Geethanjali College of Engineering and Technology

Cheeryal (V), Keesara (M), Medchal District – 501 301 (T.S)

PROJECT MANAGEMENT AND FINANCE

(Subject code-18MB4204)

COURSE FILE

DEPARTMENT OF
COMPUTER SCIENCE AND ENGINEERING
(2024-2025)

Faculty Incharge HOD-ECE

[Link]/[Link] [Link] Lakshmi

 Geethanjali College of Engineering and Technology
DEPARTMENT OF COMPUTER SCIENCE AND ENGINEERING

(Name of the Subject): PROJECT MANAGEMENT AND FINANCE

(SUBJECT CODE: ) 20MB42005 Programme: UG
Branch: CSE Version No: 1
Year: IV Document Number: GCET/ECE
Semester: II No. of Pages:
Classification status (Unrestricted/Restricted )
Distribution List:

Prepared by :
1) Name : [Link]/[Link]
2) Sign :
3) Design : Asst. Professor
4) Date : 02-12-2024
Verified by : *For Q.C only
1) Name : 1)Name :
2) Sign : 2) Sign :
3) Design : 3) Design :
4) Date : 4) Date :
Approved by (HOD) :
1) Name: Dr. [Link] lakshmi
2) Sign :
3) Date :
 Contents

[Link] Topic Page. No.

1 Cover Page
2 Syllabus copy
3 Vision of the Department
4 Mission of the Department
5 PEOs and Pos
6 Course objectives and outcomes
7 Course mapping with Pos
8 Brief notes on the importance of the course and how it fits into the curriculum
9 Prerequisites if any
10 Instructional Learning Outcomes
11 Class Time Table
12 Individual Time Table
13 Lecture schedule with methodology being used/adopted
14 Detailed notes
15 Additional topics
16 University Question papers of previous years
17 Question Bank
18 Assignment Questions
19 Unit wise Quiz Questions and long answer questions
20 Tutorial problems
21 Known gaps ,if any and inclusion of the same in lecture schedule
22 Discussion topics , if any
23 References, Journals, websites and E-links if any
24 Quality Measurement Sheets
A Course End Survey
B Teaching Evaluation
25 Student List
26 Group-Wise students list for discussion topic

Course coordinator Program Coordinator

HOD
 GEETHANJALI COLLEGE OF ENGINEERING AND TECHNOLOGY
(Autonomous)
Cheeryal (V), Keesara (M), Medchal Dist., Telangana-501301

20MB42005- PROJECT MANAGEMENT AND FINANCE

IV Year. [Link]. (ECE) – II

SemPrerequisite(s): None L T P/D C
Course Objective: 3 - -/- 3
Develop ability to
1. To understand the Fundamentals of Project Management and Financial considerations
involved in it.
2. Estimate the slack-time and cost of the project.
3. Analyse the project risk
4. Analyse the financial sources.
5. Configuring the venture capital sources.

Course outcomes (COs): At the end of the course, the student would be able to
CO1. Define Project Management process, classification of costs, types of risks
and sources of finance.
CO2. Applying the concepts of PERT and capital structure theories in Project
management
CO3. Integrate financial risk assessment and project risk analysis.
CO4. Assess Project financing structure to ensure project success.

UNIT I
Introduction to Project Management and Selection Criteria: Project definition, Program,
Portfolio, Project life cycle cum phases. Importance of Project management. Project
management process and classification. Project selection- Project Portfolio Management
system, selection methods.
UNIT II
Estimating times and cost: Factors influencing quality of estimates, estimation methods,
types of cost, developing network, constructing project network, activity on node, network
computation. PERT.
UNIT III
Managing Risk: Risk management process- contingency planning, change control. Project
risk management, resource allocation. Analysis of project risks, Market risk, Firm risk.
UNIT IV
Financing of Projects: Capital structure, methods of offering, equity capital, preference
capital, debenture. Methods of offering term loans, working capital advances. Project
financing structure.
UNIT V
Financing infrastructure projects and Venture capital: Typical project configuration, key
project parties. Project contracts, infrastructure financing scenario in India. Venture capital
investor, venture capital investment, raising venture capital.
TEXT BOOK(S)
1. Project management- The managerial process, Clifford F Gray, Erik W Larsom,
Gautam V. Desai, 4ed, THM
2. Project- Planning, analysis, selection , financing, implementation and review,
Prasanna Chandra, 6ed, TMH
3. Project Management- Achieving completitive advantage, Jeffrey K Pinto, 1st ed, PHP

