ENGINEERING Management Principles and EconomicsPEARSON WAYS LEARNING Engineering Management Principles and Economics Custom Edition for Concordia University Excerpts taken from Engineering Economics: Financial Decision Making for Engineers, Fifth Edition by Niall M. Fraser and Elizabeth M. Jewkes Project Management: Achieving Competitive Advantage, Third Edition by Jeffrey K, Pinto Engneorin Maragement rbipes and Econamics oTan Cust Eaton fo Co Putlahos by Pasres Laaring Selutens.Ceryrgrt© 2014 by PoarznCover Art: Courtesy of Pearson Learning Solutions Excerpts taken from: Engineering Economics: Financia! Decision Making for Engineers, Fifth Edition by Niall M, Fraser and Elizabeth M. Jewkes Copyright © 2013, 2009, 2006, 2000, 1997 by Pearson Canada Inc. Toronto, Ontano Project Management: Achieving Competitive Advantage, Third Edition by Jeffrey K. Pinto Copyright © 2013, 2010, 2007 by Pearson Education, Inc. Published by Prentice Hall Upper Saddle River, New Jersey 07458 Copyright © 2013 by Pearson Learning Solutions All rights reserved. Permission in writing must be obtained from the publisher before any part of this work may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopying and recording, or by any information storage or retrieval system. All trademarks, service marks, registered trademarks, and registered service marks are the property of their respective owners and are used herein for identification purposes only. Pearson Learning Solutions, 501 Boylston Street, Suite 900, Boston, MA 02116 A Pearson Education Company aww. pearsoned.com Printed in Canada 123456789 10 XXxx 17 16 15 14 13 000200010271768397 BK PATUSLO)NIM ISSN 20: 1-269-42123-9 ISBN 13: 978-1-269-42123-2 Engneoring Maragement Prbiples and Econamis oTant Cust Ean for Concorsta Urversti, Putlahos by Posten Laaring Selutens.Cenyrgrt ©2014 by Pearson Education incChapter 1 Chapter 2 CONTENTS Introduction: Why Project Management? 1 PROJECT PROFILE: Rescue of Chilean Miners 2 Introduction 4 1.1 What is a Project? 5. General Project Characteristics 6 1.2 Why are Projects Important? 9 PROJECT PROFILE: Projects in China: Pushing the Innovative Envelope 10 1.3 Project Life Cycles 11 1 PROJECT MANAGERS IN PRACTICE: Stephanie Smith, Westinghouse Elecic Company 14 1.4 Determinants of Project Success. 15 I PROJECT MANAGEMENT RESEARCH IN BRIEF: /\ssessing Information Technology (IT) Proje Success 17 1.5 Developing Project Management Maturity 18 1.6 Project Elements and Text Organization 22 Summary 25 Key Terms 26 Discussion Questions 27 Case Study 1.1 Megatech, Inc. 27 Case Study 1.2 The IT Department at Hamelin Hospital 28 Case Study 1.3 Disney's Expedition Everest 28 internet Exercises. 29 PMP Certification Sample Questions 30 Notes 30 The Orgat nal Context: Strategy, Structure, and Culture 32 PROJECT PROFILE: The U.S. Army Returns to the Era of Blimps 33 Introduction 34 241 Projects and Organizational Strategy 35 22 Stakeholder Management 38 Identifying Project Stakeholders 38 Managing Stakeholders 41 23 Organizational Structure 44 24 Forms of Organizational Structure 44 Functional Organizations 45 Project Organizations 47 Matrix Organizations 49 Moving to Heavyweight Project Organizations 51 1M PROJECT MANAGEMENT RESEARCH IN BRIEF: The Impact of Organizational Structure ‘on Project Performance 52 25 Project Management Offices 53 2.6 Organizational Culture 55 Engineering Management Prbeiples and Economic eTent ete Eaton for Concosa Universi. Putlahos by Posten Laaring Selutens.Cenyrgrt ©2014 by Pearson Education incContents How Do Cultures Form? 57 Organizational Culture and Project Management 59 PROJECT PROFILE: A Culture of Caring: Sanofi-Aventis and Its Commitment to Global Medical Assistance 60 summary 61 Key Terms 62 Discussion Questions 63 Case Study 2.1 Rolls-Royce Corporation 63 Case Study 2.2 Classic Case: Paradise Lost: The Xerox Alto 64 Case Study 2.3 Project Task Estimation and the Culture of "Gotchal” 65 Case Study 2.4 Widgets Us 65 Internet Exercises 66 PMP Certification Sample Questions 66 Integrated Project—Building Your Project Plan 67, Notes 69 Chapter 3. Canadian Forms of Business Organizations 71 Sole Proprietorship 71 Partnership 72 Corporation 73 Cooperative 74 Review Questions 75 References 75 Additional Resources 75 Chapter 4 Contracts and Contract Types 76 Overview of a Contract 76 Contract Types 77 Provisions For Risk Allocation 79 Review Questions and Exercises 80 References 80 Additional Resources 80 Chapter 5 Project Delivery Systems 81 Design Bid-Build Project Delivery System 81 Turnkey Project Delivery System 82 Owner-Builder Project Delivery Systern 82 Professional Construction Management Project Delivery System 83 Review Questions 85 References 86 Additional Resources 86 Chapter 6 Project Scheduling: Networks, Duration Estimation, and Critical Path 87 PROJECT PROFILE: South Africa Gets Stadiums Ready for 2010 World Cup 88 Introduction 90 6.1 Project Scheduling $0 62 Key Scheduling Terminology 92 Engineering Management Prbeiples and Economic eTent ete Eaton for Concosa Universi. Putlahos by Posten Laaring Selutens.Cenyrgrt ©2014 by Pearson Education incContents v 6.3 Developing a Network 93 Labeling Nodes 94 Serial Activities 94 Concurrent Activities 94 Merge Activities 95 Burst Activities 95 64 Duration Estimation 98 6.5 Constructing the Critical Path 102 Calculating the Network 102 The Forward Pass 103 The Backward Pass 104 Probability of Project Completion 106 Laddering Activities 109 Hammock Activities 110 Options for Reducing the Critical Path 110 (PROJECT MANAGEMENT RESEARCH IN BRIEF: Software Development Delays andSoltions 112 Summary 112 Key Terms 113 Solved Problems 114 Discussion Questions 175 Problems 116 Internet Exercises 117 MS Project Exercises 117 PMP Certification Sample Questions 118 Notes 119 Chapter 7 Cost Estimation and Budgeting 120 PROJECT PROFILE: Cost Overruns Continue to Dog Important Projects 121 7.4 Cost Management 123 Direct Versus Indirect