IPC Jan 2009

P PR RO OJ JE EC CT T E EN NG GI IN NE EE ER RI IN NG G A AN ND D M MA AN NA AG GE EM ME EN NT T
(Class notes)

for

B. E. Chemical Engineering students of Mumbai University

Revised on: January 2009

By
S Sa an nj j a ay y D Da al l v vi i
(Sr. Lecturer)
___________________________________________________________________
Department of Chemical Engineering
Thadomal Shahani Engineering College, Bandra (W)
TPS III, P. G. Kher marg,
Bandra (W), Mumbai 400 050
THADOMAL SHAHANI ENGINEERING COLLEGE
Class notes for PEM prepared by Prof. Sanjay Dalvi

For private circulations only. Revised on Jan 2009
1
CONTENT
Chapter 1: Introduction 4
1.1 Concept of Project: 4
1.2 Characteristics of project: 4
1.3 Project family tree: 4
1.4 Category/Characterisation of project: 4
1.5 Project life cycle phases: 5
1.6 Project life cycle curve: 7
1.7 Cumulative growth chart: 7
1.8 Project visibility: 8
1.9 General causes of overruns: 8
1.9.1 Pre-feasibility study phase: 8
1.9.2 Evaluation phase: 8
1.9.3 Technology selection and engineering phase: 9
1.9.4 Contracting and procurement phase: 9
1.9.5 Construction phase: 9
1.9.6 Start-up phase: 9
1.9.7 Common in all phases: 9
1.10 Definition of Project Management: 10
1.11 Features of project management: 10
1.12 Project Manager (PM): 10
1.12.1 Duties of PM: 10

Chapter 2: Project Initiation 11
2.1 Proof of fully established project: 11
2.2 Feasibility Report: 11
2.2.1 Raw Material survey: 11
2.2.2 Demand study: 11
2.2.3 Technical Study: 12
2.2.4 Location study: 12
2.2.5 Financial arrangement: 14
2.2.6 Preparation of cost estimate: 15
2.3 Project Profitability: 16
2.3.1 Pay back period: 16
2.3.2 Return on Investment (ROI) 17
2.3.3 Net Present Value (NPV) 17
2.3.4 Internal Rate of Return (IRR) 17
2.3.5 Benefit Cost Ratio (BCR) 17
2.4 Numerical Examples 17
2.5 Phases of Technology Transfer (TT): 18
2.5.1 Selection: 18
2.5.2 Source searching: 18
2.5.3 Negotiation: 19
2.5.4 Contracting: 19
2.6 Forms of TT: 19
2.6.1 Licensing: 19
2.6.2 Outright purchase: 19
2.6.3 J oint venture: 19
2.6.4 Buy-back agreement: 19
2.6.5 Loan agreement: 19
2.6.6 Plant operation and management TT: 19
2.6.7 Consultancy contract: 20
2.6.8 Other contracts: 20
2.7 Activities in technological package: 20
2.7.1 Compilation of project data: 20
2.7.2 Process design: 20
2.7.3 Basic engineering: 20
2.7.4 Detail engineering: 21

Chapter 3: Project Licensing & Patent 22
3.1 Project Licensing & Clearances 22
3.1.1 Procedure for Licensing: 22
3.1.2 Foreign collaboration Approval: 22
3.1.3 Approval for appointment of foreign consultant: 23

2
3.1.4 Import of capital goods: 23
3.1.5 Import policy: 23
3.1.6 Environmental/ Pollution control clearances: 24
3.1.7 Railway clearance: 24
3.1.8 Electricity clearance: 25
3.1.9 Forest clearance: 25
3.2 Intellectual property: 25
3.2.1 Patent: 26
3.2.2 Rights granted and rights not granted: 26
3.2.3 Governing laws 26
3.2.4 Examination process and procedure 26
3.2.5 Term of patent 27
3.2.6 Example 27
3.2.7 Miscellaneous 27

Chapter 4: Project Organisations & Planning 28
4.1 Project organisations: 28
4.1.1 Project Manager as a Staff Assistant to the Chief Executive: 28
4.1.2 Consultant as a Project Manager: 28
4.1.3 Project Manager as a specialized staff function: 28
4.1.4 Matrix organization: 29
4.1.5 Task Force Organization: 30
4.1.6 Totally Projectised Organization: 30
4.2 Team Building: 31
4.2.1 Seven Cs for Team Building: 31
4.2.2 Teams Success: 31
4.3 Work Breakdown Structure (WBS): 32
4.3.1 Hardware Oriented WBS: 32
4.3.2 Agency Oriented WBS: 33
4.3.3 Function Oriented WBS: 33
4.4 Contracts: 33
4.4.1 Business contract: 33
4.4.2 Three Rs of contracting: 34
4.4.3 Contract planning: 36
4.4.4 Tendering and selection of contractor: 36

Chapter 5: Project Scheduling 38
5.1 Project Implementation schedule: 38
5.1.1 Time estimate: 38
5.2 PERT (Project Evaluation & Review Technique): 39
5.2.1 Definitions: 39
5.2.2 General guidelines to draw network: 40
5.2.3 General guidelines to number the events on network: 40
5.2.4 Earliest Expected Time (EET): 40
5.2.5 Latest (allowable) Occurrence Time (LOT): 41
5.2.6 Slack: 41
5.2.7 Time scaled network/ Squared network/ Activity-time schedule: 41
5.2.8 Critical Path: 41
5.3 Critical Path Method (CPM): 42
5.4 Project cost analysis: 42
5.4.1 Crashing of Network: 43
5.5 Gantt Charts: 44
5.5.1 Advantages: 44
5.5.2 Disadvantages of Gantt chart: 45

Chapter 6: Project Monitoring & Control 46
6.1 Material Management: 46
6.2 Inventory Control: 46
6.2.1 ABC Analysis: 46
6.3 Value Engineering and Design (VED) Optimisation analysis: 47
6.4 Time and Cost control Tools and Techniques: 47
6.4.1 Schedule control: 48
6.4.2 Cost control: 49
6.4.3 Fund flow control: 49

3
6.5 Economic Order Quantity (EOQ): 49
6.5.1 EOQ problem with no shortages: 49
6.5.2 EOQ problem with no shortage and unequal purchase runs: 51
6.5.3 EOQ with shortage 52
6.6 Commissioning: 54
6.7 Start-up: 54
6.8 Stabilisation: 54
6.9 Close-out: 54


4
Chapter 1: Introduction
1.1 Concept of Project:
- Project is generalized term used for time restricted task.
- Project is not always a new task but sometimes it may be an improvement over existing
system.
- It is not a physical object.
- Any idea to be implemented must be technically feasible, economically viable, politically
suitable and socially acceptable. Once the idea passes these tests, an investment proposal is
made. When the investment proposal is approved, the project commences.
- A project is initiated to achieve a mission.
- A project is a combination of human and non-human resources pooled together in a
temporary organization to achieve a specific purpose.
1.2 Characteristics of project:
- Approach of grouping of work in any work environment is termed as Projectisation of work.
- The special features of a project are as below,
1. objective
2. life span
3. single entity
4. team work
5. life cycle
6. uniqueness
7. change
8. successive principles
9. made to order
10. unity in diversity
11. high level of sub-contracting
12. risk and uncertainty
1.3 Project family tree:

Fig.1.1: Project family tree

1.4 Category/Characterisation of project:
Location, type, technology, size, scope and speed are normally the factors which determine the
efforts.

Plan
Program
(Not time limited.
Approach is same as
project)
Project
Work package
(Subset of project)
Task
Activity

5

Fig.1.2: Characterisation of project
1.5 Project life cycle phases:
1. Conceptive phase:
- Project idea germinates.
- The idea need to be examined in light of objectives and constraints and what finally becomes
acceptable may form the future project.
- Consideration towards project implementation is not done in this phase.
- It is quite possible that idea may undergo some changes as the project progresses.
2. Definition phase:
- Covers all aspects necessary for the customer and/or financial institutions to make-up their
minds on project.
- For example:
i) Raw Material: qualitative and quantitative analysis.
ii) Plant size/capacity.
iii) Location and site: with map.
iv) Technology/process selection: with reasons.
v) Project layout: with reasons.
vi) Plant & machinery: selection and specification with cost.
vii) Electrical and instrumentation work: power distribution.
viii) Civil engineering work: selection & cost.
ix) Utilities: fuel, power, water with quality & cost.
x) Manpower & organizational pattern: organizational structure.
xi) Financial analysis: investment cost.
xii) Implementation schedule.
- This phase make interactions with non-technical people, mostly.
- Survival of project depends on this stage.
Project
National International
Non-Industrial Industrial
Non-conventional/
R&D
High Technology Conventional
Technology
Low Technology
Mega Major Medium Mini
Grass-root Modification Expansion
Normal
- Min. cost
- High quality
- Long period
Disaster
- Gaining in time is most important.
- High capital cost.
- Very low project time.
Crash
- Max. overlapping
- Short period i.e.
saving in time.
- Increased cost

6
- Too many technical details should be avoided while making a feasibility report.

3. Planning & organizing phase:
- This phase overlaps so much with the definition and also implementation phase.
- Sometimes it is called as project execution plan.
- Activities during this phase
i) Project infrastructure & enabling services,
ii) System design and basic engineering package,
iii) Organizing and manpower allotment,
iv) Schedules and budgets,
v) Licensing and government clearances,
vi) Finance,
vii) System and procedure,
viii) Identification of Project Manager,
ix) Design basis, general conditions for purchase and contracts,
x) Site preparation and investigation,
xi) Construction resource and materials,
xii) Work packaging.
- This is an important stage, to be completed before implementation.

4. Implementation phase:
- This is a period of hectic activity for the project.
- Project is physically visible in this phase.
- Work done generally during this phase is,
i) Preparation of specifications for equipments and machinery,
ii) Ordering of equipment,
iii) Lining up construction contractors,
iv) Issue of construction drawings,
v) Civil construction and construction of equipment foundations,
vi) Equipment and machinery erection,
vii) Plant electrical, piping, instrumentation, testing, checking, trial runs, and commissioning
of plant take place during this phase.
viii) 80 to 85% work is done in this phase.
0 2 4 6 8 10 12 14
Start-up
Construction
Delivery
Ordering
Detailed engg.
Weeks

Fig.1.3: Activity overlapping

5. Project clean-up phase:
- Hand over of plant is done during this phase.
- Drawing, documents, files, operation and maintenance manuals are catalogued and handed
over to the customer.
- Finishing and patch-up work.
- Project accounts are closed.
- Outstanding payments made and dues collected during this period.
- Project personnel are replaced gradually by production people.
- First design engineers go off.
- Customers engineers replace the project engineers.
- Residual engineers give training to the customers engineers; look after break-downs if any,
for a limited period after the hand over.
1.6 Project life cycle curve:
GROWTH MATURITY
D
E
C
A
Y

Concept
phase
D
e
f
i
n
i
t
i
o
n

p
h
a
s
e

P
l
a
n
n
i
n
g

&

O
r
g
a
n
i
s
i
n
g

p
h
a
s
e

Implementation
phase
C
l
e
a
n
-
u
p

p
h
a
s
e

85% efforts
8% efforts
4% efforts
3% efforts
Time
L
e
v
e
l

o
f

e
f
f
o
r
t
s

Fig.1.4: Project life cycle curve

- Efforts build-up is very slow but efforts withdrawal is very sharp.
- Time (formative +clean-up) >time (implementation).
- A life cycle curve represents a class of project.
- Knowledge of characteristic life curve enables a project manager to ascertain the state of health
of any project at any point of time.
1.7 Cumulative growth chart:
Cumulative Growth chart
0
20
40
60
80
100
0 6 12 18 24 30 36 42 48 54 60
Time in weeks
%

P
r
o
g
r
e
s
s
Detailed Engg Ordering Delivery
Construction Startup

Fig.1.5: Cumulative growth chart

- Line of balance (LOB) represents the state of health of a project.
- Cumulative growth chart is prepared for each activity. Which is always S shape curve.
Project manager has to prepare two cumulative growth charts: one for predicted progress and
other for actual progress.
- On the cumulative growth chart of predicted data if a vertical line is drawn at present time it
will give the current progress of each activity as per prediction. Where as the same procedure
for actual chart will give the actual current progress of each activity. Plotting this data on bar
chart gives the Line of Balance (LOB), as shown in fig.1.6.
- LOB is the best tool to keep control over schedule. It is very easy technique to watch the
progress of any activity can be read by any person who is unaware of managerial tools and
techniques.

7
- But on other hand it is very difficult to quantify each and every activity. Also getting data for
each activity is sometimes impossible and project manager has to predict this data based on
his/her experience. This adds up the error in measuring the progress. Therefore LOB alone
should not be used affirmatively to measure the team members performance.

