination, management and financing arrangements;

A monitoring and evaluation system (to support performance management); and

An appropriate level of financial and economic analysis, which indicates that the project’s

benefits will exceed its costs.

Development projects are a way of clearly defining and managing investments and change

processes. A project can vary significantly in their objectives, scope and scale.

Smaller projects might involve modest financial resources and last only a few months, whereas a

large project might involve many millions of Dollars and last for many years.

In general, the work organisations undertake involves either operations or projects. Operations

and projects are planned, controlled and executed. So how are projects distinguished from

'ordinary work'?

1 European Commission, Project Cycle Management Guidelines


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Projects Operations

Have a defined beginning and end On-going

Have resources allocated specifically to them,

although often on a shared basis

Resources used 'full-time'

Are intended to be done only once (e.g.

organising the Year 2005 London Marathon – the

2006 event is a separate project)

A mixture of many recurring tasks

Follow a plan towards a clear intended end-result Goals and deadlines are more general

Often cut across organisational and functional

lines

Usually follows the organisation or

functional structure

Common examples of projects include:

Producing a new product, service or object

Changing the structure of an organisation

Developing or modifying a new information system

Implementing a new information system

Project management is the combination of systems, techniques, and people used to control

and monitor activities undertaken within the project. A project will be deemed successful if it

is completed at the specified level of quality, on time and within budget.

1.1 What is project management?

Project management involves co-ordinating the resources necessary to complete the project

successfully (ie on time, within budget and to specification).

Today’s highly competitive business environment forces organisations to make high-quality

products at a lower cost and in a shorter duration. Organisations therefore are increasingly using

project management because it allows you to plan and organise resources to achieve a specified

outcome within a given timeframe. The techniques of project management also help you manage

and anticipate risks in a structured manner. Surveys of organisations using project management

have shown that project management allows for better utilisation of resources, shorter


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development times, reduced costs, interdepartmental cooperation that builds synergies across

the organisation, and a better focus on results and quality.

The objective of project management is a successful project. A project will be deemed successful

if it is completed at the specified level of quality, on time and within budget.

Objective Comment

Quality The end result should conform to the project specification. In other

words, the result should achieve what the project was supposed to do.

Budget The project should be completed without exceeding authorised

expenditure.

Timescale The progress of the project must follow the planned process, so that

the 'result' is ready for use at the agreed date. As time is money, proper

time management can help contain costs.

Whatever its size, a project’s success is based on three main criteria as shown by the following

triangle:

Your project will therefore be deemed successful if it:

Delivers the outcome with an agreed upon quality.

Does not overrun its end date.

Remains within budget (cost of resources).

Note however, that outcome, time and budget are interrelated, and during a project you may

need to do trade-offs between them. For example, if you want to get something done more

quickly, you may have to pump in more money into your project for additional resources.

1.2 The challenges of project management

Managing a project presents a variety of challenges. Some common challenges are outlined in

the following table.


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Challenge Comment

Teambuilding The work is carried out by a team of people often from varied work and

social backgrounds. The team must 'gel' quickly and be able to

communicate effectively with each other.

Planning Many possible problems may be avoided by careful design and planning

prior to commencement of work.

Problem solving

mechanisms

There should be mechanisms within the project to enable unforeseen

problems to be resolved quickly and efficiently.

Delayed benefit There is normally no benefit from a project until the work is finished.

This means that significant expenditure is being incurred for no

immediate benefit – this can be a source of pressure.

Dealing with

specialists

Project managers often have to deal competently and realistically with

specialists at differing stages of the project.

Potential for

conflict

Projects often involve several parties with different interests. This may

lead to conflict.

Project management ensures responsibilities are clearly defined and that resources are focussed

on specific objectives. The project management process also provides a structure for

communicating within and across organisational boundaries.

All projects share similar features and follow a similar process. This has led to the development

of project management tools and techniques that can be applied to all projects, no matter

how diverse. For example, with some limitations similar processes and techniques can be applied

to whether building a major structure or implementing a company-wide computer network.

All projects require a person who is ultimately responsible for delivering the required outcome.

This person is the project manager.

2 The project manager

The person who takes ultimate responsibility for ensuring the desired result is achieved on time

and within budget is the project manager.

Some project managers have the job title 'Project Manager'. These people usually have one major

responsibility: the project. Most people in business will have 'normal work' responsibilities outside

their project goals – which may lead to conflicting demands on their time. Anybody responsible

for a project (large or small) is a project manager.

The person who takes ultimate responsibility for ensuring the desired result is achieved on time

and within budget is the Project Manager.


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The way in which a project manager co-ordinates a project from initiation to completion, using

project management and general management techniques, is known as the Project

Management process.

2.1 Project management v operations management

The role a project manager performs is in many ways similar to those performed by other

managers. There are however some important differences, as shown in the following table.

Project manager Operations manager

Are often 'generalists' with wide-ranging

backgrounds and experience levels

Usually specialists in the areas managed

Oversee work in many functional areas Relate closely to technical tasks in their area

Facilitate, rather than supervise team members Have direct technical supervision

responsibilities

2.2 Duties of the project manager

Duties of the project manager include: Planning, teambuilding, communication, co-ordinating

project activities, monitoring and control, problem-resolution and quality control.

The duties of a project manager are summarised below.

Duty Comment

Outline planning Project planning (e.g. targets, sequencing)

• Developing project targets such as overall costs or timescale

needed (e.g. project should take 20 weeks).

• Dividing the project into activities and placing these activities into

the right sequence, often a complicated task if overlapping.

• Developing a framework for the procedures and structures, manage

the project (e.g. decide, in principle, to have weekly team meetings,

performance reviews etc.).

Detailed planning Work breakdown structure, resource requirements, network analysis for

scheduling.

Teambuilding Build cohesion and team spirit.

Communication The project manager must let superiors know what is going on, and

ensure that members of the project team are properly briefed.

Co-ordinating

project activities

Between the project team and users, and other external parties (e.g.

suppliers of hardware and software).


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Monitoring and

control

The project manager should estimate the causes for each departure

from the standard, and take corrective measures.

Problem-resolution Even with the best planning, unforeseen problems may arise.

Quality control There is often a short-sighted trade-off between getting the project out

on time and the project's quality.

An effective project management process helps project managers maintain control of projects

and meet their responsibilities.

2.3 The responsibilities of a project manager

A project manager has responsibilities to both management and to the project team.

2.3.1 Responsibilities to management

Ensure resources are used efficiently – strike a balance between cost, time and results

Keep management informed with timely and accurate communications

Manage the project to the best of his or her ability

Behave ethically, and adhere to the organisation's policies

Maintain a customer orientation (whether the project is geared towards an internal or

external customer) – customer satisfaction is a key indicator of project success

2.3.2 Responsibilities to the project and the project team

Take action to keep the project on target for successful completion

Ensure the project team has the resources required to perform tasks assigned

Help new team members integrate into the team

Provide any support required when members leave the team either during the project or

on completion

2.4 The skills required of a project manager

Project managers require the following skills: Leadership and team building, organisational

ability, communication skills (written, spoken, presentations, meetings), some technical

knowledge of the project area and inter-personal skills.

To meet these responsibilities a project manager requires a wide range of skills. The skills required

are similar to those required when managing a wider range of responsibilities. The narrower focus

of project management means it is easier to make a judgement as to how well these skills have

been applied.


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Type of skill How the project manager should display the type of skill

Leadership and

team building

Be enthusiastic about what the project will achieve.

Be positive (but realistic) about all aspects of the project.

Understand where the project fits into the 'big picture'.

Delegate tasks appropriately – and not take on too much personally.

Build team spirit through encouraging co-operation.

Do not be restrained by organisational structures – a high tolerance for

ambiguity (lack of clear-cut authority) will help the project manager.

Organisational Ensure all project documentation is clear and distributed to all who require

it.

Use project management tools to analyse and monitor project progress.

Communication Listen to project team members.

Use persuasion to coerce reluctant team members or stakeholders to

support the project.

Ensure management is kept informed and is never surprised.

Technical By providing (or at least providing access to) the technical expertise and

experience needed to manage the project.

Personal

Be flexible. Circumstances may develop that require a change in plan.

Show persistence. Even successful projects will encounter difficulties that

require repeated efforts to overcome.

Be creative. If one method of completing a task proves impractical a new

approach may be required.

Patience is required even in the face of tight deadlines. The 'quick-fix' may

eventually cost more time than a more thorough but initially more time-

consuming solution.

2.5 Leadership styles and project management

As in other forms of management, different project managers have different styles of leadership.

There is no 'best' leadership style, as individuals suit and react to different styles in different ways.

The key is adopting a style that suits both the project leader and the project team.


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Managers will usually adopt a style from the range shown in the following diagram.

The leadership style adopted will affect the way decisions relating to the project are made.

Although an autocratic style may prove successful in some situations (e.g. 'simple' or 'repetitive'

projects), a more consultative style has the advantage of making team members feel more a part

of the project. This should result in greater commitment.

Not all decisions will be made in the same way. For example, decisions that do not have direct

consequences for other project personnel may be made with no (or limited) consultation. A

balance needs to be found between ensuring decisions can be made efficiently, and ensuring

adequate consultation.

The type of people that comprise the project team will influence the style adopted. For example,

professionals generally dislike being closely supervised and dictated to. (Many non-professionals

dislike this too!) Some people however prefer to follow clear, specific instructions and not have

to think for themselves.

Project management techniques encourage management by exception by identifying, from the

outset, those activities which might threaten successful completion of a project.

3 The project team

3.1 Building a project team

Project success depends to a large extent on the team members selected.


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The Project Team comprises the people who report directly or indirectly to the project manager.

Project success depends to a large extent on the team members selected. The ideal project team

achieves project completion on time, within budget and to the required specifications – with the

minimum amount of direct supervision from the project manager.

3.1.1 Project team composition

The team will comprise individuals with differing skills and personalities. The project manager

should choose a balanced team that takes advantage of each team member's skills and

compensates elsewhere for their weaknesses.

The project team will normally be drawn from existing staff, but highly recommended outsiders

with special skills may be recruited. When building a team the project manager should ask the

following questions.

(a) What skills are required to complete each task of the project?

(b) Who has the talent and skills to complete the required tasks (whether inside or

outside the organisation)?

(c) Are the people identified available, affordable, and able to join the project team?

(d) What level of supervision will be required?

Although the composition of the project team is critical, project managers often find it is not

possible to assemble the ideal team, and have to do the best they can with the personnel

available. If the project manager feels the best available team does not possess the skills and

talent required, the project should be abandoned or delayed.

Once the team has been selected each member should be given a (probably verbal) project

briefing, outlining the overall aims of the project, and detailing the role they are expected to play.

(The role of documentation is discussed later).

3.1.2 Project team performance

The performance of the project team will be enhanced by the following.


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Effective communication

All members being aware of the team's purpose and the role of each team member

Collaboration and creativity among team members

Trusting, supportive atmosphere in group

A commitment to meeting the agreed schedule

Innovative/creative behaviour

Team members highly interdependent, interface effectively

Capacity for conflict resolution

Results orientation

High energy levels and enthusiasm

An acceptance of change

Collaboration and interaction between team members will help ensure the skills of all team

members are utilised, and should result in 'synergistic' solutions. Formal (e.g. meetings) and

informal channels (e.g. email links, a bulletin board) of communication should be set up to

ensure this interaction takes place.

Team members should be responsible and accountable. The project manager should provide

regular updates on project progress and timely feedback on team and individual performance.

3.1.3 Effective team management

Most effective project managers display the ability to:

• Select the right people

• Connect them to the right cause

• Solve problems that arise

• Evaluate progress towards objectives

• Negotiate resolutions to conflicts

• Heal wounds inflicted by change

3.2 Managing conflict

Wherever there is a potential for conflict a process to resolve it should be established before

the conflict occurs.

It is inevitable when people from wide-ranging backgrounds combine to form a project team that

conflict will occasionally occur. Some conflicts may actually be positive, resulting in fresh ideas

and energy being input to the project. Other conflicts can be negative and have the potential to

bring the project to a standstill.


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An open exchange of views between project personnel should be encouraged as this will help

ensure all possible courses of action and their consequences are considered. The project manager

should keep in touch with the relationships of team members and act as a conciliator if necessary.

Ideally, conflict should be harnessed for productive ends. Conflict can have positive effects such

as those listed below.

• Results in better, well thought-out ideas

• Forces people to search for new approaches

• Causes persistent problems to surface and be dealt with

• Forces people to clarify their views

• Causes tension which stimulates interest and creativity

3.2.1 Negotiation techniques

Most conflicts that arise during a project should be able to be resolved using negotiation and

resolution techniques.

When conflict occurs the project manager should avoid displaying bias and adopt a logical,

ordered approach towards achieving resolution. The following principles should be followed.

Focus on the problem, not the personalities

Define the problem carefully

Try to develop options that would result in mutual gain

Look for a wide variety of possible solutions

3.2.2 Resolution techniques

Ideally the conflict will be resolved by the parties involved agreeing on a course of action. In

cases where insufficient progress towards a resolution has occurred the project manager should

attempt to bring about a resolution.

The project manager should employ the following techniques in an attempt to resolve the

conflict.

a) Work through the problem using the negotiation techniques described above.

b) Attempt to establish a compromise – try to bring some degree of satisfaction to all

parties through give and take.

c) Try to smooth out any differences and downplay the importance of any remaining

differences.

d) Emphasise areas of agreement.


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e) If all else fails, and resolution is vital, the project manager should force the issue and

make a decision. He or she should emphasise to all parties that their commitment to the

project is appreciated, and that the conflict should now be put behind them.

3.3 A computerised information system project team

Much of the work of a dedicated IS department is likely to be project-based. This has lead to

many organisations organising the IS department according to a flat structure that recognises

that multitalented individuals will adopt different roles at different times – rather than

occupying a particular 'status'. Staff are selected from a pool of those currently available, and

perform different roles depending upon demand.

To operate such a system the organisation needs to devise a remuneration system that recognises

skills and work done rather than status.

We cover the systems development process in depth later in this Text. In the context of explaining

the roles of analysts and programmers, developing a computer system can be divided into two

parts.

a) Designing a system to perform the tasks the user department wants to be performed –

to the user's specification. This is the task of the systems analyst.

b) Writing the software – this is the job of the programmer.

3.3.1 Systems analysts

In general terms, the tasks of the systems analyst are as follows.

Systems analysis – involves carrying out a methodical study of a current system (manual or

computerised) to establish:

a) What the current system does.

b) Whether it does what it is supposed to do.

c) What the user department would like it to do, and so what the required objectives of

the system are.

Systems design – having established what the proposed system objectives are, the next stage is

to design a system that will achieve these objectives.

Systems specification – in designing a new system, it is the task of the systems analyst to specify

the system in detail.


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This involves identification of inputs, files, processing, output, hardware, costs, accuracy, response

times and controls.

The system design is spelled out formally in a document or manual called the systems

specification (which includes a program specification for each program in the system).

The analyst will often also have overall responsibility systems testing.

Once installed, the analyst will keep the system under review, and control system maintenance

with the co-operation of user departments.

3.3.2 Programmers

Programmers write the programs. This involves:

a) Reading the system specification and understanding it.

b) Recognising what the processing requirements of the program are, in other words,

defining the processing problem in detail.

c) Having defined and analysed the processing problem, writing the program in a

programming language.

d) Arranging for the program to be tested.

e) Identifying errors in the program and getting rid of these 'bugs' – ie debugging the

program.

f) Preparing full documentation for each program within the system.

3.4 Controlling the team

The project manager is responsible for overall control of the project team.

There are two types of control strategies related to supervision.

(a) Behaviour control deals with the behaviour of team members. In other words,

control is exercised through agreed procedures, policies and methodologies.

(b) Output control is where management attention is focused on results, more than the

way these were achieved.

Handy writes of a trust-control dilemma in which the sum of trust + control is a constant

amount:

T + C = Y

Where T = the trust the superior has in the subordinate, and the trust which the subordinate feels

the superior has in him;

C = the degree of control exercised by the superior over the subordinate;

Y = a constant, unchanging value.


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Any increase in C leads to an equal decrease in T; that is, if the manager retains more 'control' or

authority, the subordinate will immediately recognise that he or she is being trusted less. If the

superior wishes to show more trust in the subordinate, this can only be done by reducing C, that

is by delegating more authority.

3.4.1 Span of control

Span of control or 'span of management', refers to the number of subordinates or team

members responsible to a person.

Classical theorists suggest:

a) There are physical and mental limitations to a manager's ability to control people,

relationships and activities.

b) There should be tight managerial control from the top of an organisation downward. The

span of control should be restricted to allow maximum control.

Project managers may control very large teams. On large projects management layers will be

required between the overall project manager and team members. The appropriate span of

control will depend on:

a) Ability of the manager. A good organiser and communicator will be able to control a

larger number. The manager's workload is also relevant.

b) Ability of the team members. The more experienced, able, trustworthy and well-trained

subordinates are, the easier it is to control larger numbers.

c) Nature of the task. It is easier for a supervisor to control a large number of people if

they are all doing routine, repetitive or similar tasks.

d) The geographical dispersal of the subordinates, and the communication system of the

organisation.

3.4.2 Flat management structures

The wide range of people and skills required to successfully complete a systems development

project has led to the acceptance of flat management structures being the most appropriate

for this process.

The span of control has implications for the 'shape' of a project team and of an organisation

overall. An organisation with a narrow span of control will have more levels in its management


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hierarchy – the organisation will be narrow and tall. A tall structure reflects tighter supervision

and control, and lengthy chains of command and communication.

A team or organisation of the same size with a wide span of control will be wide and flat. The flat

organisation reflects a greater degree of delegation – the more a manager delegates, the wider

the span of control can be.

The wide range of people and skills required to successfully complete a systems development

project has led to the acceptance of flat management structures being the most appropriate for

this process.

The justification is that by empowering team members (or removing levels in hierarchies that

restrict freedom), not only will the job be done more effectively but the people who do the job

will get more out of it.

Project team members must be flexible to be able to respond quickly to specific and varied

customer demands. Team members must therefore be committed.

The following steps may help increase commitment.

a) Develop identification with the team and the project by means of:

Communications

Participation

Team member ideas

Financial bonuses

b) Ensure that people know what they have to achieve and are aware of how their

performance will be measured against agreed targets and standards.

c) Introduce a reward system, which relates at least partly to individual performance.

d) Treat team members as human beings, not machines.

4 Project stakeholders

Project stakeholders are the individuals and organisations who are involved in or may be

affected by project activities.

We have already looked at the role of the Project Manager and the Project Team. Other key

stakeholders are defined as follows.


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Project sponsor is accountable for the resources invested into the project and responsible for

the achievement of the project's business objectives. The sponsor may be owner, financier, client

etc., or their delegate.

Project support team is a term used to designate the personnel working on a project who do

not report to the project manager administratively.

Users are the individual or group that will utilise the end product, process (system), or service

produced by the project.

Risk manager. For large projects it may be necessary to appoint someone to control the process

of identifying, classifying and quantifying the risks associated with the project.

Quality manager. For large projects it may be necessary to appoint someone to write the

quality plan and develop quality control procedures.

Project stakeholders should all be committed towards a common goal – successful project

completion. The Project Plan should be the common point of reference that states priorities and

provides cohesion.

However, the individuals and groups that comprise the stakeholders all have different roles, and

therefore are likely to have different points of view. There is therefore the potential for

disagreements between stakeholder groups.

4.1 Managing stakeholder disputes

The first step is to establish a framework to predict the potential for disputes. This involves risk

management, since an unforeseen event (a risk) has the potential to create conflict, and dispute

management – implementing dispute resolution procedures that have minimal impact on costs,

goodwill and project progress.

One approach to dispute management strategy is to organise affairs in a way that minimises

exposure to the risk of disputes. This means employing effective management techniques

throughout all areas of operation.

4.1.1 Dispute resolution processes

Resolution is the solution of a conflict. Settlement is an arrangement, which brings an end to

the conflict, but does not necessarily address the underlying causes.

Wherever there is a potential for conflict, a process to resolve it should be established before

the conflict occurs.


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We have already discussed negotiation and resolution techniques in the context of project team

conflict. Many of the principles discussed previously can be applied to stakeholder conflicts,

although the relative positions of the stakeholders involved can complicate matters.

Conflict between project stakeholders may be resolved by:

Negotiation (perhaps with the assistance of others)

Partnering

Mediation

A third party neutral may judge or intervene to impose a solution

On very large projects a Disputes Review Board (DRB) may be formed. This may comprise

persons directly involved in the project engaged to maintain a 'watching brief' to identify and

attend upon disputes as they arise.

Usually there is a procedure in place which provides for the DRB to make an 'on the spot' decision

before a formal dispute is notified so that the project work can proceed, and that may be followed

by various rights of review at increasingly higher levels.

In practice, disputes are often resolved by the acceptance of the view of the party that has the

most financial 'clout' in the project. In such a situation mediation and negotiation may only deliver

an outcome which is a reflection of the original power imbalance.

5 Organisational context for projects

‘Every strategic initiative in a firm involves change management—and that is best accomplished

through the tools, tactics and techniques of project management…’

Project management thus becomes the enabler, the vehicle through which all strategic change

happens. The project itself is the gap filler, the bridge between what is and what will be’ (Baker,

2008).

Projects should be undertaken within the usual corporate and functional planning processes. The

objectives set at different levels will set the foundations of strategy. Project management is often

critical in ensuring that required changes are put in place.

Projects can be set at corporate level, departmental level, product level and market level or even

across departments or geographies. Top-level projects include culture change throughout the


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organisation, new market entry or even implementation of an enterprise system. Departmental,

product and market levels could include research or promotional projects for marketers, or the

roll out of a new sales force reporting system as examples. Projects that span departments and

geographies include new product development projects.

It is clear that projects are an essential part of the business activities at all levels. The challenge

then is to prioritise and manage these appropriately to meet the organisation’s needs.

Organisations and departments typically have many projects at any given time. Projects need to

be aligned with the organisation’s strategic priorities, and prioritised to ensure that the

organisation’s resources are focused on the priorities of the organisation. However, Rad and Levin

(2008) comment that often projects appear like ‘floating’ islands and are not best integrated into

the organisation.

They recommend the use of Project Portfolio Management (PPM), which enables organisations

to select, resource and implement projects to ensure that the right projects are selected on the

basis of their benefit to the organisation, and also taking account of the organisation’s resources.

Most PPM approaches result in a prioritised list of the most important projects. The project at the

top of the list should have priority over others, and resourcing decisions should follow.

This PPM approach is not limited to new projects, but places a check on the relevance of projects

as the organisation’s strategy changes. As the portfolio term implies, this assessment must not

only apply in the original selection decision, but also review the project at key stages to test the

current alignment with the organisation’s objectives and strategy, failing which can result in early

project termination.

While the discipline of a PPM approach is perfectly logical, it must be recognised that the

outcomes are often not. If a number of projects are competing for approval at a project board or

equivalent, then the relative strength of support and positions of power of the project champions

will often influence the decision.

External conditions may have an impact – it is much harder to get approval for expenditure during

recessionary times, as otherwise important work will be cancelled or postponed.

It is often more difficult to make a case for large-scale in-house projects that do not directly relate

to profitability. For example, a company may have a series of databases within separate

departments that are not integrated. To rationalise them into a consolidated database with much


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more potential for improving, Customer Relationship Management could give significant longer-

term returns. The problem is that it might be forgotten when a campaign shows good results that

it was the refined database that pointed the way to better targeting of new clients.

6 Why is project management important?

Professional project management started on major projects, such as new airport developments

or major industrial developments. In such instances, project managers were required to co-

ordinate and control the development process and the interaction of all players (e.g. owners,

funding agencies, developers, designers, contractors, suppliers, operators, regulatory bodies etc.).

The complex nature of these projects meant that a formal management was required.

Successful project management in this sphere led to an awareness that organisations with strong

project management were more effective than those that did not manage projects well. Project

management then developed its ‘body of knowledge’ that has since spread to all sizes of projects

across different functions and throughout organisations.

What is effective project management? Meredith and Mantell (2003) state that success or failure

of a project is based on whether they have achieved targets on:

Required performance (quality)

Cost (money invested)

Due date (delivery)

Traditionally, the key measure of success in projects is achieving the outcome. A successful

project is thus completed within the allocated time and cost and to the desired quality or results

(such as achieving a level of awareness or encouraging people to trial or specific sales results).

The three core issues – performance, cost and delivery – are clearly sound commercial issues. A

delay in the launch of a movie may mean that it misses a period when demand is traditionally

high. A delay in launching the movie in one market may result in pirated copies there. A poor-

quality soundtrack or editing of a movie may limit customers’ enjoyment and reduce the

possibility of word-of-mouth referrals. Failing in one of these areas results in loss of revenue and

customer satisfaction. Exceeding the budget will also impact on profitability.


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6.1 Project Success

Project management’s contribution is now widely recognised as important within the functional

areas of organisations. Business initiatives, activities and campaigns often fit the above definition

of projects. Professional project management gives attention to the various players, tasks and

outcomes for their success.

The consideration of project management will first address the types of projects (activities), how

these are undertaken (people and processes) and why they do it (strategic goals and competitive

position). Success results from their effective co-ordination and integration.

6.2 Projects present some management challenges

Table: Sample project challenges table

Challenge Comment

Teambuilding The work is carried out by a team of people often from varied work and

social backgrounds. The team must 'gel' quickly and be able to

communicate effectively with each other.

Expected

problems

Expected problems should be avoided by careful design and planning

prior to commencement of work.

Unexpected

problems

There should be mechanisms within the project to enable these

problems to be resolved quickly and efficiently.

Delayed benefit There is normally no benefit until the work is finished. The 'lead-in' time

to this can cause a strain on the eventual recipient who is also faced with

increasing expenditure for no immediate benefit.

Specialists Contributions made by specialists are of differing importance at each

stage.

Potential for

conflict

Projects often involve several parties with different interests. This may

lead to conflict.

7 Project success factors

Projects, small or large, are prone to fail unless they are appropriately managed and some effort

is applied to ensure that factors that might contribute to success are present. Here are some of

the key factors.


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Clearly defined mission and goals effectively communicated to, and understood by, all

participants.

Top management support that is visible is important in sending out the right messages

regarding the significance of the project.

Competent project manager with the necessary technical and inter-personal skills.

Well-designed operational process to ensure that work proceeds efficiently.

Competent team members with the appropriate knowledge, skills and attitudes. A good

team spirit helps to smooth the path to completion.

Sufficient resources in terms of finance, materials, people and processes.

Excellent communication ethos to ensure information is shared and there are no

misunderstandings.

Use of effective project management tools such as charts, leading edge software and

project progress meetings.

Clear client focus so that all work is done bearing in mind the needs of internal and

external customers.

Project management ensures responsibilities are clearly defined and that resources are focused

on specific objectives. The project management process also provides a structure for

communicating within and across organisational boundaries.

All projects share similar features and follow a similar process. This has led to the development

of project management tools and techniques that can be applied to all projects, no matter how

diverse. For example, with some limitations, similar processes and techniques can be applied

whether building a major structure (e.g. Terminal 5 at Heathrow Airport) or implementing a

company-wide computer network.


This person (whether officially given the title or not) is the project manager.

