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Project Questions
Before the formulation of project problem, many questions to be asked by the project initiators.
These questions can be summarized as follows:
The first phase of project management is the concerned with identifying the project to achieve
the desired objectives. The initial task coming under project identification is to find out the
sources of the project. Agencies like government organisations, international institutions like
WHO, World Bank, UNDP, Non Governmental Organisations etc can be better source of
projects.
The factors included under project need analysis are the, problem, solutions, beneficiaries and
decisions. The problem should exhibit an immediate intervention. The focus should be to
identify the beneficiaries. The solutions should be based on the original problem. The decision
to take up the project lies on how these three factors problem, solutions and beneficiaries are
important to project intervention.
The crux of the project lies in the problem formulation process. The project team should have
detailed understanding of the problem, scope, intervention areas and the out come of the
project to be hypothesized. Based on a multi phased understanding and analysis, describe the
problem to be addressed and resolved. The macro level objectives and micro level objectives
to be separated and should give differential wastages
Project Planning
Successful implementation of the project lies on effective project plan. Based on the
anticipated goals and objectives the project planning to be made. The project plan is the blue
print of the project. Effective planning gives proper direction in the implementation of the
project and it further helps in adequate monitoring and evaluation. For the implementation of
plan, an activity chart to be prepared. The activity chart consists of all the proposed activities in
the implementation process, including the start date, calendar for the entire project, dates of
monitoring and evaluation periods, finishing stages, series of out puts, slack time, responsible
person to be coordinate the activities etc.
Project Budget
The project budgeting phase is in the project formulation phase. Two types of budgets are to
be made. The prior one is the cost category budget (materials, administration, capital;
expenditures etc) and the later is the activity budget. This project budget is to calculate the
cost of each project out put. Keep in mind the cash flow of the project, considering the
contingencies like, technical shortage, shortage of raw materials, delays in the activity
implementation etc. The estimation of the project cost should be made on fairly realistic sense
of financial values. In the multi year projects the inflation rate also to be anticipated in advance.
1. Management Appraisal
2. Technical Feasibility
Technical feasibility analysis is the systematic gathering and analysis of the data pertaining to
the technical inputs required and formation of conclusion there from. The availability of the raw
materials, power, sanitary and sewerage services, transportation facility, skilled man power,
engineering facilities, maintenance, local people etc are coming under technical analysis. This
feasibility analysis is very important since its significance lies in planning the exercises,
documentation process, risk minimization process and to get approval.
3. Financial feasibility
One of the very important factors that a project team should meticulously prepare is the
financial viability of the entire project. This involves the preparation of cost estimates, means of
financing, financial institutions, financial projections, break-even point, ratio analysis etc. The
cost of project includes the land and sight development, building, plant and machinery,
technical know-how fees, pre-operative expenses, contingency expenses etc. The means of
finance includes the share capital, term loan, special capital assistance, investment subsidy,
margin money loan etc. The financial projections include the profitability estimates, cash flow
and projected balance sheet. The ratio analysis will be made on debt equity ration and current
ratio.
4. Commercial Appraisal
In the commercial appraisal many factors are coming. The scope of the project in market or the
beneficiaries, customer friendly process and preferences, future demand of the supply,
effectiveness of the selling arrangement, latest information availability an all areas,
government control measures, etc. The appraisal involves the assessment of the current
market scenario, which enables the project to get adequate demand. Estimation, distribution
and advertisement scenario also to be here considered into.
5. Economic Appraisal
How far the project contributes to the development of the sector, industrial development, social
development, maximizing the growth of employment, etc. are kept in view while evaluating the
economic feasibility of the project.
6. Environmental Analysis
Environmental appraisal concerns with the impact of environment on the project. The factors
include the water, air, land, sound, geographical location etc.
This is the period in which all the activities that are planned in the initial phases of the project
get materialized through operation. Here the role of the project managers comes in to the
picture. It is the task of the project managers to schedule the activities one by one and
establish functional relationship of the project activities in the fulfillment of the project. The
techniques like PERT (Programme Evaluation and Review Technique), CPM (Critical Path
Method) etc are the various network techniques the managers make utilize to implement the
activities planned in the project considering the cost and time.
Monitoring is the process of observing progress and resource utilization and anticipating
deviations from planned performance. (UNIDO, 1993). In the monitoring and controlling phase
the project managers have to monitor the technical performance, time and cost performance in
addition to the organisational performance. Correction, re-planning and cancellation of the
activities are the control actions expected from this phase in order to get the expected
outcome. The monitoring is periodical by fixing milestones in the project phases.
Evaluation
The final stage is the evaluation of the project. Upon the conclusion of the project success in
attaining the goals, and to determine how future projects could be managed. Here the
effeteness of the degree of the objective achievement, the efficiency of the financial, human,
and time resources to be observed. The impact of the project, the major concern of the project,
i.e. whether the project reach up to the beneficiaries with quality and quantity is to be
measured. Different types of evaluation are there like performance appraisal, work audit, result
evaluation, cost benefit evaluation, impact analysis etc. Evaluation is done to ensure the
effective mutilation of all resources for the accomplishment of the project.
Conclusion
Here the role of the project manager to be analyzed into. From the conception stage to
implementation stage and from periodical monitoring to evaluation stage his role is inevitable.
He should show his leadership in managing the relationship, motivating the team, procuring
the resources, developing the capabilities, leading all the resources to the accomplishment of
the project. The accountability of the project manager's leadership comes only when the team
members accept the ideas and directions of the leader towards the accomplishment of the
project. A project manager here should be an effective leader. This article briefs up the
conceptual and theoretical understanding of the project management and project appraisal. It
will be beneficial to those who are inspired to take a business of socio-economic project in their
career.