8
Line of balance for 24th Week
0% 20% 40% 60% 80% 100%
Detailed Engg
Ordering
Delivery
Construction
Startup
% Progress

Fig.1.6: Line of Balance (LOB)
1.8 Project visibility:

Fig.1.7: Project visibility

- A project can not be seen for most of its life time.
- At same stages proof of progress is not possible. This is non-visibility of project.
- At any point in the life cycle something will be clearly visible, something nearly visible, but the
rest will still have to be imagined.
- A project abandoned in-between has zero value; the full value of the project is realized only at
the end.
1.9 General causes of overruns:
The reasons of the overruns of project are different in different phases.
1.9.1 Pre-feasibility study phase:
- Delay in land acquisition, forest clearance, and environmental clearance.
- Delay in clearances from financial/regulatory bodies of the government.
- Lack of infrastructure facilities.
- Failure in planning for important resources, facilities, tie-ins & inputs needed for timely
construction and putting into operation.
- Selection of incompetent consultant.
1.9.2 Evaluation phase:
- Inadequate project study; understatement of scope and underestimate of cost & resources,
calling for subsequent changes in scope of the project; non-freezing of specifications; and
revision of budgets.
- Political influences, in site selection.
- Consultants and project authorities inadequacies, leading to wrong economic studies and
misleading fund flow statements and projections causing financial barrier.
t
1

t
2

t
3

t
4

Idea
Project life cycle
R
e
a
l
i
t
y


9
1.9.3 Technology selection and engineering phase:
- Poor and outdated technology acquisition.
- Technological tie-ups more on considerations of credit offered by the supplier rather than of
technical necessities.
- Starting of detail engineering and preparation of shopping lists before finalizing process
flowsheets and line diagrams.
- Delay in completing detail engineering; lack of design data; delay in the freezing of design
and specifications; absence of an engineering schedule, leading to delay in the release of
drawings for procurement.
- Inefficient procedures for scrutiny, approval and transmittance of drawings and specifications.
1.9.4 Contracting and procurement phase:
- Delayed and careless preparation of bid documents.
- Poor selection of vendors/manufacturers/fabricators/suppliers or contractors and preferential
treatment to public sector enterprises, on the basis of government guidelines.
- Delayed placement of orders.
- The practice of accepting the lowest quotation, irrespective of the vendor quality and/or
contractors competency.
- Delay in the opening of letters of credits and issuance of various guarantees by foreign
suppliers.
- Time-consuming procedures concerning the procurement of imported raw materials and hi-
tech components by Indian manufacturers of equipment.
- Inadequate speed in actions.
- Lack of integrated action plans closely involving suppliers and contractors.
- Delay in the supply of critical equipments.
- Lack of proper quality control arrangements.
- Changes and modifications without cost benefit analysis.
- Poor logistics planning.
1.9.5 Construction phase:
- Very early starting of construction activities that are before ensuring the availability of working
drawings, storage and preassembly space, sequential supply of equipment and materials and
adequate infrastructure.
- Delay and/or inadequacy in contractors mobilization.
- Poor planning by contractors.
- Failure to assure contractors of law and order in the project area.
- Contractors low productivity and consequent financial problems.
- Inefficiency of contractors, in both the public and private sector.
- Hold-up resulting from delays in interconnected activities, because of the absence of
integrated management.
- Belated clearances.
- Indecisions and delayed decision making.
- Bad quality control.
- Unfair treatment to contractors and suppliers.
- Delay in reimbursement.
1.9.6 Start-up phase:
- Delay in inputs like special tools, first fills, manuals, services and feedstock.
- Absence of commissioning specialists.
- Failure of equipment or parts.
- Design changes.
- Defects in erection and installations.
1.9.7 Common in all phases:
- Weak project team.
- Indecision.
- Lack of managerial talent.
- Discontinuity of efficient team members.
- Absence of personal accountability and commitment.
- Undue job security and resultant indiscipline.
- Lack of awareness of money value of time.

10
- Inadequate controls and ignoring of warning signals.
- Poor quality awareness.
1.10 Definition of Project Management:
Defining what is to be done, maintaining its integrity, and ensuring that, it is done and
performed as desired, within time & cost budgets fixed for it through a modular work approach using
organization and extra-organizational resources is what project management has to achieve.
- Project management is fully bound by time, cost and performance targets.
- Project management approach can be utilized for scheduled maintenance within the
organization.
- Benefits of project management approach for scheduled maintenance are
i) The Project Manager (PM) will be totally concerned with completing the
projectised maintenance work within the budget and schedule.
ii) Reduction in total down time of plant.
iii) Each agency will be monitored continuously which resolves the problem before
they cause any damage.
iv) PM is clear with the idea what to do?
v) Decision will be made faster.
1.11 Features of project management:
i) Grouping work into packages.
ii) Single responsibility centre PM.
iii) Supporting & servicing internally by organization and externally by vendors and contractors.
iv) Commitment through negotiations, coordinating and directing towards goals through
schedules, budgets & contracts.
v) Ensuring adherence to goals through continuous monitoring & control using schedules,
budgets and contracts as the basis.
1.12 Project Manager (PM):
An ideal PM qualities:
i) He should have a good technical background and knowledge of related discipline like
business administration & economics.
ii) Should have excellent managerial & organizational capabilities.
iii) Good communication is a plus point for project engineer to achieve great amount of success.
iv) He should actively participate at all times keeping the moral of his team high which goes a
long way to complete a difficult and challenging project.
1.12.1 Duties of PM:
i) To prepare overall process design flow-sheet.
ii) To estimate overall requirements of utilities, and raw material consumption.
iii) To specify process requirement.
iv) To select materials and equipments.
v) To allot duties to various groups and keep monitoring each activity by use of schedule charts.
vi) To hold regular meeting.

***********************

11
Chapter 2: Project Initiation
2.1 Proof of fully established project:
A project can be considered to have been fully established when the following conditions are
fulfilled.
1. The technical configuration of the project has been fully defined.
2. The performance requirement for the various technical systems, sub-systems and the key
equipments has been specified.
3. Cost estimate for the project is frozen.
4. Techno-economic viability of the project has been examined, appraised and approved.
5. An overall schedule for implementation of the project has been drawn-up.
6. Financial arrangements have been made to implement the project.
7. A project manager has been appointed for implementation of the project.
8. Pre-project activities have been completed and a zero date fixed.
- Item no. 1 to 5 are covered in feasibility report.
- Feasibility report is prepared during definition phase.
- Project Manager only updates and validates the report.
2.2 Feasibility Report:
- It is prepared to present techno-commercial analysis.
- This is used to give idea about project, to financial institutions and/or customer.
- According to planning commission feasibility report should include:
1. Raw material survey,
2. Demand study,
3. Technical study,
Product pattern
Process selection
Plant size
Raw material requirements
4. Location study,
5. Project capital cost estimates and source of finance,
6. Profitability and cash flow analysis,
7. Cost-benefit analysis.
2.2.1 Raw Material survey:
- There are three categories of raw material,
i) Available in natural form as deposit, either on the surface or underground, but in same
country.
ii) Available as finished product or by-product from some operating plants.
iii) Not available in country but to be imported.
- Qualitative and quantitative analysis is required.
- Transportation of raw material has to be considered.
2.2.2 Demand study:
This include,
i) Demand: It covers,
Uses of the product to be manufactured,
The prospective consumer,
Present consumption,
Expected consumption in future including possible export,
ii) Supply: Covering assessment of
Existing capacity,
Present level of production,
Capacity utilization,
Extent of import and projected supply.
iii) Distribution:
Channels of distribution,
Mode of transport,
Mode of packing and cost of distribution,
Govt. policies.
iv) Prices:
Domestic and international price trends,

12
Control on price as imposed by the govt.
Prevailing duties and taxes,

Literature which are generally referred for study:
1. Plan documents: Issued by planning commission, provides information on plan proposal and
growth targets those are both physical and fiscal.
2. Guidelines to the industries.
Published by the department of industrial development, ministry of industry.
It provides information about licensed and installed capacity, present production, imports
and exports, indigenous capability regarding know-how, design & fabrication, future
scope, etc.
3. Economy survey: Published by the Ministry of Finance it provides data on industrial
production, prices, export etc.
4. Annual survey of Industries: Published by the central statistical Organization, it provides data
on production, number of units installed, capacity, etc for several industries.
5. Import and export statistics: Published by the Ministry of Commerce, it provides data on
imports and exports of a very large number of items.
6. Monthly bulletin of Reserve Bank of India: Provides information on production cost indices for
various industrial items.
7. Survey reports of various institutions: Publications of
Industrial Development Bank of India,
National Council of Applied Economic Research,
Times of India, economic division.
2.2.3 Technical Study:
1] Production pattern:
- In case of process plant, the selected process would also determine the various co-product
and by-products those are possible.
- The total spectrum of product, co-product and by-product represents the product pattern.
- Quantitative analysis with cost has to be done.
- Changing technology, govt. policies, import and export governs product pattern.
2] Process selection:
- All alternative process has to be tested for techno-economic feasibility.
- Patented process has to be used through license agreement.
- If company possessing patent, do not engineer the project, then it may be done through
project engineering company which convert patent into a technology package.
- A good technology package for a chemical process plant should consist of
i) Basic design data, process description and specifications,
ii) Process flow diagram,
iii) Equipment list,
iv) Process data sheet for all equipments,
v) Process piping and Instrumentation diagrams (P & I),
vi) Instrumentation data sheet,
vii) Utility summary,
viii) Indicative plot plan,
ix) Utility P&I,
x) Pipeline list process and utility,
xi) Operating instructions.
2.2.4 Location study:
- Possession of site and removal of uncertainties associated with site has to be completed before
zero date.
- Change in plant site makes greater impact on viability of project.
Site selection criteria:
i) Availability of land, soil characteristics and cost of land,
ii) Approach to site,
iii) Source of raw material and transportation requirements,
iv) Transportation and marketing of finished product(s),
v) Source and availability of water,
vi) Availability of power and source,
vii) Availability of skilled manpower,

13
viii) Social amenities in area,
ix) Availability of tax incentives, if any,
x) Facility for drainage and effluent disposal,
xi) Availability of engineering and maintenance facilities,
xii) Acceptance of the project by the local bodies.
1] Availability of land:
- The site chosen should be sufficiently large for the present requirement and also for any possible
future expansion.
- Minimum required area is summation of area for manufacturing unit, utility unit, off-site facilities,
arterial roads, car parks and open spaces (e.g. assembly points).
- Land should preferably be govt. owned and available for industrial development.
- It should not involved displacement of population.
- The land should be reasonably flat so that expensive levelling can be avoided.
- It should have adequate means of natural or artificial drainage.
- The site should not get flooded from river water or sea tide.
- It should also be accessible for transport of materials and personnel.
- The land should be suitable for heavy construction work and should not come under earthquake
prone zone.
- Cost of land should be competitive with other suitable sites.
2] Approach to site:
- The site must be approachable by rail/road.
- This survey can be done using maps.
3] Transportation:
- Cost and level of difficulty are major constraints.
- For bulky raw material and for high raw material to product ratio, a site should be nearer to source
of raw material e.g. cement plant, sugar factory.
- Also for raw material requires immediate processing, plant is located nearer to source of raw
material e.g. dairy.
- Volume and nature of raw material and product decides the mode of transport.
- But final choice on mode of transport is made base on site location.
- Transportation of staff also has to be considered.
4] Water:
- For process industries water requirement is very high therefore source of water should be near to
site.
- Quality and quantity assessment of water has to be done.
- Assessment should be done for following purposes steam generation, cooling water, floor
washing, fire-fighting and drinking.
- Surface water (except sea water) is mostly preferred over sub-soil water for process industry.
5] Power:
- Power may be the only guiding factor for plant location for some industries like aluminium, mini
steel, calcium carbide, etc.
- A continuous process requires uninterrupted power supply.
- Irregular power supply will not only cause heavy losses to production but may also damage plant
machinery and equipments.
6] Manpower:
- The industries need is manpower of desired skill.
- A site should be attractive to skilled workers.
- If site is at remote place then amenities like housing, transportation, educational institutions, etc
has to be provided to attract skilled workers.
- Training to local people is also a good solution to get skilled personnel. This increases social
interaction with local bodies.
- The review of manpower should also take into consideration to labour relation, productivity, etc in
a particular region.

14
7] Regional development:
- If industries are set-up in notified backward areas, then certain benefits are available by way of
low cost of land, cash subsidy, and development loan and tax relief.
- Financial institutions also may help by concessional rates and relaxed norms.
- Benefits have to be weighed against difficulties in that location.
- If raw material, power and other inputs are easily available and there is not too much of a problem
in marketing the produce, then locating the project in a backward area may be an attractive
proposition.
8] Effluent disposal:
- Effluent may be solid, liquid or gaseous.
- Site selection do not influenced much by gaseous effluent disposal. But government may induce
stringent laws for particular areas like urban locality.
- For solid effluent suitable location within a reasonable distance from plants required for disposal.
- Volume and nature of the effluent influence the location of the dumping space.
- Liquid effluents need to be treated to make it harmless to discharge in natural waterways.
- If the cost of treatment is very high then select coastal region for project site.
9] Acceptability by local bodies:
- Project must get accepted by local people.
- Sometimes government declares zones for particular class of project.
2.2.5 Financial arrangement:
- Though the entire fund is not required on the zero date, nevertheless, suitable arrangement will
have to be made in advance so that funds do not pose a constraint for meeting the project targets
once the project starts.
- Various types of cost have to be identified.
1] Capital cost:
- All cost incurred in the project before it becomes ready to start commercial production will be
treated as capital cost.
- It includes cost of land, plant and machinery, township, design engineering, licensors fee,
management and supervision and even pre-operative expenses.
2] Working capital:
- The fund required for maintaining various inventories in the form of raw materials, operating
supplies, intermediate products, finished products and meeting miscellaneous cash requirements
for maintenance of a level of production, is treated as working capital.
- These inventories have to be maintained as if there is no consumption (i.e. as soon as any item
get consumed, new has to be purchased).
- A part of working capital borrowed for inventories before full production is termed as borrowed
working capital. The rest of working capital is termed as margin.
3] Operating cost:
- Expenses on raw material, labour, utilities, repair and maintenance, selling and others during
commercial production are treated as operating expenses.
- The part of the operating expenses which can be financed from long term sources as pre-
operative expenses.
Financial structure:
- Debt are cheaper than equity as interest on debt is tax deductible where as dividends on equity
are paid out of net income after taxes.
- Debt capital has fixed liabilities.
- Dividend payment is at the sole discretion of the company.
- Debt contains risk but equity requires high tax payment.
- If dividend paid is less, share holder may dispose their shares.
- To keep balance between debt and equity, debt-equity ratio has to be maintained.
- A company with major proportion of debt is said to be high leveraged.
- A high leveraged company can make larger profit when the demand is pitched high, but at
recession it will also incur high losses.