7.1 Why do projects go wrong?

Project planning is fundamental to project success. Realistic timescales and resource

requirements must be established, use of shared resources must be planned and, most

fundamental of all, jobs must be done in a sensible sequence.

Common reasons for project failure are also:


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Poor project planning (specifically inadequate risk management and weak project plan)

A weak business case

Lack of top management involvement and support

However, even if all these aspects are satisfactory there are other potential pitfalls that the project

planner must avoid or work around. Here are some examples.

a) Unproven technology

The use of new technological developments may be a feature of any project. The range of such

developments extends from fairly routine and non-critical improvements, through major

innovations capable of transforming working practices, costs and time scales, to revolutionary

techniques that make feasible projects that were previously quite impracticable. As the practical

potential of a technical change moves from minor to major, so its potential to cause disruption if

something goes wrong with it also increases.

b) Changing client specifications

It is not unusual for clients' notions of what they want to evolve during the lifetime of the project.

However, if the work is to come in on time and on budget, they must be aware of what is

technically feasible, reasonable in their aspirations, prompt with their decisions and, ultimately,

prepared to freeze the specification so that it can be delivered.

Note that the term 'client' includes internal specifies.

c) Politics

This problem area includes politics of all kinds, from those internal to an organisation managing

its own projects, to the effect of national (and even international) politics on major undertakings.

Identification of a senior figure with a project; public interest and press hysteria; hidden agendas;

national prestige; and political dogma can all have disastrous effects on project management.

Lack of senior management support is an important political problem.

8 A project-oriented organisation (‘POO’)

A project oriented organisation (POO) is an organisation, which:

Defines ‘Management by Projects’ as an organisational strategy


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Applies temporary organisations for the performance of complex processes

Manages a project portfolio of different project types

Has specific permanent organisations to provide integrative functions

Applies a ‘New Management Paradigm’

Has an explicit project management culture

Perceives itself as project-oriented

A project-oriented culture (‘POC’) is characterised by the existence of an explicit culture of project

management. In the POC, project management is considered as a business process, for which

there exist specific procedures and a common understanding of the performance of this process.

9 Projects and strategy

9.1 Linking projects with strategy

Grundy and Brown (2002) see three links between strategic thinking and project management.

a) Many projects are undertaken as consequences of the overall strategic planning process.

These projects may change the relationship between the organisation and its

environment or they may be aimed at major organisational change.

b) Some important projects arise on a bottom-up basis. The need for action may become

apparent for operational rather than strategic reasons: such projects must be given

careful consideration to ensure that their overall effect is congruent with the current

strategy.

c) Strategic thinking is also required at the level of the individual project, in order to avoid

the limitations that may be imposed by a narrow view of what is to be done.

9.2 Project managing strategy

Project management in its widest sense is fundamental to much strategy. This is because very

few organisations are able to do the same things in the same ways year after year. Continuing

environmental change forces many organisations to include extensive processes of adaptation

into their strategies. Business circumstances change and new conditions must be met with new

responses or initiatives. Each possible new development effectively constitutes a project in the

terms we have already discussed.

Gray and Larsen (2010) give examples, some of which are noted below.


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a) Compression of the product life cycle: product life cycles have fallen to one to three years,

on average, and it has become necessary to achieve very short time to market with new

products if advantage is to be retained.

b) Global competition emphasises cost and quality; project management techniques are

used to achieve the new requirements.

c) Increased product complexity requires the integration of diverse technologies.

d) Management delayering has eliminated routine middle-management posts while much

work has been outsourced: such organisational change tends to be continuous and

project management techniques are required to get things done in a flexible manner.

e) Increased customer focus in the form of customised products and close service

relationships is often achieved through a project management approach.

Grundy and Brown (2002) offer an integrative analysis of this trend and suggest three reasons for

taking a project management view of strategic management.

a) Much strategy appears to develop in an incremental or fragmented way; detailed

strategic thinking may be best pursued through the medium of a strategic project or

group of projects. Project management is a way of making ad hoc strategy more

deliberate and therefore better considered.

b) Strategic implementation is more complex than strategic analysis and choice; a project

management approach, as outlined above, has an important role to play here, but must

become capable of handling more complex, ambiguous and political issues if it is to play

it effectively. When an apparent need for a project emerges, it should be screened to

ensure that it supports the overall strategy.

c) Even at the smaller, more traditional scale of project management, wider strategic

awareness is vital if project managers are to deliver what the organisation actually needs

Of course, not all new developments are recognised as worthy of project management. For

example, the installation of a new, shared printer in an office would probably be regarded as a

matter of routine, though it would no doubt have been authorised by a responsible budget holder

and installed and networked by a suitable technician. There would probably have been a small

amount of training associated with its use and maintenance and it might have been the subject

of a health and safety risk assessment. All these processes taken together look like a project, if a

very small one.


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In contrast to the multitude of such small events, modern organisations are likely to undergo

significant change far less often, but sufficiently frequently and with developments that have

sufficiently long lives for project management to be an important aspect of strategic

implementation. Project management and change management are thus intimately linked.

An atmosphere of change and continuing development will be particularly evident in relation to

marketing; information systems and technology; organisation structure; and organisation culture.

9.3 Project management as a core competence

Project management can be a core strategic competence for many companies. This is particularly

true for companies working in such industries as consulting and construction, but it is also true

of organisations of all kinds that can benefit from Grundy and Brown's (2002) approach outlined

above. Such companies must ensure that they maintain and improve their project management

abilities if they are to continue to be commercially successful.

Kerzner (2009) describes a five-level project management maturity model of continuous

organisational improvement in the methodology of project management. Organisations should

aspire to progress to the highest level, which is a state of continuous improvement. The five levels

need not necessarily follow one another in a linear fashion: they may overlap, but the degree of

overlap allowed is reflected in the risk associated with the overall process.

Level 1 Common knowledge

The importance of project management to the organisation is understood and

training in the basic techniques and terminology is provided.

Level 2 Common processes

The processes employed successfully are standardised and developed so that

they can be used more widely, both for future projects and in concert with other

methods such as total quality management.

Level 3 Singular methodology

Project management is placed at the centre of a single corporate methodology,

achieving wide synergy and improving process control in particular. A separate

methodology may be retained for IS matters.

Level 4 Benchmarking


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Competitive advantage is recognised as being based on process improvement

and a continuing programme of benchmarking is undertaken.

Level 5 Continuous improvement Benchmarking information is critically appraised for its

potential contribution to the improvement of the singular methodology.

Models such as Kerzner’s are a guide to progress; in particular they indicate corporate training

needs and career development routes for project managers.

9.4 Strategic project management

It is possible to move from the slightly ad hoc approach outlined above, where project

management is essentially an implementation method, to a more all-embracing theory of

strategic development. Grundy and Brown (2002) suggest that it is often appropriate for

organisations to combine project management and strategic management into a process that

they call strategic project management. This envisages strategy as a stream of projects.

9.5 The project-structured organisation

Globalisation, other aspects of rapid environmental change and, above all, the need to exploit

knowledge make the structures, processes and relationships that compose configurations vital

for strategic success.

Johnson, Scholes and Whittington (2008) identify three major groups of challenges for twenty-

first century organisation structures.

a) The rapid pace of environmental change and increased levels of environmental

uncertainty demand flexibility of organisational design.

b) The creation and exploitation of knowledge requires effective systems to link the people

who have knowledge with the applications that need it.

c) Globalisation creates new types and a new scale of technological complexity in

communication and information systems; at the same time, diversity of culture, practices

and approaches to personal relationships bring their own new problems of

organisational form.

Of these three sets of issues, the need to capture, organise and exploit knowledge is probably

the most pressing for most organisations. An important element of response to this need is

therefore an emphasis on the importance of facilitating effective processes and relationships


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when designing structures. Johnson, Scholes and Whittington (2008) use the term configuration

to encompass these three elements.

a) Structure has its conventional meaning of organisation structure.

b) Processes drive and support people: they define how strategies are made and controlled;

and how the organisation’s people interact and implement strategy. They are

fundamental to systems of control.

c) Relationships are the connections between people within the organisation and between

those internally and those externally.

Effective processes and relationships can have varying degrees of formality and informality and

it is important that formal relationships and processes are aligned with the relevant informal ones.

It is very important to be aware that structures, processes and relationships are highly

interdependent: they have to work together intimately and consistently if the organisation is to

be successful. Here we will be concerned with structures and processes: relationships in this

model are not really relevant to project management.

10 Structure

An organisation’s formal structure reveals much about it.

a) It shows who is responsible for what.

b) It shows who communicates with whom, both in procedural practice and, to a great

extent, in less formal ways.

c) The upper levels of the structure reveal the skills the organisation values and, by

extension, the role of knowledge and skill within it.

We are concerned here with the project-structured organisation, but we will approach it via some

other forms that are relevant to it.

10.1 The functional structure

In a functional organisation structure, departments are defined by their functions, that is, the

work that they do. It is a traditional, common sense approach and many organisations are

structured like this. Primary functions in a manufacturing company might be production, sales,

finance, and general administration. Sub-departments of marketing might be selling, advertising,

distribution and warehousing.


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Functionally structured organisations can undertake projects successfully, partly, because they

are able to provide in-depth expertise to project managers by allocating expert staff from

appropriate functions. However, such staff can suffer from lack of focus if they still have a major

functional role to play and it can be difficult to integrate their efforts properly.

Functional structures are simple and almost intuitive in their operation. However, they tend to

promote insularity of thought and even distrust between functions. Achieving full co-ordination

of the work of the various departments can be very difficult. This sort of problem leads to the

matrix structure.

10.2 The matrix structure

The matrix structure imposes an extra layer of cross-functional management on top of the

functional structure in order to improve co-operation and integration of effort by granting

authority to project managers. Typically, the superimposed structure will be concerned with

individual products or product groups. Product or brand managers may be responsible for

budgeting, sales, pricing, marketing, distribution, quality and costs for their product or product

line, but have to liaise with the R&D, production, finance, distribution, and sales departments in

order to bring the product to the market and achieve sales targets.

The product managers may each have their own marketing team; in which case the marketing

department itself would be small or non-existent. The authority of product managers may vary

from organisation to organisation.

The division of authority between product managers and functional managers must be carefully

defined. Many decisions and plans will require careful negotiation if there is to be proper

cooperation. This can result in stress, conflict and slow progress.

The matrix structure is now regarded as rather old-fashioned, since it is essentially a complex way

of retaining the basic functional structure by adding extra resources to overcome its

disadvantages. More modern approaches seek fundamental improvements and tend to focus on

processes and projects.

10.3 The team-based structure

Both team- and project-based structures use cross-functional teams. The difference is that

projects naturally come to an end and so project teams disperse.


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A team-based structure extends the matrix structures’ use of both vertical functional links and

horizontal, activity-based ones by utilising cross-functional teams. Business processes are often

used as the basis of organisation, with each team being responsible for the processes relating to

an aspect of the business. Thus, a purchasing team might contain procurement specialists, design

and production engineers and marketing specialists, to ensure that outsourced sub-assemblies

are properly specified and contribute to brand values as well as being promptly delivered at the

right price.

10.4 The project-based structure

The project-based structure is similar to the team-based structure except that projects, by

definition, have a finite life and so, therefore, do the project teams dealing with them. Staff are

allocated to a project team as needed to deliver the project end state. This approach has been

used for many years by such organisations as civil engineers and business consultants.

A high level of motivation is common and the integration of specialist work is eased by

commitment to project delivery. Staff may work on several projects at the same time and thus

have responsibilities to several project managers.

This approach is very flexible and easy to use; it tends to complete projects quickly if the discipline

of project management is well-understood. In particular, it requires clear project definition if

control is to be effective and comprehensive project review if longer-term learning is to take

place.

However, there is a downside to project-based organisation:

It can be expensive in staff and loss of economies of scale.

Project teams can become insular, rivalries and unwilling to import expertise when

necessary.

In the project-based organisation, specialist functional departments still exist, but their role is to

support the project teams. Since the project teams are staffed from a pool of experts, the

functional structure remains intact and is not weakened by secondments to project work.

11 Types of projects

The differences between projects indicate how they should be managed. Brown (2000) sees

projects as spreading across a continuum, with complexity increasing on a number of dimensions.

These dimensions include:


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Budget size

Time span

Human resources involved

Complexity of tasks

Cross-functional involvement

Co-ordination required

Simple projects, characterised as low budget, short term, simple tasks, within a functional domain,

would require more administrative management. Those that are more complex, with higher

budgets, often with people from different departments (and maybe organisations) and spanning

a longer term would require more sophisticated project management.

Obeng (1994) takes a related approach to characterise four distinct project environments, with

differences in process uncertainty (ie what to do) and the level of outcome uncertainty (ie what

can be achieved) and named the four resulting categories.

a) Paint by numbers – Projects are low in process and outcome uncertainty, e.g. installing

point of sale (POS) displays in retailers’ outlets. The outcome is the same – the installation

of the POS display – and the process (the way in which it is implemented) would be

similar. However, differences, such as environmental factors (e.g. existing store design),

time issues (e.g. minimising staff and customer inconvenience) and cost issues (e.g.

adaptations for a given situation) mean this is not a completely routine process. Often,

organisations have process protocols or manuals detailing core processes. These types

of projects are considered ‘hard’ projects, because of their fixed processes and clarity of

outcome.

b) Making a movie – Projects are low in process uncertainty and high in outcome

uncertainty. Producers and directors know what is involved in making the movie,

although the topic, location and people vary. However, predicting the success of the

movie is difficult. Projects such as new product or advertising campaign launches often

have a similar pattern of high costs and a high risk of failure. These projects need clear,

precise definition of outcomes, and stakeholders’ expectations must be managed

throughout the process. Timescales and budgets must be tightly controlled.

c) The quest – Projects are high in process uncertainty and low in outcome uncertainty.

These projects have focused outcomes, but it is not clear how or when this will be

achieved. Some exploratory development projects, such as AIDS cures for pharmaceutical


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companies, are in this category. Progress and resources reviews throughout these

projects are essential to keep within cost. Further, focus is essential to keep the project

on target.

d) The foggy project – Projects are vague in what is involved and in the expected results,

so they have no set process and uncertainty outcomes. The original dot-com companies,

like boo.com and lastminute.com, were foggy projects in their development stages, with

little to guide them. Foggy projects need control over costs and level of risk. Project

managers need to manage stakeholder relationships as the project develops.

11.1 Hard and soft projects

Project management, as a management discipline, has largely been developed in a context of

engineering, where there have been well-defined, tangible objectives to be achieved. Examples

abound in the civil engineering and aircraft industries. Even where objectives have been events

rather than things, such as mounting the Olympic Games, it has been fairly clear what the desired

outcomes were and what was involved in achieving them. There is, however, a wide category of

projects for which clear-cut scope does not exist and it is difficult to see quite how to proceed.

The project sponsors are aware that something must be done, but they are not quite sure what,

precisely, it is, nor how to achieve it. The public sector could provide many illustrations, such as,

for example, a perceived need to improve secondary education. Such a mission would be subject

to extensive debate: first as to what was to be understood by ‘improve’; and, second, how to go

about the ‘improving’.

11.2 Hard and soft labels

This apparent dichotomy represented by clearly defined, engineering-oriented programmes on

the one hand and, vaguer areas of aspiration on the other has led to the use of the terms hard

and soft to label the two types of project. This usage is not confined to the sphere of project

management. Professor Mike Pidd of Lancaster University Business School in relation to

operations research (OR) says:

‘Unfortunate though these terms are, they have crept into common usage in recent years. They

are really extreme points on a spectrum ...’ (Pidd, 2010).

In hard OR, the question of problem definition is seen as relatively straightforward, and

is more a question of finding out what is going on so that some appropriate analysis can

be conducted


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The key assumption is that this real world can be understood and (sic) a taken-for-granted way.

By contrast, in soft OR, problem definition is seem as problematic and the process of

problem structuring is regarded as crucial to the success of any soft OR. This relates to

John Dewey’s maxim that, ‘a problem well put is a problem half solved’. The world is seen

as multi-faceted, and the approaches adopted to try to understand it are interpretive or

pluralistic. Thus, problem definition is seen as something which must be negotiated

between parties who may have different interests and interpretations.’ Professor Pidd’s

remarks about problem definition are as applicable to project management as to OR. The

other insight he offers us here is the idea of hard and soft as extreme points on a

spectrum: an awareness that an apparently hard project has some soft aspects will be

very useful to the project manager, as will be an awareness of the opposite case.

11.3 Seven dimensions for analysis

Just as the overall classifications of hard and soft should be seen as ends of a spectrum, so

Crawford and Pollacks’s factors have degrees of presence in a project; they are not qualities that

are present or absent. Most of these factors are both visible in the project and in the methods

used in its management, though some are more relevant to one or the other.

a) Goal/objective clarity. The degree of definition of the goal or objectives is the first

dimension of analysis.

Clear and specific desired outcomes are typical of engineering projects, while projects

relating to research or organisational change, for example, tend to have less well-defined

objectives.

b) Goal/objective tangibility. The clarity and tangibility of project goals and objectives are

often linked and the link may be very strong indeed, as with many engineering projects,

where the objective is the construction of a physical object. However, this is not always

the case: very clear goals can relate to intangible outcomes, such as individual exam

success, while some very tangible construction objectives, for example, may be

approached via ambiguous specifications.

c) Success measures. Generally, it is easier to measure the degree of success of hard projects

than of soft ones, partly as a result of their higher degree of goal tangibility and clarity.

Quantitative performance measures are associated with hard projects and qualitative

with soft. It should not be assumed that quantitative measures are superior to qualitative

ones: each has its place. Quantitative measures are generally confined to a few variables


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considered significant in order to minimise the cost of data capture; this does not give a

full picture. Nor are quantitative measures adequate when projects deal with qualitative

matters such as attitude, learning and morale.

d) Project permeability. The permeability of a project is the extent to which its objectives

and processes are subject to influences outside the control of the project manager. The

extent of these influences might be very limited in a short, simple project of a well-

understood type. However, larger, less well-defined projects in less well-understood

environments are likely to display considerable permeability. A good example of a factor

increasing project permeability is the use of sub-contractors: their competence and

diligence are far less subject to the control of the project manager than are those of in-

house teams.

e) Number of solution options. Hard projects will normally have one or more clearly defined

outcomes, possibly handed down by authority. Softer projects will tend to have a range

of possible outcomes that require consideration.

f) Degree of participation and practitioner role. This dimension relates specifically to the

nature of the appropriate project management practice and is dealt with below under

implementation.

g) Stakeholder expectations. Clear and logical stakeholder relationships are typical in hard

projects, where the emphasis is on efficiency and predictability. Soft projects, because of

their indeterminate nature, require a greater degree of interaction between stakeholders

in order to overcome differences of style, language, assumptions and competence. The

credibility of project staff in the eyes of stakeholders may become an issue.

11.4 Implementation considerations

The chances of making a project a success are enhanced if project management methods are

tailored to the degree of its hardness or softness. Hard and soft approaches are not mutually

exclusive and can be combined in ways that reflect the project's position on the various

dimensions.

a) Goal/objective clarity. The extent of clarity in the definition of a project's goals and

objectives affects the methods that are used to move the project forward. Well-defined

goals permit the application of techniques designed to achieve them efficiently. Where

there is goal ambiguity, effort must be deployed on consultation, learning and


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negotiation in order to reach an adequate degree of goal definition. These processes will

almost certainly have to be continued throughout the life of the project as new

ambiguities arise and have to be dealt with. The management of the project thus entails

as much consideration of what is to be done as of how to do it.

b) Project permeability. Where project permeability is low, hard management methods that

concentrate on clear objectives and techniques are appropriate. However, where

permeability is high, a softer approach is needed. It may be necessary to deal with, for

example, bureaucratic, organisational, cultural and political influences that are capable of

affecting both objectives and methods. These influences will probably have to be dealt

with sympathetically and diplomatically. They will require a learning approach to

management and a degree of adjustment to project processes and intended outcomes

as understanding of the environment grows.

c) Number of solution options. Hard projects tend to be managed to achieve efficient

delivery of clearly defined outcomes. Softer project management methods will tend to

explore a range of methods and solutions to problems. This will be appropriate when

there is potential benefit in questioning assumptions and exploring a range of options.

Crawford and Pollack (2004) say ‘the soft paradigm emphasises learning, debate,

participation, exploration and questioning’.

d) Degree of participation and practitioner role. A soft approach to project management is

participative and collaborative, with expertise in facilitating the efforts of others being a

major competence for the project manager. By contrast, the hard project management

style tends to be based on individuals’ technical expertise in their areas of concern.

Project staff will have clearly defined roles and boundaries. This hard approach can

achieve faster project delivery, but at a potential cost in lost innovation and learning.

e) Stakeholder expectations. The implementation aspects of this dimension follow on from

the previous one. A hard management approach will tend towards command and control,

whereas a soft approach ‘has culture, meaning and value as central concerns’.

Organisations are seen as cultural systems and project success will depend on the

perceptions of the stakeholders involved.

Chapter 2: Project Feasibility Studies

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Key areas of feasibility

Steps in feasibility studies

Terms of reference

Investment appraisal techniques: payback, ARR, discounted cash flow (DCF), NPV and IRR

Principal methods of evaluating the economic viability of a project

Feasibility study report


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1 Investment in project

Investment is any expenditure made with the expectation of future benefits or 'returns'.

Expenditure can be divided into two categories: capital expenditure and revenue expenditure.

Commercial investment decisions are largely determined by financial considerations. (Are the

returns sufficient? Is it the cheapest option available?)

An investment decision is a decision:

(a) whether or not to undertake an investment in a particular project

(b) when there are alternative choices for an investment, selecting which of the mutually

exclusive investments to undertake

(c) when capital for spending is in short supply, deciding which investments to undertake with

the money that is available.

1.1 Investment by the commercial sector and by not-for profit organisations

For investments by commercial organisations, a major consideration is finance. An investment

should be justified in financial terms, and should not be undertaken if it is not expected to meet

the minimum financial requirements. However, non-financial considerations could influence an

investment decision. Investment by not-for-profit organisations differs from investment by

commercial organisations.

(a) Relatively few capital investments by not-for-profit organisations are made with the

intention of earning a financial return. For example, government spending on roads,

hospitals, schools, the defence forces and the police service, nuclear waste dumps and so

on are not made with an eye to profit and return. Similarly, investments by charities would

not be made with profit in mind.

(b) Rather than considering financial cost and financial benefits (if any) alone, not-for-profit

organisations will often have regard to the social costs and social benefits of investments

when making capital expenditure decisions. The social costs of building a new motorway

into a city might include the loss of people's homes, more pollution and health hazards

whereas the social benefits might include faster travel, the ability of the road to carry a


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larger volume of traffic and the environmental benefits for the people in the city from

reduced traffic congestion.

The project appraisal techniques described in this chapter are based on the assumption that the

investment decision is a commercial one, and that financial considerations will therefore

predominate.

2 Steps in project appraisal

There is a need for management control over capital spending. Projects, once identified as

potential investments, should be properly evaluated and a formal proposal to invest submitted to

the managers responsible for authorising the spending. The spending should be authorised. Once

authorised, the spending on the project and benefits from the project should be monitored. After

the project has been completed, there should be a post-completion audit.

Capital expenditure proposals should go through a formal decision making and control cycle with

the following key stages.

• Identification

• Appraisal

• Proposal

• Approval and authorisation

• Implementation

• Monitoring and control

• Performance review and post completion audit

2.1 Identification

Projects originate from the identification of a problem or the opportunity to do something new.

If the issue identified matches the long-term strategic objectives of the business then an initial

proposal may be made which, if approved, will result in a formal project.

At this point management must ensure that the project is established with clear terms of

reference, an appropriate management structure and a carefully selected project team. The

project team will have to study, discuss and analyse the problem, from a number of different


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aspects (e.g. technical, financial etc.) so must have the appropriate skills and authority to carry

out the task.

It is important at this stage to establish general project goals which can be developed into specific

objectives. Clear goals and objectives give team members quantifiable targets to aim for. This

should improve motivation and performance, as attempting to achieve a challenging goal is more

inspiring than simply being told ‘do your best’.

2.2 Appraisal

Appraisal has a number of elements

• Feasibility study and financial appraisal

• Risk assessment

• Finance source selection

2.2.1 Feasibility study and financial appraisal

A feasibility study undertaken by a carefully selected team covering all aspects of a project's

feasibility is a vital stage in assessing whether an investment is worthwhile. Feasibility studies are

particularly important for investments and projects that are likely to be long and complicated and

for very large projects where it will be essential to be able to develop a clear business case.

A more realistic judgement as to the overall feasibility of the project can now be made. Some

large projects may involve a pre-project feasibility study, which establishes whether it is feasible

to undertake the project at all. For complex projects, a detailed feasibility study may be required

to establish if the project can be achieved within acceptable cost and time constraints.

A feasibility study team might be appointed to carry out the study (although individuals might

be given the task in the case of smaller projects).

• Members of the team should be drawn from the departments affected by the investment.

• At least one person must have relevant detailed technical knowledge, and one other

person must be able to assess the organisational implications of the new system.

• It is possible to hire consultants to carry out the feasibility study, but their lack of

knowledge about the organisation may adversely affect the usefulness of their proposals.


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• Before selecting the members of the study group, the steering committee must ensure

that they possess suitable personal qualities, e.g. the ability to be objectively critical.

There are five key areas in which a project must be feasible if it is to be selected.

• Operational feasibility – Operational feasibility is a key concern. If an investment makes

technical sense but conflicts with the way the organisation does business, the solution is

not feasible. Thus an organisation might reject a solution because it forces a change in

management responsibilities, status and chains of command, or does not suit regional

reporting structures, or because the costs of redundancies, retraining and reorganisation

are considered too high.

• Technical feasibility – The requirements, as defined in the feasibility study, must be

technically achievable. For a computer system for example, any proposed solution must be

capable of being implemented using available hardware, software and other technology.

Technical feasibility considerations could include the following.

– Volume of transactions that can be processed within a given time

– Capacity to hold files or records of a certain size

– Response times (how quickly the computer does what you ask it to)

– Number of users that can be supported without deterioration in the other criteria

• Social feasibility – An assessment of social feasibility will address a number of areas,

including the following.

– Personnel policies

– Redrawing of job specifications

– Threats to industrial relations

– Expected skills requirements

– Motivation

• Ecological feasibility – Ecological feasibility relates to environmental considerations. A

particular course of action may be rejected on the basis that it would cause too much

damage to the environment. In some markets customers may prefer to purchase

ecologically sound products. Ecological feasibility issues could include the following.

– What waste products are produced?


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– How is waste disposed of?

– Is use of the product likely to damage the environment?

– Could the production process be 'cleaner'?

– How much energy does the process consume?

• Economic feasibility – Any project will have economic costs and economic benefits.

Economic feasibility has three strands.

– The benefits must justify the costs.

– The project must be the ‘best’ option from those under consideration for its

particular purpose.

– The project must compete with projects in other areas of the business for funds.

Even if it is projected to produce a positive return and satisfies all relevant criteria, it

may not be chosen because other business needs are perceived as more important.

2.2.2 The feasibility study team

A feasibility study team should be appointed to carry out the study (although individuals might

be given the task in the case of smaller projects).

