PROJECT MANAGEMENT TECHNIQUES

PROJECT MANAGEMENT

TECHNIQUES

CONTENTS

• Introduction

• Definitions

• Phases in project management

• Components of PERT/ CPM network

• Critical path method (CPM)

• Programme evaluation and review technique (PERT)

• Project formulation

• Project report

• Project appraisal in terms of social benefit analysis

• Logical framework

Introduction

• Any project involves planning, scheduling and

controlling a number of interrelated activities with use of limited resources, namely, men, machines, materials, money and time.

• The projects may be extremely large and complex such as construction of a housing, a highway, a shopping complex etc.

• Introduction of new products and research and

development projects.

• It is required that managers must have a dynamic planning and scheduling system to produce the best possible results and also to react

immediately to the changing conditions and make necessary changes in the plan and schedule.

• A convenient analytical and visual technique of PERT and CPM prove extremely valuable in

assisting the managers in managing the projects.

• Though both PERT and CPM techniques have similarity in terms of concepts, the basic

difference is, PERT is used for analysis of project scheduling problems.

• CPM has single time estimate and PERT has three time estimates for activities and uses probability theory to find the chance of

reaching the scheduled time.

Project

• A project is an interrelated set of activities that has a definite starting and ending point and that results in a unique product or

service.

Project management

Project management is a scientific way of planning, implementing, monitoring &

controlling the various aspects of a project such as time, money, materials, manpower &

other resources

Project Management Generally Consists of Three Phases.

Planning:

• Planning involves setting the objectives of the project.

• Identifying various activities to be performed and determining the requirement of resources such as men, materials, machines, etc.

• The cost and time for all the activities are

estimated, and a network diagram is developed showing sequential interrelationships

(predecessor and successor) between various

activities during the planning stage.

Scheduling:

• Based on the time estimates, the start and finish times for each activity are worked out by applying forward and backward pass

techniques, critical path is identified, along

with the slack and float for the non-critical

paths.

Controlling:

• Controlling refers to analyzing and evaluating the actual progress against the plan.

Reallocation of resources, crashing and review

of projects with periodical reports are carried

out.

COMPONENTS of PERT/CPM NETWORK

• PERT / CPM networks contain two major components

1. Activities

2. Events

1. Activity:

•

An activity represents an action and

consumption of resources (time, money,

energy) required to complete a portion of a project.

• Activity is represented by an arrow

2. Event:

•

An event (or node) will always occur at the beginning and end of an activity. The event has no resources and is represented by a circle.

•

The i

event and j

event are the tail event

and head event respectively

CRITICAL PATH METHODS(CPM)

HISTORY :

• It was developed by J.E.KELLY of REMINGTON- RAND and M.R.WALKER of DU PONT and the emphasis was on the trade-off between the cost of project and its overall completion time.

• The first test was made in 1958, when CPM

was applied to the construction of a new

chemical plant.

DEFINITION:

• CPM is a project network analysis technique used to predict total project duration.

• Critical path is the sequence of activities between a project’s start and finish that takes the longest time to completed.

or

• A critical path for a project is the series of activities that determines the earliest time by which the project can be completed.

or

• The critical path is the longest path through the

network diagram

STEPS IN DETERMINING CRITICAL PATH

• Specify the individual activities.

• Determine the sequence of the activities.

• Draw the network diagram.

• Estimate the activity completion time.

• Identify the critical path.

• Update the CPM diagram

CRITICAL PATH ANALYSIS

• The critical path for any network is the longest path through the entire network.

• Since all activities must be completed to

complete the entire project, the length of the

critical path is also the shortest time allowable for completion of the project.

• Thus if the project is to be completed in that shortest time, all activities on the critical path must be started as soon as possible.

• These activities are called critical activities.

PROJECT EVALUATION REVIEW

TECHNIQUE (PERT)

HISTORY

• "PERT" was developed primarily to simplify the planning and scheduling of large and complex projects.

• It was developed for the U.S. Navy Special Projects Office in 1957 to support the U.S.

Navy's Polaris nuclear submarine project.

• Initially PERT stood for Program Evaluation Research Task, but by 1959 was already

renamed.

• In the critical path method, the time estimates are assumed to be known with certainty.

•

In certain projects like research and

development, new product introductions, it is

difficult to estimate the time of various activities.

• Hence PERT is used in such projects with a

probabilistic method using three time estimates

for an activity, rather than a single estimate

• If the project has to be completed ahead of the schedule, then the time required for at least one of the critical activity must be

reduced.

• Further, any delay in completing the critical activities will increase the project duration.

• The activity, which does not lie on the critical path, is called non-critical activity.

• These non-critical activities may have some

slack time.

TIME ESTIMATES

❖PERT has defined four types of time required to accomplish an activity

•

Optimistic time (to) – It is the shortest time in which the activity can be completed.

