Project Management (MBA 592)

Chapter One
Overview of Project Management

St. Mary’s University 1

What is a Project?

• A project is
• a one-time, multitask job with a definite starting point, definite ending point,
• has clearly defined scope of work, a budget, and usually a temporary team.

• A project is a problem scheduled for solution

• It is defined as a unique set of co-ordinated activities, with definite

starting and finishing points, undertaken by an individual or
organization to meet specific objectives within defined schedule, cost
and performance parameters.’

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 Cont...
• It is a temporary endeavor undertaken to create unique product or service
• Thus, projects are designed to bring about a product, service, or result that
didn’t exist before.

• Projects are temporary in nature and have definitive start dates and
definitive end dates. Thus, a project is completed when its goals and
objectives are accomplished to the satisfaction of the stakeholders.

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Cont...

• Sometimes projects terminate when it’s determined that the goals

and objectives cannot be accomplished or when the product, service,
or result of the project is no longer needed.

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 Cont...
 A project is also defined as a sequence of unique, complex, and inter-
connected activities having one goal or purpose and that must be
completed by a specific time, within budget, and according to
specification.

 A project is a proposal consisting of collection of activities performed to

achieve a specific purpose so as to get benefits that exceed costs.

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Important concepts in the definition a project

1. Sequence of activities: a project is comprised of a series of

activities that are follow one after the other
2. Unique activities: activities in a project are typical to the
project
3. Complex activities: The activities that make up the project
are not simple and repetitive actions
4. Connected activities: logical or technical relationship
between pairs of activities.
5. Specific goal: the goal of a particular project is specific to it.
Multipurpose projects are normally called programs.
6. Specific duration/completion time
7. Within a budget
8. According to specification

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Important Characteristics of a Project

1. It has established objectives.

2. It has a defined life span with a beginning and an end.
3. Usually, it involves several departments and professionals.
4. It involves typically doing something that has never been done
before (Novel).
5. It has specific time, cost, and performance requirements.

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Cont...

Unique: accomplishment of specific purpose

Specific deliverable in terms of outputs
Specific due date
Multidisciplinary in nature (involves different types of
professionals)
Complex in nature (activities are not routine)
Conflict
Part of programs
Needs capital and commitment of other resources
Collection of activities that generates benefits in the
long run
Associated with risk and uncertainty
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What is not a project?

Projects should not be confused with everyday routines. A project is

different from daily routines that involve repetitive work!
Ordinary daily work typically requires doing the same or similar
work over and over, while a project is done only once; a new product
or service exists when the project is completed.

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 Comparison of daily Routine Work with Projects

Routine, Repetitive Work Projects

 Taking class notes  Writing a term paper
 Responding to a supply-chain  Developing a supply-chain information
request system
 Routine manufacture of an Apple  Designing an iPod that is approximately 2 X
iPod 4 inches, interfaces with PC, and stores 10,000
 Attaching tags on a manufactured songs
product  Wire-tag projects for Wal-Mart

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 Program versus Project
In practice the terms project and program cause confusion. They are often used
synonymously.
A program is a group of related projects designed to
accomplish a common goal over an extended period of
time.
Each project within a program has a project manager. The
major differences lie in scale and time span.
A program is defined as a group of related projects,
which may include related business-as-usual activities that
together achieve a beneficial change of a strategic nature
for an organisation.
It is a group of related projects managed in a coordinated
way to obtain benefits. Programmes may include elements
of related work outside the scope of the discrete projects in
a programme
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Cont...

A programme is also defined as a temporary flexible organisation

created to coordinate, direct and oversee the implementation of a set
of related projects and activities in order to deliver outcomes and
benefits related to the organisation’s strategic objectives.
A programme is likely to have a life that spans for several years.
Program management is the process of managing
a group of ongoing, interdependent, related projects
in a coordinated way to achieve strategic objectives.

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Portfolios Vs Programmes

Portfolios are collections of programs and projects that support a

specific business goal or objective.
Let’s say consider a company in the construction business. The
company may have several business units such as retail, single-family
residential, and multifamily residential.
Each unit may have different projects that are inter-related, which will form a
programme but different from the projects in other units.
Collectively, the projects and the programmes within all of these business
units make up the portfolio.

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Project, Programme and Portfolio

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Cont...

Programs and projects within a portfolio are not necessarily related to

one another in a direct way.
However, the overall objective of any program or project in this
portfolio is to meet the strategic objectives of the portfolio, which in
turn should meet the objectives of the department and ultimately the
business unit or corporation.

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Cont...

Programs are collections of related projects.

Portfolios consist of programs, projects, and other
portfolios that meet a business objective.
Projects or programs within a portfolio are not
necessarily related or dependent on each other.

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 Types of Projects
The principal identifying characteristic of a project is its novelty. It is a
step into the unknown, which is fraught with risk and uncertainty.
No two projects are ever exactly alike: even a repeated project will differ
from its predecessor in one or more commercial, administrative or physical
aspects.

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18
Cont...

Project Type 1: civil engineering, construction,

petrochemical, mining and
quarrying
These types of projects:
 incur special risks and problems of organization.
they may require massive capital investment, and they
deserve (but do not always get) rigorous management of
progress, finance and quality.
operations are often hazardous so that health and safety
aspects demand special attention, particularly in heavy
work such as construction, tunnelling and mining.
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Cont...

Project Type 2: Manufacturing

Manufacturing projects result in the production
of a piece of mechanical or electronic
equipment, a machine, ship, aircraft, land
vehicle, or some other product or item of
specially designed hardware.
The finished product might be purpose-built for
a single customer but internal research and
development projects for products to be sold in
all market sectors also fall into this
manufacturing category.
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 Cont...
Project Type 3: IT projects and projects associated with
management change
Every company, whatever its size, need this type of
project at least once in its lifetime.
These are the projects that arise when companies engage
in operations that involve the management and
coordination of activities to produce an end result that is
not identifiable principally as an item of hardware or
construction. This may happen when:
companies relocate their headquarters,
restructure the organization,
develop and introduce a new computer system,
launch a marketing campaign,
produce a feasibility or other study report, and
prepare for a trade exhibition.
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 Cont...
Project Type 4: Pure scientific research projects
Pure scientific research projects (should not be confused with
research and development projects) are truly a special case. They
occasionally result in dramatically profitable discoveries.
They can consume vast amounts of money over many years, yet
yield no practical or economic result.
They carry the highest risk because they attempt to extend the
boundaries of current human knowledge.
The project objectives are usually difficult or impossible to
define and there may be no awareness of the possible outcome.
Therefore, pure research projects are not usually amenable to the
project management methods that can be applied to industrial,
manufacturing or management projects. 22
 Project Management
Project Management is the application of knowledge,
skills, tools and techniques to project activities to meet
project goals.
It is the application of a set of principles, methods, and
techniques to effectively plan and control a project
work.
Project management is the discipline of planning,
organizing and managing resources to bring about the
successful completion of specific project goals.
It is accomplished through the application and
integration of the project management processes of
initiating, planning, executing, monitoring and
controlling, and closing.
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 Cont...
Project management establishes a sound basis for effective planning,
scheduling, resourcing, decision-making, controlling, and re-planning.
Project management principles and techniques help complete projects on
schedule, within budget, and in full accordance with project specifications.
At the same time, it helps to achieve other goals of the organization, such
as productivity, quality, and cost effectiveness.
The objective of project management is to optimize project cost, time, and
quality.

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 Cont...
Project management is the application of modern management
techniques and systems to the execution of a project from start to finish,
to achieve predetermined objectives of scope, quality, time and cost, to
the equal satisfaction of those involved.

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The Balance Quadrant

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 Benefits of Project Management
1. Clear Objective
2. Risk Assessment
3. Milestones
4. Resource Allocation
5. Task Dependencies
6. Communication
7. Avoid Scope Creep
8. Client Appreciation

 Your team will know what’s going on and what is expected of

them. With clear objectives, scheduled milestones and a detailed
task list , there should be no confusion about who is to do what.

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 Skills needed by Project Managers
Project managers accomplish work through the project team and other stakeholders.
Effective project managers require a balance of ethical, interpersonal, and
conceptual skills that help them analyze situations and interact appropriately.
Therefore, Project Managers require:
 Leadership,
 Team building,
 Motivation,
 Communication,
 Influencing,
 Decision making,
 Political and cultural awareness,
 Negotiation skills
 Trust building,
 Conflict management, and
 Coaching.
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Project Management Vs General Management
General management
• Responsible for managing the status
quo
• Authority defined by management
structure
• Consistent set of tasks
• Responsibility limited to their own
function
• Works in 'permanent' organisational
structures
• Tasks described as 'maintenance’
• Main task is optimisation
• Success determined by achievement of
interim targets
• Limited set of variables
Project management
• Responsible for overseeing change
• Lines of authority fuzzy/unclear
• Ever-changing set of tasks
• Responsibility for cross-functional
activities
• Operates within structures which exist for
the life of the project
• Predominantly concerned with innovation
• Main task is the resolution of conflict
• Success determined by achievement of
stated end-goals
• Contains intrinsic uncertainties
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Project Cycle

From initiation/authorization to completion/closure, a project goes

through a whole lifecycle that includes:
1. defining the project objectives (Initiation),
2. planning the work to achieve those objectives (Planning),
3. performing the work (Execution),
4. monitoring and controlling the progress (M&E/Controlling), and
5. closing the project after receiving the product acceptance
(Closing).

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Cont...

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 Initiating
This stage defines and authorizes the project. The project manager is
named, and the project is officially launched through a signed document
called the project charter, which contains items such as the purpose of the
project, a high-level product description, a summary of the milestone
schedule, and a business case for the project.

Another outcome of this stage is a document called the stakeholder

register, which identifies the project stakeholders and important
information about them.

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 Planning
In this stage, the project manager, along with the project management
team, refine the project objectives and requirements and develop the
project management plan, which is a collection of several plans that
constitute a course of actions required to achieve the objectives and meet
the requirements of the project. The project scope is finalized with the
project scope statement.

The project management plan, the outcome of this stage, contains

subsidiary plans, such as a:
 project scope management plan,
schedule management plan, and
quality management plan.

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 Executing
In this stage, the project manager, implement the project management
plan, and the project team performs the work scheduled in the planning
stage.

The project manager coordinates all the activities being performed to

achieve the project objectives and meet the project requirements. Of
course, the main output of this project is the project deliverables.

Approved changes, recommendations, and defect repairs are also

implemented in this stage. But where do these changes and
recommendations come from? They arise from monitoring and controlling
the project.

The stakeholders can also suggest changes, which must go through an

approval process before implementation.
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 Monitoring and controlling
You monitor and control the project through its lifecycle, including the
executing stage.
Monitoring and controlling includes:
defending the project against scope creep (unapproved changes to the project
scope),
monitoring the project progress and performance to identify variance from the
plan, and recommending preventive and corrective actions to bring the project in
line with the planned expectations in the approved project management plan.
Requests for changes, such as change to the project scope, are also
included in this stage.
The changes must go through an approval process, and only the
approved changes are implemented.

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Closing
In this stage, you manage the formal acceptance of the project’s product,
close any contracts involved, and bring the project to an end by
disbanding the project team.

Closing the project includes conducting a project review for lessons

learned and possibly turning over the outcome of the project to another
group, such as the maintenance or operations group.

At the closing stage celebration is important.

Terminated projects (that is, projects cancelled before completion)

should also go through the closing stage.

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End of Chapter One

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 Project Management (MBA 592)

Chapter 2: Project Identification, Feasibility Study

and Initiation
Project idea generation: Sources and methods

Finding a good idea is the first step in the process of converting an

entrepreneur’s creativity into an opportunity.
Therefore, we might have these questions in mind:
What is a Good Business Idea?