(a) Members of the team should be drawn from the departments affected by the project.

(b) At least one person must have a detailed knowledge of computers and systems design (in a

small concern it may be necessary to bring in a systems analyst from outside.

(c) At least one person should have a detailed knowledge of the organisation and in particular

of the workings and staff of the departments affected. Managers with direct knowledge of

how the current system operates will know what the information needs of the system are,

and whether any proposed new system (for example an off-the-shelf software package) will

do everything that is wanted. They are also most likely to be in a position to recognize

improvements that can be made in the current system.

(d) It is possible to hire consultants to carry out the feasibility study, but their lack of knowledge

about the organisation may adversely affect the usefulness of their proposals.


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(e) Before selecting the members of the study group, the steering committee must ensure that

they possess suitable personal qualities, e.g. the ability to be objectively critical.

(f) All members of the study group should ideally have some knowledge of information

technology and systems design. They should also be encouraged to read as widely as

possible and take an active interest in current innovations.

With larger projects it may well be worthwhile for a small firm to employ a professional systems

analyst and then appoint a management team to work with the analyst.

2.2.3 Identifying and selecting Information Systems projects

A planned approach is needed when identifying and selecting new information systems projects.

The following actions should be considered.

a) IS projects almost always utilise IT. IT is critical to the success of many organisations. This

means that an IT strategy should form a core part of the overall corporate strategy and should

be developed/updated whenever the organisation's strategy is reviewed or as otherwise

necessary. IT needs can then be identified in the context of overall business needs.

b) Because IT is critical, it requires adequate representation at senior management level. It is no

longer suitable for IT to be under the control of the MD, FD or computer centre manager. It

really needs a separate Board level person responsible, such as an Information Director or an

IS director. This will help to ensure that IT is given adequate consideration at strategic level.

c) The IT development can no longer function as a subsystem of accounting, administration or

finance. It should be given separate departmental or functional status in the organization

with its own reporting lines and responsibilities.

d) Once the IT department has been set up, its funding must be considered. A simplistic

approach would be to treat it as an overhead; this is simple but inefficient. There are various

approaches possible to the recovery of IT costs from user departments, and the IT

department may even operate as a commercial concern providing services to third parties at

a profit.

e) A strategic plan for the use of IT should be developed. This should take in separate elements

such as information technology and information systems. It should also acknowledge the

importance of the organisation's information resource.


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f) If new computer systems are to be introduced regularly, the organisation may set up a

steering committee to oversee systems development. A steering committee can also be set

up for a one-off project. The role of the steering committee includes approving or rejecting

individual projects and where appropriate submitting projects to the Board for approval. The

composition and determination of terms of reference for the steering committee must be

agreed.

g) The approach of the organisation to individual projects must be decided. Will it follow the

traditional life cycle or will it use a methodology? Commercial methodologies impose

discipline on the development process.

h) Procedures for evaluating and monitoring performance both during and after a project need

to be put in place. Many methodologies require formal sign-off of each stage, but this does

not obviate the need for good project management or for post-implementation evaluation.

i) Details of the systems development procedures must be agreed. If a commercial

methodology is used, many of these procedures will be pre-determined. Areas to be

considered include the approach to feasibility studies, methods of cost-benefit analysis,

design specifications and conventions, development tools and techniques, reporting lines,

contents of standard invitations to tender, drawing up of supplier conditions and procedures

for testing and implementation.

2.2.4 Conducting the feasibility study

Some of the work performed at the feasibility study stage may be similar to work performed later

on in the development of the project. This is because both processes include the need to define

the current situation or problem.

A feasibility study should be carried out before undertaking an information systems project

because a new or amended system may:

a) Be complicated and costly.

b) Disrupt operations during development and implementation (e.g. staff and management

time).

c) Have far reaching consequences in a way an organisation conducts future business.

d) Impact on organisation strategy and structure.


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2.2.5 Terms of reference

The terms of reference for a feasibility study group may be set out by a steering committee, the

information director or the board of directors, and might consist of:

a) To investigate and report on an existing system, its procedures and costs.

b) To define the systems requirements.

c) To establish whether these requirements are being met by the existing system.

d) To establish whether they could be met by an alternative system.

e) To specify performance criteria for the system.

f) To recommend the most suitable system to meet the system's objectives.

g) To prepare a detailed cost budget, within a specified budget limit.

h) To prepare a draft plan for implementation within a specified timescale.

i) To establish whether the hoped-for benefits could be realised.

j) To establish a detailed design, implementation and operating budget. (k) To compare

the detailed budget with the costs of the current system.

k) To set the date by which the study group must report back.

l) To decide which operational managers should be approached by the study group.

The remit of a feasibility study may be narrow or wide. The feasibility study team must engage

in a substantial effort of fact finding.

The methods available for financially appraising a proposed project are discussed below.

2.2.6 Risk assessment

At this initial stage, risks that could affect project implementation need to be carefully identified.

Once this has happened, risks need to be ranked according to their seriousness and likelihood,

and measures taken to transfer, minimise, accept or eliminate project risks. What happens to the

risk will depend on the severity of the risk and the cost of management action.

The risk situation also needs to be reviewed every time key project decisions are taken.

From the point of view of any financial risks it may be necessary to consider sensitivity or scenario

analysis (covered later).


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2.2.7 Finance source selection

The alternative sources of finance available to businesses and the methods of selecting the most

appropriate one are covered later.

2.3 Proposal

Once the feasibility study has been completed, the project team should prepare a formal proposal

to put to the business executives with a recommended course of action. The contents of the

proposal will largely follow on directly from the feasibility study, the proposal being a formalised

document setting out the business case for the proposal and how it should be financed.

It is likely that the results of various studies undertaken for the feasibility study will be included

as appendices in this report, though the information may well be in a more summarised form.

The proposal must stand alone. It must provide all of the information that the executives may

need in order to come to a conclusion. It would typically start with an executive summary,

followed by the detail of the report, the conclusion and recommendations, and any appendices.

2.4 Approval and authorisation

The specific authorisation requirements will depend on the financial and strategic significance of

the proposal. Senior managers may have the authority to decide on small projects in their area.

Directors are liable to be able to authorise larger projects on their own, but for the most

significant projects approval will be required from the full board of directors.

Those making the decision must be satisfied that an appropriately-detailed evaluation has been

carried out, that the proposal meets the necessary criteria to contribute to profitability, and that

it is consistent with the overall strategy of the enterprise.

The benefits of a formal system of authorisation and monitoring are as follows.

(a) Capital expenditure projects often involve large amounts of spending and resource

utilisation. In view of their importance for a business, they should be planned, approved

and controlled with as much care as revenue spending is controlled (e.g. through

budgeting and budgetary control).

(b) A capital investment decision may be difficult to reverse. When a spending decision is

reversed, considerable costs might already have been incurred for little or no benefit.


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(c) Investment decisions need to be considered in the light of strategic and tactical plans of

the company. Investment decisions should be consistent with the company's long-term

objective, which will usually be the maximisation of the wealth of shareholders. A formal

process of project appraisal and approval is a way of checking consistency with strategic

objectives.

(d) Capital projects might have an expected life of many years, and estimates of future

returns will inevitably be uncertain. Consequently, there may be a high degree of risk

and uncertainty in investment decisions. A formal appraisal procedure provides an

opportunity for assessing the risk.

2.5 Implementation

Once the decision has been made that the project will be undertaken, responsibility for the

project should be assigned to a project manager or other responsible person. The required

resources will need to be made available to this manager, who should be given specific targets

to achieve.

The project manager is concerned with co-ordinating people and other resources to carry out

the project plan and has two phases.

• Design and development

• Distribution

2.6 Monitoring and control

Monitoring and control is concerned with ensuring project objectives are met by monitoring and

measuring progress and taking corrective action when necessary.

At the start of each project, an overall project plan needs to be produced to enable the business

to monitor project delays. This should be supplemented by detailed project plans and budgets

describing the tasks, resources and links. At the initial stage, the plan needs to highlight resource

and time constraints, and also project date constraints.

Quality standards also need to be established before the project commences and ongoing quality

control procedures defined.

Managers and project monitoring committees should be kept informed of progress, with

achievements measured against the project's critical success factors being regularly reported.


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Cost control systems also need to be established that will monitor actual against planned

expenditure.

Actual performance should be reviewed against the objectives identified in the project plan. If

performance is not as expected, control action will be necessary.

2.7 Performance review and post implementation audit

2.7.1 Performance review

The nature of an investment or project will determine how its success is measured. Performance

reviews will vary in content from organisation to organisation, and from investment to

investment. Organisations will need to consider carefully the following factors.

• What is evaluated

• Who decides what constitutes performance and whether it is good or bad

• Does the investment have a single clear purpose, or a number of different purposes which

will complicate the targets that are set for it

• How important will quantitative measures be and how important will qualitative measures

be

Financial measures are an important measure of many investments’ success. Organisations will

assess whether the investment is generating the expected positive cash flows and whether it is

fulfilling other targets, for example a payback period of less than a certain number of years, or a

target return on investment.

With many investments, the key success indicators are likely to be direct improvements in

production. Likely important measures here include:

• Number of customer complaints and warranty claims

• Rework

• Delivery time

• Non-productive hours

• Machine down time

• Stock-outs


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Some investments will be undertaken to improve internal procedures, and will be assessed on

the basis of whether they have fulfilled the needs that prompted the investment. The performance

of a computer system for example will be evaluated on the basis of whether it meets the basic

needs to provide information of the required quality (timely, accurate, relevant to business needs,

clear etc.), or improves turnaround time for information.

2.7.2 Post completion audit

A post-completion audit is designed to identify improvements not only over the remaining life of

a specific project, but in the business's budgeting and management procedures.

A post audit or a post-completion audit is a review of the cash inflows to and outflows from a

project after it has reached the end of its life, or at least some years after it began. As far as

possible, the actual cash flows should be measured and compared with the estimates contained

in the original capital expenditure appraisal. The manager responsible for the project should be

asked to explain any significant variances.

A post-completion audit is an objective, independent assessment of the success of a capital

project in relation to plan. It covers the whole life of the project and provides feedback to

managers to aid the implementation and control of future projects.

3 Methods of project appraisal

There are several methods for the financial appraisal of a project, and evaluating whether the

project would be of value to the organisation.

(a) The accounting rate of return method (or return on investment). This method

calculates the profits that will be earned by a project and expresses these as a percentage

return on the capital invested in the project. The higher the rate of return, the higher a

project is ranked. A project might be undertaken if its expected accounting rate of return

exceeds a minimum target amount. This method of project appraisal is based on

accounting results rather than cash flows.

(b) The payback period. This method of investment appraisal calculates the length of time a

project will take to recoup the initial investment, in other words how long a project will

take to pay for itself. A capital project might not be undertaken unless it achieves payback


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within a given period of time. This method of project appraisal is based on the anticipated

cash flows.

(c) A discounted cash flow (DCF) appraisal. There are three methods of project appraisal

using DCF.

(i) The net present value (NPV) method. This takes into consideration all the relevant

cash flows associated with a project over the whole of its life, and also when the cash

flows will occur. Cash flows occurring in future years are then adjusted to a 'present

value'. The process of re-valuing all project cash flows to a 'present value' is known

as discounting. The present value of benefits (revenues or savings) are then

compared with the present value of expenditures. The difference is the net present

value. If the present value of benefits exceeds the present value of costs, the project

is financially justified. If the present value of benefits is less than the present value

of costs, the project is not justified financially. The NPV method is the recommended

method of project appraisal, since it is consistent with the objective of maximising

shareholder wealth.

(ii) The internal rate of return (IRR) method. This method uses discounting arithmetic

to calculate the return expected from the project calculated on a discounted cash

flow basis.

This 'internal rate of return' for the project is then compared with the target rate of return.

The project is justified financially if the IRR of the project exceeds the target rate of return.

(iii) The discounted payback method. This method converts all the expected cash flows

from a project to a present value, and calculates how long it will take for the project

to payback the capital outlay on a discounted cash flow basis. It is similar to the non-

discounted payback method, except that it uses discounted cash flows.

4 Non-financial factors in a capital investment decision

Although capital investment decisions by commercial organisations are largely finance-driven,

non- financial factors can affect a decision. Non-financial factors include legal issues, ethical

issues, political and regulatory issues, quality issues and employee issues.


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A decision maker should always bear in mind non-financial factors that affect a decision, and

you may be asked to identify these from a case described in your examination. Such 'non-

financial' factors may have indirect financial implications, at some time in the future.

Possible non-financial factors that could influence an investment decision include:

a) Legal issues. There may be a risk of legal action against the company as a result of its

investment.

b) Ethical issues. Unethical investments or actions by a company could be damaging to its

public reputation.

c) Government regulation. Investment decisions might be affected by the risk of government

regulation.

d) Political issues. A future change of government in the country concerned could affect the

future returns from an investment. Political uncertainty often has a deterrent effect on

investment decisions, persuading companies to defer their spending decisions until the

future is more certain.

e) Quality implications. Although financial objectives are important for commercial

investments, other strategic objectives may also be relevant. In particular, the perceived

quality of output produced by the company could be important for its relations with

customers. A profitable investment might therefore be turned down if there are quality

implications.

f) Personnel issues. Employees might be affected significantly by a capital investment decision,

and the impact on employee relations, motivation and working culture might need to be

considered.

5 The accounting rate of return (ARR) method

ARR = the accounting profits from the project, expressed as a percentage of the amount

invested. Typically, profit is the average annual profit and the amount invested is measured as

the average investment over the life of the project. A project would be undertaken if its

expected ARR exceeds the company's minimum required ARR. If there are two mutually

exclusive investments, the investment with the higher ARR would be chosen.

A capital investment project may be assessed using the accounting rate of return method of

appraisal. The expected accounting return on investment (ROI) or accounting rate of return


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(ARR) for the project is calculated, and compared with a pre-determined minimum target

accounting rate of return. The project is justified financially if its expected ARR exceeds the

minimum target.

The accounting rate of return (ARR) measures the profitability of an investment by expressing

the expected accounting profits as a percentage of the book value of the investment. There are

several different possible formulae for its calculation.

The organisation must define ARR, and specify how it should be calculated, since various methods

are possible. A formula for calculating ARR that is common in practice is:

ARR = Estimated average profits

× 100% Estimated average investment

The average investment is the average of the investment at the start of the project and the

investment at the end of the project, allowing for depreciation of the non-current asset or assets.

For example, suppose that a capital investment will call for spending of $100,000 on a non-current

asset that will have a four year life and zero value at the end of this time, and for a working capital

investment of $20,000. The average investment would be $70,000 (half of $100,000 plus the

working capital investment of $20,000).

Another method of calculating ARR is for the figure below the line to be the total initial

investment, rather than the average investment over the life of the project.

ARR = Estimated average profits

× 100% Estimated total investment

A third method of calculating ARR is to have total expected profits above the line.

ARR = Estimated total profits

× 100% Estimated total investment

Profits are accounting profits, and are calculated after deducting a charge for depreciation of the

noncurrent asset(s).


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5.1 Example: the accounting rate of return

A company has a target accounting rate of return of 20%. ARR is calculated as estimated average

annual profits over estimated average investment. The company is now considering the following

project.

Capital cost of asset $80,000

Estimated life 4

years

Estimated profit before depreciation

Year 1 $20,000

Year 2 $25,000

Year 3 $35,000

Year 4 $25,000

The capital asset would be depreciated by 25% of its cost each year, and will have no residual

value.

You are required to assess whether the project should be undertaken.

Solution

The annual profits after depreciation, and the mid-year net book value of the asset, would be as

follows.

Profit after Average ARR

Year depreciation investment

$ $

1 0

2 5,000

3 15,000

4 5,000

25,000

Average 6,250 40,000 15.625%

The project would not be undertaken because it would fail to yield the target return of 20%.

5.2 The ARR method and the comparison of mutually exclusive projects

The ARR method of capital investment appraisal can also be used to compare two or more

projects which are mutually exclusive. The project with the highest ARR would be selected,

provided that the expected ARR is higher than the company's target ARR.


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Note how, in the question above as much weight was attached to cash inflows at Year 4 as to

those at Year 1, whereas the management of Bee would favour high cash inflows in the early

years. Early cash flows are less risky and they improve liquidity. For this reason, they might choose

machine X despite its lower ARR. One of the disadvantages of the ARR method is that it does not

take account of the timing of cash inflows and outflows.

5.3 The drawbacks to the ARR method of capital investment appraisal

The ARR method of capital investment appraisal has several major weaknesses.

It does not take account of the timing of the profits from an investment. For example, suppose

that investment A and investment B would both cost $1,000. Investment A would make a profit

of $100 in Years 1- 4 and a profit of $2,000 in Year 5. Investment B would make a profit of $2,000

in Year 1, and $100 in each of Years 2 - 5. If the two investments are compared by their ARR, both

would have exactly the same ARR.

It might be apparent, however, that investment B would be preferable because it provides most

of its expected returns earlier. Whenever capital is invested in a project, money is tied up until

the project begins to earn profits which pay back the investment. Money tied up in one project

cannot be invested anywhere else until the profits come in. Management should be aware of the

benefits of early repayments from an investment, which will provide the money for other

investments.

A second major weakness of investment decisions based on ARR is the lack of a clear decision

rule for deciding whether or not a project should be undertaken, based on its expected ARR. For

example, suppose an investment is expected to achieve an average accounting rate of return of,

say, 15% over the next five years. Does this suggest that the investment should be undertaken or

not? The company might set a target ARR that investments must achieve, so that if the target is,

say, 14%, a project expected to yield 15% would be undertaken. However, the choice of the ARR

target return would be subjective, lacking a rational basis. In contrast, decision methods based

on discounted cash flows (DCF), described in the next chapter, do have a rational basis for the

target rate of return. With DCF, the target return is based on the expected returns of investors in

the company, and investments are required to provide a return that is at least enough to meet

investor requirements. Accounting returns, however, are not the same as investment returns, and

a target investment return would be inappropriate for applying an ARR decision rule.

There are a number of other disadvantages with the ARR decision method.


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(a) It is based on accounting profits and not cash flows. Accounting profits are subject to a

number of different possible accounting treatments.

(b) It is a relative measure rather than an absolute measure and hence takes no account of the

size of the investment.

(c) It takes no account of the length of the project.

(d) It ignores the time value of money. With the ARR method, $1 receivable in five years' time

has exactly the same value as $1 spent now. Money 'now' is actually worth more than the

same amount of money at a future date, because the money 'now' can be invested to earn

a return, whereas future money can't be invested until it is received.

There are, however, advantages to the ARR method. It is a quick and simple calculation, it involves

a familiar concept of a percentage return and it looks at the entire project life.

6 The payback method

Payback = the time required for the cash inflows from a project to recoup the cash outlays. A

project would be undertaken if its expected payback is sooner than the maximum tolerated. If

there are two mutually exclusive investments, the investment with the earlier payback would be

chosen.

The payback period is the length of time required before the total of the cash inflows received

from a project is equal to the cash outflows, and is usually expressed in years. In other words, it

is the length of time the investment takes to pay itself back.

When deciding between two or more competing projects, the usual decision is to accept the one

with the shortest payback. In the previous question (in Paragraph 6.2), machine X pays for itself

after two years and machine Y after three years. Using the payback method of investment

appraisal, machine X is preferable to machine Y.

Payback is often used as a 'first screening method'. By this, we mean that when a capital

investment project is being considered, the first question to ask is: 'How long will it take to pay

back its cost?' The organisation might have a target payback, and so it would reject any capital

project unless its payback period were less than a certain number of years.

However, a project should not be evaluated on the basis of payback alone. Payback should be a

first screening process, and if a project gets through the payback test, it ought then to be


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evaluated with a more sophisticated investment appraisal technique. You should note that when

payback is calculated, we take profits before depreciation, because we are trying to estimate the

cash returns from a project and profit before depreciation is likely to be a rough approximation

of cash flows.

6.1 Example

A company is considering an investment in a project to acquire new equipment costing $80,000.

The equipment would have a five-year life and no residual value at the end of that time. The

straight-line method of depreciation is used. The expected profits after depreciation from

investing in the equipment are as follows.

Year Profit

$

1 15,000

2 15,000

3 16,000

4 24,000

5 20,000

What is the payback period for the investment?

The payback period is calculated from the cumulative annual profits before depreciation. Annual

depreciation is $16,000, and the profit before depreciation each year is found simply by adding

$16,000 the annual profit estimate.

Year

Investment

Profit before

depreciation

Cumulative profit before

depreciation

$ $ $

0 (80,000) (80,000)

1 31,000 (49,000)

2 31,000 (18,000)

3 32,000 14,000

4 40,000 54,000

5 36,000 90,000

Payback occurs when the cumulative profits stop being negative and start to be positive. This will

happen sometime during year 3. If it is assumed that profits each year arise at an even rate

throughout the course of the year, the payback period can be calculated in years and months.


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Payback = Y years + [ B

x 12 months ] B + E

Where

Y = the number of complete years before payback. This is the year before the one in which

payback occurs.

B = the cumulative profits before depreciation at the beginning of the payback year, ignoring

the negative value.

E = the cumulative profits before depreciation at the end of the payback year.

In this example:

Payback = 2 years + [ 18,000

x 12 months ] (18,000 + 14,000)

= 2 years 7 months (to the nearest month).

6.2 Disadvantages of the payback method

There are a number of serious drawbacks to the payback method.

(a) The choice of a maximum payback period for an investment is arbitrary and subjective. For

example, if a company establishes a rule that projects will not be undertaken unless they pay

back within four years, where has the choice of a four year cut-off period come from?

(b) It ignores all cash flows after the end of the payback period, and so is not concerned with

the total expected returns from the investment. For example, suppose that the maximum

payback period that a company selects for its investments is four years, and it is considering

two mutually exclusive projects, X and Y, each costing $80,000. Project X would be expected

to make total profits of $100,000 and pay back within two years. Project Y would be expected

to make total profits of $500,000, but only pay back after five years. On the basis of payback

alone, project X would be preferred, despite its lower total profitability.

(c) If the objective of a company is to maximise the wealth of its shareholders, it would be wrong

to ignore the future profits from an investment after an arbitrary cut-off date for payback.

Using a payback cut-off limit is inconsistent with shareholder wealth maximisation.


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(d) The payback method ignores the timing of cash flows within the payback period and the

time value of money (a concept incorporated into DCF appraisal methods). This means that

it does not take account of the fact that $1 today is worth more than $1 in one year's time.

Other disadvantages of the payback method are that:

(a) The method is unable to distinguish between projects with the same payback period.

(b) It may lead to excessive investment in short-term projects.

6.3 Advantages of the payback method

In spite of its limitations, the payback method continues to be popular, and the following points

can be made in its favour.

(a) It is simple to calculate and simple to understand, and this may be important when

management resources are limited. It is similarly helpful in communicating information

about minimum requirements to managers responsible for submitting projects.

(b) It can be used as a screening device as a first stage in eliminating obviously inappropriate

projects prior to more detailed evaluation.

(c) The fact that it tends to bias in favour of short-term projects means that it tends to minimise

uncertainty about both financial and business risk.

It can be used when there is a capital rationing situation to identify those projects which generate

additional cash for investment quickly.

7 The payback and ARR methods in practice

The ARR method fails to give any consideration to the timing of cash flows over the life of a

project, and is based on accounting profits, not cash flows. The payback method ignores the total

amount of returns from a project over its life. Both methods therefore have serious weaknesses,

and should not be used in isolation.

Despite the severe theoretical limitations of the payback method, it is widely used in practice.

There are a number of reasons for this.

(a) It is a particularly useful approach for ranking projects where a firm faces liquidity constraints

and requires a fast repayment of investments.


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(b) It is appropriate in situations where risky investments are made in uncertain markets that are

subject to fast design and product changes or where future cash flows are particularly

difficult to predict.

(c) Most managers see risk as time-related: the longer the period, the greater the chance of

failure. The payback method, by concentrating on the early cash flows, therefore uses data

in which they have confidence. The justification for this is that cash flows tend to be

correlated over time and hence if cash flows are below the expected level in early years, this

pattern will often continue.

(d) The method is often used in conjunction with the NPV or IRR method and acts as a first

screening device to identify projects which are worthy of further investigation.

(e) It is easily understood by all levels of management.

(f) It provides an important summary method: how quickly will the initial investment be

recouped?

The ARR method is an unsatisfactory appraisal method, but remains popular despite its

drawbacks mentioned above. Its popularity is probably due to the fact that, compared to DCF

appraisal methods, it is more easily understood and calculated.

Although the ARR and payback methods are used in practice, they have no rational justification,

and they provide only subjective rules for making investment decisions. Since the objective of a

company should be to maximise shareholder wealth through investments, using a subjective

basis for making investment decisions is inadequate. A rational approach to investment decision-

making is provided by discounted cash flow methods of investment appraisal. These are

described in the next chapter.

8 Investment appraisal and cash flows

With the exception of the ARR method, all methods of project appraisal focus on the expected

cash flows of the project, not accounting profits. The cash flows to take into consideration are

the relevant cash flows of the project. Relevant cash flows are future cash flows arising as a

direct consequence of the investment. These may be extra revenues, extra costs, and savings in

costs or reductions in revenue.


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The ARR method of project appraisal is based on accounting returns, with profits measured as

profits after deducting depreciation. In contrast, the payback method of appraisal considers cash

flows only.

An investment is the outlay of money with the expectation of getting more money back. When

evaluating an investment, it is more appropriate to consider cash flows – money spent and

received – rather than accounting profits. Accounting profits do not properly reflect investment

returns, and this is a major weakness of the ARR method of project appraisal.

Cash flows represent the economic reality of investment and returns. An investment involves the

outlay of money, in the expectation of getting more money back over the term of the investment.

A company might pay out a sum of money to invest in a new business operation with an expected

commercial life of several years. Over that period, it will expect to incur running costs to run the

business, and to receive cash from sales. The returns on the investment will be the net cash inflows

from the business operation.

In the same way, a shareholder’s investment involves paying out cash to buy shares, and the

returns are obtained in the form of dividends and the cash received from the eventual disposal

of the shares.

Accounting profits are based on the accruals concept of accounting, and do not represent the

reality of a company as a portfolio of many different investments. Instead of reporting the cash

outlay on an investment, an income statement reports a depreciation charge on capital

equipment over the economic life of the asset. Depreciation is a notional accounting charge, and

does not represent a cash flow.

Thus cash flows and not accounting profits should be used for investment appraisal and decision-

making.

8.1 Cash flows and profits compared

The cash flows involved in an investment should be measured as the relevant costs of the

investment, as explained below. However, it is useful to remember the differences between

operational cash flows and operating profit.

$

Operating profit (accounting profit) 125,000

Add back depreciation 60,000

185,000


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Subtract the increase in working capital (15,000)

Net cash flow from operations 17,000

In the example above, there are two reasons why cash flows differ from the accounting profit.

(a) Depreciation is not a cash flow item, and to work out the actual cash flow depreciation has

to be added back to the accounting profit.

(b) Profit also differs from cash flow by the amount of the change in working capital in the

period. Working capital means the investment in inventories and trade receivables, less any

investment in trade payables. If there has been an increase in working capital due to larger

inventories or more receivables, cash flow will be lower than profit. If working capital has

been reduced in the period, e.g. by running down inventories, or extending credit taken

from creditors, cash flow will exceed profit.