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 3. Vision of the Department
To produce globally competent and socially responsible computer science engineers
contributing to the advancement of engineering and technology which involves creativity and
innovation by providing excellent learning environment with world class facilities.
4. Mission of the Department
1. To be a centre of excellence in instruction, innovation in research and scholarship, and
service to the stake holders, the profession, and the public.
2. To prepare graduates to enter a rapidly changing field as a competent computer science
engineer.
3. To prepare graduate capable in all phases of software development, possess a firm
understanding of hardware technologies, have the strong mathematical background necessary
for scientific computing, and be sufficiently well versed in general theory to allow growth
within the discipline as it advances.
4. To prepare graduates to assume leadership roles by possessing good communication skills,
the ability to work effectively as team members, and an appreciation for their social and
ethical responsibility in a global setting.

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 5 Program Educational Objectives (PEOs)
PEO.1 To provide graduates with a good foundation in mathematics, sciences and engineering
fundamentals required to solve engineering problems that will facilitate them to find
employment in industry and / or to pursue postgraduate studies with an appreciation for
lifelong learning.
PEO.2 To provide graduates with analytical and problem solving skills to design algorithms,
other hardware / software systems, and inculcate professional ethics, inter-personal skills
to work in a multi-cultural team.
PEO.3 To facilitate graduates to get familiarized with the art software / hardware tools, imbibing
creativity and innovation that would enable them to develop cutting-edge technologies of
multi-disciplinary nature for societal development.

3
 Program Outcomes (CSE)
PO.1 Engineering knowledge: Apply the knowledge of mathematics, science, engineering
fundamentals, and an engineering specialization to the solution of complex engineering
problems.
PO.2 Problem analysis: Identify, formulate, review research literature, and analyze
complex engineering problems reaching substantiated conclusions using first
principles of mathematics, natural sciences, and engineering sciences.
PO.3 Design/development of solutions : Design solutions for complex engineering
problems and design system components or processes that meet the specified needs
with appropriate consideration for the public health and safety, and the cultural,
societal, and environmental considerations.
PO.4 Conduct investigations of complex problems: Use research-based knowledge and
research methods including design of experiments, analysis and interpretation of data,
and synthesis of the information to provide valid conclusions.
PO.5 Modern tool usage: Create, select, and apply appropriate techniques, resources, and
modern engineering and IT tools including prediction and modelling to complex
engineering activities with an understanding of the limitations.
PO.6 The engineer and society: Apply reasoning informed by the contextual knowledge
to assess societal, health, safety, legal and cultural issues and the consequent
responsibilities relevant to the professional engineering practice.
PO.7 Environment and sustainability: Understand the impact of the professional engineering
solutions in societal and environmental contexts, and demonstrate the knowledge of,
and need for sustainable development.
PO.8 Ethics: Apply ethical principles and commit to professional ethics and responsibilities and
norms of engineering practice.
PO.9 Individual and team work: Function effectively as an individual, and as a member or
leader in diverse teams, and in multidisciplinary settings.
PO.10 Communication: Communicate effectively on complex engineering activities with the
engineering community and with society at large, such as, being able to comprehend and
write effective reports and design documentation, make effective presentations, and give
and receive clear instructions.

4
PO.11 Project management and finance: Demonstrate knowledge and understanding of
the engineering and management principles and apply these to one’s own work, as
a member and leader in a team, to manage projects and in multidisciplinary
environments.
PO.12 Life-long learning : Recognize the need for, and have the preparation and ability to
engage in independent and life-long learning in the broadest context of technological
change.