Any good business ideas could be an invention, a new product or service,

or an original idea or solution to an everyday problems.
A good business idea does not necessarily have to be a unique products or
services.
Techniques for Generating Ideas
Several techniques can be used to stimulate and facilitate the generation
of new ideas for products, services and businesses.
The techniques could be:
Brainstorming
Focus Group Discussion (FGDs)
Observations
Surveys
Emerging Trends
Research and Development
Tradeshows and Association Methods
 Brainstorming
Brainstorming sessions have the purpose of exploring as many solutions
or ideas to a given problem or question as possible, without judging merit
within the session itself, in a more unstructured way than in a focus
group
This is a process in which a small group of people interact with very
little structure, with the goal of producing a large quantity of novel and
imaginative ideas.
The goal is to create an open, uninhibited atmosphere that allows
members of the group to “freewheel” ideas.
 Focus Group Discussion
Focus groups have the purpose of exploring the advantages and
disadvantages of a number of pre-identified options which are presented
to the group, in a highly structured way;
These are group of individuals who provide information using a
structured format. Normally, a moderator will lead a group of people
through an open, in depth discussion.
The group members will form comments in open-end in-depth
discussion for a new product area that can result in market penetration.
This technique is an excellent source for screening ideas and concept.
 Differences b/n FGD and Brainstorming
Criteria Brainstorming FGD

Purpose Generate ideas Improve existing ideas

Trigger A need to solve a problem A need to study an existing idea, solution or process

Condition Problem exist Idea, solution or process exist

Number of participants 6-8 6 - 12

Participant types Heterogeneous Can be homogeneous or heterogeneous

Person running the show Facilitator Skilled moderator

Knowledge of topic of Not necessary In depth knowledge of topic

discussion
Type of questions to ask Progressive closed-ended to generate Can be open-ended to generate qualitative data or
and build on ideas closed-ended to generate quantitative data
Observers No Yes
Observation
 A method that can be used to describe a person or group of people’s
behavior by probing:
1. What do people/organizations buy?
2. What do they want and cannot buy?
3. What do they buy and don't like?
4. Where do they buy, when and how?
5. Why do they buy?
6. What stuff they are buying more of?
7. What else might they need but cannot get?
Surveys
This process involves the gathering of data based on communication with a
representative sample of individuals.
This research technique requires asking people who are called respondents
for information either verbally or by using written questions.
Questionnaires or interviews are utilized to collect data on the telephone or
face-to-face interview.
Emerging Trends

 Emerging trends within your area may be create demand for new
products and services, and can serve as a business idea.
Research and Development
Research is a planned activity aimed at discovering new knowledge, with
the hope of developing new or improved products and services.
Researching on new methods, skills and techniques that enable
entrepreneurs to enhance their performance and ability to deliver better
products and services.
Tradeshows & association meetings

This can be an excellent way to examine the products of many

potential competitors, uncover product trends and identify potential
products.
Literature

This can be achieved by reading relevant trade magazines and

browsing through trade directories. These may include local, national
and foreign publications.
 Assessment of Ideas
You may already have a good idea for your business. What is rare is the
ability to execute an idea and turn it into a profitable business idea.
The ability to take action is far more important than the idea itself.
As a result of the brainstorming process, you will probably have far more
business ideas than you can realistically analyze in depth.
It doesn’t make sense to do studies and write business plans on ideas that are
in the end likely to be passed over.
We suggest here that one way to reduce the number of ideas is by roughly
assessing the market potential of the idea and its likelihood of success.
For this purpose, it is useful to think of success in two dimensions: (1) The
strength of the idea, and (2) Its fit within the organizations
Cont…
The strength of the idea:
1. Does this concept have market potential and a business model?
2. Will it advance your mission either by generating lots of revenue or by
strengthening your service delivery?
The fit within the organization:
1. Can your organization implement this idea successfully in the current market?
Thinking about these two dimensions, chart each enterprise idea using the
matrix below.
Enterprise ideas that go in the upper-right quadrant have a high potential
for success. If the idea ends up in the lower-left quadrant, do not pursue it.
Cont…
 Feasibility study

In the idea screening step, your objective was to eliminate the ideas that
were either not a strong fit for your organization or did not provide a
significant business or social impact.
Now the formal feasibility study can test the key assumptions that
determine whether this enterprise actually would have a good chance to
succeed.
The study is an opportunity to refine and explain the concept, and to test
market reaction.
Generally speaking you will want to: consult potential customers and
funders, and evaluate competitors; and do some preliminary market
research, such as a focus group or survey, to gain confidence in the value
of the concept.
Organizations do their feasibility studies in various ways. You may wish
to apply for funding to hire a consultant to conduct the study, or you
may have someone in your organization who can do it.
 Cont…
You can choose to do a feasibility study on one idea (usually the idea that
scored the highest on the assessment scorecard), or you can decide to do a
feasibility study on two or more ideas. That depends on your resources.
It would be reasonable to spend the equivalent of three to six full-time
person days preparing a single feasibility study.
 Elements considered while doing Project
Analysis/feasibility study
Project analysis refers to analyzing a project from various perspectives
so as to determine its viability and sustainability.
Project analysis consists of :
1. Market/demand analysis (Some parts covered)
2. Technical analysis
3. Financial analysis (Already covered in Managerial Economics)
4. Economic cost benefit analysis
5. Environmental and social cost benefit analysis
6. Risk analysis (Already covered in Managerial Economics)
Market/Demand Analysis

This step in project analysis aims to estimate the potential size of the
market for the product proposed to be manufactured (or service planned
to be offered) and to get an idea about the market share that is likely to
be captured. Hence, the two broad issues raised are:
1. What is the likely aggregate demand for the product/ service?
2. What will be the share of the market for the proposed
product/service?
Cont...
Answers to these two questions call for an in-depth study of various
factors like:
patterns of consumption growth,
income and price elasticity of demand,
composition of the market, and nature of competition,
availability of substitutes,
reach of distribution channels, etc.
The purpose of market/demand analysis

Market/demand analysis for new/improved products

development should answer the following questions:
Who are the buyers?
What is the total current demand for the product?
How is demand distributed geographically?
What is the demand for the product segmented in different sizes?
What price will the customers be willing to pay for the improved product?
How can potential customers be convinced about the superiority of the
new product?
What price and warranty will ensure its acceptance?
What channels of distribution are most suited for the product?
What trade margins will induce distributors to carry it?
Process of market/demand analysis
Market/demand analysis follow the following processes:
1. Situational analysis
2. Collection of secondary information
3. Conduct market survey
4. Characterization of the market
5. Demand forecasting
6. Market planning
Situation Analysis
In order to get an understanding of the relationship between the product
and its market, the project analyst may informally talk to
customers,
competitors,
middlemen,
and others in the industry.
Wherever possible, s/he may look at the experience of the company to
learn about
the preferences and purchasing power of customers,
actions and strategies of competitors, and
practices of the middlemen.
 Collection of information
Gathering information help to better understand the market situation.
information may be obtained from secondary and/ or primary sources.
Secondary information is information that has been gathered in some
other context and is already available.
Primary information, on the other hand, represents information that is
collected for the first time to meet the specific purpose on hand.
Secondary information provides the base and the starting point for market
and demand analysis.
It indicates what is known and often provides some clues for gathering
primary information required for further analysis.
 Evaluation of Secondary Information
While secondary information is available economically and readily
provided, the market analyst is able to locate
its reliability,
accuracy, and
relevance for the purpose under consideration.
The market analyst should seek to know:
Who gathered the information and for what objective?
When was the information gathered? When was it published?
How representative was the period for which the information was gathered?
What was the target population?
How was the sample chosen?
How representative was the sample?
How satisfactory was the process of information gathering?
How accurately was the information edited, tabulated, and analyzed?
Was statistical analysis properly applied?
 Conduct Market Survey
Secondary information, though useful, often does not provide a comprehensive
basis for market/ demand analysis.
It needs to be supplemented with primary information gathered through a market
survey, specific to the project being appraised.
The market survey may be a census survey or a sample survey.

The information sought in a market survey may relate to one or more of the
following:
Total demand and rate of growth of demand
Demand in different segments of the market
Income and price elasticity of demand
Motives/Desire for buying
Purchasing plans and intentions
Satisfaction with existing products
Unsatisfied/Unmet needs
Attitudes towards available products
Distributive trade practices and preferences
Socio-economic characteristics of buyers
 Steps in market survey
1. Define the target population
2. Select the sampling frame and sample Size
3. Develop the questionnaire
4. Recruit and train the field investigators
5. Obtain information as per the questionnaire
from the sample of respondents
6. Scrutinize the information gathered
7. Analyze and interpret the information
 Technical Analysis
Analysis of technical and engineering aspects is done continually when a project is
being examined and formulated. The technical analysis is made to identify and
evaluate:
• The availability of technology
• The availability of technical experts
• The appropriateness of technology
• The affordability of technology
Technical analysis is concerned primarily
with:
• Material inputs and utilities
• Manufacturing process/ technology
• Product mix
• Plant capacity
• Location and site
• Machineries and equipments
• Structures and civil works
• Work schedule
3. Financial Analysis
• Financial analysis involves evaluating the viability or the
capability of the project to raise the appropriate funds
needed to implement the proposed project.
Financial analysis consists determination of the following:
• Cost of project
• Means of financing
• Estimates of sales and production
• Cost of production
• Working capital requirement and its financing
• Breakeven point
• Projected cash flow statements
• Projected balance sheet.
 Cost of Project
The cost of project represents the total of all items of outlay associated
with a project. It is the sum of the following outlays:
• Cost of land and site development
• Cost of Building and Civil work
• Cost of Plant and Machinery
• Technical know how Fees (expertise fee)
• Miscellaneous Fixed Assets
• Preliminary expenses
• Preoperative expenses (Costs)
• Provision for Contingencies
• Initial Cash Losses
 Means of Financing
In order to finance the project cost, a firm may use combination of the
following sources;
• Share capital (sell of stock)
• Term loan and /or bond capital
• Deferred credit ( Purchase of goods and services on credit)
• Miscellaneous sources: Eg. unsecured loan, leasing
Points to be considered in selecting best means of
financing
a) Cost: cost of capital/interest rate
b) Risk: The two main sources of risk for a firm (a project) are: business
risk and financial risk.
• Business risk refers to the variability of earnings before interest and
tax and arises mainly from fluctuation in demand and variability of
prices and costs.
• Financial risk refers to the risk arising from financial leverage –
inability to serve the source of capital.
 Cont....
c. Control: Promoters of the project would ordinarily prefer a scheme of
financing which enable them to maximize their control over the affairs of
the firm, given their commitment of funds to the project.
d. Flexibly: This refers to the ability of a firm (or project to raise further
capital from any source it wishes to tap to met the future financing needs.
• Thus, when we determine (choose) the financing mix we must consider
the above factors.
• After we understand the monetary policy of the country( norms of
regulatory bodies) we must select a source of capital with moderate cost
and risk, that enables the firm maximize the control and allows flexibility
in raising additional capital
 Estimates of sales and production
• In estimating sales revenue, the following considerations should be born
in mind:
1. It is not advisable to assume a high capacity utilization level in the first
years of operation.
• It is sensible to assume that capacity utilization would be somewhat low
in the first year and rise gradually to reach the maximum level in the
third or fourth year of operation.
• A reasonable assumption with respect to capacity utilization is as
follows: 40 –50 percent of the installed capacity in the first year, 50 –80
percent in the second year, and 80 –90 percent from the third year
2. For practical purpose, it may be assumed that production would be equal
to sales ( No inventory of Finished goods or manufactured good will be
sold)
3.The selling price considered should be the price realizable by the
company.
 Cost of Production
• Given the estimated production, the cost of production may be worked
out. The major component of cost of production are:
1.Material cost (raw materials, chemicals, components, and consumables
required for production).
2. Labor cost (Direct & indirect labor)
3. Utilities Cost (Power, water, and fuel)
4. Factory overhead cost (repairs and maintenance, rent, taxes, insurance
on factory assets, etc)
Working Capital Requirements and Its
Financing
• Working capital is commonly defined in financial analysis as net
current assets.
• Consisting of inventories, including goods in process; net
receivables; marketable securities; bank balances; and cash in hand.
• A certain amount of working capital is normally required to run
project facilities created by investment in fixed assets.
• The principal sources of working capital finance are (i) working
capital advances provided by commercial banks, (ii) trade credit (iii)
accruals provisions; and (iv) long term sources of financing.
 Profitability of Projects

• Given the estimates of sales revenue and cost of production, the next
step is to prepare the profitability projections.
• The estimates of profitability may be prepared.
Breakeven Points

• In addition to determining the level of profitability, it is helpful to

know what the level of operation should be to avoid losses.
• For this purpose, the break –even point, which refers to the level of
operations at which the project neither makes profit nor incurs loss is
calculated.
Breakeven Analysis
Examines the relationship among the TR, TC, and total profits of the
firm at various levels of output.
This technique is often used by business executives to determine the
sales volume required for the firm to break even and the total profits and
losses at other sales levels.
The analysis uses a cost-volume-profit chart in which the TR and TC
curves are represented by straight lines and the break-even point is
determined at their intersection.