8.2 Example

A company invests $50,000 in a new item of equipment that has an expected life of five years and

no residual value. Depreciation is charged by the straight-line method. The equipment is used to

make a new product, and sales in Year 1 produce profits of $14,000. An additional investment in

working capital of $3,000 is needed in Year 1.

The cash flows at the start of this project are as follows.

(a) Immediate outlay at the start of the first year: $50,000 on equipment.

(b) The cash profits for the first year, measured as operating profit plus depreciation added

back, is $14,000 + $10,000 depreciation = $24,000.

(c) Actual operational cash flows will not be $24,000 in Year 1, however, because of the

increase in working capital. Some of the increase in profit is ‘invested’ in inventories and

receivables. The actual cash flow is $3,000 lower.

(d) However, it is generally assumed, in investment appraisal, that an investment in working

capital occurs at the start of the year, and it is therefore treated as an initial investment

rather than, in this example, as a cash flow in Year 1.

If the start of Year 1 is called Year 0 (i.e. the end of the current year), the cash flows in this example

would be:


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Year Item $

0 Purchase of equipment (50,000)

0 Additional working capital (3,000)

0 Total cash flow (53,000)

1 Cash profits 24,000

8.3 Cash flows and relevant costs

Business decisions should be based on the expected cash flows arising as a consequence of the

decision. The cash flows arising as a direct consequence of a decision are known as 'relevant

costs'.

The relevant cash flows for appraisal of a project are the changes in future cash flows that

would arise from acceptance of the project.

(a) Relevant costs are future costs. A decision is about the future; it cannot alter what has

been done already. A cost that has been incurred in the past is totally irrelevant to any

decision that is being made 'now'. Costs that have been incurred include not only costs

that have already been paid, but also costs that are the subject of legally binding contracts,

even if payments due under the contract have not yet been made. (These are known as

committed costs.)

(b) Relevant costs are cash flows.

(i) The assumption used in relevant costing is that, in the end, profits earn cash. Accounting

profits and cash flow are not the same in any period for various reasons, such as the timing

differences caused by giving credit and the accounting treatment of depreciation. In the

long run, however, a profit that is earned will eventually produce a net inflow of an equal

amount of cash. Hence when decision making we look at cash flow as a means of

measuring profits.

(ii) Only cash flow information is required. This means that costs or charges which do not

reflect additional cash spending should be ignored for the purpose of decision making.

These include depreciation charges.

(c) Relevant costs are incremental costs. A relevant cost is one which arises as a direct

consequence of a decision. Thus, only costs which will differ under some or all of the

available opportunities should be considered; relevant costs are therefore sometimes


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referred to as incremental costs. For example, if an employee is expected to have no other

work to do during the next week, but will be paid his basic wage (of, say, $200 per week)

for attending work and doing nothing, his manager might decide to give him a job which

earns only $140. The net gain is $140 and the $200 is irrelevant to the decision because

although it is a future cash flow, it will be incurred anyway whether the employee is given

work or not.

Relevant costs are therefore future, incremental cash flows.

8.4 Non-relevant costs

A number of terms are used to describe costs that are irrelevant for decision making because

they are either not future cash flows or they are costs which will be incurred anyway, regardless

of the decision that is taken.

A sunk cost is a cost which has already been incurred and hence should not be taken account of

in decision making.

(a) A principle underlying decision making is that 'bygones are bygones'. In other words, what

has happened in the past is done, and cannot be undone. Management decisions can only

affect the future. In decision making, managers therefore require information about future

costs and revenues which would be affected by the decision under review, and they must

not be misled by events, costs and revenues in the past, about which they can do nothing.

A committed cost is a future cash outflow that will be incurred anyway, whatever decision is

taken now about alternative opportunities.

(b) Committed costs may exist because of contracts already entered into by the organisation

that it cannot get out of.

8.5 Working capital

You will be familiar with the concept of relevant costs already if you have studied the Performance

Management syllabus. The same principles of relevant cash flows apply to long-term investment

decisions as to short-term decision-making. However, there are some extra ‘rules’ to remember

about the timing of cash flows for long-term investment projects.

(a) A cash outlay incurred at the beginning of an investment project ('now') occurs in Year 0.


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(b) Cash flows that occur evenly over the course of a year are assumed to occur all at once

at the end of the year. Receipts of $10,000 during Year 1 are therefore taken to occur at

the end of Year 1.

(c) A cash flow that occurs at the beginning of a year is taken to occur at the end of the

previous year. Therefore a cash outlay of $5,000 at the beginning of Year 2 is taken to occur

at the end of Year 1.

(d) An increase in working capital during a year should normally be treated as occurring at

the start of the year, and so is a cash outlay at the start of the year/end of the previous

year.

(e) A decrease in working capital during a year should also normally be treated as occurring

at the start of the year. However, there is an important exception to this general rule. At

the end of a project, any remaining investment in working capital is no longer required,

and working capital will therefore be reduced to zero. This reduction in working capital to

zero is treated as a cash inflow occurring at the end of the last year of the project.

8.6 Example

Bat has spent $2 million developing a new product and a further $800,000 on market research to

find out whether a market launch would be worth undertaking. The findings of the market

research were as follows.

(a) To launch the product on the market, the company would have to spend a further $800,000

on equipment. This would be depreciated over three years by the straight-line method,

and would have an estimated resale value of $200,000 at the end of this time.

(b) The product would have a life of just three years, and profits after depreciation would be

$500,000 in the first year, $600,000 in the second year and $300,000 in the third year.

(c) There would be an initial investment of $120,000 in working capital in the first year and a

further $140,000 of working capital would be needed in Year 2.

(d) Instead of investing in the product launch, the company could sell the rights to the product

to another company for $500,000.

What are the estimated cash flows from this project?


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The annual depreciation charge would be $200,000. [($800,000 - $200,000)/3 years]. This should

be added back to the annual profit after depreciation, to get the cash profit for each year. The

resale value of the equipment is a cash inflow at the end of the project.

Costs already incurred are sunk costs and so irrelevant to the current investment decision. The

sunk costs in this example are the development costs of $2 million and the market research cost

of $800,000.

A decision to go ahead with the product launch will involve not just the cost of the equipment

and the working capital investment. There would also be an opportunity cost by choosing not to

sell the product rights.

Study the following cash flows carefully, and make sure that you understand how they have been

derived.

Year 0 Year 1 Year 2 Year 3

$000 $000 $000 $000

Equipment (800) 200

Sale opportunity forgone (500) (140) 260

Working capital (120)

Cash profits 700 800 500

Total cash flow (1,420) 560 800 960

9 The time value of money

DCF appraisal methods allow for the time value of money. $1 today is worth more than $1 at a

future time, because money can be reinvested to earn more money over time.

The time value of money describes the concept that the earlier cash is received, the greater

value it has to the recipient. Conversely, the later a cash payment is made, the less the cost to the

payer.

Investors put money into shares in the expectation of getting back, over time, an amount in

excess of their original investment. The idea of investing cash to make more money should be a

familiar concept to you.


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If you put money into a deposit account, you will expect to get your money back with interest. If

the interest is not high enough, you will look somewhere else to invest.

In the same way, an investor buying shares expects a return in the form of dividends plus the

eventual disposal price of the shares when he decides to sell them. If the expected returns are

not high enough to justify the purchase price of the shares, he will not buy the shares, but put

his money into another investment instead.

The same principle applies to investments by companies. The cash returns from long-term

investments should be sufficient to provide an adequate return; otherwise, the investment should

not be undertaken.

The required return on an investment consists of three elements, for any investor:

(a) An opportunity cost. This is the return that could be obtained by investing in something

else. In financial management, the opportunity cost of an investment is usually expressed

in terms of the return that could be obtained by putting money into a risk-free (and

inflation-proof) investment.

(b) An amount to cover inflation. Inflation erodes the value of money over time, and an

investor will expect the return on investment to cover the effect of inflation as well as to

provide a ‘real’ return.

(c) An amount to reward the investor for the risk in the investment. Higher returns are

expected from investments with a higher risk element.

An investment return is expressed as a percentage of the amount invested for each year of

investment, in other words as a percentage amount each year. The longer the investment, the

greater the required return. This too should be a familiar idea to you. If you put cash into a deposit

account, you will expect to earn interest, and the longer you keep the money on deposit, the

more interest you will expect to earn.

We must therefore recognise that if a capital investment is to be worthwhile, it must earn at least

a minimum profit or return so that the size of the return will compensate the investor (the

business) for the length of time which the investor must wait before the profits are made. For

example, if a company could invest $60,000 now to earn revenue of $63,000 in one week's time,

a profit of $3,000 in seven days would be a very good return. If it takes three years to earn the

revenue, however, the return would be very low.


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When capital expenditure projects are evaluated, it is therefore appropriate to decide whether

the investment will make enough profits to allow for the 'time value' of capital tied up. The time

value of money reflects people's time preference for $1 now over $1 at some time in the future.

DCF is an evaluation technique which takes into account the time value of money.

10 Discounted cash flow

In DCF, expected future cash flows (inflows and outflows) are converted into a present value

equivalent amount. The present value of a future cash flow is the amount that would have to be

invested now at the organisation's cost of capital to earn the future cash flow at the future time.

Discounted cash flow, or DCF for short, is an investment appraisal technique which takes into

account both the timings of cash flows and also total profitability over a project's life.

Two important points about DCF are as follows.

(a) DCF looks at the cash flows of a project, not the accounting profits. Cash flows are

considered because they show the costs and benefits of a project when they actually occur.

For example, the capital cost of a project will be the original cash outlay, and not the

notional cost of depreciation which is used to spread the capital cost over the asset's life

in the financial accounts.

(b) The timing of cash flows is taken into account by discounting them. The effect of

discounting is to give a bigger value per $1 for cash flows that occur earlier: $1 earned

after one year will be worth more than $1 earned after two years, which in turn will be

worth more than $1 earned after five years, and so on.

10.1 Compounding and discounting

Suppose that a company has $10,000 to invest, and wants to earn a return of 10% (compound

interest) on its investments. This means that if the $10,000 could be invested at 10%, the value of

the investment with interest would build up as follows.

(a) After 1 year $10,000 × (1.10) = $11,000

(b) After 2 years $10,000 × (1.10)2 = $12,100

(c) After 3 years $10,000 × (1.10)3 = $13,310 and so on.


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This is compounding. The formula for the future value of an investment plus accumulated

interest after n time periods is: FV = PV (1 + r)n

where FV is the future value of the investment with interest

PV is the initial or 'present' value of the investment

r is the compound rate of return per time period, expressed as a proportion (so 10% =

0.10, 5% = 0.05 and so on)

n is the number of time periods.

Discounting starts with the future amount of a cash flow and converts it into a present value. A

present value is the amount that would need to be invested now to earn the future cash flow, if

the money is invested at the 'cost of capital'. For example, if a company expects to earn a

(compound) rate of return of 10% on its investments, how much would it need to invest now to

have the following investments?

(a) $11,000 after 1 year

(b) $12,100 after 2 years

(c) $13,310 after 3 years

The answer is $10,000 in each case, and we can calculate it by discounting. The discounting

formula to calculate the present value of a future sum of money at the end of n time periods is:

Discounting can be applied to both money receivable and also to money payable at a future date.

By discounting all payments and receipts from a capital investment to a present value, they can

be compared on a common basis at a value which takes account of when the various cash flows

will take place.


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Present value can be defined as the cash equivalent 'now' of a future sum of money receivable

or payable at a future date, assuming that money 'now' can be invested at a given rate of return

(known as the 'cost of capital'). A present value is calculated by discounting the future cash flow

to its present value equivalent amount.

10.2 Discount factors

To make it easier to discount future cash flows to a present value, discount factor tables are

available.

These tables give the value of [1/(1+r)n ] for any cost of capital (value of r) and any future year

(any value of n). In your examination, you will be given any discount factors that you might need

to use to make a DCF appraisal. You will find the relevant tables at the back of this book.

Any cash flows that take place 'now', at the start of a project, take place in Year 0. The discount

factor for Year 0 is 1.0. This means simply that cash flows occurring 'now' do not need to be

discounted to convert them to a present value equivalent, because they are already at present

value.

10.3 The cost of capital

The cost of capital used in DCF is the cost of funds that a company raises and uses, and the

return that investors expect to be paid for putting funds into the company. It is therefore the

minimum return that a company should make from its own investments, to earn the cash flows

out of which investors can be paid their return. The cost of capital can therefore be measured by

studying the returns required by investors, and used to derive a discount rate for DCF analysis

and investment appraisal.

Calculating the cost of capital for a company is explained in a later chapter. For the time being,

the 'cost of capital' is assumed to be a known figure.

11 The net present value method of project appraisal

With the NPV method of project appraisal, all expected cash inflows and all expected cash

outflows from the project are discounted to a present value at the organisation's cost of capital.

The net present value is the difference between the present value of total benefits and the present

value of total costs. If the PV of benefits exceeds the PV of total costs, the NPV is positive, and the


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project is expected to earn a return in excess of the organisation's cost of capital. If the PV of

benefits is less than the PV of total costs, the NPV is negative, and the project will earn a return

that is lower than the organisation's cost of capital. Projects with a positive NPV are financially

viable, but projects with a negative NPV are not.

Net present value or NPV is the value obtained by discounting all cash outflows and inflows of

a capital investment project by a chosen target rate of return or cost of capital. The sum of the

present value of all expected benefits from the project and the present value of all expected cash

outlays is the 'net' present value amount.

The NPV method compares the present value of all the cash inflows from an investment with the

present value of all the cash outflows from an investment. The NPV is thus calculated as the PV

of cash inflows minus the PV of cash outflows.

a) If the NPV is positive, it means that the cash inflows from a capital investment will yield a

return in excess of the cost of capital, and so the project should be undertaken if the cost of

capital is the organisation's target rate of return.

b) If the NPV is negative, it means that the cash inflows from a capital investment will yield a

return below the cost of capital, and so the project should not be undertaken if the cost of

capital is the organisation's target rate of return.

c) If the NPV is exactly zero, the cash inflows from a capital investment will yield a return

which is exactly the same as the cost of capital, and so if the cost of capital is the

organisation's target rate of return, the organisation will be indifferent about whether it

undertakes the project or not.

11.1 Example: NPV

Slogger is considering a capital investment, where the estimated cash flows are as follows.

Year Cash flow

$

0 (100,000)

1 60,000

2 80,000

3 40,000

4 30,000

The company's cost of capital is 15%. You are required to calculate the NPV of the project and to

assess whether it should be undertaken.


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The following discount factors might be relevant.

Year Discount factor at

15%

1 0.870

2 0.756

3 0.658

4 0.572

5 0.497

6 0.432

Solution

Year Cash flow Discount factor at 15% Present value

$ $

0 (100,000) 1.000 (100,000)

1 60,000 0.870 52,200

2 80,000 0.756 60,480

3 40,000 0.658 26,320

4 30,000 0.572 17,160

Net present value 56,160

The PV of cash inflows exceeds the PV of cash outflows by $56,160, which means that the project

will earn a DCF yield in excess of 15%. It should therefore be undertaken.

11.2 Annuity discount factor tables

An annuity is a constant annual cash flow, for a number of years. An example of an annuity would

be, say, cash receipts of $50,000 a year for six years, Years 1 – 6. To save time with calculating the

present value of all the individual annual cash flows of an annuity, tables are available for the

cumulative discount factors. Annuity tables give the total of all the discount factors for each year

in Year 1 to Year n, for a given cost of capital r.

For example, the annuity factor for a cost of capital of 12% for Years 1 – 3 is 2.402. This is simply

the sum of the discount factors for Year 1, 2 and 3.

Year Discount factor at 12%

1 0.893

2 0.797

3 0.712

1 - 3 2.402 = Annuity factor at 12%, Years 1 - 3


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If the amount of the annual cash flow for Years 1 – 3 is, say, $10,000 per annum, and the cost of

capital is 12%, it is quicker to calculate the present value of these cash flows in one calculation

($10,000 × 2.402 = $24,020) instead of having to calculate the present value for the cash flow in

each individual year and then add up the total.

These total discount factors could be described as 'same cash flow per annum' factors, or

'cumulative present value' factors, but the term 'annuity' factors is commonly used.

11.3 Example: NPV including use of annuity tables

IMC is considering the manufacture of a new product which would involve the use of both a new

machine (costing $150,000) and an existing machine, which cost $80,000 two years ago but has

no resale value. There is sufficient capacity on this machine, which has so far been under-utilised.

Annual profits before depreciation would be $40,000.

The project would have a five-year life, after which the new machine would have a net residual

value of $5,000.

Working capital requirements would be $10,000 in the first year, rising to $15,000 in the second

year and remaining at this level until the end of the project, when it will all be recovered. The

company's cost of capital is 10%.

You are required to assess whether the project is worthwhile.

Year Discount factor at 10%

1 0.909

2 0.826

3 0.751

4 0.683

5 0.621

1 - 5 3.791

Solution

The project requires $10,000 of working capital at the end of Year 1 and a further $5,000 at the

start of Year 2. Increases in working capital reduce the net cash flow for the period to which they

relate. When the working capital tied up in the project is 'recovered' at the end of the project, it

will provide an extra cash inflow (for example receivables will eventually be received in cash).


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The historic cost of the current machine is not a relevant cost and must be ignored in the

appraisal.

The NPV is calculated as follows.

Net Discount PV of net

Year Equipment Working

capital Contribution cash flow factor cash flow

$ $ $ $ 10% $

0 (150,000) (10,000) (160,000) 1.000 (160,000)

1 (5,000) (5,000) 0.909 (4,545)

1-5 40,000 40,000 3.791 151,640

5 5,000 15,000 20,000 0.621 12,420

NPV = (485)

The NPV is negative (although not by much) and the project is therefore not recommended for

acceptance, because it fails to earn a return of 10%.

11.4 Perpetuities

A perpetuity is a constant annual cash flow that continues indefinitely (a perpetual annuity).

The present value of a perpetuity is given by:

NPV = Annual cash flow

r

where r is the discount rate, expressed as a decimal.

Thus the present value of $400 to be received annually, for ever, if the cost of capital is 8% pa, is:

PV (T1–00) $400 = 400/0.08 = $5,000

Notice that the value of the perpetuity is finite because the cash flows that arise far into the future

will have very low present values.

11.5 Strengths and weaknesses of the NPV method

The NPV method is the most valid of all the capital project appraisal methods.

(a) It recognises the time value of money, and evaluates cash flows, not accounting profits.


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(b) When the cost of capital used in the appraisal is the organisation's cost of finance, a project

with a positive NPV should add to the overall value of the organisation, and (in the

case of a company) increase shareholder wealth.

The connection between NPV and creating shareholder wealth is very important, and is explained

in more detail later.

Although it is the most appropriate method of project appraisal, the NPV method does have a

drawback.

The net present value of a project is a money value. This is often difficult to understand. For

example, it is easier to understand the comment: 'Project A will earn a return of 15% per annum'

than it is to understand the comment 'Project A has an NPV of + $60,000 at a cost of capital of

10%'.

12 Discounted payback

The NPV method calculates a value for a capital project, taking into account all the expected cash

flows over the entire life of the project. A company might want capital projects to earn a positive

NPV, but also to pay back within a maximum time period. The discounted payback method is a

way of combining DCF evaluation with a minimum payback period.

The discounted payback method of project appraisal is similar to the non-discounted payback

method, except that payback is measured with the present value of cash flows.

A company might have an investment policy of undertaking projects only if:

(a) They have a positive NPV, and

(b) They pay back, in NPV terms, within a maximum time limit.

12.1 Example: discounted payback

TJ is considering two mutually-exclusive investments, Project A and Project B. It can undertake

one of them, or neither, but it cannot undertake both.

Project A would involve expenditure on a non-current asset of $60,000 and a working capital

investment of $5,000. The profits from the project, ignoring depreciation, would be:

Year Cash profit


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$

1 15,000

2 20,000

3 20,000

4 25,000

5 20,000

6 15,000

7 10,000

Project B would involve expenditure on a non-current asset of $50,000 and a working capital

investment of $5,000. The profits from the project, ignoring depreciation, would be:

Year Cash profit

$

1 20,000

2 30,000

3 20,000

4 10,000

5 5,000

6 2,000

In both cases, the non-current asset would have nil residual value at the end of the project's life.

The company's cost of capital is 11%, and the discount factors are:

Year Discount factor at

11%

1 0.901

2 0.812

3 0.731

4 0.659

5 0.593

6 0.535

7 0.482

It is company policy to require projects to pay back in discounted cash flow terms within four

years.

Which project, if either, should be undertaken?

Solution

The NPV and discounted payback period for each project are calculated as follows.

Project A


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Project A has the higher NPV, but does not pay back until after 4 years 4 months, which is longer

than the minimum acceptable payback period. Project B has a lower NPV but pays back within

three years, which is less than the maximum acceptable. On the basis of the investment criteria

used by this company, Project B would be undertaken.

12.2 Strengths and weaknesses of the discounted payback method

The discounted payback method of project evaluation is similar to the normal payback method,

except that it allows for the time value of money.

(a) It establishes a requirement for projects to pay back within a maximum time period,

although the maximum discounted payback is a subjective measure, for which there may

be no rational justification.

(b) It gives recognition to the fact that for many companies liquidity is important, and projects

need to provide returns fairly quickly.

(c) Unlike the non-discounted method of appraisal, it will not recommend any project for

investment unless its NPV is expected to be positive.


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The main disadvantage of the discounted payback method is that, as with the non-discounted

payback method, it ignores all cash flows after payback has been reached. It does not take into

consideration all the expected cash flows from the project. In the example above, for example,

Project B is preferred even though the expected NPV from Project A is higher. By ignoring total

returns from a project, its use is not consistent with the objective of maximising shareholder

wealth.

13 The internal rate of return method of project appraisal

With the IRR method of project appraisal, the internal rate of return of the project is calculated.

This is the cost of capital at which the NPV of the project would be zero, and so is the discount

rate of return that the project is expected to earn. A project is financially viable if its IRR exceeds

the company's target rate of return (its cost of capital).

The internal rate of return (IRR) of a project is the discount rate at which the project NPV is

zero. For a 'conventional' project – initial outflow followed by net inflows – this represents the

maximum rate of return the project is able to cover before the NPV turns negative.

Using the NPV method of discounted cash flow, present values are calculated by discounting at

a target rate of return, or cost of capital, and the difference between the PV of costs and the PV

of benefits is the NPV. In contrast, the internal rate of return (IRR) method is to calculate the

exact DCF rate of return which the project is expected to achieve, in other words the rate at which

the NPV is zero.

The rule with the internal rate of return (IRR) method of project evaluation is that a project

should be undertaken if it is expected to achieve a return in excess of the company’s weighted

average cost of capital. A project that has an IRR in excess of the cost of capital must have a

positive NPV.

13.1 Estimating the IRR

Without a computer or calculator program, the calculation of the internal rate of return is made

using a hit-and-miss technique known as the interpolation method. The interpolation method

produces an estimate of the IRR, although it is not arithmetically exact.


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The first step is to calculate two net present values, both as close as possible to zero, using rates

for the cost of capital which are whole numbers. Ideally, one NPV should be positive and the

other negative, although this is not essential.

Choosing rates for the cost of capital which will give an NPV close to zero (that is, rates which are

close to the actual rate of return) is a hit-and-miss exercise, and several attempts may be needed

to find satisfactory rates.

13.2 Example: the IRR method

A company is trying to decide whether to buy a machine for $80,000 which will save costs of

$20,000 per annum for five years and which will have a resale value of $10,000 at the end of Year

5. If it is the company's policy to undertake projects only if they are expected to yield a DCF return

of 10% or more, ascertain whether this project should be undertaken.

Use the following discount factors to estimate the IRR of the project.

Year Discount factor at 9% Discount factor at 12%

1 - 5 3.890 3.605

5 0.650 0.567

Solution

The IRR is the rate for the cost of capital at which the NPV = 0.

This is fairly close to zero. It is also positive, which means that the IRR is more than 9%. We can

use 9% as one of our two NPVs close to zero, although for greater accuracy, we should try 10%

or even 11% to find an NPV even closer to zero if we can. However, a discount rate of 12% will

be used here, to see what the NPV is.


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This is fairly close to zero and negative. The IRR is therefore greater than 9% (positive NPV of

$4,300) but less than 12% (negative NPV of $2,230).

If we were to draw a graph of the NPV at different costs of capital of a 'typical' capital project,

with a negative cash flow at the start of the project, and positive net cash flows afterwards up to

the end of the project, it would look like Figure 1.

If we use a cost of capital where the NPV is slightly positive, and use another cost of capital where

it is slightly negative, we can estimate the IRR - where the NPV is zero - by drawing a straight line

between the two points on the graph that we have calculated.

Figure 1


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Study the diagram above carefully.

(a) If we establish the NPVs at the two points P, we would estimate the IRR to be at point A.

(b) If we establish the NPVs at the two points Q, we would estimate the IRR to be at point B.

The closer our NPVs are to zero, the closer our estimate will be to the true IRR.

We shall now use the two NPV values calculated earlier to estimate the IRR. The interpolation

method assumes that the NPV rises in linear fashion between the two NPVs close to 0. The real

rate of return is therefore assumed to be on a straight line between NPV = $4,300 at 9% and NPV

= –$2,230 at 12%.

The formula to apply is as follows.

where A is the lower rate of return

B is the higher rate of return

NA is the NPV discounted at A NB is the NPV discounted at B

Let us go back to our example.

If it is company policy to undertake investments which are expected to yield 10% or more, this

project would be undertaken.


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14 NPV and IRR compared

14.1 Advantages of IRR method

The main advantage of the IRR method is that the information it provides is more easily

understood by managers, especially non-financial managers. For example, it is fairly easy to

understand the meaning of the following statement.

'The project will be expected to have an initial capital outlay of $100,000, and to earn a yield of

25%. This is in excess of the target yield of 15% for investments.'

It is not so easy to understand the meaning of this statement.

'The project will cost $100,000 and have an NPV of $30,000 when discounted at the minimum

required rate of 15%.'

14.2 Disadvantages of IRR method

A major weakness of the IRR method is its failure to take account of the total value of a capital

project (the project's NPV). When there are mutually exclusive investments, the IRR method might

favour a project with a higher IRR but a lower NPV. In this case NPV should be used.

It might be tempting to confuse IRR and accounting return on capital employed (ROCE). The

accounting ROCE and the IRR are two completely different measures. If managers were given

information about both ROCE (or ARR) and IRR, it might be easy to get their relative meaning

and significance mixed up.

The IRR method ignores the relative size of investments. Both the following projects have an IRR

of 18%.

Project A Project B

$ $

Cost, year 0 350,000 35,000

Annual savings, years 1-6 100,000 10,000

Clearly, project A is bigger (ten times as big) and so more 'profitable' but if the only information

on which the projects were judged were to be their IRR of 18%, project B would be made to seem

just as beneficial as project A, which is not the case.


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14.3 Mutually exclusive projects

Mutually exclusive projects are two or more projects from which only one can be chosen.

Examples include the choice of a factory location or the choice of just one of a number of

machines. The IRR and NPV methods can, however, give conflicting rankings as to which project

should be given priority. Let us suppose that a company is considering two mutually exclusive

options, option A and option B. The cash flows for each would be as follows.