• Most likely time (tm) – It is the probable time required to perform the activity.

• Pessimistic time (tp) – It is the longest estimated time required to perform an activity.

• Expected time (te)

te = to + 4tm + tp/ 6

SLACK TIME:-

The Slack Time available for any Task is

equal to the difference between the Earliest completion Time (ECT) and the Latest

Completion Time (LCT)

SLACK TIME = (LCT – ECT)

• To reduce the overall project time, it would require more resources (at extra cost) to

reduce the time taken by the critical activities

to complete.

Management tools

• PERT event: A point that marks the start or completion of one or more activities. It

consumes no time and uses no resources.

• Predecessor event: An event that immediately precedes some other event without any other events intervening.

• Successor event: An event that immediately

follows some other event without any other

intervening events

• PERT activity: The actual performance of a task which consumes time and requires

resources (such as labor, materials, space, machinery

• PERT sub-activity: A PERT activity can be further decomposed into a set of sub-

activities. For example, activity A1 can be

decomposed into A1.1, A1.2 and A1.3.

Float : Is a measure of the excess time and resources available to complete a task.

• It is the amount of time that a project task can be delayed without causing a delay in any subsequent tasks (free float) or the whole project (total float).

•

Positive slack would indicate ahead of schedule,

negative slack would indicate behind schedule and zero slack would indicate on schedule.

Critical Path: The longest possible continuous pathway taken from the initial event to the terminal event.

• It determines the total calendar time required for the

project and, therefore any time delays along the critical

path will delay the reaching of the terminal event by at

least the same amount.

Critical Activity : An activity that has total float equal to zero.

• An activity with zero float is not necessarily on the critical path since its path may not be the longest.

• Lead time ^: The time by which a predecessor

event must be completed in order to allow

sufficient time for the activities that must

elapse before a specific PERT event reaches

completion.

• Lag Time: The earliest time by which

a successor event can follow a specific PERT event.

• Fast Tracking: Performing more critical activities in parallel

• crashing critical path: Shortening duration of

critical activities

STEPS IN PERT

1. Identify the specific activities.

2. Determine proper sequence of the activities.

3. Construct the network diagram.

4. Estimate the time required for each activity.

5. Determine the critical path.

6. Update the PERT chart.

Advantages of PERT

• Expected project completion time.

• Probability of completion before a specified date.

• The critical path activities that directly impact the

completion time.

• The activities that have slack time and that can lend resources to critical path activities.

• Activity start and end dates.

LIMITATIONS

• The PERT Formula Requires Too Much Work.

• The network charts tend to be large and unwieldy.

• Calculating the time estimates is very complex for all the activities.

• Updating of the project is time consuming and requires high costs.

• Emphasis is laid only on time factors and cost

factors are neglected.

Difference between CPM & PERT

CPM PERT

CPM works with fixed deterministic time

PERT works with probabilistic time CPM is useful for repetitive

and non complex projects with a certain degree of time

estimates.

PERT is useful for non

repetitive and complex projects with uncertain time estimates.

CPM includes time-cost trade off.

PERT is restricted to time variable.

CPM- for construction projects.

PERT- used for R&D programs.

Project formulation

What is Project Formulation?

• Taking a first look carefully and critically at the project idea

• Carefully weighing its various components

• Analyzing with the assistance of specialists or consultants

• Assessment of the various aspects of an investment proposition

• It is an important stage in the pre-investment

phase

Stages of Project Formulation

1. Feasibility Analysis

2. Techno-Economic Analysis

3. Project Design and Network Analysis 4. Input Analysis

5. Financial Analysis

6. Cost-Benefit Analysis

7. Pre-Investment Analysis

1. Feasibility Analysis:

•First stage in project formulation.

•Examination to see whether to go in for a detailed investment proposal or not.

•Screening for internal and external constraints.

Conclusion could be:-

•The project idea seems to be feasible

•The project idea is not a feasible one

•Unable to arrive at a conclusion for want of

adequate data

2. Techno-Economic Analysis:

•Screens the idea to-Estimate of potential of the demand for goods/services.

•Choice of optimal technology.

•This analysis gives the project a platform for

preparation of detailed project design.

3. Project Design and Network Analysis:

•It is the heart of the project entity.

•It defines the sequence of events of the project.

•Time is allocated for each activity.

•It is presented in a form of a network drawing.

•It helps to identify project inputs, finance

needed and cost-benefit profile of the project.

4. Input Analysis:

•Its assesses the input requirements during the construction and operation of the project.

•It defines the inputs required for each activity.

•Inputs include materials, human resources.

•It evaluates the feasibility of the project from the point of view of the availability of

necessary resources.

•This aids in assessing the project cost.

5. Financial Analysis:

•It involves estimating the project costs, operating cost and fund requirements.

•It helps in comparing various project proposals on a common scale.

