MAM-057

Project Management in Agribusiness

School of Agriculture
Indira Gandhi National Open University
New Delhi
 MAM - 057
Project Management in
Indira Gandhi
Agribusiness
National Open University
School of Agriculture

PROJECT MANAGEMENT: AN OVERVIEW 7

UNIT 1 : Introduction to Project 11
UNIT 2 : Project Preparation and Implementation 34
UNIT 3 : Project Costs and Budgeting 54

PROJECT FORMULATION 77
UNIT 4 : Participatory Rural Appraisal and 81
Rapid Rural Appraisal
UNIT 5 : Project Planning 105
UNIT 6 : Planning Tools 127
UNIT 7 : Modeling the Project System 166
UNIT 8 : Analyzing Plan 187

PROJECT IMPLEMENTATION AND EVALUATION 211

UNIT 9 : Project Control 215
UNIT 10 : Tools and Techniques 232
UNIT 11 : Project Closure and Performance 249
UNIT 12 : Continuous Improvement Process (CIP) 262
MAM-057 PROJECT MANAGEMENT IN
AGRIBUSINESS
The projects produce specific, unique tangible, or intangible results. It acts as a catalyst
of change by way of inserting new processes, procedures, tools, resources, and so on
into organizations thereby enabling future processes. Projects are means to help any
organization learn, change, adapt, improve, and adopt new processes, products, or
technology. Increasing the growth and efficiency of the agricultural and rural sectors is
of prime concern to the policymakers and government. The large quantities of scarce
resources, both people and money needed for the purpose must be used efficiently.
Projects are a collection of tasks that must be completed with limited resources to
meet specific goals at a particular time and location. Projects are an investment in
which resources are used to build assets that will provide benefits over time in
Agribusiness. It consists of a series of organized and supervised activities with start
and finishes dates that are carried out to meet specific requirements, such as time, cost,
and resource constraints. The project requires systematic planning and careful
implementation. Therefore, the application of knowledge, skill, tools, and techniques
in the project environment refers to project management. Project management involves
decision-making for the planning, organizing, coordination, monitoring, and control of
several interrelated time-bound activities. Project managers use several tools and
techniques to identify the best possible initial plan and to assess the impact of deviations
to initiate necessary corrective measures. The students of project management would
upon going through the course learn the concept of the project, project formulation,
implementation, and evaluation of the project. They would be able to understand how
the project is formulated and how the project report is prepared.
The Course is designed into three blocks. Block 1 gives an overview of project
management. Block 2 deals with the project formulation and Block 3 presents the
concepts related to project implementation and evaluation.
The course assessment as per IGNOU norms will be through assignments and term-
end examination. You must prepare the assignments based on your understanding of
the contents of this course and the application of the same to the proposed business
activity.
 MAM - 057
Project Management in
Indira Gandhi
Agribusiness
National Open University
School of Agriculture

Block

1
PROJECT MANAGEMENT: AN OVERVIEW
UNIT 1
Introduction to Project 11
UNIT 2
Project Preparation and Implementation 34
UNIT 3
Project Costs and Budgeting 54
EXPERT COMMITTEE
Prof. R. P. Das, PVC, IGNOU Dr. Leena Singh, Assistant Professor,
SOMS, IGNOU
Prof. S.K. Yadav, Director, SoA, IGNOU
Prof. Sunil Gupta, SOMS, IGNOU
Dr. B.K. Sikka, Former Dean, College of
Agribusiness Management, GBPUAT Dr. P. Vijayakumar, Associate Professor,
SoA, IGNOU
Dr. V.C. Mathur, Former Professor and
Head, Div. of Agri. Econ. IARI Dr. Mita Sinhamahapatra, Associate Professor,
SoA, IGNOU
Dr. Pramod Kumar, Principal Scientist
(Agri. Econ.) IARI Dr. Mukesh Kumar, Assistant Professor,
SoA, IGNOU
Prof. M. K. Salooja, School of Agriculture,
IGNOU Dr. P. K. Jain, Associate Professor and
Programme Coordinator, SoA, IGNOU
Dr. Anjali Ramtake, Associate Professor,
SOMS, IGNOU

PROGRAMME COORDINATOR : Dr. Praveen Kumar Jain

BLOCK PREPARATION TEAM

Unit Writers Editors

Unit 1: Dr. Pramod Kumar, IARI, New Delhi

Dr. B.D. Tripathi, MANAGE, Hyderabad
Prof. R.S. Sampat
Units 2 & 3:
Dr. Praveen Kumar Jain
Prof. Anand Chakravarthi, Hyderabad

COURSE COORDINATOR : Dr. Praveen Kumar Jain

PRINT PRODUCTION
Mr. Rajiv Girdhar Mr. Hemant Kumar Parida
Assistant Registrar, Section Officer,
MPDD, IGNOU, New Delhi-110 068 MPDD, IGNOU, New Delhi-110 068

June, 2022
 Indira Gandhi National Open University, 2022
ISBN :
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of this course provided by the authors as far as the copyright issues are concerned.
Further information on the Indira Gandhi National Open University courses may be obtained from the
University’s office at Maidan Garhi, New Delhi-110 068 or the official website of IGNOU at [Link].
Printed and published on behalf of Indira Gandhi National Open University, New Delhi by the Director,
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BLOCK 1 PROJECT MANAGEMENT:
AN OVERVIEW
A project is a temporary and unique endeavor designed to produce a product, service,
or result with a defined beginning and end. A project is usually constrained by time,
funding, or staffing. It is undertaken to meet unique goals and objectives, typically to
bring about beneficial change or added value. The project management process includes
planning, initiation, execution, monitoring, and closing. Thus every project needs a plan
that outlines how things will get off the ground, how they will be built, and how they will
finish. Block 1 is designed to build the concept of the project, project implementation,
and evaluation, financing, and budgeting of the project among the students.
The first Block consists of three units, the first one deals with the concept, characteristics,
and types of project. It also discusses the nature of agricultural projects and the phases
of a project cycle. You will also come to know the meaning of project management
and the critical factors associated with project implementation.
The second Unit explains the concept of project preparation and gives an idea of
various models of project selection. It also discusses the project implementation and
schedule. It also describes the appointment and roles and responsibilities of the project
manager.
The third Unit deals with the various components of project cost and also explains
how to identify the costs and benefits. It will help you understand the concept of social
cost and benefit analysis. It will also help you understand how to write the feasibility
report. The means of financing the project and project budgeting are also described in
the unit.
The material provided in this block is supplemented with various examples and activities
to make the learning process simple and interesting. We have also provided Check
Your Progress questions for the self-test at a few places in these units which invariably
lead to possible answers to the questions set in those exercises. What perhaps you
ought to do, is to go through units and jot down important points as you read, in the
space provided in the margin. This will help you in assimilating the content. A list of
reference books has been provided at the end of each unit for further detailed reading.
Project Management:
An Overview

10
 Introduction to Project
UNIT 1 INTRODUCTION TO PROJECT
Structure

1.0 Objectives
1.1 Introduction
1.2 Project
1.2.1 Meaning
1.2.2 Purpose
1.2.3 Interdependencies
1.2.4 Uniqueness
1.2.5 Conflicts
1.3 Categories of Project
1.4 Characteristics of Project
1.5 Organisational Form
1.6 Nature of Agricultural Projects
1.7 Project Life Cycle
1.8 Project Management
1.8.1 Characteristics of project management
1.8.2 Critical factors in project management
1.9 Let Us Sum Up
1.10 Keywords
1.11 Suggested Further Readings /References
1.12 Answers to Check Your Progress

1.0 OBJECTIVES
After studying this unit, you should be able to:
 explain the concept, characteristics, and types of project;
 discuss the nature of agricultural projects;
 describe the phases of the project life cycle; and
 explain the meaning of project management, and critical factors associated
with project implementation.

1.1 INTRODUCTION
You must be aware that the development of civilization has seen the creation of many
unique ‘marvels’ and ‘organization of events’ by mankind. Around 2500 years B.C.,
the construction of great structures like the Pyramids by Egyptians, many grand structures
including the Temple in Jerusalem by King Solomon, the development of roads, canals
for water supply by Greeks and Romans, the great wall of China, etc. with unique
structures were completed successfully without sophisticated machinery, modern 11
Project Management: scientific knowledge, and technology. All those examples of construction projects from
An Overview
history used labour, skills of people, and managerial competence in planning different
activities, meeting uncertainties and emergencies. From those examples, we find that
mankind was using project activities ever since the dawn of civilisation to meet different
purposes. With scientific innovations for energy like electricity and growing
industrialisation, a modern world has emerged. Today, a majority of work in the industrial
world is undertaken as a project to get output within the cost and time limits, with
concern for quality. The projects have also crossed the boundaries of construction and
industries to enter areas such as scientific research, defence, space science, new modes
of transportation, medicine, biotechnology, information technology, etc.
This unit explains the concept and role of the project for taking any new development
activities or we can say starting new business enterprises. You will understand the
basic features and uniqueness of the project. You will also be briefly introduced to the
concept of project management.

1.2 PROJECT
Before proceeding forward, you should have conceptual clarity about the term project.
What it is?

1.2.1 Meaning
A project may be described as an endeavour/assignment with the uniqueness of doing
first time to achieve certain pre-decided goals and deliverables with given resources
such as time, cost, manpower, materials, machinery, etc. with pre-defined quality as
well unforeseen constraints. A project may be identified with the following features:
 By nature, the project has uniqueness, i.e., it does not involve the repetition of
processes. Nevertheless, the operational activities to carry out a project may be
identical.
 The project has a pre-decided time frame given by the client to complete it with
dates of start and finish of operational activities, and deliverables.
 Has a budget approved by the client and agreed by the project manager to complete
all operational activities and provide deliverables specified by the client within
budget in a normal working situation.
 Resources such as manpower, material, and equipment are deployed as agreed
between the client and project manager before the start of a project.
 Projects involve elements of risk and uncertainties due to natural calamities or
unfavourable environments affecting the progress of work.
 Generally, projects are undertaken to bring beneficial changes as perceived by the
client.
Before going further, let us understand three terms viz. programme, project, and task.
The programme refers to a large endeavour, with long-range objectives spread over a
longer period for implementation, catering to many end users/stakeholders. The
programmes are broken into projects to achieve specific objectives. The projects are
further broken into tasks for implementing planned activities. Our focus here is on projects.
12
The project can be defined in many ways. A few standard definitions are given below: Introduction to Project

 A set of activities to deliver a specific and unique result that requires the efforts and
inputs of more than one department and which will have an effect on more than
one department and people/customers/stakeholders.
 A project is a temporary setup to create a unique output /product/service (Project
Management Institute (PMI of USA, 2001).
 A combination of human and other non-human resources, such as material,
machinery, finance, space, ideas, etc. pooled together in a temporary setup to
achieve a unique and pre-decided purpose.
 It is a one-shot, time-limited, goal-directed major undertaking requiring the
commitment of varied skills and resources. (PMI of U.S.A.)
 A project is an organized plan of activities carried out to reach a defined goal,
often of a non-recurring nature with a specified terminal point. It is a package of
time-bound, scheduled, and assembled a package of activities dedicated to the
attainment of a specific objective of successful completion of work on time and
within the allotted budget.
 In a precise sense, a project is a defined activity on which money is spent in the
expectation of returns. There is a specific starting point, a specific endpoint and it
is intended to achieve a specified objective. In addition, a project has a specific
geographic location and would serve a group of population.
 A project in the context of developmental activities is a kind of investment that
denotes purposefulness, size, location, etc.
 A project is a scientifically evolved work plan devised to achieve a specific objective
within a specified period.
 A project is an organization of people dedicated to a specific purpose or objective.
 Projects generally involve large, expensive, unique, or high-risk undertakings which
have to be completed by a certain date, for a certain amount of money, within
some expected level of performance.
 At the minimum, all projects need to have well-defined objectives and sufficient
resources to carry out all the required tasks.
A series of definitions spelled out above is intended to provide further clarity about the
term ‘Project’. Behind all these attributes, there must be a purpose.

1.2.2 Purpose
Usually, a project is a one-time activity with a complete focus on achieving the project
objectives in the form of the pre-decided end result with quality parameters, within
given time and resources. So, one important purpose behind a project always remains
the focus on the objective to achieve for the first time. The other purpose we find is to
focus on quality output within given time limits, with the optimum use of different resources
to control cost. Most of the projects have complexities of different nature; hence, it
requires a strong focus on coordination and control of different subtasks in terms of
timing, quality of output for each subtask within cost norms, and performance standards.
13
Project Management: It is difficult to say when the Projects and their scientific management started. Looking
An Overview
back into history, it is often associated with the space programme of NASA, in the
sixties of the last century, when different programmes targeted at different planets were
either showing no progress or going very slow. In fact, various techniques of project
management were conceptualized and practiced in isolation for major construction.
At the beginning of the 20th century during World War I, the tool for monitoring the
progress of activities associated with work, known as the Gantt chart, was introduced.
Around 30 years later by the middle of the 20th century, the complex scientific innovations
in different fields especially Defense, Space Science, transport vehicles for air, water,
etc., and for very large work assignments, the available tools were found inadequate.
The solution to this problem came through two networks inventions known as the
Critical Path Method (CPM) developed by DuPont of France in 1957 and the other
Project Evaluation and Review Techniques (PERT) by the U.S. Navy in 1958. In the
beginning, these two networks were developed for planning, scheduling, and monitoring
large projects. Around ten years later, the computer application to networking techniques
resulted in the development of a method called GERT for a more realistic analysis of
schedules. The network scheduling and costing techniques, known as the ‘Cost Schedule
Control System’, were approved by the U.S. Government for Defense and NASA
contracts. The next decade saw the development of new tools and techniques for
different project components, like resource planning and control for different projects.
This concept gave a new application called Performance Measurement System giving
the percentage of work completed, thus giving more realistic information for forecasting
about cost and date for completion of the project.
The application research during the last three decades of the 20th century resulted in
the development of computer software to apply the latest techniques for scheduling,
resource planning, costing, performance measurement, and forecasting for medium to
large projects.
IBM became one of the first companies to use project managers’ role in industrial
setups in 1961, by deputing computer engineers called ‘System Managers’ with a
responsibility to oversee the development and installation of different computer models
across different operational lines in commercial units of industries. Further development
is launching various software for monitoring and control, such as Prima Vera, MS-
Project, etc. which are currently in use.
Consequent to a strong focus on achieving the stated objectives within the prescribed
time frame, in the form of pre-decided output with quality parameters through optimum
use of resources, the project approach has been used universally to complete major
assignments in each sector of the economy. Whether it is a construction of a dam or a
stadium to organize Olympic games, carrying the Olympic torch to the game venue, or
construction of a space station and its placement in orbit, or sending ‘Curiosity’ the
vehicle to explore life at ‘Mars’, or search of God particle, or research work, and even
for disaster management, etc., the projects are formulated and carried out to achieve
objectives and desired end result.
To sum up, a project is a proposal for investment for creating, expanding, and developing
facilities to produce goods or provide services, with definite start and termination dates
specified with a defined budget. Project activity has been in existence ever since the
dawn of civilization. Illustrative examples are the Pyramids of Egypt, the Great Wall of
China, etc. In other words, the concept of the project is not new. Modern projects
14
are, however, complex with added sophistication involving different sets of parameters Introduction to Project
and disciplines and the use of Information Technology for Project Planning, Monitoring
& Control. A project as a whole is a sum of its parts with interdependencies.

