Cipm Paper 1

PGCPM - MPM-001
UNIT 1: PROJECT FUNDAMENTALS
A. PROJECT
PROJECT MANAGEMENT
Project Fundamentals is the First Phase of the

project life cycle.
Both Knowledge sharing and acquiring are not

the discrete or time defined processes but on
the contrary, part of continuous processes. It
is important to learn from the experience of
the current project from conceptulisation to
delivery phase for the betterment of the next
project. Individual knowledge gained must be
institutionalized to transform into Corporate
knowledge database.
The fundamentals of project management is

also available as part of the knowledge
database and interlinked with this phase of the
project life cycle.
a. What is Project
b. Operations V/s Projects
a. What is a Project?
A project is the means of converting a vision, a dream or a need to reality. Such a need could have arisen due to
business, personal or social reasons.
Projects are needed in each and every sphere of society such as:
Business
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Industry
Government
Social sector etc.
A project can vary a great deal depending on what it is to achieve. It could be: Very large or very small; a
massive complex undertaking or a simple undertaking.
Projects can be undertaken by anyone and at any level in an organization.
The actual project will vary a great deal depending on the nature and the amount of work that has to be
done.
It can involve just one person for a few days to thousands of persons over many years.
Across just one department in the organization to a number of departments in the organization or even
across multiple organizations at multiple locations.
What is a Project?
Projects have been defined in various ways by different persons.
Let us look at some definitions of what a project is
The Webster's dictionary has defined a project as:
A proposal of something to be done; scheme; plan; an organized undertaking; a special unit of work; an
extensive public undertaking etc.
According to the definition given in Project Management Institute, USA's Guide to the Project
Management Body of Knowledge: "a project is a temporary endeavor undertaken to create a unique
product or service."
Buchanan and Body have described projects as: Unique ventures that have a beginning and an end and
are conducted by people to meet established goals within parameters of cost, schedule and quality.
Cleland and King have described projects as: A complex effort to achieve specific objectives within
schedule and budget targets, which generally cut across organizational lines and are normally not
repetitive within the organization.
All projects have some common characteristics irrespective of their size or sector.
Some key features of projects are that they are:
Temporary: All projects have a definite beginning and a definite end. They are undertaken to
achieve specific goals and objectives and close when these goals and objectives are achieved
Unique: Each project, big or small, no matter how similar to other projects will vary from others
in some respect or the other. A project will never be identical to other projects
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pre-defined goals/objectives : This could cover financial, social or economic reasons
budgets and schedules: Each project will have a pre-fixed budget to be completed in and a
timeframe for completing it
quality (performance) measures : The performance expected to be followed in the project is

decided in beginning
use resources and manpower: Availability of both resources and manpower is limited in the
project
face known and unknown risks: Uncertainties in the project could jeopardize it's successful
completion
have a project life cycle: Project's go through different phases in it's journey from initiation to its
completion
Projects fulfill diverse needs
A project can be taken up for such diverse reasons as:
Organizing a simple lunch or arranging a wedding, to developing new products and services,
infrastructure development, constructing a building, implementing a new business procedure,
R&D, designing new software, a poverty alleviation campaign by the government/NGO, putting
man on the moon etc.
Projects can also be classified in different ways such as:
a) by the industry or sector in which it falls
b) by the size of the project
c) By the total cost involved for the project etc.
For example, a project can be undertaken to provide new products or services for:
d) the organization's own internal need
e) for an outside client
f) For one's own personal requirements etc.
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b. Operations v/s Projects

Operations are used for:
Routine, ongoing and repetitive undertakings in an organization.
The objective of operations is to:
Sustain the existing business of the organization and
Make the existing operations more and more efficient.
Operations are not involved in introducing any new changes as is the case in projects.
In practice, both operations and projects have many characteristics that are common to each other in
spite of the fact that they are undertaken to fulfill different aims and objectives.
Some common characteristics between projects and operations are that they are both:
Performed by people
Both have limited resources at their disposal for undertaking the project or the routine
operations
To be successful both operations and projects must be properly planned, executed and
controlled
Differences between a project and operations:
Though projects and operations have many features in common there are many differences
between them. A key difference between projects and operations is in their objectives, the aims
for which they are performed.
The main differences between the two are shown below:
Projects Operations
Unique Ongoing
Temporary Repetitive
Aim is to achieve the objectives of the project and Objective of operation is to sustain
then to close the project the business
Future orientation Present Orientation
Creation of new things Maintenance of existing things
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B. PM fundamentals
a. Why modern PM is the key Discipline
b. History prospective
c. Project Management
d. Triple Constraints
e. Project Life Cycle
f. Uncertainties v/s Live Cycle
g. Value addition v/s Life Cycle
h. Cost of change v/s Life Cycle
i. Amount of Stake v/s Life Cycle
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a) Why modern PM is the key Discipline
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b) Historical Perspective
Historical Perspective
We are living in a momentous time slot. For the first time in civilization, global human networks
are being formed. With the use of internet technology, Mind To Mind (M2M) communication is
possible instantly across the globe.
If the 20th century can be termed as the 'Industrial age', the 21st century is the age of
'Communication'.
We find that as a profession, project management is as old as the human civilization. Projects
such as the Pyramids, the Taj Mahal and the Great Wall that were undertaken centuries ago
required massive amounts of labor and material.
Though such projects did not use modern techniques of project management they all required
the management of hundreds of thousands of workers and exceptional use of planning,
organizing and control.
Over the last fifty years modern project management has emerged as a separate discipline.
With the onset of globalization gradual changes are not enough. The unprecedented rate of
changes taking place has made transition complex and non-linear.
Both organizations and individuals must regularly transform themselves to stay ahead or usher
in better times.
Project management (PM) is the ideal discipline to manage change and its use is crucial for
enterprises to maintain a competitive advantage.
Consequently, project management has experienced an extraordinary growth in the last

decade.
There are 8 basic processes associated with project management.
These processes are commonly described as:
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Conceptualize
Plan
Organize
Implement
Control
Integrate
Deliver
Knowledge Leveraging
Till recent times the whole edifice of project management was based on three major
considerations or parameters.
These three parameters are related to:
The Scope of the project
The Time to complete the project
The Cost associated in completing the project
Together they form the three major parameters for each and every project.
What do we understand by the term scope?
Scope is the basis of any project.
It is used to provide a detailed and accurate description of the work that is required to
be done to deliver the product or service which has been undertaken by the project.
Scope forms the basis for time and cost estimates and is the most critical aspect in
achieving the goals of the project.We can represent the three key parameters of Scope,
Time and Cost in the form of an equilateral triangle showing that all the three are
equally important.
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Time & Cost

Both the time taken to complete a project and the cost incurred in completing the project are directly
dependent on what the project is required to accomplish.
In other words both the time and cost aspects in the project are dependent on the scope of the project.
Let us take a broad look at the historical perspective of the project management discipline.
Stone Age
In this age, people were primarily engaged in the
survival process both from the point of view of
obtaining food to eat and to escape from
becoming food for others.
The need was well established and the planning

and execution required was of a low order to
fulfill the basic need of remaining alive.
The remaining two out of the five major processes of project management i.e. control and completions
were the direct outcome of effectiveness of planning and execution stages.
Kings and Queens Era

With the evolution of mankind, human society grew in a fragmented way with rulers down the ages who
governed the majority. There was a clear distinction between the rulers and the subjects.
In the Kings and Queens Era, in general:
The scope of the project was usually well defined
Time and cost for the project was not well defined and was given considerably less importance.
For instance, massive projects like the Taj Mahal, Pyramids and Great Wall were based on the wishes of
Kings who possibly wished to make their existence immortal. The scope or the end result was given
primary importance. The kings were not worried about the cost or time involved in completing the
project.
Both the Time and Cost involved in completing the projects

were secondary to achieving the Scope of the project as is
shown in the figure.
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Domination Era
In coexistence with the Kings and Queens Era, a major thrust was also to
expand the boundaries of the kingdoms/territories. The desire to possess a
larger terrain was the main consideration in undertaking many projects
related to conquest of other kingdoms.
To achieve such an aim:

The Scope of the project was well defined and maintaining Time was also
essential.
When to launch the attack was a key factor for achieving victory.
Costs involved was not that important as the same could be collected from the people and/or acquired
through booty and surpluses coming from the fallen territory and kingdoms.
Industrial Era
The effective interaction between machine and men brought about the
revolutionary era of the industrial age. Various machines could perform
functions which their designers could not as the exploitation of science was
carried out to create a unique symbiosis between Men and Machines.
In this era all the three components of Scope, Time and Cost were important
to:
Create wealth in factories
Become competitive
Create a market place where products will be exchanged for the betterment of the living
standards of the people.
It was necessary in the industrial age to fulfill all the components of the defined Scope within Time and
Cost. It was no longer enough to manage two sides of the triangle. When undertaking projects
successfully the need was to ensure a balance of all the three sides of the triangle representing Scope,
Time and Cost.
Competitive Era
As the industrial era became well entrenched it gave rise to
the establishment of many industries creating a surplus of
production over demand. With this came the need for
completion amongst the industrial organizations that
offered similar products to customers.
Customers slowly grew in importance and began to get into

the driving seat. Competitiveness became the hallmark of a
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new competitive era. This was given a boost by Japanese organizations that wanted to penetrate the
global market outside Japan.
In 1960's and 1970's, Quality became the 4th major component to be considered in managing projects
of all kinds across the globe.
It was not good enough to meet the scope and performance criteria of the project with no time and cost
runs. It was now necessary to ensure that there was no compromise on Quality. Enhanced Quality
became the basis for the industries to function and survive/thrive.
Globalization Era
As the world market began opening up to form one big
global market other issues related to managing projects
came to the forefront.
Risk, procurement, human resource, communication and

project integration gained importance along with scope,
time, cost and quality parameters.
E-Technology Era
In this era, there is always a tremendous pressure in reducing
time and cost without changing the scope or compromising
the quality.
If for the sake of argument, the area of a triangle that

comprises of its three sides namely Scope, Time and Cost is
the Baseline (representing Scope) multiplied by the height of
the triangle from baseline to the tip of the other 2 sides
divided by 2, then the E-Technology era is creating pressures
to organizations to reduce this area.
The only way it can be reduced in a most optimal way is by reducing the height of the triangle. The
baseline cannot be reduced. This implies reducing the cost and time proportionately. This is a big
challenge to modern day corporations.
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Development of PM in 1950's
Techniques such as industrial engineering began to be used to

manage projects. Flowcharts were used to represent project
activities and Henry Gantt introduced his famous Gantt chart
which is a bar chart used to monitor planned project activities
against a calendar i.e. a time frame.
Around this time two famous organizations, DuPont and the

United States Navy both independently developed very similar networking techniques to
manage project activities.
DuPont developed the Critical Path Method through the use of networks which used arrows to
represent different project activities and circular nodes to represent events or the start and end
of the activities. This technique is known as an Arrow Diagramming Method (ADM).
Using the network the Critical Path Method calculates the earliest completion date possible for
a project.
The US Navy developed a technique known as Project Evaluation Review Technique or PERT by
using network diagrams very similar to arrow diagrams. However, instead of using arrows to
represent activities, the US Navy networks used a rectangular node to represent different
project activities. Basically developed for it's Polaris submarine and missile program, the US
Navy was required to monitor projects using hundreds of contractors. It was very important to
monitor and optimize the time and cost of this massive project.
During the 1960s the rapid development of fast computer technology brought a number of
changes. Computers began to be used to develop project networks and do accompanying
analysis of project activities.
Many new terms, techniques and nomenclature began to be used in managing projects. Former
US President, John F Kennedy's vision of putting a man on the moon in the 60s gave a
tremendous boost to the development of project management tools and techniques.
Features such as cost control, scheduling of resources for the project etc. merged with network
diagrams to develop project management.
Two leading project management professional not-for-profit bodies were formed that gave
further impetus to the growth of the profession:
The European project management professional body known as the INTERNET was formed in 1965. This
was an umbrella body with membership from different European countries.
In 1969 the American project management association, known as the Project Management Institute was
formed.
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Experience of the 60's began to be used to further develop the

management of projects and an exciting new, formal discipline of
modern project management began to emerge.
Project management software which chiefly dealt with making

computerized project networks was developed by many software
companies. Such software became more and more popular.
The construction industry worldwide began to use project

management techniques extensively as an integral part of
managing its projects.
For this reason the use of project management methodologies is traditionally associated with
construction activities.
Development of PM since 1980's

Project management began to be formally recognized as a fast growing discipline in its own right.
Use of modern project management skills, PM tools and techniques and use of PM software to
manage all projects grew.
PM knowledge began to move away from a limited address of traditional issues connected to
time, scope, cost and quality to the additional knowledge areas of risk, communication,
procurement, human resource and integration for managing projects effectively.
Project management professional associations began to be formed in more and more countries.
INTERNET of Europe was renamed International Project Management Association (IPMA) and it
has grown to become one of the two most influential PM bodies worldwide with membership
from 40 countries.
Project Management Institute of USA grew to become the largest PM body in the world with
chapters all over the world.
From late 90s onwards there is a mind-boggling development in the project management field. Project
Management certification is growing exponentially worldwide and there has been an 8 to 10 fold
increase in the total number of certified project managers globally in the last 3-4 years.
The first project manager to be certified was in 1986. Today, there are over 400,000 certified project
professionals worldwide.
Currently, there are three leading project management certifications available in the world.
They are:
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o International Project Management Association, Switzerland's 4 Level Certification (4LC)

which is based on knowledge, skills and practice. Level D is at the bottom and is the
basic knowledge level.
o Project Management Institute of USA's PMP certification
o PMGURU Inc of USA has 3 levels of Certification;
o Introductory Certificate In Project Management (IntroCIPM),Certificate In Project

Management (CIPM)and Certified Project Professional (CPP). (PMA, India is the
Examination body for India)
More and more companies worldwide - both IT and non-IT are demanding that their
professionals be certified in project management.
The Certificate In Project Management (CIPM)is a globally recognized, top-rated certificate that
teaches the intricacies of project management and builds a very strong foundation of project
management skills and knowledge.
c) Project Management
Project Management
Today, the information explosion coupled with shrinkage of time has made the rate of change
unprecedented.
Time has become the most crucial strategic weapon to gain a better market share or supremacy.
'Everything should have been done yesterday' is a kind of syndrome we are all familiar with.
In this scenario it is becoming more and more important to manage all our projects on time and within
budget without compromising quality.
Project Management is the art and science of managing a project . It can also be termed as Dream or
Change management.
We can say that project management is the art and science of converting 'vision' into reality and
'abstract' into concrete.
Worldwide, the discipline of project management is universally regarded as the most efficient way of
introducing changes, which is most crucial both at business and personal levels.
The use of project management is so advantageous that it is becoming one of the fastest growing
disciplines worldwide.
Project management discipline is used to:
Successfully manage all projects irrespective of their size or complexity.
It involves the use and application of specific knowledge, skills, tools and techniques to project activities
to meet the aims for which the project was undertaken.
Project management achieves all this by following those procedures and processes which involves:
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Making a plan to achieve project objectives/goals and following this plan.
Managing everything that is required to achieve project objectives safely within agreed upon
time, cost, quality, technical and other performance criteria.
Using the most appropriate tools and techniques to plan, monitor and maintain progress of the
project.
Using persons knowledgeable about project management to manage the project with the
competing demands of scope, time, cost, risk and quality in the project.
Project team members have to manage all the different persons such as the client, the customer
and the contractor who are directly or indirectly involved with the project i.e. the project
stakeholders. This can be a difficult task as different stakeholders have different expectations
from the project.
Modern project management encompasses both the 'hard' side and 'soft' side of managing projects.
The hard side deals with the tools and techniques used in managing projects
The soft side deals with the people and project teams involved in carrying out project activities.
Project management provides a basic understanding of how we should address project uncertainties in
a planned manner through planning, executing, controlling and closing and various issues throughout
the project's life cycle.
As the project progresses project management provides the "single point of integrative responsibility"
that is needed to ensure successful delivery of the project's aims and objectives.
To properly carry out a project from initiating to closing, we require specific knowledge and skills related
to project management.
There are various bodies of knowledge today that have organized the basic project management
knowledge areas in different ways.
Project Lifecycle Phases