Project Objectives:
There are many factors that determine the outcome of a project, but the six main parameters
that define a construction project are:
1) SIZE denotes the number of tasks to be executed in a project and each task is measured in
terms of quantities of work involved.
4) PRODUCTIVITY measures the ratio of planned effort to produce a unit quantity of work to
the actual effort employed to achieve this unit quantity of work.
5) COMPLETION TIME depends upon the speed with which the project is to be executed.
6) COST is the expenditure which the client has agreed to commit for creating the desired
construction facility
The planning and controlling of the project objectives of time &cost and setting up of the
resources productivity standards to achieve these objectives are the most important
functions of project management.
PROJECT ENVIRONMENT:
Most of the construction projects have one or more characteristics associated with them:
1) THE PRE-INVESTMENT PHASE would usually cover the following four stages:
3) OPERATION PHASE: This phase involves day to day operation of the completed project
and is expected to yield results which meets the original objectives for which the project has
been conceived, formulated & implemented.
a) Geographical location
b) Size ( sq.km)
c) Important physical features ( forest, undulating, hilly, rocky,water logged riverine
etc)
d) Contour maps
4..Basic exploited and potentially exploitable factors of production( land, Labour, natural
resources etc)
5..Infrastructural facilities ( transport, power and telecommunications ) which are necessary for
developing new business / industry
6..A comprehensive check list of businesses that can be developed by exploiting the
resources and facilities available in the area.
7.Estimates of the present & expected demand –supply gaps based on earlier studies /
published data.
8) Estimated lumpsum capital costs of the selected business/ industry taking into account:
(a) Land including site development
(b) Civil Works
(c) Technology
(d) Plant & equipment
(e) Project Implementation
S.R.PUBLICATIONS-NICMAR 2ND TERM-PROJECT APPRAISAL Page 8
(f) Preliminary expenses for conducting feasibility studies
(g) Working capital requirements.
FEASIBILITY STUDIES:
After the identification stage, the project ideas are subjected to a process of
preliminary filtration by way of feasibility study.
This involves study of project idea at a more elaborate level than that was carried
out at the opportunity stage.
This is an intermediate stage between an opportunity study and a full fledged
feasibility study .
If the preliminary projections thrown up at the stage of opportunity study are quite
encouraging or decisive, then the pre-feasibility study stage can be ignored and one
may straight away take up feasibility study itself. A pre-feasibility study should not
normally take more than 3 months to complete , and on the basis of which the
investor should be able to decide:
1) Executive Summary: This gives the title, brief description and objectives of the proposal
and a summary of all essential findings and recommendations of the study in about two pages.
2) PROJECT BACKGROUND & HISTORY: This identifies the project sponsors and gives a
chronological account of the project and various studies /surveys/investigations that were
carried out along with their results.
(a) Demand capacities & market: This outlines the profile of the customers and their
needs, estimates of the present and future trends of gross demand, production capacities to be
set up, their utilisation levels and imports /exports.
(b)Sales Forecast & Marketing: This covers the qualitative and quantitative aspects of
competition to the project and distributional requirements of the product / service.
(d) Plant Capacity: The feasible normal plant capacity taking into account the production
under normal working conditions, holidays,
Stoppages for shift change, preventive maintenance, repairs, and the relationship between
sales, plant capacity and major inputs is worked out.
5) LOCATION & SITE : Here, geographical location and setting up of the plant / facilities is
recommended and specifies essential related activities and cost-estimates.
(b) technologies and processes that are to be applied to the project considering the
proposed capacity, location, nature of inputs and estimates of cost of inputs.
(d) Civil engineering works covering site preparation & development, buildings & structures
etc) together with rough cost estimates.
7) ORGANIZATION: This gives (a) an outline of the recommended organization structure for
production, sales, and administration
By rule of thumb, the following are the percentages of project cost factors:
1) Project development & DPR: 2%
2) Engineering & Design : 13%
3) Materials & equipment : 55%
4) Fabrication & Construction: 30%
Percentage of uncertainty at various phases:
1) Concept and Pre-feasibility: ( 25-40% uncertainty)
2) Design & Techno-economic Feasibility ( 15-25% uncertainty
3) Engineering & procurement ( 10-15% uncertainty)
4) Construction & Commissioning ( 0-10% Uncertainty)
IDBI which is the principal Indian Financial Institution or the apex development bank to
coordinate the activities of all development financing institutions in the country, has besides
publishing its own guide lines in the form of application form & explanatory notes, reproduced
and published UNIDO‟s Manual for the preparation of Industrial Feasibility Studies
UNIDO has divided project cycles into phases and stages as follows
Pre-investment Phase
Investment Phase
Operational Phase
1.Pre-investment Phase
2. Investment Phase
3.Operational Phase
A project has to pass through three stages of scrutiny & clearance, namely prefeasibility
(PF), techno-economic feasibility (TEF) and detailed project report (DPR)
Project enterprise‟s name and profile, detailing its experience and performance in the
project implementation
Project description
Cost of study/investigation already carried out
Demand Pattern, size & market : Existing size and capacities in the industry, the
project size of future growth, Governments & private sector development programmes
Approximate present size of demand, its past growth/graph, major determinants
and/or indicators
Sales forecast and market plan: Anticipated competition for the project from existing
and potential local & foreign producers and contractors
Estimated annual cost on marketing & sales promotion
Details of input requirements, their sources, present & potential supply positions and
estimate of annual cost of utilities under following sub headings
Raw materials
Processed Industrial materials
Bought out components
Auxiliary materials
Power , water and other utilities, including transport service
Implementation Schedule
Electricity authority/board
Clearance from chief controller of explosives
Clearance from mines & geological survey dept.