Costs 124 Recurring Versus Nonrecurring Costs 125 Fixed Versus Variable Costs 126 Normal Versus Expedited Costs 126 7.2 Cost Estimation 127 Learning Curves in Cost Estimation 129 Software Project Estimation—Function Points 133 PROJECT MANAGEMENT RESEARCH IN BRIEF: Software CostFstimaton 133 Problems with Cost Estimation 135 PROJECT MANAGEMENT RESEARCH IN BRIEF: “Delusion and Deception” Taking Place in Large lnastucture Projects 137 7.3 Creating a Project Budget 138 Top-Down Budgeting 138 Bottomn-Up Budgeting 139 Activity-Based Costing 139 7.4 Developing Budget Contingencies 141 Engineering Management Prbeiples and Economic eTent ete Eaton for Concosa Universi. Putlahos by Posten Laaring Selutens.Cenyrgrt ©2014 by Pearson Education incContents summary 143 Key Terms 144 Solved Problems 144 Discussion Questions 145 Problems 146 Case Study 7.1 The Dulhasti Power Plant 147 Case Study 7.2 Boston's Central Artery/Tunnel Project 148 Internet Exercises 151 PMP Certification Sample Questions 157 Integrated Project—Developing the Cost Estimates and Budget 152 Notes 154 Chapter 8 Project Control: An Introduction to Earned Value Management (EVM) 156 What Is Earned Value Management? 156 The Cost Schedule Plan 156 Earned Value Terminology 156 Use of Earned Value Management for Performance Reporting 158 Review Questions and Exercises 159 References 160 Chapter 9 Time Value of Money 161 Chapter 10 ENGINEERING ECONOMICS IN ACTION, PART 9A A Steal For Steel 161 9.4 Introduction 162 9.2 Interest and Interest Rates 162 MENET VALUE 9.1: Prime interest Rates 162 9.3 Compound and Simple Interest 164 9.4 Effective and Nominal Interest Rates 166 915 Continuous Compounding 169 946 Cash Flow Diagrams 170 97 Equivalence 172 Mathematical Equivalence 174 Decisional Equivalence 172 Market Equivalence 173 Review Problems 174 summary 176 ENGINEERING ECONOMICS IN ACTION, PART 9B You Just Have to Know When 177 Problem 177 Mini Case 9.1 Student Credit Cards 180 Cash Flow Analysis 182 10.1 Introduction 182, 10.2 Timing of Cash Flows and Modelling 182 ENGINEERING ECONOMICS IN ACTION, PART 108 Apples and Oranges 183 10.3 Compound Interest Factors for Discrete Compounding 183 10.4 Compound interest Factors for Single Disbursements or Receipts 184 10.5 Compound Interest Factors for Annuities 187 10.6 Conversion Factor for Arithmetic Gradient Series 193 Engineering Management Prbeiples and Economic eTent ete Eaton for Concosa Universi. Putlahos by Posten Laaring Selutens.Cenyrgrt ©2014 by Pearson Education incContents 10.7 Conversion Factor for Geometric Gradient Series 195 LNET VALUE 10.1 ESTIMATING GROWTH RATES 196 10.8 Non-Standard Annuities and Gradients 198 10.9 Present Worth Computations When N—> =» 200 Review Problems -201 Summary 202 [ENGINEERING ECONOMICS IN ACTION, PART 108 No Free Lunch 204 Problems 204 ‘Mini Case 10.1 The Canadian Oil Sands 208 Appendix 1A Derivation of Discrete Compound interest Factors 210 Chapter 11 Comparison Methods Part 1 213 11.4 Introduction 213, ENGINEERING ECONOMICS IN ACTION, PART 11A What's Best? 214 11.2 Relations Among Projects 215 11.3 Minimum Acceptable Rate of Return (MARR) 217 114 Present Worth (PW) and Annual Worth (AW) Comparisons 217 11.4.1 Present Worth Comparisons for Independent Projects 218 11.42 Present Worth Comparisons for Mutually Exclusive Projects 219 11.43 Annual Worth Comparisons 220 INET VALUE 10.1 CAR PAYMENT CALCULATORS. 220 11.44 Method Two: Comparison of Alternatives With Unequal Lives 222 1155 Payback Period 225 Review Problems -229 Summary 232 ENGINEERING ECONOMICS IN ACTION, PART 118 Doing It Right? 232 Problems 233 Mini Case Study 11.1 Rockwell International 240 Appendix 11 The MARR and the Cost of Capital 241 Chapter 12 Comparison Methods Part2 243 ENGINEERING ECONOMICS IN ACTION, PART 12A What's Best? Revisited 244 12.1 Introduction 244 12.2 The Internal Rate of Return 244 12.3 Internal Rate of Return Comparisons 247 42.3.1 IRR for Independent Projects 247 12.3.2 IRR for Mutually Exclusive Projects 249 12.3.3 Multiple IRS 253 IMLNET VALUE 12.1. ADDITIONAL PROJECT COMPARISON RESOURCES 256 12.3.4 External Rate of Return Methods 256 12.3.5 When to Use the ERR 258 12.4 Rate of Return and Present/Annual Worth Methods Compared 259 12.4.1 Equivalence of Rate of Return and Present/Annual Worth Methods 260 12.4.2 Why Choose One Method Over the Other? 263 Review Problems -264 Summary 266 Engineering Management Prbeiples and Economic eTent ete Eaton for Concosa Universi. Putlahos by Posten Laaring Selutens.Cenyrgrt ©2014 by Pearson Education incContents ENGINEERING ECONOMICS IN ACTION, PART 118 The Invisible Hand 266 Problems 267 Mini Case 12.1 The Galore Creek Project 271 Chapter 13. Depreciation and Financial Accounting 273 ENGINEERING ECONOMICS IN ACTION, PART 13A The Pit Bull 274 13.4 Introduction 274 13.2 Depreciation and Depreciation Accounting 274 13.2.1 Reasons for Depreciation 274 13.2.2 Value of an Asset 275 13.23 Straight-Line Depreciation 275 13.24 Declining-Balance Depreciation 277 13.3 Elements of Financial Accounting 281 13.3.1 Measuring the Performance of a Firm 282 13.3.2 The Balance Sheet 283 13.3.3 The Income Statement 286 13.34 Estimated Values in Financial Statements 288, 13.3.5 Financial Ratio Analysis 288 MENET VALUE 13.1: SECURITIES REGULATORS. 