1.2.3 Interdependencies
Interdependencies in a project are obvious due to its operational requirements. In a
project, interdependencies are observed in different forms. The very unique
interdependency exists among three major components of any project viz. time, cost,
and quality due to the interface relationship between them. Changes in any one of these
three components make a visible effect on the other two components. It is commonly
observed that delay in implementing any project requires revision of project cost to
maintain the agreed quality parameters.
The ‘Parent Organization’ which implements projects has its own functional departmental
structures such as production, procurement, marketing, finance, etc. On one side,
these functional departments interact with each other regularly. A high level of
interdependency among functional departments may give rise to conflict among them.
Interaction of functional departments of parent organization with functional units created
for different projects may vary from time to time in terms of their activities, like
procurement, and have to be involved at the beginning; manufacturing and finance may
be involved throughout the project life, or marketing may be involved at a later stage
before completion of the project. The Project Manager has to identify these
interdependencies and establish a clear communication channel with proper maintenance
of interrelationships for smooth project activities. For example, a seed-producing
company may have production farms at different locations for different crops and
varieties. During sowing season, requirements of different types of equipment need to
be planned by individual Project Managers in consultation with the engineers of
equipment divisions of a parent company to provide well-maintained equipment at
sowing time, to avoid waiting and clash of sowing dates with other farms.
The other inter-dependencies in a complex project can be observed with regard to
different resources, like equipment/finances as well as human resources. The most
difficult part of project management is noticed in the coordination and integration of
different components while implementing the plan of a complex project, which requires
varied expertise and skills drawn from the parent organization or from outside forming
multidisciplinary teams (MTs) with different expertise. One important fact must be
remembered that though human resources are controlled by the Project Manager about
their roles and responsibilities, i.e., who will do what, when, and where; the functional
manager decides who will be assigned to which project and for how long. The process
of coordination of these MTs is called Integration Management and the process of
managing this task of coordination across MTs is known as Interface Coordination.
Benningson (1972) developed a solution to this problem called ‘Transformed
Relationship Evolved from Network Data’ (TREND), analyzing and indicating
dependencies and important linkages among MTs and workgroups.

1.2.4 Uniqueness
One of the characteristics of a work/assignment to be called a project is its uniqueness.
Even two projects with the same objectives for construction or research, where many
activities are repeated, differ in one or the other aspect due to customization. One of
the important characteristics of a project is customization.
15
Project Management: A certain degree of natural risk and uncertainty involved in each project makes it
An Overview
different from the other. Some important features like customization, risk, uncertainties,
etc. provide uniqueness and do not allow it to become routine when the component of
risk and uncertainty tends to become zero, the work/ assignment goes out from the
ambit of a project and becomes routine. As long as the construction of high-rise
buildings is done with design and construction takes place as per plan, it is called a
project. Once the construction is based on repetitively erecting pre-fabricated structures
as a specific activity with no risk, it becomes routine. Today, sending space vehicles to
other planets is a project. In the future, once the risk and uncertainty involved in
sending space vehicles to other planets come to zero, it will be a routine like going to
another city or country by airplane. Remember the days when E-commerce was in
infancy when the [Link] address was created as a project, but today every company/
business activity has its website and [Link] address. Similarly, earlier commercial
preservation activities for fruits and vegetables were undertaken as a project. Now,
even the setting of high technology tetra pack unit has become a routine for packing
liquids, such as milk or juices, to make them available even in remote villages.
The success of a project depends on the functioning of different multidisciplinary teams
(MTs). As long as the members of MTs follow teamwork with motivation, the tasks
undertaken get completed well in time. Hence, an intelligent Project Manager in the
role of the HR manager must use some motivation techniques like financial awards,
encouraging and offering complimentary words for members to achieve results, providing
certainly needed amenities at the project site, etc. Researchers found that participatory
management techniques are found to be the most successful means to develop teamwork
among project members. Despite such a culture or environment, the scope for conflict
is germane to Project.

1.2.5 Conflicts
The project manager operates in an environment of conflict. Various sources of these
conflicts emerge from his functional responsibilities, such as work priorities, allocation
of resources including human beings, working schedule, change in standards, meeting
certain uncertainties, etc; all these may become major reasons for conflict in project
management.
The project has to be executed economically, maintaining quality parameters and within
time schedule by staff engaged on contract, which may result in various constraints, such
as the latest knowledge, technology, manpower, facilities, adequacy of capital, activity
schedule, etc. Despite these constraints, three major goals of the project viz., time,
cost, and operational systems need to be kept in perspective. Here, the project manager
is required to balance the outcome of these constraints and negotiate with the client/user
of a project to deal with some of the given parameters, like time, cost, schedule, manpower,
etc. to reduce the effect of constraints as well as conflict in executing a project.
Four major stakeholders in a project, the client, parent organization, project team, and
public may have conflicts of objectives and mutual interests. The client wants to make
changes in the project as per his need in a changing situation, whereas the parent
organization looks for profit optimization. A project manager as the executing agency
faces these conflicts often. Members of project teams generally have a responsibility
to report to two authorities, i.e. ‘the project manager’ and ‘the functional head’ of the
parent organization, and face divided loyalty and priority. Functional managers
16
sometimes face inroads of their authority by project managers, especially demanding Introduction to Project
services of personnel. The functional manager may reject the demand to show his
authority or due to work pressure compulsion at his end. It has been observed that the
Project Manager often lacks the authority required to execute the responsibility assigned
to him/her and in most cases, s/he relies on the goodwill of functional heads in the
parent organization.
Every project in any multi-project organization competes for different types of
requirements, including the resources of functional departments. The functional
departments have their own compulsions, goals, needs, and objectives; that is why
they functionally differ from each other. Sometimes, in unforeseen situations, the
functional departments are not able to meet the needs of the project and request the
project manager to change the schedule, standards, or even resources, which may put
the project manager into a conflict of choice. Though the schedule and cost are initially
set by functional departments, a project manager may insist on revising or changing
due to practical difficulties in operation.
The conflict between contractor and user of services and products/ client or project
manager is a regular feature. In practice, both the conflicting parties display the least
concern for developing mutual trust and a spirit of teamwork and go for hard bargains
to derive maximum self-advantage. The user wants to spend less to reduce cost, while
the contractors aim at the maximum profit for themself. Under such circumstances, the
gain for one is a loss for the other.
Certain sources of conflict in a project may be listed as the setting of priorities, use of
operating procedures, development and implementation of schedules, use of human
resources, personal issues, and allocation of resources. However, the success of a
project up to a large extent depends upon an important functionary engaged in the
running project, designated as ‘Project Manager’, who remains the focal point to
bring all efforts and resources together, heading the project organization, keeps close
liaison with the parent organization, providing leadership and independent decision
taking in coordination with other project experts and functionaries. The success of a
project depends on the functioning of different multidisciplinary teams (MTs). As long
as the members of MTs follow teamwork with motivation, the tasks undertaken are
completed well in time. Hence, an intelligent Project Manager in the role of the HR
manager must use some motivation techniques like financial awards, encouraging and
offering complimentary words for members to achieve results, providing certain basic
amenities at the project site, etc. Researchers found that participatory management
techniques are found to be the most successful means to develop teamwork among
project members.
Check Your Progress 1.1
Note : a) Write your answers in the space given below.
b) Match your answers with those given at the end of the unit.
1. Define the term Project.
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Project Management: 2. What is the purpose behind setting up the project?
An Overview
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3. What do you understand from the term ‘interdependencies’ in the context of a
project?
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4. Why the project is considered unique?
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1.3 CATEGORIES OF PROJECT

Projects have certain orientations leading to their categorization. A project may originate
from any need to achieve certain definite objectives viz. construction (Pyramids, Taj
Mahal), development (Delhi Metro, Euro Tunnel), or a combination of both (space
station), operations during the war, artistic work, and making of sculpture, rehabilitation
of human life, post disasters like earthquake or tsunami, varietal improvement for a
particular crop, introducing a new approach for agricultural or rural technology extension,
scientific researches for a breakthrough in any field, etc.
A project is identified as a combination of human and other non-human resources such
as material, machinery, finance, space, ideas, etc. pooled together in a temporary setup
to achieve unique and pre-decided purposes. Projects can be of various shapes, sizes,
or duration, from small and straightforward to extremely large and highly complex.
Projects may be categorized broadly based on sector/discipline/operational area,
organizational form, and management aspects. In organizations and businesses, a project
can be related to any functional area, particularly introducing or changing products/
services. A list of some functional area that requires a project is as under:
 People, project staff, and their management;
 Products and services;
 Materials, manufacturing, and production;
 IT and communications;
18
 plant, vehicles, equipment; Introduction to Project

 storage, distribution, transportation, logistics;

 buildings and premises;
 finance, administration, acquisition, and divestment;
 procurement and disposal;
 purchasing, sales, marketing;
 human resources development and training;
 customer service and relations;
 quality, health, and safety;
 legal and professional;
 technical, scientific, research, and development;
 new business development; and
 and anything else which needs planning and managing within organizations.

1.4 CHARACTERISTICS OF PROJECT

Projects have some features or characteristics. To qualify an assignment of work/task
to be called a project, it must have some of the following characteristics:
 A specific and definable purpose that can be spelled out in terms of cost, efforts
required for performance, and time schedule to get the end result (Output).
 Every project has some uniqueness, even for the most commonly repeated activities
like house construction, scientific research to test new seeds, etc, as each project
is a one-time activity.
 Projects are temporary endeavours started with definite goals and outputs, ad hoc
establishment with people, materials, machinery, and facilities. The establishment
is disbanded once the goals are achieved.
 Large projects have complexity due to the use of advanced technology, size of
operation, and deployment of large quantities of resources resulting in
interdependency regarding the use of resources, efforts, time utilization, etc.
 Since each project differs from the other one, it involves new risks and uncertainties.
 Due to commitments of organizations to project results on time, at pre-declared
quality parameters within limited resources, organizations may call for special efforts
to meet deadlines to maintain their reputation.
 The project follows a ‘process’ to achieve pre-defined and set definite goals.
Each project passes through certain phases called the project life cycle with
beginning, growth, maturity, and end.
 The project requires a variety of skills, resources, and expertise; hence the actual
work is performed by people from a variety of functional areas employed by
contractors and outsiders. 19
Project Management:  Certain important aspects of work such as decision making, output, accountability,
An Overview
and rewards are shared by the team members of a project supporting functional
units.
 The people working as members of the project team return to original positions or
are deployed in other projects, once a particular project activities come to a close;
whereas the functional units are generally permanent establishments.
 Project Management generally sets up many other support services like
procurement, accounting, personal appraisal, information system, etc.
 The project is a typical endeavour to bring improvement through a beneficial change
from ‘state A’ to ‘state B’.
 Projects may have various stakeholders. The four main stakeholders in any project
are the client, parent organization, project team, and people.
Let us also refer to British Standards (BS.6046 Part I (1984), in order to get an
overall perspective of the project.
 Project duration is usually pre-determined (finite) with a definite start and termination
date specified.
 What happens during a project often affects the rest of the subsequent life of the
product (hardware or service).
 Project organisation is often temporary and may change from one phase to the
next.
 Projects contain some elements of uncertainty and risk.
 Many projects are non-repetitive.
 Finally, projects are not isolated; they interact with other projects and organisations;
their structures and systems are interactive organisationally, technically,
economically, and socially.

1.5 ORGANIZATIONAL FORM

Project organisation functions as a temporary setup and terminates its functioning once
a project is completed. The members of the project team normally return to their
parent organisations or are re-assigned to new projects.
An important uniqueness of a project is its optimum resource utilization. That is why a
majority of projects use a matrix organization structure. Matrix organization structure
allows many projects to run simultaneously using human and non-human resources
optimally. A project may be with only one permanent person, the project manager,
who can run it successfully with his coordination skills. Projects from different sectors
like manufacturing, construction, IT, and research, may require different organizational
structures depending on the project needs and its unique features.
Considering organizational forms, projects are formulated and run as pure or ‘stand
alone’ project organisations, matrix organization, or mixed organization. In pure project
form, the project functions as a self-contained identity having its staff, technical as well
as administrative, with obligations to follow specified procedures relating to personnel,
20
financial, administrative, and control matters, and is required to provide a periodic Introduction to Project
progress report to the parent organization. The project manager enjoys complete
operational freedom in decision-making with accountability. This form of organization
has certain advantages as well as disadvantages.
In order to derive advantages and minimize disadvantages, the form of matrix
organization was evolved, which is a combination of pure project form and functional
organization structure. The matrix project is not separated from the parent organization
running multi projects simultaneously, which is not the case in regard to the stand-alone
project. The project manager of Project I (PM-I) reports to a programme manager
designated to supervise other projects also. A Project I is allotted few staff members
by other functional divisions e.g., procurement, manufacturing, finance, personnel, etc.
The allotment of staff may be for full or part-time as per the need of a project. These
project staff members work under dual control. The PM-I has control over what s/he
will do, whereas the respective manager of the functional department decides on who
will be allotted to which project and which technology is to be used. Thus, every
project manager under this arrangement in a matrix organization framework is required
to coordinate with the programme manager as well as other functional managers for
staff utilisation.
The mixed organizational form is not often used; however, the pure project and pure
functional organizations co-exist resulting in a mixed organization form. Many
organizations declare their large, successfully run projects after reaching to maturity
stage as subsidiaries or allow them to operate as independent units declaring it a venture
firm under a parent organization.