Clearance from the state industries department
Approvals from urban development authority / municipalities/town planning departments
wherever applicable
TEFR is the second stage of evaluation phase where the project scope is defined, its
size and methods determined, suitability of the site, the required natural resources and
raw materials investigated, and more accurate estimates , buildings, offsite facilities and
other assets, their costs etc., and the total feasibility of the proposal studied in depth
and cleared
After TEFR is cleared, the project proposer can expend money on preparation of DPR
and detailed cost estimate (DCE)
DPR & DPE go together. This is the last and most important stage of the preinvestment
phase of any project
DPR are cleared not only by PIB, but also by the cabinet committee on economic affairs
(CCEA)
DPR shall be prepared after obtaining the investment decision based on TEFR so that
the expensive efforts involved in the preparation of DPR are not wasted
For DPR preparation, process designs, layout drawings & construction data are
necessary
Process/systems design
Raw materials/feed stock and project specifications
License fee for technology
Engineering plan & engineering manpower curves
Final flow diagrams
Material balance
Piping & Instrumentation diagrams for utilities & process
Equipment list
Specifications & data sheets for all major equipment
S.R.PUBLICATIONS-NICMAR 2ND TERM-PROJECT APPRAISAL Page 16
Quotations/proforma invoices and other procurement costs for major equipments
Resources schedules
Bulk materials take off sheets & price schedules
Construction labour wages rates and productivity details
Organisational charts and manpower curves
Construction equipment usage charts and equipment prices
Works contract tax basis & rates
Drawings
Map/Index plan showing location of the project in relation to adjoining towns, trunk
roads, railway lines etc.,
Drawing showing detailed layout of factory, indicating roads, railway lines, water supply,
sewerage and power lines and installations
Physical/Topographical
Rates
A copy of schedule of Rates of the district based on which the estimate has been
prepared
Cost of materials and labour at site. For materials, the cost at source, lead and carriage
charges should be indicated
An indication regarding the assurance from the state government or local authority
concerned, guaranteeing supply of the required quantity of water and power
Effluent disposal
Storm water drainage
Power supply
Construction plant & equipment
Compound wall/fencing
Plant & equipment layout
Plant & machinery
Spares
Foundation erection & electrification
Material handling equipment
General
Detailed Project Report prepared by the consultant M.N. Dastur & Company is in 33
volumes. The following is the list of volumes and their major contents
Summary
Product – Mix, Raw materials, production technology and Plant layout
Coke & Iron Making
Steel Plant & Rolling Mills
Conclusion
Complete and detailed feasibility studies covering all aspects of a project is a vital
requirement for the success of the project
A high rate of accuracy is required for project cost estimates and it must be good
enough to be used as the documents of guidance and key information base for the
subsequent project planning & implementation
It should be carried out by a knowledgeable consultant or an internal study team
capable to do so
Project success will depend a great deal in obtaining the various clearances on time,
and completely
Besides the techno-economic clearance and financial clearance, other clearance
procedures are required for the project implementation
Some of them may be technical, others or statutory – but all regulated by the
Government
Various Clearances/Approvals
♣ A proper & Complete soil investigation is necessary for designing foundations. In view
of the previous bad consequences of improper soil investigation, the government made
it mandatory that every TEFR must be accompanied by a reliable soil investigation
report
♣ CSMRI,CRRI,CBRI, Soil research stations of both Central & State governments
♣ As per the central governments guidelines most of the industries are exempted from
license
♣ Setting up of industries and pollution causing projects within radius of 25km from the
standard periphery of the standard urban area limits of a city having population of 10
lakh and above requires industrial license
♣ Arms & ammunition and allied items of defence equipment, defence aircrafts & warships
♣ Atomic energy
♣ Coal & Lignite
♣ Mineral oils
♣ Mining or iron ore, manganese ore, chrome core, gypsum, sulphur, gold & diamonds
♣ Minerals specified in the schedule of atomic energy
♣ Railway transport
♣ A special approval committee called SAC exists to clear all the Industrial investment
proposals emanating from NRI
♣ The committee decides and monitors the progress of all applications received from
NRI‟s involving
♣ Industrial licenses/registrations/permissions
♣ Foreign collaboration
♣ Import of capital goods
♣ All applications from NRI for investment are processed and finalised within a period of
45 days
♣ Foreign collaboration encompasses two distinct aspects, namely foreign investment &
foreign technology agreement
♣ Applications shall be made to the exchange control department for cases falling under
automatic approval category
♣ The application shall seek approval for foreign investment & payment in FE under the
following heads
♣ Import of designs and drawings is allotted without any restriction
♣ Foreign consultant, who is different from foreign technician , shall be engaged as a sub-
consultant to render engineering services through an Indian prime consultant.