The DCF yield (IRR) of option A is 20% and the yield of option B is only 18% (workings not shown.)

On a comparison of NPVs, option B would be preferred, but on a comparison of IRRs, option A

would be preferred.

The fact that A has a higher IRR than B indicates that, if the company's cost of capital were to

increase from 16%, A would yield a positive NPV for a larger range of costs than B. (It is 'less

sensitive' to increases in the discount rate).

However, at the company's actual cost of capital, B gives a higher NPV, thereby increasing

shareholder wealth by a greater amount than A.

Thus in the case of mutually exclusive projects where NPV and IRR rankings appear to conflict,

the NPV approach should be used to decide between them.


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Of course, if the projects were independent all this would be irrelevant since under the NPV rule

both would be accepted and the organisation would be indifferent as to the order in which they

were accepted.

14.4 Summary of NPV and IRR comparison

(a) Both methods gives the same accept or reject decision for individual projects.

(b) The IRR method is more easily understood.

(c) NPV is simpler to calculate than IRR.

(d) IRR and accounting ROCE can be confused.

(e) IRR ignores the relative sizes of investments.

(f) NPV is the preferred method for deciding between mutually exclusive projects.

Despite the advantages of the NPV method over the IRR method, the IRR method is widely used

in practice. Even so, the NPV method is superior because it focuses on the measurement of

shareholder wealth. This point is explained below.

15 The feasibility study report

Once each area of feasibility has been investigated a number of possible projects may be put

forward. The results are included in a feasibility report.

Once each area of feasibility has been investigated a number of possible projects may be put

forward. The results of the study should be compiled into a report that makes a recommendation

regarding future action (e.g. a new system, modify the existing system, or to remain with the

status quo).

The feasibility study report may be submitted to the organisation's steering committee for

consideration or perhaps to the likely project manager (this will depend upon the size and nature

of the project and the preferences of the organisation.

A typical feasibility study report may include the following sections.

Terms of reference

Description of existing system

System requirements

Details of the proposed system(s)


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Cost/benefit analysis

Development and implementation plans

Recommendations as to the preferred option

Chapter 3: The Project Life Cycle

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Description of the project life cycle,

Understanding of project scope,

Process of scope definition,

Determining performance drivers,

Project termination and project evaluation,

Stakeholder interests, project resources – skills and people,

Implementing a project.


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1 The project life cycle

A successful project relies on two activities – planning first, and then doing. These two activities

form the basis of every project.

Projects can be divided into several phases to provide better management control. Collectively

these phases comprise the project life cycle.

The term project life cycle refers to the major time periods through which any project passes.

Each period may be identified as a phase and further broken down into stages.

Although the principles of the project life cycle apply to all projects, the number and name of the

phases identified will vary depending on what the project aims to achieve, and the project model

referred to.

When studying Project Management it is convenient to give generic names to the phases of the

project life cycle. Remember though, in 'real' situations (or in examination questions!) the

model can be modified to suit circumstances.

The diagram below shows a generic model of the five main phases of a project.

As shown on the diagram, resource use (such as funds and staff hours required) is relatively low

at the start of the project, higher towards the end and then drops rapidly as the project draws to

a close.

The cost of making changes to the project increases the further into the life cycle the project has

progressed.


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1.1 Project phases and stages

A project typically passes through five phases: defining, planning, implementing, controlling and

completing. The number and sequence of stages of a project will vary across organisations.


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The phases of a project can be broken down into a number of stages. Again, the number of

stages identified varies depending on type of project and the conventions of the organisation

undertaking the project.


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We now will look at each of these phases and stages.

1.2 Defining Phase

The defining phase of a project is concerned with deciding whether a project should begin and

committing to do so.

1.2.1 Initiation stage

Project initiation describes the beginning of a project at which point certain management

activities are required to ensure that the project is established with clear reference terms and an

appropriate management structure.

Projects originate from someone attempting to resolve a problem, or seeing an opportunity to

do something new.

It is often not clear precisely what the problem is. The project team should study, discuss and

analyse the problem, from a number of different aspects (e.g. technical, financial).

Not all ideas will result in viable projects. A 'reality test' should be applied to all ideas. This is not

a detailed feasibility study, and is intended to eliminate only concepts that are obviously not

viable. For example, a small construction company should not waste resources investigating the

possibility of submitting a tender to build the second channel tunnel.

At the start of a project, a Project Initiation Document (PID) may be drawn up, setting out the

terms of reference for the project. Typical contents might include.


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(a) The business objectives. Projects should not be undertaken simply for their own sake: the

business advantages should be clearly identified and be the first point of reference when

progress is being reviewed, to make sure that the original aim is not lost sight of.

(b) Probable project objectives, stated in a general manner.

(c) The scope of the project: what it is intended to cover and what it is not.

(d) Constraints, such as maximum amount to be spent and interim and final deadlines.

(e) The ultimate customer of the project, who will resolve conflicts as they occur (for example

between two different divisions who will both be using the new system) and finally accept

it.

(f) The resources that will be used – staff, technical resources, finance.

(g) An analysis of risks inherent in the project and how they are to be avoided or reduced (for

example, the consequences of replacing the old sales ledger system and only discovering

after the event that the new one does not work).

(h) A preliminary project plan (targets, activities and so on) and details of how the project is

to be organised and managed (see the next section).

(i) Purchasing and procurement policy, perhaps specifying acceptable suppliers and

delivery details.

1.2.2 Formation stage

The formation stage involves selecting the personnel who will be involved with the project. First

to be selected is usually the Project Manager and the Project Board.

The project manager should select and build the project team.

1.2.3 Objective setting stage

Before specific objectives can be set it is necessary to establish more general project goals. Clear

goals and objectives give team members quantifiable targets to aim for. This should improve

motivation and performance, as attempting to achieve a challenging goal is more inspiring than

simply being told 'do your best.'

The overall project goal or project definition will be developed. On complex projects it is likely

that the goal will require be written in stages, with each definition being more detailed and

refined than before. The project goal might be defined in a:

Contract

Product specification

Customer's specification

A goal is a result or purpose that is determined for a project. Goals are broader than objectives.


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An objective is a specific project outcome required – including required resources and timing.

Project objectives define what a project must achieve for it to be judged to be complete and

successful and hence able to be closed. Benefits on the other hand may only just be starting to

appear at the end of a project and may continue to be realised long after the project has finished.

A well-defined and agreed (set of) objective(s) is a necessary pre-cursor to detailed project

planning. For the objectives to be useful as an aid to project management they must be:

Specific to the project, and within the project. For example the objective: ‘To improve

the efficiency of our interactions with customers.’ is too vague. It is really a goal shared

by a number of programmes, projects and business as usual activities. On the other hand

'To reduce the average turnaround times for enquiries from customers on subject X.' is a

much clearer indication of what the project must do. However it is not yet very

measurable.

Measurable. You need to define in as measurable and subjective terms as possible what

must be achieved. Measurability will depend on the nature of the objective and may be

in terms of such things as performance, cost, effort, % change, amount of time,

deliverables, quality levels, numbers of events, agreements, approvals, commencement

or termination of something, numbers of people/organisations, a benefit to be achieved

within the life of the project etc. The example above might be made measurable by saying

'To reduce the average turnaround times by 30% from the 2006 figure.' When setting a

measurable target you must ensure that it is achievable.

Achievable. It must be possible to achieve the objective in practical terms and also within

whatever time target has been set (see Time bound below). You might need to consider

constraints of technology, people and processes when assessing achievability. Other

things that influence achievability include: the time needed to perform consultations,

common commencement dates and the requirements of OJEU procurement process. You

should be realistic without being too conservative - project objectives will often be

challenging. Objectives must also be relevant to the bigger picture of the environment

within which the project is running. Sometimes it is only as a result of detailed planning

that it becomes clear that an objective is not achievable. If this happens during

production of the Project Initiation Document then agreement must be reached on the

revised objective. After the PID has been approved, change control must be applied so


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that the impact of any changes to a project's objectives are carefully assessed and

managed.

Relevant. Is the objective consistent with, and does it contribute towards, the

goal/objective at the next level up (Programme, Departmental, PSA)? Make sure the

project, or some part of it is not just there because of a whim or has been influenced by

an agenda that is not aligned with the organisation's core purpose.

Time Bound (and, perhaps trackable). It is useful to have a target date by which each

objective should be achieved. Sometimes there will be one date that applies to most or

all objectives. In other cases each project objective may require its own time frame.

Setting interim time targets may also be useful for certain types of objective. This will

make the objective trackable so that you can measure whether or not you are on course

to achieve it and hence can take early action if not. The following example is both time

bound and trackable:

'To reduce the average turnaround times to satisfy enquiries from customers on subject X by 20%

from the 2009 figure by date d1/m1/y1, and by a further 10% by d2/m2/y2.'

The SMART criteria described above should be used to check that your objectives are sufficiently

rigorous. Non-SMART objectives can lead to one or more of the following:

Insufficient information available to enable production of detailed plans as it is not clear

what the project must achieve.

Wasted effort producing multiple plans to cater for the range of possibilities allowed for

in vague objectives.

Shortage of project resources as the availability of people, skills, £, things is driven by

supply rather than planned requirement.

Project deliverables and outcomes rejected - 'That's not right! What I really need is....'

Needs of external stakeholders and other interested parties not met leading to

dissatisfaction and damage to reputations.

If you find it difficult or impossible to define your objectives in SMART terms, or it is difficult to

gain agreement on them then you must be aware of the risk this poses and hence the additional

effort the SRO and Project Manager must devote to controlling the project and to managing the

expectations of stakeholders.


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1.3 Planning Phase

The planning phase of a project aims to devise a workable scheme to accomplish the overall

project goal.

1.3.1 Task planning stage

After the project team is in place and project goals and objectives have been set, the project

should be broken down into manageable tasks. This process is often referred to as Work

Breakdown Structure (WBS). A brief overview of the process follows. We cover WBS in greater

detail later in this chapter.

A task is an individual unit of work that is part of the total work needed to accomplish a project.

An activity is a set of tasks that are carried out in order to create a deliverable.

A deliverable is another name for a required outcome (e.g. product, service, document etc.) from

a project.

By breaking the project down into a series of manageable tasks it is easier to determine the skills

needed to complete the project. A task list should be produced showing what tasks need to be

done and the work sequences necessary.

Building a task list for a complex project can be an involved and lengthy process. It can be difficult

deciding what constitutes a task, and where one task ends and another begins.

Tasks should be:

a) Clear. Eg Design the layout of the fixed asset depreciation schedule.

b) Self-contained. No gaps in time should be apparent on work-units grouped together to

form a task. All work-units within a task should be related.

1.3.2 Feasibility and fact finding stage

Once all the tasks have been defined a basic network diagram can be developed, together with

a complete list of resources required. Network diagrams are covered later in this chapter.

A more realistic judgement as to the feasibility of the project can now be made. Earlier feasibility

decisions, such as a pre-project feasibility study, have been fairly general. Feasibility concerns

now are more specific – such as whether initial time and cost estimates are realistic.

The activities carried out will differ depending on the nature of the project. For information

systems projects the fact finding exercise would take the form of a systems investigation.


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1.3.3 Position analysis, options generation and options evaluation stages

Once the current position has been clearly established options can be generated with the aim of

utilising the internal strengths identified.

The general management technique of SWOT analysis can be applied to establish the current

position, generate available options and evaluate those options.

1.4 Implementing Phase

The implementing phase is concerned with co-ordinating people and other resources to carry

out the project plan.

1.4.1 Design and development stage

The design and development stage is where the actual product, service or process that will be

the end result of the project is worked on.

The activities carried out in this stage will vary greatly depending on the type of project. For

example, in a software implementation this is when the programming of the software would take

place, in a construction project the building design would be finalised.

1.4.2 Implementation stage

After the process, service or product has been developed it will be implemented or installed so it

is available to be used.

If the project involves a new system or process, a period of parallel running alongside the existing

system or process may be carried out. This enables results to be checked, and any last-minute

problems to be ironed out before the organisation is fully reliant on the new system or process.

1.5 Controlling Phase

The controlling phase is concerned with ensuring project objectives are met by monitoring and

measuring progress and taking corrective action when necessary.

1.5.1 Review stage

Actual performance should be reviewed against the objectives identified in the project plan. If

performance is not as expected, control action will be necessary.


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1.6 Completing Phase

Completion involves formalising acceptance of the project and bringing it to an orderly end.

1.6.1 Completion stage

Following installation and review there should be a meeting of the Project Board to:

Check that all products are complete and delivered

Check the status of any outstanding requests for change

Check all project issues have been cleared

Approve the project completion report

Arrange for a post-implementation review

2 Management tools and techniques

Various tools and techniques are available to plan and control projects including the Project

Plan Project Budget, Work Breakdown Structure, Gantt charts, Network Analysis, Resource

Histogram and specialist software.

2.1 The Project Budget

Project budget. The amount and distribution of resources allocated to a project.

Building a project budget should be an orderly process that attempts to establish a realistic

estimate of the cost of the project. There are two main methods for establishing the project

budget; top-down and bottom-up.

2.1.1 Top-down budgeting

Top-down budgeting describes the situation where the budget is imposed 'from above'. Project

Managers are allocated a budget for the project based on an estimate made by senior

management. The figure may prove realistic, especially if similar projects have been undertaken

recently. However the technique is often used simply because it is quick, or because only a certain

level of funding is available.


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2.1.2 Bottom-up budgeting

In bottom-up budgeting the project manager consults the project team, and others, to calculate

a budget based on the tasks that make up the project. Work breakdown structure (WBS) is a

useful tool in this process. WBS is explained later in this section.

The budget may express all resources in monetary amounts, or may show money and other

resources – such as staff hours. A monetary budget is often used to establish the current cost

variance of the project. To establish this we need:

a) The Actual Cost of Work Performed (ACWP). This is the amount spent to date on the

project.

b) The Budgeted Cost of Work Scheduled (BCWS). The amount that was budgeted to be

spent to this point on scheduled activities.

c) The Budgeted Cost of Work Performed (BCWP). This figure is calculated by pricing the

work that has actually been done – using the same basis as the scheduled work.

BCWP – ACWP = The cost variance for the project.

BCWP – BCWS = The schedule variance for the project.

Budgets should be presented for approval and sign-off to the stakeholder who has responsibility

for the funds being used.

It may be decided that a project costs more than the value of expected benefits. If so, scrapping

the project is a perfectly valid option. In such cases the budgeting process has highlighted the

situation before too much time and effort has been spent on an unprofitable venture.

During the project actual expenditure is tracked against budget on either a separate Budget

Report, or as part of a regular Progress Report. We will be looking at project documentation

and reports later in this chapter.

2.2 Work breakdown structure (WBS)

Work breakdown structure is the analysis of the work of a project into different units or tasks.

WBS:


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(a) Identifies the work that must be done in the project.

(b) Determines the resources required.

(c) Sequences the work done, to allocate resources in the optimum way.

Work breakdown structure is used as a starting point for many project management functions

including budgeting and scheduling. As a simple example of WBS, wiring a house can be sub-

divided into connecting the mains, fitting light sockets and power points etc. Dealing with the

foundations involves digging, filling, area marking, damp proofing and disposal of soil.

The process of work breakdown continues until the smallest possible sub-unit is reached. Digging

the foundations for example would be analysed so that the number of labour hours needed, and

hence the cost, could be determined. Lock recommends giving each sub-unit of work a code

number to enable resources to be obtained and the work to be planned.

2.2.1 WBS and estimates of expenditure

WBS can be used in devising estimates. From the WBS it is possible to compile a complete list of

every task that is going to attract expenditure.

Collating the various costs identified with each task has several benefits:

(a) Provides a useful cost analysis for various business functions.

(b) Assists cost control.

(c) Provides evidence, in any dispute with the client, that the costs are reasonable.

Estimates (and therefore budgets) cannot be expected to be 100% accurate. Business conditions

may change, the project plan may be amended or estimates may simply prove to be incorrect.

Any estimate must be accompanied by some indication of expected accuracy.

Estimates can be improved by:

Learning from past mistakes

Ensuring sufficient design information

Ensuring as detailed a specification as possible from the customer

Properly analysing the job into its constituent units

The overall level of cost estimates will be influenced by:


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a) Project goals. If a high level of quality is expected costs will be higher.

b) External vendors. Some costs may need to be estimated by outside vendors. To be realistic

these people must understand exactly what would be expected of them.

c) Staff availability. If staff are unavailable, potentially expensive contractors may be required.

d) Time schedules. The quicker a task is required to be done the higher the cost is likely to be

– particularly with external suppliers.

2.3 Gantt charts

A Gantt chart, named after the engineer Henry Gantt who pioneered the procedure in the early

1900s, is a horizontal bar chart used to plan the time scale for a project and to estimate the

amount of resources required.

The Gantt chart displays the time relationships between tasks in a project. Two lines are usually

used to show the time allocated for each task, and the actual time taken.

A simple Gantt chart, illustrating some of the activities involved in a network server installation

project, follows.


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The chart shows that at the end of the tenth week Activity 9 is running behind schedule. More

resources may have to be allocated to this activity if the staff accommodation is to be ready in

time for the changeover to the new system.

Activity 4 had not been completed on time, and this has resulted in some disruption to the

computer installation (Activity 6), which may mean further delays in the commencement of

Activities 7 and 8.

A Gantt chart does not show the interrelationship between activities as clearly as a network

diagram (covered later in this chapter). A combination of Gantt charts and network analysis will

often be used for project planning and resource allocation.

2.4 Network analysis

Network analysis, also known as Critical Path Analysis (CPA), is a useful technique to help with

planning and controlling large projects, such as construction projects, research and development

projects and the computerisation of systems.

Network analysis requires breaking down the project into tasks with estimated durations and

establishing a logical sequence. This enables the minimum possible duration of the project to be

found.

CPA aims to ensure the progress of a project, so the project is completed in the minimum

amount of time.

It pinpoints the tasks which are on the critical path, ie those tasks which, if delayed beyond the

allotted time, would delay the completion of the project as a whole. The technique can also be

used to assist in allocating resources such as labour and equipment.

Critical path analysis is quite a simple technique. The events and activities making up the whole

project are represented in the form of a diagram. Drawing the diagram or chart involves the

following steps.

Step 1 Estimating the time needed to complete each individual activity or task that makes

up a part of the project.

Step 2 Sorting out what activities must be done one after another, and which can be done

at the same time, if required.

Step 3 Representing these in a network diagram.


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Step 4 Estimating the critical path, which is the longest sequence of consecutive activities

through the network.

2.4.1 The critical path

The duration of the whole project will be fixed by the time taken to complete the largest path

through the network. This path is called the critical path and activities on it are known as critical

activities.

Activities on the critical path must be started and completed on time, otherwise the total

project time will be extended.

Network analysis shows the sequence of tasks and how long they are going to take. The diagrams

are drawn from left to right. To construct a network diagram you need to know the activities

involved in a project, the expect time of each order (or precedences) of the activities.

2.4.2 Activity-on-node presentation

Network diagrams may also be drawn using Activity-on-node presentation which is similar in

style to that used by the Microsoft Project software package.

2.5 Project evaluation review technique (PERT)

Project evaluation and review technique (PERT) is a technique for allowing for uncertainty in

determining project duration. Each task is assigned a best, worst, and most probable completion

time estimate. These estimates are used to determine the average completion time. The average

times are used to establish the critical path and the standard deviation of completion times for

the entire project.

PERT is a modified form of network analysis designed to account for uncertainty. For each activity

in the project, optimistic, most likely and pessimistic estimates of times are made, on the basis of

past experience, or even guess-work. These estimates are converted into a mean time and also a

standard deviation.

Once the mean time and standard deviation of the time have been calculated for each activity, it

should be possible to do the following.


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a) Estimate the critical path using expected (mean) activity times.

b) Estimate the standard deviation of the total project time.

2.6 Resource histogram

A useful planning tool that shows the amount and timing of the requirement for a resource (or a

range of resources) is the resource histogram.

A resource histogram shows a view of project data in which resource requirements, usage, and

availability are shown against a time scale.

A simple resource histogram showing programmer time required on a software development

program is shown below

Some organisations add another bar (or a separate line) to the chart showing resource availability.

The chart then shows any instances when the required resource hours exceed the available hours.

Plans should then be made to either obtain further resource for these peak times, or to re-

schedule the work plan. Alternately the chart may show times when the available resource is

excessive, and should be redeployed elsewhere. An example follows.


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The number of workers required on the seventh day is 13. Can we re-schedule the non-critical

activities to reduce the requirement to the available level of 10? We might be able to re-arrange

activities so that we can make use of the workers available from day 9 onwards.

3 Project management software

Project management techniques are ideal candidates for computerisation. Project management

software packages have been available for a number of years. Microsoft Project and Micro Planner

X-Pert are two popular packages.

Software might be used for a number of purposes.

a) Planning

Network diagrams (showing the critical path) and Gantt charts (showing resource use) can be

produced automatically once the relevant data is entered. Packages also allow a sort of 'what if?'

analysis for initial planning, trying out different levels of resources, changing deadlines and so on

to find the best combination.

b) Estimating

As a project progresses, actual data will become known and can be entered into the package and

collected for future reference. Since many projects involve basically similar tasks (interviewing

users and so on), actual data from one project can be used to provide more accurate estimates

No. of workers available

Number of workers required to complete scheduled tasks

No. of workers

Time (days) 20

15

5 10 7

13

12

10

8

6

4

2


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for the next project. The software also facilitates and encourages the use of more sophisticated

estimation techniques than managers might be prepared to use if working manually.

c) Monitoring

Actual data can also be entered and used to facilitate monitoring of progress and automatically

updating the plan for the critical path and the use of resources as circumstances dictate.

d) Reporting

Software packages allow standard and tailored progress reports to be produced, printed out and

circulated to participants and senior managers at any time, usually at the touch of a button. This

helps with co-ordination of activities and project review.

3.1 What input data is required?

Most project management packages feature a process of identifying the main steps in a project,

and breaking these down further into specific tasks.

A typical project management package requires four inputs.

a) The length of time required for each activity of the project.

b) The logical relationships between each activity.

c) The resources available.

d) When the resources are available.

3.2 Advantages of project management software packages

The advantages of using project management software are summarised below.

Advantage Comment

Enables quick re-

planning

Estimates can be changed many times and a new schedule produced

almost instantly. Changes to the plan can be reflected immediately.

Document quality Well-presented plans give a professional impression and are easier

to understand.

Encourages constant

progress tracking

The project manager is able to compare actual progress against

planned progress and investigate problem areas promptly.

What if? analysis Software enables the effect of various scenarios to be calculated

quickly and easily. Many project managers conduct this type of

analysis using copies of the plan in separate computer files – leaving

the actual plan untouched.


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Another advantage is that the software is able to analyse and present the project information in

a number of ways. The views available within Microsoft Project are shown in the following

illustration – on the drop down menu.

3.3 Disadvantages of project management software packages

Two disadvantages of project management software are:

a) Some packages are difficult to use.

b) Some project managers become so interested in producing perfect plans that they spend

too much time producing documents and not enough time managing the project.

4 Documentation and reports

Project documentation plays an important part in project control and communication.

We will now look at the main documents and reports used in project management. The name

allocated to documents will vary across different organisations. What is constant is the need for

clear and relevant documentation that helps monitor and control the project.

Remember that reports are not a substitute for one-on-one communication. Too many (or too

lengthy) reports will result in information overload.


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When outlining possible content of documents some duplication of items occurs. This does not

mean that information should be repeated, but that the information may appear in one or other

of the documents depending on the format adopted by the organisation.

It is likely that the Project Initiation Document will evolve until it is ultimately incorporated into

the Project Management Plan, sometimes referred to as the Project Quality Plan.

4.1 The Project Plan

The project manager should also develop a Project Plan. In some organisations what is described

here as the Project Plan would be called the Project Management Plan. In other organisations

the Project Plan refers only to the project schedule, usually in the form of a network diagram.

The Project Plan is used to guide both project execution and project control. It outlines how the

project will be planned, monitored and implemented.

4.1.1 Contents of the Project Plan

The project plan should include:

Project objectives and how they will be achieved and verified

How any changes to the project plan are to be controlled

The management and technical procedures, and standards, to be used

Details of the quality strategy

The budget and time-scale

Safety, health and environmental policies

Inherent risks and how they will be managed

An example of a simple Project Plan / Project Management Plan is shown over the page. This

plan was produced by an American organisation – the Project Management Institute (PMI) – to

manage a project to produce formal project management principles.

The Project Plan evolves over time. A high level plan for the whole project and a detailed plan

for the current and following stage is usually produced soon after project start-up. At each

subsequent stage a detailed plan is produced for the following stage and if required, the overall

project plan is revised

4.1.2 Project Quality Plan

An important element of the overall Project Plan is the Project Quality Plan.


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The Project Quality Plan outlines the quality strategy to be followed and links this to any formal

quality management approach the organisation has chosen to follow.

There is no generally accepted format for a quality plan – in fact the distinction between a

project management plan and a quality plan is becoming increasingly blurred.

A Project Quality Plan may include a number of elements, for example; project overview, project

organisation and management, project requirements, development/production methods,

quality management, risk management and procurement.

For example, the organisation and management section of the Project Quality Plan would include

details of the roles and responsibilities of stakeholders involved in managing the project. This

might include members of the project board, the project sponsor, project manager, project team,

contact people in the client organisation, formal reporting procedures, planning, monitoring and

control methods.

Other sections of the Project Quality Plan will depend upon the nature of the project. For example,

a software project Quality Plan may include a section dealing with configuration management,

containing details of:

Version control – how software version numbering issues are dealt with

Change control – covering how changes are identified, evaluated and implemented correctly.

The contents of the plan will vary depending on the complexity of the project.

The contents page and introduction from a detailed Project Plan relating to a software

implementation project at a call centre follow. (These plans are shown to provide practical

examples – you do not need to learn the details of the plans – what you need for the exam is a

general understanding of possible approaches to project documentation.)

4.2 Progress report

A progress report shows the current status of the project, usually in relation to the planned

status.

The frequency and contents of progress reports will vary depending on the length of the project

and the progress being made.


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The report is a control tool intended to show the discrepancies between where the project is,

and where the plan says it should be.

A common form of progress uses two columns – one for planned time and expenditure and one

for actual.

Any additional content will depend on the format adopted. Some organisations include only the

'raw facts' in the report, and use these as a basis for discussion regarding reasons for variances

and action to be taken, at a project review meeting.

Other organisations (particularly those involved in long, complex projects) produce more

comprehensive progress reports, with more explanation and comment.

The progress report should also include an updated budget status – perhaps showing the cost

and schedule variance explained earlier in this chapter.

4.2.1 Milestones

The progress report should monitor progress towards key milestones.

A milestone is a significant event in the project, usually completion of a major deliverable.

Another way of monitoring progress that could be included in a progress report is a milestone

slip chart.

The milestone slip chart compares planned and actual progress towards project milestones.

Planned progress is shown on the X-axis and actual progress on the Y-axis. Where actual progress

is slower than planned progress slippage has occurred.

A milestone slip chart is shown below.


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On the chart above milestones are indicated by a triangle on the diagonal planned progress line.