1.6 NATURE OF AGRICULTURAL PROJECTS

The agricultural sector projects are dealt with in different manner for project formulation,
implementation, analysis of critical parameters, and appraisal because they carry different
sets of risks, though they pass through the same stages of the project life cycle and
follow the same principles of project management. Generally, agriculture and veterinary
projects have five features viz. physical, economic, social, infrastructure, and institutional
aspects.
The physical features include (i) geographical location where a project is located, (ii)
climatic parameters, such as rainfall, period of rainfall, its intensity and variation, average/
maximum humidity, temperature, and its variation, rate of water evaporation, etc. for
dryland farm project as well as irrigated project, (iii) soil and topography, its agricultural
potential, fertility, mineral content and suitability for irrigation purposes, (iv) water
resources and their sources, viz., surface or underground, (v) crop varieties and livestock
species, mechanization in crop production, pest endemic and control mechanism
followed in that area.
Economic features include resources (i) Agricultural and livestock resources at project
location/region, dependency of people on these resources, approximate value of
production in terms of the rupee, (ii) Land use, farming system, and cropping pattern –
which includes production from crops and livestock, crop yield and inputs, agricultural
practices and technology used, supply of inputs, subsidies to farmers on inputs,
marketing, and logistic facilities, taxation on products, etc., (iii) Other economic activities
undertaken by farmers such as forestry, fisheries, sericulture, etc.
21
Project Management: Social features include issues related to (i) land tenure and land holdings by farmers.
An Overview
Land tenures should be seen in the context of the owner as a cultivator, tenant cultivator
with certain conditions, sharing the output with the owner, landless labour cultivating
purely on wages, size of a land plot, and the effect of agrarian reforms on land tenure.
(ii) Rural population and migration of labour to urban towns for employment during a
non-harvesting period or getting better remuneration in town affecting labour supply
for cultivation in rural areas. (iii) Social services available in terms of schools, health
care services, dispensary, communication facilities, etc.
Infrastructure is one of the essential features of the project undertaken in rural area.
Electricity, roads, communication facilities, etc., and a number of beneficiaries using
them play an important role in the success of a project.
Institutions in rural areas like Government agencies provide support and facilities to
farmers like agriculture credit banks, agri-input supplying agencies, marketing agency,
crop insurance agencies, grain storage facilities, cooperative institutions, veterinary
hospitals, etc. These are important features for the success of Agriculture and Veterinary
projects.
‘Agricultural projects’ are handled differently for analysis of critical parameters, appraisal,
and project formulation as they carry different sets of risks.
Check Your Progress 1.2
Note : a) Write your answers in the space given below.
b) Match your answers with those given at the end of the unit.
1. List any three categories of the project.
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2. What is the organisational form of projects?
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3. Why do agriculture projects display complexities and are handled differently?
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22
 Introduction to Project
1.7 PROJECT LIFE CYCLE
In the preceding sections, the characteristics and categories, including the complexities
in Agriculture projects have been explained. It is essential to understand that every
project has its life cycle. The description given below is intended to provide clarity.
Owing to the definitions and characteristics of a project, all projects pass through the
same path from beginning to its termination. The path followed by a project is termed
the project life cycle. During its life cycle, a project passes through four main stages
called phases. In the majority of projects, a pattern of progress in activities to achieve
goals is marked by a slow-fast-slow pattern. However, the pressure of three main
components viz. time limit for completion, cost, and performance remains the main
driving force throughout the project life cycle. The four phases of the project life cycle
are termed Conception (Initiation), Definition (selection, planning, scheduling), Execution
(Action, monitoring & control), and Operation (Closure).
The conception phase starts with recognition of a problem to be solved or opportunity
to be availed of and setting up a project is considered necessary. At this stage, the
preliminary goals and all the possible means to achieve them are specified. The next
step is to search for a consultant or system developer group (SDG), that examines the
environment and set project objectives, search for alternative solutions, and resources
and develop strategies, conducts technical, economical, and environmental feasibility
for executing the project. The contractor, SDG conducts a feasibility study to find out
whether each option/alternative solution addresses the business problem before giving
a formal proposal or letter of interest to the client.
After the client decides to accept one of the proposals and commits to own the proposal
and pay for the project, the project team gets involved in the establishment of a formalized
set of plans to achieve goals developed at the first stage of the life cycle of a project.
The contractor/SDG expands the project management team with required experts to
list necessary resources, undertake planning, schedule various activities, prepare
estimates and budgeting, workout performance requirements, support systems, and
system interfaces needed to execute Project. The scope of the project is defined in
terms of reference before going for detailed planning. The comprehensive plan includes
schedules of activities, budget, required resources, assurances, control measures, quality
targets, etc., as well as an implementation system. The contractor/SDG evaluates the
project for acceptability and sends the proposal to the project management team for
final evaluation by top management/client, for revisions/modifications or even
abandonment, as deemed appropriate.
The third phase of the project is considered to be crucial as the client acquires different
systems to be placed for the execution of the project; that is why this phase is referred
to as the ‘acquisition’ phase. The major activities of the project are executed with the
support of sub-contractors/operators and the project management team overseeing
and monitoring the progress of work, controlling the resources, developing progress
reports, and forward to top management/clients for their perusal and direction. Near
the end, when the project reaches its completion, the end result/output becomes part
and parcel of the client’s asset. The client operates the project with the technical support
of the project team to make it functional in all respects.
In the final phase called ‘operation’ or project closure phase, the client takes overall
control of deliverables and activities. The project management team starts handing
23
Project Management: over project documentation to the business, releasing equipment and other resources,
An Overview
terminating contracts, and communicating about the closure of the project to various
stakeholders. For some time, the contractor remains associated with the client to provide
certain needed services and support like maintenance or evaluation.
Among all the phases of the project, the maximum time is allocated to the second and
third phases, depending upon the nature of the project, where maximum efforts are put
to achieve the project goals.

Phase I Phase II Phase III Phase IV

Conceptualization Planning Execution Termination
Fig.1.1: Stages in the project life cycle. (Based on Adams and Barndt; King and Cleland).

Check Your Progress 1.3

Note : a) Write your answers in the space given below.
b) Match your answers with those given at the end of the unit.
1. What is meant by project cycle?
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2. What are the different phases through which a project passes before completion?
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1.8 PROJECT MANAGEMENT

Let us think about what is Project Management? And why it is required? Some standard
definitions provide broader perspectives of project management.
The British Standards BS 6079:2000 defines project management as “the planning,
24 monitoring and controlling all aspects of a project and the motivation of all
those involved in it to achieve the project objectives on time and to the specified Introduction to Project
cost, quality and performance”.
The International Standards Organisation (ISO 10006:1997 (E) has defined it as “the
planning, organising and monitoring and controlling of all aspects of a project in
a continuous process to achieve its objective”.
Project Management Institute of USA (PMI) has defined Project Management as the
“application of knowledge tools and techniques to project activities to meet
project requirements”.
We may note that the crucial aspects are time management, cost management, resources
management, and quality management to achieve the desired objective. We shall go
further into detail.
‘Management’ as a function in nutshell is explained as the integration and arrangement
of needed resources to perform certain tasks, in order to achieve organizational goals
by an individual or group of persons called manager or management. The specific roles
of the manager or management differ as per the organization and task, but this function
remains common to all. ‘Management’ includes certain basic functions like planning of
activities, organizing resources, providing leadership and control in relation to various
parameters.
From time to time, ever since the start of the twentieth century, management was
looked at from different viewpoints viz. classical, scientific, and bureaucratic. Various
principles were propagated in each viewpoint. In the 1930s, Elton Mayo put forth the
concept of ‘Social Men’ and introduced behavioural viewpoint. Similarly, during
Second World War, another viewpoint, i.e., the systems approach was introduced
explaining the understanding of the management of the system and the environment in
which it functions. Later, the viewpoint of the contingency approach came to indicate
that none of the viewpoints alone, can guide a manager in different situations.
The project viewpoint of management relies a lot on the principles of classical and
behavioural viewpoints and uses a goal-oriented system approach to achieve project
goals effectively with time and quality commitment. To be effective, the project
organisation follows certain systems like ‘horizontal hierarchy’ and ‘informal
communication’. The task of project manager becomes difficult as he gets work done
by temporary manpower with a diverse background. The various management principles
under traditional management are used in project management with the bottom line of
delivering the project results on time, within cost, and assured quality.
Project management may also be referred to as a combination of ‘skills’, ‘tools’, and
‘process’ to accomplish a series of tasks effectively. Project management requires a
set of certain skills, specialised knowledge, and relevant experience for enhancing the
chances of success of a project and minimizing risks. Knowledge and skills in the use
of different tools such as aim setting, planning, accounting, project monitoring, software
application, registers, checklists, review systems, etc. make his performance
commendable for effective management of essential components of a project, such as
time, cost, quality, risk, change, etc. The knowledge of different processes and
appropriate techniques coupled with experience becomes an added advantage for
project managers.
The term Project management has various names in technical terminology such as
team management, task force management, ad hoc management, matrix management 25
Project Management: or programme management, etc. Whatever the name we give to project management,
An Overview
all the forms have two things in common. (i) a project manager and (ii) a project team
or project organization. The one responsible person in the setup, called the project
manager, is given complete responsibility and authority to plan, organise, give direction,
and control project activities. Based on the nature of the assignment, its objectives,
and goals the project management may be further categorized into task-specific,
these are as follows:
 Programme management
 Taskforce management
 New venture management
 Product Management
 Commercial Project Management with profit as an objective
 Government/Non-profit project management
 Military Project management
 Research & Development Project management
 New Product Development Project management
 Marketing of a New Product management
 Service Project Management in the field of Auditing, Consultancy, etc.
We may state that both Project Management and Operations Management strive to
achieve the set goals by managing the environment, humans, and other resources. The
management principles apply equally to both, such as planning, organising, staffing,
motivating, monitoring, and controlling activities. A crucial difference is that while the
project organisation comes to an end after achieving the goal, the general manager
takes over the operational phase as an ongoing activity, repetitive in nature.
To sum up, project management is transient; it is unique in the sense that no two projects
are alike. The critical factors in a project are time, cost, and resources, with concern
for quality. From concept to commissioning, the resources – men, materials, machines,
and money - need to be put to optimum use. Management holds the key to realising
the objective, i.e., achieving the end result by traversing through different stages.

1.8.1 Characteristics of Project Management

Having understood the meaning of Project Management, we may identify the following
characteristics of project management:
 A functionary designated as ‘Project Manager’ acts as a coordinator of all the
activities and arranges necessary resources to achieve a single project objective.
 The Project Manager as head of the temporary project organisation operates
independently from the normal chain of management.
 Project activities require a variety of resources and people with different skills,
provided by contractors operating outside the project organisation. The Project
Manager is responsible for integrating these resources and skills to achieve project
26 activities.
 The Project Manager keeps close coordination with functional managers of the Introduction to Project
organisation for different support systems to work in a project team.
 The focus of the project remains on delivering the output as a product or service
on time, within cost, as per technical specification The functional organisation
maintains resources for doing other activities of organisations and sometimes has a
conflict with the project manager for resources.
 The responsibility for decision making, output, reward, and accountability lies
with the support units of contractors and sub-contractors, the project team, and
the project manager.
 The project manager is responsible for integrating all the skills and expertise required
by the project. He directly negotiates with functional managers for different support
services to meet deadlines. The project manager is responsible for integrating all
the skills and expertise required by the project. He directly negotiates with functional
managers for different support services to meet deadlines.
 Project management gives rise to different systems, like project and personal
evaluation procurement of resources, accounting, and financial management,
communication and information systems., etc.

1.8.2 Critical Factors in Project Management

Certain critical factors need to be reckoned with by Project Management. An attempt
is made to summarise those factors.
Management of projects carries various complexities because of their predefined
parameters for implementation such as ‘aims and objectives that have to be achieved’,
‘on schedule’, ‘within budget’, and ‘acceptability by the client who pays for project
and end-users for whom the project is meant’ etc. However, various experts in this
field tried to identify the critical factors which play a decisive role in implementing
project activities. Jeffrey K. Pinto and Dennis P. Slevin identified ten critical factors.
1) Project Mission: Project Mission refers to the condition where the goals of the
project are clear and understood by members of a project team and various
stakeholders as well as other departments. It clearly defines statements related to
goals and general directions with a belief about the success of a project.
2) Top Management Support: Willingness of top management to participate in the
project, not only to provide authority, support, and direction to provide leadership,
influence on the client (sometimes provides finances and uses the output) to accept
or express resistance to the project output as well as in the allocation of sufficient
resources (financial, manpower, time, etc). In absence of support from management,
manpower and funding resources may not be available for the
project. Management’s agreement for the project is important, as it adds value to
the business, or solves a pressing problem. If management does not see the value
of the project, they will be reluctant to support it. At this time, the project manager
has to give full commitment to the successful achievement of project goals.
3) Project Schedule/Plan: Developing a plan is more than just taking on the tasks.
At this stage, deliverables need to be defined along with the necessary tasks to
produce them and associated risks with each task, develop a detailed specification
for time schedules with due dates, milestones, manpower requirements with 27
Project Management: accountabilities, and equipment associated with each task. The schedule/plan also
An Overview
includes alternatives, safety measures, budget requirements at each stage,
monitoring systems for performance concerning time and budget, feedback
mechanism for corrective actions, etc. In fact, the project schedule/plan provides
the first step for taking the project forward.
4) Client Consultation: For the success of a project, one important step is to ensure
agreement among the client (Project sponsors), various stakeholders, and the
project management team on the purpose and goals formulated for the project.
Ultimately, what are the changes the project will bring, what problems it will solve,
and in which form results will be seen are important. Clear measurable goals on
the one hand help the project team to implement the project and compare projected
results with the actual. The clear measurable goals, on the other hand, help define
the project scope. The client as one who pays for the project and uses the project
output is the most important stakeholder. For successful implementation of the
project and to bring about the change, the client consultation and involvement at
different stages make it possible for sponsors to see whether his/her and future
clients’ needs are fulfilled. It requires a well-established communication system
and active listening between client and project manager, as well as between project
manager and project team.
5) Personnel: As a project is defined as the combination of human and non-human
resources to achieve specific goals within time and budget parameters, the level of
knowledge, skills, goals, and personalities of members of the project team must
be considered in assessing the environment of the project organization for which a
sound and effective system for recruitment, selection, and training is essential from
the beginning of a project.
6) Technical Tasks: It refers to the necessity of technology and the members of a
project team with the required skills to perform different technical tasks. Some of
the risks, the analysts have identified as major risks are technical incompatibility or
non-availability of needed technology or skilled people and cost-effectiveness.
7) Client Acceptance: This refers to the final stage of implementation or ‘selling’ the
final project to its user, who pays for the project. Many project managers carry a
wrong belief that if they implement other stages of the project efficiently with cost-
effectiveness, the client will accept the project, but in fact consultation and
participation of the client or intended user in the beginning stages of the project
give him a better understanding and more likelihood of him to accept the project.
Sometimes, even the “intermediaries” are engaged to act as a liaison between the
project implementation team and the client as an aid to getting client acceptance.
8) Communication: The communication network acts as the lifeline of the project in
two ways. First, it creates an environment for efficiency and success of a project
by providing essential data to concerned members of the team, and secondly, the
communication between the client and project team acts as a channel for the
exchange of views and ideas about project objectives, and changes in procedures
and policies, etc. Communication channels are needed to inform the relevant
stakeholders of the progress of the project. Management and project sponsors
may require regular status reports. Suppliers, clients, and/or customers may need
statements of work, contracts, and progress reviews. The project team will need
28
 task assignments and regular briefings. The frequency and types of communication Introduction to Project
for each channel should be clearly defined and managed. The communication plan
should be part of a project plan and then communication work as a lifeline, as it
has been observed that many projects fail because of poor communication.
9) Monitoring & Feedback: This refers to control mechanisms designed at every
stage of project implementation. Monitoring and feedback help the project manager
to compare the actual performance with what was projected in the plan and take
corrective action. In fact, the monitoring contributes to the optimum utilization of
various project resources, particularly financial.
10) Troubleshooting: Whatsoever be the perfectness in formulation and planning of
the project, it is really impossible to guess and foresee the problem actually faced
by the project teams while implementing different phases of the project. Every
project manager keeps contingency plans and alternative solutions to handle
unforeseen problems known as troubleshooting mechanisms. This mechanism not
only provides a solution to an unforeseen problem but also the ability to identify
and foresee potential problem areas.
Besides the ten critical factors mentioned above, there are a few more factors that
make a project a success or failure viz. appropriate and clearly defined scope,
competence and experience of project manager, building a project team of competent
and committed members, leadership, availability of adequate resources, etc.
Check Your Progress 1.4
Note : a) Write your answers in the space given below.
b) Match your answers with those given at the end of the unit.
1. Define Project Management.
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2. Name important critical factors that need to be considered by the Project
Management.
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1.9 LET US SUM UP

A project may originate from any need to achieve certain definite objectives. The
project has certain ‘characteristics’ such as specific and definable purpose, uniqueness,
ad-hoc establishment disbanded once the goals are achieved. In projects, the
complexity, interdependency regarding the use of resources, risks, and uncertainties, 29
Project Management: need special efforts to complete the project within the stipulated time frame, ensuring
An Overview
optimal utilization of resources.
Projects can be of various shapes, sizes, or duration, from small and straightforward to
extremely large and highly complex. Projects may be ‘categorized’ broadly based on
sector/discipline/ operational area, organizational form, and management aspects.
The project passes through a life cycle comprising four phases, termed as Conception
(Initiation), recognizing a problem to be solved or opportunity to be availed of and
confirming its existence as a project is considered necessary, Definition (selection,
planning, scheduling) includes an elaboration of specific project objectives, forms of
the outcome, scope, detailed plans by the project team and project manager, once the
client decides to accepts project proposal and gives commitment. The execution phase
is considered to be crucial as the client acquires different systems to be placed for the
execution of a project in terms of action, monitoring, and control; and the Operation
(Closure) phase is when the client takes overall control of deliverables and activities
and project management team starts handing over of project documentation to client,
releasing equipment and other resources, terminating contracts and communicating
about the closure of the project to various stakeholders. The critical factors in a project
are Time, Cost, and Resources, consistent with quality.