269 13.3.6 Financial Ratios 289 Review Problems -295 Summary 297 ENGINEERING IN ACTION, PART 138%: Usually the Truth 298 Problems 298 Mini Case 13.1 Research in Motion 308 Appendix 13 Cost Estimation 306 Chapter 14 Taxes 312 ENGINEERING ECONOMICS IN ACTION, PART 144 It's in the Details 313 44.1 Introduction 313 142 Personal Income Taxes and Corporate Income Taxes Compared 313 143 Corporate TaxRates 314 144 Before- and After-Tax MARR 316 145 The Effect of Taxation on Cash Flows 317 145.1 The Effect of Taxes on First Cost. 317 145.2 The Effect of Taxes on Savings 319 14.5.3 The Effect of Taxes on Salvage or Scrap Value 319 146 Present Worth and Annual Worth Tax Calculations 320 147 IRR Tax Calculations 321 147.1 Accurate IRR Tax Calculations 321 147.2 Approximate After-Tax Rate-of Return Calculations 322 148 Specific Tax Rules in Canada 323 148.1 The Capital Cost Allowance System 323 MENET VALUE 14.1 CANADA REVENUE AGENCY WEBSITE 324 148.2 Undepreciated Capital Cost and the Half-Year Rule 327 148.3 The Capital Tax Factor and Capital Salvage Factor 329 Engineering Management Prbeiples and Economic eTent ete Eaton for Concosa Universi. Putlahos by Posten Laaring Selutens.Cenyrgrt ©2014 by Pearson Education incComtents ix 1484 Components of a Complete Tax Calculation 331 Review Problems -334 Summary 336 ENGINEERING ECONOMICS IN ACTION, PART 148 The Work Report 337 Problems 338 ‘Mini Case 14.1 Flat Taxes 341 Appendix 144 Deriving the Capital Tax Factor 341 Chapter 15. Infla in 34 ENGINEERING ECONOMICS IN ACTION, PART 15A The Inflated Expert 345 15.1 Introduction 345 15.2 Measuring the Inflation Rate 345 INET VALUE 15.1 STATISTICS CANADA 346 153 Economic Evaluation with Inflation 347 15.3.1 Converting Between Real and Current Dollars 348 154 The Effect of Correctly Anticipated Inflation 350 15.4.1 The Effect of Inflation onthe MARR 351 15.4.2 The Effect of Inflation on the IRR 353 155 Project Evaluation Methods With inflation 354 Review Problems -360 Summary 361 ENGINEERING IN ACTION, PART 158 Exploting Volatility 362 Problems 362 ‘Mini Case 15.1 Economic Comparison of High Pressure and Conventional Pipelines: Associated Engineering 368 ‘Appendix 15 Computing a Price Index 369 Engineering Economics Formulas, Discrete Compounding 373 Discrete Compound interest Factors 374 Chapters 1-2 and 6-7 taken from Project Management, Achieving Competitive Advantage, Third Edition by Jelfey K. Pinto, Chapters 9-15 taken from Engineering Economic Financial Deckion Making for Engineers, Efth Edition by Niall M, Fraser and Elizabeth M, Jewkes, Chapters 3-5 and 8 written by Christopher [. Willis. Engineering Management Prbeiples and Economic eTent ete Eaton for Concosa Universi. Putlahos by Posten Laaring Selutens.Cenyrgrt ©2014 by Pearson Education incIntroduction Why Project Management? Chapter Outline PROJECT PROFILE 1.5. DEVELOPING PROJECT MANAGEMENT. Rescue of Chilean Miners MATURITY INTRODUCTION 1.6 PROJECT ELEMENTS AND TEXT 4.1 WHAT IS. PROJECT? ORGANIZATION General Project Characteristics Summary 1.2 WHY ARE PROJECTS IMPORTANT? Key Terms: PROJECT PROFILE Discussion Questions 1 Case Stady 1. MegoTech, In. Projects in Chins: Pashing the Innovative Envelope ase Study b MegnTecby Tres 1,3 PROJECT LIFE CYCLES Case Study 12 The TT Department at Hamelin Hospital Case Study 1.3 Disney's Expedition Everest PROJECT MANAGERS IN PRACTICE, Internet Exercises Stephanie Smith, Westinghouse Electric Company PMP Certification Sample Questions 4.4 DETERMINANTS OF PROJECT SUCCESS Notes PROJECT MANAGEMENT RESEARCH IN BRIEF “Assessing Information Technology (IT) Project Success Chapter Objectives After completing this chapter you should be able to: 1. Understand why project management is becoming such a powerful and popular practice in business. 2 Recognize the basic properties of projects, including their definition. 3. Understand why effective project management is such a challenge. 4. Differentiate between project management practices and more traditional, process-oriented business fonctions, 5. Recognize the key motivators that are pushing companies to adopt project management practices. 6. Understand and explain the project life cycle, its stages, and the activities that typically occur at each stage in the project 7. Understand the concept of project “success,” including various definitions of success, as well as the alternative models of success, Engineering Management Prbeiples and Economic eTent ete Eaton for Concosa Universi. Putlahos by Posten Laaring Selutens.Cenyrgrt ©2014 by Pearson Education inc(Chapter L = Introduction 8. Understand the purpose of project management maturity models and the process of benchmarking in organizations. 9. Identify the relevant maturity stages that organizations go through to become proficient in their use of project management techniques. PROJECT MANAGEMENT BODY OF KNOWLEDGE CORE CONCEPTS COVERED. INTHIS CHAPTER Definition of a Project (PMBOK sec. 1.2) Defi ition of Project Management (PMBOK sec. 1.3) Relationship to Other Management Disciplines (PMBoK sec. 14) Project Phases and the Project Life Cycle (PMBoK sec. 2.1) The world acquires value only through its extremes anc endures only through moderation: extremists make the world great, the moderates gives stability. PROJECT PROFILE Case—Rescue of Chilean Miners ‘On October 13, 2010, Foreman Luiz Urzua stepped out of the rescue capsule to thunderous applause and cries of "Viva, Chile!”; he was the last of 33 miners rescued after spending 70 days trapped beneath 2,000 feet of earth and rock. Following a catastrophic collapse, the miners were trapped in the lower shafts of the mine, initially without contact with the surface, leaving the world in suspense as to their fate. Their discovery and ultimate rescue are a story of courage, resourcefulness, and ultimately, one of the most successful projects in recent times ‘The work crew of the San Jose copper and gold mine near Copiapo, in northern Chile, were in the middle of thelr shift when suddenly, on August 5, 2010, the earth shoak and large portions af the mine tunnels callapsed, ‘rapping 33 miners in a “workshop,” in a lower gallery of the mine. Though they were temporarily safe, they were nearly a half mile below the surface, with no power and food for two days. Worse, they had no means of ‘communicating with the surface, so their fate remained a mystery to the company and their families. Under these conditions, their main goal was simple survival, conserving and stretching out meager food supplies for 17 days, Until the first drilling probe arrived, punching a hole in the ceiling of the shaft where they were trapped. Once ‘they had established contact with the surface and provided details of their condition, a massive rescue operation was conceived and undertaken. The first challenge was simply keeping the miners alive. The earliest supply deliveries down the narrow com- munication shaft included quantities of food and water, oxygen, medicine, clothing, and necessities for survival ‘as well as materials to help the miners pass their time, While groups worked to keep up the miners’ spirits, com- municating daily and passing along messages from families, other project teams were formed to begin developing aplan to rescue the men, The challenges were severe. Among the significant questions that demanded practical and immediate 41. How do we locate the miners? 