The vertical lines that meet milestones 1 and 2 are straight – showing that these milestones were

achieved on time.

At milestone 3 some slippage has occurred. The chart shows that further slippage occurred

between milestones 3 and 4. This is shown by the fact that the vertical line for milestone 4

intersects the diagonal line further to the right of the triangle 4 than was the case for milestone

3.

4.3 Completion report

The completion report summarises the results of the project, and includes client sign-off.

On project completion the project manager will produce the Completion Report. The main

purpose of the completion report is to document (and gain client sign-off for) the end of the

project.

The report should include a summary of the project outcome. The completion report should

contain:


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a) Project objectives and the outcomes achieved.

b) The final project budget report showing expected and actual expenditure (If an external

client is involved this information may be sensitive – the report may exclude or 'amend'

the budget report).

c) A brief outline of time taken compared with the original schedule.

The completion report will also include provision for any on-going issues that will need to be

addressed after completion. Such issues would be related to the project, but not part of the

project. (If they are part of the project the project is not yet complete!) An example of an on-

going issue would be a procedure for any 'bugs' that become apparent after a new software

program has been tested and approved. Responsibilities and procedures relating to any such

issues should be laid down in the report.

The manager may find it useful to distribute a provisional report and request feedback. This

should ensure the version presented for client sign-off at the completion meeting is acceptable

to all parties.

A more detailed review of the project and the system follows a few months after completion, the

post completion audit.

4.4 The post-completion audit

The post-completion audit is a formal review of the project that examines the lessons that may

be learned and used for the benefit of future projects.

The audit looks at all aspects of the project with regard to two questions.

a) Did the end result of the project meet the client's expectations?

The actual design and construction of the end product Was the project

achieved on time?

Was the project completed within budget?

b) Was the management of the project as successful as it might have been, or were there

bottlenecks or problems? This review covers:

i. Problems that might occur on future projects with similar characteristics.

ii. The performance of the team individually and as a group.

In other words, any project is an opportunity to learn how to manage future projects more

effectively.


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The post-completion audit should involve input from the project team. A simple questionnaire

could be developed for all team members to complete, and a reasonably informal meeting held

to obtain feedback. On what went well (and why), and what didn't (and why).

With information systems projects the post-completion audit may be conducted as part of the

post implementation review (covered later in this Text). Strictly speaking, a post-completion

audit would include a detailed review of the project management process, while the post-

implementation review is concerned mainly with the resulting system.

4.4.1 Post-completion audit report

The post-completion audit report should contain the following.

a) A summary should be provided, emphasising any areas where the structures and tools used

to manage the project have been found to be unsatisfactory.

b) A review of the end result of the project should be provided, and compared against the

results expected. Reasons for any significant discrepancies between the two should be

provided, preferably with suggestions for how any future projects could prevent these

problems recurring.

c) A cost-benefit review should be included, comparing the forecast costs and benefits

identified at the time of the feasibility study with actual costs and benefits.

d) Recommendations should be made as to any steps which should be taken to improve the

project management procedures used.

4.4.2 Using post-completion audit information

Lessons learnt that relate to the way the project was managed should contribute to the smooth

running of future projects.

A starting point for any new project should be a review of the documentation of any similar

projects undertaken in the past.

5 Risk management

Risk management is concerned with identifying such and putting in place policies to eliminate

or reduce these risks.


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Projects and other undertakings carry an element of risk, for example the risk of an inappropriate

system being developed and implemented.

The identification of risks involves an overview of the project to establish what could go wrong,

and the consequences.

5.1 Risk management process

A risk is any area of uncertainty that represents a threat or an opportunity to the project. Most of

your attention to risk will be to avoid or reduce the likelihood of events that might cause your

project to be thrown off course. To manage and mitigate risks, you first need to identify them,

assess the likelihood of them happening and estimate the impact they might have on your

project. The identification and consideration of risk is an integral part of project management

and the successful delivery of change.

Decisions in a project or programme environment are taken based on evidence and reasoned

assumptions, but outcomes are never wholly predictable. Often, hard decisions must be taken

quickly or without complete information. However, managing risk does not mean playing it safe

at all costs. As projects deal with change, some amount of risk taking is inevitable for a project to

achieve its objectives and to take advantage of any opportunities that might surface.

Good project management aims to manage the exposure of the project to risk by driving action

to improve control of uncertainty and take steps to reduce the chance of failing to achieve the

stated objectives. A successful project manager will routinely review their exposure to risk and

the steps being taken to manage it. The SRO (Senior Responsible Owner) and if there is one, the

Project Board (includes Senior Responsible Owner, Senior User role, Senior Supplier), should be

actively engaged in the risk management process to ensure that risks are identified by members

of the project team and that emerging risks are escalated upwards as required.

Good risk management requires you to:

Clearly understand what you are trying to achieve - not always simple but very important

Focus equally on 'what could we achieve with a fair wind?' rather than just 'what might stop

us' - it helps ensure opportunities are not missed!

Risk management is not:

A science - often it is based on subjective and qualitative judgements


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Just about finance - it applies to all business decisions at all levels and should also consider

reputational, operational, regulatory factors

A bureaucratic exercise - as with all project management, certain decisions may be better

supported by appropriate documentation. But use common sense and remember that having

a Risk Log is not the same as managing risk.

Managing the project risks helps Project Manager to demonstrate to your SRO (Senior

Responsible Owner), Project Board, colleagues and key stakeholders that you are aware of your

challenges, have considered options appropriately, and that the project is going to deliver

successfully.

Risk management may be viewed as a six-stage process:

Stage 1 Plan risk management approach.

Stage 2 Identify and record risks, for example in a risk register.

Stage 3 Assess risks and record this assessment.

Stage 4 Plan and record risk responses.

Stage 5 Carry out risk reduction actions.

Stage 6 Review the risk management approach.

5.2 Risk assessment process

Risk identification - risks should be directly related to the project objectives and agreed by

the whole project management team and its key stakeholders. Risk management means

identifying and managing uncertainties to delivery of objectives, not managing issues that

might be constant. Focus on issues alone can lead to fire fighting. Enter details into a Risk

Log/Risk Register

Risk evaluation - what is the impact of each risk should it occur? What impact might they

have on benefits, time, cost, quality, reputation, people, etc. How likely is it that these risks

will occur? The probability and impact can both be scored, e.g. using a High/Medium/Low

scale. A Risk Profile could be used to show the overall pattern of risk.

Risk prioritisation - what is the priority of each risk? The urgency and importance of a risk

is not the same thing - deal with the urgent risks quickly, deal with the important risks

comprehensively.


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Risk management planning - do you have a strategy for mitigating the risks you have

identified and preventing the project from being derailed? What actions and resources will

you need to reduce the impact and/or probability of the risk happening? You might find it

useful to consider:

- How to prevent it from happening - either by putting some counter-measures in place

or putting the project in a position where it would have no impact

- How to reduce the risk - what action is needed to reduce the probability of the risk

happening and/or to reduce the impact if it does occur

- Can you transfer the risk to a third party (e.g. take out insurance) or share it in some way

(shared risk-shared gain)?

- What to do to if the risk does occur - do you need a contingency plan?

- What are the implications of accepting the risk - ensuring that all the stakeholders are

aware of the possible consequences?

Planning and resourcing - actions should be built in to the project's plans. If it has been

decided to accept a particular risk without action you may need to inform key stakeholders.

Risk monitoring - Individual risks, and the project's overall exposure to risk, must be

reviewed throughout the life of a project and where necessary actions to mitigate risks must

be changed or revisions to the project business case or assumptions must be considered, if

circumstances alter.

5.3 Contingency plan

For each risk on the risk register it should be recorded what approach will be taken to deal with

the risk.

Developing a risk contingency plan that contains strategies for risks that fall into the VH

quadrant should have priority, followed by risks falling into the two H quadrants. Following the

principle of management by exception, the most efficient way of dealing with risks outside

these quadrants may be to do nothing unless the risk presents itself.

5.4 Dealing with risk

Dealing with risk involves four strategies.

a) Avoidance: the factors which give rise to the risk are removed.

b) Reduction or mitigation: the potential for the risk cannot be removed but analysis has

enabled the identification of ways to reduce the incidence and / or the consequences.

c) Transference: the risk is passed on to someone else – or is perhaps financed by an insurer.


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d) Absorption: the potential risk is accepted in the hope or expectation that the incidence and

consequences can be coped with if necessary.

Risk management is a continuous process. Procedures are necessary to regularly review and

reassess the risks documented in the risk register.

5.5 Dealing with slippage

'Slippage' or slipping behind schedule is a common problem.

When a project has slipped behind schedule there are a range of options open to the project

manager. Some of these options are summarised in the following table.

Action Comment

Do nothing After considering all options it may be decided that things should be allowed

to continue as they are.

Add

resources

If capable staff are available and it is practicable to add more people to certain

tasks it may be possible to recover some lost ground. Could some work be

subcontracted?

Work

smarter

Consider whether the methods currently being used are the most suitable – for

example could prototyping be used.

Re-plan If the assumptions the original plan was based on have been proved invalid a

more realistic plan should be devised.

Reschedule A complete re-plan may not be necessary – it may be possible to recover some

time by changing the phasing of certain deliverables.

Introduce

incentives

If the main problem is team performance, incentives such as bonus payments

could be linked to work deadlines and quality.

Change the

specification

If the original objectives of the project are unrealistic given the time and money

available it may be necessary to negotiate a change in the specification.

5.5.1 Project change procedure

Some of the reactions to slippage discussed above would involve changes that would significantly

affect the overall project. Other possible causes of changes to the original project plan include:


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The availability of new technology

Changes in personnel

A realisation that user requirements were misunderstood

Changes in the business environment

New legislation e.g. Data protection

The earlier a change is made the less expensive it should prove. However, changes will cost time

and money and should not be undertaken lightly.

When considering a change an investigation should be conducted to discover:

The consequences of not implementing the proposed change.

The impact of the change on time, cost and quality.

The expected costs and benefits of the change.

The risks associated with the change, and with the status-quo.

The process of ensuring that proper consideration is given to the impact of proposed changes is

known as change control.

Changes will need to be implemented into the project plan and communicated to all

stakeholders.

5.6 Project implementation

The majority of the work in projects takes place within the project process. However, this section

is shorter than that for initiation. This is because many of these issues are considered in the other

resources. The first part of implementation is developing an outline plan into an integrative

project plan (Meredith and Mantell, 2003), including:

1 Overview of the objectives and scope.

2 Detailed objectives – profit, technical and competitive aspects of the project.

3 The general approach of the managerial and technical aspects of the project – how this links

or deviates from existing approaches and projects. This would include the choice of the

appropriate project management methodologies.

4 Contractual requirements – the reporting processes of all parties, the review processes,

agreements with third parties and schedules. Information on changes to the plan, including

rescheduling, the substitution of suppliers or cancellation of the contract should also be

determined.


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5 Schedules for the work – the components parts and key milestones in the progress of the

project. The project scope should be broken down (‘decomposed’) into parts. This depends

on the chosen work breakdown structure (WBS). At its simplest, a WBS is a structured and

itemised ‘to do’ list. Each task should be detailed, with time estimates. Timings should be

agreed by the project manager.

6 Resource issues – the detailed budget should be included, as should the project budget

monitoring process.

7 Personnel requirements – the skills required, and processes and criteria for selection of

employees, training programmes.

8 Methods and standards of evaluation – mechanisms for collecting and storing data on the

progress of the project should be determined.

9 Potential problems or assumptions – including terrorist threats, weather problems or

governmental bureaucratic factors that might be outside the project manager’s control.

10 Contingency planning – most plans have some form of contingency planning. The approach

and allowances for this is part of the main project plan.

5.7 Project termination and project evaluation

The third stage of the project management life cycle is project termination. A decision to

terminate a project occurs when one or more of the following occur:

a) A project is superseded, possibly by competitors’ actions or a new technical

development.

b) A project is ‘killed’ by management before completion, often once its internal sponsor

leaves or another initiative has greater priority or fit.

c) Projects are deprived of funds and starve to death.

d) Projects are integrated into the routine activities of an organisation.

The decision to terminate a project is not the end of the project management process, which

ends after the project evaluation. Evaluation determines how well the project met its objectives,

including time, cost and quality, and how well the needs of its stakeholders were met. Project

evaluation helps develop learning to guide future projects.


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Small projects may have informal reviews, but larger projects need formal reviews. Although

evaluation takes place throughout the project, an integrated evaluation at the end of the project

reflects on reasons for success and failure that may be missed in operational management.

Project audits are rigorous reviews, using a structured approach, and often undertaken by an

independent party.

5.7.1 Stakeholder interests

It is important to understand who has an interest in a project, because part of the responsibility

of the project manager is communication and the management of expectations. An initial

assessment of stakeholders should be made early in the project’s life, taking care not to ignore

those who might not approve of the project, either as a whole, or because of some aspect such

as its cost, its use of scarce talent or its side-effects. The nature and extent of each stakeholder’s

interest in, and support for (or opposition to) the project should be established as thoroughly as

possible and recorded in a stakeholder register. This will make it possible to draw on support

where available and, probably more important, anticipate and deal with stakeholder-related

problems. The project manager should be aware of the following matters for each stakeholder or

stakeholder group:

a) Goals

b) Past attitude and behaviour

c) Expected future behaviour

d) Reaction to possible future developments

6 Managing stakeholders

In order to manage stakeholder relationships you must:

Identify the stakeholders

Analyse their attitudes to, and potential need for involvement in, the project. You find it useful

to summarise this with a Stakeholder Power/Impact Matrix (see below).

Establish your stakeholder management strategy to ensure a consistent, appropriate and

cost-effective approach is adopted across the project (perhaps formalised as a Stakeholder

Management Strategy).

Identify potential approaches to engage, manage relationships and communicate (both

ways) with each stakeholder.


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Select the approaches that are likely to be effective cost-effective proportionate and

affordable (perhaps formalised as a Communications Plan - see below), and build them in to

the Project Plan as appropriately resourced and scheduled activities.

Execute the plan, monitor its effectiveness and revise as necessary.

6.1 Analysing the Stakeholders

For each stakeholder consider

What is their interest in the project?

How important are they to the project?

Will you be changing such things as:

The way they work (e.g. new processes, information or technology)?

Their attitudes (e.g. to customers, suppliers, employers, the public)?

The speed/productivity of their work?

The people they work with and/or communicate with?

Their level of accountability/responsibility/authority?


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The timing of events in their working day, or its duration?

The working environment or the location(s) of their work?

Which aspects of the project might they wish to/try to influence in some way?

How much power do they possess to influence the project in some way? (The

Power/Impact matrix may help clarify this analysis)

Are they mostly for or against the project?

Will they be involved in:

Setting/reviewing the strategy direction that triggered the programme/project?

Acting as a ‘Champion’ or ‘Ambassador’ for the project or for the change it will bring

about?

Specifying the project's outcome, benefits, scope, objectives and priorities?

Specifying project products/deliverables?

Changing the way their organisation operates in order to cater for the outcome of the

project?

Using project deliverables after the project?

Supporting and/or maintaining project deliverables after the project?

Providing specialist skills for the project (e.g. law, IT, policy, project management)?

Providing non-human resources (e.g. £, accommodation, equipment, facilities)?

Providing information/opinions/advice?

Taking decisions affecting the direction of the project (e.g. Change requests)?

Quality checking the projects deliverables/outputs?

Make sure you establish:

Who is the key day-to-day contact from within the stakeholder organisation, and who

in the project will be responsible for managing the relationship with them?

Who from within the stakeholder organisation will be the person to whom to escalate

issues that can't be dealt with day-to-day level. Who in the project will be responsible for

such escalation?

Is it clear which aspects of the project are of most interest to a particular stakeholder? (A

Stakeholder Interest Map that relates stakeholders to the aspects of the project that are

likely to be of most interest may help clarify this analysis)


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Decide how best to involve them:

Should they be actively involved in directing the project (e.g. as Senior Responsible

Owner, Project Board/Steering Group member)?

Should they be involved as a member of the project team doing specialist work to

7 Project resources – skills and people

7.1 The project manager


This person (whether officially given the title or not) is the project manager. The duties of a project

manager are summarised below.

Table: Project manager roles and responsibilities

Duty Comment

Outline planning Project planning (e.g. targets, sequencing).

Developing project targets such as overall costs or timescale

needed (e.g. project should take 20 weeks).

Dividing the project into activities and placing these activities into

the right sequence. Developing a framework for procedures and

structures, manage the project (e.g. decide, in principle, to have

weekly team meetings, performance reviews etc.).

Detailed planning Work breakdown structure, resource requirements, network analysis

for scheduling.

Teambuilding Build cohesion and team spirit.

Communication The project manager must keep supervisors informed about progress

as well as problems, and ensure that members of the project team are

properly briefed.

Co-ordinating

project activities

Between the project team and users, and other external parties (e.g.

suppliers of hardware and software).

Monitoring and

control

The project manager should estimate the causes for each departure

from the standard, and take corrective measures.


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Problem-

resolution

Even with the best planning, unforeseen problems may arise.

Quality control There is often a short-sighted trade-off between getting the project out

on time and the project's quality.

Risk management A key consideration is project failure and hence project risks and

potential risk areas must be identified and monitored.

Project management as a discipline developed because of a need to co-ordinate resources to

obtain desired results within a set timeframe. Common project management tasks include

establishing goals and objectives, developing a work-plan, scheduling, budgeting, co-ordinating

a team and communicating.

The project management process helps project managers maintain control of projects and meet

their responsibilities.

7.2 The responsibilities of a project manager

A project manager may be regarded as having responsibilities both to management and to the

project team.

Responsibilities to management:

(a) Ensure resources are used efficiently – strike a balance between cost, time and results.

(b) Keep management informed with timely and accurate communications about progress and

problems.

(c) Manage the project competently and take action to keep it on schedule for successful

completion.

(d) Behave ethically, and adhere to the organisation's policies.

(e) Maintain a customer orientation (whether the project is geared towards an internal or

external customer)

- customer satisfaction is a key indicator of project success.

Responsibilities to the project team:

(a) Ensure the project team has the resources required to perform tasks assigned.


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(b) Provide new team members with a proper briefing and help them integrate into the team.

(c) Provide any support required when members leave the team either during the project or on

completion.

(d) Listen properly to team members so that potential problems are identified and can be dealt

with as soon as possible.

7.3 The skills required of a project manager

To meet these responsibilities a project manager requires a broad range of skills. The skills

needed are similar to those necessary when managing a wider range of responsibilities. A project

manager requires excellent technical and personal capabilities. Some of the skills required are

detailed in the following table.

Table: Project manager skill set

Type of skill How the project manager should display the type of skill

Leadership and

team

Building

Be enthusiastic about what the project will achieve.

Be positive (but realistic) about all aspects of the project.

Understand where the project fits into the ‘big picture’.

Delegate tasks appropriately – and not take on too much personally.

Build team spirit through encouraging co-operation and sharing of

information.

Do not be restrained by organisational structures; a high tolerance for

ambiguity (lack of clear-cut authority) will help the project manager.

Be prepared to motivate team members and give due praise and

encouragement.

Project

administration

Ensure all project documentation is clear and distributed to all who

require it.

Use project management tools to analyse and monitor project progress.


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Communication Listen to project team members. Exploit good ideas whatever the source.

Use persuasion to win over reluctant team members or stakeholders to

support the project.

Ensure management is kept informed and is never surprised.

Encourage team members to share their knowledge and support each

other.

Technical By providing (or at least access to) the technical expertise and experience

needed to manage the project.

Personal Be flexible. Circumstances may develop that require a change in plan.

Show resilience. Even successful projects will encounter difficulties that

require repeated efforts to overcome.

Be creative. If one method of completing a task proves impractical a new

approach may be required.

Patience is required even in the face of tight deadlines. The ‘quickfix’ may

eventually cost further time than a more thorough but initially more

time-consuming solution.

Keep in touch with team members as their performance is key to the

success of the project.

7.4 Building a project team

Project success depends to a large extent on the team members selected. The ideal project team

achieves project completion on time, within budget and to the required specifications – with the

minimum amount of direct supervision from the project manager.

The team will comprise individuals with differing skills and personalities. The project manager

should choose a balanced team that takes advantage of each team member's skills and

compensates elsewhere for their weaknesses.

The project team will normally be drawn from existing staff, but highly recommended outsiders

with special skills may be recruited. When building a team the project manager should ask the

following questions.


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a) What skills are required to complete each task of the project? This list will be based on the

project goals established previously.

b) Who has the talent and skills to complete the required tasks, whether inside or outside the

organisation?

c) Are the people identified available, affordable, and able to join the project team?

d) What level of supervision will be required?

7.5 Developing the project team

Group cohesiveness is an important factor for project success. It is hoped that team members will

develop and learn from each other, and solve problems by drawing on different resources and

expertise.

The performance of the project team will be enhanced by the following.

a) Effective communication

b) All members being aware of the team's purpose and the role of each team member

c) Collaboration and creativity among team members

d) Trusting, supportive atmosphere in the group

e) A commitment to meeting the agreed schedule

f) Innovative/creative behaviour

g) Team members highly interdependent, interface effectively

h) Capacity for conflict resolution

i) Results orientation

j) High energy levels and enthusiasm

k) An acceptance of change

Collaboration and interaction will help ensure the skills of all team members are utilised, and

should result in ‘synergistic’ solutions. Formal (e.g. meetings) and informal channels (e.g. e-mail

links, a bulletin board) of communication should be set up to ensure this interaction takes place.

Chapter 4: Methods of Project Management

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Concept of most common and popular methodologies: PRINCE/PRINCE2

Scalable methodologies and agile methodologies

Project management plan

Implementing the project management plan with a project planning template


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1 Project management approaches

Project management approaches vary substantially, across a continuum, with the following

extremes:

Organisations have no formal methodology, which means that the project manager has all the

information and plans. Team members may be less involved or committed because they lack

information. Management may be given only limited information on progress, as reporting takes

time.

An organisation-wide methodology is applied for all projects and departments. Usually, this is a

sophisticated methodology, which prepares plans, metrics, communications tasks etc. Often,

these methodologies require training for all participants. However, an overly complex

methodology may be cumbersome for some projects, such as simple, ‘soft’ or creative projects,

and may demotivate people.

Between these extremes, there are many off-the-shelf software packages for managing projects,

including Microsoft Project. Typically, these require some training, but are not the highly specialist

project management methodologies. These packages identify the core processes and reporting

that is required in project management, and can be bought or licensed for application. Pre-

established packages are cheaper than the specialist packages. They may increase project

management efficiency by automating planning and reporting processes. In turn, this improves

effectiveness, such as reducing risks.

These packages are flexible enough to take account of a project’s unique aspects and can be

customised for any projects, but there are also ‘off-the-shelf’ software packages specifically for

marketing, IT projects.

A second option is to buy an existing methodology and customise it (or have it customised) for

a specific situation. This is generally for more sophisticated projects and project-focused

organisations. There is a fine line here between the adaptation of an existing methodology and

the development of in-house methodologies, customised for an organisation’s skills, values and

best practices. The latter are becoming less common with ever-increasing numbers of quality

project management software. Sophisticated customised packages are typically time consuming

and expensive, and staff must be trained to use these.


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2 Core project management methodologies

Using existing methodology is increasingly common, especially in larger organisations that have

extensive project management experience. Often, job advertisements for projects managers

detail the methodology to be used, and ask for experience in using this technology.

This discussion presents features of two common process methodologies:

• PRINCE/PRINCE2

• Scalable methodology

Process methodologies are those that follow a formal planning stage, whereby processes are

determined for undertaking the project.

2.1 PRINCE/PRINCE2

PRINCE (PRojects IN Controlled Environments) methodologies are commonly used in public

sector project management, although they were originally designed for developing and

implementing information systems. It is the default methodology for public sector organisations

in the United Kingdom, and is widely used by large organisations across Europe. A related

approach is Managing Successful Programmes (MSP). Both approaches are structured, but

adaptable to different projects and programmes.

PRINCE methodologies have:

A clear management structure

Formal allocation of project roles and responsibilities

Plans for resourcing and technical issues

Control procedures

A focus on products – deliverables to the customer and project deliverables for the

management of the project

PRINCE methodologies have three separate progress assurance roles:

The business – The Business Assurance Co-ordinator (BAC) ensures that the project meets

the organisation’s mission.

The specialist – The Technical Co-ordinator is responsible for ensuring that the project does

not have technical problems.


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The user – The User Assurance Co-ordinator represents the user throughout the process.

These different roles ensure that the various stakeholders agree that the project is satisfactory

(in terms of the cost, quality and delivery) from all perspectives.

In terms of progress planning and monitoring, PRINCE2 shows:

The project life cycle stages

Progress against plan and key user-defined decision points

Alerts for any variance from plan

In addition, PRINCE2 enables:

Management and stakeholder involvement at critical times in the project

Effective communication within the project team and other stakeholders

However, PRINCE2 has its critics, who claim it will:

Make projects longer

Increase project costs

Tie up resources

Delay payback on the project

Increase risks of failure

Read more information on PRINCE2 at http://www.prince2.com/.

2.2 Scalable methodology

Scalable methodology recognises the differences in project size, risk and complexity, and allows

a customised best practice management approach for each project. This approach builds on the

Project Management Institute’s PMBOK (Project Management Body of Knowledge), identifying

differences between minor and major projects on nine dimensions and their impact on project

management.

2.3 Agile methodologies

A change in recent years has come about owing to criticisms of the process-driven

methodologies (such as PRINCE2 and scalable methodology) because they lacked the capacity

to adapt as the project developed. New agile methodologies were developed, which allow the

project to adapt to changes in the changing environment and business challenges. Although they

are seen as contrasting with the process methodologies, they are actually considered to be ‘half-

way’ between a process methodology and no methodology.


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Agile methodologies are defined as being:

Adaptive rather than predictive – Agile approaches welcome changes, rather than have fixed

plans.

Focused on people rather than process – Process methods focus the process set, and anyone

could implement the plans. Agile approaches recognise that people have skills that can add to

the project as it progresses.

Adaptive Project Framework (ADF): ADF is a customer-focused methodology, which is based

on being:

- Client focused and client-driven

- Frequent and early results reporting

- Focused on questioning and introspection

- Change is good, when it is moving to a better solution

ADF allows project scope to vary within defined time and cost levels. The project scope is

reviewed in several iterations, by involving the client in identifying the issues that are of most

value to the business. This means that the project changes course to deliver the maximum

business value.

This approach was developed for IT projects, after many of them failed to deliver using the

traditional and more rigid methodologies. However, its focus and flexibility make it appropriate

for projects.

3 Choosing a methodology

The choice of a project methodology is commonly set given the preferences of the

commissioning organisation.

However, if you have an open choice of methodology, you should consider the following issues

to make an informed choice:

Availability of software

Number of team members

Team member communications


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Complexity of the task

Training required to effectively utilise the methodology

Cost of the methodology to acquire or use

4 Project management plan

The project management plan is the document that the project manager builds to describe in

more details the planning of the project and its organisation.

Without careful planning it is likely that your project will fail to achieve its objectives. In a small

project it is possible that one plan may be used to define the entire scope of work and all the

resources needed to carry out that work. For larger projects, planning will be carried out at

different levels of detail at different times. In all types and sizes of project you must be prepared

to re-plan in the light of experience.