1.10 KEYWORDS
Programme : A large activity to encompass similar projects associated
to achieve specific goals.
Interdependencies : Denote relationship between organizational functions,
where a function depends on another function/task for
completion.
Uniqueness : A characteristic that differentiates an object, process, and
person from the other one due to certain features.
Risk : Can be defined as the possibility that the outcome of a
particular event/activity does not turn out as planned for
action.
Multidisciplinary : Comprises members with varied skills to assist the Project
Team Manager in implementing varied project activities.
Conflict : A perceived difference of values between two or more
parties that result in mutual opposition/ disagreement.
Uncertainty : A situation where information about alternatives and future
events is not available to a decision maker.
Integration : The intricate process of coordinating the work and timing
Management of different groups associated with a project.
Parent organization : An organization operating multi-projects simultaneously
with functional departments.
Matrix organization : Combination of a pure project and functional organization
Form structure, where members of the project team are
30
 controlled Project Manager as well as the Head of the Introduction to Project
functional department.
Project Life Cycle : The life cycle the project passes through in four phases
viz. Conception (Start), Definition (Growth), Execution
(Maturity), and Operation (Closing) phases.
Project Management : Managing any piece of work as discrete project activity
or set of activities with specific objectives, planned,
monitored, and controlled to give output within cost, time,
and quality.

1.11 SUGGESTED FURTHER READINGS/

REFERENCES
1. Cleland, D.I., Project Management Handbook: Proceedings of the Third
International Symposium, New York, Van Nostrand Reinhold, 1988.
2. Cleland, D.I., Project Management Techniques Handbook – Advanced. Centerville,
VA: Management Control Institute, 1990.
3. Davis E.W., Project Management: Techniques, Applications, and Managerial
Issues, 2nd ed., Norcross, GA: AIIE Monograph, 1983.
4. Dennis P. Slevin and Jeffrey K. Pinto. 1987. Balancing Strategy and Tactics in
Project Implementation. Sloan Management Review, Fall 1987, pp. 33-41.
5. Gittinger J. Price, ‘Economic Analysis of Agricultural Projects’, The Economic
Development Institute of the World Bank, published by The John Hopkins
University Press, Baltimor & London,1984.
6. Harvey Maylor, Project Management, Pearson, Published by Dorling Kindersley
(I) Pvt. Ltd. Noida, New Delhi, 2012 for Pearson.
7. Helen S. Cooke and Karen Tate, Project Management, Tata McGraw Hill, New
Delhi, Hill Edition 2011.
8. James P. Lewis, Project Planning Scheduling and Control, Tata McGraw Hill,
New Delhi, Hill Edition 2011.
9. Jason Westland, ‘The Project Management Life Cycle’, Kogan Pages India, New
Delhi, 2006 (4).
10. King, W.R. and Cleland, D.I. “Life Cycle Management.” in Project
ManagementHandbook, ed. Cleland, D.I. and King, W.R. (Van Nostrand
Reinhold. New York,1983), pp. 209-22 1.
11. Lock, D. ed., Project Management Handbook, Hants, England: Gower
Publications, 1987.
12. Micheal W. Newell, Marina N. Grashina, The Project Management Question and
Answer book, Yesdee Publishing Pvt. Ltd., Ayyavoo colony, Amin ji Karai,
Chennai.
13. Neeta Baporikar. 2007. Entrepreneurship Development & Project Management.
Himalaya Publishing House, Mumbai, 2007 (5). 31
Project Management: 14. Prasanna Chandra, ‘PROJECTS preparation, Budgeting and Implementation’,
An Overview
Tata MgGraw-Hill Publishing Company Limited, New Delhi, 2003.
15. Project Management Institute, A Guide to the Project Management Body of
Knowledge, Newtown Square, Pa: Project Management Institute, 2001.
16. Randall L. Schultz, Dennis P. Slevin, and Jeffrey K. Pinto, ‘Strategy and Tactics in
a Process Model of Project Implementation”, Interfaces, 16:3 May-June, 1987,
pp. 34-46.
17. Vasant Desai. 2007. Project Management. Himalaya Publishing House, Mumbai,
2007.

1.12 ANSWERS TO CHECK YOUR PROGRESS

Check Your Progress 1.1
1. A project may be described as an endeavour/assignment with the uniqueness of
doing first time to achieve certain pre-decided goals and deliverables with given
resources such as time, cost, manpower, materials, machinery, etc. with pre-defined
quality as well unforeseen constraints.
2. An important purpose behind the project is to achieve an objective for the first
time. The other purpose is the focus on quality output within given time limits, with
the optimum use of different resources, controlling cost.
3. Interdependencies in a project are inherent because of its operational systems and
requirements. One of the unique interdependencies exists among three major
components of any project viz. Time, Cost, and Quality are known as the ‘Quality
Triangle’. As and when any one of the three components is disturbed from a pre-
decided position, the other two components are naturally influenced.
4. One of the characteristics of a work/assignment to be called a project is its
uniqueness. Even two projects with the same objectives for construction or research,
where many activities are repeated, differ in one or other aspect due to
customization.
Check Your Progress 1.2
1. Projects may be categorised broadly based on sector/discipline/operational area,
organizational form, and management aspects. Some functional area that requires
a project is people, project staff and their management; products and services;
materials, manufacturing, and production; IT and communications; etc.
2. Pure or ‘stand alone’ project organization, matrix organization, or mixed
organization.
3. The ‘Agricultural Projects’ are handled differently for analysis of critical parameters,
appraisal, and project formulation, as they carry different sets of risks. Generally,
these projects have five features viz. (1) physical related to geographical location,
climatic parameters, soil and topography, water resources, crop varieties, and
livestock species (2) economic related to agricultural and livestock resources,
land use, farming system and cropping pattern, economic activities undertaken by
farmers, (3) social features include tenure and land holdings by farmers, rural
32
 population and migration of labour to urban towns, social services available in Introduction to Project
terms of schools, health care services, communication, etc. (4) infrastructure which
includes electricity, roads, communication facilities, etc; and (5) institutional aspects,
which include agriculture credit banks, agri-input supplying agency, marketing
agency, crop insurance agencies, grain storage facilities, cooperative institutions,
veterinary hospital, etc; which make them different from other projects.
Check Your Progress 1.3
1. All projects pass through the same path from beginning to their termination. The
path followed by a project is termed the project life cycle.
2. The project passes through a life cycle comprising four phases termed Conception
(Initiation) recognizing that a problem is to be solved or an opportunity to be
availed of and confirming its existence as the project. Definition (selection, planning,
scheduling) includes an elaboration of specific project objectives, forms of the
outcome, scope, and detailed plans by the project team and project manager,
once the client decides to accept the project proposal and give commitment. The
execution phase is considered crucial as the client acquires different systems to be
placed for the execution of a project in terms of action, monitoring & control; and
the Operation (Closure) phase is when the client takes overall control of deliverables
and activities and the project management team starts handing over project
documentation to client, releasing equipment and other resources, terminating
contracts and communicating about the closure of the project to various
stakeholders.
Check Your Progress 1.4
1. Project Management denotes planning, monitoring, and controlling all aspects of a
project and the motivation of all those involved in it to achieve the project objectives
on time and to specified cost, quality, and performance.
2. Project management carries various complexities. Experts in this field with their
practical experience tried to identify critical factors which play a decisive role in
the management of project activities during implementation viz., project mission,
top management support, project schedule/plan, client consultation, project
personnel, technical tasks, client’s acceptance, communication, troubleshooting,
monitoring, and feedback.

33
Project Management:
An Overview UNIT 2 PROJECT PREPARATION AND
IMPLEMENTATION
Structure

2.0 Objectives
2.1 Introduction
2.2 Project Preparation Phases
2.3 Project Selection
2.4 Nature of Project Selection Models
2.4.1 Non-numeric models
2.4.2 Numeric models
2.5 Project Implementation
2.5.1 Project schedule
2.5.2 Terms of reference
2.5.3 Project boundaries
2.6 Project Manager
2.6.1 Roles and responsibilities of project manager
2.6.2 Project office
2.7 Let Us Sum Up
2.8 Keywords
2.9 Suggested Further Readings / References
2.10 Answers to Check Your Progress

2.0 OBJECTIVES
After studying this unit, you should be able to:
 explain the concept of project preparation;
 identify the various models of project selection;
 discuss the project implementation and schedule; and
 describe the appointment and roles and responsibilities of the project manager.

2.1 INTRODUCTION
Having examined in the Unit 1, the meaning of the project, its purpose, characteristics,
uniqueness, and its life cycle and getting a fairly good understanding of its organisational
structure, management, and the role of the Project Manager, we may now examine in
this section, the issues in project preparation and implementation.
We have noted that a project in its entirety involves a series of activities aimed at
bringing about clearly specified objectives within a defined time period and with a
defined budget. Examples of projects were given in Unit 1.
34
After project identification/selection and definition, project formulation and project Project Preparation and
Implementation
preparation take place. Feasibility report preparation is the next step involving analysis
of the various components of a project. Under project formulation and preparation,
the project objectives and targets are defined and refined. Further, the potential
components or elements are also defined. Alternative potential design configurations
are evaluated and ranked. At this stage, we determine the appropriate project size and
location and refine the project justification analysis. We now provide detailed cost
estimates and assess the potential benefits, prepare a financing plan and secure
preliminary review and approval of the competent authority. We then explore the possible
funding agencies like banks and financial institutions. This completes the project
preparation, which will be followed by the project implementation process.

2.2 PROJECT PREPARATION PHASES

Project Preparation is an important phase because it provides the basis for the success
of a project. In this phase, the project content will be defined, the necessary permits must
be obtained and the Company Master Plan and Project plan will be made or updated.
A good Project Preparation will ensure that the project can be realized with the lowest
possible lead time and cost-effective investment.
In the project preparation phase, we can define four main components:
 Analysis: To collect all information needed to make or update the Company
Master Plan and the Project plan;
 Permits: To prepare all needed documents to obtain all necessary permits/licenses
to build/modify the factory;
 Equipment selection/building design: To make a (preliminary) selection of
process- and utility equipment and make the design for the building (also needed
as input for obtaining the permits);
 Project: The results of the above activities are summarized in a project plan which
serves as the guideline for the project realization.
The basic principle of project preparation is to clearly identify the purpose of a project.
At the beginning of project preparation, the project leader should have a clear idea of
the problem areas requiring attention; how to improve the situation, and identify the
stakeholders who will be directly involved.
The Different Phases/Stages of a Project Preparation:
Every project can be presented as a sequence of consecutive phases or known as
Project Cycle. They are:
 Concept Phase: During this phase, the complete concept of the project is
developed.
 Analysis Phase: Specific objectives of the project, expected results, activities,
and the analysis of risks that can affect its implementation is defined.
 Planning Phase: Stakeholders are identified as well as the beneficiaries of the
project and specific target groups will be addressed by the project. Furthermore,
the resources (Finance & Human resources) that the project requires should be
35
Project Management: identified in addition to clear coordination and management arrangements as well
An Overview
as monitoring and evaluation systems.
 Implementation Phase: The project becomes operational and activities are
executed.
 Evaluation Phase: The implementation of project activities is monitored through
indicators that have been developed during the planning phase. It is a continuous
process that might lead to adjustments before a final evaluation at the termination
phase.
 Termination Phase: The initial assumptions are compared with the actual outcome
of the project, to evaluate the project results and impact and draw recommendations
for future action.
After finishing the Project Preparation Phase (including obtaining all the necessary
permits/licenses) and after securing the necessary budgets, the project realization phase
commences.
In the Project Realization phase, we define three main compositions:
 Project Management: from project set-up to start-up of the new factory or
new set-up.
 Design & Engineering: from design to detailed engineering for process equipment,
supporting utility systems, and building;
 Purchase Support: bid packages, contracts, and price negotiations for process
equipment, supporting utility systems, and building.
More on Project Preparation Phase:
In the Project Preparation phase for a Greenfield Project or Expansion, more work
has to be done. In case of a Modernization, the preferred site location has to be
investigated to ensure it is free of encumbrances checking up the position from the
office of the Registrar of Properties. If the land is free from encumbrances, and if it has
a good load-bearing capacity and is not prone to floods and storms, etc., it should be
selected. The building design has to meet the requirements of the area development
plan and image quality plan of the local administration, concerning architectural
requirements, infrastructure, and logistics. In the case of an Expansion Project, it is
worthwhile to investigate if the utility systems of the existing factory have overcapacity.
Surplus utility capacity can then eventually be used for the expansion. For project up-
gradation, the existing factory has to be analyzed and checked, to see if existing process
equipment, utility systems, and/or building can support the up-gradation. It is also
necessary to check if the planned up gradation is possible within the existing permits. If
not, it is necessary to request new permits and obtain the same according to a time
frame. Before the building permissions, environmental clearance must be obtained from
the local authorities. Then only the building design and the detailed process description
of the factory must be finished. The presentation of the permit requests to the local
administration is the most important milestone of the Project Preparation phase. During
the time the local administration is checking the permit requests, the Project plan be
made and the first steps of the Project Realization can be started, depending on customer
wishes.
36
Check Your Progress 2.1 Project Preparation and
Implementation
Note : a) Write your answer in the space given below.
b) Compare your answers with those given at the end of the unit.
1. What do you mean by Project Preparation?
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2. What are the different stages of Project Preparation?
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2.3 PROJECT SELECTION

Project selection is the process of evaluating independent projects or groups of projects
and selecting some or all of them. This process is complex and choosing a number of
different projects i.e. a portfolio, is even more complex. In the following sections, we
discuss several techniques that help managers to select projects. These are called
decision aiding models. The idealized version of the problem that results in a simplified
description of the system is called a model. The models may be quite simple or extremely
complex. The input data for the model may be probabilistically known as stochastic
rather than deterministic.