PSO (Program Specific Outcome):

PSO 1: To identify and define the computing requirements for its solution under given
constraints.
PSO 2: To follow the best practices namely SEI-CMM levels and six sigma which vary
from time to time for software development project using open ended programming
environment to produce software deliverables as per customer needs.

5 Course Objectives and Outcomes

Course Objective:
Develop ability to
1. To understand the Fundamentals of Project Management and Financial considerations
involved in it.

Course outcomes (COs):

At the end of the course, the student would be able to
CO1. Project Management process, project selection methods based on financial
criteria.
CO2. Estimate project duration and completion time, estimate the cost and develop a
project plan.
CO3. Risk management
process.CO4. Financing of
project.
CO5. Concept of Venture capital.

5
 7. Course Mapping with POs

Course PEOs Pos

18MB4204 - PROJECT PEO1, PEO2 PO1,PO2,PO3,PO4,PO5,PO9,PO10,PO11,
MANAGEMENT AND PO12,PSO1,PSO2
FINANCE

Mapping of Course outcomes to Program Outcomes

Program Outcomes
Course outcomes PSO PS
1 2 3 4 5 6 7 8 9 10 11 12
1 O2
CO1. Project Management process,
project selection methods based on 2 2 1 1 3 - - - 1 1 1 1 2 1
financial criteria.
CO2. Estimate project duration and
completion time, estimate the cost 3 2 1 2 3 - - - 1 1 1 1 2 1
and develop a project plan.
CO3. Risk management process.
1 2 1 1 3 - - - - 1 1 1 1 1
CO4. Financing of project. 1 2 1 2 2 - - - - 1 1 1 1 3
CO5. Concept of Venture capital. 2
1 1 1 2 - - - 1 1 1 1 1 1
1

6
8. Brief notes on the importance of the course and how it fits into the curriculum

(a) What role does this course play within the Program?
Financial managers are responsible for the financial health of an organization. They
produce financial reports, direct investment activities, and develop strategies and plans for
the long-term financial goals of their organization. Financial managers typically: ...
Help management make financial decisions.
(b) What essential knowledge or skills should they gain from this experience?
Students acquire knowledge in Finance and project management.
(c) What knowledge or skills from this course will students need to have mastered to
perform well in future classes or later (Higher Education / Jobs)?
Finance and project management is the active management of financial activities to
maximize wealth and achieve profitability.
(d) Why is this course important for students to take?
Students learn the fundamentals of financial management and project management is very important in the field
of increasing the wealth of the investors and the business concern. Ultimate aim of any business concern will
achieve the maximum profit and higher profitability leads to maximize the wealth of the investors as well as the
nation. Promoting Savings.
(e) What is/are the prerequisite(s) for this course? (NIL)
(f) When students complete this course, what do they need know or be able to do?
Able to analyze techniques of financial accounting and project management.
(g) Is there specific knowledge that the students will need to know in the future?
In future, students have to apply these concepts in Business applications.
(h) Are there certain practical or professional skills that students will need to apply in the
future?
YES. Students can develop process of task and risk management knowledge.
(i) Five years from now, what do you hope students will remember from this course?
This course gaining knowledge about Project management outcomes are the results – the
outputs from any process. This is what counts. Processes are how you get there. That makes
processes relevant and important.
(j) What is it about this course that makes it unique or special?
This course Accountants need to understand project management to better advocate for
good financial and data practices.
(k) Why does the program offer this course?