2, How quickly can we drill relief shafts to their location? 3. How do we bring them up safely? ‘The mine tunnels had experienced such damage in the collapse that simply digging the miners out would have taken several months. A fullscale rescue operation was conceived to extract the miners as quickly as pos- sible, The U.S-Chilean company Geotec Bayles Brothers, a subsidiary of Layne Christensen Company, assembled the critical resources from around the world, In western Pennsylvania, two companies that were experienced in mine collapses in the South American region were brought into the project. They had UPS ship 2 specialty drill, capable of creating wide-diameter shafts, large enough to fit men without collapsing. The drill arrived within Engineering Management Prbeiples and Economic eTent ete Eaton for Concosa Universi. Putlahos by Posten Laaring Selutens.Cenyrgrt ©2014 by Pearson Education incChapter | + Inodustion 3 48 hours, free of charge. In all, UPS shipped more than $0,000 pounds of specialty equipment to the drilling and rescue site. The design of the rescue pod was the work of a NASA engineer, Clinton Cragg, wha drew on his experi- ence as a former submarine captain in the Navy and directed a team of 20 to conceive of and develop a means to arty the miners one at a time to the surface. Doctors from NASA and U.S. submarine experts arrived at the mine site in mid-August, to assess the psycho- logical state of the miners. Using their expertise in the physical and mental pressures of dealing with extended isolation, they worked with local officials to develop an exercise regimen and a set of chores for the workers in order to give them a sense of structure and responsibilities. The miners knew that help was being assembled, but they had no notion of the technical challenges of making each element in the rescue succeed. Nevertheless, with contact firmly established with the surface through the original contact dill shaft, the miners now began receiving news, updates from the surface, and a variety of gifts to ease the tedium of waiting, ‘The United States also provided an expert driller, Jeff Hart, who was called from Afghanistan, where he was helping American forces find water at forward operating bases, to man the specialty drilling machine. The 40-year-old drilled for 33 straight days, through tough conditions, to reach the men trapped at the mine floor. A total of three drilling rigs were erected and began drilling relief shafts from different directions. By September 17, Hart's drill (referred to as “Plan 8") reached the miners, though the diameter of the shaft was only 5 inches. It would take a few weeks to ream the shaft with progressively wider drill bits to the final 25cinch diameter necessary to support the rescue capsules being constructed. Nevertheless, the rescue team ‘was exuberant over the speed with which the shaft reached the trapped miners. "This success required the extra special knowledge and skills only our team could provide,” said Dave Singleton, water resource division president for Layne Christensen. "Had Layne and Geotec not been there, it probably would have taken until Christmas for ‘Plan A’ or ‘Plan C’ to break through,” Singleton noted. "We cut more than two months from the original estimate.” The first rescue capsule, named Phoenix, arrived at the site on September 23, with two more under construc- tion and due to be shipped in two weeks. The Phoenix capsule resembled a specially designed cylindrical tube. Ht was 13 feet long and weighed 924 pounds with an interior width of 22 inches. It was equipped with oxygen and a harness to keep occupants upright, communication equipment, and retractable wheels. The idea was for the capsule to be narrow enough to be lowered into the rescue shaft but wide enough for one person at a time to be fitted inside and brought back to the surface. Ta ensure that all 23 miners would fit into the Phoenix, they were put on special liquid diets and given an exercise regimen to follow while waiting for the final preparations to be made. Hugo Infanta/ei FIGURE 1.1 Phoenix Escape Capsule for Chilean Miner Rescue Source: waw.geekologie.com/2010/10/cramped.the.chilean_mine_rescu.php (continued Engneoring Maragement Prbiples and Econamis oTant Cust Ean for Concorsta Urversti, Putlahos by Posten Laaring Selutens.Cenyrgrt ©2014 by Pearson Education inc4 Chapter + Introduction Finally, after extensive tests, the surface team decided that the shaft was safe enough to support the rescue efforts and lowered the first Phoenix capsule into the hole. In two successive trips, the capsule carried down a para- medic and rescue expert who volunteered to descend into the mine to coordinate the removal of the miners. The first rescued miner broke the surface just after midnight on October 13 following a 15-minute ride in the capsule. Alittle more than 22 hours later, the shift manager, Urzua, was brought out of the mine, ending a tense andi stress. ful rescue project. The rescue operation of the Chilean miners was one of the most successful emergency projects in recent memory. It highlighted the ability of people to work together, marshal resources, gather support, and use innova- tive technologies