Remember that plans are essential for ongoing project control and must be used and kept up to

date right through the life of the project.

The Project Plan will typically contain the following:

Plan Description (a brief narrative description of the plan's purpose and what it covers)

Pre-requisites (things that must be in place for the plan to succeed)

External dependencies (e.g. commitments required from outside agencies)

Planning Assumptions (e.g. availability of resources)

Gantt/Bar chart showing Stages and/or Activities

Financial budget - planned expenditure

Resource requirements (e.g. in a table produced using a spreadsheet or project planning

tool)

Requested/assigned specific resources

4.1 The steps in planning

Planning should be carried out in the order shown but bear in mind that iteration around some

or all of the steps will be necessary for all but the simplest of plans.

Make sure you understand the project's desired outcome, scope, objectives, constraints,

assumptions and the purpose and level of detail of the plan you must produce.

Define the deliverables to be created as a result of the plan.

Specify the activities necessary to develop the deliverables.

Put the activities in a logical sequence taking into account interdependencies.

Estimate resource requirements (people, skills, effort, money and other things that will

be needed to carry out each activity).


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Estimate the timescale for each activity (e.g. elapsed duration).

Schedule the work from the target start date onwards.

Define project management progress controls and decision points.

Identify and deal with risks and uncertainties.

Document the plan.

Gain approval to proceed with the plan.

The following detailed checklist will help you through these steps.

4.2 Planning checklist

This checklist may be used when planning an entire project, a phase/stage within a project, an

activity within a stage/phase or a task that contributes towards completion of an activity. You

might also find it useful if you are applying project management techniques to help you manage

non-project work.

(a) Confirm scope and purpose of the plan

Are you clear about the purpose of the plan? (e.g.: to gain commitment and approval for a

project/stage, for day to day management and control, to establish feasibility or viability, to

define contingency arrangements)

Do you understand the objectives to be met by the plan?

Is it clear what is within the scope of the piece of work you are planning?

Are there any constraints (e.g. resource availability, mandated delivery dates)?Do you

understand the high-level structure of the plan (e.g. for a procurement stage it might be:

Specify requirements: Invite tenders: Evaluate tenders: Award contract)?

Are there any assumptions you must make in order to construct the plan?

(b) Define the deliverables

Identify the final, and any interim, deliverables required from the project

Specify for each deliverable:

- What it must contain/cover

- Who will be responsible for its development

- What it is dependant on (e.g. information, resources)

- The required quality characteristics that must be built in to it

- The types of quality checks to be applied


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- The skills, resources, individuals needed to develop the deliverable and to apply the

quality checks

Establish the logical order for development of the deliverables (what must be developed in

sequence, what can be done in parallel).

(c) Identify and estimate activities:

Consider need to involve experts who will understand the detail of the development

processes (e.g. Policy, Lawyers, IT staff, Procurement specialists)

Identify all the activities necessary to develop each deliverable

Identify all the activities necessary to quality control each deliverable

Agree the order in which activities must be carried out

Include activities that take into account the interest of stakeholders who will use, operate and

maintain the deliverables from the project

Break down `large' activities that are difficult to estimate into sets of smaller activities of a

size you can estimate resource requirements and durations with confidence

Identify the skill types required to carry out each activity

Estimate the amount of effort and optimum numbers of individuals

Identify and estimate any non-human resources and services required

If required, calculate the estimated cost to develop each deliverable/product

Calculate the overall cost for all activities

Make sure you use appropriate units taking into account staff availability:

- e.g. 3 x policy staff each required to commit 10 days of effort for an activity and able to

work on the project for 25% of their time: total effort = 30 person days, minimum elapsed

time = 40 working days = 8 working weeks.

Make sure you have made appropriate allowances for such things as:

- Formal consultations

- Turnaround times for ministerial submissions

- ‘Dead time’ (e.g. elapsed time while ‘external’ agencies review proposals consider

recommendations, provide responses, make decisions)

- Supplier lead times

- A realistic working week (i.e. over an extended period you will not achieve 5 days of

effort per individual per working week. - a figure of 4 to 4.5 working days per week allows


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for `non productive' activities such as attending training courses, sick leave, holidays, job

appraisal and non project meetings)

- Participation in progress meetings and quality control activities?

(d) Schedule the work and resources

Has your scheduling of activities been based on a realistic start date and does it allow for

weekends, Bank Holidays and other non-working days?

Will the resources/skills be available in sufficient quantities when you need them?

Are there any internal and/or external stakeholder tasks/events that coincide with the project

and will limit the availability of resources?

Are any individuals scheduled to work on other projects when you need them?

Will any individuals or skill/types be overloaded with project work at any time?

Have you adjusted the timing and allocation of work to spread the load evenly?

Can you meet your time constraints/target delivery dates?

Do you need to include recruitment, procurement, training or induction activities?

(e) Identify risks and design controls:

Is it clear when the SRO/ Project Board must review viability and take decisions?

Would it be sensible to break your project down into a series of separately planned stages to

minimise risk and enable SRO/ project Board control?

Have you identified key milestones? (e.g. deliverable sign-offs)

Does the plan identify formal quality controls and audit activities?

Have you identified any risks that may prevent you executing the plan and delivering:

- to the required specification and ability to deliver benefits?

- on time?

- within budget?

- without damaging the organisation's reputation?

Are you confident partner organisations and/or external suppliers will meet their

commitments in accordance with the plan?

Does your plan allow contingency (time and effort) to allow for the fact that you will identify

the need for new unplanned activities when you execute the plan?

Does the amount of contingency you have allowed reflect the degree of uncertainty you have

about the accuracy of your estimates for effort, costs, timescales?


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Can you forecast any events in the business year which coincide with important activities in

your plan (e.g. recess, audits, end of year reporting?

Have all resource 'owners' committed to the plan?

(f) Document and gain approval for the plan

Is the plan to a form that will be understood by its audience?

Does the version of a plan for the SRO/Project Board include, as a minimum:

- Narrative describing the purpose, author(s), current status, assumptions, constraints, pre-

requisites, recommendations and next actions required

- Definition of deliverables

- Risk assessment and countermeasures

- Gantt/bar chart(s) showing a schedule of major activities.

- Resource schedules showing resource requirements against time

Does the working plan for project and team management go to a fine enough level of detail

for management and control purposes? (e.g. the lowest level of plan for day to day control

should have activities of no more than 10 elapsed days duration, allocated to a named

individual or small defined team)

Is your plan acceptable to those who must:

- provide the staff?

- provide non-human resources/services?

- commit financial resources?

- do the work to create the deliverables?

An example of a simple project management plan is shown below. This plan is able produced by

the American to manage a project to produce formal project management principles.

The project management plan evolves over time. A high-level plan for the whole project and a

detailed plan for the current and following stage is usually produced soon after project start-up.

At each subsequent stage a detailed plan is produced for the following stage and, if required, the

overall project plan is revised.

Table: Project planning template


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Project management plan

Project name The full name of this project is ‘Project Management Principles’.

Project manager The project manager is Joe Bloggs. The project manager is authorised

to (1) initiate the project, (2) form the project team and (3) prepare

and execute plans and manage the project as necessary for successful

project completion.

Purpose/Business

need

This project addresses a need for high-level guidelines for the project

management profession through the identification and presentation

of project management principles. The project sponsor and accepting

agent is the Project Institute (PI) Standards Program Team (SPT). The

principal and beneficial customer is the membership of PI. Principles

are needed to provide high-level context and guidance for the

profession of project management. These Principles will provide

benefit from the perspectives of practice, evaluation, and

development.

Project

management

The project team will use project methodology consistent with PMI

Standards. The project is to be managed with definitive scope and

acceptance criteria fully established as the project progresses and the

product is developed.

Assumptions,

constraints and

risks

The project faces some increased risk that without a clearly prescribed

definition of a Principle, standards for product quality will be more

difficult to establish and apply. To mitigate this risk, ongoing

communication between the project team and the project sponsor on

this matter will be required.


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Resources The PI SPT is to provide the project team with the following.

Financial. SPT will provide financial resources as available. The initial

amount for the current year is $5,000. The project manager must not

exceed the allocated amount, and notify the SPT when 75% of the

allocation has been spent.

Explanation of Standards Program. SPT will provide guidance at the

outset of the project, updates as changes occur, and clarifications as

needed.

Personnel/Volunteers. SPT will recruit volunteer team members from

within the membership of PMI through various media and liaisons.

The project team is to consist of no less than ten members, including

the project manager. General qualifications to be sought by SPT in

recruiting will be:

Mandatory

Acceptance of project plan

Demonstrated capability for strategic, generalised or intuitive

thinking

Capability to write clearly on technical subject matter for general

audiences

Capability to work co-operatively with well-developed

interpersonal skills

Be conversant in English and be able to use telephone and

internet email telecommunications

As possible

Time availability (Team members may contribute at different

levels. An average of approximately five to ten hours per month

is desired.)

Diversity (Team members collectively may represent diverse

nationalities, types of organisations or corporate structure,

business sectors, academic disciplines, and personal experience.)

Travel (As determined mutually by the project sponsor and manager,

some travel for face-to-face meetings may be requested.)


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Approach The project will progress through the following phases.

Phase 1: Team formation – Recruit and orient volunteer team

members. Establish procedures and ground rules for group process

and decision making.

Phase 2: Subject matter clarification – Identify and clarify initial

scope and definitions of project subject matter.

Phase 3a: Exploration – Begin brainstorming (through gathering,

sharing, and discussion) of data and views in unrestricted, non-

judgemental process. Phase 3b: Selection – Conclude brainstorming

(through evaluation and acceptance or rejection) of collected data

and views. As the conclusion to this phase, the SPT will review as an

interim deliverable the selection made by the project team.

Phase 4: Development – Conduct further research and discussion to

develop accepted subject matter.

Phase 5: Articulation – Write a series of drafts to state the accepted

and developed subject matter as appropriate for the project business

need and product description.

Phase 6: Adoption – Submit product to SPT for the official PI

standards approval and adoption process. Revise product as needed.

Phase 7: Closeout – Perform closure for team and administrative

matters.

Deliver project files to SPT.


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Communication

and reporting

The project manager and team will communicate with and report to

the PI Standards Program Team as follows.

Monthly status reports – Written monthly status and progress

reports are to include:

Work accomplished since the last report

Work planned to be performed during the next reporting period

Deliverables submitted since the last report

Deliverables planned to be submitted during the next reporting

period

Work tasks in progress and currently outside of expectations for

scope, quality, schedule or cost

Risks identified and actions taken or proposed to mitigate

Lessons learned

Summary statement for posting on PI website

Monthly resource reports – Written monthly resource reports are to

include:

Financial resources

Total funds allocated

Total funds expended to date

Estimated expenditures for the next reporting period

Estimated expenditures for entire project to completion

Milestone and critical status reports – Additional status reports are

to be submitted as mutually agreed upon by SPT and the project

manager and are to include at least the following items.

Milestone status reports are to include the same items as the monthly

status reports, summarised to cover an entire project phase period

since the last milestone report, or entire project to date.

Critical status reports are to focus on work tasks outside of

expectations and other information as requested by SPT or stipulated

by the project manager.

Acceptance The project manager will submit the final product and any interim

deliverables to the Standards Program Team (SPT) for formal

acceptance. The SPT may (1) accept the product as delivered by the

project team, or (2) return the product to the team with a statement

of specific requirements to make the product fully acceptable. The


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acceptance decision of the SPT is to be provided to the project

manager in writing.

Change

management

Requests for change to this plan may be initiated by either the project

sponsor or the project manager. All change requests will be reviewed

and approved or rejected by a formal proceeding of the Standards

Program Team (SPT) with input and interaction with the project

manager. Decisions of the SPT will be documented and provided to

the project manager in writing. All changes will be incorporated into

this document, reflected by a new version number and date.

Table PSC Project sign-off card

Plan acceptance Signature and Date

By PMI Standards Program Team

12 July 20XX

Fred Jones – Pl Technical Research & Standards Manager

By Project Manager

20 July 20XX

Joe Bloggs – Pl member

The format and contents of a project management plan will vary depending on the organisation

involved and the complexity of the project.

Chapter 5: Project Management Tools and Techniques

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Chapter 5: Project Management Tools and

Techniques


Management tools and techniques for project

Determining resource checklist for projects

Gantt charts, network analysis

The critical path, project evaluation review technique (PERT), resource histogram


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1 Management tools and techniques

The techniques we discuss in this section are concerned with the fundamentals of planning

projects and controlling their progress. As with most activities, it is difficult to separate the

process of planning a project from that of controlling it: planning is likely to continue throughout

the life of the project. A baseline plan will show the following:

a) Start and end dates for the project and its major phases or activities

b) The resources needed and when they are required

c) Estimates of cost for the project and the major phases or activities

Several books report on planning mistakes, many of which come from poorly planned projects.

Good planning is essential for project success, as is clear in the 6 Ps of project management: Prior

Planning Prevents Poor Project Performance (this may be also be familiar in a rather more earthy

form).

Often, the problems start with vague or poor project definition. Typically, projects have requests

such as:

(a) Prepare a communications plan for a new product launch or

(b) Develop an improved new product development process

At one level, these seem fine. However, exploring these further highlights issues that must be

addressed before planning can be undertaken.

What sort of communications plan?

What targets – trade or consumer markets?

What timescale?

Are there any specific media to be used or avoided?

What is meant by improved?

How would this project be measured?

Initial scoping helps identify some aspects of the project, but this next stage of planning adds to

the detail for the project plan and clarifies more precisely what is involved. There is an old saying


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that ‘the devil is in the detail’ and it is certainly true that you will have the devil of a time trying

to successfully manage a project if you fail to pay attention to detail.

The general process of project planning is the structure of this chapter.

1. Determining the work breakdown structure

2. Estimating timing and task duration

3. Determining resource requirements

4. Allocating responsibilities

5. Sequencing work

6. Developing the project schedule or network

7. Preparing the integrated planning document

The key project management tools will be identified within these headings.

2 Determining the work breakdown structure

The key element of good project plans is the work breakdown structure. WBS can be defined as:

'A Deliverable-oriented grouping of project elements that organises and defines the total work

scope of the project. Each descending level represents an increasingly detailed definition of the

project work’.

In his book Project Management: Planning and Control Techniques, Rory Burke (2003) argued a

structure that is based on the four project phases of Concept, Design, Implementation and

Handover. He contends that each of these individual phases can also be broken down into the

full four at a subproject level. Let us take the concept phase as an example. It would include within

it the original idea, but that idea would need to be checked and researched to put an overview

together. That rough design overview needs to be built into enough of a case to allow the project

to gain approval, and that is the implementation that is aimed for. Once that has been gained,

then there is a handover to those responsible for the next stage in the process.

The WBS is a structured hierarchy of the work that needs to be accomplished on a project. This

organises work in an organisational chart-type structure, with different levels showing how goals,

objectives, topics etc. can be broken down into increasingly detailed activities (see Figure WBS).


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1. Define the needs – what do we need to allocate to the system and what do we need in return?

What do we want from the software package?

What are the IT requirements e.g. compatibility?

What does the sales team expect to get?

How will we able to fit it in to our overall processes?

We must remember that the customer is the C in CRM

What are the hardware requirements – do we need to upgrade?

2. Research the suppliers that potentially have suitable software/hardware to satisfy our needs

Shortlist those suppliers we will invite to bid after more detailed research e.g. costs,

testimonials, Product limitations.

(Note that this is only the start of the structure for illustrative purposes and it may go down

through many more levels until it is broken down into discrete work pack ages. You may also

note that the text that follows the diagram reflects the hierarchic al structure of the diagram.)

The WBS will go down through a series of levels until the project tasks produce manageable

outputs. These are called work packages. Work packages are normally viewed as being

deliverables or products at the lowest level of the WBS. Deliverables are the tangible outputs

from work, which are normally then signed off as complete. This may be a milestone – the end of

a period of work.


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Identifying the work packages forms the foundation for developing schedules, budgets and

resource requirements, and also forms the foundation for assigning responsibilities.

Work packages can be split into activities or tasks that are used to create a workflow. These

contrast with activities and tasks, which are about what is involved in doing work.

Figure BPP looks at the process that would be involved in the purchasing of the CRM software

outlined in Figure WBS It considers a traditional purchasing of traditional physical goods with the

alternative of buying software. Again, remember that it is included as an illustration, and you may

very well see variations in your organisation.

Some people refer to the 80-hour rule to make the decision about the bottom level. The bottom

level of a WBS should identify 80 hours or fewer of work. This WBS is the foundation for the other

elements of the project plan. The project manager’s mantra states that ‘if it is not in the WBS,


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then it is not in the plan’. Clearly, there must be attention to this for the project to be successful,

but you may well miss some issues if you are new to project management.

Seek advice from others to check that this is not a major issue.

Some key things to review concerning a WBS are:

Does the WBS go outside the scope of the project?

Does the WBS cover the entire scope of the project?

Does the WBS ultimately result in deliverables?

2.1 Dependencies and interactions

A very important aspect of project planning is the determination of dependencies and

interactions. At any level of WBS analysis, some tasks will be dependent on others; that is to say,

a dependent task cannot commence until the task upon which it depends is completed. Careful

analysis of dependencies is a major step towards a workable project plan, since it provides an

order in which things must be tackled. Sometimes, of course, the dependencies are limited and

it is possible to proceed with tasks in almost any order, but this is unusual. The more complex a

project, the greater the need for analysis of dependencies.

Interactions are slightly different; they occur when tasks are linked but not dependent. This can

arise for a variety of reasons: a good example is a requirement to share the use of a scarce

resource. If there were two of us working on our vegetable plot but we only possessed one spade,

we could not use it simultaneously both to cultivate the plot itself and to dig the trench in which

we wish to place the kerbstones. We could choose to do either of these activities first, but we

could not do them both at the same time.

The output from the WBS process is a list of tasks, probably arranged hierarchically to reflect the

disaggregation of activities. This then becomes the input into the planning and control processes

described in the rest of this section.

2.2 PRINCE2 – product breakdown

Rather than using work breakdown structure, PRINCE2 uses a product-based approach to

planning. This has the advantage of directing management attention to what is to be achieved

rather than how to do it, thus providing an automatic focus on achieving the product goals. Also,

it can be helpful in complex projects, where the processes involved may be initially unclear. Under


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this approach, work breakdown is preceded by product breakdown. PRINCE2 starts this analysis

by dividing the project products into three groups.

a) Technical products are the things the project has been set up to provide to the users. For an

IT system, for example, these would include the hardware, software, manuals and training.

b) Quality products define both the quality controls that are applied to the project and the

quality Standards the technical products must achieve.

c) Management products are the artefacts used to manage the project. They include the project

management organisation structure, planning documentation, reports and so on.

Each of these groups of products is then broken down into manageable components as part of

the planning process, using the traditional work breakdown structure approach if the complexity

of the project requires it. Project and stage plans may make use of the normal planning tools

such as CPA, Gantt charts and resource histograms.

2.3 Estimating timing and task duration

Project duration defines the length of time (in hours, days, weeks or months) to complete an

activity. Typically, in any projects, the deadline will be set, such as to launch in time for a Christmas

holiday or before the Olympics. Working back from the set deadlines is stressful for a project

manager, and often for all other members of the project team too.

Task and activity duration also needs to be determined for planning purposes. Estimating the

task duration for work packages is one of the most difficult things for a novice project manager.

There are several ways to try and determine this:

Consider similar activities for which you have information about the task duration. However,

this may not be possible for all tasks.

Historical data may identify how long tasks or activities have taken in the past. However,

some project tasks may be new tasks.

Expert advice – or knowledge – from senior managers can give indications of the likely – or

desired – outcomes.

Problems with establishing time periods include:

Lack of experience in planning time du ration for tasks, and in doing activities.


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Clearly, novices will typically take longer than experienced workers to do the same tasks, and

may be unaware of the problems that take time. Clearly, lack of experience here can lead to

unrealistic timescales.

Complexity of the problems – often these involve creative tasks, for which focusing on time

may detract from quality.

Unexpected events or delays due to illness etc. Also, mistakes or other problems can add to

the time needed. Contingencies may have to be built into the systems.

Novices tend to underestimate the amount of work involved in any tasks. Expert project

managers tend to use the longest predicted duration in scheduling, as this allows for possible

delays.

There is a dual issue here. It is very difficult to judge the time taken for new projects or new

activities or tasks. Some tasks involved in marketing activities – such as creative work – are

especially difficult to do ‘to a timescale’. This in turn will impact on the feasibility of the project

completion date.

2.4 Determining requirements – a resource checklist

Project resourcing clearly varies depending on the type and size of projects. The central issue in

identifying this is using the WBS and estimated timings to determine the resource requirements

to complete the project on time and budget:

a) The people to be involved in the project, the level of their commitment, and the required

level of skills.

b) The facilities for the project planning, and depending on the project, its implementation.

c) The equipment required, such as computers, cameras, or other audio-visual equipment.

d) The money – a budget needed to complete the task. There will often be an iterative process

to determine budgets, taking account of the costs, timescales etc.

e) The materials – what tangibles, consumables or other items will be required in the process.

The resources need to be determined at this stage, and this becomes a reference point for

monitoring resource use once the project starts. While the WBS tends to work top-down, many

argue that resources should be determined from the bottom-up. Contingencies may need to be

built in for some resources.


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3 Sequencing work

The tasks so far have complexities, but the real difficulties in project planning come through

scheduling. Scheduling is essentially about the links between and among activities/tasks and or

people and organisations. Some work tasks will be completed in parallel, while others will be

dependent on the completion of other activities.

Scheduling examines the sequence of tasks, both independent and interrelated, that will be

undertaken. This is then organised into a series of sub schedules and charts, which can be

prepared from the master plan, detailing what will happen when, by whom, and detailing the

interfaces and the milestones for the tasks.

For example, a brochure cannot be printed until the content has been prepared. The content

cannot be prepared until a copywriter has been appointed and the R&D team has provided the

product information. However, a printer can be sourced while the copy is being written.

Once you know what needs to be done, you need to examine the work involved to determine:

Predecessor tasks: those required for another task to be completed.

Successor tasks: those that cannot start until another task has been completed.

The schedule can be prepared once this workflow is established. The schedule becomes a key

tool in managing progress.

Detailed scheduling turns the project plan into action plans, on the basis of the WBS. Each WBS

task is normally named and numbered, and the duration of tasks, any lead or lag times, and

resources and budget involved must be estimated in order for a detailed schedule to be

undertaken. Clearly, this reinforces the need for good time and resource estimates. Each WBS

task should become the responsibility of a named individual.

However, schedules will often feature ideal start dates and late finish dates. Ideal start dates are

the latest dates for an activity to start, if delays are to be avoided. Late finish dates are the latest

dates for an activity to finish without causing delays in the project.

Later in the project, revised schedules are prepared as issues emerge. Rescheduling does not

always result in delays in completion, as contingencies – for time or budget – may be built into

the project plan. However, if the delays exceed this, and there is no flexibility with the de livery


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date or resources, terminating the project should be considered. Many tools are used to present

schedules.

3.1 Gantt charts

Gantt charts are a visual planning tool useful for projects but are limited in their use as they do

not recognise the interrelations between tasks.

A Gantt chart, named after the engineer Henry Gantt who pioneered the procedure in the early

1900s, is a horizontal bar chart used to plan the time scale for a project and to estimate the

resources required.

The Gantt chart displays the time relationships between tasks in a project. Two lines are usually

used to show the time allocated for each task, and the actual time taken.

A simple Gantt chart, illustrating some of the activities involved in a network server installation

project, follows.

The chart shows that at the end of the tenth week Activity 9 is running behind schedule. More

resources may have to be allocated to this activity if the staff accommodation is to be ready in

time for the changeover to the new system.


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Activity 4 has not been completed on time, and this has resulted in some disruption to the

computer installation (Activity 6), which may mean further delays in the commencement of

Activities 7 and 8.

3.2 Network analysis

Network analysis, also known as Critical Path Analysis (CPA), is a useful technique to help with

planning and controlling large projects, such as construction projects, research and development

projects and the computerisation of systems.

Network analysis requires breaking down the project into tasks with estimated durations and

establishing a logical sequence. This enables the minimum possible duration of the project to be found.

CPA aims to ensure the progress of a project, so the project is completed in the minimum

amount of time.

It pinpoints the tasks which are on the critical path, ie those tasks which, if delayed beyond the

allotted time, would delay the completion of the project as a whole. The technique can also be

used to assist in allocating resources such as labour and equipment.

Critical path analysis is quite a simple technique. The events and activities making up the whole

project are represented in the form of a diagram. Drawing the diagram or chart involves the

following steps.

Step 1 Estimating the time needed to complete each individual activity or task that

makes up a part of the project.

Step 2 Sorting out what activities must be done one after another, and which can

be done at the same time, if required.

Step 3 Representing these in a network diagram.

Step 4 Estimating the critical path which is the longest sequence of consecutive

activities through the network.


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3.3 The critical path

The duration of the whole project will be fixed by the time taken to complete the largest path

through the network. This path is called the critical path and activities on it are known as critical

activities.

Activities on the critical path must be started and completed on time; otherwise the total project

time will be extended.

Network analysis shows the sequence of tasks and how long they are going to take. The diagrams

are drawn from left to right. To construct a network diagram you need to know the activities

involved in a project, the expect time of each order (or precedences) of the activities.

3.3.1 Example

The table below shows the Activities, time scales and precedences of a particular project.

This information could be used to construct the network diagram shown below the table.

Activity Expected time Preceding activity

A 3 –

B 5 –

C 2 B

D 1 A

E 6 A

F 3 D

G 3 C,E

Points to note from the diagram:

a) Events (e.g. 1 and 2) are represented by circles. Tasks (e.g. A) connect events.


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b) The critical path may be shown by drawing a small vertical line through the arrow or by

making arrows on the critical path thicker. The critical path is the longest (in terms of time)

path through the network – which is the minimum amount of time that the project will take.

c) It is the convention to note the earliest start date of any task in the top right hand corner of

the circle.

d) We can then work backwards identifying the latest dates when tasks could start. These we

insert in the bottom right quarter of the circle.

The critical path in the diagram above is AEG.

Note the float time of five days for Activity F. Activity F can begin any time between days 4 and

9, thus giving the project manager a degree of flexibility. The diagram above uses 'Activity on

line' notation – as Activities are shown on the lines or arrows that connect events.

3.4 Activity-on-node presentation

Network diagrams may also be drawn using Activity-on-node presentation which is similar in

style to that used by the Microsoft Project software package.

3.4.1 Example: Activity on Node

Suppose that a project includes three activities, C, D and E. Neither activity D nor E can start until

activity C is completed, but D and E could be done simultaneously if required.

This would be represented as follows

Note the following.

(a) An activity within a network is represented by a rectangular box. (Each box is a node.)

(b) The 'flow' of activities in the diagram should be from left to right.

(c) The diagram clearly shows that D and E must follow C.


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A second possibility is that an activity cannot start until two or more activities have been

completed. If activity H cannot start until activities G and F are both complete, then we would

represent the situation like this.

3.4.2 Example showing start and end nodes

Draw a diagram for the following project. The project is finished when both D and E are complete.