7
 This course helps the students to understand project management; financial management is the active
integration and coordination of all financial activities to provide you, the organization, with the best value.
(l) Why can’t this course be “covered” as a sub-section of another course?
It is not possible as it covers many topics such as Financial and project management.
(m) What unique contributions to students’ learning experience does this course make?
Students will be able to understand how FAPM works in business.
(n) What is the value of taking this course? How exactly does it enrich the program?
A project manager is a person who has the overall responsibility for the successful initiation,
planning, design, execution, monitoring, controlling and closure of a project ......Most of the
issues that impact a project result in one way or another from risk.
(o). what are the major career options that require this course
• Finance Manager.
• Financial Planner.
• Financial Analyst.
• Accountant.
9. Prerequisites if any: NIL

10. Instructional Learning Outcomes

[Link] Unit Outcomes

1 I • Project life cycle cum phases.
• Importance of Project management
• Project management process
• Project selection
• Project Portfolio Management system
2 II • Quality of estimates
• Estimation of cost
• Developing network
• Constructing project network
3 III • Risk management process
• Contingency planning
• Project risk management
• Resource allocation
• Analysis of project risks.
4 IV • Offering term loans
• Working capital advances
• Project financing structure
• Capital structure
5 V • Project configuration
• Project contracts
• Financing scenario in India
• Venture capital investor

8
 11. Time Table/12 Individual Time table

Geethanjali College of Engineering & Technology

Department of Computer Science & Engineering
Even Sem
Room
Year/Sem/Sec: [Link] II-Semester A-Section 307
No
Version :
Class Teacher: P Krishna Rao A.Y. : 2022-23 W.E.F. 02-01-2023
01
09.00- 90.50- 10.40- 11.30- 12.20- 01.00- 01.50-
Time 02.40-03.30
09.50 10.40 11.30 12.20 01.00 01.50 02.40
Period 1 2 3 4 5 6 7

Monday

Tuesday
Project Project

LUNCH
Wednesday
Project Project
Thursday
Project Project
Friday DM SPT PMF LIB

Saturday DM PMF SPT Technical Seminar

Course [Link]
[Link] Subject(T/P) Faculty Name
code Periods
1 Software Practice and Testing 18CS4201 P Krishna Rao 4
2 Disaster Management 18CE4241 D Varun 3
3 Project Management and Finance 18MB4204 K Naupal Reddy 3
4 Technical Seminar 18CS4206 3
5 Project 18CS4205 21
TT. Coord:__________ HOD:__________________ Dean Academics:-_______________
Principal:___________________

Geethanjali College of Engineering & Technology

9
 Department of Computer Science & Engineering
Even Sem
Room
Year/Sem/Sec: [Link] II-Semester B-Section G 18
No
Version :
Class Teacher: K Srinivas A.Y. : 2022-23 W.E.F. 02-01-2023
01
09.00- 90.50- 10.40- 11.30- 12.20- 01.00- 01.50-
Time 02.40-03.30
09.50 10.40 11.30 12.20 01.00 01.50 02.40
Period 1 2 3 4 5 6 7

Monday

Tuesday Project Project

LUNCH
Wednesday Project Project

Thursday Project Project

Friday PMF DM SPT LIB

Saturday SPT PMF DM Technical Seminar

Course [Link]
[Link] Subject(T/P) Faculty Name
code Periods
1 Software Practice and Testing 18CS4201 K Srinivas 4
2 Disaster Management 18CE4241 D Varun 3
3 Project Management and Finance 18MB4204 V Bhavani 3
4 Technical Seminar 18CS4206 3
5 Project 18CS4205 21

TT. Coord:__________ HOD:__________________ Dean Academics:-_______________

Principal:___________________

Geethanjali College of Engineering & Technology

Department of Computer Science & Engineering
Even Sem
10
 Room
Year/Sem/Sec: [Link] II-Semester C-Section 206
No
Version :
Class Teacher: G Niveditha A.Y. : 2022-23 W.E.F. 02-01-2023
01
09.00- 90.50- 10.40- 11.30- 12.20- 01.00- 01.50-
Time 02.40-03.30
09.50 10.40 11.30 12.20 01.00 01.50 02.40
Period 1 2 3 4 5 6 7