15
- There is specific debt-equity ratio for each type of industry, e.g. for cement industry it is 4:1.
2.2.6 Preparation of cost estimate:
- Purpose: assessing fund requirement and economic viability.
- Under-estimate may cause shortage of fund. Whereas over-estimate may fail to attract fund
raisers due to high cost.
Types of estimates:
Order of magnitude,
Study estimate,
Preliminary estimate,
Definitive estimate,
Detailed estimate.
-60
-40
-20
0
20
40
60
1 2 3 4 5
Stages
%

E
r
r
o
r

Fig.2.1: Accuracy in cost estimates
1] Order of magnitude:
- This estimate is made when a project has been identified and the entrepreneur wants to get a
rough idea of the investment so as to decide whether to pursue the project or not.
- Accuracy 60%.
- Ratio method is used.
i) Investment per annual ton capacity.
If installed cost of plant-1 of annual capacity C
1
ton is rupees R
1
then installed cost R
2
of
plant -2 having capacity C
2
can be estimated as,
1 2
2
1
R C
R
C
=

For same technology cost per annual ton capacity assume to be remained constant.
If same type of plant data is not available then final data of plant of same complexity can
be used.

ii) Turnover ratio and Capital ratio.
The ratio between annual sales and investment expressed in rupees is known as turn-
over ratio. Inverse of (or reciprocal of) turnover ratio is capital ratio(C).
Total investment in Rs
C=
Annual sales in Rs

Installed cost for plant-2,
R
2
= CV
1
P
1

V
1
is projected annual sales volume,
P
1
is price per unit of sales volume.

iii) Six-tenth factor.
This is modification of the investment per annual ton capacity method. Plant investment is
assumed to vary as 0.6 power of the plant size.
0.6
2
2 1
1
C
R R
C
| |
=
|
\ .

iv) Inflation index.
This method is used to estimate cost of same capacity plant. If capacity is different then
this method can be used with previous discussed methods.
CI (new)
Installed cost (new) = Installed cost (past)
CI (past)
Where CI is cost index.


16
v) Location index.
Knowing a plant cost in one country, the cost of similar plant in other country can be
estimated using this index. The index can be developed if data related to productivity of
countries involved are available.
2] Study estimate:
- This estimate is for studying the economic viability of the project and also for arranging funds for
the project.
- Equipment list is available at this stage.
- Cost of each equipment, can be obtained from previous data or from vendors.
- Total cost of equipment is then multiplied by Lang factor to get overall plant cost.
- Lang factor takes care of civil, electrical, piping, instrumentation, insulation and installation costs.
- Accuracy is 30%.
3] Preliminary estimate:
- The preliminary estimate is prepared when the technology package is frozen and a firm
implementation schedule is available.
- That is, this is done on zero date.
- At this stage budget allocation is frozen.
- Accuracy is 20%.
- Greater accuracy because of available data.
4] Definitive cost estimate:
- This estimate is prepared after the zero date, when the detailed engineering of a project is in an
advanced stage.
- Higher accuracy is due to knowledge of real cost of equipments, contract work and other material.
- Accuracy is 10%.
5] Detailed estimate:
- This estimate may be made on completion of engineering, ordering of equipment and machinery
and award of major field contracts.
- Accuracy is due to information about,
i) Ordered value of plant, equipment and machinery.
ii) Awarded cost of all major contracts.
iii) Final material take-offs.
iv) Ninety percent construction drawings are available.
- Accuracy is 5%.
2.3 Project Profitability:
The economic viability of project can be assessed by the following methods.
1. Pay back Period (PBP)
2. Return on investment (ROI)
3. Net Present Value (NPV)
4. Internal Rate of Return (IRR)
5. Benefit Cost Ratio (BCR)
2.3.1 Pay back period:
- It is the time required to recover the original investment through incomes from the project.
Original investment
PBP = No. of years
Annual income
=

- Annual income =Gross income Total operating cost excluding depreciation.
- If annual income is not uniform then pay back period will be counted as the number of years,
over which, the income accumulated together will equal the original money invested.
- Advantages:
i) Method is simple and easy to calculate.
ii) Good for project financed with high borrowed money where fund recovery is of greatest
concern.
iii) Suitable for projects where technology obsolescence is very rapid.
- Disadvantage:
i) This method does not tell anything about income over investment.
ii) Complete life is not considered in this method.
iii) Project having long working period, even though their return in latter years are very high, may
get rejected.
e.g.
Project A B C
Capital investment, Rs 1,50,00,000 1,50,00,000 1,50,00,000
Project operating life, yr 10 15 20
Annual income, Rs 15,00,000 15,00,000 15,00,000 for first 11
yrs and 20,00,000
for remaining life.
Pay back period, yr 10 10 10
2.3.2 Return on Investment (ROI)
- The ratio relates earnings to investment.
Avg. annual earnings after tax
ROI
Avg. book investment after depreciation
=
- ROI must not only be higher than bank borrowing rate, but also above the minimum acceptable
profitability rate of the company.
- No allowance for time value of money (i.e. interest).
- Not useful for long operating life.
( ) ( ) (
Annual Profit
std. % Return = 100
Total initial investment
where,
Total investment = Fixed Capital Working capital
Profit = Gross income Operating Charges Depriciation
)

2.3.3 Net Present Value (NPV)
- Pay-back period and ROI method doesnt consider time value of money.
- NPV is the difference between the present value of the annual cash flows and the initial required
investment.
1
(1 )
n
t
t
t
S
NPV I
i
=
=
+

Where,
S
t
=Net cash flow for the year, t
i =Interest rate,
I =Original Capital investment,
n =Operating life
2.3.4 Internal Rate of Return (IRR)
- This is also a discounting method.
- Discount rate at which NPV becomes zero is known as Internal Rate of Return.
- Project with highest IRR will be considered as the best.
2.3.5 Benefit Cost Ratio (BCR)
- Modified form of NPV.
- Ratio of aggregate present values of all future cash flows to initial capital investment.
- Higher BCR, the better is the Project.
- BCR should be higher than unity.
1
(1 )
n
t
t
t
S
i
BCR
I
=
+
=

2.4 Numerical Examples
Ex-1: A heat exchanger has been designed and insulation is being considered for the unit. The
insulation can be obtained in thickness 1, 2, 3, or 4 inches. The following data have been determined
for different insulation thickness. What thickness of insulation should be used? Value of heat is 30
units/Million Btu. An annual return of 15% on fixed capital investment is required for any capital, put
into this type of investment. Then exchanger operates 300 days per year, which costs 0.1 Rs/unit.

17

18
Insulation, in 1 2 3 4
Btu saved/ hr 3,00,000 3,50,000 3,70,000 3,80,000
Cost of insulation, Rs 12,000 16,000 18,000 18,700
Annual fixed charges, % 10 10 10 10
Ans: 2 in thickness.

Ex-2: A proposed chemical plant will require a fixed capital investment of Rs. 10 million. It is
estimated that the working capital will amount to 25% of total investment and annual depreciation
10% of fixed capital. If annual profit will be Rs. 3 million, determine the standard percent return on
total investment and minimum pay out period.
Ans: Std. % ROI = 15%, Pay out Period = 4.44 yr

Ex-3: Cash flow pattern for two projects is given below in Rs crores.

Year 0 1 2 3 4
Project-A 10 7.2 9.0 11.2 13.4
Project-B 10 9.0 9.4 10.2 12.0

We wish to select project giving higher IRR. Which one should we choose?
Ans: Project-B (IRR=0.875)

Ex-4: Find NPV, BCR for the following project with interest rate of 15%

Year 0 1 2 3 4 5
Cash flow, Rs 1,10,000 30,000 31,000 36,000 40,000 43,000

Working capital for project is Rs 20,000/-.
Ans: NPV = Rs 17,000/- , BCR = 1.1545
2.5 Phases of Technology Transfer (TT):
2.5.1 Selection:
- Technology selection has to be done, considering the environment in which the undertaking is set
up.
- For Indian conditions technology should labour oriented and not highly sophisticated. Use local
raw materials, local infrastructure and other locally available inputs to the fullest possible extent.
- Obsolete or an unproven technology must not be selected. Also well proven ancient technology
should not be used either, if recent competitive technology is available.
- The choice of technology, comprising license fee and royalty, should be reasonable and its
absorption in the production cost should not render the product highly priced with no buyers.
- Technology may be acquired from any of the following sources:
1. Indigenous technology owners like National Laboratories, Research Institutes and
industrial undertakings which have either indianised same technology or developed same
technology and proved its success.
2. Extension to an existing technology transfer agreement between a foreign collaborator
and another user-undertaking. This arrangement is practicable only among undertakings
which do not individually compete in the market.
3. A duplicate import of technology owned by different collaborator.
4. The import of new technology not tried in India before.
2.5.2 Source searching:
Following are the some of the sources for TT
1. The government data bank.
2. Scientific and industrial research departments national register of foreign collaborator.
3. Industrial and technical directories and journals, advertisements.
4. Research papers, professional bodies.
5. Trade fairs.
6. Indian investment centre, New Delhi.
7. International Trade Association like BASATA (British & South Asian Trade Association).
8. Asian Productivity Organization (APO),
9. British technology group.

19
2.5.3 Negotiation:
After establishing contact with several sources, one must negotiate with them for getting the best at
the least cost, keeping the government guidelines and actual requirements of the project in view.
2.5.4 Contracting:
- To avoid any loss to project work, a careful contract agreement has to be prepared.
- Collaborators often take advantage of the other partys ignorance.
- All requirements from TT for the project should be included in contract.
- While documenting contract agreement consideration towards government guidelines is required
to get clearance (license) from government.
- One should take full advantage of the collaborators knowledge, experience and skill.
2.6 Forms of TT:
2.6.1 Licensing:
- A licensing agreement would give the right to use and transfer a technology either patented or an
unpatented, on agreed terms and conditions.
- The technology package must be split up into many components with corresponding break down
of fee/charges.
- The scope of TT must be defined well.
- Licensors guarantee must be set out specifically with quantities, qualities and values, amount of
liquidated damages, etc.
- Duration of the license must be stipulated with reference to construction period and production
period.
- Gradual Indianisation of the technology and sublicensing rights must be clearly stipulated.
2.6.2 Outright purchase:
- Outright purchase makes it possible to share the technology with others or use it in multiple units
of same organizations or license out or transfer to other users.
- This type of TT is preferable when,
1. the technology is unlikely to undergo substantial improvement at the hands of the
collaborator in the future,
2. user have the organizational strength to use it without the association of the collaborator,
and,
3. user is confident of subjecting the technology to its own R&D and improving it.
2.6.3 Joint venture:
- The most common and inexpensive form of TT.
- Continuous benefit of the collaborators R&D results, experience and skill for all times to come.
- Collaborators participation in a risk associated with the technology.
- Collaborators support in foreign market for the end product.
- Possibility of product improvement without time-consuming bargaining with the collaborator.
- Even in the in-house R&D efforts, there will be more sincere participation by the collaborator.
2.6.4 Buy-back agreement:
- The supply of technology by the collaborator to a new or existing project for production or
substantial improvement of a product.
- The collaborators undertaking to buy a substantial part of the product for some year at a
manufacturing cost.
- Here the collaborator takes good care of the product quality, and as he is obliged to pay a mfg
cost over which he has to make a profit, he strives to ensure cost effectiveness too.
2.6.5 Loan agreement:
- Lender refers the particular technology to be used for project.
- Lender may make technology-owner, a party to the loan agreement or a subsidiary agreement.
- Lender monitors the effectiveness of the TT to the projects complete success.
2.6.6 Plant operation and management TT:
- It is often introduced in a running plant that is subjected to modification or partial renovation.

20
- The technology owner operates and manages the plant for a specified number of years with
guaranteed, larger, and better quality output of the product.
- Mostly this form of the contract is given to the original collaborator to take advantage of his
previous knowledge about the plant, and to benefit from the use of the latest technological
improvements with minor modification to the plant and equipments.
2.6.7 Consultancy contract:
- The consultant either introduces his own proven technology or brings in another technology under
his management.
- Between the technology-owner and the consultant there shall be the valid collaboration
agreement ensuring the appropriate support.
- User must get copy of that agreement, to be sure of its existence.
2.6.8 Other contracts:
- These are for supply and commissioning of equipment and turnkey packages.
- The support ends with the completion of the contract.
- Separate fee for commissioning and erection need not be paid.
2.7 Activities in technological package:
Once the technology for project is selected, following are the activities to be done for completing the
technology package.
2.7.1 Compilation of project data:
- Design data required for engineering design and technical specification is compiled and verified.
- The data to be supplied for following areas.
i. General project design requirements,
ii. Design codes and standards to be used,
iii. Regulatory requirements,
iv. Permits and approvals necessary,
v. Soil conditions and site conditions, climate conditions,
vi. Water analysis,
vii. Input qualities,
viii. Electrical system,
ix. Effluents and other waste disposals and environment requirements,
x. The requirements of utilities and off sites,
xi. Auxiliaries and subsystems,
xii. Raw material/feedstock and the end product.
2.7.2 Process design:
- Process design has to be completed before basic and detailed engineering.
- It covers,
i. Material and heat balances,
ii. Process control system, specification and data sheets,
iii. Pressure and flow diagrams,
iv. Equipment load data sheets,
v. Process piping and instrumentation diagrams
- Where the project is setup with the technology supplied by an outside agency, the process design
package, including a process recipe, is usually given by the agency.
- In most cases, process design is done at the feasibility study stage itself.
2.7.3 Basic engineering:
- Basic engineering defines the scope of the project with reference to contents, capacity, quality,
etc.
- Basic engineering includes following activities,
i. Design package,
ii. Engineering specifications,
iii. Equipment listing and purchase requisitions,
iv. Piping and Instrumentation Diagrams (P&ID) including line and valve sizing.
v. Single line electrical diagrams,
vi. Site plan and implementation plan.
- These factors determine the projects investment cost; therefore owner has to see what the actual
requirements are and what the unwanted features are.