Shown below is the division of a project life cycle. This is a very generic project life cycle phases covering
broadly most of the situations. However, depending upon industry, the project life cycle phases may go
through different nomenclature.
The 8 phases of project Life Cycle are:
Conceptulize, Plan, Organize, Implement, Control, Integrate, Deliver & Closeout and Knowledge
Leverage.
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Conceptualize
It is the first phase of the Project Life Cycle. Project implies projection of Dream or
Vision or Strategy or Abstract. Management transforms Dream to its awakening or
Realize the Vision or delivers the Strategy or Concretize the Abstract.
Conceptualization phase not only deals with the vision or Dream but it also later
on carry out the analysis of its viability or practicability keeping n view the
extended boundaries of an organization.
Only after establishing the viability, we declare the existence of a project and release a Project Charter.
Project Charter gives a green signal of going ahead with the project.
The key deliverable of Conceptualization phase of Project Life Cycle is the Project Charter.
Plan
Plan is an output of Planning Phase. The input to Planning Phase is Project
Charter- the main output of the Conceptulization Phase of project Life Cycle.
Planning is the core of performing action. Every action must have a planning
component for its execution. Execution without planning is ad-hocism and nothing
concrete can come out of such a process.
Planning evolves a complete road map to change from the existing state to the
state we would all like to reach as detailed out in the Project Charter.
It is said if we evolve a good Plan document having detailed steps and road map outlined, major portion
of success is ensured.
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Action without Planning give rise to ad-hoc outcomes and Planning without its execution is a road map
of a vision without realizing.
Organize
How to get maximum output with the minimum inputs is the way we optimize the
efficiency of various processes.
Organize Phase of the Project Life Cycle follows Planning Phase. In fact, Organize
and Planning phases of project Life cycle overlaps to a certain degree as Plan
assumes certain way of organsing the implementation of activities. As it is shown
in the graphic of project Life cycle, we have carefully indicated the inter-linkage
between Planning and Organize Project Life Cycle phases.
Organize Phase established guidelines of availability of Resources with reference to time. Resources
imply Human, Material, Capital and Machinery.
Organise Phase also elaborates the organizational structure which would be decided for implementation
of project. For instance, organizational structure could be Functional like in manufacturing organizations
or Matrix or projectized.
Implementation
In Action lies Results. Ultimately, we need performance to achieve what was
targeted or conceptulized and planned / organized. Implementation is the 4th
Phase of the Project Life Cycle following Oraganization Phase.
Project manager is the principal actor responsible for the implementation of the
Plan to the satisfaction to Stakeholders of a project. Project manager is virtually a
mini CEO in implementing a project to deliver the expected results as an ultimate
outcome of the project. Human resource management and able to communicate
and negotiate for resources are some of the major challenges faced by project
manager.
Project manager must also display Leadership characteristics and should be willing to take decisions
based on his or her convictions along with carrying the team.
Implementation Phase depicts the real efforts to bring about a change in transforming strategies to
deliveries.
Control
Like in any system, without Feedback, the system is unstable. It implies that while
we implement, it is with reference to deliverables in the domain of typically Time,
Cost, and Quality.
Control is an important 5th Phase of the project Life cycle and intertwined with
the Implementation Phase of the project Life cycle.
Control phase must display maturity in ensuring the balanced view of control i.e.
not excessive and at the same time not too little. Depending upon the nature of
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the deliverables in the implementation phase, a typical Control strategy should be evolved. Control
strategy is not to exercise power of those who demand control but it is the basic component of the
project life cycle ensuring the right deliverables with appropriate processes.
Integration
Integration is the 6th Phase of the Project Life Cycle. It follows Implementation/
Control Phases. There could be overlapping between Implementation and
Integration phases.
The order of integration is an important factor for creating the final product for
the Delivery Phase of the project life cycle. The skill of the human resource
required for integration can be different than those of responsible of Planning
phase decomposing a visulized product / service to many deliverables.
It is mandatory in the Integration Phase to establish a fool proof mechanism of ensuring conformance to
the specifications as outlined in the Plan document and to ensure Quality of the integrated product as
expected.
It is better to have as rigid as possible the correctness of Integration phase as that alone will save Redo
of efforts and later reducing the Customer dissatisfaction.
Deliver
It is the 7th Phase of the Project Life Cycle. In Deliver phase, we interface with the
ultimate customer of the outcome of undertaking a project. A series of outcome
could be in the form of products/ services. Customer is the key player in accepting
the deliveries. In delivery phase, deliveries can be 1 or many depending upon the
project plan. It is the complete delivery which is to be accepted by a customer.
Delivery phase brings the close out of a project with many lessons which have
been learnt during the complete project life cycle. Lessons learned is shown as
the separate Phase of the project Life cycle under the title of Knowledge leveraging/ Lessons Learnt.
It may be mentioned here that it is in the delivery Phase that the conflict can arise between those who
have worked to deliver and those who are accepting the results of such work. In such situations, the
Project Plan holds the key for solving the conflicts as in project plan itself the specifications are detailed
with time and quality considerations.
Knowledge Leveraging
Knowledge leveraging / Lessons learnt are symbolically the 8th and the final
Phase of the project life cycle. In a real sense, it is a continuous phase whose span
starts from the first phase of conceptulization to the last and the 7th phase of
delivery.
Both Knowledge sharing and acquiring are not the discrete or time defined
processes but on the contrary, part of continuous processes. It is important to
learn from the experience of the current project from conceptulization to
delivery phase for the betterment of the next project. Individual knowledge
gained must be institutionalized to transform into Corporate knowledge database.
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The fundamentals of project management is also available as part of the knowledge database and
interlinked with this phase of the project life cycle.
d) Triple Constraints
Triple Constraints
Conventionally, a project explicitly focused on three major aspects and had one additional aspect which
was implied in the project.
The explicit considerations for managing projects were:
Scope
Time
Cost
While, maintaining Quality was implied in the project.
These three major considerations of scope, time and cost, all of which are equally important in any
project, were considered to be the triple constraints under which projects functioned.
They can be represented as the three sides of a triangle as all three are equally important. A quality
consideration which affects all three is shown in the center.
Scope
Scope is used to define the total products or the services that are to be provided by the project.
It defines the boundaries of the work, which needs to be done in terms of deliverables to the
customers.
Scope forms the basis of all projects.
For this reason Scope is shown as the base of the basic PM triangle which comprises of scope, time and
cost.
Time and Cost

The other two sides in the triangle are Time and Cost.
Both parameters of Time and Cost are computed for a project based on the Scope of the
project. For this reason the scope of the project must be fully clear in advance. A basic
method adopted in project management to understand, identify and cover all aspects of the
scope of the project is by detailing out all the work that will be required to be done in the
project's Work Breakdown Structure (WBS).
Once this is done:
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It is easier to cost the project based on actual tasks and resources involved (bottom-up
estimation)
Assess and manage the time it will take to complete the project
Representing Scope, Time and Cost as three sides of an equilateral triangle shows that there should be a
balanced emphasis on all these three aspects of the project.
Each side of the triangle represents different units of measure. For instance:-
Scope is measured in terms of deliverables
Time is measured in units of years, weeks, months, days etc.
Cost is measured in monetary currency
Why is Quality kept in the center of the triangle?
This is to show that quality can interact with all the three sides of the triangle and reflect that there
cannot be any compromise on Quality during any phase of the project's life cycle
The representation of the Customer in the above diagram represents the ultimate receiver of the
project work who needs to be fully satisfied. The project must ultimately satisfy different stakeholders.
Managing the scope, time and cost:
Managing any two sides of this PM triangle is relatively easy.
The challenge lies in managing all the three sides of the triangle without changing any one side.
This is where we need competent project managers to build internal and external teams
including suppliers.
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What happens to our symbolic equilateral triangle when there is change in the different parameters
of scope, time and cost?
The original balanced triangle is:
For change in Cost the triangle can be depicted as:
For change in Time the triangle can be depicted as:
For changes in Scope the triangle can be depicted as:
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For Change in all three parameters of Scope, Time and Cost the new triangle can be depicted as:
If you are the project manager what is the choice you should make between managing the scope, time
and cost in any project?
Ideally speaking, a balanced approach should be followed by in managing proper inter-relationship

amongst scope, time, cost and quality.
However this is not always possible in real life.
Each company has their own policy regarding their preference in terms of maintaining the integrity of
the triple constraints of scope, time and cost in managing their projects. This policy should guide us for
making our choice regarding which parameter should be given more weightage.
We have seen that by giving more stress to one parameter over the other the scope or the time or the
cost will vary of the project.
e) Project Life Cycle

Project life cycle
Enterprises perform all kinds of work. This includes both the
routine operational work as well as project related work.
Project related activities keep a future angle in view while

operational level of activities are more concerned with the
present set of activities. These activities must necessarily be
performed well in order to keep the market share.
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Operational level activities ensure the market share is maintained based on the existing product or
services offered by an enterprise.
Operations and projects share many common characteristics. Both operations and projects require good
management to move forward.
Basically all activities require sound management in terms of organizing, resources and that too never
enough, planning, execution, control and finally achieving the aim for which we begin the work.
Projects are part of the strategic vision of an enterprise. They are futuristic oriented. Operational
activities are repetitive and ongoing.
Projects are one time and unique. Certainties are more associated with projects as being unique and
temporary. Projects have a definite start time and finish time.
Projects of any size, large or small, can be managed by using the scientific project management skills,
methodology and knowledge.
The Project Life Cycle defines the beginning and the end of a project from its conceptualization to its
close-out and hand over.
This includes various key milestones and significant events of relevance to stakeholders in the project.
Enterprises performing projects will usually break-up the project into various phases. This is done to
improve management control of the project at all levels.
Management control does not imply control only by the upper management. Management control can
be and should be exercised by everyone in the project to the extent he or she is responsible for
performing and coordinating a group of activities.
Some of the project phases also show more clearly the links to the ongoing operations of the performing
organizations.
One of the major advantages of breaking down the project into various phases is that as the
requirements of resources will vary from one phase to another, it provides a good way of managing
dynamic resources of varied skill levels and experience throughout the project life cycle.
For instance, in the phase of planning or detailed planning, we would need a set of skills, which may or
may not be totally required in the execution phase. Collectively all the broken up project phases is called
the project life cycle.
What are the characteristics of a project phase?