Monday

Tuesday Project Project

LUNCH
Wednesday Project Project

Thursday Project Project

Friday SPT PMF DM LIB

Saturday PMF DM SPT Technical Seminar

Course [Link]
[Link] Subject(T/P) Faculty Name
code Periods
1 Software Practice and Testing 18CS4201 G Niveditha 4
2 Disaster Management 18CE4241 N Kranthi Kumar 3
3 Project Management and Finance 18MB4204 V Bhavani 3
4 Technical Seminar 18CS4206 3
5 Project 18CS4205 21
TT. Coord:__________ HOD:__________________ Dean Academics:-_______________
Principal:___________________

Geethanjali College of Engineering & Technology

Department of Computer Science & Engineering
Even Sem
Room
Year/Sem/Sec: [Link] II-Semester D-Section 225
No
Version :
Class Teacher: G Niveditha A.Y. : 2022-23 W.E.F. 02-01-2023
01
09.00- 90.50- 10.40- 11.30- 12.20- 01.00- 01.50-
Time 02.40-03.30
09.50 10.40 11.30 12.20 01.00 01.50 02.40

11
 Period 1 2 3 4 5 6 7

Monday

Tuesday
Project Project

LUNCH
Wednesday
Project Project
Thursday
Project Project

Friday PMF DM SPT LIB

Saturday SPT PMF DM

Technical Seminar

Course [Link]
[Link] Subject(T/P) Faculty Name
code Periods
1 Software Practice and Testing 18CS4201 G Niveditha 4
2 Disaster Management 18CE4241 N Kranthi Kumar 3
3 Project Management and Finance 18MB4204 V Shivani 3
4 Technical Seminar 18CS4206 3
5 Project 18CS4205 21
TT. Coord:__________ HOD:__________________ Dean Academics:-_______________
Principal:___________________

Geethanjali College of Engineering & Technology

Department of Computer Science & Engineering
Even Sem
Room
Year/Sem/Sec: [Link] II-Semester E-Section 226
No
Version :
Class Teacher: P Krishna Rao A.Y. : 2022-23 W.E.F. 02-01-2023
01
09.00- 90.50- 10.40- 11.30- 12.20- 01.00- 01.50-
Time 02.40-03.30
09.50 10.40 11.30 12.20 01.00 01.50 02.40
Period 1 2 3 4 5 6 7
LUNCH

Monday

Tuesday
Project Project

12
Wednesday
Project Project
Thursday
Project Project
Friday SPT DM PMF LIB

Saturday SPT DM PMF Technical Seminar

Course [Link]
[Link] Subject(T/P) Faculty Name
code Periods
1 Software Practice and Testing 18CS4201 P Krishna Rao 4
2 Disaster Management 18CE4241 V Navaneetha 3
3 Project Management and Finance 18MB4204 V Shivani 3
4 Technical Seminar 18CS4206 3
5 Project 18CS4205 21
TT. Coord:__________ HOD:__________________ Dean Academics:-_______________
Principal:___________________

13. Lesson Plan

13
 Lesson Plan
Academic Year: 2024-25 Course-Year-Sem-Branch-Sec: [Link]-IV-II-ECE-A,B,C,D&E
Subject: 20MB42005- PROJECT MANAGEMENT AND FINANCE [Link] Periods/Week: 03
Faculty Name: [Link]/[Link] Designation: Asst. Prof.