76
77
 Projected Cash Flow Statements

• The cash flow statement shows the movement of cash into and out of the
firm and its net impact on the cash balance with the firm.
• The cash flow statement is really a cash flow budget.
There are three basic steps in determining whether a project is worthwhile
or not are:
1. Estimate projected cash flows,
2. Establish the cost of capital, and
3. Apply a suitable decision or appraisal criterion (pay back, NPV, IRR)
to decide whether to accept or reject the project
 Project Selection Models
• A numeric model is usually financially focused and quantifies the project in terms of
either time to repay the investment (payback) or return on investment.
• While non-numeric models look at a much wider view of the project considering
items from market share to environmental issues.
• The main purpose of these models is to aid decision-making leading to project
selection. Most importantly the model must evaluate projects by how well they meet
a company's strategic goals and corporate mission. The following are the types of
questions to ask:
1. Will the project maximize profits?
2. Will the project maximize the utilization of the workforce?
3. Will the project maintain market share, increase market share or consolidate
market position?
4. Will the project enable the company to enter new markets?
5. Will the project maximize the utilization of plant and equipment?
6. Will the project improve the company's image?
7. Will the project satisfy the needs of the stakeholders aspirations?
8. Is the project's risk and uncertainty acceptable?
9. Is the project's scope consistent with company expertise?
 Numeric Models
• The numeric selection models presented here may be sub-
divided into financial models and scoring models. The
financial models are:
1. Payback Period (PV)
2. Return on Investment (ROI)
3. Net Present Value (NPV)
4. Internal Rate of Return (IRR)
• Companies tend to prefer financial models and often select
solely on profitability. This may not be as drastic as it
sounds because subconsciously the managers will be
considering a wider scope of selection criteria.
• In an investment appraisal only the incremental income
and expenses attributed directly to the project under
consideration should be included. Costs that have already
been incurred (sunk costs) should be ignored as they are
irrelevant to decisions effecting future projects.
 Scoring Models
• The numeric models discussed so far all have a common limitation; they
only look at the financial element of the project.
• In an attempt to broaden the selection criteria a scoring model called the
factor model which uses multiple criteria to evaluate the project.
• The factor model simply lists a number of desirable factors on a project
selection proforma along with columns for Selected and Not Selected.
• A weighted column can be added to increase the score of important
factors while reducing the scoring of the less important.
• The weighted column is calculated by first scoring each factor, and then
dividing each factor by the total score.
• The total of the weighted column should always add up to one.
• The factors can be weighted simply 1 to 5 to indicate; 1 "very poor", 2
"poor", 3 "fair", 4 "good" and 5 "very good".
 4. Risk Analysis
• Risk has always been an intrinsic part of project management.
• Risk management is gaining significance and importance due to:
1. increasing market competition,
2. increasing technology and
3. an increasing rate of change,
• Risks are generally deemed acceptable if the possible gains exceed the
possible losses.
• A project risk may be defined as any event that prevents or limits the
achievement of project objectives as defined at the outset of the project,
and these objectives may be revised and changed as the project progresses
through the project life-cycle.
The generally accepted risk management model includes the
following:
• Define Objectives: define what you have to achieve to be successful and
establishes a basis for dealing with risk and future decisions.
• Identify Risk: identify areas of risk which may limit or prevent
achievement of objectives.
• Quantify Risk: evaluate and prioritize the level of risk and quantify
frequency of occurrence and impact.
• Develop Response: define how we are going to respond to the identified
risks; eliminate, mitigate, deflect or accept.
• Document: the risk management plan documents how we propose to
tackle risk on the project.
• Risk Control: the risk control function implements the risk management
plan.
• This may involve training and communication.
• And as the risks and the work environment are continually changing, it is
essential to continually monitor and review the level of risk and your
ability to effectively respond.
 5. Economic Analysis and Environmental Assessment
• Successful economic development depends on the rational use of natural
resources and on reducing as far as possible the adverse environmental
impacts of development projects.
• Environmental assessment (EA) is a primary tool for achieving this
objective, by inserting critical environmental information into the process
of project identification, preparation, and implementation.
• Economic analysis, by comparison, is employed to determine if the overall
economic benefits of a proposed project exceed its costs, and to help design
the project in a way that produces a solid economic rate of return.
• Adverse environmental impacts are part of the costs of a project, and
positive environmental impacts are part of its benefits.
• Consideration of environmental impacts, therefore, should be integrated
with the other aspects of the project in the economic analysis to the extent
possible.
Environmental Analysis
• Environmental analysis process is a systematic, interdisciplinary process
used to identify the purpose of a proposed action, develop practical
alternatives to the proposed action, and predict potential environmental
effects of the action.
• A few examples of proposed actions are road construction, tree clearing
for disease control, reforestation, building a hydroelectric dam, or
developing a quarry.
• An Environmental Analysis (EA)identifies problems, conflicts, or
resource constraints that may affect the natural environment or the
viability of a project.
• It also examines how a proposed action might affect people, their
communities, and their livelihoods.
• The analysis should be conducted by an Interdisciplinary Team consisting
of personnel with a range of skills and disciplines relevant to the project.
• Team members should include a team leader and may include
• Engineers, geologists, biologists, archaeologists, and social workers.
 Cont....
• The EA process and findings are communicated to the various affected
individuals and groups.
• At the same time, the interested public helps provide input and comment
on the proposed project.
• The document produced as a result of the EA guides the decision maker
toward a logical, rational, informed decision about the proposed action.
• The EA process and Interdisciplinary Team studies can reveal sound
environmental, social, or economic reasons for improving a project.
• After predicting potential issues, the EA identifies measures to minimize
problems and outlines ways to improve the project’s feasibility.
• Environmental mitigations a designer can use to avoid potential impacts
on wildlife, such as use of animal underpasses and culvert requirements
for fish passage
Cont....
• The EA process can provide many benefits to the road builder, local
agencies, and the communities who will be affected by road construction
and maintenance activities.
• The process and resulting reports are tools that road managers can use to
guide their decisions, produce better road designs and maintenance
plans, identify and avoid problems, and gain public support for their
activities.
• An EA document can be long and complex for major, potentially high
impact projects, or it may only be a few pages long for a simple road
project presents an eight-step process that is useful for doing
Environmental Analysis.
The Eight Steps of Environmental Analysis Process and Its Associated Outputs

1. Identify the Project: Identify the purpose and need of the proposed action.
2. Scoping, identify the issues, opportunities, and effects of implementing
3. Collect the probable effects of project implementation and Interpret Data .
4. Design of the Alternatives. Consider a reasonable range of alternatives.
• Usually at least three alternatives are considered.
• Include a No-Action Alternative.
• Consider the mitigation of negative impacts.
5. Evaluate Effects, predict and describe the physical, biological, economic,
and social effects of implementing each alternative.
• Address the three types of effects --Direct, Indirect, and Cumulative.
6. Compare alternatives, measure the predicted effects of each alternative
against evaluation criteria.
7. Select preferred alternative and allow review and comment by the affected
and interested public.
8. Implement selected alternative and ensure that EA mitigations are followed.
Annex: Project Analysis Techniques
 Techniques of Valuing a project

1. Net Present Value (NPV)

2. Internal Rate of Return (IRR)
3. Benefit Cost Ratio or Profitability
Index (PI)
4. Discounted Payback Period

90
 Net Present Value (NPV)

NPV: is the difference between the present values of

the yearly (future) net cash inflows and the initial
investment outlay

n
Rt
NPV    C0
t 1 (1  k )
t

Rt = Return (yearly net cash flow)

k = Risk-adjusted discount rate
C0 = Initial cost of project
91
Decision rule

 If NPV is positive, accept the project

 If NPV is negative, reject the project
 If NPV is zero, be indifferent
 If we are comparing two or more projects, the higher the NPV, the
better the project is.

92
Example: The initial investment of a project is ETB 60,000.
Find the NPV of the project if the discount rate is 10%, and
the yearly cash flow is given below.

Year (t) Cash flow Discount factor Present Value

1
(in Birr) (In Birr)
(1  k ) t

0 -60,000 1 -60,000
1 6,000 0.909 5454
2 20,000 0.826 16520
3 30,000 0.751 22530
4 40,000 0.683 27320
5 4,000 0.621 2484
Total NPV 14,308

Decision: accept the project (NPV>0).

93
Exercise: Based on the information given below calculate
the NPV and choose between project A and project B.

Year Project “A” Project “B”

1 40,000 25,000
2 30,000 25,000
3 25,000 25,000
4 20,000 25,000
5 10,000 25,000
Initial investment 80,000 80,000

Discount rate 10% 10%

94
Internal Rate of Return (IRR): Is the rate of
discount that equates the present value of future net cash
flows equal to the initial investment cost of the project.

n
Rt

t 1 (1  k *)
t
 C0

Rt = Return (yearly net cash flow)

k* = IRR
C0 = Initial cost of project
95
Decision Rule for IRR

 Accept: When IRR is greater than the cost of capital

 Reject: When IRR is less than the cost of capital
 Indifferent: If IRR is equal to the cost of capital
 If we are comparing two or more projects, the higher the IRR, the
better the project is.

96
 Example:

Find the IRR of a project with 20,000 initial investments, the cost of
capital of 12 % and with the following table of cash flows.

Year 1 2 3 4
Cash flow 6000 6000 8000 9000

97
  Try to compute the NPV with 12% discount rate.

 Since the NPV8000

6000 6000 9000  (1603), try again with a higher discount
is still positive,
 rate: 15% 2  3
   20000  5357  4800  5714  5732  20000  1603
4 
 1.12 (1.12) (1.12) (1.12) 
NPV= 167

 6000 6000 8000 9000 

  2
 3
 4
  20000
 1.15 (1 .15) (1 .15) (1 .15) 
98
Still the NPV is positive. Try again with a higher discount rate i.e.
16%.

 6000 6000 8000 9000 


 1.16   NPV= 
-344   20000

 (1.16) 2 (1.16) 3 (1.16) 4 
 Thus, it can be concluded that the IRR is between 15% and 16%

99
IRR continued...

IRR=r1 + ((r2-r1)(NPV1/NPV1-NPV2)
Other option:
However, the exact percentage can be computed
using interpolation techniques as:
Present value at 15% = 20167
Present value at 16% = 19656
Difference = 511
Therefore, we get the percentage difference of: [1-
(511-167)/511=0.33
Adding this number to 15%, we get the IRR
approximately 15.33%.

101
Exercise : Using the data below, calculate the
IRR based on trial and error and interpolation
method

Year Cash flow

1 30,000
2 30,000
3 40,000
4 45,000
Initial investment 100,000
Discount rate 12%

102
Profitability Index (PI) or Benefit Cost Ratio: is the
ratio of present value of future net cash flows to the
initial cost of the project.

n
Rt
 (1  k ) t
PI  t 1
C0

Rt = Return (yearly net cash flow)

k = Risk-adjusted discount rate
C0 = Initial cost of project
103
 Decision rules:

 When PI > 1, accept the project

 When PI < 1, reject the project
 When PI = 1, be indifferent
 If we compare two or more projects, the higher the PI, the
better the project is

104
 Example: Consider a project with initial investment of Birr
50,000 and the following Cash inflows. Discounting rate is
12%
Year 1 2 3 4
Cash inflow 12500 10000 30000 25000

PV
PI 
Co
12500 10000 30000 25000
(  2
 3
 4
)  50000
(1.12) (1.12) (1.12) (1.12)

11160  8000  21428  15924

50000
56512
 1.13
50000
Decision: Accept 105
Exercise: Calculate the PI of the two projects
and choose the best project
Year Project “A” Project “B”

1 30,000 25,000

2 40,000 40,000

3 45,000 40,000

4 50,000 50,000

Initial investment 110,000 100,000

Cost of capital 12% 12%

106
 Payback Period
The payback period: The length of time required to
recover the initial investment.
Decision Rule: the shorter the payback period, the
more desirable the project is

107
 Example
Project Year Cash In flow PV of $1 at PV of cash inflow Cumulative cash
10% savings
0 -10000 1 -10000 -10000
1 5000 0.909 4545 -5455
2 6000 0.826 4956 -499
3 8000 0.751 6008 5509
4 7000 0.683 4781 10290
5 6000 0.621 3726 14016

Payback Period = 2 Years + 499/6008

= 2.083 Yrs
• 1 year is equivalent to 12 months; then 0.083 year is
equivalent to 0.996 months, which is about 1 month
• Therefore, the payback period is 2 years and one month.
108
Exercise: Given the following information,
calculate the payback period of the project?
Year Cash Flow
1 5000
2 6000
3 8000
4 7000
5 6000
Initial investment 10,000
Discount rate 12%

109
Decision making under risk and
uncertainty

 The techniques of project analysis have been

considered so far as if the basic data which we
have used are known with certainty.
 However, both technical and economic
information is used in the form of forecasts and is
subject to considerable uncertainty.

110
Risk and Uncertainty
Risk: A situation where there is more than one
possible outcome to a decision and the probability of
occurrence of each outcome is known
It is important to note that risk refers to the amount of
variability in the outcome as a result of the adoption of a
particular strategy.
Uncertainty: A situation where there is more than one
possible outcome to a decision and the probability of
occurrence of each outcome is unknown
 In decision making involving risk or uncertainty
three terms are quite often used. They are:
1. Strategy
2. State of nature
3. Outcome
111
 The Terms…
A strategy refers to one of several alternative courses of
action or plans that can be implemented to achieve the
desired goal.
 A state of nature refers to the conditions that prevail in
future and which have a significant effect on the success
or failure of the strategy.
 The different states of nature that may exist in the future
are: boom, recession, and normal conditions.
Outcome refers to the results which are usually in the form
of profit that come about as a result of implementation of a
strategy.
A payoff matrix lists the outcomes associated with
combinations of each strategy and state of nature.
112
Measuring Risk: Probability Distributions
Probability: Chance that an event will occur
Probability Distribution: List of all possible events and the probability
that each will occur
Expected Value or Expected Profit

n
E ( )      i  Pi
i 1

113
 Calculation of Expected Profit

State of Probability Outcome Expected

Project Economy (P) () Value
Boom 0.25 $600 $150
Normal 0.50 500 250
A
Recession 0.25 400 100
Expected profit from Project A $500
Boom 0.25 $800 $200
Normal 0.50 500 250
B
Recession 0.25 200 50
Expected profit from Project B $500

114
Discrete Probability Distribution
• List of individual events and their probabilities
• Represented by a bar chart or histogram
Continuous Probability Distribution
• Continuous range of events and their probabilities
• Represented by a smooth curve

115
Discrete Probability Distributions

Project A; E() = 500, Low Risk Project B: E() = 500, High Risk

116
Continuous Probability Distributions

Project A: E() = 500, Low Risk Project B: E() = 500, High Risk

117
Absolute Measure of Risk: The
Standard Deviation

n
 (X
i 1
i  X )  Pi
2

118
Calculation of the Standard Deviation
Project A

  (600  500)2 (0.25)  (500  500) 2 (0.50)  (400  500) 2 (0.25)

  5, 000  $70.71

119
Calculation of the Standard Deviation
Project B

  (800  500)2 (0.25)  (500  500)2 (0.50)  (200  500)2 (0.25)

  45, 000  $212.13

120
 Coefficient of variation (CV)
Coefficient of variation (CV) is also known as
Relative Standard Deviation (RSD), is a standardized
measure of dispersion of a probability distribution or
frequency distribution.