21
2.7.4 Detail engineering:
- Detailed engineering is the activity that produces the final system design with the necessary
sizing and integration, aimed at optimizing all segments and components of the project.
- Detailed engineering include following activities.
i. The final plot plans and detailed drawings and other documents for manufacture,
fabrication and construction of civil works, piping, electrical and instrumentation.
ii. Approved vendor drawings,
iii. Complete specifications,
iv. Bill of materials,
v. Material takeoff sheets,
vi. Purchase requisitions,
vii. Delivery schedules.

*********************

22
Chapter 3: Project Licensing & Patent
3.1 Project Licensing & Clearances
- As per central governments Industrial policy statement of 1991, most of the industries are
exempted from license. But pollution causing projects needs Industrial License (IL).
- Not only setting up new units, but also substantial expansion, take over of an existing plant, taking
up the manufacture of a new article in an existing unit or even changing the location of an existing
industrial undertaking in pollution causing industries require license.
- Foreign companies can also apply for IL. But maximum 51% foreign equity investment is allowed.
3.1.1 Procedure for Licensing:
1. The License applicability:
- The licensing provisions apply to an industrial undertaking set up by any person or authority
including the Government.
- If the company has to be formed to implement the project the Letter of Intent (LOI) be issued in
the name of the applicant by Secretariat for Industrial Approvals (SIA), otherwise it will be in
companys name.
- Original applicant, usually hold at least 10% of the equity of the company.
- Administrative ministries issue endorsement and amendments (i.e. LOI).

2. Approval procedure:
- The government had announced a streamline system for issue of industrial approvals. According
to procedure letters of intent, foreign collaboration approval and capital goods clearances are to
be issued within 30 days of the receipt of applications in each case.
- Entrepreneurs can make simultaneous application for IL, foreign collaboration approval and
capital goods clearance.
- For composite and simultaneous applications the time target is 90 days.

3. Issue of LOI/ Prima Facie rejection letters:
- If an application is approved and further clearances are not involved, an IL is issued to the
applicant. Otherwise LOI is issued.
- LOI will include conditions proposed by government for implementation of project.
- Within six months from issue of LOI, entrepreneur should make an application to the funding
institutions. Administrative ministries can pardon the delay in application for funding.
- If it is proposed to reject the application, the tentative decision of government to this effect is
communicated indicating the grounds of rejection to the applicant, giving him an opportunity to
state his case within a specified period of time, before a final decision is taken on the application.
- Prima Facie rejection orders are given by administrative ministry. Decision can be revised by
appropriate approval committee if needed.
- The initial validity period of LOI is three years. Extension can be sought from administrative
ministry.
- Entrepreneur has to file application for all clearances required within validity period of LOI.

4. Industrial License (IL):
- Once the conditions incorporated in the LOI are fulfilled, it is converted into an IL. The LOI will be
converted into IL by the SIA.
- The initial validity of IL will be three years within which period the commercial production from the
licensed capacity has to be established.
- Administrative ministry can extend license period for two more term of one year each, if there is
good and sufficient reason. Extension beyond five years is normally not entertained.
3.1.2 Foreign collaboration Approval:
- Foreign collaboration is either done for foreign investment or foreign technology.
- Import of technology in high priority industries can be approved if the royalty payment does not
exceed five percent of domestic sales and 8% of export. Government declares list of high priority
industries, frequently.
- For lump-sum payment within ceiling limit for technology transfer, RBI approves up to Rs. 1 crore.
- Foreign collaboration involving payment in excess of this ceiling amount would require
government approval.

23
- The application shall seek approval for foreign investment and payment in foreign exchange
under following cases:
i. Lump-sum payment towards,
Technical know-how fees,
Design, engineering, consultancy, etc, and
Use of patents, brand names and trade marks, etc.
ii. Recurring annual royalty,
As a percent of the ex-factory value of annual production (excluding excise duties),
after deducting the all in total landed cost of imported components, and the standard
bought out components, if any.
- Import of design and drawing is allowed without any restriction.
3.1.3 Approval for appointment of foreign consultant:
- Foreign consultant is allowed to work as sub-consultant to render engineering services through an
Indian prime consultant.
- Sub-consultancy by foreign consultant is only approved on the following conditions:
i. He is responsible for the supply of a patented technology which is the basic know-how for
the proposed Indian project, and for the licensing of its use.
ii. His services are necessary for the scrutiny of the detailed engineering done in India, and
that such scrutiny has a bearing on the successful transfer of the technology with
performance guarantees.
iii. His services are vital in equipment selection and inspection.
iv. His presence is important in quality assurance and observance of standards in construction,
for achieving the performance guaranteed by technology owner.
v. His supervision is needed for rectification of any equipment failure.
- Agreement with foreign consultant must include,
time-bound schedule for achievements of targets/ milestones,
performance guarantees,
penalty and bonus clauses,
training of Indian personnel,
design and introduction of related management practices, and
information and communication system.
- Fees payable to foreign consultant must be a fixed amount, and its payment should be linked with
milestone achievements.
3.1.4 Import of capital goods:
- Import of capital goods is allowed unless it is restricted by government.
- Government issues a list of permitted goods to be imported according to change in policy.
3.1.5 Import policy:
- Capital goods enlisted as free import can be imported by project enterprises without license.
- Otherwise there are three types of items,
1. Prohibited items: these shall not be imported,
2. Restricted items (negative list): may be imported only with an import license,
3. Canalized items: may be imported through the canalizing agencies like state trade
corporation.
- Capital goods (CG) required for high priority industries are generally kept outside the negative list.
- CG clearances have been made automatic when CG imports are covered by foreign equity or
they are 25% of the value of plant and equipments.
- Second hand CG may be imported in following sectors without a license.
Printing and allied process,
Garments/ hosiery/ made-ups,
Leather processing/ Leather finishing/ Leather goods manufacturing/ Leather apparel
manufacturing,
Rubber and canvas footwear,
Sports goods,
Electric lamps,
Packaging and packaging material,
Forged hand tools,
Oil field services,
Writing instruments,
Sea food,
Any other sector specified time to time.

24
- Second hand CG to be imported shall not be more than seven years old and shall have a
minimum residual life of five years.
- Some of the CG can be imported on re-export basis without license. (e.g. hot gas balloon
imported for Raymonds Chairman Emeritus Dr. Vijaypat Singhania who set the world record of
flying a hot air balloon to a height of 69,852 feet on November 25, 2005).
- Imported CG or parts may be sent abroad for repairs, and re-imported without license.
- If the CG imported (new/second hand) is to be used for production of goods for export then
enterprise gets concession on import duty for CG.
3.1.6 Environmental/ Pollution control clearances:
- Unless and until an enterprise gets a clearance for pollution control financial institutions will not
clear their funding proposal.
- This clearance is very critical issue, due to its direct connection with public.
- Government has identified 20 industries causing high pollution.
1. Primary metallurgical producing industries namely, zinc, lead, copper, aluminium and
steel.
2. Paper and pulp and newsprints.
3. Pesticides/ Insecticides.
4. Refineries.
5. Fertilizers.
6. Paints.
7. Dyes.
8. Leather tanning.
9. Rayon.
10. Sodium/ Potassium cyanides.
11. Basic dyes.
12. Foundry.
13. Storage batteries.
14. Acid/ alkalis.
15. Plastics.
16. Rubber (synthetic).
17. Cement.
18. Asbestos.
19. Fermentation industry.
20. Electro-plating industry.
- In respect of these industries, the following conditions have to be fulfilled.
The state director of industries confirmation that the site of project has been approved from
environmental angles by the competent state authority.
The entrepreneurs commitment, both to the state government and the central government
that he will install the appropriate equipments and implement the prescribed measures for the
prevention and control of pollution.
The state pollution control boards certification that the proposal meets with environmental
requirements and that the equipments installed or proposed to be installed are adequate and
appropriate for the requirements.
- The ministry has classified industries into three categories red, orange, and green for the
purpose of inspection and enforcement of pollution control status.
- The frequency of inspection is high for the red, medium for orange, and low for green.
- Some of the general environmental considerations to be taken care of in project design.
Incorporate all features generally necessary for the protection of the environment and of
human health, both in the main facility and supporting facilities.
Control erosions caused by the removal of trees and vegetation.
Minimize the undesirable use of hazardous chemicals, if any.
Make provisions for electrostatic precipitator, dust collectors, air cleaners, etc.
Minimize the toxicity to marine life.
Plan all disposal systems with the minimum risk to the environment.
- In short, during the course of your project activities, try seriously not to do anything which will
directly or indirectly pollute or degrade or damage the land, air, water, and natural resources.
3.1.7 Railway clearance:
- The secretariat for Industrial Approval (SIA) gets it cleared by the Railway ministrys department.
- So no separate application is required if owner is applying for IL.
- Owner enterprise has to fulfil following requirements for this clearance,
1. Allocation and preparation of yard,

25
2. Railroad to site,
3. Siding, handling, and special facilities including types of wagons required at the dispatching
and receiving stations, for dispatching and receiving raw material and finished goods.
4. wagon allotment, and
5. Up-gradation of serving railway station, if necessary.
- If IL is not necessary, owner has to deal with the Railways in this regard directly.
3.1.8 Electricity clearance:
- Depending on the size of the requirement, clearance should be sought from the state electricity
board or the central electricity authority.
- Details of connected load (in kW) and maximum load (in kW) should be given for clearance.
- For own generation station, owner has to give full particulars of the station proposed to install and
also has to show its capital cost separately in project estimate.
3.1.9 Forest clearance:
- Every project involving de-reservation of reserved forest or use of forest land needs clearance.
- This clearance is to be given first by the state government and then the central government
- Application for environmental and forest clearance should be submitted simultaneously to Ministry
of Environment and Forest.
- If only environment clearance is required, the case will be processed only for environmental
clearance.
- Decision is normally given within six weeks.
- Application should include following issues
1. J ustification for locating the project in the forest area, giving alternatives that were
examined and the reasons for their rejection.
2. Species-wise and diameter-class-wise list of trees to be cut down.
3. A map showing location of the areas to be deforested, to the scale of 1:50,000.
4. A detailed and satisfactory proposal for the rehabilitation of the affected persons. (Non-
forest land must be identified for rehabilitation).
5. Monitoring mechanism for implementation of the condition of compensatory afforestation
and other stipulated conditions.
Compensatory afforestation:
Compensatory afforestation is required for de-reservation or diversion of forest land for non-
forest use. The following norms are laid down for compensatory afforestation.
1. Where non-forest land is available, compensatory afforestation shall be raised over equivalent
area of non-forest land
2. Where non-forest land is not available, compensatory plantation shall be raised over
degraded forests twice in extent to the area being diverted.
3. Where non-forest land available is less in extent than the forest land being diverted, in
addition to compensatory afforestation on available non-forest land, plantation shall be raised
in degraded forest, twice in extent to the difference between forest land being diverted and
available non-forest land.

Compensatory afforestation is usually not required for following cases.
1. In case of diversion of land in small areas of less than 1 hectare in extent, unless specifically
asked for by the department.
In case of transmission line afforestation is not required if diverted area is less than 10 hectare.
3.2 Intellectual property:
- Intellectual property is a form of legal entitlement which allows its holder to control the use of
certain intangible ideas and expressions.
- The term intellectual property reflects the idea that once established, such entitlements are
generally treated by courts, especially in common law jurisdictions, as if they were real property.
- The most common forms of intellectual property include patents, copyrights, trademarks, and
trade secrets. In civil law jurisdictions, intellectual property has often been referred to as
intellectual rights, traditionally a somewhat broader concept that has included moral rights and
other personal protections that cannot be bought or sold.
- Intellectual property rights may exist either for an indefinite period of time (in the case of
trademarks and trade secrets), or they may last for a term of years, after which they typically
expire and become part of the public domain.
- These rights are governed by the law of the sovereign nation in which the intellectual property
was created or established. Traditionally, each nation established and enforced its own
intellectual property rights; however, beginning with the Paris Convention for the Protection of

26
Industrial Property in 1883, numerous treaties have provided for cross-border protections,
multinational procedures, and increasing uniformity.
3.2.1 Patent:
- A patent is a set of exclusive rights granted by a government to an inventor or applicant for a
limited amount of time (normally 20 years from the filing date).
- The word's original definition, one theory of patent legislation is to induce the inventor to disclose
knowledge for the advancement of society in exchange for a limited period of exclusivity.
Furthermore, as the grant of letters patent only grants the right to exclude others from practicing
the invention and does not affirmatively grant the right to practice the invention, a patent is not
considered a monopoly right.
3.2.2 Rights granted and rights not granted:
- A modern patent provides the right to exclude others from making, using, selling, offering for sale,
or importing the patented invention.
- Generally, patents are enforced only through private actions; namely, through civil lawsuits or
licensing agreements. Governments typically reserve the right to suspend or cancel a patent at
will.
- An application for a patent (other than a design patent) must explain how to practice (i.e., make
and/or use) the invention(s) and must also include "claims" that particularly point out the
invention(s) and will define the protection conferred to the owner of the patent, once granted.
Generally, the exclusive rights are limited to the invention(s) defined by the patent's claims.
- For example: Patent claims are typically of the form of a long sentence, e.g., "An apparatus for
catching mice comprising, a base member for placement on a flat surface, a spring member...", "A
chemical for cleaning windows comprised of 10-15% ammonia, ...", etc.
- If an inventor takes an existing patented mouse trap design, modifies it to make an improved
mouse trap, and obtains a patent on the improvement, he/she can legally build his/her improved
mouse trap only with permission from the patent holder of the original mouse trap, assuming the
original patent is still in force, and the patent holder of the original license has every right to deny
the patent holder of the improvement use of the invention at any price. However, if the original
patent owner tried to copy the inventor's improvement, he/she could prosecute that original patent
owner to exclude him/her from using the improvement without permission.
- Continuing the example though, if the inventor's improved mouse trap patent claims a guillotining
member, but the original manufacturer copies other unclaimed aspects of the improvement, the
inventor might not be able to exclude the manufacturer from using those other improvements.
- For this reason, it is important, that the patentee eventually obtain patent claims that include the
absolute minimal set of limitations that differentiate a new invention over what came before.
Dependent claims can be used to describe additional variations and features.
3.2.3 Governing laws
- At this time, there are a number of significant international treaties governing patent law. The
most universal of these is the WTO Trade-Related Aspects of Intellectual Property Rights
(TRIPS) Agreement, to which almost all countries are a party.
- There are two types of awarding the patent, "first to invent" and "first to file". In first to invent, the
second one to file has the burden of proof and usually loses such contests.
- Patent grants are territorial in nature. Thus, patent protection in multiple countries requires
separate filings of patent applications in each country, or region, where protection is sought.
Within Europe, a single patent application procedure is available through the European Patent
Office, but successful applications result in multiple patents (up to 36) rather than a single
European-wide patent.
- Many of the international treaties are designed to afford some recognition of filing dates to patent
applications filed in one country.
- Typically, inventors are allowed one year from the date of their filing in their home country to file
the application abroad, frequently called national stage filing. Systems such as the Patent
Cooperation Treaty (or PCT) allow inventors a cost effective way to further delay national stage
filings.
3.2.4 Examination process and procedure
- The application is reviewed by a patent examiner for patentability.
- Some countries do not formally review patent applications while others accept the judgment of
other patent examining authorities.