♣ Sub-consultancy by a foreign consultant will be approved only on the following
conditions
♣ He is responsible for the supply of a patented technology which is the basic know how
for the proposed Indian Project, and also for the licensing of its use
♣ The services are necessary for the scrutiny of the detailed engineering done in India,
and that scrutiny has a bearing on the successful transfer of technology with
performance guarantees
♣ The consultants services are vital for equipment selection & inspection
♣ Automatic approval will be given by the RBI for direct foreign investment up to 51 per
cent of equity in high priority industries
♣ Foreign equity investment up to 49 percent may be allowed in the public sector
undertakings to meet their FE requirements
♣ NRI‟s & Overseas corporate bodies (OCB‟s) predominantly (60%) or more owned by
NRI‟s can invest any amount without the approval of the government or RBI on
condition that neither the invested amount nor the income accruing on that will be
allowed to be repatriated outside India at any time in future
♣ Capital Goods comprising plant, machinery and equipment, raw material, intermediates,
components, consumables, spares, accessories, equipment and other goods than those
regulated by a defined negative list (NL) of imports for use in projects
♣ Import & Export policy and Hand book of procedures for relevant period obtained from
Government Publications Dept. may be referred for list of materials that can be imported
and procedures for obtaining license or permit for import
♣ For approval for setting up of export oriented unit, the application shall be submitted to
SIA (Secretariat for Industrial Approvals)
♣ The following goods required for production may be imported provided they are
prohibited items in the NL
♣ Capital goods
♣ Tools, Jigs, fixtures, gauges, moulds
♣ Raw materials, components, consumables, intermediates, spares and packing materials
♣ Prototypes and technical samples not exceeding two in number
♣ Material handling equipment like fork lifts and over head cranes
♣ Office equipment and spares and consumables thereof
♣ With a view to check & prevent air, water & soil pollution, arising out of industrial
projects, the government insists on certain conditions being fulfilled
♣ In respect to certain industries of a high polluting nature, it is not only necessary to
install suitable pollution control equipment, but also to identify the site and location of
the project where a particular industrial unit would be set up
♣ In order to provide concrete shape to this requirement, the government has identified 20
industries causing high pollution
♣ The location of project close to an airport should be selected in consultation with the
International Airport Authority and with its clearance so that the two do not interfere with
each other hand, and at the same time, support each others operations
Railway Clearance
♣ The projects wherein railway structure may effect shall obtain clearance from SIA
(Secretariat for Industrial Approvals) to meet the requirements of
♣ Marshalling yard
♣ Railroad to site
♣ Siding, handing and special facilities including special types of wagons required at
dispatching and receiving stations
♣ Wagon allotment
♣ Up gradation of serving railway station, if necessary
♣ Depending on the requirement, clearance shall be sought from the State Electricity
Board or Central electricity authority, in consultation with the SEB for power supply
♣ The total power requirement broken down between
♣ To be met from own captive generating station
♣ To be availed from power supply
♣ and detailed with connected load in KW
♣ Maximum load in KW shall be given for clearance
Explosives Clearance
♣ Clearance from Chief Controller of Explosives (CCE) is necessary for handling all
explosive materials during construction and/or operation.
♣ Blasting in stone quarry and for doing earthwork in hard rock is a common operation in
project work needing procurement, storing, handling & transportation of explosives
Forest Clearance
Rehabilitation means: the restoration of the APs‟ resource capacity to continue with
productive activities or lifestyles at a level higher or at least equal to that without the
project.
The objective of this RP is to provide a plan for the resettlement and rehabilitation of
the APs so that their losses will be compensated and their standards of living will be
improved or at least restored to the pre-project levels in a sustainable manner. Affected
productive resources of businesses, enterprises (including shops) and public facilities
and infrastructures will also be improved or at least restored to their pre-project levels
Payback Period
Accounting Rate of Return
Net Present Value
Internal Rate of Return
Profitability Index
PAYBACK PERIOD
Payback period is the time duration required to recoup the investment committed to a project.
Business enterprises following payback period use "stipulated payback period", which acts as
a standard for screening the project.
Computation Of Payback Period :When the cash inflows are uniform the formula for
payback period is cash outflow divided by annual cash inflow
When the cash inflows are uneven, the cumulative cash inflows are to be arrived at and then
the payback period has to be calculated through interpolation.
Here payback period is the time when cumulative cash inflows are equal to the outflows. i.e.,
Payback Reciprocal Rate : The payback period is stated in terms of years. This can be
stated in terms of percentage also. This is the payback reciprocal rate.
Decision Rules
Select the projects which have payback periods lower than or equivalent to the
stipulated payback period. „
Arrange these selected projects in increasing order of their respective payback periods.
Select those projects from the top of the list till the capital Budget is exhausted.
In the case of two mutually exclusive projects, the one with a lower payback period is
accepted, when the respective payback periods are less than or equivalent to the stipulated
payback period.
Stipulated payback period, broadly, depends on the nature of the business/industry with
respect to the product, technology used and speed at which technological changes occur, rate
of product obsolescence etc.
Stipulated payback period is, thus, determined by the management's capacity to evaluate
the environment vis-a-vis the enterprise's products, markets and distribution channels and
identify the ideal-business design and specify the time target.
It is easy to understand and apply. The concept of recovery is familiar to every decision-
maker.
Business enterprises facing uncertainty - both of product and technology - will benefit by
the use of payback period method since the stress in this technique is on early recovery
of investment. So enterprises facing technological obsolescence and product
obsolescence - as in electronics/computer industry - prefer payback period method.
Liquidity requirement requires earlier cash flows. Hence, enterprises having high
liquidity requirement prefer this tool since it involves minimal waiting time for recovery of
cash outflows as the emphasis is on early recoupment of investment.
The time value of money is ignored. For example, in the case of project
A Rs.500 received at the end of 2nd and 3rd years are given same weightage. Broadly
a rupee received in the first year and during any other year within the payback period is
given same weight. But it is common knowledge that a rupee received today has higher
value than a rupee to be received in future.
But this drawback can be set right by using the discounted payback period method. The
discounted payback period method looks at recovery of initial investment after
considering the time value of inflows.
There ARE TWO PROJECTS (Project A AND B) AVAILABLE FOR A COMPANY, WITH A
LIFE OF 6 YEARS EACH AND REQUIRING A CAPITAL OUTLAY OF Rs.9,000/- EACH; AND
ADDITIONAL WORKING CAPITAL OF Rs.1000/- EACH.