The coefficient of variation is a measure of spread

that describes the amount of variability relative to the
mean.
The coefficient of variation is unitless. Therefore,
you can use it instead of the standard deviation to
compare the spread of data sets that have different
units or different means.

121
Relative Measure of Risk: The
Coefficient of Variation (v)


v 


Project A Project B

70.71 212.13
vA   0.14 vB   0.42
500 500

122
 Decision with uncertainity

1. Maximax - Risk Seeking

– Prefer to take on risk
– Maximize the best possible outcome
2. Maximin- Risk Averse
– Must be compensated for taking on risk
– Maximize the worst/least possible outcome with minimum risk.
3. Minimax regret- Risk Neutral
– Are indifferent to risk
– Minimize the maximum opportunity cost

123
 Example
Say I own land that might contain oil.
oValue of land – 5 million
oDrill for oil – 12 million
oFind oil – 40 million
oFind no oil – 3 million
Decision: sell or drill?
Required:
1. Prepare pay off table
2. Make a decision based on:
i. Expected value (probability distribution)
ii. Maximax approach (best case scenario)
iii. Maximin approach (best worst case scenario)
iv. Minimax regret approach (opportunity cost
approach)
124
Pay off table

Oil Dry

Drill 40-12 =28 3-12= -9

Sell 5 5

125
Decision based on expected value
If chance of finding oil is 0.6

Oil Dry EV
Drill 28 -9 13.2
Sell 5 5 5
Prob. 0.6 0.4

Decision: EV of drill = 13.2 which is greater than

EV of Sell = 5. Therefore, the decision is to drill.

126
Decision based on Maximax approach

For every decision, find the best max outcome

Oil Dry Max

Drill 28 -9 28
Sell 5 5 5
Max 28 5 28
Decision: since the maximum outcome is 28,
the decision is to drill.

127
Decision based on maximin approach

For every decision, find the best outcome

Oil Dry Min

Drill 28 -9 -9
Sell 5 5 5
Max 5 5 5
Decision: since the maximin outcome is 5, the
decision is to sell.

128
Decision based on minimax regret approach

For every decision, find the opportunity cost

Oil Dry Oil regret Dry regret Max

regret

Drill 28 -9 0 [5-(-9)]=14 14

Sell 5 5 (28-5)=23 0 23

Min 14

Decision: since the Minimax regret is 14, the

decision is to drill.

129
End of Chapter Two!!!
Project Management (MBA 592)

Chapter 3: Project Planning and

Implementation
(Part one: Concepts of planning)
 What is project planning?
• Planning is one of the management functions
which involves determination of missions, goals
and strategies to achieve these predetermined
objectives. It gives the basis for implementation,
monitoring and evaluation of activities.
• Planning, in general, can best be described as the
function of selecting the enterprise’s objectives
and establishing the policies, procedures, and
resources necessary for achieving them.
• Planning is concerned with the future.
 Cont...
• Before commencement of any project, the first thing
that we need to do is project planning. Any reasonable
project manager certainly understands importance of
planning a project well.
• Carefully planned project takes into account necessary
aspects of a project (e.g. tasks, milestone, schedule,
risks, communication, quality, etc.) and provide a plan
which project team can refer to during execution.
• Planning in a project environment may be described as
establishing a predetermined course of action within a
forecasted environment.
• Project planning includes the prediction of the tasks
necessary to achieve a goal, the estimation of required
resources to accomplish the tasks, and the scheduling of
people and tasks to meet the deadline.
 Characteristics of a project plan:
1. It is a time-sequenced Action Item Register
2. Has both a near-term and a long-term focus
3. Meant to be a working document
4. Schedules have a combination of hard deadlines
and soft deadlines(with slack)
5. Schedules change frequently but should always
reflect
i. Your best current estimate of what tasks(get specific)
need to be done and which are most
important(prioritize)
ii. Who will do the tasks (responsibility)
iii. How long they will take to complete (duration)
iv. What is needed to get the job done (resources)
 Cont...
• Typical problems with developing objectives include:
1. Project objectives/goals are not agreeable to all parties.
2. Project objectives are too rigid to accommodate changing priorities.
3. Insufficient time exists to define objectives well.
4. Objectives are not adequately quantified.
5. Objectives are not documented well enough.
6. Efforts of client and project personnel are not coordinated.
7. Personnel turnover is high.
Cont...
• Once the objectives are clearly defined, four questions must be
considered:
1. What are the major elements of the work required to satisfy the
objectives, and how are these elements interrelated?
2. Which functional divisions will assume responsibility for
accomplishment of these objectives and the major-element work
requirements?
3. Are the required corporate and organizational resources available?
4. What are the information flow requirements for the project?
Cont...

• Effective total program planning cannot be accomplished unless all of

the necessary information becomes available at project initiation.
These information requirements are:
1. The statement of work (SOW)
2. The project specifications
3. The milestone schedule
4. The work breakdown structure (WBS)
 Why plans are made?
• One of the objectives of project planning is to completely
define all work required (possibly through the
development of a documented project plan) so that it will
be readily identifiable to each project participant.
• This is a necessity in a project environment because:
1. If the task is well understood prior to being performed,
much of the work can be pre-planned.
2. If the task is not understood, then during the actual
task execution more knowledge is gained that, in turn,
leads to changes in resource allocations, schedules,
and priorities.
3. The more uncertain the task, the greater the amount
of information that must be processed in order to
ensure effective performance
 Basic Reasons of Planning
1. To eliminate or reduce uncertainty
2. To improve efficiency of the operation
3. To obtain a better understanding of the objectives
4. To provide a basis for monitoring and controlling work
5. To clearly communicate the schedule (to the project team and
outside reviewers)
6. To track progress relative to the plan
7. To assist in effective resource allocation
8. To schedule/estimate costs
Consequences of poor planning include:
1. Project initiation without defined requirements
2. Wild enthusiasm
3. Disillusionment /Lack of expectation
4. Chaos
5. Search for the guilty
6. Punishment of the innocent
7. Promotion of the nonparticipants
 Logical process in planning
• The logic of planning requires answers to several questions in order for the
alternatives and constraints to be fully understood. A list of questions would
include:
• Prepare environmental analysis
Where are we?
How and why did we get here?
• Set objectives
Is this where we want to be?
Where would we like to be? In a year? In five years?
• List alternative strategies
Where will we go if we continue as before?
Is that where we want to go?
How could we get to where we want to go?
• List threats and opportunities
What might prevent us from getting there?
What might help us to get there?
• Prepare forecasts
Where are we capable of going?
What do we need to take us where we want to go?
Cont....
• Select strategy portfolio
 What is the best course for us to take?
What are the potential benefits?
 What are the risks?
• Prepare action programs
What do we need to do?
When do we need to do it?
How will we do it?
Who will do it?
• Monitor and control
 Are we on course? If not, why?
What do we need to do to be on course?
Can we do it?
 Basic Planning elements
• Planning is determining what needs to be done, by whom, and when, in
order to fulfil one’s assigned responsibility.
• The basic planning elements include the following:
1. Identify the key project tasks(What)
2. Identify the objective for each task (Why)
3. Estimate the Personnel, Resources, and Time Required to meet each
task objective (How)
4. Establish priority of tasks by arranging them in time sequenced order
(When) + Estimate Costs(Project Budget)
Cont...
There are nine major or specific components of the planning phase:
1. Objective: a goal, target, or quota to be achieved by a certain time
2. Strategy: the strategy to be followed and major actions to be taken in
order to achieve or exceed objectives
3. Schedule: a plan showing when individual or group activities or
accomplishments will be started and/or completed
4. Budget: planned expenditures required to achieve or exceed objectives
5. Forecast: a projection of what will happen by a certain time
6. Organization: design of the number and kinds of positions, along with
corresponding duties and responsibilities, required to achieve or
exceed objectives
7. Policy: a general guide for decision-making and individual actions
8. Procedure: a detailed method for carrying out a policy
9. Standard: a level of individual or group performance defined as
adequate or acceptable
Part Two: The Logical Framework
Approach (LFA) as a Planning Tool

Maru Shete (PhD and Associate Prof.)

 Result Based Management (RBM) and the Logical
Framework Approach (LFA)
 RBM is a management strategy that helps:
o To manage the whole project cycle by focusing on outcomes
o To prepare a plan with SMART objectives
o To monitor/track progress by continuously collecting and analyzing data
o To assess/analyze results, disseminate results and learn from results
o To manage and acting upon results
 The LFA is an RBM tool used for systematic planning, implementing,
monitoring, and evaluating projects/ programmes.
The Logical Framework Approach
Some features of the LFA include:
1. Stakeholder involvement
2. Needs-based approach
3. Logical intervention approach
4. Framework for assessing relevance, feasibility and
sustainability
5. Results-oriented – not activity driven
6. Logically sets objectives and their causal relationships
7. Shows whether objectives have been achieved:
Indicators (for M&E)
8. Describes external factors that influence the project’s
success: assumptions and risks
Why LFA?

• Using LFA ensures that the project/program meets:

1. Relevance
2. Feasibility
3. Sustainability
4. Cost efficiency
 The nine steps of the LFA
analysis- the planning process
1. Analysis of the project´s Context
2. Analysis of Stakeholders
3. Problem Analysis/Situation Analysis
4. Objectives Analysis
5. Plan of Activities
6. Plan of Resources/Inputs
7. Indicators and Source of Verification
8. Risk Analysis and Risk Management
9. Analysis of Assumptions
Step 1: Context Analysis
• Projects are part of a larger context - prior to start, collect
relevant background information on the sector and on the
relevant organizations to work with.
• Which environment will the project be situated in,
the country, the region and the sector?
• Analysis of Context made through a study and/or through making
a “SWOT” analysis: Strengths, Weaknesses, Opportunity and
Threats
• SWOT analysis is a tool for auditing /identifying e.g. an
environment, agency, company etc:
• SWOT is a separate method, which may be used for the analysis
of the project’s Context
Step 2: Stakeholder Analysis
• Stakeholders are those who are influenced by and exert an
influence on the project’s entity. Who will be influenced,
positively or negatively, by the project.
• Normally they are with different knowledge, different
background, different sex, different region , etc
• Stakeholder analysis - mapping of different
individuals/institutions and their respective roles, degree of
influence on the project, gender, age, ethnicity, etc
• Which stakeholders should be involved in planning and / or
implementing the project?
• As a rule of thumb it is important to include a broad group
of people/institutions with different knowledge on the
sector
Cont...
Five main groups of stakeholders to involve:
1. Beneficiaries/Target group
2. Implementers
3. Financing agents
4. Decision makers
5. Experts
 A stakeholder may belong to several groups.
 All stakeholders have important information to
give to the future project group/ implementers.
 They provide a relevant picture of the situation
in order to find relevant, feasible and
sustainable solutions.
Step 3: Problem Analysis
 Problem analysis enables to get an understanding of
the root cause of the problem
 Finding “the roots of the evil” is the most important
task. So, it is imperative to ask:
1. What is the focal problem to be solved?
2. Who owns the problem?
3. What are the causes and effects to the focal problem
 The causes of the problem shall be “tackled”
through activities within the framework of the
project so that the problem will be solved in a
sustainable way
 Cont...

 Problem analysis is helping us finding “the roots of the evil”

 Three parts in a problem analysis;

The main problem to be solved, one focus
The causes to the focal problem
The effects of the focal problem

 Discuss who owns the problem?

 A problem analysis should always be made by the local

stakeholders who are the owners of the problem.
 PROBLEM TREE

Effekr Effects

Focal Problem

Causes
 EXAMPLE of aPROBLEM TREE
Bus company gets a Disabled High cost for
Effekr
bad reputation people hospital care

People die and Buses

are delayed
get injured

High number of
bus accidents

Careless Buses in Roads in

busdrivers poor condition poor condition
Stress Alcohol Poor
abuse maintenance Old buses
Poor maintenace
Bad traffic Tight
situation No maintenance
schedule Weak Corruption
routines
knowledge
Too few drivers on manintenace
and buses
Weak management capacity
at the bus company
 Step 4: Objective Analysis

• Formulating objectives: Moving from problem tree to objective tree

 Why a Problem Tree?