27
A typical examining procedure is:
- Filing a patent application by inventor or applicant.
- Formalizing of application (signatures by inventors or applicant), often filed at the same time as
the application.
- Publication at 18 months from earliest claimed filing date.
- Review by the examiner or the Examining Division, including back and forth "negotiation" with
applicant to narrow/modify the claim language.
- Grant of the patent (if it the patentability criteria are met) and publication of the issued patent.
- Opposition period, during which anybody (e.g. other companies) can challenge the patent grant.
The specifics of the review process include:
1. Verifying that claims are for a patentable subject matter.
2. Unity of invention, since each patent application can only be for one invention (called
"restriction" practice in the United States).
3. Formalities. Is the claim grammatically correct, properly drawn, and unambiguous?
4. Utility or industrial applicability.
5. Novelty (newness)
6. Non-obviousness or inventive step.
Different patent systems use different terms and different standards for these concepts, of
which the most important probably are: patentable subject matter, novelty, non-obviousness and
sufficient disclosure.
3.2.5 Term of patent
- As TRIPS agreement declares, the term of an issued patent is twenty years from earliest claimed
filing date.
- Also, in several countries there are multiple types of patents, and the twenty year term frequently
only applies to so-called utility patents and not design, petit, or other kinds of less heavily
examined patents.
3.2.6 Example
- If the better mousetrap patent is filed on J anuary 1, 1996 and is issued or granted on J anuary 1,
2000, it will lapse twenty years from filing: J anuary 1, 2016. However, if the inventor comes up
with a second improvement and claims priority to her first patent when filing the second patent on
J anuary 1, 1998, that second patent, after grant, would lapse twenty years from the earliest
claimed priority: J anuary 1, 2016.
3.2.7 Miscellaneous
- While a patent grants an exclusive right on the invention claimed, many national laws provide for
special rules on granting compulsory license to requesting third parties when the invention is not
put into to practice within a specified amount of time or is put into practice in a manner that is
deemed to be insufficient for the needs of the Country.
- Secrecy provisions are also present in many national laws in case the invention for which a patent
is filed is deemed to have military interest.
- A patent might also be seized by the State under grounds of public utility. For example, during the
anthrax scare that followed the September 11 attacks, it was rumoured that the US was
considering seizing from the Bayer Corporation the patent on the Cipro-antibiotic. However, the
anthrax attacks did not continue and eventually the patent was not seized.

*************************

28
Chapter 4: Project Organisations & Planning
4.1 Project organisations:
4.1.1 Project Manager as a Staff Assistant to the Chief Executive:

Fig.4.1 Project manager as a staff assistant to the chief executive

- Depending on position of PM, he can produce results.
- In this type of arrangement PM virtually has no authority.
- He serves as a staff assistant to the chief executive.
- PM does not make any decision for project, nor does he provide any staff service to the functional
departments who make all decisions relating to the project.
- PM collect information and communicate with chief executive.
- This arrangement may be chosen by chief executive who wants to directly control the project but
cannot devote much time to keep track of details.
- This arrangement may work for very small projects, but for large project it cannot work.
4.1.2 Consultant as a Project Manager:
- Consultant advice the chief executive.
- He has no authority to implement the activities.
- He doesnt take decisions but can influence the decisions of the chief executive and functional
executives.
- His task is same as previous one.
- Gains in this method
o Recommendation which should be authentic, reliable and impartial.
o Improved effectiveness.
- As he is not a staff of the organization, he can make recommendations freely to chief executive,
but informal communication with project staff as he doesnt have authority.
4.1.3 Project Manager as a specialized staff function:
- PM provides specialized staff service to other department.
- The PM in this role provides schedules, budgets, and information to the various functional
departments who will execute the project.
- PM should be specialist in project management tools and techniques.
- He should have good knowledge of scheduling, budgeting and information systems.
- Activities of PM
i) Collection and transmission of data.
ii) Follow-up of one functional group to service another,
iii) Maintain records,
iv) Measure progress,
v) Analyze progress, and
vi) Prepare progress report.
- PM remains focal point for communication between various agencies.

Chief executive
Personnel Technical Finance
Project Manager
Commercial
Engineering Construction Contract
Administrator
Purchase

29

Fig. 4.2: Project manager as a specialised staff function

- PM doesnt take decision but only give service to functions.
- He doesnt direct how to implement schedule.
- He only advice the functional groups.
- The functional management would expect PM to take all the responsibilities without any authority.
- PM may throw-up his hands if anything goes wrong as he doesnt have sufficient authorities.
4.1.4 Matrix organization:

Fig. 4.3: Matrix organisation

- When arrangement of sharing authority between a PM and other functional managers is
formalised, we have an organization form which is known as matrix organization.
- Two superiors to specialized team are available one belonging to the project and the other to
the specialized function.
- Here both managers are responsible for successful completion of project.
- Both have authority over the working force.
- There may cause confusion due to dual reporting system.
- For this there should be clarity of roles.
Functional
manager
Project
manager
Functional
manager
A
Functional
manager
B
Functional
manager
C
Project manager 1 A1 B1 C1

Chief
Executive
Project Management
Division
Engineering
Division
Commercial
Division
Civil Mechanical
Project manager
X Project
Project manager
Y Project
Contractor
Company
Civil
contractor Staff
X Project
Staff
Y Project
Contractual authority relatio
Line authority relationship
nship
Chief
Executive
Project Management
Division
Engineering
Division
Commercial
Division

Civil Mechanical Electrical
Project
manager
Project
manager
Flow of project
authority
Flow of functional authority

30

- A mutually supportive relationship should exist between the partners in matrix setup for the
successful execution of a project.
- In contractual situation also mutually supportive role has to be played for smooth execution.
- Both parties should not try to overtake each other.
- If both the parties work on mutual understanding then the matrix is called Balanced matrix .
- If the project influence is more in decision making for the project, then the arrangement is called
Strong matrix , otherwise Weak matrix .
4.1.5 Task Force Organization:

Fig. 4.4: Task force organisation

Advantages:
- Project management dominating which receive attention over time and cost constraints.
- Project moves very fast.
Disadvantages and limitations:
- One cannot be too sure about the quality objective.
- For complex technology and for large project this may become ineffective.
- Due to shortage of specialists sometimes creation of task force is difficult.
4.1.6 Totally Projectised Organization:

Fig. 4.5: Totally projectised organisation

- PM has total authority even regarding policies and procedures.
- Function specialists have to report only to PM and they dont have their separate department.
- It works like mini company.
- Function specialists have authority to take decision for their respective area of work.
- PM has to carry out lot of administrative work with a core project work.
- This arrangement is used when the project is too large and complex or it is located far away.
Chief
Executive
Project Engineering Procurement
Central Engineering
Indirect authority relationship
Line authority relationship
Construction
Task force
Engg
Task force
procurement
Task force
construction
Central
Procurement
Central
Construction
Chief Executive
Project Engineering Finance Commercial
Engineering Finance Commercial
Personal
Personal

31
4.2 Team Building:
- The real source of uncertainty is behaviour of people working in project.
- If the people are concerned more about their rights, which a contract aims to protect, and not
about their responsibility then the project is not likely to show the best result.
- If the people working in project could able to keep their self-interest aside and put project interest
high then they can able to work together smoothly. This is called as Team.
- Any amount of contractual clauses cannot make a team and consequently, can not avoid all sorts
of uncertainties those may arise due to the same.
4.2.1 Seven Cs for Team Building:
- Whenever there is more than one brain working together there is always a chance of conflict.
- So to build a good team there is seven aspects which are to be followed by each team member.
1. Conceiving: Conceive or understand the inter-relationship model, which will become
operative for the realization of the project objective.
2. Concurring: The second step is to make the members concur or agree on this or ask them to
accept this.
3. Committing: Only when members it would be possible to obtain commitments from them.
4. Communicating: Communication of the requirements of the interrelationship model must be
done.
5. Coordinating: A total coordination must exist so that any shortfall in commitment, anywhere
in the line doesnt upset the team balance.
6. Counselling: The defaulting member must be counselled to exercise more self control so
that he makes an all-out effort to meet his commitment.
7. Controlling: When self-discipline doesnt work and the smooth and harmonious working is
being affected, control must be exercised to bring the working in line with the requirements.
- So team building should be based on cooperation and not competition.
4.2.2 Teams Success:
Following are the factors, which are to be considered for success of team.
1. Training the Team Members:
- The team members must be given a short-term training.
- This will make them aware of
the objective of project,
the environment and culture in which they are required to function,
the time-cost relationship,
the system and techniques to be followed,
social responsibility, etc.
- Every member of the team should become a self-propelling person with a clear direction.

2. Personal qualities of Team Member:
- Team members should have
positive attitude,
good conceptual abilities,
good communications skill and language ability,
dependable character,
knowledge of the enterprise and its philosophy,
good knowledge of work.

3. Specialist committees and daily meetings:
- Specialist committees must form to work on special areas, where it may consume more time if
given to other members.
- Proper communication between members and specialist committees is required to resolve
problems quickly.
- Meetings should be structured, to avoid waste of time by bad organizers and incompetent
presidents.

4. Functional interface:
- A continuous interface has to be there, between different functional departments, as well as
between project team and other agencies for project success.

5. Specific responsibility of the teams:
- Team leaders, group leaders and individual members, everyone has to take their responsibility
according to the work assigned to them.

32
- While delivering responsibility, appropriate resources have to be assigned to the member.

6. Team Members authority:
- For achieving the desired good results, the team member representing the various functions and
agencies should have sufficient authority to commit their departments or organizations on
specified matters.

7. Team Members accountability:
- In the same manner as every functional department and the project team as a whole have their
specific accountability to the top management, every member of the team also should have an
individual accountability apart from the team responsibility.
- This accountability is as important as individual commitment.
- In team and committees there can be a tendency for some members to remain passive without
assuming any real responsibility or doing any hard work.
4.3 Work Breakdown Structure (WBS):
- WBS is a technique which breakdown a work into its components and at the same time
establishes the connections between the components on the lines of a family tree.
- WBS enables the integration of people, hardware and software into a total project work system.
4.3.1 Hardware Oriented WBS:
Hardware oriented WBS provides the basic framework for project work system design.

Fig.4.6: Hardware oriented WBS
Cement
plant
Limestone
supply
Raw meal
preparation
Clinkerisation Cement
grinding
Packaging
& loading
Common
utilities &
offshore
facilities
Feeding Grinding Blending
Civil Mechanical Electrical Instrumentation
Building Equipment
foundation
Table
feeder
Raw mill Grit
separator
Design Ordering Supply Commissioning Construction
Gear assembly
drawing
Detail total
assembly drawing
Detail Shell
drawing
Drafting Checking Printing
H
a
r
d
w
a
r
e

S
o
f
t
w
a
r
e


33

4.3.2 Agency Oriented WBS:
- Development of work is in definite or in one form in case of hardware-oriented WBS and it may be
in many form for agency oriented WBS. This is due to different way of working of different
agencies.

Fig.4.7: Agency oriented WBS
4.3.3 Function Oriented WBS:
- This is normally the approach used by contractors for distributing work in-house which is normally
organized on functional line.

Fig.4.8: Function oriented WBS

- The relationship between hardware and software, hardware and hardware are fixed.
- But the relationships between hardware and agencies, software and agencies or between
agencies themselves are depending on agencies.
- It is only the agency which can make this relationship frictionless.
4.4 Contracts:
When Project Manager has to get things done with resources over which he has no direct authority, it
becomes necessary to acquire the required authority in lieu of some considerations. Such an
arrangement can be termed as a Contract and the authority so acquired as Contractual authority. If
this authority is acquired in-house through a contract, then the process can be termed as internal
contracting; all other contracts are business contracts.
4.4.1 Business contract:
- It is written agreement between two or more parties.
- These agreements are enforceable at law.
Project
Owner Consultant System
supplier
Civil
contractor
Electrical
contracto

r
Design Ordering Commissioning
Design Ordering Commissioning Supplier-1 Supplier-2
Contractor-1 Contractor-2
Project
Design Procurement Construction Commissioning
Civil Mechanical Electrical
Contractor-1
(Site preparation)
Contractor-2
(Plant construction)
Contractor-3
(General construction)
Site grading &
roads & drains
Water supply &
distribution
Plant building Non-plant Township

34
- Legal consideration is usually payment in the form of money.
- Consideration is term used for return for a specific promise contained in contract.
- Sequence of events in contract:

1. Enquiry Issue of Notice Inviting Tender (NIT) to selected parties or to the
newspapers by the project authority and sale of tender document.