The cash inflows comprise of profit after tax + Depreciation + INTEREST (Tax adjusted) for
five years and salvage value of Rs.500/- for each project plus working capital released in the
6th year. This company has prescribed a hurdle payback period of 3 years. Which of the two
projects should be selected?
Example
(Note: Interpolation technique is used here to identify the exact period at which cumulative
cash inflows will be equal to outflows. The amount required to equate is Rs.500, while the
returns from the 5th year is 3,000. Hence the addition time duration required to compute the
payback period is (500/3000) x 12 which is 2 months. The interpolation technique is used
based on the assumption that cash inflows accrue uniformly throughout the year.)
The investment decision will be to choose Project A with a payback period of 3 years and
reject Project B with a payback period of 4 years and 2 months.
The definition of cash inflows is erroneous; it takes into account profit after tax only. It,
therefore, fails to present the true return.
Definition of investment is ambiguous and fluctuating. The decision could be biased
towards a specific project, could use average investment to double the rate of return
and thereby multiply the chances of its acceptances.
Example
There are two projects (Project A and B) available for a business enterprise, with a life of 6
years each and requiring a capital outlay of Rs.9,000/- each and additional working capital of
Rs.1000/ each. The cash inflows comprise of profit after tax + depreciation + interest (Tax
adjusted) for five years and salvage value of Rs.500/- for each project at year 6 plus working
capital released also in the 6th year.
The Profit (after tax) component of the cash inflows for each project are given in the next
slide.
Example
Taking into account the working capital released in the 6th year and salvage value of
the investment, the total investment will be (10,000-1,500) Rs.8500 and the average
investment will be (8500/2) Rs.4250 for each project.
Project A
Project B
The investment decision will be to select Project B since its rate of return is higher than that
of Project A if they are mutually exclusive. If they are independent projects both can be
accepted if the minimum required rate of return is 11.7% or less.
Let 'b' be the cash outflow in period 't' where t = 0,1,2,....n 'B' be the present value of cash
outflows 'c' be the cash inflow in period 't'=0,1,2,........n 'C' be the present value of cash
inflows 'K' be the cost of capital
Then
When the cash outflow is required for only one year i.e., in the present year, then the Net
Decision Rules
A. "Capital Rationing" situation :Select projects whose NPV is positive or equivalent to zero.
Arrange in the descending order of NPVs. Select Projects starting from the list till the capital
budget allows.
B. "No capital Rationing" Situation : Select every project whose NPV >= 0
Assuming that the cost of capital is 6% for a project involving a lumpsum cash outflow of
Rs.8,200 and cash inflow of Rs.2,000 per annum for 5 years, the Net Present Value
calculations are as follows:
Net present value = present value of cash inflows - present value of cash outflows = 8424 -
8200 = Rs.224
Since the net present value of the project is positive (Rs.224), the Project is accepted.
IRR can be restated as the rate of discount, at which the present value of cash flow (inflows
and outflows) associated with a project equal zero.
Let at be the cash flows (inflow or outflow) in period t • Where t = 0,1,2...... .. n years
the project is found out by solving for the value of 'r' in the Then IRR of „r‟ in following equation
is :
Computation of Internal Rate Of Return (Irr) When Trial and error method is used to solve
for the IRR, two rates are computed one that gives a small positive NPV, another that gives a
small negative NPV. The IRR using the trial and error method will be:
A new machinery costs Rs.8,200 and generates cash inflow (after tax) per annum of Rs.2,000
during its life of 5 years.
IRR method involves trial and error in the sense that one has to experiment with different rates
of discount before arriving at the appropriate rate at which the equation 1 and 2 are satisfied.
Butwhen the cash inflows are by way of annuities the relevant interest factor is:
Through the trial and error method, we can begin with a 10% discount
The net present value assuming a 10% discount rate is rate.
(2000 x 3.7908) - 8200 = 7581.6 - 8200 = -618.4.
Since the NPV is negative, we need to reduce the discount rate to arrive at a positive NPV.
Hence, let us assume a discount rate of 5%.
The net present value assuming a 5% discount rate is
(2000 x 4.3295) - 8200 = 8659 - 8200 = 459.
Profitability ratio is otherwise referred to as Benefit/Cost ratio. This is an extention of the Net
Present Value Method. This is a relative valuation index and hence is comparable across
different types of projects requiring different quantum of initial investments.
Profitability index (PI) is the ratio of present value of cash inflows to the present value of cash
outflows. The present values of cash flows are obtained at a discount rate equivalent to the
cost of capital.
The terms interest, interest period and interest rate are useful in calculating equivalent sums of
money for an interest period. Interest is the manifestation of the time value of money. It is the
difference between an ending amount of money and the beginning amount over an interest
period. For more than one interest period, the terms simple interest and compound interest
become important.
Simple interest is calculated using the principal only, ignoring any interest accrued in preceding
interest periods. The total simple interest over several periods is computed as:
Here the interest rate is expressed in decimal form. The total sum accrued at the end of n
interest periods is given by:
For compound interest, the interest accrued for each interest period is calculated on the
principal plus the total amount of interest accumulated in all previous periods. Compound
interest reflects the effect of the time value of money on the interest also. The interest for one
period is calculated as:
The total sum accrued after a number of interest periods can be calculated from the following
expression:
We can see from the above two expressions that the sum accrued at the end of first year
would be same for both simple interest and compound interest calculations. However, for
interest periods greater than one year, the sum accrued for compound interest would be larger.