Problem Tree Objective Tree

Effects Overall objectives

Project Objective
Focal problem
Expected results
Causes
Activities
Objective Tree

Ends

Means
 Objectives vs. Activities
There is a difference between objectives and activities.
Objectives should describe;
1. Which is the changed situation to acheive
2. What to acheive when the project is completed.
3. What the activities are aiming at
While, an activity is a means to acheive the objective
Example
Objective: Enhanced competence on trade facilitation among
trading partners
Activity: Arrange a seminar on trade facilitation
Objectives Cont...
1. Overall Objectives/ Development Objectives
 Several different projects often aiming at the same overall
objectives. Sometimes also called goals
 Often Governmental level E.g. Social welfare, economic growth
 Time frame: Long term..
2. Project Objective/ Project Purpose :
 The main objective that the intervention/project should be able to
achieve.
 Solution to the focal problem.
 The very reason for implementing a project.
 Time frame: Medium term (the length of the project). Purpose
should be “SMART’’
3. Expected results/ immediate objectives:
 The results describe the services to be produced by the project.
 What services do the beneficiary get access to?
 Short term objectives. Directly after the project activities.
 Time frame: After the activities have been implemented. Results
should be “SMART”.
LFA Overall Objectives
 Long-term social and/or economic benefits, to which the project will
contribute
 Not achieved by the project on its own, several projects contribute
 States the positive state for the beneficiaries and for the society
 Examples:
 Improved social welfare
 Economic growth in region X
 Food supply stabilised
LFA Project Purpose

 The main reason for having a project ! WHY a project

 Connection to the “focal” problem
 Sets out the benefits, which the beneficiaries derive from the
project
 Implementing agencies should enable for the beneficiaries to
achieve the benefits by delivering the required services/results
 Examples;
 Improved labour productivity for crop X achieved
 Health hazards (for certain diseases) of the population in
area X reduced to a certain standard
River water quality improved etc...
LFA Results
 Connected to the causes of the focal problem
 Sets out the services which the beneficiaries will
receive from the implementing agency through the
project
 Examples;
 Farmers able to apply more efficient maize
production techniques,
 Adequate mother and child care provided to
the people in region X,
 Improved transport between A and B
Make it logic when planning: Example
Overall objectives:
The project will contribute to increased trade and
increased GDP in country X

Project objective:
Increased efficiency in the customs service in country X

Expected results:
1. Enhanced competence on custom related trade
facilitation mesures among customs service staff
2. Strengthened management capacity in the
Customs service
3. Improved customs clearence routines

Expected Outputs:
1. 500 staff members trained on trade facilitation
3. New manuals for customs clearance developed

Activities: Ex. some activities

1.1 Develop a training , 1.2 Implemeted a pilot training
for 20 staff , 1.3 Evaluate the training
 Writing objective statements
Example of how to write objectives
Objective hierachy  To contribute to increased GDP in country X
Overall objectives
(long term) -------------------------
---------------------------------  Improved service from the state sector to exporting
Project objective companies in country X
(mid-term): ----------------------------------------
----------------------------------  1.Enhanced knowledge among officials on Trade
Expected Results: facilitation and Rules of Origin
(Short term objectives) 2. Improved trade standards
established and effectively enforced in the country.
-------------------------------------
Activities for expected result 1:
------------------------------- 1:1 Conduct a baseline survey of the vocational training and a need
Activities: assessment (knowledge gaps)
1:2 Analyse the findings of the study
1:3 Make a curriculum for trainings based on the findings
1:3 Prepare tender documents for new training programs
1.4 Select trainers /providers of the vocational trainings
1:5 Implement pilot trainings
1.6 Follow-up /monitor of the trainings , analyze results and
if needed change the trainings
1:7 Run a full scale training program for health care staff
1:8 Evaluate the program after 3 years, and analyze, if needd repeat
part of the training program
 Common terminologies for objectives used by
different donors
Objectives DFID (department EU RBM World Bank
of International
(Results-
development) Based
(Great Britain) Management)

Long-term Goals Overall Impact Impacts/

objectives Objectives Development
Objectives

Medium-term Project Project Outcome Project

objective Purpose Objective Outcome

Short-term Immediate Expected Outputs Intermediate

Objectives objectives Results Outcomes

Use of terminologies differ for different project

Step 5. Activities/ Plan of Operation/
Plan of Activities
• Activities are means to achieve the objectives,
not the objectives. Activities tackle the causes to
the focal problem (see problem analysis, step 3)

• Activities should be clearly specified and

expressed as an action. They explain how to
achieve the expected results of the project (the
short term objectives).

• Activities should be connected to the expected

results , the short-term objectives
(Expected result 1: activities 1:1,1:2, 1:3… etc.)
 Cont’d...
Activities should always be connected to the expected results/short-term objectives e.g.

Result 1: Improved knowledge among decision-makers at ministerial level on

efficient trade facilitation measures
Activity: 1:1 Make a need assessment among staff in Ministries and relevant authorities
1:2 Develop a training program, a curricula, and training material for trainings
1:3 Print training material
1:4 Train 15 teachers/trainers (ToT )
1:5 Implement the training program for 25 persons, a pilot training
1:6 Follow-up of the training program, review evaluations, if needed make
changes in the training curricula
1:7 Complete the training program
1:8 Evaluation and dissemination of the results of the trainings
1:9 Integrate the program in to existing services

Specified plans of activities make it easier to implement, to monitor

and much easier to make a realistic planning of resources
(budget, manning schedule and time schedule etc.) .
 Group Assignment (40%)

• Focal problem: Transportation problem in Addis Ababa

i. Do a situation analysis on the above focal problem and identify the
causes and effects of the focal problem. Then develop a problem
tree
ii. Develop objective tree (Change the problem tree into objectives)
iii. Make stakeholder analysis
Step 6 : Planning of Resources

Staff
Budget
Equipment
Time
 Step 6. Inputs/Resource planning

• Experts and personnel (human resource management, project group,

reference group, which knowledge & capacity is needed?)

• Financing (loans, grants, funds, cost sharing, who is financing what?

Future long term financing?)

• Equipment, equipment should be adapted to local conditions

(Are spare parts and maintenance available?)

• Premises (office, training facilities, is there a contract for the premises?)

• Time (make a realistic time schedule, e.g. GANTT-schedule)

 Example GANTT schedule
Time Schedule / Gantt Chart

Microsoft Project Professional

Step 7 : Indicators & Sources of verifications

To monitor results
 Indicators Measure achievements

• Are the objectives achieved? Any positive results?

• The process of setting up indicators shows whether

the objectives are vague and unrealistic.

• Indicators should be set for all expected results and for the
project purpose (short-term objectives and medium-term
objective).

• Indicators should state the quantity and the quality

 Indicators for a management training
1. Number of persons participating in the training
Examples
(SoV: Listofofindicators,
participation)quantity
(quantity)and/or quality,
2. Number of occasions when knowledge among the trained
personnel has been used
(Source of verification (SoV): Number, interviews) (quality)
3. Number of persons passing the test after the training
(SoV: The test results from the training)
4. Examples of changes made in the organization after the training
(SoV: Organizational study )
5. Staff recognition/comments 6 months after the management
training ( SoV: Interviewing staff on management at the authority)

Indicator for service: e.g. Number of satisfied customers (SoV:

statistics, interviews %) (measures quality).
 ............... Measure achievements

• A baseline study, input data is needed, in order to be able to

measure the final results, to be able to compare.
(E.g. how many custom clearances per year when we start our
project)

• Each indicator should be connected to a Source of Verification

(SoV), answering the questions how the information on the
indicator should be collected, when/how it will be collected
(e.g. SoVs interviews, exams, at the statistical office,
questionnaires etc.)
Step 8 : Risk Analysis and Risk Management

Continuous risk analysis

& risk management
important to reach sustainability
Cont’d...
• Analysis of factors which may influence the implementation of the
project and hence the achievement of the objectives.

• Internal and External risks

• Make a risk management plan – mitigation of risks, new activities.

• Killing factors? Important threats, threatening the whole

implementation e.g. the political situation, corruption etc.
 Risk value
Risks Probability Consequence Risk value Risk management
1-5 1-5 /mitigation

1.Brain- 5 4 20 a. Train more staff

drain b. Develop manuals for
training
c. Develop an internal long
term training module
d. Avoid dependence on one
person, share
responsabilities
2.Delayed 2 1 2 None
deliveries
 Step 9: Analysis of Assumptions

• Assumptions describe situations and conditions which are

necessary for project success, problems needed to be solved, but
which are largely beyond the control of the project group to
solve due to the resources of the project group, their mandate
and knowledge etc)

• An assumption is a problem the project group realistically can

assume that other projects/ authorities/actors will handle
Cont...
• The project in the perspective of society/ institutional
situation in a country (laws, political commitments,
financing)
• Assumptions describe situations and conditions,
which are necessary for project success, but which are
largely beyond the control of the project management
• Assumptions on each level of objective (results,
project purpose and overall objectives)
Examples: Delivery in time of equipment, at least five
of the trained personnel stays within the company for
5 more years, prevailed stable political situation
 Why different steps in LFA in the planning
procedure?

• Relevance Step 1 – 4 The Context, the Stakeholder-, the Problem- and

the Objectives analysis. Logical links between problems and solutions?
Ensure that the problems of the target group are solved by the project.

• Feasible Step 5 – 7 Plan of Activities, Resources/inputs and Indicators. Are

the activities and resources sufficient to achieve the objectives?
(Resources: Personnel, time, funding, equipment)

• Sustainable Step 8 – 9 Risk analysis, Risk Management and Analysis of the

Assumptions. If the project is sustainable, will the effects of the project
remain without external assistance?
 The nine steps of an LFA
analysis - why?
 1. Analysis of project´s Context
 2. Analysis of Stakeholders
 3. Problem Analysis/Situation Analysis RELEVANCE
 4. Objectives Analysis

 6. Plan of Resources/Inputs
 5. Plan of Activities FEASIBILITY
 7. Indicators/measurements

 8. Risk Analysis and Risk Management

 9. Analysis of Assumptions SUSTAINABILITY
 LOGICAL FRAMEWORK MATRIX
Narrative Verifiable Means of Important
Summary Indicators Verification Assumptions
(OVI) (MOV)

GOAL

PURPOSE

OUTPUTS

ACTIVITIES Inputs
The Logical Framework Matrix
Objectives & Means of
Indicators Assumptions
activities verification

Goal
(Impact)

Purpose/
(Outcome)

Outputs

Means Cost
Activities

What needs to
be fulfilled Pre-conditions
before activities
can start
Summary of the logical framework
Intervention Logic
• Goal
The higher level objective towards which the project is expected to contribute
(mention target groups)
• Purpose
The effect which is expected to be achieved as the result of the project.
• Outputs
The results that the project management should be able to guarantee (mention
target groups)
• Activities
The activities that have to be undertaken by the project in order to produce
outputs.
Cause-effect relationship among objectives at
several levels

Goal

Purpose

Outputs

under full control of

Activities
project management

Inputs beyond control of

project management
 The logical framework

Impact

Outcome
Assumptions

Outputs Assumptions

Activities Assumptions
 Evaluation Criteria
 Relevance: The appropriateness of the project objectives to the
problems it addresses and to the physical and policy
environment.
 Efficiency: Results achieved at reasonable cost i.e how well
inputs/means have been converted into results in terms of
quality, quantity and time?
 Effectiveness: An assessment of the contribution made by the
results to achievement of the project purpose and how
assumptions have affected project achievements.
 Impact: The effect of the project on its wider environment. Its
contribution to the objectives for the sector (overall objectives)
 Sustainability: Likelihood of the benefits produced by the
project to continue to flow after end of project with particular
reference to ownership, environment, policy support,
institutional capacity and financial support.
 Project Management (MBA 592)