2.4 NATURE OF PROJECT SELECTION MODELS

There are two basic types of selection models: Numeric and Non-numeric. Both
are widely used by many organizations. While Numeric Models use numbers as inputs
that are objective in nature. Non-numeric models do not use numbers as inputs and
they are subjective in nature. Models do not make decisions – people do. All models,
however sophisticated, are only partial representations of the reality they are meant to
reflect. A Project Manager is appointed to implement the project whose selection,
roles, and responsibilities are vital for the implementation and commissioning of a project.
Types of Project Selection Models
As already mentioned, there are two types of project selection models viz. (i) Non-
Numeric Models and (ii) Numeric Models. They are described below:

2.4.1 Non-Numeric Models

Of the two types of project selection models, non-numeric models are simple and
have only a few subtypes. They are described below: 37
Project Management:  Sacred Cow: In this case, the project is suggested by a senior and powerful
An Overview
functionary in the organization. There may be an undeveloped idea for a new
product and efforts need to be directed toward the development of a new market.
The immediate result of this initiation is the development of the project idea leading
to further exploration. The project is “sacred” in the sense that it will be maintained
until successfully concluded, or the competent authority recognizes the idea as a
failure and terminates it.
 Operational Necessity: The selection of the project in this model is based on
operational necessity. For example, if a flood is threatening the plant, a project to
build a protective dike does not require much formal evaluation. If the project is a
must, project costs will have to be examined to make sure that they are kept as
low as is consistent with project success and the project will be funded.
 Competitive Necessity: Suppose a company needs modernization to maintain
its competitive position in the market, the decision to undertake the project must
be based on a desire to maintain the company’s competitive position. For example,
many business houses are restructuring or re-strategizing their activities in a
competitive environment.
 Product Line Extension: In this case, a project to develop and market new
products would be based on the degree to which it is in alignment with the firm’s
existing product line, fills a gap, strengthens a weak link, or diversifies into a new
line or expands.
 Comparative Benefit Model: Let us assume that an organization has several
projects to consider and the senior management would like to consider a few
projects that would benefit the firm, but the projects do not seem to be easily
comparable. The firm does not have a formal method of selecting the projects, but
the selection committee feels that some projects will benefit the firm more than
others, even if they have no precise way to define or measure the benefit. This
concept of comparative benefits is widely adopted for selection decisions on all
sorts of projects. Senior management generally examines all projects with positive
recommendations and attempts to construct a portfolio that best fits in with the
firm’s aims and budget.
Check Your Progress 2.2
Note : a) Write your answer in the space given below.
b) Compare your answers with those given at the end of the unit.
1. Define the Non-numeric model in project selection.
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2.4.2 Numeric Models

Numeric models are of two types based on the criteria of non-discounting and
38 discounting.
A. Techniques Based on Non-Discounted Criteria: The techniques covered in Project Preparation and
Implementation
the Non-Discounted Criteria are explained below, while the techniques based on
the discounted method are dealt with separately under B.
1. Payback Method: The time needed to recover the original investment from net
returns (before depreciation but after taxes) is the payback period. This is a rule of
thumb method and implies that adoption of an investment project as long as it pays
for itself within a specified period of time will always be desirable. This method
for choosing among alternative proposals is very popular among corporate
managers. The payback method is a time concept. It does not measure profitability
but finds out how fast the investment will be recovered. The fact that one investment
has a shorter payback period than another investment does not mean necessarily
that the former is more profitable than the latter. The payback method may be
used merely to supplement other measures of evaluating the investment. All other
things being equal, preference should be given to those projects demonstrating the
best rate of return on investment or if the return is approximately the same as to
project with the shortest payback period.
This method measures the speed of capital recovery, rather than profitability. It
does not consider the time value of money, cost of capital, and cash flows over the
project’s entire life. Once payable has accrued, further, flows are ignored. This
method is useful in cash short situations, where speed of recovery of investment is
considered essential, where projects are risky, and in uncertain situations.
2. Accounting Rate of Return (ARR): Whereas the payback method is based on
the time concept, the ARR is a measure of profitability. A common practice in
computing ARR is to use average income over average investment. The average
income is a simple average of expected benefits from the investment computed
after depreciation and taxes. The ARR method is superior to the payback method
since it measures profitability and the analysis is usually extended over the entire
life of the project. It ignores the time value of money and uses accounting income
instead of cash flows in the analysis.
3. Un-discounted Benefit-Cost Ratio: This is a ratio of the total benefits and
costs involved in a particular project. Both benefits and costs are accounted for
without any discount for futurity, business risk, or financial risk. Symbolically:

Where: Bt = Cash flows generated from a project in period‘t’

Dt = accounting depreciation charges in the same period
C = Original cost of the project
B. Techniques Based on Discounted Cash Flow:
Time value of money: The concept of the time value of money means that a
rupee received today is more valuable than a rupee to be received, say a year 39
Project Management: later. The underlying assumption here is that, in an economy in which interest and
An Overview
opportunities for investment exist, a rupee received today could be invested to
earn money immediately. A rupee to be received one year hence could not be
invested until it is received; therefore, it is less valuable than a rupee received
today. For this reason, a differentiation should be made between cash flows received
at different points in time. Before adding cash flows to be received at different
points of time, they should be adjusted. This adjusting process is called discounting,
which is a reverse process of compounding.
1. Net Present Value Method (NPV): Net present value concept is based on the
principle of the time value of money. This is determined by discounting the value of
an investment with an appropriate interest rate over a period of years.
NPV is calculated with the help of the following formula:

where t = 1, 2, 3…….. n
and At refers to cash flow at the end of the year t
r = discount rate
n = life of the project in a number of years and
I = initial investment
The inherent difficulty in using the net present value method is the selection of an
appropriate discount rate.
Internal Rate of Return (IRR): Internal rate of return is the discount rate that
makes the Net Present value zero.

Where, Bt = Benefits in each year

Ct = Costs in each year
t = 1, 2, ….. n
n= Number of years
r = Rate of interest
Example: An investment of Rs.1000 made in a project pays an income of Rs.600
in the first year and Rs.500 in the second year. There the net present value at a
discount rate of ‘r’ percent is

and Internal Rate of Return is that value of r which satisfies the equation

40
Calculation of Internal Rate of Return Project Preparation and
Implementation
 Add to the BCR proforma Net Benefit Columns.
 Compute net benefit over the years of assured life span period of the project.
 Discount with the appropriate discount factor (generally the prevailing bank rate
of interest).
 Add up the discounted Net Benefits over the years of assured life span period of
the project.
 You will arrive at a positive Net Present Value of net benefits with a particular
discount factor.
 Calculate the Net Present Value of the benefits with another discount factor which
provides a negative net present worth of net benefits.
 Compute the Internal Rate of Return by using the interpolation formula shown in
the proforma below.
Proforma for Calculation of Internal Rate of Return

Year Capital Operating Total Total Net Discount Discount

costs costs costs value of benefits/ Factor factor at
(Non- (Recurring (Gross production Cash at a another
recurring Costs) costs) Benefits flow specified specified
costs) (Gross rate of rate of
benefits) interest interest
(i) (ii) (iii) C=(ii) B B–C (DF1) B-C x (DF2) B-C
+(iii) DF1 x DF2
1
2
3
-
-
-
-
-
-
-
-
n
Net Net
Present Present
Value Value
positive negative
41
Project Management: Interpolation Formula:
An Overview
Internal Lower Difference Present value of net cash flow
Rate of = Discount + between two at the lower discount rate
Return Rate (DF1) discount rates Absolute difference between
(DF2 – DF1) present values of the net cash
flows at the two discount rates

3. Benefit-Cost Ratio/Profitability Ratio (Based on Discounted Values)

The Benefit-Cost Ratio (BCR) is one of the choicest criteria commonly used in the
economic analysis of public investment projects/programs. BCR is a relative measure
and not an absolute measure like NPV and IRR. The process of calculating the
benefit-cost ratio involves discounting the benefit and cost streams by an appropriately
selected discount rate and then computing the ratio of the present worth of benefits
to the present worth of costs. This ratio is sensitive to the discount ratio used. The
ratio is computed either as the ratio of gross benefits to gross costs or as the ratio of
net benefits to investment cost plus operation and maintenance costs. When the
benefit-cost ratio is used in project evaluation the formal decision criterion is to
accept all projects with a ratio of one or greater in the case of unique programme
assessment. In the case of alternatives, the benefit-cost ratios will be considered
among the alternatives and will be selected with a higher benefit-cost ratio.

Where, Bt = benefits in each year

Ct = Costs in each year
t = 1, 2, ……………, n
n = Number of years
i = Interest rate (Discount rate)

Proforma for Calculation of Benefit-Cost Ratio

Year Capital Operating Total Total Discount
cost (Non- costs Costs benefits in Factor at
recurring (Recurring (Gross the year a specified
costs) costs) Costs) (Gross rate of
benefits) interest
C B (DF) DF x B DF x C
1 2 3 4=(2+3) 5 6 7 8
1
2
3
-

42 -
 Project Preparation and
Implementation
-
n

 Present Present
Total Value of Value of
Benefits Costs

Present Value of Benefit

Benefit - Cost Ratio
Present Value of Costs

Total of Column 7
Benefit - Cost Ratio
Total of Column 8

B = Benefits
C = Costs
n = refers to number of years
Procedure to calculate the year-wise Benefit-Cost Ratio
 Identify the capital costs (Non-recurring costs).
 Identify the recurring costs.
 Compute the total costs of the project.
 Identify and estimate the primary and secondary benefits.
 Compute the total benefits of the project.
 Deduct total costs from the total benefits of the project.
 Arrive at Net Benefits of the project.
 Estimate the life span of the project/programme.
 Assume the appropriate life span of the project/programme.
 Estimate costs and benefits and net benefit over a period of the assured life span
of the project/programme.
 Fill up the columns in the proforma.
 Generally, assume the bank rate of interest as a discount factor over the years.
 Discount the gross costs and gross benefits.
 Get the total discounted costs and benefits over years assured life span of the
project.
 Divide the discounted gross benefits with discounted gross costs over the years of
the assured life span period of the project.
 You will arrive at Benefit-Cost Ratio.
43
Project Management: Check Your Progress 2.3
An Overview
Note : a) Write your answer in the space given below.
b) Compare your answers with those given at the end of the unit.
1. Enlist the methods to evaluate Return on Project Investment.
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2.5 PROJECT IMPLEMENTATION

On appraisal of the project and establishing the technical feasibility and financial,
economic, and social viability of the project, the Detailed Project Report (DPR) will
be prepared which is similar to the Feasibility Report with more elaborated details. In
addition to the decision-making process of the project based on appraisal techniques,
the major components of DPR for execution purposes are the establishment of project
organization structure, project staff, and budgeting of the project. Further, the
implementation plan through network analysis (PERT/CPM techniques) for time
scheduling and resource allocation is prepared. As per the scheduled implementation
plan, the actual implementation of the project will be taken up. While monitoring and
reporting the process of implementation, it is essential to take stock of the progress of
implementation as per schedule. In case of any deviation, monitoring and reporting will
help us to take corrective measures and proceed with further implementation.

2.5.1 Project Schedule

Once the selection of the project and its approval by the management are gone through,
the project enters the next phase. This phase is preparatory to the actual implementation
of the project. Planning how to implement the project and scheduling denotes how the
implementation should be carried out in this phase. Planning includes deciding on what
are the activities to be undertaken for implementing the project, while scheduling is
fixing time frames for the activities. The level of activity and also the project cost rise
rapidly during this phase. The number of personnel assigned to the project also increases
manifold. The functions to be carried out in this phase are:
 Set up a technical team to decide on how the project can be implemented.
 Plan for the requirements of personnel, finance, material, etc.
 Prepare a schedule keeping in view the date given by the client (if the project is
being undertaken for a client) or the management (if it is an in-house project), and
the required buffer time to meet the unexpected event or mishaps.
At this stage, generally, the project staff tends to be more concerned with the
performance than with the schedule or costs.

2.5.2 Terms of Reference

44 There are many methods of which one is outlined below.
The sequence of steps is: 1) Stakeholder Analysis 2) Problem Analysis 3) Alternatives Project Preparation and
Implementation
Analysis 4) Objectives Analysis 5) Development of Project Planning Matrix.
The “terms of reference” are developed during the earlier stages of project management,
immediately after the approval of a project business case. They are documented by
the project manager and presented to the project sponsor or sponsors for approval.
Once the terms have been approved, the members of the project team have a clear
definition of the scope of the project. They will then be ready to progress with the
creation of the remaining project deliverables.
This phrase is often used when describing the task that has been assigned to a consultant
or advisor. As such, the consultant or advisor may be engaged via a contract with
general terms of engagement that also incorporates the terms of reference that specifically
describe the consultant’s task.
 Project charter
 Project governance
 Project management
 Project manager
 Risk management
 Quality management
 Business Analysis
In project management, a project charter, project definition, or project statement is a
statement of the scope, objectives, and participants in a project. It provides a preliminary
delineation of roles and responsibilities, outlines the project objectives, identifies the
main stakeholders, and defines the authority of the project manager. It serves as a
reference of authority for the future of the project. The terms of reference are usually
part of the project charter. The project charter is usually a short document that refers
to more detailed documents such as a new offering request or a request for proposal.
Project governance is the management framework within which project decisions
are made. Project governance is a critical element of any project. The accountabilities
and responsibilities associated with an organization’s business as usual activities are
laid down in the organizational governance arrangements; seldom does an equivalent
framework exist to govern the development of its capital investments (projects). For
instance, the organization chart provides a good indication of who in the organization is
responsible for any particular operational activity the organization conducts. The
organization has to specifically develop a project governance policy, to chart out project
development activity. The role of project governance is to provide a decision-making
framework that is logical, robust, and repeatable to govern an organization’s capital
investments. In this way, an organization will have a structured approach to conduct
both its business as usual activities and its business change, or project activities.
Project management, to recapitulate, is the discipline of planning, organizing,
motivating, and controlling resources to achieve specific goals. A project is a temporary
endeavor with a defined beginning and end (usually time-constrained, and often
constrained by funding or deliverables), undertaken to meet unique goals and objectives
specifically to bring about beneficial change or added value. The temporary nature of
45
Project Management: projects stands in contrast with business as usual (or operations), which are repetitive,
An Overview
permanent, or semi-permanent functional activities to bring out products or services.
In practice, the management of these two systems is often quite different, and as such
requires the development of distinct technical skills and management strategies. The
primary challenge of project management is to achieve all of the project goals and
objectives while reckoning the preconceived constraints. The primary constraints are
scope, time, quality, and budget. The secondary challenge is to optimize the allocation
of necessary inputs and integrate them to meet pre-defined objectives.
A project manager is a professional in the field of project management. Project
managers can have the responsibility for the planning, execution, and closing of any
project, typically relating to the construction industry, architecture, Aerospace and
Defence, computer networking, telecommunications, or development. Many other fields
in the production, design and service industries also have project managers.
Risk management is the identification, assessment, and prioritization of risks followed
by coordinated and economical application of resources to minimize, monitor, and
control the probability and/or impact of unfortunate events or to maximize the realization
of opportunities. Risks can come from uncertainty in financial markets, project failures
(at any phase in design, development, production, or sustainment life-cycles), legal
liabilities, credit risk, accidents, natural causes and disasters as well as deliberate attack
from an adversary, or events of uncertain or unpredictable root-cause. Several risk
management standards have been developed including the Project Management Institute
and the National Institute of Standards and Technology.
The term quality management has a specific meaning within many business sectors.
This specific definition, which does not aim to assure ‘good quality’ by the more general
definition, but rather to ensure that an organization or product is consistent, can be
considered to have four main components: quality planning, quality control, and quality
assurance and quality improvement. Quality management is focused not only on product/
service quality but also on the means to achieve it. Quality management, therefore,
uses quality assurance and control of processes as well as products to achieve more
consistent quality.
Business analysis is a research discipline of identifying business needs and determining
solutions to business problems. Solutions often include a systems development
component, but may also consist of process improvement, organizational change, or
strategic planning and policy development. The person who carries out this task is
called a business analyst. Business analysts who work solely on developing software
systems may be called IT business analysts, technical business analysts, online business
analysts, business systems analysts, or systems analysts.

2.5.3 Project Boundaries

There are two times during a project when the scope is defined. The high-level scope
is defined in the up-front project definition process. These scope statements help
establish the boundaries of the project. The more detailed scope is defined when you
gather business requirements. If you think of scope as a box, the high-level scope
would be used to define the size and shape of the box. The requirements would then fill
up the insides of the box.
One of the first places to look for your high-level scope definition is the project objectives.
All projects build things and the objectives are achieved through the creation of one or
46
more deliverables. Listing the deliverables tells the reader what your project will deliver Project Preparation and
Implementation
and by implication, what it will not deliver. This is the place to start when describing
your scope boundaries. If you do not include anything else in your high-level scope
section, at least list your deliverables. Since the sponsor will approve your project
definition document, these should be the external deliverables that the sponsor
understands. Don’t include the internal deliverables that are only needed by your project
team.