We can extend equation (3) to calculate the sum accrued if the interest is compounded
continuously. Here m tends to . Taking the limits such that m goes to infinity, we get the
following expression:
To carry out calculations, it is convenient to draw what is called as cash flow diagram. The
following figure gives one such cash flow diagram:
Equations (2) and (5) are used in problems concerning single payment. In today‟s world
we deal with problems that involve annual/monthly equal payments such as home mortgage
payments, vehicle loans or loans for consumer electronic goods. The following relationships
hold good for problems involving such uniform series:
From these equations, we can calculate present worth or future worth given uniform annual
amounts. We can also calculate the uniform annual amounts given either present worth or the
future worth. A typical example would be person borrowing money from a financial institute for
buying a vehicle. Knowing the interest rate and number of installments, the person can
calculate the uniform equal amounts he or she has to pay depending on the amount borrowed.
The up-arrow indicates the amount „coming in‟ such as borrowing and the down arrow
indicates the amount „going out‟ such re-payments towards the borrowing.
1.3. Inflation:
In all the above equations, we had assumed that there is no inflation. Inflation is an increase in
the amount of money necessary to obtain the same amount of product before the inflated price
was present. Inflation occurs due to downward change in the value of the currency. If „C‟ is the
cash in hand today for buying a product, f is the inflation rate, nthen the amount we need to
pay for the same product after n years would be C(1 + f) , assuming uniform inflation over the
years. The present worth of such money with interest component added is given by:
Life cycle costing or LCC is an important factor for comparing the alternatives and deciding on
a particular process for completing a project. The different components taken into account for
calculating LCC are:
Here, Capital is the present worth. Replacement cost that may occur at a later years need to
converted to present worth. Maintenance cost is annual maintenance cost and needs to be
converted to present worth and so is the energy cost. Salvage is the money that is obtained
while disposing the achinery at the end of life cycle period. Even this amount has to be
converted to present worth for calculating LCC. Once we have the LCC value, we can easily
find the Annual Life Cycle Costing using the following equation:
1.5. Example:
A community has 500 people. The source of water to the community is from the bore-wells and
the supply of water from the bore-wells is by hand-pumps. Six hand-pumps are installed to
meet the water requirement of the community. Per-capita water consumption of the community
is 40 liters/day. Bore-well depth is 20 meters. The cost of each hand-pump is Rs.5,000.00.
Cost of digging of each bore-well is at the rate of Rs.250.00 per meter. Life of the hand-pump
is 10 years. Annual maintenance cost perpump is Rs.1250.00. If the rate of interest is 10%,
what is the unit water cost for the life cycle period of 20 years?
Solution
A PV array of 500 watts has been installed to pump water from a bore-well of 2 meters deep
using a submergible motor and pump system to an over-head tank. The length of pipe required
to pump the water is 30 meters. Following are the costs involved for the sub-systems and their
life spans:
Solution:
Replacement cost of pipe at the end of 5 year and at the end of 10 year = $240 each
A micro-hydel plant of 1kW power capacity has been installed. Following are the cost involved
in installation of the whole system:
Solution:
The problem involves only the initial cost incurred at year 0. There is no replacement
cost or maintenance cost involved. Hence, we can calculate the total capital cost just by
adding the given quantities. Let K be the capital cost. It is calculated as follows:
K = Rs.16000 + Rs.16000 + Rs.2500 + Rs.4000 x d
Here d is the distance to which 11 kV line runs
What is a Project?
A successful Project Manager must simultaneously manage the four basic elements of a
project: resources, time, cost, and scope. Each element must be managed effectively. All
these elements are interrelated and must be managed together if the project, and the project
manager, is to be a success.
However, managing project resources frequently involves more than people management.
The project manager must also manage the equipment (cranes, trucks and other heavy
equipment) used for the project and the material (pipe, insulation, computers, manuals)
assigned to the project.
Any project can be broken down into a number of tasks that have to be performed. To
prepare the project schedule, the project manager has to figure out what the tasks are, how
long they will take, what resources they require, and in what order they should be done.
3.Managing Costs
Often a Project Manager is evaluated on his or her ability to complete a project within
budget. The costs include estimated cost, actual cost and variability. Contingency cost takes
into account influence of weather, suppliers and design allowances.
The 80/20 Rule means that in anything a few (20 percent) are vital and many (80 percent) are
trivial. Successful Project Managers know that 20 percent of the work (the first 10 percent
and the last 10 percent) consumes 80 percent of your time and resources.
The process flow of Project management processes is shown in Figure 7.1. The various
elements of project management life cycle are
1) Need identification
2) Initiation
3) Planning
4) Executing
5) Controlling
6) Closing out
The first step in the project development cycle is to identify components of the project.
Projects may be identified both internally and externally:
Internal identification takes place when the energy manager identifies a package of
energy saving opportunities during the day-to-day energy management activities, or from
facility audits. External identification of energy savings can occur through systematic energy
audits
undertaken by a reputable energy auditor or energy service company.
c) Planning
The planning phase is considered the most important phase in project management. Project
planning defines project activities that will be performed; the products that will be produced,
and describes how these activities will be accomplished and managed. Project planning
defines each major task, estimates the time, resources and cost required, and provides a
framework for management review and control. Planning involves identifying and
documenting scope, tasks, schedules, cost, risk, quality, and staffing needs.
The result of the project planning, the project plan, will be an approved, comprehensive
document that allows a project team to begin and complete the work necessary to achieve the
project goals and objectives. The project plan will address how the project team will manage
the project elements. It will provide a high level of confidence in the organization‟s ability to
meet the scope, timing, cost, and quality requirements by addressing all aspects of the
project.
e) Controlling
Project Control function that involves comparing actual performance with planned
performance and taking corrective action to get the desired outcome when there are
significant differences. By monitoring and measuring progress regularly, identifying
variances from plan, and taking corrective action if required, project control ensures that
project objectives are met.
f) Closing out
Project closeout is performed after all defined project objectives have been met and the
customer has formally accepted the project‟s deliverables and end product or, in some
instances, when a project has been cancelled or terminated early. Although, project closeout
is a routine process, it is an important one. By properly completing the project closeout,
organizations can benefit from lessons learned and information compiled. The project
closeout phase is comprised of contract closeout and administrative closure.