Chapter 3: Project Planning and

Implementation
(Part Three: Organizing Activities in
a Work Breakdown Structure/WBS)
 Work Breakdown Structure (WBS)
• Definition of WBS:
WBS is an outline of the work; it is not the work itself. The work is the sum of
many activities that make up the project.
We need WBS because it serves as a framework to define and organize the work.
 It is a deliverable-oriented hierarchical decomposition of the work to be
executed by the project team to reach to the project objectives and create the
required deliverables. It organizes and defines the total scope of the project.
Each descending level in the hierarchy represents an increasingly detailed
definition of the project work.
 WBS is decomposed into Work Packages: lowest level in the WBS, and is the
point at which the cost and schedule can be reliably estimated. The level of detail
for Work Packages will vary with the size and complexity of the project.
 Importance of WBS
The following points may help you appreciate the role of WBS:
1. The intelligent structure of work breakdowns is a
precursor to effective project management
2. The WBS serves as the framework for project plan
development. Much like the frame of a house, it
supports all basic components as they are
developed and built
3. The WBS is the key tool used to assist the project
manager in defining the work to be performed to
meet the objectives of a project
4. The WBS provides the framework on which costs,
time, and schedule/performance can be compared
against the budget for each level of the WBS
 Steps in Developing WBS
1. Specifying the project objectives
2. Identifying specifically the products, services, or results (deliverables
or end items) to be provided to the customer
3. Identifying other work areas in the project to make sure that 100
percent of the work is covered and to identify areas that cut across
the deliverables, represent intermediate outputs, or complement the
deliverables.
4. Subdividing each of the items in steps 2 and 3 into successive, logical
subcategories until the complexity of the elements become
manageable units for planning and control purposes (work packages).
 Types/Elements of WBS
1. Product Breakdown-The subdivision based on the physical structure
of the product(s) being delivered (as the capital asset) is the most
common basis for a WBS and the easiest WBS to develop.
• This happens when projects have a tangible output product: software, a building,
a dam, an airplane, a user's manual, etc.; all have a natural structure.
2. Service Project Breakdown-Service projects do not have a tangible,
and structured deliverable. The output is a defined body of work or
service provided for others. E.g includes arranging a conference,
party, wedding, vacation trip, etc. The work breakdown is a logical
collection of related work areas.
 Cont...
3. Results Project Breakdown-Results projects do not have a tangible,
structured deliverable. The output is the consequence of a process
that results in a product or a conclusion: cancer research, new drug
development, culture change, etc. The work breakdown is a series
of accepted steps.
4. Cross-Cutting Element-This is a breakdown of items that cut across
the product/service, such as architectural design, assembly, or
system test. These usually are technical and supportive in nature.
While there is no restriction, these types of cross-cutting elements
are rare in service or results projects.
5. Project Management-This is a breakdown of the managerial
responsibilities and managerial activities of the project. It includes
such items as reports, project reviews, and other activities of the
project manager or his or her staff.
Creating the WBS
• The breaking down of large activities into comprehensible or
manageable units is a fundamental part of project management.
• WBS is also known as 'chunking' or 'unbundling'. This is attractive as it
gives people responsibility for a manageable part of the project.
• WBS also facilitates financial control activities, as individual parts can
have their consumption of resources tracked.
• The sensitivity of such control is preferable to keeping track of a single
large activity.
• The WBS is described as a hierarchical structure which is designed to
logically subdivide all the work-elements of the project into a graphical
presentation.
• The full scope of work for the project is placed at the top of the diagram,
and then sub-divided smaller elements of work at each lower level of
the breakdown.
 Cont...
• At the lowest level of the WBS the elements of work is called a work
package. A list of project‘s activities is developed from the work
packages.
• Effective use of the WBS will outline the scope of the project and the
responsibility for each work package. There is not necessarily a right or
wrong structure because what may be an excellent fit for one discipline
may be an awkward burden for another.
Mechanics of the WBS: Numerical Sequencing
• Top Level: Regardless of the approach, the work breakdown structure
(WBS) looks fundamentally the same. The top level, or project level, is
1.0.
• Second Level: The second level will carry the same first digit, followed
by a decimal point, then another set of integers starting with one. Thus,
under Level 1.0, the second level would have groups subcomponents
1.1, 1.2, 1.3, etc.
• Third Level and Beyond: The third level will carry the same first two
sets of digits, a decimal point, then another set of integers. Thus, the
third level would have subcomponents 1.1.1, 1.1.2, 1.1.3, and so on.
WBS Orientation
• The lowest level of the WBS, where the work is actually assigned, is
known as the ‘work package’. The level above the work package is a
reporting level (used for all management reporting, not just financial
reports) known as the 'cost account’.
• Some sample work breakdown structures are provided below.
• These two orientations are significant in that the project manager
needs to determine which approach will serve the best interests of the
project. The choices are between-task– and deliverable-oriented WBS.
Cont...

1. Deliverable Orientation
• In the WBS below, the elements at the highest level are deliverables
associated with this project.
• As the work is broken down, subcomponents of the primary
deliverables are described as continues down to the lowest where
the work is defined as simple easy-to-understand and easy-to-
manage deliverables that are the responsibility of the single
individual, a single organization or a single function within the-
organization.
 Cont...
• The orientation is not by phase, or by checkpoints, but by the deliverables that have to be
produced.
• Example: Let's use the simple example of an office move. Here, the target deliverable is the
organization's completed move to a new facility.
• To accomplish that goal, the organizers have identified the key deliverables as the efforts to (1)
move networks, (2) move equipment, and (3) move personnel:
1.0 Organizational Move
1.1 Network Move
1.2 Equipment Move
1.3 Personnel Move
• Under Network Move, there could be several key deliverables:
1.1 Network Move
1.1.1 Server Move
1.1.2 Backup Systems Move
1.1.3 Workstation Move
• Under Workstation Move, there could be a breakdown either by office group or by other
pertinent deliverables.
1.1.3 Workstation Move
1.1.3.1 Word Processing Workstation Move
1.1.3.2 Data Entry Workstation Move
1.1.3.3 Customer Service Workstation Move
• If those departments are sufficiently large, there might even be cause to break the deliverables
down even further.
1.1.3.2 Data Entry Workstation Move
1.1.3.2.1 Sun Workstation Transfer
1.1.3.2.2 M/S Workstation Transfer
1.1.3.2.3 Mac Workstation Transfer
Fig. Deliverable oriented WBS
207
 Cont...

• The other school of thought argues that the lowest level of the WBS
should always feature a "verb-object" or task orientation to describe
the specific work that has to be accomplished.
• The latter approach is more specific in describing these work packages-
the lowest level of the WBS-and how they should be accomplished.
 Cont...
2. Task Orientation
• While the deliverable-oriented WBS has become the predominant
approach over the past few years, the task-oriented WBS remains a
favorite among project managers -whose projects are heavily time
dependent and whose organizations- are steadfast in their orientation-
toward “checkpoints" and "gates" that allow for progress-from stage to
stage-or phase to-phase.
• Task oriented work breakdown structures break the work out by task
groupings that either occur within the same timeframe or are related in
function.
• In using the same example we used for the deliverables-oriented WBS,
the only change has been to reflect a time-scaled (or checkpoint-scaled)
orientation.
Cont...

1.0 Move to New Facility

1.1 Concept Phase
1.2 Development Phase
1.3 Implementation Phase
1.4 Termination Phase
• As you progress down the WBS, the activities are grouped by tasks,
rather than by deliverables.
• In this example, the Implementation Phase might include all work
done by a single group of specialists:
1.3 Implementation Phase
1.3.1 Move Workstations
1.3.2 Move Office Equipment
1.3.3 Move Personal Effects
Cont...

1.3.1 Move Workstations

1.3.1.1 Move Word Processing Workstations
1.3.1.2 Move Data Entry Workstations
1.3.1.3 Move Customer Service Workstations
1.3.1.2 Move Data Entry Workstations
1.3.1.2.1 Transfer Sun Workstation to New Facility
1.3.1.2.2 Transfer M/S Workstation to New Facility
1.3.1.2.3 Transfer Mac Workstation to New Facility
Cont...

• In this example, WBS elements are expressed using the verb-object

form. In these types of process or task-oriented Work Breakdown
Structures, the work is described as a process or action.
• This implies that the true end-product of the WBS element is a
refined process rather than the actual deliverables of the process.
Project Management (MBA 592)

Project Implementation
(Part Four)
Maru Shete (PhD and Assoc. Prof.)
How will approved projects be implemented?
Implementation of approved projects require choosing among different
Organizational Structures.
There are three different project management structures to choose from:
1. Functional organization
2. Projectized or dedicated teams
3. Matrix structure

214
Cont..
In any organizational structure there is Organizational Workflow with
different level of authority, responsibility and accountability.
Authority: the power granted to individuals so that they can make the final
decision
Responsibility: The obligation incurred by individuals in their roles in the
formal organization to effectively perform assignments
Accountability: being answerable for the satisfactory completion of a
specific assignment
Accountability = Authority + Responsibility

215
 Functional Organization
 When top management decides to implement the projects
with the existing functional hierarchy, it is functional
organizations
 Thus, the implementation and coordination of the projects
are managed by functional management.
 The project will be part of the working agenda of top
management.
 The overall project will be managed following (within)
the normal hierarchy.
 One functional area plays a dominate role or has a
dominant interest in the success of the project

216
 Functional Organization (Example)

General
Manager

Adminis-
Director Level Engineering Production Sales Marketing Admin.
tration

Division Level

Department Level

Section Level Functional Responsibility

217
 Cont…
Advantages of Functional Organization
1. No change: Projects are managed within the functional structure of the
organization to administer and complete project. No radical change in
the operations of the parent company. Thus, status quo is maintained.
2. Flexibility: Specialists in different functional units can temporarily
work on the project then return to their normal work.
3. Indepth Expertise: The functional unit is assigned primary
responsibility and in-depth experts within the unit can concentrate on
the most crucial aspects of the project.
4. Easy Post-Project Transition: Normal career paths within a
functional division remain intact. The functional unit worked on it and
they maintained it after being implemented.

218
Cont...
Disadvantages of Functional Organization
1. Lack of Focus: Each functional unit has it own routine
operational work to do. Project responsibilities can easily
be pushed aside in order to meet normal obligations.
Creates delay!
2. Poor Integration: Poor integration across functional teams
as functional specialists tend to be concerned only with
their project responsibilities, not what is best for the total
health of the project.
3. Slow: Decisions have to be circulated through normal
management channels. As project operations are not their
core function, they respond to project concerns slowly.
Thus, takes longer to complete projects!
4. Lack of Ownership: Weak motivation of the resources
assigned to the project as it is not directly linked to their
professional development or advancement. This lack of
ownership discourages a strong commitment to project-
related activities. 219
Organizing Projects as Dedicated Teams

Dedicated Teams is also known as a projectized organization.

These teams operate as separate units as part of the parent organization
or separately from the parent organization depending on the nature of
the project.
Thus, the project team could be located physically separated from the
parent organization.
The project manager does all the recruiting of project resources and has
full authority to assign priorities and direct the work of team members
assigned to the project.
The sole purpose of this dedicated team is to drive completion of the
project with no interest in daily operations.
There can be multiple dedicated teams within the organization each
dedicated to a major project.

220
Dedicated Project Team (Example)

30/11/2019 Prepared by Temesgen Belayneh (PhD) 221

 Cont...
Advantages of Dedicated Project Team

1. Simple: All specialists are dedicated to the project allowing the

functional units to operate without project work interruption.
2. Fast: Project get done more quickly when project team members
are fully focused to the project and are not distracted by other
obligations. Response time is much faster because decisions are
made within the dedicated team instead of being dependent on
the response across the hierarchy.
3. Cohesive: Motivation and cohesiveness is present as all share a
common goal and personal responsibility towards the success of
the project.
4. Cross-Functional Integration: Experts or specialists from
different work areas work together and are committed to
optimizing the project, not just their respective area of expertise.

222
Cont...

Disadvantages of Dedicated Project

Team
1. Expensive: Newly created management positions, resources and project teams
working on a full-time basis. If more than one project is going on at a time,
duplication of efforts across all projects occurs and a loss of economies of
scale.
2. Internal Strife: Sometimes dedicated teams take on a social phenomenon
called Projectitis in which members of the dedicated team exhibit
inappropriately intense loyalty to the project.
3. Limited Technological Expertise: Because these teams are self-contained, the
level of expertise is limited by the skill level and expertise among the recruits.
Because of the “we versus them” syndrome, specialists often will not consult
with other experts in the functional units.
4. Difficult Post-Project Transition: When the project is completed and the team
members are released from the project, going back to their former functional
position may not be available. It may be difficult for those released resources to
catch up with new developments that occurred during their prolonged absence. 223
 Organizing Projects within a Matrix
Model
The Matrix model is a hybrid organizational form in which a project
horizontally crosses over several functional units.
Matrix structure is designed to utilize resources working on multiple
projects as well as being capable of performing normal functional
duties.
Two chains of command: Project managers and functional managers.
Matrix structure achieves smoother integration by recognizing the
legitimate authority of the project manager. The functional manager
ensures the project tasks will be implemented and completed as per the
project schedule.

224
 Matrix Organization Cont…
 Participants must spend full time on the project. This ensures a degree
of loyalty.
 Horizontal as well as vertical channels exist for making commitments.
 Both horizontally and vertically oriented managers negotiate for
resources.
 The horizontal line operates as a separate entity except for
administrative purposes.
 All managers will have input in the planning process.
 The structure requires to have quick and effective methods for
conflict resolution.
 It also requires good communication channels and free access
between managers.

225/48
Different Matrix Forms
1. Weak matrix: very similar to a functional approach with the exception
that there is a formal designated project manager responsible for
coordinating project activities.
 The project manager acts as a staff assistant who develops the schedules and
checklists, collects information on work status, and facilitates project
completion.
 Project managers have indirect authority
 Functional managers have full and direct authority over resources
 Advantage: likely to improve technical quality as well as a better system for
managing conflicts across projects because the functional manager is in control
of unit resources.
 Disadvantage: Functional control over the project is often the cause of poor
project integration.

226
Weak Matrix (Example)

DIVISION MGR.
LEGEND
FORMAL FLOW
PROJECT MGR.
INFORMAL FLOW

DEPT. MANAGER DEPT. MANAGER

227
The Matrix Management Structure (Example)

General
Manager

Engineering Operations Finance Others

Functional Responsibility

Project Mgr. Project Responsibility

X

Project Mgr.
Y

Project Mgr.
Z
228
Modified Matrix Structure (With a Director of Project Management)

General Manager

Director: Director: Director: Director:

Project Mgmt. Engineering Manufacturing Finance/Admin.

Project Mgr. X

Project Mgr. Y

Project Mgr. Z

229
 Matrix Cont…
2. Balanced matrix: classic structure in which the project manager is
responsible for defining what needs to be accomplished and functional
managers are concerned with how it will be accomplished.
 The project manager establishes the overall plan, integrates
completed tasks, sets schedules, and monitors progress
 Functional manager is responsible for assigning personnel and
executing their project work per the standards and schedules set by
the project manager.
 Both the project and functional managers work closely together and
jointly approve technical and operational decisions.
 Power is shared equally between the project and functional manager
 Balanced matrix can achieve better balance between technical and
project requirements. However, it is a delicate system to manage due
to sharing authority and resources with a functional manager.