in a humanitarian effort that truly captured the imagination of the world. The challenges that had to be overcome were significant: first, the technical problems associated with simply finding and making contact with survivors; second, devising a means to recover the men safely; third, undertaking special steps to ‘ensure the miners’ mental and physical health remained strong; and finally, requiring all parties to develop and rely on radical technologies that had never been used before. In all these challenges, the rescue team performed wonders, recovering and restoring to their families all 33 trapped miners. On November 7, just one month after the rescue, one of the miners, Edison Pena, realized his own personal dream: running in and completing the New ‘York City marathon. Quite an achievement for a man who had just spent more than two months buried a half mile below the surface of the earth!? INTRODUCTION Projects are one of the principal means by which we change our world, Whether the goal is to split the ‘atom, tunnel under the English Channel, introduce Windows 7, or plan the next Olympic Games in London, the means through which to achieve these challenges remains the same: project management, Project management has become one of the most popular tools for organizations, both public and private, to improve internal operations, respond rapidly to external opportunites, achieve technological breakthroughs, streamline new product development, and more robustly manage the challenges arising from the business ‘environment. Consider what Tom Peters, best-selling author and management consultant, has to say about project management and its place in business: “Projects, rather than repetitive tasks, are now the basis for ‘most value-added in business.” Project management has become a critical component of successful business ‘operations in worldwide organizations, One of the key features of modern business is the nature of the opportunities and threats posed by external events. As never before, companies face international competition and the need to pursue com mercial opportunities rapidly. They must modify and introduce products constantly, respond to customers as fast as possible, and maintain competitive cost and operating levels. Does performing all these tasks seem impossible? At one time, i was, Conventional wisdom held that a company could compete using a low-cost strategy 07 asa product innovator or with a focus on customer service. In short, we had to pick our compet tive niches and concede others their claim to market share, In the 1990s, however, everything turned upside down, Companies such as General Electric, Apple, Fricksson, Boeing, and Oracle became increasingly effoc- tive at realizing all of these goals rather than scttling for just one. These companies seemed to be successful in ‘every aspect of the competitive model: They were fast to market and efficient, cost-conscious sd customer- focused. How were they performing the impossible? Obviously, there is no one answer to this complex question, There is no doubt, however, that these ‘companies shaved at least one characteristic: They had developed and committed themselves to project ‘management asa competitive tool. Old middle managers, reported Fortune magazine, are dinosaurs, [and] a new class of manager mammal is evolving to fill the niche they once ruled: project managers. Unlike his biological counterpart, the project manager is more agile and adaptable than the beast he's displacing, moe likely to ive by his wis than throwing his weight around. Effective project managers will remain an indispensable commodity for suecessful organizations in the coming years. More and more companies ate coming to this conclusion and adopting project manage- ment as a way of life. Indeed, companies in such diverse industries as construction, heavy manufacturing, insurance, health care, finance, public utilities, and software are becoming project savy and expecting their ‘employees to do the same. Engineering Management Prbeiples and Economic eTent ete Eaton for Concosa Universi. Putlahos by Posten Laaring Selutens.Cenyrgrt ©2014 by Pearson Education incChapter | + Introduction 5 1.4 WHAT IS A PROJECT? Although there are a number of general definitions of the term project, we must recognize at the outset that projects are distinct from other organizational processes. As a rule, a process refers to ongoing, day. {o-day activites in which an organization engages while producing goods or services, Processes use existing systems, properties, and capabilities in a continuous, fatly repetitive manner.’ Projects, on the other hand, take place outside the normal, process-oriented world of the firm, Certainly, in some organizations, such as construction, day-to-day processes center on the creation and development of projects, Nevertheless for the ‘majority of organizations, project management activities remain unique and separate from the manner in ‘which more routine, process-driven work is performed. Project work is continuously evolving, establishes its ‘own work rules, and is the antithesis of repetition in the workplace. As a result it represents an exciting alter- native to business as usual for many companies. The challenges are great, but so are the rewards of success. First, we need a clear understanding of the properties that make projects and project management so unique. Consider the following definitions of projects A project isa unique venture with a beginning and end, conducted by people to meet established goals within parameters of cost, schedule, and quality® Projects [are] goal-oriented, involve the coordinated undertaking of interrelated activities, are of finite duration, and areall, to adegree, unique” A project cam be considered to be any series of activities and tasks that + Have a specifi objective to be completed within certain specifications + Have defined start and end dates {Have funding limits (applicable) + Consume human and nonhuman resources (ie, money, people, equipment) + Are multifunctional (i... cut across several functional lines)* [A project is] [olrganized work toward a predefined goal or objective that requires resources and effort, unique (and therefore risky) venture having a budget and schedule.” Probably the simplest definition is found in the Project Management Body of Knowledge (PMBoK) guide of, the Project Management Institute (PMI). PMI is the world’s largest professional project management asso- lation, with more than 380,000 members worldwide as of 2012. In the PMBoK guide, a project is defined as, “a temporary endeavor undertaken ( create a unique product or service” (p.4}.