2.6 PROJECT MANAGER

The role of the project manager has been explained in detail under Unit 1. The crucial
role of the Project Manager, who is primarily responsible for the quality of the project’s
deliverables and its successful completion is summed up below. To succeed, the project
manager must work closely with the project sponsor to ensure that adequate resources
are deployed. The project manager also has responsibility for planning and ensuring
that the project is successfully completed on time and within budget. Ideally, the project
manager should be assigned early in the initiating and planning processes so that the
plan can be owned by the person responsible for its execution. In choosing a Project
Manager, considerable care and attention need to be given to his leadership qualities
and managerial skill.

2.6.1 Roles and Responsibilities of Project Manager

The followings are included in the role and responsibilities of project managers:
 Implementing project policies and procedures.
 Identifying and acquiring resources through the Project Sponsor and Steering
Committee.
 Maintaining staff’s technical proficiency and productivity, and providing training
whenever required.
 Establishing and maintaining quality in the project.
 Identifying and procuring tools to be used on the project.
The project manager undertakes the following roles and responsibilities during different
stages of the project:
1. Initiating:
 Developing the Project Statement including success criteria and constraints.
 Conducting general cost/benefit analysis.
2. Planning:
 Developing the detailed project plan and tailoring methodology to reflect project
needs.
 Ensuring that management, users, affected state organizations, and contractors
commit to the project.
3. Project Start-Up:
 Finalizing project baseline plan. 47
Project Management:  Assigning resources to the project and assigning work packages.
An Overview
 Finalizing the project quality.
4. Project Execution:
 Regularly reviewing the project status, comparing the budget to the actual values,
and presenting to the Steering Committee.
 Ensuring that the project plan is updated and approved as needed.
 Reviewing the results of QA reviews.
 Participating in the change control board, to approve system changes.
 Updating the project risks and establishing prevention and mitigation procedures,
as required.
5. Close-Out:
 Developing an action plan for any product that does not receive user sign-off.
 Obtaining user and management approval of tested systems and final deliverables.
 Closing-out open action items.
 Assisting the Division of Purchases in contract close-out.
 Developing the Post Implementation Evaluation Report (PIER).
 Conducting the lessons learned session and facilitating the celebration of project
success.
In short, the successful implementation of a project hinges on the Project
Manager.

2.6.2 Project Office

The project office is intended to assist the project manager in carrying out his duties.
Personnel in the project office should, therefore, have good working relationships with
the line managers and the project team. The responsibilities of the project office are:
 Providing a control point for the exchange of information to all concerned – both
internal and external to the project organization.
 Monitoring the time, cost, and performance.
 Distributing work to key personnel.
 Ensuring that all the work done is properly documented and funding is authorized.
Thus, it is very clear that manning the office is to be done with the utmost care.
Check Your Progress 2.4
Note : a) Write your answer in the space given below.
b) Compare your answers with those given at the end of the unit.
1. Briefly explain the roles and responsibilities of a Project Manager.
48
 .................................................................................................................... Project Preparation and
Implementation
....................................................................................................................
....................................................................................................................
....................................................................................................................

2.7 LET US SUM UP

Before embarking on a project, it is necessary to understand the different phases in
project selection and the selection models like Payback Period, NPV, IRR, Benefit-
Cost Ratio, and so on. Project implementation depends on the project schedule, which
will spread over a period from the zero date or date of starting till the commissioning of
the project. Terms of reference and the project boundaries have to be understood.
For implementation, the Project Manager is the key person. Hence his roles and
responsibilities have to be well defined.

2.8 KEYWORDS
Net Present Value : A method for evaluating investment proposals. It is the
(NPV) present value of benefits reduced by the present value of
costs.
Payback Period : The length of time required for an asset to generate cash
flows is just enough to cover the initial outlay.
Present Value : It is the value of a future stream of payments or receipts
discounted at a given rate to the present time.
Profitability Index : Also called Benefit-Cost Ratio, it measures the present
value per rupee of outlay and is useful for a ranking project
in the order of decreasingly efficient use of capital.
Project Manager : He has primary responsibility for the quality of a project’s
deliverables and its successful completion. He also has
responsibility for planning and ensuring that the project is
successfully completed on time and within budget.
Risk management : It is the identification, assessment, and prioritization of
risks followed by coordinated and economical application
of resources to minimize, monitor, and control the
probability and/or impact of unfortunate events or to
maximize the realization of opportunities.

2.9 SUGGESTED FURTHER READINGS /

REFERENCES
1. Chakravarthi Anand and D. Chakravarthy Reddy, “Project Formulation, Appraisal
and Implementation”, ICFAI University Press, 2006.
2. Jack R. Meredith and Samuel J. Mantel Jr, “Project Management: A Managerial
Approach”, John Wiley & Sons, Fifth En.
3. P.C.K. Rao, “Project Management and Control”, Sultan Chand & Sons, 2008. 49
Project Management: 4. P.K. Joy, “Total Project Management – The Indian Context”, Macmillan India
An Overview
Ltd, New Delhi, 1994.
5. Prasanna Chandra,”Project Planning, Analysis, Selection, Implementation &
Review”, 7 Ed, Tata McGraHill Education.
6. Project Management Institute, People in Projects, Project Management Institute,
2001.
7. Wysocki, Robert K. et al. Effective Project Management, New York: Wiley 1995.
8. Wysocki, Robert K. et. al., Building Effective Project Teams, New York: Wiley
2001.
Website:
 [Link]
 http:/[Link]/wiki /Terms_of_reference.

2.10 ANSWER TO CHECK YOUR PROGRESS

Check Your Progress 2.1
1. Project Preparation is an important phase in the project cycle as it provides the
basis for the success of a project. In this phase, the project content will be defined,
the necessary permits must be obtained and the Company Master Plan and Project
plan will be made or updated.
2. Every project can be presented as a sequence of consecutive phases or known as
Project Cycle. They are Concept Phase, Analysis Phase, Planning Phase:
Implementation Phase Evaluation Phase, Termination Phase.
Check Your Progress 2.2
1. Of the two types of project selection models, non-numeric models are simple and
have only a few subtypes. Non-numeric models do not use numbers as inputs and
they are subjective in nature.
Check Your Progress 2.3
1. Payback Period (PB), Average rate of return (ARR), NPV, IRR, Profitability
Index.
Check Your Progress 2.4
1. Some of the roles and responsibilities of a Project Manager are:
 Implementing project policies and procedures.
 Identifying and acquiring resources through the Project Sponsor and Steering
Committee.
 Maintaining staff’s technical proficiency and productivity, and providing training
whenever required.
 Establishing and maintaining quality in a project.
 Identifying and procuring tools to be used on the project.
50
Illustration 2.1 Project Preparation and
Implementation
Describe the various methods to evaluate Return on Project Investment?
ABC Ltd. is investing in a project with an outlay of Rs.12 lakhs estimated to last 5
years, with no salvage value. It follows a straight-line method of depreciation. The tax
rate is 50%. The expected cash flows before tax are:

Years 1 2 3 4 5
Cash Inflows 2 3 3.5 4 4
([Link])

Find:
 Payback Period (PB)
 Average rate of return (ARR)
 NPV at 10% of the cost of capital
 IRR
 Profitability Index at 10% of the cost of capital
 The acceptability or otherwise of the project based on NPV and IRR
Illustration is given as under:

First let us find the cash inflows: (Rs. Lakh)

YEAR CFBT DEPN NET TAX EAT EAT + CUMULATIVE

EARNINGS DEPN= CFATBD
CFATBD
1 2.000 2.000 - - - 2.000 2.000
2 3.000 2.000 1.000 0.500 0.500 2.500 4. 500
3 3.500 2.000 1.500 0.750 0. 750 2. 750 7.250
4 4.000 2.000 2.000 1. 000 1.000 3.000 10.250
5 4.000 2.000 2.000 1. 000 1.000 3.000 13. 250

EAT = Earning After Tax

CFATBD = Cash flow After Tax but Before Depreciation
CFBT = Cash flow Before Tax
A. Pay Back Period
Total amount of outlay: 12 Lakhs
At end of 4th year cumulative CFATBD: 10.250
Amount to be recovered in 5th year = 12.00 - 10.25
= 1.75 lakhs 51
Project Management: Times required for recovering Rs. 1.75 lakhs out of CFATBD (3.00 lakhs) in 5th year
An Overview
= 1.75/3.00

= 0.58 years

PBP= 4 + 0.58 = 4.58 years

B. Average Rate of Return (ARR)

Net earning: 650000

Total investment: 1200000

The investment of Rs 12 lakh in the project by ABC Ltd would give an average rate of
return of 10.83 % per annum.

C. Net Present Value (at a given rate of 10%)

(Values in Rs lakh)

1 2 3 4 5

CFAT 2.000 2.500 2.750 3. 000 3.000

P.V factor at 10% 1/(1.10) 1/(1.10)2 1/(1.10)3 1/(1.10)4 1/(1.0)5

=1/(1+r)n =0.909 =0.826 =0.751 =0.683 =0.621
=1/(1.10)n

Present Value
(PV) at 10%=
CFAT*PV factor 1.818 2.065 2.065 2.049 1.863

Sum of PV of CFAT at 10% (cash inflow) = 9.86 lakhs

P.V of Cash Outflows = Rs.12.00 lakhs

NPV = PV of cash inflow - PV of cash outflow

NPV = 9.86 – 12.00 = - Rs.2.14 lakh

The NPV from investing in the project By ABC ltd is (-) Rs 2.14 lakh. This project is
incurring a loss of Rs 2.14 lakh from its operation for a period of five years.

52
D. Internal Rate of Return (IRR) Project Preparation and
Implementation

Year CFAT PV factor at 3% = PV factor at 10% = PV at 3% PV at 10%

1/(1+r)n=1/(1.03)n 1/(1+r)n=1/(1.10)n
(a) (b) (c) (d) (e)=(b)*(c) (f)=(b)*(d)
1 2.000 1/(1.03)=0.971 1/(1.10)=0.909 1.942 1.818
2 2. 500 1/(1.03)2=0.943 1/(1.10)2=0.826 2.356 2.066
3 2.750 1/(1.03)3=0.915 1/(1.10)3=0.751 2.517 2.066
4 3.000 1/(1.03)4=0.889 1/(1.10)4=0.683 2.665 2.049
5 3.000 1/(1.03)5 =0.863 1/(1.10)5=0.621 2.588 1.863
Total 12.068 9.862

NPV at 3% discount rate = Total PV of CFAT at 3% discount rate (cash inflow) -PV
of cash outflow
NPV at 3% discount rate = Rs 12.068 - Rs 12.00 = Rs (+) 0.068
NPV at 10% discount rate = Total PV of CFAT at 10% discount rate (cash inflow) -
PV of cash outflow
NPV at 10% discount rate = Rs 9.862- Rs 12.00= Rs (-) 2.138
Internal Lower Difference Present value of net cash flow
Rate of = Discount + between two at the lower discount rate
Return Rate (DF1) discount rates Absolute difference between
(IRR) (DF2 – DF1) present values of the net cash
flows at the two discount rates
IRR= 3% + (10% -3%) [0.068/[(0.068 – (-)2.138)]
= 3% + (7%)*(0.068/2.2028)
= 3% + 7%*0.029
= 3.206%
E. Profitability Index
Profitability Index = PV of Cash Inflows
PV of Cash Outflows
= 9.86 = 0.822
12.00
F. NPV is Negative
IRR is 6.96%, which is less than the cut off rate of 10%.
Profitability Index is less than 1.
Hence the project is not acceptable.

53
Project Management:
An Overview UNIT 3 PROJECT COSTS AND BUDGETING
Structure
3.0 Objectives
3.1 Introduction
3.2 Project Cost
3.3 Identification of Costs and Benefits
3.4 Feasibility Reports
3.4.1 Components of feasibility study
3.4.2 Uses of feasibility report
3.5 Financial Matrix for Project
3.6 Project Budgeting
3.6.1 Budgeting process
3.6.2 Types of budgeting process (Top Down and Bottom Up)
3.6.3 Budgeting techniques
3.7 Work Element Costing
3.8 Let Us Sum Up
3.9 Keywords
3.10 Suggested Further Readings/References
3.11 Answers to Check Your Progress

3.0 OBJECTIVES
After studying this unit, you should be able to:
 define the concept and components of the project cost;
 identify the kinds of costs and benefits;
 explain the steps in social cost-benefit analysis;
 discuss the components and uses of the feasibility report; and
 describe the meaning, types, and techniques of project budgeting.

3.1 INTRODUCTION
In the previous section (Unit 2), we examined in detail the financial cost-benefit analysis
of the project. In this Unit 3, we will address the social cost-benefit analysis, termed
Economic CBA. By going through the narrative in this text, fairly a good understanding
will emerge. Economic analysis uses shadow prices for evaluating project inputs and
outputs. Shadow prices are computed on the principle of opportunity cost. Evaluation
factors are called ‘externalities’ and may include environmental impact, employment
effect, poverty alleviation, the balance of payments, etc. What benefit the project brings
to society is the determining factor in the social cost-benefit analysis, vis-a-vis profitability,
which is the direct outcome based on an expected financial rate of return.
54
In this unit, we deal with the project costs and the project budgeting. Thus, this unit Project Costs and
Budgeting
deals with the identification of costs of the project and the benefits derived from
the project such as return on investment, employment generation, infrastructure
development, contribution to the Gross Domestic Product (GDP), export promotion,
import-substitution, earning of foreign exchange, and so on. Though every project has
some social costs like causing environmental pollution, congestion, and environmental
degradation, they will, however, be offset by the benefits mentioned above. Before
setting up a project, you should go for a thorough investigation of the cost-benefit
analysis.
Project budgeting is a plan of spending. It identifies the level of requirement of resources,
time, and the department where funds are required. It is a statement showing how a
firm would allocate its resources during a given period. For a project, it is a statement
of the plan of spending or the statement of monetary constraints on the various activities
to be carried out for completion of the project.