230
 Matrix Cont...
3. Strong matrix: project manager controls most aspects of the project
including assignment of functional personnel.
 Project manager controls when and what resources do and has final say on major
project decisions
 Functional manager has title over the unit and is often utilized as a
“subcontractor” for the project, in this case having more control over specialized
work.
 Advantage: Strong matrix is likely to enhance project integration, diminish
internal power struggles, and ultimately improve control of project activities and
costs.
 Disadvantage: quality may suffer because functional areas have less control over
the quality of contributions to the project.

231
 Matrix Cont...
General Advantages
1. Efficient: Resources are shared across multiple projects within functional
divisions. This reduces duplication of effort as seen in a projectized structure.
2. Strong Project Focus: A stronger focus on projects due to having a designated
project manager. This helps sustain a holistic approach to problem solving which
is often lacking in the functional unit.
3. Easier Post-Project Transition: Since the project organization is overlaid across
functional divisions, specialists maintain ties with their functional group and are
not displaced when a project ends.
4. Flexible: Matrix structure provides for flexible utilization of resources and expert
skill sets within the organization. Depending on the culture and the Matrix
structure, functional units may provide individuals who are entirely managed by
the project manager while engaged on a project. In other cases, the contributions
to the project are managed and monitored by the functional manager.

232
 Matrix Cont...
General Disadvantages
 Potential weaknesses in a matrix structure is due in great part that it
creates multiple bosses over functional resources. This is a radical
departure from the traditional hierarchical authority system.
 Managers who are not indoctrinated to a project style organization may
find it difficult to relinquish or even share their authority over their
staff with a project manager.
 Analysis shows that a matrix structure can take 3 to 5 years to reach full
maturity. The disadvantages and problems that follow represent
growing pains along the journey of project maturity
 Project management maturity refers to the progressive development of an
enterprise-wide project management approach, methodology, strategy, and
decision-making process. The appropriate level of maturity will vary for each
organization based on its specific goals, strategies, resource capabilities, scope,
and needs.

233
Matrix disadvantage cont...
1. Dysfunctional conflict: Tension between functional managers and
project managers is viewed as a necessary mechanism for achieving a
balance between complex technical issues and unique project
requirements. This tension can be the result of conflicting agendas
(project and operational) and accountabilities (to project and to
operational demands).
2. Infighting: When equipment and resources are being shared between
project and functional activities, it can lead to conflict and
competition for scarce resources. Infighting can occur between
project managers who are vying for the same resources when
concerned about what is best for their project.
3. Stressful: Matrix structures violate the management principle of unit
of command. Project participants take orders from their functional
managers in addition to one or more project managers. Working in a
matrix environment can be stressful to people resources.
4. Slow: The presence of a project manager to coordinate project tasks
should accelerate completion of projects. In practice, however,
decision making can get bogged down as agreements have to be
obtained across multiple functional groups. This is especially true in
balanced matrix. 234
What is the Right Project Mgmt. Structure?
The following Organizational and Project Considerations are
important:
1. Project Considerations
1. How important is project management for the success of the
organization?
 If over 75% of work being done involves projects, then the
organization should consider a fully projectized structure.
 If the organization performs both standard products and projects,
then a matrix structure would be appropriate.
 If the organization has very few projects, then a less formal
arrangement is probably all that is needed (i.e. functional structure).
 Finally, dedicated (or projectized) teams could be formed only when
needed or could be outsourced.

235
Cont...
There are seven project-related factors that influence the choice of a
project management structure. This includes:
1. Size of the project
2. Strategic importance of the project
3. Novelty and need for innovation
4. Need for integration
5. Environmental complexity
6. Budget and time constraints
7. Stability of resource requirements

236
Cont...

 The higher the importance of these seven factors the more

autonomy and authority the project manager and the project team
needs in order to be successful.
 Today a growing number of companies are using the “mix and
match” structure approach for managing their projects.

237
Cont...
2. How available are resources?
Matrix structures share resources across multiple projects and functional
work while at the same time creating legitimate project leadership.
For organizations which have limited resources and cannot afford to tie
up critical personnel on projects, a matrix structure is appropriate.
Alternatively, the organization could create a dedicated team or
outsource the project when internal resources are not readily available.

238
 Organizational Culture and Choice of
Project Management Structure
Organizational Culture: refers to a system of shared norms, beliefs,
values, and assumptions which binds people together and becomes a shared
meaning.
Culture reflects the personality of the organization and defines its aspects,
which differentiate its setting from other organizations, even in the same
industry.
Culture provides a sense of identity for its members. The more clearly an
organization’s perceptions and values are stated, the more strongly people
can identify with their organization and feel part of it.
Culture helps legitimize the management system and helps clarify
authority and why authority should be respected.
Culture clarifies and reinforces standards of behavior by defining what is
permissible and inappropriate behavior.
Culture helps create social order within the organization. Customs, norms,
and ideals provide stability and predictability in behavior, essential for an
effective organization.
239
 Cont...
According to research, there are 10 primary characteristics that, when
aggregated, capture the culture of the organization. There are:
1. Member identity: employees identify with the organization as a
whole rather with their type of job or their field of professional
expertise.
2. Team emphasis: the degree in which work activities are organized
around groups rather than individuals.
3. Management focus: the degree in which management decisions take
into account the effect of outcomes on people in the organization.
4. Unit integration: the degree to which organizational units are
encouraged to operate in both coordinated or interdependent manners.
5. Control: the degree in which rules, policies, and direct supervision
are used to oversee and control employee behavior.

240
Culture Cont...
6. Risk tolerance: the degree in which employees are encouraged to be
aggressive, innovative, and risk seeking.
7. Reward criteria: the degree to which rewards (promotion & salary
bumps) are allocated according to performance rather than seniority,
favoritism, or other non-performing factors.
8. Conflict tolerance: the degree in which employees are encouraged
to air conflict and criticisms openly
9. Means versus end orientation: the degree in which management
focuses on outcome rather than on techniques or processes used to
achieve those results.
10. Open-system focus: the degree to which the organization monitors
and responds to changes in the external environment
 These 10 dimensions provide a composite picture of the
organization’s culture. It becomes the basis for shared feelings across
the organization, how things are done, and the way members are
supposed to behave.
241
Implications of Organizational Culture
for Organizing Projects
Project managers have to interact with the culture of the parent
organization and work well in the subcultures of various departments.
Project managers have to interact with the client or customer
organizations.
Project managers have to interact with other organizations connected
to the project
Project managers have to be able to read and speak the culture they
are working in when developing strategies, plans, and responses that
will be understood and accepted.
Strong correlation between project management structure and the
organizational culture with project success.

242
 Cont...
Given the metaphor that culture is a river and a project is a boat
Cultures that are conducive to project management is like paddling
downstream.
Some organizations have such a strong project culture and are project
friendly. In these cases, projects succeed due to the norm of project
commitment, healthy conflict, and committed to the strategies of the
organization.
Toxic cultures is like paddling upstream, which requires more time, effort,
and constant attention to the end goal. These are cultures that discourage
teamwork, have a low tolerance for conflict, and where “getting ahead” is
less about performance and more on relationships with upper management.

243
Cont...

The degree of interdependence between the parent organization and

the project team determines how well the culture will support project
management.
Again, based on the culture and commitment to project management,
the structure will be conducive to either Functional, Projectized, or
Matrix (weak, balanced, strong).

244
Chapter 4: Project Monitoring and
Evaluation/Controlling
 Monitoring & Evaluation (M&E)

• M & E are two different management tools that are

closely related, interactive and mutually supportive

• Through routine tracking of project progress,

monitoring can provide quantitative and qualitative
data useful for designing and implementing project
evaluation exercises
• Through the results of periodic evaluations,
monitoring tools and strategies can be refined and
further developed
246
 Comparison Between M&E
Item Monitoring Evaluation
Frequency Regular, ongoing Episodic
Main action Keeping track/oversight Assessment
Basic purpose Improving efficiency Improve effectiveness, impact,
Adjusting work plan future programming
Focus Inputs/outputs, process outcomes, Effectiveness, relevance,
work plans efficiency, impact, sustainability
Information Routine systems, field visits, Same plus
sources stakeholder meetings, output Surveys (pre-post project)
reports, rapid assessments Special studies
Undertaken by Project/program managers External evaluators
Community workers Community (beneficiaries)
Supervisors Project/program managers
Community (beneficiaries) Supervisors
Funders Funders
Other Stakeholders

247
 Commonalities of M&E

• Both monitoring and evaluation must be planned at the program/

project level

• Baseline data and appropriate indicators of performance and results

must be established

248
Planning a Monitoring System

1. What should be monitored?

• Keep information requirements to a bare minimum
• Collect info that will be most helpful to those who will use it

2. How?
• Select methods to track indicators/report on progress
 Observations, interviews, routine reporting, sentinel sites
 Both formal/informal and quantitative/qualitative methods
 Decide how information will be recorded systematically and reported
clearly
 Consider the time and skills of those who will collect the data
 Pretest new monitoring instruments

249
 Planning a Monitoring System

3. Who should be involved when?

• Clearly identifying who will collect information on
indicators, when (frequency) and who will receive it
• The monitoring plan should also identify who will be
involved in reviewing progress and providing feedback

4. What resources are needed and available?

• The human and financial cost of gathering, reporting
and reviewing data should be identified
• Needed funding and time should be set aside for this
work

250
Planning a Monitoring System

5. Consultation and Training

• Discuss the monitoring program with a representative
group from each level before it is put into effect
• Provide training to those who will be using the
monitoring systems

6. Prepare a work plan

• for each year
• listing the main activities to be carried out, their output,
timing and parties involved

251
 Tools for Project monitoring/controlling:
The Earned Value Analysis
What is Earned Value?
• It is a project monitoring and measurement system that:
1. establishes a clear relationship between planned accomplishments and actual
accomplishments
2. reinforces and rewards good planning practices
• Basic concepts of Earned Value Management (EVM)
Each task in a project earns value as planned work is completed
 For example, if you were paid on this basis, you would earn $x at key milestones based on the value
of what you have completed (earned value)
Earned value can be compared to actual cost and budgeted cost to determine variance
and predict future performance
• One way of measuring overall performance is by using an aggregate
performance measure called earned value
• A serious difficulty with comparing actual expenditures against budgeted or
baseline is that the comparison fails to take into account the amount of work
accomplished relative to the cost incurred
 Cont…
• The earned value of work performed (value completed) for
those tasks in progress is found by multiplying the
estimated percent completion for each task by the planned
cost for that task
• The result is the amount that should have been spent on the
task so far
• The concept of earned value combines cost reporting and
aggregate performance reporting into one comprehensive
chart
 Cont…
• Variances on the earned value chart follow two primary guidelines:
 Negative means there is a deviation from plan—not good
 The cost variances are calculated as the earned value minus some other measure
1. Earned Value (EV):
 The value (in person-hours) in terms of your base budget of what you have accomplished at a
given point in time (or, % complete X Planned Value/Cost). In short, budgeted cost of
work performed
2. Actual Cost (AC):
 How much work (person-hours) you have actually spent at a given point in time. In short,
Actual cost of work performed
3. Planned Value/Cost (PV/PC):
 How much work (person-hours) you planned to have accomplished at a given
point in time (this is from the WBS in your plan). In short, Budgeted cost of
work scheduled
4. Scheduled Time (ST): Schedule for work performed
5. Actual Time (AT): Actual time of work performed
 Earned Value: Example
Today

18

14

On Day X:
• PLANNED VALUE (Budgeted cost of the work scheduled, BCWS) =
18 + 10 + 16 + 6 = 50
• EARNED VALUE (Budgeted cost of the work performed, BCWP) =
18 + 8 + 14 + 0 = 40
• ACTUAL COST (of the work performed , ACWP) =
45 (from your project tracking - not evident in above chart)

255
Earned Value: Example

Actual Cost: what you Today

have actually spent to this
point in time.
Cost (Person-Hours)

Planned Value: what your

plan called for sending on the
tasks planned to be
completed by this date.

Earned Value: value (cost) of

what you have accomplished
to date, per the base plan.