No. of Regular/ Teaching Aids Used

[Link]. Topics to be covered
Periods Additional LCD/OHP/BB/LCD
UNIT-I
Introduction to Project Management and Selection
1 1 Regular BB/LCD/OHP
Criteria
2 1 Project definition, Program, Portfolio, Regular BB/LCD/OHP
3 1 Project life cycle cum phases Regular BB/LCD/OHP
4 1 Importance of Project management Regular BB/LCD/OHP
5 1 Project management process and classification Regular BB/LCD/OHP
6 1 Project selection Regular BB/LCD/OHP
7 1 Project Portfolio Management system Regular BB/LCD/OHP
8 1 Selection methods. Regular BB/LCD/OHP
9 1 Revision Regular BB/LCD/OHP
UNIT-II
10 1 Estimating times and cost Regular BB/LCD/OHP
Factors influencing quality of estimates, Estimation BB/LCD/OHP
11 1 Regular
methods
12 1 Types of cost, developing network Regular BB/LCD/OHP
13 1 Constructing project network, Activity on node Regular BB/LCD/OHP
14 2 Network computation-PERT Regular BB/LCD/OHP
15 2 Network computation-PERT Regular BB/LCD/OHP
16 2 Network computation-PERT
17 1 Revision
18 1 Revision
UNIT-III
19 1 Managing Risk-Risk management process Regular BB/LCD/OHP
20 1 Contingency planning, change control. Regular BB/LCD/OHP
21 1 Project risk management Regular BB/LCD/OHP
22 1 Resource allocation Regular BB/LCD/OHP
23 1 Analysis of project risks Regular BB/LCD/OHP
24 1 Market risk, Firm risk. Regular BB/LCD/OHP
25 1 Revision Regular BB/LCD/OHP
UNIT-IV
26 1 Financing of Projects Regular BB/LCD/OHP
27 2 Capital structure-Methods of offering Regular BB/LCD/OHP
28 2 Equity capital, preference capital, debenture. Regular BB/LCD/OHP
29 2 Methods of offering term loans Regular BB/LCD/OHP

14
30 1 Working capital advances. Regular BB/LCD/OHP
31 1 Project financing structure. Regular BB/LCD/OHP
32 1 Revision
UNIT-V
1 Financing infrastructure projects and Venture BB/LCD/OHP
33 Regular
capital
34 1 Typical project configuration Regular BB/LCD/OHP
35 1 Key project parties Regular BB/LCD/OHP
36 1 Project contracts Regular BB/LCD/OHP
37 1 Infrastructure financing scenario in India Regular BB/LCD/OHP
38 1 Venture capital investor Regular BB/LCD/OHP
39 1 Venture capital investment Regular BB/LCD/OHP
40 1 Raising venture capital. Regular BB/LCD/OHP
41 1 Revision Regular BB/LCD/OHP
42 1 Revision Regular BB/LCD/OHP

15
 UNIT-I

Introduction to Project Management and Selection Criteria

Project, Program, and Portfolio Management

The relationship between project, program, and portfolio management can best be described
like this:
• A project is a temporary endeavor undertaken by a company or organization (such as
the creation of a new product, service, or result)
• A program is a group of projects that are similar or related to one another, and which
are often managed and coordinated as a group instead of independently
• A portfolio is a group of different programs and/or projects within the same
organization, which may be related or unrelated to one another

What Is a “Project” in Project Management?

So, what exactly does “project” mean in the world of project management? Generally, a
project is a temporary endeavor, with a finite start and end, that is focused on creating a
unique product, service, or result.
Nothing in this definition describes the size or the precise content of a project—there are
projects of every size imaginable in virtually every industry, and project managers supervise
them regardless of these specifics.

What Does a Project Manager Do?

As project managers, the key parts of the job are to balance the scope of work—also known
as “deliverables”—to meet the project objectives with the resources that are available within
the schedule and allotted budget. They must do this all while working to ensure the project
meets the quality guidelines required by its customers, which is not an easy task.
Learn More: What Does a Project Manager Do?
Project management is about applying the right tools, techniques, and processes, in a value-
added way, to complete the project successfully. As we know, the body of project
management knowledge is huge, and there are a number of skills, tools, and techniques
available to support project managers in the delivery of these initiatives. What’s important is
to understand the project, its goals and objectives, and what its challenges are, and to pick,
choose, and use those right parts of project management accordingly.

What Is a “Program” in Project Management?

In some cases, it’s important that a group of projects is managed in a coordinated way to
ensure that value is achieved. In project management terms, this collection of projects

16 1
becomes a program. Like a project, a program is a temporary organization, so when the
related projects are complete, the program is complete.
The Project Management Institute (PMI) describes program management in its PMBOK
Guide as:
“The application of knowledge and skills to achieve program objectives and to obtain
benefits and control not available by managing related program components individually.”