•Analytical tools used are discounted cash flow,

cost-volume-profit relationship and ratio analysis.

•Investment decisions involve commitment of resources in future, with a long time horizon.

•It needs caution and foresight in developing

financial forecasts.

6. Cost- Benefit Analysis:

•The overall worth of a project is considered.

•The project design forms the basis of evaluation.

•It considers costs that all entities have to bear

and the benefit connected to it.

7. Pre-investment Analysis:

•The results obtained in previous stages are consolidated to arrive at clear conclusions.

•Helps the project-sponsoring body, the project- implementing body and the external

consulting agencies to accept/reject the

proposal.

Project Report

•It is a concise copy of detailed analysis done for the project.

•An entrepreneur/expert prepares the report before the investment in project is done.

•The report assesses the demand for proposed product/service, works out cost of investment and profitability on this investment.

•It acts as an instrument to convince investors

to invest in the project.

Project Appraisal In Terms Of Social

Benefit Analysis

• One way or the other in our daily lives we are all calculating - either explicitly or implicitly - costs and benefits before we take important decisions

• Every public decision, including policies, plans, programmes and projects tend to have

economic, social, environmental, cultural and such other impacts.

•

Every choice has its associated costs and

benefits.

COST-BENEFIT ANALYSIS

• Cost-benefit analysis has become one of the most important tools to assess the impact of public decisions, especially programmes and projects.

•

From a simple assessment of net financial benefits, it has been refined to take into

account economic, social and environmental

objectives.

SCOPE OF COST-BENEFIT ANALYSIS

•

Analysis from whose perspectives? – Individual, Organization, Society or specific groups.

•

Identification and quantification of costs and benefits.

• Putting a value to costs and benefits and to develop a cash flow table.

• Adjusting the costs and benefits to reflect

economic, social and ecological considerations.

• Bringing them to a common time point for

comparison using discounting.

Expressing the net effect of the project in terms of

• Net present value - NPV (Discounted Benefits minus Discounted Costs)

•

Benefit – Cost Ratio: ( if it exceeds 1, the investment is considered as viable)

•

Internal Rate of Return (IRR): If the IRR

exceeds the prevailing rate of interest the

project is considered viable.

EVOLUTION OF COST-BENEFIT ANALYSIS

• Cost-benefit analysis has evolved over time largely

based on the changes in the concept of socio-economic development.

• Cost benefit analysis has evolved over time to address a range of issues from the varying perspectives of

those undertaking it.

•

From the perspective of an individual or private enterprise focusing on financial viability, costs and benefits are considered from a narrow perspective.

• As we broaden the framework what may be considered

as costs and benefits will change.

Concept of development

Cost-benefit analysis

Emphasis on private profit generation

Financial cost-benefit analysis

Enhancing efficiency and viability from the larger

perspective of the economy.

Economic analysis

Fulfillment of social objectives Social cost-benefit analysis

Accomplishing environmental objectives

Environmental analysis

KEY STEPS IN COST-BENEFIT ANALYSIS

1. DETERMINE THE OBJECTIVES

2. IDENTIFY COSTS AND BENEFITS 3. VALUE COSTS AND BENEFITS

4. AGRREGATE COSTS AND BENEFITS 5. SENSITIVITY ANALYSIS

6. CONSIDER DISTRIBUTIONAL IMPACTS

7. PREPARE RECOMMENDATIONS

COST-BENEFIT ANALYSIS AND SOCIAL OBJECTIVES

• With social objectives becoming an important concern, there have been efforts to modify cost- benefit analysis to assess their social impacts, in particular:

•

Impact on regions that are considered as backward.

• Livelihood of specified groups, especially poor and impact on the provision of basic needs.

• Income distribution.

•

Gender aspects – in particular betterment of the

condition of women in terms of their economic

and social well-being.

• Once the social objective is specified, costs and

benefits are considered from the perspective of the specific objectives.

• For example if poverty reduction becomes the key objective, then the entire focus is on the costs and benefits that the target group confronts.

• Benefits accruing to the poor are given a higher weight age in comparison with what accrues to the non-poor

• If basic needs fulfillment becomes a development objective, then every programme and project is assessed on the basis of their impact on

(a) producing basic needs goods

(b)enhancing income that enables the fulfillment of

basic needs.

CHALLENGES IN THE USE OF COSTBENEFIT ANALYSIS

• Although one of the most useful tool, CBA is also one of the most miss-used tools.

• Unless there is transparency, it is convenient to manipulate CBA to justify any decision. In fact there are several instances where

favorable decisions are engineered through manipulation of cost-benefit analysis.

• Correctly identifying the entire cost and

benefit stream is the greatest challenge.

• Many of the project proponents have a strong tendency to exaggerate the benefits and

underestimate the costs.

• Finding the right price that reflects the true value/ cost to society remains challenging.

•

Choosing the discount rate is another

contentious issue.