3.2 PROJECT COST

Project cost is the total outlay on a project. If this amount is spent, the project can be
completed without any cost over-run. Once the project is completed, it can commence
the commercial operations.
Now let us identify the project costs for a Project ABC:
Capital Cost Estimates (Figures are left blank)
Item Particulars Cost of Sub-Items Item Costs
1 2 3 4
I Advance expenditure
 Prep, of prospect sheet
 Survey of raw materials
 Techno-economic survey
 Project formulation costs
Total advance expenditure
II Cost of land
 Cost of land
 Cost of site development
Total cost of land
III Cost of buildings and civil works
 Cost of project premises
 Cost of administrative buildings
 Cost of ancillary buildings
(godowns) 55
Project Management:
An Overview  Cost of residential buildings and
civic amenities
 Cost of services and other civil
works
Total building costs
IV Plant and machinery costs
 Cost of imported Plant and
Machinery (P & M)
 Cost of spares
 Freight and insurance charges
 Duties and taxes
 Cost of indigenous P & M
 Cost of spares
 Freight and insurance charges
 Local taxes and duties
 Installation costs
 Erection charges
 Overhead expenses
Total plant and machinery costs
V Costs of ancillary and miscellaneous
assets
 Cost of ancillary plant
 Installation and costs of
ancillary plant
 Erection charges for ancillary
plant
 Costs of ancillary equipment
(workshop, fire fighting)
 Costs of miscellaneous assets
Total costs of ancillary and
miscellaneous assets
VI Invisible expenses
 Costs of patents, licenses,
copyrights, technical know-how,
trademarks, etc.
 Consultants fees for engineering
services
Total invisible expenses
56
 Project Costs and
VII Special items not listed above Budgeting

 Registration fees
 Pre-operation interest changes
Total special items costs
VIII Standing resource requirement
costs Overheads
Total standing resource
requirement costs
IX Provision for escalation
 Escalation on a/c of land costs
 Escalation on a/c of building
costs
 Escalation on a/c of plant
machinery
 Escalation on a/c of ancillary
assets
 Escalation on a/c of other items
Total provision for escalation
Provision for contingencies and
unforeseen item@-%of items
I-IX
X. Provision for margin
money for working capital
Total capital cost estimates for
the project (I to x)

3.3 IDENTIFICATION OF COSTS AND BENEFITS

Social cost-benefit analysis is the process of evaluating a project from the point of
view of the total impact the project will have on the economy of the nation. In project
preparation/formulation, cost-benefit analysis follows financial analysis as a natural
sequence. The information developed during the course of feasibility analysis, techno-
economic analysis, project design and network analysis, input analysis and financial
analysis is made use of in constructing the social cost-benefit profile of the project. In
social cost-benefit analysis, the project is not looked upon merely as a capital investment
proposition, but as a resource investment proposition where not merely the project
implementing body but the nation as a whole gets involved. In the case of a project
which has spill-over effects going beyond the boundaries of a country, the disturbance
is not limited to the national frontiers but steps across these borders. The projects in
such cases assume importance not only for the national, but also the regional, or in
certain cases even the world economy. Cost-benefit analysis, where the project
transcends the bounds of the national economy, evaluates the project based on the
effect it will have on the world as a whole. 57
Project Management: Social Cost-Benefit Analysis and Project Formulation
An Overview
Project formulation is a technique suitable for the design and evaluation of projects
both in the private as well as public sectors. Social cost-benefit analysis, on the face of
it, is concerned primarily with the appraisal of the project from the point of view of the
economy as a whole. The investor in the private sector has a simple set of objectives
before him. If the project meets this criterion of selection, he is prepared to invest in the
project. The national criteria of project selection are more complex. They take into
account the impact of the project on regional disparities, unemployment, gross accretion
to the national output, foreign exchange, and a myriad of other objectives. The social
cost-benefit of the private sector projects would appear to be an unnecessary expense
and over-burden from the point of view of the private investor. But is it not really so.
In most developing countries, Governments at one stage or the other get involved in
every project, be it in the private or the public sector. The constraint of resources in
these countries makes it inevitable to subject every project, to the national criterion of
selection. The individual entrepreneur has to convince not only himself but a host of
other authorities and outside agencies. He/she must be in a position to obtain a license
where a license is needed, a foreign exchange allocation where he wants to import
goods or services, and financial support where he requires institutional finance. Social
cost-benefit analysis is necessary to enable him to judge the project from the point of
view of national objectives and to provide him with adequate information to put the
project through various stages of approval. A project to be cleared must fit squarely
into the national objectives. If the project licensing authority is faced with a situation of
choice, a project with a better social contribution to society will inevitably receive
greater if not decisive weightage.
With the ever-increasing role which the national and international development agencies
and development finance institutions are playing in the field of economic development
in developing countries, social cost-benefit analysis is becoming more and more
important. A project formulation cannot be accepted as complete from the point of
view of these institutions unless and until it is accompanied by social cost-benefit analysis.
Profitability is one of the welcome and desirable attributes of a project, but not the only
criteria for project selection. The social cost-benefit analysis aims at the quantification
of the contribution of a project toward the national economy. It looks upon the project
as a source of generation of additional welfare and evaluates its effectiveness in furthering
the national goals and increasing the fund of resources that can be made use of in
further improving the volume of available net resources for consumption.
Step by step procedure for developing social cost-benefit estimates:
Step 1 : Estimate the Cost C, and Benefits B, accruing to the Project
Implementation Body.
The viewpoint here is purely that of the implementing body. These estimates will therefore
be identical to the financial cost-benefit estimates worked out during the course of
financial analysis. If the cash flow statement is taken as the base, it will be observed
that
Cp = Financial outflows on capital account + Financial outflows on account of
permanent increases in inventory levels and
Bp = Income before interest and taxation (IBIT)
58
The time profile of primary costs and benefits can be presented in the tabular form as Project Costs and
Budgeting
indicated below
Project XYZ: Costs and Benefits Accruing to the Implementing Body

Year 1st Year 2nd year ……………… nth year

Description
Primary
Costs
Primary
benefits

Step 2 : Estimate the Costs C, and Benefits B, which will accrue to individual
Members of the Society, as Consumers, as Suppliers and of Factor
Inputs.
An individual has a dual relationship with a project, one as a consumer of project
output and the other as the supplier of productive services and other factors of
production. The main gain to the individual, however, takes the shape of consumers’
surplus. Quantification of consumers’ surplus as distinct from primary benefits is
necessary in order to take into account the total impact of the project and not the
impact as observed by the project implementing body. Consumers’ surplus accrues to
the individual and not to the project-implementing body and, as such, it does not form
a part of the primary benefit estimates. This benefit has therefore to be separately
quantified and added to the primary benefits for compiling the social benefits.
As a supplier of factor inputs, the individual again makes a gain, so to say, at the cost
of the project. Here the linkage is with the cost aspect of the project. Project activity
leads to a rise in factor prices. Financial estimates take into account the total factor
price including the cost to be incurred on account of the rise in factor prices. The social
costs of the project are in reality less than the financial costs. Cj, the costs accruing to
the individual as a supplier of factor inputs are therefore negative.
Step 3 : Estimate the Costs Cc and Benefits Bc Accruing to the Community.
Costs and benefits accruing to the community are the main components of the secondary
project costs and benefits. Secondary effects of a project arise on account of
Environmental spill-over, financial spill-overs, and social spill-overs of a project.
Environmental spill-overs are caused by the effect that a project may have on the
ecological balances in the local area. Pollution is one of the main items in the catalogue.
It costs money to overcome the environmental drawbacks of a project. The community
has besides to sustain a project through infra-structure support. Here again, additional
costs may have to be borne by the community. Technological spill-overs take into
consideration the direct effect that a project will have on the functioning of other existing
or future projects. Where a direct loss of production is involved, the costs of the loss
to the community have to be qualified. Financial spillovers include the effect of the
project on items like rents, etc. benefits computation. Social spill-overs include the
effect of the project on the unemployment situation, rehabilitation costs, costs of life
and limb, costs of recreational facilities and leisure, and other inconveniences like noise,
etc. As it has been observed earlier, the extent of refinement in the quantification of
59
Project Management: secondary effects will depend on the amount of resources available for such
An Overview
quantification and the gains expected to accrue out of such quantification. Where
quantification is not possible within the four corners of the existing state of the art, spill-
over effects can be reckoned with under tertiary costs and benefit descriptions.
Step 4 : Estimates the Costs Ce and Benefits Be accruing To the National
Exchequer.
Projects have a direct impact on the national exchequer over and above the impact
they have on the project-implementing body, the individual, and the community. Projects
make a direct contribution to the national exchequer in the form of indirect taxes. The
financial cost-benefit estimates reckon these contributions as costs, whereas from the
point of view of the economy; they do not constitute a cost at all. To arrive at the true
costs of the project, indirect taxes contributed by the project to the national exchequer
have to be deducted. Conversely, these contributions have to be reckoned as extra
benefits arising from the project to the national economy. The reverse is the case with
subsidies. In financial estimates, subsidies are accepted as a natural element of the
cost-benefit structure. From the point of view of the economy, subsidies are in real
effect negative benefits or costs and have to be reckoned as such.
The impact of a project on foreign exchange has also to be evaluated in case primary
cost-benefit analysis projections are developed with the help of observed market prices
and official rates of foreign exchange. The true cost of a project will be obtained only
after the real cost of foreign exchange consumed by the project or earned by the
project is taken into account. The quantification of the impact of the project on the
foreign exchange reserves, therefore, becomes necessary.
Multiplier effects of a project also need quantification, but the effort needed in such
quantification generally far exceeds the benefit derived from such quantification. These
effects of a project are therefore best relegated to descriptive sections of the project
cost-benefit profile.
Step 5 : Discount the time stream of costs and benefits to determine the
present value of the project.
If (Co, Bo), (C1, B1),……….., ( Cn, Bn) are the costs and benefits in the zero, first and
nth year of a project and ‘r’ the rate of discount which is assumed to be constant
throughout the effective life-span of the project, as was observed earlier.

The benefits and costs accruing in the nth year can be obtained by adding together the
primary benefits costs and secondary benefits and costs of the project in the nth year.
The appropriate rate of discount ‘r’ is a national parameter and has to be determined
after taking into consideration the social rate of time preference and the social rate of
return from investment. In case, however, the rate of discount is not prescribed at the
national level, it will still be possible to work out the present worth of a project by
adopting the rate of long-term Government bonds duly adjusted to make allowance
for expected inflation and income tax payments.
The present value of a project gives the total value of the contribution that the project
will make towards potential Pareto improvement. It does not give any idea about the
60 relative effectiveness of the project in terms of welfare generated per unit of investment.
This difficulty is overcome by using the profitability ratio which indicates the present Project Costs and
Budgeting
value generated by the project per unit of capital expenditure. Thus,
Present Value of the Project
Profitability ratio =
Discounted value of capital expenditure
Step 6 : Sensitivity Analysis (Treatment of Uncertainty).
While applying discounted measures of the project worth for economic and financial
analysis of proposed projects one may run into some practical questions about their
use. One of the real advantages of careful economic and financial analysis of a project
is that it may be used to test what happens to earning capacity if something goes
wrong. How scientific is a project’s internal economic or financial return to increased
construction costs? time escalation in the implementation period? to a fall in prices?
reworking and analyzing to see what happens under these changed circumstances is
termed sensitivity analysis, the fact that projections are subject to a high degree of
uncertainty about what will happen.
All projects should be subjected to sensitivity analysis. The following are a few sensitivity
factors to be considered :
 Prices
 Delays in the implementation period
 Cost overruns
 The extent of output generated
The technique of sensitivity analysis is not complicated. It is just the calculation of a
measure of the project worth again using the new estimates for one or another element
of cost or return (benefit). Sensitivity analysis is really a straightforward means to deal
with the question of risk and uncertainty in project analysis.
Cost-Benefit Appraisal
Information developed during the course of cost-benefit analysis has to be compiled
and presented in a readable form to the decision-maker. Cost-benefit analysis is the
penultimate exercise in the step-by-step development of a project design. It is, therefore,
necessary to recapitulate the results of feasibility analysis, techno-economic analysis,
project design development, network analysis, input analysis, and financial analysis.
Appraisal reports on each of these aspects of the project are already available with the
project preparation/formulation team at the point of commencement of the social cost-
benefit analysis. Social cost-benefit analysis is undertaken to provide the decision-
maker with a set of valuations on which he can base a final decision. The appraisal
report must provide him with enough material not only to evaluate the project in hand
in isolation but to consider the strong and weak points of the project in a comparative
appraisal of a bunch of projects lined up for consideration at a particular instance of time.
Social Cost-Benefit Appraisal
It mainly deals with the social-cost-benefit analysis (SCBA) which is essential to assess
the viability of projects in developing countries. The significance of the SCBA begins
with an assessment of expected total costs to be incurred and benefits derived out of a
project that is under consideration from the community point of view.
61
Project Management: The important measures which are widely applicable to projects of national importance
An Overview
are:
Economic Rate of Return (ERR)
Effective Rate of Protection (ERP)
UNIDO Approach - The United Nations Industrial Development Organization
(UNIDO) method of project appraisal involves five stages:
 Calculation of financial profitability of the project measured at market prices.
 Obtaining the net benefit of the project measured in terms of economic prices.
 Adjustment for the impact of the project on savings and investment.
 Adjustment for the impact of the project on income distribution.
 Adjustment for the impact of the project on merit goods and demerit goods whose
social values differ from their economic values.
Little-Mirrlees Approach – There is considerable similarity between the UNIDO
approach and the L-M approach. Like:
 Calculating accounting prices, particularly for foreign exchange savings and unskilled
labour.
 Considering the factor of equity.
 Use of Discounted Cash Flow (DCF) analysis.
Check Your Progress 3.1
Note : a) Write your answers in the space given below.
b) Match your answers with those given at the end of the unit.
1. What is a social cost-benefit analysis?
....................................................................................................................
....................................................................................................................
....................................................................................................................
....................................................................................................................
2. What are the steps in the social cost-benefit analysis?
....................................................................................................................
....................................................................................................................
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3. What is the objective of sensitivity analysis?
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 Project Costs and
3.4 FEASIBILITY REPORTS Budgeting

The purpose of a Feasibility Study is to identify the likelihood of one or more solutions
meeting the stated business requirements. In other words, if you are unsure whether
your solution will deliver the outcome you want, then a Project Feasibility Report/
Study will help gain that clarity. During the Feasibility Study, a variety of ‘assessment’
methods are undertaken. The outcome of the Feasibility Study is a confirmed solution
for implementation.
A Project Feasibility Study is an exercise that involves documenting each of the potential
solutions to a particular business problem or opportunity. Feasibility Studies can be
undertaken by any type of business, project, or team and they are a critical part of the
Project Life Cycle.
At this stage the client’s business needs are analyzed, information about project
participants is collected, and the requirements for the system are gathered and analyzed.
The client’s expectations for system implementation are studied and the proposed
solution is offered. During the Feasibility Study stage, the project’s goals, parameters,
and restraints are agreed upon with the client including:
 Project budget and rules for its adjustment;
 Project time frame;
 Conceptual problem solution.
The following tasks are performed at this stage:
 The project feasibility is estimated and the project scope is defined;
 Risks and benefits are identified;
 The project structure is elaborated;
 The project is roughly planned;
 The next project stage is planned precisely;
 The cost of the next phase is evaluated precisely and the cost of the other phases
— is estimated at approximately;
 Functionality development priorities are defined; and
 System creation risks are estimated.
At the end of this phase the following documents are available:
 Feasibility Report — description of the proposed solution and list of high-level
functional requirements;
 Project Structure — description of the project organization;
 Project Plan — project schedule;
 Risks List — list of potential project risks and possibilities of their elimination.
Feasibility studies address things like location, availability of raw material, and other
natural resources like water, power, gas, etc. They provide in-depth details about the
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Project Management: business to determine if and how it can succeed, and serve as a valuable tool for
An Overview
developing a successful business plan.
The information you gather and present in your feasibility study will include:
 Listing in detail all the things you need to make the business work;
 Identification of logistic and other business-related problems and solutions;
 The information which serves as a solid foundation for developing your business
plan.
The feasibility study will help to find a cost-effective way to set up the plant. This is
especially important when operating cost plays the dominant role in survival.