What Does a Program Manager Do?

Program management is not simply managing multiple projects—it’s a bit more strategic than
that. The program manager also doesn’t micromanage those projects; he or she is helping
ensure that the right work is moving between the right projects at the right points in time.
The program manager focuses, throughout the program, on the business benefits, starting
very early at its inception by looking at what benefits can be realized and then making that
happen.
Each project still has a project manager completing the work described above. The role of the
program manager is to ensure that the benefits intended are met by validating that the correct
projects are included in the program. Any project not providing value to the benefits is then
realigned or removed from the program.
The program manager is responsible for overseeing the dependencies between projects and
creating program-level plans to accomplish this.
For example, a master schedule is created to manage the dependencies between projects; a
program risk management plan is created to manage program-level risks; and a program
communication plan establishes how information will flow in the program. The program
manager is then not managing the projects, but rather providing the oversight needed to
ensure that the pieces of each project are completed effectively and efficiently in order to
meet the needs of the other projects.
The program manager is focused on benefits realization—rather, knowing the benefits that
can be accomplished from this collection of projects and focusing on achieving them. The
program manager is also working to manage organizational change and ensure that the
benefits are not only transitioned to operations, but that processes are in place to sustain these
benefits.
Since the role of program management is to ensure that projects are aligned to the business
strategy, as the strategy changes, the program manager also needs to communicate with the
project teams so that they are aware of the changes and what needs to be done about them.

What Is a “Portfolio” in Project Management?

A portfolio is a collection of projects and programs that are managed as a group to achieve
strategic objectives. An organization may have one portfolio, which would then consist of all

17 1
projects, programs, and operational work within the company. It may also establish several
portfolios for project selection and ongoing investment decisions.
According to PMI and its PMBOK Guide, a portfolio includes, “Projects, programs, other
portfolios, and operations managed as a group to achieve strategic objectives.”
Organizations need to decide which projects are the right ones to focus on. Often times, they
are limited by how many projects can be done based on the capacity within an organization,
begging the question, “Are we doing the right projects?”

What Does a Portfolio Manager Do?

Portfolio management is the centralized management of one or more portfolios to achieve an
organization’s strategic objectives.
Within organizations, the reality is often that resources are limited, whether it’s dollars,
people, space, or equipment. Based on the organization’s strategy, there are several projects
and programs that could be done; it just needs to be decided which are the right ones and in
what order they should be completed.
It’s critical to look not only at programs and projects at the individual level, but also
holistically to know how these align with the organization’s overarching goals.
At the same time, it’s important to consider a level of balance in the portfolio. The
organization “needs to keep the lights on,” while also developing new opportunities. Some
risk needs to be taken, but the portfolio should not be so risky that everything could be lost
within a period of time.
Beyond prioritizing and selecting projects and programs, portfolio management is balancing
the portfolio so that the right projects and programs are selected and implemented.
Monitoring and controlling is key to the process, since portfolio composition is not a one-
time decision. Evaluations should be conducted in some regular cadence. It may be decided
that a project’s priority becomes lower and others move into its place. A project could be
temporarily moved out of the portfolio or permanently moved out of what that portfolio
entails.
This is done to ensure projects align with an organization’s strategies, goals, and objectives.
It may also be the case that, as we get into performing a project or program, we find it no
longer aligns, causing a reprioritization of all projects and programs in the portfolio.
What Is a Program in Project Management?

A program is a collection of projects that are managed as a group to achieve efficiencies of

scale. Just as project management involves the coordination of individual tasks, program
management is the coordination of related projects that are grouped together.

Projects are bundled together into a program when the benefits of managing the collection
outweigh the benefits of managing them as individual units. A related concept here is project
portfolio management, a method for organizations to manage and evaluate a large number of

18 1
projects by grouping them into strategic portfolios. Portfolios are then analyzed for overall
effectiveness, how their estimates compare with actual costs, and whether they align with the
larger, strategic objectives of the organization.

So what is a program in project management? Simply put, it is a group of related projects

managed as a whole unit.