2. Offer Submission of the tender document by the bidder.

3. Acceptance Communication from the recipient of the offer to the bidder indicating
intent to enter into an agreement and acceptance of the same by the
bidder.

4. Agreement Offer and considerations as accepted given a legal form and duly signed
by competent authorities of both parties.

5. Contract The contract consists of an agreement on stamp paper, a detailed letter
of intent with agreed variation/conditions and the original tender
document.

4.4.2 Three Rs of contracting:
Responsibility, Reimbursement, and Risk.

1] Responsibility:
- This is also referred to as scope of work.
- It covers typically
i) What to parcel out to the contractors and what to retain?
ii) How to define the work parcels so that the contractors know their scope precisely?
iii) What are the relevant performance parameters for fulfilment?
- While defining responsibilities ambiguity must be to the minimum level.

Types of responsibility structures:
a) Owner doing everything except manufacturing of plant and machinery.

Fig.4.9: Contractual relationship with supplier

- This mode is normally used for replacement, overhaul, or limited expansion of an existing
plant.
- Engineers from the plant design and maintenance department normally carry out this work in
addition to their routine responsibilities. This gives second priority to project which increases
time to complete the project.

b) Owner assuming the task of ordering and carrying out project management through
contracts.
- Owners team only involve in production.
- So they keep the production interest uppermost in mind while implementing project.
- This may suffer project as production and project management requires different skills.

Fig.4.10: Project management through contracts
Owner
Engineering Order Supply Erection &
commissioning
Owner
Design Order Supply Erection &
commissioning

35

c) Owner engages a consultant for engineering and project management services.

Fig.4.11: Project management through consultant

- Detailed engineering contractor offer project management service.
- Performance of detailed engineering contractor affect the time required for completion.
- So for the best deal from this agreement, the consultant should guarantee the time schedule
and cost of the whole project.

d) Owner engages number of agencies for specific work packages inclusive of design,
procurement, erection and commissioning.

Fig.4.12: Different agencies for different works.

- Owner takes entire responsibility for project management.
- Owner has to handle the areas which are common to all contractors i.e. integrating services.
- Sometimes owner offloads the integrating services to another agency.

e) Owner hands over the entire responsibility of project execution to a prime contractor.

Fig.4.13: Prime contracting

- The prime contractor selects associates and sub-contractors to share the responsibilities of
project implementation.
- Selection of prime contractor is tedious and time consuming process.
- The risk involved is also high.
- Owner may not be able to introduce any change without incurring a heavy cost.

f) Turn-key contract.
- According to type of work, contractor will be different.
- Therefore, for large project number of contractors will increase, which may create problem in
managing the project.
- In a turn-key project a single contractor has complete responsibility to supply the owner, a
plant, which is complete and ready for the owner to operate by simply turning the key.
- Turn-key is not always a fixed price contract; sometimes it may be turn-key reimbursable
contract.
- Division of work doesnt stop by giving turn-key contract. The turn-key contractor has to divide
the work in proper way.

Owner
Order Consultant
(Engineering)
Supply Erection &
commissioning
Owner
Agency-1 Agency-2 Agency-3 Integrating services
Owner
Prime contractor
Engineering Supply Erection & Commissioning

36
2] Reimbursement:
- This R is more important for contractor than the owner.
- Owner refers to responsibility to describe contract arrangement, whereas contractor refers to
reimbursement.
- There are three types of reimbursement used in contracting lump sum, cost plus, and item
rate.
- Sometimes combination of these three is also preferred.
- Lump sum contracts are usually more expensive than a cost plus contract as contractor likely
to bid more amounts for unknown work.
- Cost plus reimbursement accounts contractors fee over expense in project.
- Whereas item rate gives more detailed fee structure of contractor by putting cost and fee over
each item/activity.
3] Risk:
- Both contractor and owner are so much concerned about this R.
- Contract is considered to be an instrument or medium for transfer of risk from owner to the
contractor.
- There will be always some resistance from contractor to accept the risks.
- If risk for contractor is only his fee, then there will be an adverse effect on project.
- Risk is associated with outcomes with which probability can be associated.
4.4.3 Contract planning:
Following are the factors to decide number of contracts to be offered.
a. Specialty of the work e.g. design, supply, erection, etc.
b. Location of the work site e.g. fabrication at shop or site.
c. Value of the contract large or small.
d. Availability of contractor.
e. Need to accommodate local contractors.
f. Need to obtain performance guarantee for a system from a single party.
g. Concern for early completion.
h. Concern for top quality.
i. Current work load of the contractor and capability of the contractors.
j. Time schedule of the work.
k. Political pressure.
4.4.4 Tendering and selection of contractor:
- If the contractor selected for a specific work is not competent technically, financially, or
managerially, then the risk will multiply several times.
- To avoid this problem tendering procedure is adopted.
- A tender is an offer to carry out certain work or supply certain material or services in accordance
with clear detailed descriptions and conditions.
- Tendering procedure includes
Prequalification of contractors,
Preparation of tender documents,
Receipt of tender,
Guidelines for evaluation of tenders and selection of contractors.
1] Prequalification of contractors:
- Prequalification documents are issued in the press or to selected firms.
- This seeks information on,
the organization (contractors),
experience in the intended type of work,
availability of resources like managerial, technical, labour and plant, and
financial statement.
- Contractor has to give all above data to get qualify in prequalification phase.
- Inclusion of contractor for selection, usually depends on:
a. He has had similar experience earlier and his performance reports for previous contracts
are satisfactory.
b. His past turn-over and present financial commitments indicate no constraint on fund
availability for execution of the proposed contract.
c. He has the necessary infrastructure, adequate technical manpower, construction
equipment and his present commitments would not prevent him from executing the
proposed assignment satisfactorily.

37
d. His credibility in terms of his associates and associations with other agencies including
foreign agencies, job performance and relationship with customers are sound.
2] Preparation of tender document:
Tender document include following
a. Letter of invitation to tender,
b. instruction to tenders,
c. general conditions of contract,
d. Technical specification,
e. Special conditions of contract,
f. Scope drawings (explains work clearly),
g. Bill of quantities,
h. General information about site (location, soil characteristics, environmental conditions)
i. Form of tender.
A tender form for supply and erection of plant and machinery may cover the following items.
a. prices
b. Program
c. Term of payment
d. Conditions of contract
e. Contract price adjustment
f. Validity
This document is then issued to the short-listed contractors for submission of their tender.
3] Receipt of tender:
- The tenders may make a request to visit the site.
- Owner organization provides extra information if needed to the bidders at the site.
- There may be pre-bid conference to clarify the various issues to the bidders.
- Supplementary queries can be clarified through correspondence till the date for the bidding.
- On the due date bid may be opened in front of the bidders present.
4] Evaluation of tenders:
- The bidders are evaluated from technical, commercial, contractual and managerial angles.
- Confirmation and clarification may be sought from contractors on disagreed or not offered
matters by contractors.
- Normally, the lowest cost bidder who is also technically and managerially acceptable is
awarded the contract.
5] Agreement:
- Agreement is signed on a stamp paper.
- Agreement refers to the various documents which will together form the contract.
- These documents are
a. Original tender papers comprising the conditions of contract, specifications, date,
drawings, and relevant information.
b. Schedule of rates/prices, including these for engaging workmen, equipments, etc.
c. A list of deviation from original tender stipulations as mutually agreed upon between the
purchaser and the contractor after discussion.
d. Other relevant attachments.

************
Chapter 5: Project Scheduling
5.1 Project Implementation schedule:
- Schedule has to be realistic
- At the feasibility stage first schedule is prepared, which hardly contains realistic time data
- Same as cost, realistic time target can be arrived at only successively.
- Time is only directly dependent on volume of work as cost.
- Time can be bought with increased cost.
- Because of this feature accurate time estimation is not possible.
5.1.1 Time estimate:
1. Time study approach:
Time T for completing a work is,
Q
T
P n
=

Q =Total quantity of work,
P =productivity factor i.e. output per man-day using normal working method,
N =Normal size of crew.
- None of the data is easily available,
- Factors P & n cannot ascertain unless they are know from experience of past projects.
- Also Q can be estimated correctly only after a project has made substantial progress.
2. Previous project data:
It is used when data of..
i) same type of project is available,
ii) Project of similar complexity available.
iii) Foreign project of same type available
3. Guesstimating approach:
- Experienced project personnel guess the time.
- Guessing is of three type optimistic time (to),
Pessimistic time (tp) and most likely time (tm)
Expected time,
4
6
to tm tp
tc
+ +
=
4. Range estimate:
- Based on past experience, target is given in range.
- For example, vendors usually quote delivery time as 6-8 weeks.
5. Time taken vs. time required:
- Time required for remaining activities is calculated based on time taken by the past activities.
- This is also a guesstimating approach:
- But truly speaking, past data cannot provide a true estimate of time require.
Parkinsons law:
- Actual activity time always expands to consume the time allowed.
- It is general practice that activities will often starts late but almost never early.
- Estimates of activity time generally include a large safety margin. But this safety margin at each
activity does not help in achieving on-time completion.
- Its human nature that many of the people leave the project until the last possible minute. This is
called Student syndrome.
- For example if any assignment work is given to students with time limit. Most of the students start
working on task on the last date.
- This approach delays the activity, if any uncertainty arises.
6. Estimates from vendors & contractors:
- Vendors and contractors are asked to indicate time estimates.
38

39
- These estimates in a competitive situation are supposed to provide a realistic estimate.
- This approach may be disadvantageous when there is no competitive bidding. Vendors/
contractors may quote more time than the actual required.
7. Allocated & committed time:
- Time is allocated for particular activity and commitment obtained from implementing agency.

CAT Vs RAT
- CAT is Committed Activity Targets and RAT is Reserved Activity Targets.
- The RATs are the ones which must be achieved.
- The committed targets would be used for measurement of the progress of the executing
agencies.
- In simple way, RAT gives the maximum available time (with allowance) for particular activity,
whereas CAT gives allocated time or target time for that activity.
- RAT contains only key milestones

Fig.5.1: CAT and RAT

- CAT contains all important activities.
- Usually RAT schedule is not made public.
- If activities targeted with CAT delays beyond RAT them corrective action has to be done to
avoid major project delay.
- CAT & RAT schedules should be revised every time the cost estimates are revised.
- As project will progress, gap between CAT & RAT will reduce due to availability of realistic
time data.
5.2 PERT (Project Evaluation & Review Technique):
5.2.1 Definitions:
i) Event: - It is node in PERT diagram. It doesnt consume any time or resources.
ii) Activity: - It is shown by arrow in PERT diagram. This consumes time as well as resources.
iii) Parallel activities: - The activities which ends at same node or start from same node are called
parallel activities.
iv) Predecessor event: - The event which occurs before the event in focus is predecessor.
v) Successor event: - The event which immediately follows the event in focus is successor.
vi) Dummy activity: - Two activities go parallel and ends at same time and successor event can not
occur unless both the events are occurred.

Fig.5.2: Dummy activity

vii) Expected time or the average time: - It is addition of optimistic (t
O
), pessimistic (t
P
) and most
likely (t
m
) time. The formula for averaging is as below.
6
4
P m O
E
t t t
t
+ +
=
RAT
CAT
100
%

P
r
o
g
r
e
s
s

0
Time

40
5.2.2 General guidelines to draw network:
i) As far as possible avoid crossing of arrows. Crossing arrows create great confusion in
understanding the network when the network diagram is highly complex. But sometimes at
unavoidable circumstances crossing arrow should be used with jumpers.

ii) Do not bend arrows. Bending of arrow also add confusion in complex networks. Also it may give
impression of recycle as arrow may bend in opposite direction as shown below.

iii) Do not make infinite loop in network. This is bad network drawing practice. This should be
avoided completely, as this type of network doesnt have any meaning in project management. If
any infinite loop present in the network then there is a mistake in network drawing.

iv) Use minimal number of dummy activities. Unnecessary dummies create confusion and the
network becomes difficult to read.

5.2.3 General guidelines to number the events on network:
a. Number the event first at which no single arrow is terminating but all arrows are originating i.e.
this type of event is called as starting event. In further discussion under this topic we will refer this
type of event as starting event.
b. Now, remove all outgoing arrows from starting event.
c. Find new staring event(s). If there are many, then number from top to bottom of the page.
d. Follow the step b.
e. The last event is the event, at which arrow(s) are terminating but not originating.
5.2.4 Earliest Expected Time (EET):
- This is the earliest time at which event can start.
- This time can be calculated by adding expected time of preceding activity of that event in EET of
preceding event. If event in focus is starting event then EET is zero.

- When there are many routs preceding the event, then EET of that event will be maximum of
calculated from each route.

1 2 4
t
e
=4
A
t
e
=4
C
T
E
=0 T
E
=4 T
E
=8
6
3 5
t
e
=2
E
t
e
=2

F
t
e
=8

B
t
e
=1

G
t
e
=8

D
T
E
=8 T
E
=12
T
E
=14
1 2 3
t
e
=4
A
t
e
=6
B
T
E
=0 T
E
=4 T
E
=10
Incorrect method Correct method

41
5.2.5 Latest (allowable) Occurrence Time (LOT):
- This is the latest time by which an event must occur to keep the project on schedule.
- This time is calculated in backward direction on network diagram.
- If you subtract Expected time (t
E
) of succeeding activity from LOT (T
L
) of succeeding event or
maximum time allowed (T
s
) if succeeding event is end of project, then resultant is T
L
for that
event.

- If there are two or more routes after the event in focus then T
L
for that event is the minimum one.