° Let us examine the various elements of projects, as identified by our set of definitions Projects are complex, one-time processes. project arises for a specific purpose or to meet a stated ‘goal. It is complex because it typically requires the coordinated inputs of numerous members of the ‘organization. Project members may be from different departments or other organizational units or from one functional area, For example, a project to develop a new software application for a retail company may require only the output of members of the Information Systems group working with the marketing staf: On the other hand, some projects, such as new product introductions, work best with representation from many functions, including marketing, engineering, production, and design. Because a projects intended to fulfil a stated goal, itis temporary. It exists only until its goal has been met, and at that point, itis dissolved. Projects are limited by budget, schedule, and resources. Project work requires that members work ‘ith limited financial and human resousces for a specified time period. They do not run indefinitely Once the assignment is completed, the project team disbands. Until that point, all its activities are ‘constrained by limitations on budget and personnel availability. Projects are “resource-constrained” activites Projecis ure developed to resolvea clear goal or set of goals. There is no such thing as a project team with an ongoing, nonspecific purpose. The project’s goals, or deliverables, define the nature of the project and that of its team. Projects are designed to yield a tangible result, either as a new product oF service. Whether the goal isto build a bridge, implement a new accounts receivable system, or win a presidential election, the goal must be specific and the project organized to achieve a stated aim. Projects are customer-focused. Whether the project is responding to the needs of an internal ‘organizational unit (e.g, accounting) or intended to exploit a market opportunity external to the ‘organization, the underlying purpose of any project is to satisfy customer needs, Inthe past, this goal Engineering Management Prbeiples and Economic eTent ete Eaton for Concosa Universi. Putlahos by Posten Laaring Selutens.Cenyrgrt ©2014 by Pearson Education inc6 (Chapter L = Introduction ‘was sometimes overlooked. Projects were considered successful if they attained technical, budget: ary, or scheduling goals. More and more, however, companies have realized that the primary goal of 8 project is customer satisfaction. If that goal is neglected, a firm runs the risk of “doing the wrong things well”—pursuing projects that may be done efficiently but that ignore customer needs or fail ‘commercially, General Project Characteristics Using these definitional elements, we ean create @ sense of the key attributes that all projects share, These characteristics are not only useful for better understanding projects, but also offer the basis for seeing how project-based work differ from other activities most organizations undertake, Projects represent a special type of undertaking by any organization, Not surprisingly, the challenges in performing them right are some- times daunting, Nevertheless, given the manner in which business continues to evolve on a worldwide scale, becoming “project savvy” iso longer a huxury: Itis rapidly becoming a necessity Projects are characterized by the following properties" 1. Projects are ad hoc endeavors with a clear life cyele. Projects are nontraditional; they are activities, that are initiated as needed, operate for a specified time period over a fairly well understood develop- ‘ment eycle, and are then disbanded. They are temporary operations. 2. Projects are building blocks in the design and execution of organizational strategies. As we will see in later chapters, projects allow organizations to implement companywide strategies. They are the principal means by which companies operationalize corporate-level objectives. In effect, projects are the vehicles for realizing company goals. For example, Intel's strategy for market penetration with ever newer, smaller, and faster computer chips is realized through its commitment toa steady stream of zesearch and development projects that allows the company to eontinvally explore the technologieal boundaries of electrical and computer engincering, 3. Projects are responsible for the newest und most improved products, services, and organizational processes. Projects are tools for innovation. Because they complement (and often transform) traditional process-oriented activities, many companies rely on projects as vehicles for going beyond conventional activities. Projects are the stepping-stones by which we move forward. 4. Projects provide a philosophy and strategy forthe management of change. “Change” isan abstract concept until we establish the means by which we can make real alterations in the things we do and produce, Sometimes called the “building blocks of strategy,” projects allow organizations to go beyond simple statements of intent and to achieve actual innovation. For example, whether it is Chevrolet’ Volt electric car or Apple's newest iPhone upgrade, successful organizations routinely ask for customer input and feedback to better understand their likes and dislikes. As the vehicle of change, the mannet {in which a company develops its projects has much to say about its ability to innovate and commit- sent to change. 