• There is a strong tendency to come up with one aggregated number that purportedly capture all dimensions.

• Aggregation of different numbers representing different objectives is extremely challenging

and provides enormous scope for manipulation.

• Probably a “dash-board” approach that gives

different indicators will be a better approach.

SUMMING UP

• Social cost benefit analysis is a very useful tool for decision making and to make sure that pro-poor programmes and projects are given priority.

• Meaningful SCBA however requires reliable

information and this is often challenging in many situations.

•

In the absence of transparency subjectivity could creep in at various stages – key variables can be

“adjusted” - defeating the very purpose of cost benefit analysis.

•

Consequently misuse of SCBA by decision makers

is quite widespread.

Logical Frame Work

HISTORY:

• LF originally developed by the American

Defense Department and was first formally adopted as a planning tool for United State

Agency for International Development (USAID) by the end of 1960’s

•

Today it is being used in the field of

development co-operation and private

industry.

▶

It is a framework for designing change

process, monitoring progress and evaluating impact.

▶

In designing change process, monitoring

progress and evaluating impact, ordering the change process in a logical sequence where inputs or resources are identified for

performing activities.

USES

▶ Preparing the project design in a systemic and logical way.

▶ Analyzing the existing situation during activity preparation.

▶ Identifying and assessing activities that fit with in the scope of programme.

▶ Establishing logical hierarchy of means by which objectives will be reached.

▶ Identifying potential risk to achieving the objectives and to sustainable outcomes.

▶ Establishing how outputs and outcomes might best be monitored and evaluated.

▶ Monitoring , reviewing and evaluating project progress and performance.

Steps in logical framework:

A) Situation analysis B) Strategy analysis

C)Logical frame matrix

D) Implementation

A) Situation analysis:

•

Prior to beginning work it is important to undertake a structured analysis of the existing situation.

•

It consists of 4 elements

1.

Context analysis

2.

stake holder analysis

3.

Problem analysis

4.

objective analysis.

Context analysis:

➢

It is the background analysis of the project or programme.

➢

It is necessary to make an initial overall

analysis of the project context by SWOT

analysis, etc.

2. Stake holder analysis:

➢

It is the analysis of problems, expectations,

interests, motivation, attitudes and potentials of all the agencies, organizations, groups and people will influence/be influenced by the

project, directly or indirectly.

➢

The tools such as stake holder analysis matrix, SWOT analysis, Venn diagrams and spider

diagrams are used to support stake holder

analysis.

3. Problem analysis:

➢

It is the analysis of identifying the main problems.

➢

The key purpose of this analysis is to identify the root causes and subsequently addressed in the activity design.

➢

One main tool used in problem analysis is the

‘ problem tree’, it is constructed by selecting a

problem from list of problems identified and

relating this problem to starter problem using

cause-effect relationship.

Poor socio economic condition of farmers

Low productivity of agriculture and livestock

Poor crop and

livestock husbandry practice

Moisture stress and low soil fertility

Use of low yield crop and livestock races

Inadequate factors of production (land,

human and financial asset, entrepreneurship

Poor

quality feed for livestock CAUS

E

EFFECT

PROBLEM TREE

4. Objective analysis:

➢It is systemically identifying, categorizing, specifying and balancing out objectives of all parties involved in a specific situation.

➢Objective tree can be viewed as the positive mirror image of the problem tree.

➢The objectives should be SMART i.e., Specific, Measurable, Attainable, Relevant, Timely.

➢Once these main points for the objectives have been checked as per SMART, the proposed objective tree

structure can be circulated for further comment and feed back.

➢Hence the objectives are explanations of what the project is going to achieve in short, medium and long run.

Improve increased socio- economic condition of farmers

sustain agriculture and livestock productivity at

optimum levels

Improved crop and livestock husbandry practices programme

Moisture preservation technology and soil fertility promotion are maintained

Use of high yielding crop varieties and livestock races programme Use of factors of

production optimized

Efficient means for quality of livestock feed

MEAN S

END

OBJECTIVE TREE

Problem tree Objective tree

Relationship between the problem analysis and objective analysis Effect

Focal Problem

Causes

Development objective

Project purpose/immediate objective

Immediate results/outputs

Activities

B. Strategy Analysis:

➢

This analysis involves clustering of objectives and examines feasibility of different interventions.

➢

The assessment of different intervention options

could include the expected benefits to target groups, sustainability of the benefits, ability to repair and

maintain assets post-activity, total cost and recurrent cost implications, financial and economic viability,

technical feasibility, contribution to institutional

strengthening and management capacity building,

environmental impact.

C. Log Frame Matrix (LFM):

➢

This is the standard analytical product of logical framework.

➢

This matrix consists of 4 columns and 5 rows

depending upon number of levels of objectives used to explain the means-end relationship of the activity.

➢

The four columns are narrative summary, objectively verifiable indicators, means of verification and

important assumptions.