For a project to be taken up for investment, its proponent must present a sound technical
feasibility study that identifies the following components:
The proposed new technologies, process modifications, equipment replacements and
other measures included in the project.
Product/technology/material supply chain (e.g., locally available, imported, reliability of
supply)
Commercial viability of the complete package of measures (internal rate of return, net
present value, cash flow, average payback).
Any special technical complexities (installation, maintenance, repair), associated skills
required.
7.2.3 Financing
When considering a new project, it should be remembered that other departments in the
organization would be competing for capital for their projects. However, it is also important
to realize that energy efficiency is a major consideration in all types of projects, whether they
are:
Projects designed to improve energy efficiency
Projects where energy efficiency is not the main objective, but still plays a vital role.
The funding for project is often outside the control of the project manager. However, it is
important that you understand the principles behind the provision of scarce funds.
Funding can become an issue when energy efficiency projects have previously been given a
lower priority than other projects. It is worth remembering that while the prioritization of
projects may not be under our control, the quality of the project submission is.
The availability of external funds depends on the nature of your organization. The finance
charges on the money you borrow will have a bearing on the validity of your project.
Before applying for money, discuss all the options for funding the project with your finance
managers.
It is reiterated that energy savings often add substantially to the viability of other non-energy
projects.
Since a substantial portion of a project is typically executed through contracts, the proper
management of contracts is critical to the successful implementation of the project. In this
context, the following should be done.
The competence and capability of all the contractors must be ensured. One weak link
can affect the timely performance of the contract.
Proper discipline must be enforced among contractors and suppliers by insisting that
they should develop realistic and detailed resource and time plans that are matching
with the project plan.
Penalties may be imposed for failure to meet contractual obligations. Likewise,
incentives may be offered for good performance.
Help should be extended to contractors and suppliers when they have genuine
problems.
Project authorities must retain independence to off-load contracts (partially or wholly)
to other parties where delays are anticipated.
7.2.5 Implementation
The main problems faced by project manager during implementation are poor monitoring of
progress, not handling risks and poor cost management.
a) Poor monitoring of progress: Project managers some times tend to spend most of their
time in planning activity and surprisingly very less time in following up whether the
b) Not handling risks: Risks have an uncanny habit of appearing at the least expected time.
In spite of the best efforts of a project manager they are bound to happen. Risks need
immediate and focused attention. Delay in dealing with risks cause the problem to
aggravate and has negative consequences for the project.
c) Poor cost management: A project manager's success is measured by the amount of cost
optimization done for a project. Managers frequently do all the cost optimization during
the planning stages but fail to follow through during the rest of the stages of the project.
The cost graphs in the Project planner software can help a manager to get a update on
project cost overflow. The cost variance (The difference between approved cost and the
projected cost should be always in the minds of the project managers).
Once the project is completed, performance review should be done periodically to compare
actual performance with projected performance. Feedback on project is useful in several
ways:
a) It helps us to know how realistic were the assumptions underlying the project
b) It provides a documented log of experience that is highly valuable in decision making
in future projects
c) It suggests corrective action to be taken in the light of actual performance
d) It helps in uncovering judgmental biases
e) It includes a desired caution among project sponsors.
Depending on the nature of the project, savings are determined using engineering
calculations, or through metering and monitoring, utility meter billing analysis, or computer
simulations.
System
A group of elements either human or non-human that is organised & arranged in such a way that the
elements can act as a whole towards achieving some common goal, objective or end
A composite of equipment, skills and techniques capable of performing and/or supporting an
operational role. A complete system includes related facilities equipment, material services and
personnel requirement for its operation to the degree that it can be considered as a self sufficient unit in
its intended operational and/or support environment (Defined by Air force)
Program
Program can be constructed as the necessary first level elements of a system
The integrated, time phased tasks necessary to accomplish a particular purpose
Or
A relative series of undertakings which combine over a period of time and which are designed to
accomplish a broad, scientific or technical goal
They are regarded as the subsystems, however programs are generally defined as time phased efforts,
whereas systems can exist on a continuous basis
Project
Projects are also time phased efforts (much shorter than programs) and are first level of break down of
programs
A project is within a organisation as an undertaking with a scheduled beginning and an end, and which
normally involves some primary purpose
Project Categorisation
Individual projects
Staff projects
Special projects
Matrix projects
Individual Project
Individual projects are short duration projects normally assigned to a single individual who may be acting as
both project manager and functional manager
Staff Project
These are the projects that can be accomplished by one organisational unit, say a department. A staff or task
force is developed from each section involved. This works best if only the functional unit is involved
Special Projects :Special projects occur that require certain primary functions/ or authority to be assigned
temporarily to other individual or units. This works out best for short duration projects.