A project phase is deemed completed with a deliverable or a set of deliverables.
A deliverable is tangible, can be verified and has some value associated with it. Deliverables may be
products or services that are delivered external to the project or they may be deliverables that are
needed for other project work to take place, called in-house or internal deliverables.
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The termination of a phase is decided by the completeness of all the deliverables linked with the project
performance to date. At the end of each project phase, a decision is taken regarding whether to
continue into the next phase of the project or not. At times decisions are taken to abandon the project.
Decision is also taken to detect/correct all the errors, which need rectification. We should also include
the lessons learned as one of the components, which need to be brought in at the time of a phase
completion.
Such phase end reviews are often called phase exits, stage gates, or kill points.
Generic Project Life Cycle

The points between the beginning and the end of the project will vary considerably, depending upon the
type of business and the specific project being done.
In a generic definition, there is a start or initial phase of a project as well as the final or closure phase.
There will be many intermediate phases in the project and this will depend on the type and the
complexity of the project.
In the initial or start up phase, the requirements of staff and of key people and other resources are low.
Stake of the sponsors is also low. Risk and uncertainty is maximum. Cost of making change in the initial
stage is relatively very low. Chances of the project getting cancelled are also fairly high in the beginning.
As the project progresses into the intermediate phases, the characteristics of a project go through
change. Commitment is now relatively high not to abandon the project.
However, one should be business like and rational to check at the completion of every phase whether to
proceed with the project or not. Just because one has begun the project does not imply that one must
always complete it irrespective of financial and other considerations that may come up later.
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An evaluation should be clearly done regarding what it would cost to continue and the profit and loss in
respect to closing the project in between. Sunk costs (costs that have already been incurred and cannot
be recovered) calculations should be made. At the same time, one should be careful not to create a
feeling of uncertainty regarding whether the project will be completed or not. This could be a disaster
for the company and all those who are associated with the project. Objective assessment should be
made at every stage.
Project life cycle phase concept is one of the major differentiations between projects and non-
projects.
Each project phase is associated with major processes such as initiation, planning, execution, control
and close out.
Often, there is some confusion in distinguishing phases from processes.
Processes can repeat within each phase. It is interesting to note that what is most optimal for a phase
may not be so from the entire project life cycle viewpoint. This concept is typical of system optimization
theory. We must optimize across the project life cycle rate than merely narrowing down optimization to
a single phase.
f) Uncertainties v/s Life Cycle

In the figure below, the project life cycle is divided into 8 basic phases of Conceptulize, Plan, Organize,
Implement, Control, Integrate, Deliver and Knowledge Leveraging.
The process of Control is invoked right from the beginning of initiating a project to its closure. We have
not considered Control as a separate phase though many do so.
The Project Life Cycle defines the beginning and the end of a project from its conceptualization to its
close-out and hand over.
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This includes various key milestones and significant events of relevance to stakeholders in the project.
Enterprises performing projects will usually break-up the project into various phases. This is done to
improve management control of the project at all levels.
Management control does not imply control only by the upper management. Management control can
be and should be exercised by everyone in the project to the extent he or she is responsible for
performing and coordinating a group of activities.
Some of the project phases also show more clearly the links to the ongoing operations of the performing
organizations.
One of the major advantages of breaking down the project into various phases is that as the
requirements of resources will vary from one phase to another, it provides a good way of managing
dynamic resources of varied skill levels and experience throughout the project life cycle.
For instance, in the phase of planning or detailed planning, we would need a set of skills, which may or
may not be totally required in the execution phase. Collectively all the broken up project phases is called
the project life cycle.
The level of uncertainty remains relatively high during the first 2 phases of the project i.e. initiation and
planning.
This uncertainty does not fall significantly until execution progressively translates unknowns to knowns.
With proper analysis and due diligence, the initial starting level of total uncertainties come down to give
a better control on the project during the execution stage.
It is challenging to ensure that the slope of reducing the uncertainties could be as much negative as
possible to keep full control on the events rather than driven by them.
The larger the slope of reducing uncertainties implies that due diligence was carried out and all the open
issues requiring resolution were closed.
g) Value Addition v/s Life Cycle

In the figure below, the project life cycle is divided into 8 basic phases of Conceptulize, Plan, Organize,
Implement, Control, Integrate, Deliver and Knowledge Leveraging.
Let us review the chart as to the potential of value addition throughout the project life cycle.
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When you start a project, there are many Ifs and Buts about the project. There are many Assumptions
and Constraints that are made in the project as well as information gaps that will need to be understood
and clarified as the project progresses.
The maximum value addition in the quantitative and qualitative aspects of a project can be achieved in
the early stages of the project.
Phase 1 of the project which is the initiation phase is where

maximum value addition can be made. The cost to bring about
any changes is also minimum at this stage of the project.
During the final phase of the project, the room for value addition
is minimum.
h) Cost of Change v/s Life Cycle

Changes are inevitable. Even with the best planning there will be many reasons why changes will be
required in the project.
What would it cost to make changes in the project through its life cycle?
Let us review the chart as to the cost of making changes throughout the projects life cycle.
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Often the cost of redoing work is considerable in

relationship to the cost of doing it right the first time.
The same concept can be extrapolated to making changes in

the project at a later stage in the project life cycle. As the
curve shows, the cost to make changes which may or may
not necessarily arise as a result of redoing the work is
substantially more at the closing stages of the project.
It is advisable that we endeavor to add as much value as

possible at the beginning of the project life cycle than at a later stage.
Value addition in the beginning is more constructive than destructive if done at the later stage of the
project life cycle. This process will also minimize the chances of incurring extra cost in carrying out the
changes at a later stage of the project.
i) Amount at Stake v/s Life Cycle

In a simple way, in the figure below, the project life cycle has been divided into 8 basic phases of
Conceptulize, Plan, Organize, Implement, Control, Integrate, Deliver and Knowledge Leveraging.
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When you start a project, there are many Ifs and Buts. There are many Assumptions and Constraints.
There are many information gaps that still need to bridged.
The amount of stake, if measured in terms of resources deployed and the financial commitment is
relatively low during the first two phases of the project. The stake rises rapidly during the execution
phase of the project. As the capital and other resources deployed keep on increasing with the time in a
project life cycle, the amount of stake keeps on increasing proportionately.
It is easier to back out from a project during its the initial stages then during the later part of the project
life cycle when considerable work has already been done.
The relationship between amount of stake and uncertainties is inversely proportional during the project
life cycle.
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UNIT 2:
APPRAISAL
It is the second phase of the Project Life Cycle.
Project implies projection of Dream or Vision or
Strategy or Abstract. Management transforms
Dream to its awakening or Realise the Vision or
delivers the Strategy or Concretise the Abstract.
Conceptualization phase not only deals with the

vision or Dream but it also later on carry out the
analysis of its viability or practicability keeping in
view the extended boundaries of an organization.
Only after establishing the viability, we declare the

existence of a project and release a Project
Charter. Project Charter gives a green signal of
going ahead with the project.
The key deliverable of Appraisal phase of Project

Life Cycle is the Project Charter
A. Stakeholders
Stakeholder Requirements
Who is a Stakeholder?
Stakeholders are all those individuals, groups and
organizations that are directly involved in the
project or may be affected by the project
activities and the outcome of the project.
The British Standard 6079 states that a

stakeholder is, 'a person or group of people who
have a vested interest in the success of an
organization and the environment in which the
organization operates'.
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A stakeholder can be a key stakeholder like the project manager or a secondary stakeholder like the end
user.
A stakeholder could be:
passively involved in the project and the project deliverables
actively involved in the project work and outcome
negative about the project and opposed to it
A very important role of the project manager is to keep all the stakeholders satisfied. Often projects will
have many stakeholders each with different and possibly contradictory expectations from the project. It
is a challenge for the project manager to keep all the stakeholders smiling and happy.
Project's key stakeholders are:

The key stakeholders for any project are the project manager, the sponsor, the customer, the project
team and the organization that is performing the project.
Project Manager
The project manager is overall responsible to ensure that the project meets it's goals and objectives.
Project Sponsor
The sponsor represents top management and is responsible to make sure funds are available to the
project and provide overall, high level guidance to the project.
Project team members
The project team is at the core of managing the project. A good team is essential for project success. The
team members are responsible for actually performing key parts of the project.
Project customer/client
The customer is the individual/group/organization that will use the deliverables of the project. The
project can have a single customer or more than one customer.
Performing organization
The performing organization is the organization that employs the persons who are engaged in
completing the project work. The performing organization can be engaged in internal work or be
undertaking the project work for an external customer.
Managing stakeholder expectations

There is a distinct need to manage stakeholder expectations in all projects as the expectations from the
project varies from stakeholder to stakeholder. For example, a marketing head would want a solution
that will help him to keep track of all the product changes while the sales manager would want a
solution that will help him to keep track of the choices of his customers.
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It is advisable that the project manager take care to address, identify and understand who the different
stakeholders are, their expectations from the project and any vested interests, potential impact and
influence they may have on the project outcome. Waiting till the
Implementation phase to identify and understand this is too late for
taking suitable actions.
The project manager will have to do a Stakeholder Analysis for making

the Project Management Plan to identify the different needs, set
priorities and see which requirements have to be fulfilled in the
project for each stakeholder for the project to be considered a success
by them.
Doing this helps the project manager to earn more support and
cooperation and less opposition from the stakeholders.
Steps for undertaking a stakeholder analysis:
Make a list of all the project's stakeholders
For each stakeholder understand:
o the key requirements which must be met for them to be satisfied
o chances of getting support for the project from the stakeholder
o their likely change requirements
Analyze the interests of each stakeholder in the project and rate this on a scale. For example,
this could be a scale of 1 to 4 e.g.
o Vital
o Significant
o Some effect on time/cost/quality and
o No effect
See what actions must be taken to meet the important objectives of the stakeholder and also
look into what help can be obtained from different stakeholders to achieve project success.
See what actions must be taken to incorporate the changes needed from the above steps and
incorporate them in the project's WBS.
A table can be made to do such an analysis. The following heads can be considered:
o Name of the Stakeholder
o Stakeholder's interest/potential impact
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o PM's assessment of this impact
o Actions by PM to increase stakeholder's support
o Actions by PM to reduce stakeholder opposition
B. Business Case
a) Need Analysis Cycle
Need the creator of projects
In the Webster dictionary, Need is defined as 'a lack of something wanted' or 'deemed necessary' or
'necessity arising from the circumstances of a case' etc. It further states that Need, a word of old English
origin, has connotations which make it strong in emotional appeal whereas Necessity, a word of Latin
origin, is more formal and impersonal or objective.
What gives rise to the NEED for a project?