➢

Narrative summary generally defines the project structure and it comprises the following rows viz;

development objectives/ impact, immediate

objectives, outputs, activities and inputs

The components of Log frame matrix

▶

Goal/Impact: It refers to sectoral or national objectives which the activity is designed to contribute to

increased incomes, improved nutritional status and the reduced activity, etc.

▶

Outcome: It refers to what the activity itself is expected to achieve in terms of sustainable development results.

▶

Outputs: These refer to tangible products (goods and services) produced by undertaking a series of tasks as part of the planned work of the activity.

▶

Inputs: These refer to resources required to undertake

the work program and produce the outputs.

▶

Assumptions: These refer to assumptions made about conditions which could affect the progress or success of the activity, but over which the

activity managers may have no direct control, e.g.

price changes, rainfall, land reform policies, non- enforcement of supporting legislation.

▶

Indicators: These are the measures of progress or lack of progress used to assess progress towards meeting stated objectives.

▶

Means of verification: This should clearly specify the expected source of the information we need to collect. E.g., sample surveys, records, national statistics, workshops, observation and PRA

techniques, etc.

D. Implementation:

➢

It should have a plan of work and it should be established by the project team.

➢

Activities leading to outputs should be specified clearly in more detail.

➢

The inputs required for each set of activities and/or outputs can then be specified and also scheduled over time.

➢

Finally, the cost of inputs can be determined and an

activity budget estimate and cash flow should be

calculated.

Advantages of Logical framework:

▶

continuity in the plan of work

▶

Provide reliable information about the programme, situation and resources.

▶

Minimizing the conflicts

▶

Avoiding the future problems

▶

Provide decision makers with better and more relevant information

▶

Engages stakeholders in the planning and monitoring process

▶

It identifies the main factors related to the success of project

▶

To encourage multidisciplinary approach to

project preparation and supervision

Limitations of the logical framework:

▶

It does not readily enable monitoring unintended consequences

▶

Focusing too much on problems rather than opportunities and vision

▶

Too project centered

CONSTRUCTION ECONOMICS

MRS. ASHIKA S. PATEL

ASSISTANT PROFESSOR

INTRODUCTION

• In construction project, economics affects decision making in many ways- from the cost of material to purchase and scrapping of equipment, penalty clause and so on.

• Engineer and construction manager have a

working knowledge of economic principles,

methods and terminology.

ECONOMIC DECISION MAKING

• Engineer have to tae a decision among the various competitive alternatives under various situation

– Comparison of designs

– Elimination of over design

– Designing for economy of production – Economy and location

– Economy and size

– Economy and perfection

– Economy and standardization – Economy and strength

• METHODS FOR ECONOMIC DECISION MAKING

– Out- of- pocket commitment

• The out of pocket commitment is the total expense required for an alternative.

– Pay back period

• The payback period for an investment may be taken as the number of years it takes to repay the original

invested capital.

• Project with shorter payback period should be selected.

– Average annual rate of return:

• In this methods, the alternatives are evaluated on the basis of only the average annual rate of return, as expressed in terms of a percentage of the original capital.

TIME VALUE OF MONEY

• Time value of money is a simple concept that accounts for variation in the value of a sum of money over time.

• The most important principle involved is that

of ‘interest’, which could be looked upon as

the cost of using capital.

CASH FLOW DIAGRAMS

• Cash flow may be defined as the movement of money into or out of a project

• PURPOSE OF CASH FLOW ANALYSIS:

– To ensure that sufficient cash is available to meet the demand.

– To ensure that cash resources are fully utilized for the benefit of the owner and the company

– To know the project funding pattern

• CASH OUTFLOW:

– Payments made by a contractor over a period of time for the resources he uses in a project is known as cash outflow.

• Material purchase

• Labour wages

• Equipment purchase

• CASH INFLOW

– As the work progresses, measurements are made

and bills are prepared. The receipts which a

contractor will receive over a period of time

against the work completed is called cash inflow.

PROJECT CASH FLOW DIAGRAM

• Project cash flow is basically a graph of receipts versus time.

• For executing a project, a constructor spends and receives the money at different points of time.

• For drawing cash flow diagram followings details are required.

– The gross bill value and its time of submission.

– The measurement periods.

– The certification time taken by the owner.

– The retention time taken by owner and time to release the retention money.

– The details of cost incurred by the contractor for

raising a particular bill value.

FACTORS AFFECTING PROJECT CASH FLOW

• Mobilization advance

• Margin

• Retention

• Extra claims

• Distribution of margin

• Certification time

– Over- measurements

– Under-measurements

EVALUATING ALTERNATIVE BY EQUIVALENCE

• In economic comparisons, very often there are situations wherein a comparison has to be made between alternatives, involving payments of different amounts of money at different points in time.