3.4.1 Components of a Feasibility Study

 Description of the Business: The product or services to be offered and how
they will be delivered.
 Market Feasibility: Includes a description of the industry, current market,
anticipated future market potential, competition, sales projections, potential buyers,
etc.
 Technical Feasibility: Technology selection, Raw material availability, Grid
connectivity, Water availability, Road and rail connectivity, etc.
 Financial Feasibility: For the Project under consideration, how much start-up
capital is needed, sources of capital, return on investment, etc.
 Economic Feasibility: It refers to social cost-benefit analysis, which is concerned
with judging a project from the larger social point of view, where the focus is on
the social cost and benefits of a project which is often different from its monetary
costs and benefits.
 Ecological Analysis: It refers to the study of environmental polluting industries
like power, drugs, chemicals, and leather processing to understand the likely damage
caused by the project to the environment and what is the cost of restoration measures
required to ensure that the damage is minimal.
Since good planning is a prerequisite for the survival and success of any business, let us
discuss how to write a good Feasibility Report in a good feasibility report format.
Without proper planning, a business may head towards failure if corrective measures
are not taken in time. A Feasibility Report is simply a Business Plan. A feasibility report
is a detailed study that examines the profitability, technical feasibility, and overall viability
of a proposed investment opportunity.
The report, no matter how elaborate, should be prepared before one undertakes any
business or expansion of the existing one. A feasibility report can be prepared by the
prospective investor or consultancy firms that charge fees depending on the value of
the project and how elaborate is the proposed investment opportunity. Based on the
Feasibility Report, the entrepreneur can decide to accept or reject the project. If the
project is viable and acceptable, the entrepreneur has to estimate the initial capital
outlay and decide on the means of finance.
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3.4.2 Uses of Feasibility Report Project Costs and
Budgeting
The Feasibility Report can be used by the entrepreneur in the following areas:
 To meet the stipulated requirements of financial institutions. For instance, banks
and other financial institutions giving loans to start a business demand a Feasibility
Report of the proposed investment.
 To provide the basic information for effective decision-making by Banks and
Financial Institutions with respect to the proposed investment. By showing the
market potentialities, and technical and financial implications of the proposed
opportunities, the feasibility report enables the entrepreneur to accept or reject
the project.
 To assist the entrepreneur in developing future plans for the organization.
 To serve as the basis for measuring the performance of the proposed business.
Components of a Feasibility Report
No two feasibility studies have identical components. However, certain critical aspects
must be present in a good feasibility report. Below is the feasibility report format:
A typical feasibility report format is as under:
The areas covered by a feasibility study can be divided into nine major areas namely:
 Introduction
 Description of the business
 Market consideration – A Preliminary Evaluation
 Management Team
 Technical Specifications and Production plan
 Marketing Plans
 Examination of the critical risks and problems
 Financial and Economic plans
 Evaluation and conclusion
Check Your Progress 3.2
Note : a) Write your answer in the space given below.
b) Compare your answers with those given at the end of the unit.
1. What are the important facets of a feasibility study? How feasibility study is
done?
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Project Management: 2. What does the purpose feasibility study serve?
An Overview
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3. What are the areas covered in a feasibility report?
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3.5 FINANCIAL MATRIX FOR PROJECT

The financial matrix can be prepared in the following format which helps in the
arrangement of finance or identification of means of finance.
Financial Matrix for project ABC:

[Link]. Means of Financing Repayment Rate of Amount

schedule interest
1. Promoters equity
2. Share capital
• Ordinary shares
• Preference shares
• Total
3. Secured long-term loans
• Borrowings from financial
institutions
• Borrowings from others
4. Unsecured long-term loans
• From institutional sources
• From others
5. Government subsidies
6. Other sources
Total

3.6 PROJECT BUDGETING

As already mentioned, budgeting is a plan of spending. A budget is a very good tool for
the control of funds. It gives reasons for deviation in spending more than what has been
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budgeted. The management will be able to know, in time, when things are expected to Project Costs and
Budgeting
go wrong so that corrective action can be taken. In project budgeting, the main focus
is on the process of estimating the cost of a project and its pricing in detail.

3.6.1 Budgeting Process

The main steps involved in the budgeting process are as follows:
 The Kick-off Meeting: This is the first meeting of people from all departments
concerned with budgeting to discuss the Work Breakdown Schedule (WBS) for
providing dependable estimates. This meeting may be followed by several other
meetings for clarity and follow-up action.
 Estimation of Labor Requirements: All the line departments estimate the labor
requirements for each task assigned to them in man-hours with justification thereof,
and the estimation of wages and salaries based on the above. Then the project
manager and the line managers call a meeting and finalize the same and will submit
the estimates for approval by the top management or the sponsors.
 Estimation of Overheads: Overhead costs are estimated based on overhead
rates derived from three factors viz. direct labor rates, business base, and the
overhead expenses projected. The project manager exercises control over direct
costs and overhead costs.
 Estimation of Materials and Support Services: These are estimated based
on engineering standards. They are communicated to the project office as called
bill of materials, which contains the description of the materials required, the name
of the supplier, expected cost, duration of shelf life, and estimated scrap value.
The cost of supporting services like traveling, transportation of materials, etc is
also estimated as a percentage of total direct cost.
 Pricing the Project: The aggregate of all the costs viz. labor, overheads, materials,
and support services will give the total project cost.

3.6.2 Types of Budgeting Process (Top-Down and Bottom-Up)

Based on the inputs required and accuracy:
 Order of Magnitude Analysis: In this, the project cost is estimated without
using engineering data. This applies to projects in the conceptual stage and these
estimates are on a rough basis only. Their variations will be high at 35% on either
side.
 Approximate Estimate: This is also made without engineering data and is
estimated by interpolating the expenditure on similar projects undertaken earlier.
Their variations will be 15% on either side.
 Definitive Estimates: These are the most accurate and are based on detailed
engineering data. Their accuracy will be the most and variation will be only 5% on
either side.
Based on Top-down or Bottom-up the Work Breakdown Structure (WBS):
 Top-down budgeting: In this, the amount of resources to be allocated to the
project as a whole is first estimated by the top-level people in the organization.
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Project Management: Their estimate is given to their immediate subordinates to be broken down into
An Overview
individual tasks (WBS) and their costs. People at each level do the same until it
reaches the last level of the organization, at which level the project is broken down
to the smallest tasks possible. One advantage of this method is that the overall
budget constraint is fixed at the top level and only essential activities will be funded.
The disadvantage is that higher-level executives may not like the lower-level
employees revising the figures.
 Bottom-up budgeting: This is the reverse approach to top-down budgeting. The
estimation in this approach starts at the smallest work element, at the lowest level
in the organization. Estimates are first made in terms of machine and man-hours
and are then converted into currency (rupee) and then resolved or revised through
discussions with the seniors. The rupee estimates at each level are aggregated to
get the estimates for the next higher level, starting from the lowest level on the
work breakdown structure. (WBS). The sum obtained at the higher level gives the
total direct cost for the project. To this, the project manager adds general and
administrative expenses, contingency margin, and also profit margin if required.
The advantage of this method is that the individuals who are in regular touch
with technical activities will make a better estimate of the costs. The disadvantage
lies in the higher-level people not believing in the capabilities of the lower-level
people.

3.6.3 Budgeting Techniques

 Zero Based Budgeting System: Under this, each project or activity is evaluated,
ranks are assigned, based on relative importance, and funding is first made to the
projects considered most important, in the descending order of importance. This
technique advocates against basing on the past, while taking decisions for the
future (i.e. starting on a zero basis).
 Planning-Programming-Budgeting System: This system is designed to assist
in identifying and planning projects that maximize the achievement of an
organization’s long time goals. It involves planning for identifying the goals and
objectives, programming i.e. analysis of each of the programs to be undertaken,
budgeting i.e. estimating the total cost for each of the programmes, and choosing
the portfolio i.e. selection of one of the projects based on a comparison of costs,
benefits, etc.
Check Your Progress 3.3
Note : a) Write your answer in the space given below.
b) Compare your answers with those given at the end of the unit.
1. What is project budgeting?
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2. What are the main steps involved in the budgeting process? Project Costs and
Budgeting
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3. Briefly explain the budgeting techniques.
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3.7 WORK ELEMENT COSTING

One part of Cost Estimating is Work Element Costing. Work element costing consists
of evaluating each work element for its resource requirements. When this is
accomplished, costs can be determined. Finding the total cost of a task is a good
example of Work Element Costing.
An example of Work Element Costing
Given information:
 Task requires 16 hours of labor
 At $10 per hour
 Required materials cost $200
 Overhead utilities used, indirect labor, etc. would come at a rate of 50% of direct
labor
Total task cost = $200 + [(16 hr) X ($10 per hr)] X 1.5 = $440

3.8 LET US SUM UP

In this unit, we studied the identification of project costs, and their elements, the meaning
of the feasibility report, and the steps in its preparation. The advantages of feasibility
report and financing arrangements for a project, preparation of cost estimates, the
social cost-benefit, and project budgeting, mainly top-down and bottom-up budgeting
are covered in this unit. In the end, we studied the work element costing.

3.9 KEYWORDS
Budget : A plan expressed usually in financial terms.
Capital Structure : The composition of a firm’s long-term financing consisting of
equity, preference capital, and long-term debt.
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Project Management: Risk : It refers to variability; it is measured by standard deviation.
An Overview
Term Loan : A loan which is generally in more than one year and less than
ten years.
Top Down : A budgeting method that begins with top managers’ estimates
of the resources needed for a project.
Zero Based : A budgeting method that was devised as an alternative to the
Budgeting incremental approach. Every program budget had to be
totally justified every budget cycle.

3.10 SUGGESTED FURTHER READINGS/

REFERENCES
1. Chakravarthi Anand and D. Chakravarthy Reddy, “Project Formulation, Appraisal
and Implementation”, ICFAI University Press, 2006.
2. Jack R. Meredith and Samuel J. Mantel Jr, “Project Management: A Managerial
Approach”, John Wiley & Sons, Fifth En.
3. P.C.K. Rao, “Project Management and Control”, Sultan Chand & Sons, 2008.
4. P.K. Joy, “Total Project Management – The Indian Context”, Macmillan India
Ltd, New Delhi, 1994.
5. Prasanna Chandra, “Project Planning, Analysis, Selection, Implementation &
Review”, 7 Ed, Tata McGraHill Education.
6. Project Management Institute, People in Projects, Project Management Institute,
2001.
7. Wysocki, Robert K. et. al. Building Effective Project Teams, New York: Wiley
2001.
8. Wysocki, Robert K. et. al. Effective Project Management, New York: Wiley 1995.

3.11 ANSWER TO CHECK YOUR PROGRESS

Check Your Progress 3.1
1. The social cost-benefit analysis enables the assessment of benefits to the community
arising out of an estimated investment.
2. Social cost and benefit involve step by the development of :
 Time profile of costs and benefits.
 Estimates of cost-benefit accrual to members of society at large.
 Estimates of cost-benefit to the national exchequer in the form of indirect
taxes and foreign exchange earnings.
 Appraisal of alternatives based on a calculation of present value adopting
Discounted Value Methodology, Economic Rate of Return, mapping of
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 expected total costs and benefits to individual, customer, community, and Project Costs and
Budgeting
nation at large.
3. Sensitivity analysis aims to the calculate of risk factors and uncertainties during the
implementation of the project.
Check Your Progress 3.2
1. The Facets of Feasibility Report are:
 Description of product or services to be offered and delivered.
 Current market description and future potential.
 Technical information, such as technology selection, merits, and demerits of
the chosen technology.
 Financial viability.
 Economic viability.
 Assessment of the environmental impact.
Project Feasibility Study involves documenting each of the potential solutions to a
particular issue or opportunity, prepared by a consultant for the client.
2. FR serves as a tool to enable management to consider a project proposal in a
well-informed manner for arriving at a decision.
3. A typical FR should contain:

 Introduction
 Business description
 Market consideration
 Management team
 Technical specification and production plan
 Marketing plan
 Analysis of critical risks and problems
 Financial and economic plan
 Evaluation of various factors
Check Your Progress 3.3
1. Project budgeting involves estimation of the cost in respect of each set of activities,
cost integration, and presentation of a total picture of the project cost.
2. The main steps involved in the budgeting process are:
 Kick-off Meeting, i.e., the first meeting involving personnel from all departments
to discuss the work breakdown schedule, followed by further meetings for
arriving at cost of each of the work.
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Project Management:  Estimation of labor requirements.
An Overview
 Estimation of overheads.
 Estimation of materials and support services.
 Integration of cost in a consolidated form.
3. Budgeting techniques are:
 Zero-based budgeting system advocates taking decisions starting on a zero
base.
 Planning-Programming-Budgeting System is designed to assist in identifying
and planning projects that maximize the achievement of an organization’s long
time goal. It involves an analysis of each of the planned programmes to select
the project based on a comparison of cost and benefit.

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Illustration 1 Project Costs and
Budgeting
Arun Labs is a Pharma Company that has purchased 4 acres of land near Hyderabad
at a cost of Rs.15 lakhs. The site development cost is Rs.6 lakhs. The details of the
project are given below. Central Subsidy is 15% and Debt: Equity Ratio is 2:1. A
contingency provision has to be made on buildings at 5% and plant & machinery at
10%.

Cost of the Project [Link] Means of Finance Rs. Lakhs

Land 15.00 Promoters Contribution 70.00

Site development 6.00 Term Loan from FI 200.00

Plant & Machinery:

Imported
180.00

Import Duty
8.00

Freight from Port 191.00

3.00

Buildings & civil works 50.00

Other Fixed Assets 40.00

Preliminary Expenditure 32.00

Pre-operative Expenditure 30.00

Working Capital Margin 26.00

Required: To find the cost of the project and means of finance.

Contingency 5% on Buildings

Building Estimate: Rs.50.00 lakhs

Contingency 5%: Rs.2.50 lakhs

Contingency on Plant &Machinary 10% on landed cost of Rs.191 lakhs:

Rs.19.10 lakh

Total Contingency: Rs.2.5 lakhs + Rs.19.10 lakhs =Rs.21.60 lakhs

Fixed investment : 50+ 6+191+50+40+21.60 = Rs. 232.60 lakhs

Subsidy 15% on fixed investment of Rs.323.60 = Rs.48.50 lakhs approx.

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Project Management:
An Overview Cost of the Project Rs. Lakhs Means of Finance Rs. Lakhs
Land & Site Development 21.00 Promoters Contribution 88.70
Plant & Machinery 191.00 Central Subsidy 48.50
Buildings 50.00 Term Loan 274.40
Other Fixed Assets 40.00
Contingencies 21.60
Pre-operative Expenses 30.00
Preliminary expenditure 32.00
Margin on Working Capital 26.00
Total Cost: 411.60 Total Means of Finance: 411.60

Workings:
Total Cost of the Project: Rs.411.60 lakhs
Debt-Equity Ratio: 2:1
Equity: Rs. 137.20 lakhs
Promoters Contribution: 137.20 - 48.50 = Rs.88.70 lakhs
Debt: Rs. 274.40 lakhs

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Illustration 2 Project Costs and
Budgeting
Gemini Cement Ltd (GCL), an existing grey cement manufacturing company proposes
to expand its capacity. Details of the working capital requirements of GCL for the first
year of operations are given below:
Items Rs. In Lakhs
Raw materials 480.00
Consumables 24.00
Work-in-process (WIP) 65.00
Finished Goods 235.00
Receivables 686.00
Other current assets (Other than cash) 100.00
Sundry Creditors 600.00

The margin money requirement is 25% of the working capital gap. Existing margin
money and bank finance for working capital amount to Rs.223 lakhs and Rs.660 lakhs
respectively. Find the existing working capital with the company before expansion and
increase in working capital required given that GCL’s existing creditors were worth
Rs.100 lakhs.

Rs. Lakhs
Raw materials 480
Consumables 24
WIP 65
Finished Goods 235
Receivables 686
Other current assets 100
Total Working Capital 1590
Less Creditors 600
Working Capital Gap 990

Margin @25% = 990x0.25 = 248 (Old+New)

Bank Finance = Working Capital - Margin money
= 990 -248 = 742
Increase in Bank Finance = 742 – 660 = 82
Existing working capital gap = Existing margin money +Bank Finance
= 223+660 = 883
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Project Management: Increase in working capital gap = 990-883= 107
An Overview
Add existing creditors =100
Existing working capital = 883+100 = 983
Increase in working capital =1590-983 = 607

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