A project can be defined as a projection of dreams that an organization would like to transform into
reality using either a structured or an unstructured methodology. We may call this as a process of
organizational dreaming or an organizational vision for simplicity.
Market conditions are changing quite rapidly. Competition never stands still. A commonly acceptable
strategic vision for companies is their quest for increasing their market share and the satisfaction level
of their ever demanding customers. In this tough battle of increasing the market share, a NEED arises of
taking full advantage of the opportunities being offered by the dynamic market place. A NEED can also
arise to mitigate the threats that are embedded in this new market place.
NEED emergence, which will be in line with the strategic plan of the organization is the basis of sowing
the seed, for a new potential project.
The NEED can arise from any level of the organizational

hierarchy and from anywhere across the various
functional units of the organization.
The NEED Life Cycle goes through the three phases of:
Need Emergence
Need Recognition and
Need Articulation
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Need Emergence
The dynamics of the market forces provide both new opportunities as well as threats. In both these
situations, a NEED arises to seize the new opportunities and to mitigate the threats. We may call this as
the Need Emergence phase.
The second scenario of NEED emergence could be more internal driven from within an enterprise. This
can be based on business gain or even to meet employee needs. We may have constant requirement of
NEEDS due to our own target of improving productivity or achieving excellence. Market conditions may
not force you to respond as you may be the leader but internal driven compulsions also generate
NEEDS.
The NEED can arise from any level of the organizational hierarchy and from anywhere across the various
functional units of an organization.
This phase of Need emergence is the first part of the three-phased Need Life Cycle.
Need Recognition
Need Recognition - the second phase of the Need Life Cycle involves a cross examination of the reasons
that gave rise to the need and the relevance of that need to the organization. All needs that emerge
must be vigorously screened as no organization, irrespective of it's size or mission, can afford to
undertake projects to fulfill all the needs that emerge. Some needs may not form a part of the
organization's overall visioning process while some may have a low priority for which action could be
taken at a later stage.
The Need Recognition phase takes into account the following major factors:
Validity of a Need in the realm of the organizational working philosophy or vision
Urgency of the Need
It's viability from financial and resource angles
Its impact on company's bottom line
Its impact on the emotional framework of employees or the society as a whole
After considering the above factors the NEEDs which emerge should be prioritized and ranked by
importance. A commonly used category to rank the NEEDs is shown below:
In the top 25% scale (ranked 1st) Maximum Need
In the second 25% scale (ranked 2nd)
In the third 25% scale (ranked 3rd)
In the bottom 25% scale (ranked 4th) and
Rejecting the Need as unviable on the face of it
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Only the Needs ranked in the top 25% slot are generally taken to Need Articulation - the next phase of
the Need Life Cycle
Need Articulation
The third stage of the need life cycle is when a NEED has already emerged in the organization, been
recognized and ranked in the top category. The NEED now enters the phase of Need Articulation.
This means that the selected NEED deserves to be thoroughly evaluated in detail for its viability within
the parameters operating in the company. At times, it may also be required to introduce new
parameters for which the company should be prepared.
A Need Articulation phase looks at the:
Financial viability of the need and takes into account the resources required
Its impact on the overall competitiveness of the company, or its impact on society on a social
plane, or its impact on the emotional plane of employees
Historical database of the previous NEEDS that were generated, recognized and articulated
Its urgency on a time plane
Based on the above factors and criteria, if approved the need is formally articulated by way of a
document of approval.
It is at this stage that the Need, which had emerged, can become eligible to be transformed into a
project.
The Need Life Cycle ends with Need Articulation.
This is the first part of the relay race in a project and it hands over the baton to the Project Life Cycle.
b) Business Case Concept

The Business Case is one of the most important documents in the project. It discusses the Why of the
project i.e. - the justification for taking up the project.
It deals with and defines:
the need or reasons for which the project was undertaken

the changes that the project is expected to accomplish and
the key project requirements that are needed to achieve the stated
business goals
The Business Case must check that the project is worthwhile to be undertaken and that it is in line with
the organizations overall business strategy. Developed during the Conceptualization phase of the
project, it is authorized by the top management of the organization and 'owned' by the project's
Sponsor.
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The project's justification and feasibility should consider both financial and non-financial factors.
Financial factors covers investment appraisal using different techniques like:
Payback Period
Net Present Value
Internal Rate of Return
Non-financial factors considered when justifying the feasibility of the project are the organization's:
Operational survival
Competitive position
Comparative analysis
The role of the Business case in the project
The Business Case plays a very important role in the project. It is a key document and should be well
prepared.
The Business Case not only shows the justification for taking up the project, it also identifies the
project's stakeholders and their key requirements and interests, the project's overall time, cost and
scope and known risks, contraints and assumption and what the project is to deliver on completion.
The Business Case is:
Developed from the NEED statement and shows the overall justification for undertaking the
project
Describes the why of the project - the problem or the opportunity to be addressed by the
project and the product or services that the project will deliver on completion
Highlights and links the project to the organization's business/corporate strategy
Identifies and describes the needs of all the stakeholders It describes the project's priority
within the overall business plan, its level of importance and likely support from management
It identifies the project's Critical Success Factors of time, cost, scope and quality
It details out the preferred option of the feasibility study
It provides a description of the likely impact of this project on other projects undertaken in the
organization and any possible conflicts that could arise among different projects
The scope of the project and any constraints that have been identified are documented
Any assumptions that have been made in going ahead with the project are mentioned
The project's authorization is based on the business case
This business plan is interpreted by the project's Project Manager and used as the basis for
Planning and Implementing the project
At phase end reviews the Business Case is used to check that the project objectives are likely to be met
or not, during implementation to verify that the stated business benefits are being met
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The Business case for the project should be reviewed regularly to verify that the original objectives are
still valid.
When looking at the expected project costs all major expenses that are expected to be incurred in the
project such as key procurements should be fully considered to verify the feasibility of the proposed
investment. Today, a lot of industries are also cosidering the costs that are expected in implementing
the project plus the operations, maintenance and disposal costs when doing a financial feasibility.
Once the project is complete then there should be a formal evaluation to see whether the project
achieved its stated business benefits or not as a learning exercise and to leverage knowledge for
improvements in future.
The project manager has to interpret this Business Case and interpret it to prepare the Project
Management Plan of the project.
To see the contents of the Business Case please see 'Contents of Business Case'
c) Contents of Business Case

The Business Case is a key document in the project.
It is developed and produced before the detailed planning of the project can begin. The Business Case is
authorized by top management and it is 'owned' by the project's Sponsor. The project manager, if
already appointed maybe assigned by the Sponsor to develop the Business Case.
Key contents of the Business case are:
The business need or the justification for taking up the project and how the project is linked to
the organisation's business strategy
Objectives of the project
The product or service to be delivered by the project
The financial and non-financial advantages as well as a 'do-nothing' option if no further action
on the business case is to be taken
The critical Success Factors that will be used at project completion to judge whether the project
is successful or not
The Key Performance Indicators (KPIs)
The organization strategy for implementing the project
The investment appraisal data
Time, cost, technical, safety, quality, other performance requirement outlines for the project
Major project risks perceived as well as any likely opportunities
Who all are the main stakeholders of the project
Key resource requirements for the project
Competitive impact
Impact of the project on the organizational impact, if any
The environmental impact
Social impact, if any, of the project
The assumptions and constraints considered
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d) Investment Appraisal
Project selection methods involve measuring value to the
project sponsor. Generally speaking, project selection criteria is
defined in terms of merits and evaluation of the NEED
Articulation. It is the outcome of this need articulation, which
will become the product of the project. This could include
financial returns, market share, social obligations, change in
public perception etc.
The business strategy of the organization should define the key

project selection criteria. The selection process can take the
form of a checklist to assist in the process of seeing whether the project envisioned meets
organizational strategy or not.
Various factors such as those given below should be considered when selecting a project:
Is the project aligned with the organizational vision and strategy?