• ‘PRINCIPLE OF EQUIVALENCE’ is used to

compare different engineering alternatives in

which alternatives are to be determined

similar.

• Construction management involves cost

comparisons between alternatives of different

engineering efficiency, one with a high initial

cost and low maintenance and operation cost,

compared to another with a low initial cost but

high operating and maintenance cost.

METHODS OF EVALUATING

ALTERNATIVES BY EQUIVALANCE

• Present worth comparison

– Also known as discounting rate.

• Assumptions:

– Cash flow are known.

– Cash flow do not include effect of inflation.

– The interest rate is known.

– Comparison are made before tax cash flows.

– Comparison do not include intangible considerations.

– Comparison do not include consideration of the

availability of funds to implement alternatives.

– Alternative with equal lives – Alternative with unequal lives – Alternative with infinite lives

• Future worth comparison

• Annual cost and worth method

• Rate of return method

– Minimum attractive rate of return – Internal rate of return

– Incremental rate of return

EFFECT OF TAXATION ON

COMPARISON OF ALTERNATIVES

• The prevailing tax laws impose taxes on

companies on the basis of the annual income generated through the conduct of business.

• The rate of taxes vary from times to time and

sometime incentives and relief in taxes are also

provided by the government.

SR NO. ITEM DESCRIPTION

COMPANY A

COMPANY

B REMARKS

1 Gross earnings RS. 200 Lakh RS. 200 Lakh

2 Admissible

expense

RS. 75 Lakh RS. 50 Lakh

3 Pre tax profits RS. 125 Lakh RS. 150 Lakh

(1) – (2)

4 Tax payable RS. 50 Lakh RS. 60 Lakh

40% OF (3)

5 Net profit RS. 75 Lakh RS. 90 Lakh

(3) – (4)

EFFECT OF INFLATION ON CASH FLOW

• During construction project cost of materials, labour, equipments, may undergo an inflationary trend.

• Inflation is defined as the increase in price level resulting in decrease in purchasing power of money.

• Modified discount rate = ((1+(interest

rate/100))/(1+(inflation rate/100))-1)*100

EVALUATION OF PUBLIC PROJECT

• Objective of private project is to maximize the profits while adhering to the contractual requirements of project.

• Objective of public project is to provide services/goods to the public at minimum costs.

• Benefits accrued from public project should at least recover the cost of projects.

• Project funded by state/central government are

known as public project.

• The objectives are:

– to check the viability of the project economically.

– To select the most viable project from a set of economically viable project

– To rank the economically viable alternative for a

good situation.

• Benefit/ cots ratio:

– Benefit/ cots ratio is the ratio of benefit to public to cost to the government.

– Ratio of more than 1 indicates that benefit outweighs costs and thus, the investment is justified.

– Ratio of 1.5 means that each rupee in cost yields Rs. 1.5 in benefits over the lifetime of the project.

– Ratio less than 1 indicates that benefit accrued

from the project is less than the cost required to be

invested and thus the investment is not justified.

• Benefit/cost criteria:

– Minimum investment – Maximum benefit

– Highest B/C Ratio

– Maximum advantage of benefits over cost

– Largest investment that has a B/C ratio greater

than 1

C

P

 Planning can be defined as ‘drawing up a method or scheme of acting, doing, proceeding, making, etc., developed in advance.

 Construction projects involve using different resources—human, equipment and material, money, etc., and at all times.

 The task of a construction planner is to draw up plans for optimum utilization of all these resources and to ensure appropriate preparedness at all

times.

 construction of a large project involves diverse

agencies—government regulators, clients/owners, designers, consultants and contractors.

 it is important to ensure proper coordination to ensure that the agencies do not work at cross- purposes, and that the common goal is served.

 It should be noted that plans are drawn up at each of the stages or phases of a project, though

different terminologies are used at times depending upon the stage of the project

⚫ Ex:- feasibility plan, preliminary plan etc.

 initially when the project is at the inception stage, the plan could be referred to as a feasibility plan, while in the engineering and execution stages, terms such as preliminary plan and construction plan, respectively, are commonly used.

 Some of the activities involved in construction planning are:

Defining the scope of work:

⚫ Since all activities involve consumption of different resources to different extents, it is important that the scope of work involved is properly and, to the extent possible, completely defined. Any addition, deletion, or modification in the scope could have serious

repercussions in terms of time of completion and cost etc.

⚫ For example, if felling trees and getting environment clearances is added (at a later date) to the scope of a contractor who has been awarded a job for construction of roads, it would obviously cause difficulties.

Identifying activities involved:

⚫ This part of planning is very closely linked to defining the scope, and involves identifying activities in a

particular job.

⚫ Since different activities involved consume different physical resources to varying extents, it is crucial that these activities are exhaustively listed, along with the resources required.

⚫ For example, though different agencies may be

concerned with ‘environmental impact assessment’, it is important for them to identify the tools or parameters each will be using so as to plan effectively.