Matrix projects require input from a large number of functional units and usually control vast resources
Organisation
Organisations are important to the development of nation. They serve the country and the society by
developing products that are technically advanced
The construction industry plays a key role in this development as it provides one of three basic needs of human
life
Projects with larger work scope as well as different locations require an organisation that can carry out
systematic coordination of the various construction aspects by assigning a team of trained personnel
Project Organisation
A good project organisation is one in which all individuals concerned constantly interact for achieving
project objectives which is vital for success of any project
A project team takes over the project responsibility from the study team as soon as statutory clearances
are obtained and funding arrangements made
In the scheduling stage what is generally done is to check and redesign the organisation which was
defined at the beginning of the project
In the final stage the organisation is given a more formal character and strengthened with clearly
defined responsibilities and commensurate authority
Functional Organisation
Divisional Organisation
Matrix Organisation
Functional organisation is the traditional centralised type of organisation with line and staff structure, in
which heads of various functional departments report to the CEO for their respective specialised
functions in the management of the project as well as the enterprise on the whole
The project manager supported by a few area project engineers and clerical staff would function as a
coordinator and report daily to the CEO
This form of organisation would suit pure project enterprises whose CEO can afford to function virtually
as chief project manager, without other more important business
In a going concern where the CEO has many other things to do, this form of project organisation will
lead to neglect of the project
Divisional Organisation
Divisional organisation envisages well knit decentralised project management divisions, each headed by
a PM or someone of equivalent title, and divided into several sections, each under the charge of senior
person and manned by qualified and experienced staff of appropriate levels, solely allotted to the
project
The PM concentrates totally on his project, without worrying about the general management of the
enterprise
Project schedules and resource budgets are mostly entrusted to the PM with proper rules and guide
lines which require regular submission of reports to top management
In this form of organisation there are two distinct categories of personnel one, at lower levels, recruited
solely for the particular project and the other, deputed by other functional departments to serve the
project
The first category normally faces termination at the completion of the project, unless some are
absorbed in the production and management
The second category may serve more than one project at a time according to the needs and
practicability of the situation
When posted in PMD or at site, they will report administratively to the PM, but professionally and for
specialist advice continue to report to their functional heads
On the project they represent the interests of the functional departments and might even disagree with
the PM in matters of schedules, budgets, quality etc
To complete project with strict & timely supervision achieving quality & workmanship
To complete project construction in stipulated time schedule through advance planning & coordination
To complete project construction in the most economical way with the best resources available
Engineering Department
Execution
Quality Control
R&D
Contracts
Quantity Surveying
Planning
Execution
Quality Control
Research & Development is possible through experimenting, recording of observations and deriving
easily adaptable procedures
Highlight the better points observed on other sites to the Chief Engineer/ Project Manager
Material testing & developing of new building construction techniques towards achieving better quality
results at a minimum cost
MIS documentation
Quantity Surveying
Planning
Briefing
Designing
Tendering
Constructing
Commissioning
Incomplete work
A job poorly done that must be done over
Delayed decisions
Poor communication channels
Uncontrolled telephone calls
Casual visitors
Waiting for people
Failure to delegate
Poor retrieval system
Preparing and updating on a daily basis, schedule of tasks
Sorting of tasks and short listing a daily basis
Priority fixing
Time allocation
Dismissing or suspending time-wasters
Preparation of timely plans to face the future tasks without emergencies
Making profitable use of waiting time & journey time
Selectively delegating to others a good lower part the tasks
To attend all important matters without delay or failure/excuse
Taking stock of daily achievements
Avoiding of disorganised confusion
Manage Cost
Cost control is equally important to all companies, regardless of size. Cost control is not only monitoring
of costs and recording perhaps massive quantities of data, but also analysing the data in order to take
corrective action before it is too late
A simple evaluation of the inputs and outputs and a comparison of actual expenses on the inputs with
what is expendable will suffice
Out of the available advance estimate of various cost elements, what is expendable during the reporting
month and cumulative to date must be worked out in proportion to quantity and percentage of work
completed
Consider factual measurements of percentage completed
Cost Estimating
Cost Accounting
Project cash flow
Company cash flow
Project Team
Organising Project Team
Project Office
Project Office
The project office is an organisation developed to support the project manager in carrying out his duties
Acting as the focal point of information for both in house control & customer reporting
Controlling time, cost & performance to adhere to contractual requirements
Ensuring that all the work required is documented and distributed to all key personnel
Ensuring that all the work performed is both authorised and funded by contractual documentation
For large projects it is desirable to have a full time functional representative from each major division or
department assigned permanently to the project, and perhaps even to the project office
Functional Management
Program management
Project engineering
Engineering operations
Manufacturing operations
Procurement
Quality Control
Cost Accounting
Publications
Marketing
Sales
Stores Management
Most organisations and engineers consider store keeping a minor activity in the construction field
Of the total construction cost, almost 65% is the material cost which can go up due to negligence by
engineer/organisation.
This can be controlled by effective store management
Stores management is a part of material management. Various types of buildings are used for storage
depending on the types of materials to be stored, convenience, cost of land, climatic conditions,
transportation facilities etc.,
Two factors are of utmost importance in determining the layout of store house viz., economy and efficiency
If a store house is not fully utilised, it is a waste of capital and if it is the one that holds too much, is
wasteful in terms of time & labour
Stores – Activities
Plant Management
The general aim of any construction project is to produce a structure of reasonable cost and quality
within an acceptable time period
To achieve the above time period and in many cases to overcome a shortage of suitable manpower the
mechanisation of many construction projects is considered
The items of plant which are available is very extensive, ranging from simple hand tools to very
expensive equipment
Increase rate of output
Reduce overall building costs
Carry out activities which cannot be done manually or to do them more economically
Eliminate heavy manual work thus reducing fatigue and increasing productivity
Maintain a planned rate of production where there is shortage of either skilled or unskilled operatives
Maintain high standards often required by present day designs and specifications, especially concerned
with structural engineering works
House Keeping
Safety
Quality Control
Data Processing
Selection of appropriate hardware, software for various functional requirements
Implementation of systems or effective work results
Providing timely and correct information to the management
Training the staff to use the software packages
Maintenance of all the computer systems in an organisation
Updating the information about advanced computer technologies
Monthly reporting to the management about the development and progress In the implementation
of systems