How urgent and important is it to go ahead?
If the project is due to a business need then does the product have a ready market?
Who are your competitors?
Is the technology planned to be used reliable?
What is the expected lifespan of the technology to be used?
How will the project benefit the existing business?
Will the project meet environmental, health, safety and legal requirements of company and
legal requirements?
If there is no market today, how about tomorrow?
Has a financial review been done to test financial viability?
Is the financial return expected to be up to the mark?
Investment Appraisal
Numerous books have been written on the vital subject of project appraisal in financial terms. Financial
investment and project appraisal techniques are a specialized field.
A project manager is, in essence, like a CEO of an enterprise. Irrespective of his/her specialization in any
field of art or science, a project manager must be an all rounder - a good team builder, communicator,
motivator and an effective integrator of the efforts of his team, sub-contractors and parties involved in
fulfilling the objectives of a project.
As a CEO, he also needs to have a basic understanding of the investment appraisal techniques used to
appraise the financial viability of projects. This particular concept is designed to address key concepts in
a comprehensive and easy to understand mode to help project managers and their team members to
understand the financial jargon easily.
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Various decision models such as cost measurement models (scoring models, benefit/cost analysis) and
constrained optimization models (analytical mathematical models) can be used to test the performance
of the expected project to help in deciding whether to select the project or not.
The Project appraisal step may or may not be a part of the project.
In some organizations, project appraisal is carried out by a separate group of professionals who are only
associated with the feasibility studies of a project and in seeing how to optimize the deployment of the
company's financial resources.
Generally the best possible option of deploying capital is in that area where return on capital is
maximum and the investment is in line with the strategic objective of an enterprise. In other words, see
how you can make your financial resources multiply faster. Choose that option, which gives you the best
return.
It should be noted that investments are not always made for multiplication of the capital deployed.
There can be other social objectives for undertaking a project which are not weighed in monetary terms
but are for the benefit of society at large irrespective of the financial returns.
Globalization is the process of growing interdependence between people and nations. As this
interdependence grows so does the possibility of being able to choose a better investment option.
The project manager will often come across various terms related to investments and they should be
aware of these financially related technical terms.
Let us first understand the basic principle behind financial investments.
If I have $X with me, how shall I invest it so that it grows?
My question to myself will be, 'Am I ready to loose all the money or of it or none of it'. This will give
me a good indicator regarding how much risk I am willing to take on my investment of $X.
Assume you want to be 100% safe and do not want to take chance of loosing any money the at all. In
that case you need to look for a very safe investment like Government securities or bonds subject to
your assessment of their credibility. If you have no problem of convertibility of your local currency into
hard currency such as dollar or Euro, then you could even consider investing in the government bonds of
other countries that you trust subject to the rules and processes of investment of different countries in
the world.
What does this imply?
Well, this option will protect your investment but most likely the return will be low on your investment,
possibly 2% to 4% per annum.
If you are willing to take the chance of loosing all your money then you may opt for high risk, high gain
stocks listed on the various stock exchanges. Risky stocks could be those stocks which promise very good
prospects for growth on paper but you do not have enough information to judge their track record or
full information about their investment in their various projects.
Or, you could also take a chance and bet on horses or get associated with lotteries etc.
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These are 2 cases of extremes. We now come to a 3rd scenario, where one will like to invest in a project
as the CEO of a company for increasing your market share, or getting better returns on your surplus
funds as deposits in the bank will generally not be as lucrative as investing in projects.
How will you decide whether to invest in project A or B or C provided you have some information
available about the possible revenue and expenditure of these projects over the coming years? In order
to look at scientific methods available to understand the return on capital, this section of investment
appraisal will cover the following concepts:
1. Payback Period
2. Discounted Cash Flow (DCF) Analysis
3. Internal Rate of Return (IRR)
4. Benefit - Cost Ratio (BCR)
5. Return on Investment (RoI)
Payback Period
Payback Period is a technique that is useful to get a good initial input regarding the investment pattern
for any project.
It involves simply adding up the project's predicted year wise cash flows i.e the year wise income minus
expenses for the project in question.
Payback Period for any investment is achieved when the cumulative year wise cash flows equals the
project's initial investment.
Payback period does not add the cash flows for the time period still remaining in the total project once
this initial investment has been recovered. Payback method also does not take depreciation into
consideration.
Let us create a case study for understanding the Payback Period concept. Let us assume an organization
has 3 potential projects - Project A, Project B and Project C that it can invest in. The initial investment
required for Project A is $100,000, for Project B it is $150,000 and for Project C it is $200,000. The
duration (life cycle) of all the 3 projects is 5 years. During these 5 years, projects A, B and C will have
Income and Expenditure. The figures for the Income or Inflows and Expenditures or Outflows for these 3
projects are given in Table 1, 2 and 3 respectively.
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From the Tables 1, 2 and 3, it can be seen that the Payback Period for project A is 4 years 2.57 months,
for project B it is 4 years and for project C it is 5 years. (Payback is calculated in months & years.)
The calculation of the Payback Period for projects B and C is clearly seen.
In project B, the cumulative cash flow at the end of the 4th year is $150,000 which is the same
as it's initial investment.
In project C the cumulative cash flow at the end of year 5 is $200,000 which is the same as it's
initial investment.
In the case of project A the Payback Period will fall in-between the 4th and the 5th years and we
need to calculate the exact number of months. The cumulative cash flow for project A at the
end of the 5th year is $155,000 while at the end of the 4th year it was $85,000 which is $15,000
less than the project's initial investment of $100,000. Remember, Payback Period is achieved
when the cumulative cash flow equals the initial investment. In short at the end of the 4th year
the cumulative cash flow is $15,000 less than the project's initial investment while at the end of
the 5th year the project's cash flow is much higher. During the 5th year a cash flow of $70,000 is
being generated.
The payback period will therefore fall in between the 4th and the 5th years. Assuming a linear cash flow
through the year the cash flow per month in the 5th year will be:-
70,000/12 = 5,833 per month
This shortfall of 15,000 will be made up in:
15000 / 5833 = 2.57 months
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Hence the payback period for project A is 4 years and 2.57 months.
Advantages of Payback Period Method
It is simple to use
It is a standard technique used worldwide
It can be used effectively for high risk situations
Provides a good idea of the company's liquidity position
Disadvantages of Payback Period Method
Payback period normally ignores the time value of money i.e. Inflation or the discounted cash
flow which will be learned later in this chapter
Little consideration is taken of the cash flow situation after the Payback Period
Payback Period method if used by itself can give rise to wrong decision making for investment
due to the disadvantages listed above at number 1 and 2.
Recommendation: Payback Period is a good indicator for initial Investment analysis but it must be
used in conjunction with other investment appraisal techniques.
Discounted Cash Flow Analysis

Discounted Cash Flow technique is based on the fact that the value of money depreciates with time. At
this juncture, let us understand the concept of inflation or the rate at which the purchasing power of
money is going down. Let us suppose your household comprises of yourself, your spouse and 2 children
in the age group of 8 and 10 years.
Assume in 1975, you could pay off your mortgage on a home and take care of food, clothing, sports,
entertainment expenses, transportation etc. in about $15,000. Will you be able to plan to buy these
goods and services with the same amount of funds next year or next to next year? Most probably not.
Over the years, the purchasing power of money keeps on coming down which means that $1 today will
not be able to buy the same goods or services next year at the same price. The price of goods and
services may go up by X cents. It is this X cents by which the purchasing power of your money has come
down. In fundamental terms, this is defined as Inflation which is the rate at which the purchasing power
of money keeps on coming down.
Inflation provides one example of what is called the time-phased value of money or simply time value of
money. It is a concept, as mentioned above, which suggests that the value of a dollar today is not going
to remain constant as time passes by. It may be noted that even if inflation is zero still the time value of
money concept is valid. For instance you can lend $1 to your friend today at 7% interest as he needs it
now, but he returns a total of $1 and 7 cents to you after 1 year. Your investment of 1$ has grown by 7%
over the period of time and appreciated to $1.07, which can buy more goods, and services as the
inflation is zero in this particular example.
Let us also look at the concept of Future Value of Money when dealing with Discounted Cash Flow
technique.
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When you look at the capital or money that you have today and you want to forecast its value in future,
you need to compute this value. Assume that you have $1000 and you have invested the whole amount
into your savings account for a period of 5 years. The interest on your savings account is 10% per
annum. The interest is added into your investment of $1000 after every year. The simple calculation for
the future value of your $1000 can be made as follows:
At the end of year 1: $1000 plus 10% interest on $1000 = $1100
At the end of year 4: $1331 plus 10% interest on $1331 = $1464.10
At the end of year 5: $1464.10 plus 10% interest on $1464.10 = $1610.51
To compute the Future Value (FV) we should use the formula:
FV = Present Value (PV) at the time of deposit * (1 + interest rate in decimal) raised to the power of
number of years for which FV needs to be calculated.
In our example, PV = $1000, interest rate (I) is .1 or 10% and number of years is 5. We have calculated
the future value of $1000 after 5 years at 10% interest per year to be $1610.51.
Net Present Value (NPV)

Net Present Value, is a discounted cash flow technique that is used for investment appraisals and is
often used to compare the viability of different projects. It is based on computing the Present Value (PV)
of all future cash inflows and outflows.
Present Value (PV)

This Present Value gives us the current value of expected future cash flows.
The formula used for computing the Future Value (FV) can be reversed to compute the Present
Value (PV)
PV = FV / (1 + r)n where
r = rate of interest in decimal
n = number of years (n is always = 0 for the year when Initial investment is made)
Net Present Value is the sum of all the year-wise Present Values of the project's cash flows Less the
project's initial investment. NPV uses discounted cash flows to compare viability of projects that differ
in their time spans, initial investments, and expected cash inflows and outflows. NPV shows the net
value of each project in today's monetary terms after adjusting for value of money over time. Cash flows
are considered a good way of assessment. Cash flows DO NOT consider fixed assets and depreciation.
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NPV quantifies profit in absolute terms. It shows what the future cash flow will be worth in
todays terms.
Higher NPV is better
Higher the interest rate the Lower the NPV
Steps in Calculating the Net Present Value
First calculate the cash flow for each unit of time. This is generally measured in years.
o the cash flow is the expected cash Inflow or Revenue minus the cash Outflow or
Expenses for the unit of time.
Then calculate the Present Value for each time unit.
o this can be done by multiplying the cash flow for each time unit by the discount factor that
has been given (discount factor tables are available) OR by using the formula:
PV = FV / (1 + r)n where
r = rate of interest
n = number of years
Finally, sum up the Present Values calculated for each year and subtract the project's Initial
Investment from this figure to obtain the NPV for the project.
Let us calculate the NPV using our sample projects A, B and C shown below in Tables 4, 5 and 6
respectively.
For example, for Project A it is calculated as follows:
year 0 is never discounted
year 1 = 25 x .91 or 25 / 1.10
year 2 = 25 x .83 or 25 / 1.210 (1.10 x 1.10)
year 3 = 20 x .75 or 20 / 1.331 (1.10 x 1.10 x 1.10)
year 4 = 15 x .68 or 15 / 1.464 (1.10 x 1.10 x 1.10 x 1.10)and so on.
Once the PV for each year is calculated they are added together and the initial investment of $100,000 is
then subtracted from the total to arrive at the NPV for project A.(We have taken accuracy of two
decimal places)
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Which project is most viable?