Establishing project duration

⚫ This can be done only with a clear knowledge of the required resources, productivities and interrelationships.

⚫ This information is used to prepare a network and other forms of representations outlining the schedules.

⚫ Duration for an activity normally depends on amount of resources allocated to it and can be increased or

decreased.

Defining procedures for controlling and assigning resources:

⚫ It is important that the planning document prepared is followed by others involved in the execution of the project, or in its individual phases.

⚫ Thus, the procedures to be followed for procurement and control of resources for different activities—

manpower, machines, material and money—are also laid down.

Developing appropriate interfaces:

⚫ The planner needs to devise an appropriate system for management information system (MIS) reporting.

⚫ Tools such as computers and formats for reporting are widely used, and it may be noted that several software are readily available to aid the planner

Updating and revising plans:

⚫ a construction plan needs to be continuously updated and revised during monitoring

 the planner should clearly understand the product to be produced in terms of scope and expected performance, the input required and the process involved, including the issues in quality control and tolerances at different steps.

 At the same time, the time and productivity aspects involved in the different activities should also be understood, besides the interdependence of activities.

 The planning should also identify milestones and targets for the different agencies to facilitate proper monitoring during execution.

 Inclusion of features identifying risks associated with a project, and the appropriate responses for mitigation enhance the quality of the project plan.

TYPES OF PROJECT PLANS

 Schedule, cost, quality and safety can be identified as specific items on which the success of any

(construction) project is evaluated.

 Thus, at times it makes sense to have different plans for each of these criteria—and draw up

(separately) a time plan (or schedule), cost plan, quality plan and safety plan.

 depending upon the nature and stage of the project, one may also need to deal with a plant and

equipment plan, a maintenance plan and a staff deployment plan.

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P

 Time is the essence of all construction projects, and contracts often have clauses outlining awards

(bonus payments) or penalties (as liquidated

damages) for completing a work ahead or later than a scheduled date.

 While effort is made to ensure timely completion of work, it should be noted that some of the common reasons for delays could be a sluggish approach during planning, delay in award of contract,

changes during execution, alterations in scope of work, delay in payments, slow decision-making, delay in supply of drawings and materials, and labour trouble.

 Several reasonably well-established techniques are available and commonly used for time planning (or

‘scheduling’) activities—for example, critical path method (CPM), programme evaluation and review technique (PERT), precedence network analysis (PNA) etc.

 The choice of the method to be used in a particular case depends on the intended objective, the nature of the project, the target audience, etc.

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P

 This plan focuses on estimating the size of workforce, division in functional teams and scheduling the deployment of manpower.

 It may be noted that manpower planning also

involves establishing labour productivity standards, providing suitable environment and financial

incentives for optimum productivity, and grouping the manpower in suitable functional teams in order to get the optimum utilization.

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P

 The material plan involves identification of required materials, estimation of required quantities, defining specification and forecasting material requirement, besides identification of appropriate source(s),

inventory control, procurement plans and monitoring the usage of materials.

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E

P

 Modern construction is highly mechanized and the role of heavy equipment in ensuring timely completion of projects cannot be over-emphasised. Machines are used in modern construction for mass excavation, trenching, compacting, grading, hoisting, concreting, drilling, material handling, etc. Induction of modern equipments could improve productivity and quality, besides reducing cost. At the same time, it should be borne in mind that heavy equipments are very costly and should be optimally utilized in order to be

productive. It is also important that the characteristics of equipment are kept in mind when drawing up an

equipment plan.

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P

 Given the fact that large construction projects require huge investments, and a long time to complete, it is obvious that all the money is not required at any one point in time.

 Contractors fund their projects from their working capital, a part of which is raised by the contractors using their own sources (e.g., bank loans secured against assets,

deployment of resources from their inventory).

 Whereas the rest comes from a combination of avenues such as mobilization advance for the project, running-

account bills paid by the client, secured advances against materials brought at site, advance payments, and credits from suppliers against work done.

 Thus, a careful analysis needs to be carried out to determine how the requirement of funds varies with time.

WORK-BREAKDOWN STRUCTURE

 ‘Work-breakdown structure’ (or WBS), or simply

‘work breakdown’, is the name given to a technique in project management in which the project is

broken down into manageable parts.

 WBS represents ‘a task-oriented “family tree” of activities and organizes, defines, and graphically displays the total work to be accomplished in order to achieve the final objectives of the project.’

 This provides a central organizing concept for the project and serves as a common framework for

other exercises such as planning, scheduling, cost estimating, budgeting, configuring, monitoring,

reporting, directing and controlling the entire

project. Thus, it should be intuitively clear that for a complex project, greater care is required in

formulating a successful WBS.

 A work-breakdown structure (usually triangular in shape) progresses downwards in the sense that it works from pursuing general to specific

objectives—much like a family tree, it provides a framework for converting a project’s objectives into specific deliverables.