5.2.6 Slack:
- It is difference between latest occurrence time and the earliest expected time of same event.
- Slack refers to the event.
- Slack represent the maximum allowance for delay in the event without distributing the overall time
schedule.
Slack, t
S
=T
L
T
E

5.2.7 Time scaled network/ Squared network/ Activity-time schedule:
- Network is drawn with scaled arrow i.e. length of the arrow represents the time of the activity.
Bending of the arrow is allowed but only in 90.
- Dotted line is used for slack as well as for dummy activity. This is the advantage of this network,
which also indicates the margin time available for activity if any.
- Example:

Fig.5.3 Time scaled network
5.2.8 Critical Path:
- The path with event having minimum or zero slack is called critical path.
- The events lying along this path are critical in the sense that their occurrence can not be delayed
if the scheduled completion time is to be met.
Event EET LOT Slack
1 0 0 0
2 3 3 0
3 5 8 3
4 13 13 0
5 17 17 0
1 2 4
t
e
=3
A
t
e
=10
B
T
L
=0 T
L
=3 T
L
=17 =T
S
5
t
e
=4
B
T
L
=13
3
t
e
=2

C
t
e
=5

D
T
L
=8
T
E
=5
T
E
=13 T
E
=3 T
E
=0 T
E
=17
0 5 10 15 2 0
1 2 4 5
3
1 2 4
t
e
=3
A
t
e
=10
B
T
L
=0 T
L
=3 T
L
=17 =T
S
5
t
e
=4
E
T
L
=13
3
t
e
=2

C
t
e
=5

D
T
L
=8
T
E
=5
T
E
=13 T
E
=3 T
E
=0 T
E
=17
1 2 4
t
e
=4
A
t
e
=4
C
T
L
=0 T
L
=4 T
L
=13
6
3 5
t
e
=2
E
t
e
=2

F
t
e
=8

B
t
e
=1

G
t
e
=8

D
T
L
=10 T
L
=12
T
L
=14 =T
S
1 2 3
t
e
=4
A
t
e
=6
B
T
L
=0 T
L
=4 T
L
=10 =T
S

42
- Example:

Fig.5.4 Critical path
5.3 Critical Path Method (CPM):
- It is activity based method. All the study is based on activity instead of event.
- It gives more clear idea about time margin available for any activity and its effect on other
activities and complete project.
- More calculations are to be done compare to PERT.
- The time margin for any activity is called as float, which is similar concept like slack.
- There are three types of float. To calculate float, some basic definitions should be known.
i) Earliest Start Time (EST): This is the earliest occurrence time for the event from which the activity
arrow originates i.e.
ij i
E
EST T =
.
ii) Earliest Finish Time (EFT): This is the earliest occurrence time for the event from which the
activity arrow originates plus the duration for the activity i.e. ( )
ij i ij
E
EFT T t = + .
iii) Latest Start Time (LST): This is the latest occurrence time for the node at which the activity arrow
terminates minus the duration of the activity i.e.
ij j ij
L
LST T t = .
iv) Latest Finish Time (LFT): This is the latest occurrence time for the node at which the activity
arrow terminates i.e.
ij

j
L
LFT T =
- The total duration of time available for any job is the difference between its EST and LFT. i.e.
Available Time
j i
L E
T T =
- Maximum time available of activity for ij
j i
L E
T T =
- Float =Available time Activity duration
i) Total float: It is difference between maximum available time and activity duration.
( )
( )
ij j i ij
L E
j ij i
L E
i i
TF T T t
T t T
LST EST
=
=
=

ii) Free float: It assumes all activities starts as early as possible.
( )
ij j i ij
E E
FF T T t =
iii) Independent float: It is the time of flexibility available when all preceding events have occurred at
the latest possible time and all the future events occur at the earliest possible time.
( )
ij j i ij
E L
IF T T t =
5.4 Project cost analysis:
- Normally project is analysed for two type of times crash and normal.
- Cost associated with time is plotted for crash to normal time region.
- Usually it is assumed that in this region cost and time relationship is linear.
- Reduction in time reduces the total indirect cost but increases total direct cost. Because of this a
total project cost goes through minima i.e. optimum value.

Fig.5.5: Project cost analysis
Time
C
o
s
t

Normal
Crash
Slope of assumed
relationship
C
T
A
=
A

Time
Direct costs
Indirect costs
Total costs
C
o
s
t

Normal Crash Optimum
1 2 4
t
e
=3
A
t
e
=10
B
T
L
=0 T
L
=3 T
L
=17 =T
S
5
t
e
=4
E
T
L
=13
3
t
e
=2

C
t
e
=5

D
T
L
=8
T
E
=5
T
E
=13 T
E
=3 T
E
=0 T
E
=17
Critical Path

43
5.4.1 Crashing of Network:
We will see crashing of network with following example.

Indirect cost =Rs. 160/- per day.
Normal Crash Activity
Time, days Cost, Rs. Time, days Cost, Rs.
A 3 360 2 400
B 6 1440 4 1620
C 9 2160 5 2380
D 7 1120 5 1600
E 8 400 4 800
F 5 1600 3 1770
G 3 480 2 760
Steps:
i. Find cost slope
C
T
A
A
i.e. increase in cost due to decrease in time and maximum reduction in
time allowed for each activity.
E.g. for activity A (max. reduction) = 3 2 = 1, T A C A = 400 360 = Rs. 40/-
, . 40/
C
Slope Rs per day reduction
T
A
. =
A

ii. Now find out the slopes which are less than the indirect cost on critical path at normal time.
Critical path: A-B-E-F-G and indirect cost is Rs. 160/- per day.
Activity Slope,
Rs./day
A 40
B 90
C 55
D 240
E 100
F 85
G 280

iii. Now, reduce the time for these activities which will reduce the overall cost because the net
reduction in cost is indirect cost minus direct cost.
iv. While reducing time be careful about noncritical activities as these may get converted into critical
or subcritical one. While reducing time use squared net as it helps to indicate limits on reduction.
- So reduce time of A, B, E, and F.
But here while reducing activity E, activity C becomes critical one.
New time for B 4 days
New time for E 4 days
For B-E 8 days
This is less than the time for activity C which is parallel to B-E. So, maximum time reduction for
activity E should be 3 days. (Minimum reduction should be done for maximum slope).
- Now reduce the time for E we have to crash C also. Therefore we will reduce time for C by one
day as the maximum reduction for E is now one day.
- Now, increase in cost due to reduction in time. And decrease in cost is due to decrease in indirect
cost, which is proportional to the time.
Activity Cost slope
(Rs/day)
Duration
reduced
(day)
Cost increased
(Rs)
A 40 1 40
F 85 2 170
B 90 2 180
E 100 3 300
E and C 100+55 1 155
Total 9 845
Total decrease in cost due to indirect cost = 9160 = Rs. 1440/-
Net decrease in cost of project = 1440 845 = Rs. 595/-
1 2
4
t
e
=3
A
t
e
=9

C 6
3
5
t
e
=8

E
t
e
=5

F
t
e
=6

B
t
e
=3

G
t
e
=7

D
5.5 Gantt Charts:
- The chart consists of a horizontal scale divided into time units, and a vertical scale showing
project work elements.
- The starting and completion times of jobs are indicated by the beginning and ending of each bar.
- Preparation of Gantt chart comes after a WBS analysis.
- Work elements are listed in sequence of time taking into account which elements must be
completed before others can be started.
e.g.
Activity Duration (Weeks)
H 10
I 8
J 6
K 4
L 2
M 4
N 4
O 5
P 5
Predecessor Successor
H I, J
J K, L, M
I N, O, P

0 5 10 15 20 25
Weeks
H
I
J
K
L
M
N
O
P

Fig.5.6: Gantt chart

5.5.1 Advantages:
a. Any level of work can be scheduled depending on the level of details desired.
b. it gives a clear pictorial model of the project.
c. It is easy to construct and, for everyone else in the project, easy to understand.
d. After the project is underway the Gantt chart becomes a means for assessing the status of
individual work elements and the project as a whole.
e. This is particularly effective for showing which elements are ahead of or behind schedule.
For example, Gantt chart for project showing work-progress on 15
th
week.

0 5 10 15 20 25
Weeks
H
I
J
K
L
M
N
O
P
Completed work Incomplete work

Fig.5.7: Gantt chart: Work progress on fifteenth Week

44
5.5.2 Disadvantages of Gantt chart:
a. It does not explicitly show interrelationships among work elements, meaning that it does not
reveal the effect of one work element falling behind schedule on other elements.
b. Gantt charts alone provide no way of distinguishing elements that can be delayed from those that
can not.
c. Manual maintenance of Gantt chart is burdensome for large project, so computerized method has
to be adopted.

****************************

45

46
Chapter 6: Project Monitoring & Control
6.1 Material Management:
- Functions of material management are
a. Checking of material on arrival,
b. Recording the receipt in the engineering documents with location details,
c. Storage on site, handling and retrieval,
d. Risk management,
e. Rectifications, repairs and replacements.
f. Make it at the site,
g. Inventory control,
h. Wastage and damage during usage/erection,
i. Owners supplies to contractors,
j. Transfer to general maintenance stock,
k. As-built material record.
6.2 Inventory Control:
An efficient inventory control system shall have the following components,
- Timely procurement of the materials to reach the site just in time, as far as possible.
- Care and control over the stock including,
- Proper accounting,
- Safe storage as per technical requirement,
- Watch and ward,
- Fire prevention and fire fighting,
- Periodic checking and verification,
- Special care of costly items,
- Checking on malpractices,
- Material movement analysis and disposal of non-moving items,
- Timely attention to repairs needed,
- Economical disposal of scrap and surplus,
- Insurance,
- Information on sources for speedy replacement, even at higher cost,
- Workshop facilities at the site for rectifications and,
- Repairs and to the possible extent, making the items needed.
6.2.1 ABC Analysis:
- ABC analysis is a technique of sorting out the materials on the basis of the value of materials and
taking better care of the more expensive ones.

ABC Analysis
0
10
20
30
40
50
60
70
80
90
100
0 10 20 30 40 50 60 70 80 90 100
% of Total Value
%

o
f

T
o
t
a
l

V
o
l
u
m
e

Fig.6.1: ABC analysis

- The items on which the enterprise spends the maximum money need the most care.
- Some high value items constitutes major portion of total value of inventory even the volume is
least. These items are categorised as A.
- Moderate value items may constitute same value as that of volume, which are labelled as B.
A
B
C

47
- Some bulky materials with low cost constitute more volume compare to value; these are labelled
as C.
- More attention has to pay towards A as it contributes more cost.
6.3 Value Engineering and Design (VED) Optimisation analysis:
- Value engineering or value analysis is a form of cost reduction effort in projects through design
optimisation.
- The basic function of value engineering is to reduce the cost of projects as well as end products
through design optimisation that is by designing just what is necessary to meet the defined
function.
- VED is varied out through a team or a committee constituting of representatives of all the
department concern to projects. These departments may include: Project engineering, R&D,
production, marketing, materials, finance, and quality control.
- The VED committee approaches design with two sets of questions.
- The first set
i. What is this project?
ii. What are its functions?
iii. What should it cost?
iv. What are its essential technical requirements?
- Second set
i. Is the project design just to an actual requirement or is there an overdesign?
ii. Are the equipments and materials just the right ones or overvalued?
iii. Are there any nonessential or even non-functioning frills and glitters in the design of both
the project and the end product and if so, what will be the market impact if those
expensive features are removed?
iv. Without the frills and glitters will the project and/or the product meet the functional need
which is the design objective?
v. Are there excess raw materials and other inputs over the essential requirements going
into the product and if so, how to eliminate such excess?
vi. Can the process be changed for cost effectiveness?
vii. Can imported components or raw materials be reduced?
viii. Can customer satisfaction be increased without value increase?
ix. Value-wise, how are the project and the end-product comparable with those of the
competitors?
x. In what other manner can the design be simplified, without sacrificing required quality?
- The VED committee members may visit one or two completed projects and examine them closely,
with the view to identifying the nonessential features in them.
- Design to cost is a concept in value engineering to build a plant or produce goods or generate
services at a predetermined cost. This is achieved through repeated iterations of designs.
- Care should however be taken to ensure that design economy does not weaken the project.
6.4 Time and Cost control Tools and Techniques:
- Time and Cost (TC) control is required to ensure successful execution of the project without any
time and cost overruns.
- The first major task in TC control is to plan and breakdown the project into WBS and to develop
master schedule, and also master budget. These two are the major tools to control the TC of the
project.
- From master schedule and master budget, detailed schedules of time and resources are
prepared. This detailed schedule is then integrated with project groups, agencies, departments.
- Detailed schedules include the following:
i. Master time schedule,
ii. Engineering time schedule,
iii. Procurement time schedule,
iv. Fabrication time schedule,
v. Construction time schedule,
vi. Commissioning time schedule,
vii. Schedule of contracting,
viii. Integrated schedules of critical equipment, bulk material and other equipments with time-
phased budgeted cost.
ix. Crashing economy analysis.
- With these schedules other tools for TC control are
i. Progress report,
ii. Repeatedly reviewed and updated completion forecast,

48
iii. Targets of percentage completion per project day/week/month, aimed at achieving the
overall schedule,
iv. Total project cost per project man-hour, day and engineering man-hour.
v. Total project cost till the achievement of every important milestone.
vi. Work force team composition norms,
vii. Productivity norms for different activities and categories of work,
viii. Material consumption norms per construction activity,
ix. Unit coat for every activity,
x. Individual equipment cost,
xi. Storage space requirements with separate figures for covered and open areas,
xii. Progress build-up curves for...
a. Total project,
b. Engineering, design and drafting,
c. Purchase ordering,
d. On-site deliveries of equipments and materials,
e. Construction.
- Fund flow curve,
- Statistical curves for past performance and trend curves for predicted performance,
- Ratios of various activity costs with total project cost,
- Reports on
i. Progress status,
ii. Cost status,
iii. Bottlenecks and constraints,
iv. Cost trends,
v. Change control and contingency run-down,
vi. Overall performance.
6.4.1 Schedule control:
- The intent of schedule control is to keep the project on schedule and minimize the schedule
overruns.
- One cause of project schedule overruns is poor planning and especially poor definition and time
estimation.
- But sometimes some unavoidable reasons, rather uncontrollable reasons like weather problems,
interrupted shipments of material; keep the project behind the schedule.
- Other more controllable causes of schedule overruns are as follows:
6.4.1.1 Multitasking:
Working on many tasks or projects diverts the attention of person causing some tasks to be delayed.
e.g. a contractor has three independent projects X, Y, and Z, each of which are anticipated to take 10
weeks to complete; further, assume that the contractor is anxious to finish all of them as soon as
possible.