If you now look at the Net Present Value of the three projects you will notice that Project B is the best
project as it gives the maximum NPV of $64,100 as opposed to a net loss of $72,200 in Project C while
Project A gives a positive NPV of $12,100.
One should select the project with the maximum positive NPV. If the project's NPV is not positive, you
should reject the project.
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Advantages of using NPV
It considers time value of money

All future cash flows are compared in todays values
Considers whole time span of project, from beginning to end
Can simulate what-if using different values
Disadvantages of using NPV
It's accuracy is based on the accuracy of estimates of future cash flows and the interest rate
Does not consider non-financial data
Has bias towards short term projects
Uses a fixed interest rate
Internal Rate of Return (IRR)

IRR is a significant factor, which will help to assess the feasibility of investing in a project from the
financial angle. If the IRR is less than the rate of interest accrued in the bank or in securities, why would
you invest money in a project with less return? If the IRR of a project is 5% and you can get 8% interest
from the bank in your savings account, would you not make more profit by depositing money with the
bank instead of undertaking a project that has a 5% IRR.
The simplest definition of IRR is that it is the interest rate at which an investment of money will return a
zero Net Present Value for the project.
IRR is calculated in an attempt to nullify the impact of time value of money on the proposed project. IRR
shows the interest or the discount rate at which the project will break even. It is:
Arrived at by trial and error by calculating the NPV for the project at different interest rates with the aim
of finding that interest rate at which the NPV will be zero.
The higher the IRR the better the project as it is a measure of the return on investment
While NPV expresses profitability in absolute terms IRR expresses it as a percentage.
To reduce the project's NPV calculate using a higher interest rate
The higher the project's IRR the better is the return on your money and the project falls in the 'Go'
mode.
Let us work on the same example that we used in Payback method and NPV to see which would be the
best investment from IRR technique view.
Let us examine the Tables 7, 8 and 9 for calculating their IRR.
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For Project A, when we had used a 10% discount rate refer Table 4) we found that project A had a
positive NPV of $12,100. As a rule, if the NPV is positive, then a higher discount or interest rate must be
used to make the project's NPV zero. In Project A, when we use a higher discount rate of 14% in the
calculations as shown in table 7 we find that at this rate the project's NPV now falls to almost zero from
the earlier NPV of $12,100.
In the case of Project B, if we apply a discount rate of 19%, then the NPV becomes zero.
In the case of Project C we must apply a discount rate of 0% to make its NPV zero.
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We saw earlier that Project C had a negative NPV of $72,200 when using a discount rate of 10% (refer
Table 6). In order to make a negative NPV become zero, the discount rate applied has to be reduced. We
have done this by reducing the discount rate for C to 0% from 10% to get an NPV close to zero.
From a management perspective, the best choice is Project B as it gives a maximum IRR of 19%. One
would reject Project C out rightly is it's IRR is 0%. Project A does give me 14% IRR and is feasible but
project B is better with an IRR of 19%. Remember the higher the IRR the better the project's feasibility.
Suppose a situation now arises where we only have $100,000 to invest and need to select the most
profitable project. What should we do? Let us examine this more closely.
I can go ahead with Project A which has an IRR of 14% and requires an initial investment of $100,000,
which I have. However, Project B is more lucrative but it needs an initial investment of $150,000.
Assuming that the bank interest rate is 10% which is my cost of borrowing capital, is it better to get a
loan of $50,000 from the bank at 10% interest rate and invest in Project B instead of A?
The additional loan taken from the bank will give us a better investment option. By doing this we would
be getting a 9% return on the capital borrowed from the bank as the bank borrowing interest in 10%
whereas IRR is 19% for Project B.
Benefit - Cost Ratio (BCR)

Benefit - Cost Ratio is the ratio of quantifiable benefits to the costs incurred in achieving the benefits. In
theory, benefits can be in financial terms covering the revenue generation and cost savings, fulfillment
of social objectives, intangible and non-quantifiable, improving quality, boosting the morale of the team
etc.
In our context of project investment appraisal, we will cover quantifiable measures pertaining to
financial measures.
Let us represent benefits as B and Costs as C. The Benefit - Cost ratio is B/C. Inflows can be linked to
Benefits and Outflows to the Costs incurred. Mathematically speaking, a ratio can be either greater than
1 or less than 1 or 1 itself. If the ratio is greater than 1, it is much better as benefits are more than the
costs incurred to achieve them. Ratio of less than 1 will imply that we get fewer benefits in comparison
to the costs incurred. The ratio 1 implies No gain or loss. Clearly, for gain, B/C should be greater than 1
and as high as possible.
Let us examine the following tables of comparison related to our three projects - A, B and C.
Table 10 (Refer Tables 4, 5 and 6 for calculation details)
Project Net Discounted Net Discounted Ratio of Inflow to

Inflow Outflow Outflow
A $306,700 $294, 600 1.041
B $550,200 $486,100 1.131
C $701,900 $774,100 .907
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The above calculations based on the discounted cash inflows and outflows can give us a good idea
regarding which project will be best from the point of view of Benefit to Cost Ratio. The B/C ratio for
Project B outscores Projects A and C as it's B/C ratio is greater than 1 and also higher than Project A.
Project C has a B/C ratio of less than 1 showing that we will derive much fewer benefits than the costs
incurred and project is not viable.
We can also look at the Benefit - Cost ratio based on accumulated Inflows and Outflows without using a
discount factor, as shown below in Table 11.
Table 11 (Refer to Tables 1, 2 and 3 for calculation details.)
Project Net Inflow Net Outflow Ratio of Inflow to Outflow
A $ 430,000 $ 375,000 1.146
B $ 790,000 $ 610,000 1.295
C $1010,000 $1010,000 1.000
Though this is not preferred over a discounted Inflow to Outflow ratio, but still in our case it has not
changed our preference for Project B in comparison to Project A.
In case of non-revenue generating projects, Benefit to Cost ratio can be computed by taking the ratio of
the total cost savings to cost incurred for affecting the savings. For instance, by providing an opportunity
to managers to opt for leaving the company by giving them a good compensation package.
Suppose the cost of a manager to the company for the next 5 years of his employment is $1 Million.
Assuming that based on our current situation and future forecasts we have surplus staff and can only
use this manager for roughly $200,000 worth of assignments. The senior management will be ready to
give a compensation package of $100,000 to him to quit the company.
Based on the above factors, the Benefit to Cost Ratio will work out to be 8. How did we arrive at this
figure?
From the $1 million we have to pay over the next 5 years, we have deducted $200,000 as the benefit we
expect to get from the manger working for the company. This means the company is unnecessarily
spending $800,000 on this manager. The cost of having a golden handshake with this manager is
$100,000. If we consider savings as the benefits and divide it by the cost incurred to drive the savings
which in this case is $100,000 to lay-off the manager, the ratio comes to $800,000 divided by $100,000
which is 8. Please note that we have not taken discounted figures in the cost savings and cost incurred.
If we do take the discounted figures, which would be more realistic, then the ratio will come down from
8 to a lower number. Let us assume that for the next 5 years, this manager gets $200,000 as his regular
salary and produces $40,000 worth of meaningful work for the company every year for 5 years. The
discount rate is 10%. Calculate the B/C Ratio based on Discounted Inflows and Outflows.
The ratio should come to 6.06. Every year the company is saving $160,000 for the next 5 years. $160,000
is the difference of the $200,000 salary given to the manager minus $40,000 which is the meaningful
work done by the manager every year. The compensation package is given at the beginning of year 1.
Assuming a 10% discount factor, the net savings based on 10% discount factor comes to $606,000. The
cost incurred is $100,000. Both these figures are based on NPV. The ratio therefore is 6.06.
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Return on Investment (RoI)