 In cases of complex projects the power and utility of the WBS method in effective management of the

work is clearly demonstrated

M

WBS

 A project is split into different levels from top to bottom

 The WBS does not go into the details of activity at the operational level. The term ‘subprojects’, ‘work

packages’, and ‘tasks’ are used interchangeably

 The tasks are broken down into activities that are the lowest level of a work-breakdown structure.

 It should be borne in mind that once this breakdown is exhaustive, operations such as development of the time schedules, resource allocation and project monitoring become simplified.

PROJECT PLANNING TECHNIQUES—

TERMINOLOGIES USED

Event and Activity

 Event is a point in time when certain conditions

have been fulfilled, such as the start or completion of one or more activities. An event consumes

neither time nor any other resource. Hence, it only expresses a state of system/project.

 Activities take place between events. Activity is an item of work involving consumption of a finite

quantity of resources and it produces quantitative results. An exception to this rule is the dummy

activity

⚫ Ex: activity i-j. The start (node i) and the completion (node j) of this activity can be considered as events.

Dummy Activity

 This activity does not involve consumption of

resources, and therefore does not need any time to be ‘completed’. It is used to define interdependence between activities and included in a network for

logical and mathematical reasons.

 Network

Precedence:

 This is the logical relationship implying that an activity needs one activity (or more activities) to be completed, before this activity can start.

 For example, in order to be able to start plastering, the brickwork needs to have been completed

 It is a common practice in most construction projects to represent the precedence of activities in the form of a table, called the precedence table.

 For preparing the precedence table, a list of activities that should precede a given activity is given.

 It should also be mentioned that this concept (of

precedence) is sometimes referred to as ‘dependence’.

N

L

D

A

 Duration of an activity (i, j) is denoted by D(i, j). This is the length of time required to carry out an activity (i, j) from the beginning to its end.

 Depending upon the activity and the level of detail, the duration may be expressed in days, weeks, or months.

 a duration cannot be really fixed or given as a final number, and as such remains only an estimate, based on past experience with productivity, etc

S

F

T

 In principle, an activity can be started as soon as the groundwork involved has been completed, but the client or contractor may (be able to) wait for sometime before starting the activity without

affecting the overall project completion.

 Similarly, depending upon the starting time and the duration, the activity may be completed at different times.

 Earliest start time of an activity: This is the earliest,

that the activity (i, j) can be started, i.e., all the necessary preconditions are met. Earliest start time of an activity (i, j) has been denoted by EST(i, j)

 Earliest finish time of an activity This is the earliest, that an the activity (i, j) can be completed. Earliest finish time of an activity (i, j) has been denoted by EFT(i, j)

Mathematically, the relationship can be expressed as EFT(i, j) = EST(i, j) + D(i, j)

 Latest finish time of an activity: This is the latest time that an activity needs to be completed in order that there is no delay in the project completion. Latest finish time of an activity (i, j) has been denoted by LFT(i, j)

 Latest start time of an activity This is the latest time when an activity must be started, in order that there is no delay in the project completion. Latest start time of an activity (i, j) has been denoted byLST(i, j)

Mathematically, the relationship can be expressed as:

LST(i, j) = LFT(i, j) − D(i, j)

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P

 The forward pass moves from the ‘start’ node

towards the ‘finish’ node, and basically calculates the earliest occurrence times of all events.

 Considering that the project starts at time zero, the earliest occurrence time at each node is found by going from node to node in the order of increasing node numbers, keeping in mind the logical

relationships between the nodes as shown by the connecting arrows.

 The earliest occurrence time for any node can be estimated from the (maximum) time taken to reach that node from the different incoming arrows.

 he backward pass is made in a similar manner to that of the forward pass, except that the process is carried out in reverse through the nodes, starting from the end node and finishing at the start node.

 the late occurrence time for different nodes can be found out, depending on whether there is a single outgoing arrow from a node

 For the end node the late occurrence time is

considered same as the earliest occurrence time.

 The late occurrence times for these nodes can be simply determined as L_i = L_j − D(i, j)

 In case if multiple arrows reaching same node,

 L_i = M_jin[L_j − D(i, j)], where the minimization is over all nodes j that precede node i.

 for some events (nodes) in the network, the two values (E and L) will be the same if the latest project completion time is taken as the earliest project completion time.

 These events are called critical events and the path is called critical path.

F

S

T

 The time period by which an activity can be delayed without adversely affecting project completion.

 Total float in an activity Total float of an activity is the amount of time by which the start of the

activity may be delayed without causing a delay in the completion of the project. This is calculated as TF(i, j) = LST(i, j) − EST(i, j)

Or

TF(i, j) = LFT(i, j) − EFT(i, j)

The values of TF(i, j) calculated from above equations are referred to as start float and finish float

respectively.