Time (Date)

256
Earned Value: Example

Today

Over
Budget
Cost (Person-Hours)

Behind
Schedule

Time (Date)

257
 Variance
• Any schedule or cost deviation from a specific plan.
• Used within an organization to verify the budget and schedule for a project
• Frequently used as a key component of plan reviews and performance
measurement
• Must compare scheduling and budget variance at the same time
• Schedule variance: deviations from work planned – not a measure of changes in
cost
• Cost variance: deviations from the budget – not a measure of work scheduled vs.
work completed
• Example: applying more $$/people to a task may maintain the schedule, but it adds to cost…
schedule on track… over budget on expenses (cost)

258
 Variance Analysis

Cost variance (CV)= EV – AC; Cost overrun when CV is negative

Schedule variance (SV)= EV – PV; Late when SV is negative
Time variance (TV)=ST – AT; Delay when TV is negative
• If the earned value chart shows a cost overrun or performance
underrun, the project manager must figure out what to do to get the
system back on target
• Options may include borrowing resources, or holding a meeting of
project team members to suggest solutions, or notifying the client
that the project may be late or over budget
Variance Analysis with Ratios
• Variances are also formulated as ratios rather than
differences
1. Cost Performance Index (CPI) = EV/AC
• When CPI>1An exceptional performance and If
CPI<1Poor performance
2. Schedule Performance Index (SPI) = EV/PV
• When SPI>1An exceptional performance and If SPI<1Poor
performance
2. Time Performance Index (TPI) = ST/AT
• Use of ratios is particularly helpful when comparing
the performance of several projects
 Earned Value & Variance: Example

18

14

On Day X:
• PLANNED VALUE (PV) = 18 + 10 + 16 + 6 = 50
• EARNED VALUE (EV) = 18 + 8 + 14 + 0 = 40
• ACTUAL COST (AC) = 45 (from your project tracking)
Therefore:
• Schedule Variance = EV – PV = 40 - 50 = -10 (behind schedule)
• Schedule Performance Index = 40 / 50 = 0.8, or 80% of plan
• Cost Variance =EV - AC = 40 - 45 = -5; Cost overrun
• Cost Performance Index = 40/45 = 0.89, or you are getting an 89¢ return on every $1.00 (or,
person-hour) spent on this project
261
Example

• Planned $1500 to complete work package.

• Scheduled to have been finished today.
• Actual expenditure to date is $1350.
• Estimate work is 2/3 complete.
1. What are cost and schedule variances?
Cost variance

Cost variance = EV – AC
= $1500(2/3) - $1350
= $1000 - $1350
= -$350
Schedule Variance

Schedule variance = EV – PV
= $1500(2/3) - $1500
= -$500
 Cost Performance Index (CPI)

CPI = EV/AC
=($1500/(2/3) / $1350)
= 1000/1350
= 0.74
SPI (Schedule Performance Index)

SPI = EV/PV
= ($1500(2/3))/$1500
= $1000/$1500
= 0.67
Estimate to Complete (ETC) and Estimate at
Completion (EAC)
Estimate to complete (ETC) = (PV-EV)/CPI
=(1500-1000)/0.74
= $676

Estimate at completion (EAC)= ETC + AC

= $676 + $1350
= $2026
 Exercise: Taken from Last Exam

Case 1. Tabulated Summary for Project X (Cumulative values of Project X, a 12 month project, with values to
the end of month 8).
Month PC AC %Comp EV CPI SPI
1 50 50 10%
2 150 80 20%
3 260 200 30%
4 370 300 45%
5 490 420 55%
6 590 510 65%
7 700 635 75%
8 800 780 80%
9 870
10 930
11 980
12 1000
BAC
Notes: Planned Cost (PC); Actual Costs (AC); Percentage Complete (%Comp); and Budget at Completion
(BAC).
Questions:
• Using the information provided in the table above, answer the following
questions.
1. What is the Earned Value at the end of month 8? (5 points)
2. What is the Cost Performance Index (CPI) at the end of month 8? (5
points)
3. What is the Schedule Performance Index (SPI) at the end of Month
8? (5 points)
4. What is the Budget at Completion (BAC) at the end of Month 8? (5
points)
5. Looking at the project as a whole, describe the progress of the
project thus far in terms of predicted schedule and cost implications.
(5 points)
Answers:
1. What is the Earned Value at the end of month 8? (5 points)
• Earned Value (EV)= (% Completed)(Planned Value/Cost); (0.8)(ETB3410)= ETB 2728
2. What is the Cost Performance Index (CPI) at the end of month 8? (5 points)
• Cost Performance Index (CPI)= EV/Actual Cost(AC); 2728/2975= 0.916 (91.6%). A
situation of cost overrun, or for every one birr investment, the return was only 0.916
cents.
3. What is the Schedule Performance Index (SPI) at the end of Month 8? (5
points)
• Scheduled Performance Index (SPI)= EV/PV; 2728/2975=0.8. The project is behind
schedule, i.e the project accomplished only 80% of the job that should have been done
until month 8.
4. What is the Budget at Completion (BAC) at the end of Month 8? (5 points)
• Estimate to complete the work at the end of month 8 (ETC) = (PV-EV)/CPI; (3410-
2728)/0.916= ETB 744.54. This means that the project requires ETB 744.54 to
complete the whole activities planned until month 8. Then, the BAC (EAC) of all the
activities of month 8 will be: AC (ETB 3410)+ ETB 744.54=3719.54
5. Looking at the project as a whole, describe the progress of the project thus
far in terms of predicted schedule and cost implications. (5 points)
• The project requires ETB 3719.54to complete the whole activities planned until month
8 while the budget allocated until this month was ETB 3410. Therefore, the cost
implication due to poor performance: ETB 3719.5 - 3410= ETB 309.54
• The Schedule Variance will be: EV – PV= ETB 62728-ETB3410= ETB -682. Due to late
accomplishment, the project incurred this much additional cost.
Case 2: A project has an original budget of ETB600,000 and after the first 4 months of a
12 months planned project time, the scheduled costs, actual costs and earned values are
as follows:
Performance Time
Indicators
Month 1 Month2 Month 3 Month 4

Scheduled cost 32,000 60,000 150,000 240,000

(ETB)
Actual cost 35,000 70,000 160,000 250,000
(ETB)
Earned value 30,000 50,000 140,000 230,000
(ETB)

Answer the following questions based on the information provided.

1. Draw the three curves: Scheduled cost, Actual cost & Earned Value
2. Calculate the Cost Variance for month 4
3. Calculate the Schedule Variance (cost based) for month 4
4. Calculate the CPI for month 4
The End!!!
 Chapter 5
Contract Management
Outline

 Concept and definition of contract

 Types of project contract
 Project contract management
 Concept and Definition
Contract is simply an elaborated agreement between two or more parties.
One or more parties may provide products or services in return to something
provided by other parties (client).
Contract management, also referred as contract administration, is the
process of systematically and efficiently managing contract creation,
execution and analysis for maximising operational and financial performance
and minimising risk.
It refers to the processes and procedures that companies may implement in
order to manage the negotiation, execution, performance, modification and
termination of contracts with various parties including customers, vendors,
distributors, contractors and employees.
While business people often dismiss contract preparation as “lawyer’s work,
contracting is actually one of the crucial activities that determines the success
of any business arrangement.
A number of definitions of contract management refer to post-award
activities.
Successful contract management, however, is most effective if upstream or
pre-award activities are properly carried out.
Importance of effective contract management

It is worthwhile noting that contract management is successful if:

• the arrangements for service delivery continue to be satisfactory to both parties,
and the expected business benefits and value for money are being realised
• the expected business benefits and value for money are being achieved
• the supplier is co-operative and responsive
• the organisation understands its obligations under the contract
• there are no disputes
• there are no surprises
• a professional and objective debate over changes and issues arising
• efficiencies are being realised.
Types project contract
 Contracts are used for establishing business deals and partnerships.
The parties involved in the business engagement decide the type of the
contract.
 The type of the contract used for the business engagement varies
depending on the type of the work and the nature of the industry.
 The contract type is the key relationship between the parties engaged
in the business and the contract type determines the project risk.
Cont...
The most widely used contract types are:
1. Fixed Price (Lump Sum):
 The service provider agrees to provide a defined service for a specific
period of time and the client agrees to pay a fixed amount of money
for the service.
 This is the simplest type of all contracts. The terms are quite straight
forward and easy to understand.
 This contract type may define various milestones for the deliveries as
well as Key Performance Indicators. In addition, the contractor may
have an acceptance criteria defined for the milestones and the final
delivery.
 Advantage: the contractor knows the total project cost before the
project commences.
Cont...
2. Unit Price
In this model, the project is divided into units and the charge for each
unit is defined. This contract type can be introduced as one of the more
flexible methods compared to fixed price contract.
Usually, the owner (contractor/client) of the project decides on the
estimates and asks the bidders to bid of each element of the project.
After bidding, depending on the bid amounts and the qualifications of
bidders, the entire project may be given to the same service provider or
different units may be allocated to different service providers.
Advantage: different project units that require different expertise to
complete can be awarded to different bidders.
 Cont...
3. Cost Plus
A contract model by which the services provider is reimbursed for their
machinery, labour and other costs, in addition to contractor paying an
agreed fee to the service provider.
In this method, the service provider should offer a detailed schedule and the
resource allocation for the project. Apart from that, all the costs should be
properly listed and should be reported to the contractor periodically.
The payments may be paid by the contractor at a certain frequency (such as
monthly, quarterly) or by the end of milestones.
 Cont...
4. Incentive
There are three cost factors in an Incentive contract; target price, target
profit and the maximum cost.
The main mechanism of Incentive contract is to divide any target price
overrun between the client and the service provider in order to minimize
the business risks for both parties.
This type of contracts are usually used when there is some level of
uncertainty in the project cost. Although there are nearly-accurate
estimations, the technological challenges may impact on the overall
resources as well as the effort.
This type of contract is common for the projects involving pilot programs
or the project that harness new technologies.
Cont...
5. Retainer (Time and Material - T&M)
This engagement type is the most risk-free type where the time and
material used for the project are priced.
The contractor only requires knowing the time and material for the
project in order to make the payments.
This type of contract has short delivery cycles, and for each cycle,
separate estimates are sent of the contractor.
Once the contractor signs off the estimate and Statement of Work
(SOW), the service provider can start work.
Unlike most of the other contract types, retainer contracts are mostly
used for long-term business engagements.
Cont...
6. Percentage of Construction Fee
This type of contracts is used for engineering projects. Based on the
resources and material required, the cost for the construction is
estimated.
Then, the client contracts a service provider and pays a percentage of the
cost of the project as the fee for the service provider.
As an example, take the scenario of constructing a house. Assume that
the estimate comes up to $230,000.
When this project is contracted to a service provider, the client may
agree to pay 30% of the total cost as the construction fee which comes up
to $69,000.
Final Remark

• It is always good to engage in fixed bids (fixed priced) whenever the

project is short-termed and predictable.
• If the project nature is exploratory, it is always best to adopt retainer
or cost plus contract types.
Steps in Contract Management
1. Procurement Planning
• Go through your entire project, analyze and identify any services that might
be met by organization outside yours.
• This means that the manager will need to figure out which of their needs
could be met by which other parties outside their own business.
• There may be several individuals/organizations that could potentially meet
your needs.
• This part of the process involves figuring out who is best for the job.
• Better understanding of the needs of the job, improves selection of the right
outside company.
Steps Cont...
2. Getting Ready
 This is the second ‘preliminary phase’ of contract management in
which the manager prepares all the documents that will be needed in
order to conduct business with outside parties.
 It is also very important that during this period to decide on the
approach:
1) sealed bids: the outside party makes a single final offer on the contract
2) openly negotiated proposal: when there is a back and forth discussion between
the manager and outside party
 The manager needs to set up internal evaluation criteria that will
describe how to judge the different bids or proposals coming in.
Steps Cont...
3. Solicitation
 In the third stage, the contract manager opens the floor to bids and
proposals from outside parties.
 At this stage of contract management, it is important to review all the
bids and proposals that are submitted following the call using the
internal evaluation criteria prepared.
4. Source Selection
 After a full review of the bids/proposals following the evaluation
criteria, it is time to make a sound choice.
 Once you begin final discussions with the contractor selected it is
important to acquire independent cost estimates from them as well.
 No one should be in the dark about any aspect of the project or
contract.
Steps cont...
5. Contract Administration
 Overall administration of the contract is necessary for a good process
of contract management once the contract has been signed and the
work has begun.
 It is necessary that both parties live up to the agreement in full.
 As a manager it is within your right to conduct risk monitoring,
performance measuring, and milestone reviews.
 This ensures that the work being done is as good as promised, which
is a key factor in the management process.
Steps cont...
6. Contract Closeout
 Once the job is completed, close out the contract.
However, before doing so, make sure to document performance
standards and process all final payments.
A retention payment is withheld from the service provider to check
quality delivery.
Finally, remember to engage in a post-contract audit. Good project
management requires a high level of people skills.
 Challenges in contract management
1. The process of preparing and launching of contract management in an
organization can take years. Managing contracts manually and in an ad-hoc
manner is resulting in higher risks and costs.
2. Global contracts: A number of factors, ranging from differences in language
and how words are interpreted, to unique business practices can complicate
global contracts, making it difficult to ensure that sufficient understanding is
established between parties.
3. Measuring contract performance: Businesses need to know if their
contractual obligations are being followed and deadlines are being met.
• Contract leakage: occurs if individuals, obligated to act upon the detailed
agreement in a contract, are unaware of the specifics of their agreement.
While a manager may fully understand a contract’s details at the time of
execution, remembering obligations months later is a difficult matter.
• Without a structured way to identify contract events and tie them to a
calendar or to reminders that prompt action:
o missed deadlines,
o potential penalties, and
o missed incremental revenue opportunities can become the norm.
Challenge cont...
4. Managing scattered data:
• If data is contained in different locations, it can be difficult to locate and to
associate one document to another. This can create problems if you need to
review multiple documents pertaining to a certain contract (amendments), or
review different versions of the same document, and they are not together.
• Even if documents are digitized, if they are in different environments they
can be difficult to locate or to access.
5. Lack of contractual risk assessment
• Develop contract exit strategy if satisfactory performance not ensured due to
various reasons
The End!!!