Return on Investment technique considers only the total cash profit or cash flow (income minus
expenses). It does not consider depreciation or time value of money.
To arrive at the project's RoI:
The cash flow for each year is added without discounting it and this total cash flow for the complete
project is divided by the number of years to get the Average Return per year.
The Average Return per year is then divided by the Initial Investment made in the year 0 and multiplied
by 100 to get the project's ROI.
Let us calculate the RoI for our three sample projects shown below in Table 16, 17 and 18 respectively.
The RoI for Projects A, B and C are 31%, 44% and 20% respectively.
The RoI for Project A is 31% and is calculated as :- (155,000/5) / 100,000 *100
The RoI for Project B is 44% and the calculation is :- (333,000/5) / 150,000 *100
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The ROI for Project C is 20% and is calculated as :- (200,000/5) / 200,000 *100
Some people prefer to calculate the RoI based on the discounted cash profit. This is an exception rather
than the rule. Discount based calculations for the average net cash flow would always give a lower RoI
as the net average cash profit will come down due to the discounting factor.
e) PESTLE Analysis
Projects are undertaken in tune with the strategic objectives and vision of a company. Misalignment of
undertaking a project that does not form an overall place in the company's road map can be quite fatal.
Projects are initiated in a real environment and the challenge is to work out the strategies in such a way
that the environment becomes conducive to project success.
We must pay full attention to all aspects that can influence a project including political, economic,
geographical, climatic and cultural considerations when evaluating and planning projects.
We often carry out a PESTLE analysis (also referred to as a Environmental Impact analysis), which
enables us to look at 6 major considerations in a logical and systematic manner.
These 6 parameters PESTLE are Political, Economic, Social, Technical, Legal and the physical
Environment.
P - Political analysis: As resources within any company are always limited, it is not possible to undertake
an unlimited number of projects. The initiation of a project may be on a logical framework, but selection
and priorities assigned to various projects are not always totally scientific and free from politics.
Any enterprise will always have some influence of politics but the level will vary. Good and professional
companies try to minimize the politics within the company but are not able to eliminate it completely.
Projects are executed in real environments. Besides any politics within the company, there is politics at
state/federal level as well. We should not have a reality disconnect of living in a utopian world order
where politics is not associated at all with projects. The challenge is to recognize the political framework
and transform politics in support of projects.
Political context for a project includes the major external and internal stakeholders such as:
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the political policies of the project's host country

the politics of foreign governments and foreign suppliers
impact of national politics
impact of media
impact of various lobby groups
The politics of the project's stakeholders that can affect the project is their behaviour, attitudes,
interactions etc. and includes the:
regulatory bodies
project team
contractors/suppliers/funding organization
client
E - Economic analysis: Economics is the backbone of undertaking projects. If there is no project, there is
no future as it is projects, which provide value addition to companies and countries.
In economic plane, the return on your investment in a project should be maximized by not only choosing
a right project but also to speed up its completion both in time and within cost. Feasibility studies
conducted for undertaking a project is covered in detail under Business Case in the Commercial
Knowledge Area.
The Economic context in a project covers the three separate aspects of - Micro-economic factors,
Macro-economic factors and Supra-macro economic factors.
The Micro-economic factors impact the project at the business level such as:
The financial health of the client, of the business sector of the project and the financial viability
of the project Micro-economic factors lie within the control of the project sponsor and the
project manager
Macro-economic context
These factors exist at national fiscal policy level and cannot be controlled by the project sponsor
and the project manager e.g. interest rates, exchange rates and equity markets.
Supra-macro-economic context
These are economic factors that exist at a geo-political level such as trade tariffs and lie outside
the control of the project sponsor and the project manager
S - Social context analysis includes publicly funded projects that may need approval of local
communities and bodies.
Sociological factors may affect the undertaking of projects. If the land is to be vacated by the local
inhabitants to build a hydroelectric power station, it is a social issue. Therefore it is equally important to
appreciate sociological considerations while evaluating projects.
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T- Technical analysis: The technical considerations in the project context are fairly well understood. One
must examine the impact of technological advancement on a project during the project's life cycle.
Technical issues must be fully resolved as it could be a major problem if a change is required on a
technical plane at a later date.
The technical context covers different technical aspects such as:
What is the technology being used in the project?

Is it easily available and reliable?
Is same technology available with competitors?
Is it a tried and tested technology or is it a new technology?
All of these should be looked into by the project sponsor and the project manager / project team before
the project's technology is finalized.
L - Legal analysis: We all need a legal framework to resolve any conflicts. In a project a large number of
people are involved both within the organization and outside. Project manager should be familiar with
the basics of the legal framework, as it would help him/her to be clear about the rights of the
performing organization as well as of sponsors and customers.
The Legal context considers all the legal requirements that must be followed in the project such as:
The rules and regulations that must be adhered to

Relationship between the different stakeholders
The laws that will be followed for contracts and any disputes that may arise
Laws binding any foreign partners, clients, contractors
E - Environment analysis: Projects which comprise of many constituents are planned and executed in a
real environment with various stakeholders. It is important to understand that undertaking a new
project should not cause ecological degradation. Environment plays an important role as it has a direct
bearing on all projects. The Environmental context is the actual physical environment details in which
the project will be implemented such as:
Is it a physically safe place e.g. earthquake prone, typhoon prone etc.

Is the location on land, off-shore, underground etc.
Local weather conditions
Will any hazardous materials be used
Please note the term 'Environment context' maybe confusing and a PESTLE analysis should not be
confused with the Health, Safety and Environment plans used in the project.
We must bear in mind that when we say projects are unique we are referring to the context of the
project which is unique and not to the project management methodology that is used and applied to
manage the project.
Project management uses tried and tested tools and techniques to manage projects. The exact tools and
techniques and the approach used for managing a specific project will largely depend on the challenge
and the judgment of the project manager.
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Monitoring the project context as well any changes in the context is the responsibility of the project
Sponsor and not the project manager as the sponsor is responsible for the investment used for the
project.
The context of the project is based on the type of change required and how much is known about both
the problem to be solved or opportunity to be availed as well as how this can be solved. The Project
Management approach will differ with the type of project being implemented.
Changes can be Evolutionary or Revolutionary.
An Evolutionary change is a change where an organization's current business is to be enhanced.
A Revolutionary change is a change where something new, something outside the current
business/operations is to be introduced.
f) Project Charter
The Project Charter formally authorizes the project to go ahead and it forms the link between the
project and the on-going work of the organization.
The Business Case for the project which documents full details of the project's financial viability along
with the product, service or results that are to be met by the project may or may not be approved.
Once the Business Case is approved by top management and a decision is taken to go ahead with the
project then it acts as the Project Charter.
A contract can also form the Project Charter.
The project charter could be issued external to the organization performing the project by the project
sponsor, initiator, or some person associated with funding the project e.g. a company, government
department, funding agencies.
The project's Sponsor is responsible to issue the Project Charter.
The project manager should preferably be appointed while the charter is being developed and it gives
the project manager the authority to use the organization's resources for the project.
The Project Charter should contain the following details:
The organization's vision and mission statement

The business need for taking up the project
The project's purpose or justification
Results of the feasibility study
Project's expected investment, it's IRR and Return on Investment (ROI)
The customer's requirements and expectations from the project
Expected stakeholder influences
The various organizations/departments that will be involved in the project
Who the project manager will be and his/her level of authority
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A broad, high level description of the new product/service to be provided by the project to meet
these requirements
The expected project budget
Assumptions made in project regarding external, environmental and organizational factors
Constraints identified regarding external, environmental and organizational factors
A milestone schedule showing summary of completion dates required
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PGCPM - MPM-001

UNIT 1: PROJECT FUNDAMENTALS

Project Fundamentals is the First Phase of the

Both Knowledge sharing and acquiring are not

The fundamentals of project management is

b. Operations V/s Projects

Projects can be undertaken by anyone and at any level in an organization.

Let us look at some definitions of what a project is

The Webster's dictionary has defined a project as:

Some key features of projects are that they are:

pre-defined goals/objectives : This could cover financial, social or economic reasons

quality (performance) measures : The performance expected to be followed in the project is

Projects fulfill diverse needs

A project can be taken up for such diverse reasons as:

Projects can also be classified in different ways such as:

a) by the industry or sector in which it falls

b) by the size of the project

c) By the total cost involved for the project etc.

d) the organization's own internal need

e) for an outside client

f) For one's own personal requirements etc.

b. Operations v/s Projects

Routine, ongoing and repetitive undertakings in an organization.

The objective of operations is to:

Sustain the existing business of the organization and

Make the existing operations more and more efficient.

Differences between a project and operations:

The main differences between the two are shown below:

Future orientation Present Orientation

Creation of new things Maintenance of existing things

e. Project Life Cycle

f. Uncertainties v/s Live Cycle

g. Value addition v/s Life Cycle

h. Cost of change v/s Life Cycle

i. Amount of Stake v/s Life Cycle

a) Why modern PM is the key Discipline

Consequently, project management has experienced an extraordinary growth in the last

There are 8 basic processes associated with project management.

These processes are commonly described as:

These three parameters are related to:

The Scope of the project

The Time to complete the project

The Cost associated in completing the project

Scope is the basis of any project.

Time & Cost

The need was well established and the planning

Kings and Queens Era

In the Kings and Queens Era, in general:

The scope of the project was usually well defined

Both the Time and Cost involved in completing the projects

To achieve such an aim:

Create wealth in factories

Customers slowly grew in importance and began to get into

Risk, procurement, human resource, communication and

If for the sake of argument, the area of a triangle that

Techniques such as industrial engineering began to be used to

Around this time two famous organizations, DuPont and the

Experience of the 60's began to be used to further develop the

Project management software which chiefly dealt with making

The construction industry worldwide began to use project

Development of PM since 1980's

o International Project Management Association, Switzerland's 4 Level Certification (4LC)

o Project Management Institute of USA's PMP certification

o PMGURU Inc of USA has 3 levels of Certification;