5 Project mianagement entels crossing functional and organizational boundaries. Project eit mize internal organizational collaboration by bringing together people from various functions across the company. A project aimed at new product development may require the combined work of engi ncering, finance, marketing, design, and so forth. Likewis, inthe global business environment, many companies have crossed organizational boundaries by forming long-term partnerships with other firms in order to maximize opportunities while emphasizing eificiency and keeping a lid on costs. Projects are among the most common means of promoting collaboration, both across functions and across organizations. 6. The traditional management functions of planning, organizing, motivation, directing, and con- trol apply to project management. Project managers must be technically well versed, proficient at administrative functions, willing and able to assume leadership roles, and, above all, ‘The project manager isthe person most responsible for keeping track ofthe big picture. The mature of project management responsibilities should never be underestimated because these responsibilities are both diverse and critical to project success. 7. The principal outcomes of a project are the satisfaction of customer requirements within the con- straints of technical, cost, and schedule objectives. Projects are defined by their limitations. They have finite budgets, definite schedules, and carefully stated specifications for completion, For example, aterm paper assignment in a college class might include details regarding form, length, number of Engineering Management Prbeiples and Economic eTent ete Eaton for Concosa Universi. Putlahos by Posten Laaring Selutens.Cenyrgrt ©2014 by Pearson Education incChapter | + Introduction 7 primary and secondary sources to cite, and so forth. Likewise, in the Disney’s Expedition Everest case example at the end ofthe chapter, the executive leading the change process established clear guidelines regarding performance expectations. All these constraints both limit and narrowly define the focus of the project and the options available to the project team. Tt is the very task of managing successful project development within such specific constraints that makes the field so challenging. 8. Projects are terminated upon successful completion of performance abjectives—or earlier in their life cyde, if results no longer promise an operational or strategic advantage. As we have seen, projects differ from conventional processes in that they are defined by limited life cycles. They are initiated, completed, and dissolved, :\s important alternatives to conventional organizational activites, they are sometimes called “temporary organizations." Projects, then, differ from better-known organizational activities, which often involve repetitive processes. ‘The traditional moctl of most firms views organizational activities as consistently performing a discrete set of activities. For example, a retail-clothing establishment buys, stocks, and sells clothes in a continous cyele. A steel plant orders raw materials, makes steel, and ships finished products, again in a recurring cycle, The nature of these operations focuses our attention on a “process orientation,” tha is the need to perform work as efficiently as possible in an ongoing manner. When its processes are well understood, the organization always, secks better, mor efficient ways of doing the same essential tasks, Projects because they are discrete activities, violate the idea of repetition, They are temporary activities that operate outside formal channels. They may bring together a disparate collection of team members with different kinds of functional expertise, Projects function under conditions of uncertainty, and usually have the effect of “shaking up” normal corporate a ties. Because oftheir unique characteristics, they do not conform to common standards of operations; they do things differently and often reveal new and better ways of doing things. Table 1.1 offers some other distinc tions between project-based work and the more traditional, process-based activites. Note a recurring theme: Projects operat in radical ways that consistently violate the standard, process-based view of organizations Consider Apple's development of the Pod, a portable MP3 player that can be integrated with Apple's popular iTunes site to record and play music downloads. Apple, headed by its ehairman, Steven Jobs, recog- nized the potential in the MPS market, given the enormous popularity (and, some would say, notoriety) of file-sharing and downloading music through the Internet. The company hoped to capitalize on the need for 4 customer-friendly MP3 player, while offering a legitimate alternative to illegal music downloading. Since its introduction in 2003, consumers have bought more than 278 million iPods and purchased more than 10 billion songs through Apple's ‘Tunes online store. In fact, Apple's {Tunes division is now the largest U.S. market for music sales, accounting for 25% of all music sold in the United States Tn an interview, Jobs acknowledged that Apple's business needed some shaking up. given the steady but unspectacular growth in sales of its flagship Macintosh personal computer, still holding approximately 11% ofthe overall PC market. The iPod, a8 a unique venture within Apple, became billion-dollar business for the company in only its second year of existence. So popular has the iPod business become for Apple Process Project Repeat process or product New process ar product Several objectives One objective ‘ongoing One shot—limited life People are hamagenous More heterageneous ‘Wellestablished systems in place to integrate efforts Systems must be created to integrate efforts Greater certainty of performance, cost, schedule Greater uncertainty of performance, cast, schedule Part of line organization Outside of ine organization Bastions of established practice Violates established practice Supports status quo Upsets status quo Source: RJ. Gram. (1992). “A Survival Guide for dhe Accidental Prject Manager" Pracng ofthe Anal Pret ‘Maingement Ist Symposia, Drexel Til, PA: Project Managersent Iafitate pp. 355-61. Copyright and ll ght revered Matra from this publication has bce reprodced with the pension of PML Engineering Management Prbeiples and Economic eTent ete Eaton for Concosa Universi. Putlahos by Posten Laaring Selutens.Cenyrgrt ©2014 by Pearson Education inc(Chapter L = Introduction that the firm created a separate business unit, moving the product and its support staf away from the Mac ‘group. “Needless to say, iPod has become incredibly popular, even among people who aren't diehard Apple fanatics,” industry analyst Paolo Pescatore told NewsFactor, noting that Apple recently introduced a smaller version ofthe product with great success. “In short, they have been very successful thus far and T would guess they are looking at this realignment as @ way to ensure that success will continue,” A similar set of events are currently unfolding, centered on Apple's introduction and successive upgrades of its Pad tablet. Among the numerous features offered by the iPad is the ability to download books (including college textbooks) directly irom publishers, effectively eliminating the traditional middle- ‘men—bookstores—from the process. So radical are the implications of the iPad that competitors are rushing to introduce their own models to capture a share of this new market. Meanwhile large bookstores are hoping to adapt their business models to the new electronic reality of book purchase by offering their own readers (Kindle for Amazon, and Nook for Barnes and Noble). Some experts are suggesting that within a decade, tablets and other electronic readers will make traditional books obsolete, capturing the majority ofthe pub- lishing market. These are just some examples ofthe way that project-driven technological change, sueh as that at Apple, is reshaping the competitive landscape, Given the enthusiasm with which project management is being embraced by so many organizations, ‘we should note that the same factors that make project management a unique undertaking are also among the main reasons why successful project management is so difficult. The track record of project management is by no means one of uninterrupted success, in part because many companies encounter deep-rooted resis- tance to the kinds of changes needed to accommodate a “project philosophy.” Indeed, recent research into the success rates for projects offers some grim conclusions: + A study of mare than 300 large companies conducted by the consulting firm Peat Marwick found that software and/or hardware development projects fall at the rate of 65%. Of companies studied, 65% reported projects that went grossly over budget, fell behind schedule, did not perform as expected, or all of the above. Half of the managers responding indicated that these findings were considered “normal A study by the META Group found that “more than half of all (information technology) IT projeets become runaways—overshooting their budgets and timetables while failing to deliver fully on their goals.” Joe Hatley, the Chief Information Officer at the Department for Work and Pensions for the UK gov- ‘ernment, stated that “only 30%” of technology-based projects and programs are a success—at a time hen taxes are funding an annual budget of £14bn (over $2 billion) on public sector IT, equivalent to building 7,000 new primary schools or 75 hospitals a year.” ‘According to the 204 Price WaterhouseCoopers Survey of 10,640 projects valued at $7.2 billion, across a broad range of industries, large and small, only 2.5% of global businesses achieved 100% project suc- cess, and more than 501% of global business projects failed. The Chaos Summary 2009 survey by The Standish Group reported similar findings: The majority ofall projects were either “challenged” (due to late delivery, being over budget, or delivering less than required features) or “failed” and were canceled prior to completion, or the product developed was never used. Researchers have concluded that the average sueess rate of usiness-crtea application development projets is 32%. Their statisties have remained remarkably steady since 1994." ‘The Special Inspector General for iraq Reconstruction (SIGIR) reported that the Pentagon spent about 8600 million on more than 1,200 Iragi reconstruction projects that were eventually canceled, with 42% ‘terminated de to mismanagement or shoddy construction.” ‘These findings underscore an important point: Although project management is becoming popular it is not easy to assimilate into the conventional processes of most firms. For every firm discovering the benefits ‘of projects, many more underestimate the problems involved in becoming “project savvy.” ‘These studies also point to a core truth about project management: We should not overestimate the benefits to be gained from project management while underestimating the commitment required to make ‘project work. There are no magic bullets or quick fixes in the discipline. Like any other valuoble activity project management requires preparation, knowledge, training, and commitment to basic principles. ‘Organizations wanting to make use of project-based work must recognize, as Table 1.1 demonstrates, that its very strength often causes it to operate in direct contradiction to standard, process-oriented business practices Engineering Management Prbeiples and Economic eTent ete Eaton for Concosa Universi. Putlahos by Posten Laaring Selutens.Cenyrgrt ©2014 by Pearson Education inc