Instead of giving any project priority, the contractor divides each into small pieces so that, in a sense,
work on all three can occur at the same time. If the project were scheduled sequentially, without
interruption, and if X was given top priority, Y secondary importance, and Z last place, then project
X could be finished at week 10, project Y at week 20, and project Z at week 30.

However, when the projects are broken up into smaller pieces, say in 5 weeks periods so that work
alternates among projects, then the elapsed time for each of the projects becomes 20 weeks.

Fig.6.2: Multitasking
Z X Y
X
Y
Z
10 20 30

49
6.4.1.2 Procrastination:
Given a choice between two schedule times, one early and one late, the human tendency is to wait
until the late time to begin. This of course automatically eliminates any slack time for a task, puts it on
the critical path, and increases the likelihood of project delay.
6.4.1.3 Task Variability:
Time to complete task is variable: some task will be completed sooner than expected; other later. In
project, however, the effect of early task and late task on the project schedule does not average out,
and it is only the late task that counts.

For example, a task takes 8 days to complete. If the task is actually completed in 10 days, the 2 day
delay will be passed on to succeeding tasks. If however the task had been completed in 6 days, the 2
day saving usually will not be passed on to succeeding tasks because they are not scheduled to start
until day 8.
6.4.2 Cost control:
- Project cost control has to be based on commitment and actual spending (or accrual) with
reference to the project budget.
- Cost control by commitment is necessary to control the cost at the commitment stage of
purchases and contracting.
- An effective cost control by commitment on purchases and contracting will take care of about 70%
of the project cost. A further 10-15% approximately will be controlled by the project engineering
department through engineering man-hours control. The remaining 15-20% overhead cost shall
be controlled as follows:
- Salaries by cost related man-days control. If the man-days or project time overruns, then the
manpower cost would correspondingly exceed the budget.
- Other expenses by cost related project-months elapsed. If the project time overruns, then the
time related overheads also would overrun.
6.4.3 Fund flow control:
- During implementation, fund flow should be ensured inline with the current short term schedules
within the overall master schedule.
- While dealing with fund flow it should be ensured that the required funds are available in time and
the interest cost is kept is kept to the minimum.
- If required frequency of review of fund flow plan should increase, to make definite arrangement for
funds for the work to continue as planned.
- Fund constraints are mostly delay the project.
6.5 Economic Order Quantity (EOQ):
The inventory problems in which demand is assumed to be fixed and completely predetermined are
usually referred to as the economic order quantity.

Fig.6.3: Economic Order Quantity (EOQ)
6.5.1 EOQ problem with no shortages:
Assumptions:
a. Demand is known and uniform.
b. Q denotes the lot size in each purchase and D denotes the total number of units purchased or
supplied per time period.
c. Shortages are not permitted. Thus the costs of shortage assume to be infinite.
No. of units
Ordering costs
Inventory carrying costs
Total costs
C
o
s
t


50
d. Supply of commodity is instantaneous (abundant availability).
e. Lead time is zero.
f. Procurement cost is C
s
.
g. Holding cost is C
1
per unit in inventory for a project i.e. C
1
=IC, where C is the unit cost, I is
called inventory carrying charges expressed as a percent of the value of the average inventory.

Fig.6.4: EOQ with no shortage

Let, n is the total number of runs of the quantity purchased (Q) during the year.
Q n D
t n T or
t n
=
=
=

1
. if time span is other than one year.
Total units purchased per year =no. of runs x lot size
Average inventory = Q .. (i.e. any time inventory)
Annual inventory holding cost =avg inventory x holding cost/inventory
1
2
1
) ( QC Q f =

Annual inventory associated with runs of size Q are given by,
( ) . cos
S S
g Q no of runs purchase t
D
n C C
Q
=
= =

Thus the total annual cost is given by,
1
2 1
( ) ( )
T
S
C f Q g Q
D
Q C C
Q
= +
= +

At minimum total cost
( )
0
T
d C
dQ
=
at i.e. optimum inventory purchase
O
Q Q =
1
2 1 2
T
S
dC D
C C
dQ Q
=
At
O
Q Q =
1
2
O S
DC
Q
C
=

- Optimum number of orders placed per year,
1
2
O
O
S
DC D
n
Q C
= =

- Optimum length of time between orders,
1
2
O S
O
C
T
t T
n
DC
= =

If T is one year.
1
2
O S
C
t
DC
=
- Minimum total annual inventory cost
1
2 1
1
2
O O S
T O
O
T S
DC
C Q C
Q
C DC C
= +
=

Average inventory
Time
I
n
v
e
n
t
o
r
y

t
Q

51

- If carrying cost is given as a percentage of average value of inventory held, then total annual
carrying cost may be expressed as,
1
C C I =
Therefore total inventory cost,
1
2
S
T
DC
C Q C I
Q
= +

Therefore optimum order quantity,
2
O S
DC
Q
CI
=

Example-1: An oil engine manufacturer purchases lubricants at the rate of Rs. 42 per can from a
vendor. The requirement of these lubricants is 1800 cans per year. What should be the order quantity
per order, if the cost per placement of an order is Rs 16 and inventory carrying charge per rupee per
year is only 20 paisa?
Ans:
D= annual requirement of an order in rupees
= 1800 42 =75,600 Rs/yr
C
S
= 16 Rs/order, C
1
= 0.2 Rs/Re-yr
2 75600 16
34776/
0.2
O
Q Rs

= = order

Thus at the price of Rs 42 per lubricant can the optimum inventory quantity of lubricant cans
is
34776
83
42
Rs order
cans order
Rs can
=

Example-2: A manufacturing company purchases 9000 parts of a machine for its annual
requirements, ordering one month usage at a time. Each part costs Rs 20. The ordering cost per
order is Rs 15 and the carrying charges are 15% of the average inventory per year. You have been
assigned to suggest a more economical purchasing policy for the company. What advice would you
offer and how much would it save the company per year?
Ans:
D= 9000 parts/yr C
S
=15 Rs/order
C
1
= 15% of average inventory
= 0.15 20 = 3 Rs/part-yr
1
1
30
2 2 15 9000
300
3
9000
30
300
1
O S
O
O
O
O
C D
Q units
C
D
n
Q
t year
n

= = =
= = =
= =

Minimum average yearly cost =
1
2
S
DCC
= Rs 900/-
If company follows the policy of ordering every month then annual ordering cost is
12 15 = Rs 180
And lot size of inventory, each month = 9000/12 =750 parts
average inventory at any time = Q = 750/2 =375 parts
storage cost at any time = 375 C
1
= Rs 1125/-
total annual cost = 1125 + 180 = Rs 1305/-
Net annual saving = 1305 900 = Rs 405/-
6.5.2 EOQ problem with no shortage and unequal purchase runs:

Fig.6.5: EOQ with no shortage and unequal purchase runs
Average inventory
Time
I
n
v
e
n
t
o
r
y

t
3
Q
t
2
t
1

52
1 2 3
........ 1
n
t t t t yr + + + + =
Annual inventory holding cost,
1 1 1
2 2 2 1 1 2 1
1
2 1 1 2
1
2 1
( ) ( ) ( ) ........ ( )
( ........ )
n
n
1
f Q Q t C Q t C Q t
QC t t t
QC
= + + +
= + + +
=
C

Annual purchase cost,
( )
S S
D
g Q nC C
Q
= =

Total annual cost,
1
2 1
( ) ( )
T
S
C f Q g Q
D
QC C
Q
= +
= +

Optimum quantities are same as in described in section 6.5.1, i.e.

1
2
O S
DC
Q
C
=
and
1
2
O
T
C DC =
S
C
If total time is T instead of one year, then
1
2
O S
DC
Q
CT
=
and
1
2
O S
T
DCC
C

T
=
6.5.3 EOQ with shortage
- Here we assume, as soon as the desired units of a certain commodity arrive in inventory, the
back orders are satisfied first.
- Let C
2
be the shortage cost per unit time per unit quantity.

Fig.6.6: EOQ with shortage

1 2
1 n t
t t t
=
= +

- During the interval t
1
the items are drawn from the inventory as needed and during t
2
orders for
the items are being accumulated but not filled.
-
1 2
Q = + , where Q
1
denotes the amount which goes into inventory and the Q
2
denotes the
amount which is immediately taken to satisfy past orders or unfilled demand.
Q Q

Total inventory over the time, t
1
2 1 1
Qt =

Average inventory at any time
1
2 1 1
( ) Qt t / =

Annual inventory holding cost
1
2 1 1 1
( ) C Qt /t =

Total amount of shortage over time, t
1
2 2 2
Q t =

Annual shortage cost
1
2 2 2 2
( ) C Q t /t =

Purchase cost
D
Q S S
nC C = =

Total cost,
1 1
2 2 1 1 1 2 2 2
( )/ ( )/
T S
D
C C Qt t C Q t t C
Q
= + +

For similar triangle,
1 1 2 2
t Q t Q
t Q t Q
= = &

Average inventory
Time
t
Q1
I
n
v
e
n
t
o
r
y

t1
t2
Q2
Q

53
1 2
1 2
2 2
1 1
1 1
2 2 1 2 2
&
( )
since
T S
Q Q
t t t t
Q Q
Q Q Q D
C C C C Q Q
Q Q Q
= =
| | (
= + + =
| (
\ .
1
Q

For determining the optimum values of Q
1
and Q so as to optimize C
T
,
2
1
1 1
2
2 1 1
1
2
0
( )
2
0
T
S T
C C Q
Q
Q C C
C D C Q C
Q Q
Q C
c
= =
c +
+ c
= = +
c
2

And
2 2
2 2
1
( ) ( )
0, 0
T T
C C
Q Q
c c
>
c c
>
for these values of Q
1
and Q

1 2
1 2
2 2
1
1 2 1 2 1
2
1
1 2
2 ( )
2
2
O S
O O S
O
O
O
T S
C D C C
Q
C C
C D C C
Q Q
C C C C C
Q
t
D
C
C DC C
C C
+
=
| |
= =
|
+ +
\ .
=
=
+

Reorder level,
2
2 1
1 2
1
1 2
1
O O O O
O
C
Q Q Q Q
C C
C
Q
C C
| |
= =
|
+
\ .
| |
=
|
+
\ .

Remarks:
1. If C
1
>0 and
2
C =
, shortages are prohibited.
2. If
1
C =
and C
2
>0, inventories are prohibited and each batch is used only to fill back-
orders.
3. When C
1
=C
2

1 1
2
2 2
O S S
C D C D
Q
C C
= =

Example-3: A commodity is to be supplied at a constant rate of 200 units per day. Supplies of any
amounts can be had at any required time, but each ordering costs Rs 50/-, cost of holding the
commodity in inventory is Rs 2.00 per unit per day while the delay in the supply of the item induces a
penalty of Rs 10/- per unit per delayed day. Find the optimal policy (Q and t), wheret is the reorder
cycle period and Q is the inventory level after reorder. What would be the best policy, if the penalty
cost becomes infinite?
Ans:
D=200 units/day C
S
= Rs 50/- per order
C
1
=Rs 2.00 per unit/day C
2
=Rs 10.00 per unit/day
1 2
1 2
1
2
2
109.5
109.5
200
O S
O
O
DC C C
Q units
C C
Q
t day
D
+
= =
= = =

This shows that the optimum order quantity of 109.5 units must be supplied after day.
If C
2
=,
1
1
2
2 2 50 200
100
2
O S
O
O
C D
Q units
C
Q
t day
D

= = =
= =


54
6.6 Commissioning:
- Commissioning is defined as activities performed for the purpose of verifying the capacity of the
project to function as designed. Commissioning is, therefore, called also functional tests.
- Tests are done under the guidance of the designers and equipment suppliers commissioning
experts.
- Tests are carried out before preliminary take over of the erected plant or equipments.
- Commissioning may include the initial operation or trial production.
6.7 Start-up:
- Start-up follows the commissioning and initial operation.
- This is long activity span from the initial trial production to the acceptable designed capacity, both
quantity-wise and quality-wise.
- This activity also done under experts supervision and as per instruction contained in the
commissioning manual.
- Start-up may end with guarantee test. Guarantee test shall prove the designed capacity of the
plant or facility.
- Usual practice of guarantee test is 3 days continuous operation at full designed capacity,
preceded by 11 days operation at 50% or more capacity. Generally, an effective 85% overall
output is accepted without imposing penalties on the supplier/turn key contractor for shortfall in
output.
- In matter of quality there shall be no relaxation.
- Guarantee test procedure has to be specified in technical specification as well as in
commissioning manual.
6.8 Stabilisation:
- This is the period between guarantee test and normal operation. This period covers the activity
necessary to establish reliable operation at design conditions of capacity, product quality and
efficiency.
- Stabilisation of total operations management should be included in the scope of this activity.
6.9 Close-out:
Close-out is process of
i) final take-over of the constructed and tested project from the contractors and handing it
over to the operations department,
ii) completing the project records, accounts and technical documentation on as-build
condition,
iii) submitting final report to the top management on the project achievement with reference
to the project objectives and project cost budget,
iv) giving account to the funding institutions,
v) capitalisation of the actual project cost,
vi) preservation of project documentation for future reference,
vii) disbanding the project organization.
- The contract close-out shall cover closing of the accounts with contractors and vendors.
- Financial close-out shall cover payment of contractors bills, material account, accounting with
financial institution.
- After the completion of close-out activities, the project organization shall be disbanded.
- Nonhuman resources may be partly transferred to the maintenance department and partly to
other projects.

*********************

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