Activity Preceding activity

A -

B –

C A

D B & C

E B

The first solution that follows excludes start and end nodes – the second solution includes them.

Solution

Microsoft Project style

With start and end nodes


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Any network can be analysed into a number of different paths or routes. A path is simply a

sequence of activities which can take you from the start to the end of the network.

In the example above, there are just three possible routes or paths (based on the precedences

given earlier).

a) A C D.

b) B D.

c) B E.

3.5 Showing the duration of activities

The time needed to complete each individual activity in a project must be estimated. This duration

may be shown within the node as follows. The meaning of the other boxes is explained later.

Task A

ID 6 days

Note that there are a range of acceptable notation styles for network diagrams. You should learn

the principles of the technique so you are able to interpret diagrams presented in a variety of

formats (with an explanatory key).

3.5.1 Example: The critical path

Activity Immediately preceding activity Duration (weeks)

A - 5

B - 4

C A 2


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D B 1

E B 5

F B 5

G C, D 4

H F 3

I F 2

a) What are the paths through the network?

b) What is the critical path and its duration?

Solution

The first step in the solution is to draw the network diagram, with the time for each activity shown.

We could list the paths through the network and their overall completion times as follows.

Path Duration (weeks)

AC G (5 + 2 + 4) 11

BD G (4 + 1 + 4) 9

B E (4 + 5)

B F H (4 + 5+ 3) 2

B F I (4 + 5 + 2 + 0) 1

The critical path is the longest, BFH, with a duration of 12 weeks. This is the minimum time needed

to complete the project.

The critical path may be indicated on the diagram by drawing thick (or double-line) arrows, or by

the addition of one or two small vertical lines through the arrows on the critic al path. In Microsoft

Project the arrows and the nodes are highlighted in red.


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Listing paths through the network in this way should be easy enough for small networks, but it

becomes a long and tedious task for bigger and more complex networks. This is why software

packages are used in real life.

Conventionally it has been recognised as useful to calculate the earliest and latest times for

activities to start or finish, and show them on the network diagram. This can be done for networks

of any size and complexity. Project management software packages offer a much larger variety

of techniques than can easily be done by hand. Microsoft Project allows each activity to be

assigned to any one of a variety of types: 'start as late as possible', 'start as soon as possible',

'finish no earlier than a particular date', 'finish no later than a particular date', and so on.

In real life, too, activity times can be shortened by working weekends and overtime, or they may

be constrained by non-availability of essential personnel. In other words with any more than a

few activities the possibilities are mind-boggling, which is why software is used.

Nevertheless, a simple technique is illustrated in the following example.

3.5.2 Example: Earliest and latest start times

One way of showing earliest and latest start times for activities is to divide each event node into

sections. This is similar to the style used in Microsoft Project except that Project uses real dates,

which is far more useful, and the bottom two sections can mean a variety of things, depending

what constraints have been set.

These sections record the following things.

a) The name of the activity, for example Task A. This helps humans to understand the

diagram.

b) An ID number which is unique to that activity. This helps computer packages to understand

the diagram, because it is possible that two or more activities could have the same name.

For instance two bits of research are done at different project stages might both be called

'Research'.

c) The duration of the activity.

d) The earliest start time. Conventionally for the first node in the network, this is time 0.

e) The latest start time.


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(Note: Don't confuse start times with the 'event' times that are calculated when using the

activity on-arrow method, even though the approach is the same.)

Task D

ID number: 4 Duration: 6 days

Earliest start: Day 4 Latest start: Day 11

3.5.3 Earliest start times

To find the earliest start times, always start with activities that have no predecessors and give

them an earliest starting time of 0. In the example we have been looking at, this is week 0.

Then work along each path from left to right through the diagram calculating the earliest time

that the next activity can start. For example, the earliest time for activity C is week 0 + 5 = 5. The

earliest time activities D, E and F can start is week 0 + 4 = 4.

To calculate an activity's earliest time, simply look at the box for the preceding activity and add

the bottom left figure to the top right figure. If two or more activities precede an activity take the

highest figure as the later activity's earliest start time: it cannot start before all the others are

finished!

3.5.4 Latest start times

The latest start times are the latest times at which each activity can start if the project as a whole

is to be completed in the earliest possible time, in other words in 12 weeks in our example.

Work backwards from right to left through the diagram calculating the latest time at which the

activity can start, if it is to be completed at the latest finishing time. For example the latest start

time for activity H is 12 – 3 = week 9 and for activity E is 12 – 5 = week 7.

Activity F might cause difficulties as two activities, H and I, lead back to it.

a) Activity H must be completed by week 12, and so must start at week 9.

b) Activity I must also be completed by week 12, and so must start at week 10.

c) Activity F takes 5 weeks so its latest start time F is the either 9 – 5 = week 4 or 10 – 5 = week

5. However, if it starts in week 5 it not be possible to start activity H on time and the whole

project will be delayed. We therefore take the lower figure.


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The final diagram is now as follows.

Critical activities are those activities which must be started on time, otherwise the total project

time will be increased. It follows that each event on the critical path must have the same earliest

and latest start times. The critical path for the above network is therefore B F H.

3.5.5 Criticisms of critical path/network analysis

The following criticisms are often made in relation to network analysis.

a) It is not always possible to devise an effective WBS for a project.

b) It assumes a sequential relationship between activities. It assumes that once Activity B starts

after Activity A has finished. It is not very good at coping with the possibility that an activity

'later' in the sequence may be relevant to an earlier activity.

c) There are problems in estimation. Where the project is completely new, the planning

process may be conducted in conditions of relative ignorance.

d) Although network analysis plans the use of resources of labour and finance, it does not

appear to develop plans for contingencies, other than crashing time .

e) CPA assumes a trade-off between time and cost. This may not be the case where a

substantial portion of the cost is indirect overheads or where the direct labour proportion

of the total cost is limited.

3.5.6 Example: Network analysis and Gantt charts

This example is provided as an illustration of how Gantt charts may be used to manage resources

efficiently. A company is about to undertake a project about which the following data is available.

Activity Preceded by activity Duration Day Workers required

A - 3 6


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B - 5 3

C B 2 4

D A 1 4

E A 6 5

F D 3 6

G C, E 3 3

There is a multi-skilled workforce of nine workers available, each capable of working on any of

the activities. Draw the network to establish the duration of the project and the critical path. Then

draw a Gantt chart, using the critical path as a basis, assuming that jobs start at the earliest

possible time.

Solution

Here are the diagrams.

It can be seen that if all activities start at their earliest times, as many as 15 workers will be required

on any one day (days 6-7) whereas on other days there would be idle capacity (days 8-12). The

problem can be reduced, or removed, by using up spare time on non-critical activities. Suppose

we deferred the start of activities D and F until the latest possible days. These would be days 8

and 9, leaving four days to complete the activities by the end of day 12.

The Gantt chart would be redrawn as follows.


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3.6 Project evaluation review technique (PERT)

Project evaluation and review technique (PERT) is a technique for allowing for uncertainty in

Determining project duration. Each task is assigned a best, worst, and most probable completion

time estimate. These estimates are used to determine the average completion time. The average

times are used to establish the critical path and the standard deviation of completion times for

the entire project.

PERT is a modified form of network analysis designed to account for uncertainty. For each activity

in the project, optimistic, most likely and pessimistic estimates of times are made, on the basis of

past experience, or even guess-work. These estimates are converted into a mean time and also a

standard deviation.

Once the mean time and standard deviation of the time have been calculated for each activity, it

should be possible to do the following.

a) Estimate the critical path using expected (mean) activity times.

b) Estimate the standard deviation of the total project time.

3.7 Resource histogram

A useful planning tool that shows the amount and timing of the requirement for a resource (or a

range of resources) is the resource histogram.

A resource histogram shows a view of project data in which resource requirements, usage,

and availability are shown against a time scale.


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A simple resource histogram showing programmer time required on a software development

program is shown below.

Some organisations add another bar (or a separate line) to the chart showing resource

availability.

The chart then shows any instances when the required resource hours exceed the available hours.

Plans should then be made to either obtain further resource for these peak times, or to re-

schedule the work plan. Alternately the chart may show times when the available resource is

excessive, and should be re-deployed elsewhere. An example follows.


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The number of workers required on the seventh day is 13. Can we re-schedule the non- critical

activities to reduce the requirement to the available level of 10? We might be able to re-arrange

activities so that we can make use of the workers available from day 9 onwards.

3.8 Float times and costs

Float time is the time built in to allow for unforeseen circumstances.

a) Total float on a job is the time available (earliest start date to latest finish date) less time

needed for the job. If, for example, job A's earliest start time was day 7 and its latest end time

was day 17, and the job needed four days, total float would be: (17~ 7) ~ 4 = 6 days

b) Free float is the delay possible in an activity on the assumption that all preceding jobs start

as early as possible and all subsequent jobs also start at the earliest time.

c) Independent float is the delay possible if all preceding jobs have finished as late as possible,

and all succeeding jobs have started as early as possible.

Chapter 6: Project Control and Evaluation

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The project monitoring,

Project monitoring system

Reporting progress of a project work

Project status reports

Budget report, traffic light report

Decision to terminate a project

Termination criteria

Implementation of project termination

The project report: success of the project, learning of project

The post-completion audit, project scorecard


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1 Project monitoring

Managers are familiar with the concept of a planning and control cycle. Planning and control is

different within the project environment from the analysis, planning, implementation and control

cycle in marketing. Project managers focus on planning, monitoring and controlling. Planning

was addressed earlier, and so now the focus moves to the monitoring phase.

According to Meredith and Mantell (2003): ‘Monitoring is the collecting, recording and reporting

information concerning any and all aspects of project performance that the project manager or

others in the organisation wish to know.’

Tracking and monitoring progress helps to ensure an effective and efficient project, by reviewing

project implementation against the approved plan and budget. Monitoring focuses on tracking

data about activities and progress. It needs to be built on a good plan and substantial data. The

design of a realistic chain of results, outcomes, outputs and activities is particularly important.

Monitoring cannot make a project successful – it is a ‘neutral’ part of the project process.

However, timely monitoring (followed by effective control) can help identify – and avoid if

necessary – the three Cs that challenge projects:

Crises

Catastrophes

Change

Monitoring is usually the responsibility of the project co-ordinator and may be carried out

informally (through weekly briefs) or through routine review of the project documents. The

minimum forms of review for a project should be on the ‘triple constraints’ or:

Time (schedule)

Cost (budget)

Performance

Within this, the key parameters are:

Current project status

Progress to date


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The project monitoring system

The key stages in designing a monitoring system are:

Identify the information requirements

Identifying the key factors to be monitored

Identifying the boundaries

Project monitoring normally relies on the parent organisation having a robust internal

information system for monitoring and control.

The project monitoring system needs to be specified at the project initiation. Typically, this will

look at the data collection process, the standards and the performance criteria. Unfortunately,

these may change over time, because of changes affecting scope, legal change s or other

budgetary or business priorities.

The monitoring system should also consider project mile stones of performance criteria (such as

the number of changes to plan or variations in resources usages).

The project action plan, WBS system and the further more detailed subplans are the reference for

this. These describe the project activities, tasks, schedules, resource levels and costs for all

elements. However, these factors may not identify all elements needed for project monitoring.

Indeed, focusing on monitoring activity, rather than the output, is a common error. A project may

have a considerable amount of activity, but the output may still be hidden. Focusing on the

activity may mask the problems in creating output.

2 Reporting progress

The above material has identified various ways of monitoring progress, but these analyses are

not only for the project manager. Commonly, monitoring is communicated to others through

reports and meetings. Reports can be prepared by the project team, or prepared by independent

auditors, depending on the organisation, type of project and the level of project risk. The reports

will al so form the record on which the project history will be based. However, the project manager

has the ultimate responsibility for defining how reports and meetings are managed.

2.1 Project status reports

Project status reports provide updates on the project status.

Routine reports are normally those that provide updates on the project status.


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An executive status report, for the project sponsors or other key stakeholders who are

not directly involved in the project activities. These should be prepared on an agreed

schedule, often monthly or quarterly, and timed to fit with meetings with executive

stakeholders.

The focus of this report should be on the ‘top-level’ issues affecting progress and plans.

Project progress status reports will be prepared on a regular time schedule. Projects

with full-time team members or working within a tight schedule will commonly have

these prepared weekly. Part-time projects may have a less frequent reporting schedule,

as long as they do not have a short time duration.

Project status reports are normally prepared by those in key roles in the project team. These keep

the project manager and project team up-to-date with progress or problems, and enable all to

be aware of plans to reduce problems or recover from problems.

The frequency and contents of progress reports will vary depending on the length of, and the

progress being made on, a project.

The report is a control tool intended to show the discrepancies between where the project is,

and where the plan says it should be. Major considerations will be time and cost and reports will

highlight comparisons of planned and actual progress.

Any additional content will depend on the format adopted. Some organisations include only the

‘raw facts’ in the report, and use these as a basis for discussion regarding reasons for variances

and action to be taken, at a project review meeting.

Other organisations (particularly those involved in long, complex projects) produce more

comprehensive progress reports, with more explanation and comment.

Gray and Larson (2010) suggest the following basic format for a control report:

1. Progress since last report

2. Current project status

Time schedule

Cost Scope

3. Cumulative trends

4. Problems and issues since last report


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5. Actions and resolution of earlier problems

6. New variances and problems identified

7. Corrective action planned

2.2 Budget reports – earned value

The progress report should include cost information: the earned value approach is widely used,

especially when projects are managed using the US Project Management Institute methodology.

The essence of monitoring using earned value is the computation of variances for cost and

schedule (schedule here means time progress). Three cost figures are required for the

computations.

a) Actual cost of work completed (AC). This is the amount spent to date on the project.

b) Planned value of the work scheduled to date (PV). The amount that was budgeted to be

spent to this point on scheduled activities.

c) Earned value (EV). This figure is calculated by pricing the work that has actually been done

– using the same basis as the scheduled work.

EV – AC = The cost variance for the project.

EV – PV = The schedule variance for the project.

It should be noted that the schedule variance, while a useful overall indicator, is not the best

indicator of time progress: the project network is far more accurate and informative.

2.3 Traffic light reports

Traffic light control can also provide a higher level visual summary of progress.

In the traffic light approach, project members estimate the likelihood of various aspects of a

project meeting its planned target date. Each aspect is then colour-coded.

Green Means ‘on target’: the work is on target and is expected to meet stakeholder

expectations.

Yellow Signifies the work is behind target, but the slippage is recoverable. Yellow

indicates that some problem areas have been identified, but corrective actions

can be taken to deal with them.

Red Signifies the work is behind target and will be difficult to recover. A ‘red’ traffic

light suggests there are major problems: for example, if a major component


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of the project is behind target it could significantly affect the progress of the

project as a whole.

Traffic light control can also be applied to cost and quality aspects of a project as well as time.

Equally, traffic light control could be applied to the three elements of time, cost and quality

together. If a project is on course to substantially meet its objectives in all three elements, it will

be indicated by a green traffic light. If two out of the three are likely to be substantially met, the

traffic light will be yellow, but if less than two objectives are substantially met, the traffic light will

be red.

2.4 Control charts

Several different types of chart may be used to display project progress. The Gantt chart is

inherently suited to use as a control chart, displaying planned and actual usage of resources, as

is, to some extent, the resource histogram. A 'project schedule control chart' displays overall

progress against plan. An example is shown below.

This chart shows that after a good start, by the end of period 3, the project had fallen behind by

almost two days. Efforts were obviously made to recover the lost time, because the latest report,

at the end of period 8, shows the project only about half a day behind.


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2.5 Milestones

Milestones should be definite, easily identifiable events that all stakeholders can understand.

Monitoring progress towards key milestones can be done on a control chart of the type described

above, or on a milestone slip chart such as that shown below. This chart compares planned and

actual progress towards project milestones. Planned progress is shown on the X- axis and actual

progress on the Y-axis. Where actual progress is slower than planned progress slippage has

occurred.

On the chart above milestones are indicated by a triangle on the diagonal planned progress line.

The vertical lines that meet milestones 1 and 2 are straight–showing that these milestones were

achieved on time.

At milestone 3 some slippage has occurred. The chart shows that no further slippage is expected

as the progress line for milestone 4 is the same distance to the right as occurred at milestone 3.

3 The project termination decision

Two key models or forms of project decision-making exist:

Models based on the extent to which the project has achieved – or failed to achieve – its

desired outcomes


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Models that compare the project against generally accepted standards for success and

failure for a project

3.1 Assessing project termination

A project can be terminated at any stage in the project process. Whether projects should continue

is essentially a resource allocation decision. Generally, this follows a project review, or results from

other organisational decisions.

Meredith and Mantell (2003) state ‘that the primary criterion for project continuance or

termination is whether or not the organisation is willing to invest the estimate d time and cost

required to complete the project, given the project’s current status and expected outcome.’

They argue that this definition can be applied to all projects. In practice, some managers allow

tactical projects to continue, without substantial review, if there is no ‘bad news’ associated with

them. A departmental plan will have a range of subprojects, such as those designed to support a

new brand launch.

Each element will normally continue – unless risk, budget or other factors go right out of control.

While project managers should be committed to their projects, they should also recognise when

and how to stop unsuccessful projects. Often, project managers will protect their projects,

because of an emotional involvement or concern over their careers. Early project termination can

be emotional though, as reflected in the language used.

Projects that finish early are ‘culled’ or have ‘hatchets’ taken to them. In reality, continuing some

projects may have worse outcomes on the careers of the managers and of the sponsoring

organisation. Usually, project termination decisions are made by senior sponsors rather than

project managers.

3.2 Criteria for reviewing ongoing project termination

Relatively little attention has been given to criteria for ongoing project termination in formal

studies. Dean (1968) identified the following criteria for terminating a project early.

Table PTC: Project termination criteria

Termination evaluation criteria Possible tools for evaluation

Probability of technical/commercial success Marketing research, profit/loss analysis, value

analysis


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Profitability/ROI/market potential Marketing research, profit/loss analysis, value

analysis

Cost growth Budgeting, variance analysis

Changing competitive factors/market needs Marketing intelligence, profit/loss analysis

Technical problems that cannot be resolved Project viability, marketing mix analysis

Competing projects having higher priority

within the organisation or department

Investment performance analysis, project

priority review

Low probability of technical/commercial success

Low profitability/ROI/market potential

Damaging cost growth

Change in competitive factors/market needs

Technical problems that cannot be resolved

Competing projects having higher priority within the organisation or department

Schedule delays

Despite the age of Dean’s work, these issues remain valid. Note that Dean includes changing

market situations, which is not explicitly mentioned in Meredith and Mantell’s definition. Studies

in 2008–2009 showed that over 50% of US marketing managers were considering culling projects

or project expenditure. It is not clear whether this was due to lower budgets, less cash to invest

in marketing or changes in potential rewards from projects.

Organisations rarely have formal criteria for evaluating the early termination of projects. Often, it

is easier – in terms of the level of investment and the external evidence of the project – to stop

projects than those with tangible evidence of work completed, for example construction projects.

It is also easier to stop projects that do not have a full-time team as there are no redundancies.

Notably, staff motivation and concerns are often not included in project termination decisions.

4 The project report

At the end of the project, two differing views of the project report exist:

1. Project report identifying the success of the project

2. Project history to encourage learning


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A Project Success Report focuses on the outcomes of the project, and should identify:

a) Whether the project’s objectives have been met and identifying the success of the project

on the basis of this.

b) A comparison of the performance against the planned target time and cost.

c) Whether the original project plan needed changes.

d) Analysis of any changes to time, cost, outcomes, during the project.

e) Any other organisational requirements, e.g. staff performance, testing etc.

On project completion, the project manager will produce a completion report. The main purpose

of the completion report is to document (and gain client sign-off for) the end of the project.

The report should include a summary of the project outcome:

a) Project objectives and the outcomes achieved.

b) The final project budget report showing expected and actual expenditure (If an external

client is involved this information may be sensitive – the report may exclude or amend

the budget report).

c) A brief outline of time taken compared with the original schedule.

d) Responsibilities and procedures relating to any such issues should be laid down in the

report.

5 The outcome matrix

A matrix approach may be taken to the presentation of various aspects of the completion report.

The simplest kind of matrix will simply list project deliverables in the left-hand column of cells

and show an objective assessment of achievement in the right-hand column. The matrix can be

made more informative by incorporating further columns to summarise outcomes in terms of,

for example, time, cost and stakeholder satisfaction. An example is given below.

Table NPD: New product development project outcomes

Deliverable Schedule Cost Production

engineering

Sales Finance

Product

design

Three weeks

late

£10,900 under

budget

Complexity

considered

marginally

acceptable

Good market

performance

anticipated

Breakeven

unlikely below

14,600 units

per month


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Packaging On time £2,700 over

budget

Satisfactory Satisfactory

Considered

expensive

Service

requirements

specification

Six weeks late £4,900 over

budget

Satisfactory

Over-complex Satisfactory

A more complex type of outcome matrix can be used to analyse performance against two

interacting criteria. This is the very common two-axis type of matrix that you are probably already

familiar with through ideas such as Ansoff’s product/market matrix. An example of an outcome

matrix would be one that analysed technical aspects of a project deliverable in terms of quality

of design and quality of execution.

6 The post-completion audit

Any project is an opportunity to learn how to manage future projects more effectively.

The post-completion audit is a formal review of the project that examines the lessons that may

be learned and used for the benefit of future projects.

The audit looks at all aspects of the project with regard to two questions:

a) Did the end result of the project meet the client's expectations?

i. The actual design and construction of the end product

ii. Was the project achieved on time?

iii. Was the project completed within budget?

b) Was the management of the project as successful as it might have been, or were there

bottlenecks or problems? This review covers:

i. Problems that might occur on future projects with similar characteristics.

ii. The performance of the team individually and as a group.

The post-completion audit should involve input from the project team. A simple questionnaire

could be developed for all team members to complete, and a reason ably informal meeting held

to obtain feedback, on what went well (and why), and what didn't (and why).

This information should be formalised in a report. The post-completion audit report should

contain the following:


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a) A summary should be provided, emphasising any areas where the structures and tools used

to manage the project have been found to be unsatisfactory.

b) A review of the end result of the project should be provided, and compared with the results

expected. Reasons for any significant discrepancies between the two should be provided,

preferably with suggestions of how any future projects could prevent these problems

recurring.

c) A cost-benefit review should be included, comparing the forecast costs and benefits

identified at the time of the feasibility study with actual costs and benefits.

d) Recommendations should be made as to any steps which should be taken to improve the

project management procedures used.

Lessons learnt that relate to the way the project was managed should contribute to the smooth

running of future projects.

A starting point for any new project should be a review of the documentation of any similar

projects undertaken in the past.

7 Benefits realisation

It is obviously important that the benefits expected from the completion of a project are actually

enjoyed. Benefits realisation is concerned with the planning and management required to realise

expected benefits. It also covers any required organisational transition processes.

The UK Office of Government Commerce has identified a six-stage procedure for benefits

realisation. This is most relevant to projects aimed at process improvement and changing the

organisation's way of doing things.

Stage 1 Establishing benefits measurement

Measure the start state and record it in the benefits profile. The benefits profile

defines each anticipated benefit and is used to track progress towards its

realisation. Determine how benefit realisation will be measured. Benefits may be

complex and spread across departments: designing usable and realistic

measures may be difficult.

Stage 2 Refining the benefits profile


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The benefits profile should be refined and controlled throughout the life of the

project. Project managers should conduct regular benefits profile reviews in

collaboration with key stakeholders.

Stage 3 Monitoring benefits

There should be regular monitoring of benefits realisation. It must be accepted

that some projects will only be beneficial in enabling other projects to be

successful.

Stage 4 Transition management

Projects are likely to bring change and this must be managed in a proper way.

Effective communications will be required as will the deployment of good people

skills

Stage 5 Support for benefit realisation

Benefits realisation will mainly accrue after the end of the project. Where a

project brings changes in methods and processes, there is likely to be a period

for settling-down before benefits are fully realised. During this period, costs may

rise and problems may occur. Careful management is required to overcome

these short-term effects. A philosophy of continuous improvement is required if

further benefits are to be achieved.

Stage 6 Measuring the benefits

Benefits achieved should be established by comparison with the pre-

improvement state recorded in the benefits profile.

The Project Success Report can be an important way of showing stakeholders that the project

has achieved its outcomes, or identifying the reasons for failure. This is critical for the project

manager’s future career.

The Project History focuses on ‘lessons learned’ for future projects, rather than on the merits of

the project. This report is sometimes called a project history. This history will examine the

following to determine what worked and what did not, and when and why problems occurred.

It will address:

Project performance – the outcomes, successes, failures and challenges.


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Administrative performance – reports and reporting, communications and meetings, review

procedures, scoping and change procedures, financial management.

Project organisation – how this changed throughout the project, and how this helped or

hindered the project.

Project teams – how these performed, recommendations for future teams.

Project management – scoping, plans, methodologies, budgets, schedules, risk management

etc.

Table: Project review

Summary of project history

What went well What went badly Recommendations

Project performance

Admin performance

Project organisation

Project teams

Project management

Often, these reviews will be presented in a meeting or presentation. Simply, this basic finding can

be summarised in a presentation, and Table above will help identify these key issues.

More formal project audits are often undertaken for major projects, and especially those in the

public sector.

8 The project scorecard

Project scorecards extend the traffic light approach to provide progress summaries on key

performance metrics for a project. They are produced on a regular basis, for example weekly,

monthly or quarterly, depending on the project. This scorecard approach complements, rather

than replaces, other planning and monitoring systems.

Organisations must determine appropriate metrics to include in their project scorecards. These

can take one of the two forms. The first focuses on key project management dimensions,

including:

Cost, e.g. between the actual spend against planned spend

Quality, e.g. the percentage of work completed to standard


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Time, e.g. the extent to which the project is meeting the project schedule

Corporate factors, e.g. the extent to which corporate goals or standards are being met

The second takes a ‘balanced scorecard’ approach, and assumes that assessing the following

dimensions will deliver the above benefits:

The financial perspective, e.g. EVA, ROI

The customer perspective, customer satisfaction, economic value added. (Notice the

difference between earned value analysis and economic value added. The commonality

of the acronyms can cause confusion.)

The training and innovation perspective, staff PM expertise, lessons learned

The project or other internal business perspective, e.g. satisfaction indices, fit with

corporate objectives

This information can be presented in different ways. Some organisations produce a simple one-

page sheet, which:

Highlights key developments

Shows the tracking of the key performance matrices

Identifies areas that need attention (i.e. are over budget, late, possible risks on the

horizon etc.)

The temporary nature of projects means that tracking and monitoring systems must be

accessible, easy to use and current. As a temporary initiative, some or all aspects of the project

tracking may not fit well within the existing information systems. Further, often only the larger

projects have staff with responsibilities, for example information systems or finance. Therefore,

the tracking data should be, wherever possible, gathered as part of the normal routine of the

project.

Another general rule is that the reporting should be kept brief. Therefore, an updated report

should be only a page or two for most projects.

Often, organisations do not require these reports despite their contribution to project

management knowledge and future projects. Often, other priorities overtake this, or the project

manager has moved to other projects or has a wish to move on. Further, on longer projects, there

is much documentation, but often the reasons for changes or problems are not noted.

Leadership & Management

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