Characteristics of programs in project management

The main characteristics of a program in project management are:

• Large: Programs deal with big, overall company goals rather than smaller targets
and deliverables

• General: A project management program is general in its approach — the

specific details are outlined in the projects, tasks, and subtasks

• Strategic: Programs focus on long-term objectives and the multilayered plans to

achieve them

Examples of programs in project management

• Visionary: One example of a project management program could be the decision

to make a multinational business entirely eco-friendly. This long-term goal would
incorporate many shorter-term projects, including issuing new company
guidelines, the rollout of updates across the various offices, and a marketing
campaign to advertise the new principles.

• Mandatory: Another example of a program in project management could be a

merchant’s transition to an entirely electronic payment system. In Sweden, for
example, the goal is to become a cashless society by 2023. This means many
retail organizations have already undertaken smaller projects that contribute to the
greater program goal of digital transformation.

• Emerging: Finally, a project management program could start as a small project

but turn into a larger initiative. Various company projects could be dispersed or
even duplicated, so establishing a program will enable managers to bring them all
under one structure.

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Who manages programs in project management?

A program manager’s role is to coordinate all projects within a program to align with the
strategies and long-term objectives of an organization. They oversee programs and assess
deliverables to ensure that every project goal is reached.

Program managers are not to be confused with project managers, who focus on the
individual, short-term deliverables of specific projects.

What are the benefits of programs in project management?

A successful project management program can be invaluable to a business. The benefits

include:

• Clarity: A program aligns multiple projects together towards one shared goal.
This means project managers are clear on their individual deliverables and can
plan their activities according to the program’s strategic objectives.

• Efficiency: In the program management process, a collection of projects is housed

in one place. Program managers can use project management software to oversee
progress for all projects at a glance and prioritize resources accordingly.

• Risk management: By enabling project managers to communicate pain points as

they arise, a set of best practices can be established to identify similar risks early
and avoid repeating mistakes.

What is project management?

A 'project' is a set of agreed activities with a definite start, middle and end. Together these
activities produce business products or services in line with an approved business case which
is sponsored by senior managers within the organisation.

'Project management' provides structure and control of the project environment so that the
agreed activities will produce the right products or services to meet the customer’s
expectations.

Projects are temporary structures which must be properly managed and controlled in order to
meet their stated objectives. They are usually delivered in an environment where both
funding and resources are constrained and subject to competition.

Projects may be part of overarching programmes.

Purpose of project management

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A project has a lifecycle, underpinned by a plan, which is the path and sequence through the
various activities defined to produce its products. Project management is a controlled
implementation of the project plan under the direction of the organisation’s senior
management.

Traditionally, a successful project is one that has delivered its products or services according
to the project plan, meeting overall business objectives.

Project success is now seen more and more in terms of delivering projected
business benefits or the capability required for benefits delivery within the business.

A properly managed project will usually have:

• senior level sponsorship from within the organisation

• strong leadership, accountability and governance arrangements
• a dedicated project manager
• a project plan and adequate resources to implement the plan
• clear processes for the management
of risks, issues, stakeholders, communications and benefits
• effective project assurance arrangements
• well defined reporting structures and a clearly understood project scope

Some of the key documents usually associated with a properly managed project are:

• a business case justifying the investment and proposed changes

• a project initiation document setting out the project objectives and the means for
achieving them
• a project plan setting out the main products or services and all associated resources
and activities
• standards for reporting progress and highlighting issues
• registers for recording risks and issues and managing their escalation
• end project and lessons learned reports
• a post project review report, independent of the project, reporting estimates against
eventual outturns including the extent to which projected benefits have been realised

Project management roles and responsibilities

The main roles, and their associated responsibilities, in project management are:

• project board; comprising representatives from both user and supplier sides -
representatives with authority to make decisions and commit resources; the board is
chaired by the SRO and has overall accountability for project success
• senior responsible owner (SRO); chairs the board with overall accountability for the
project; the SRO is the key decision maker responsible for continuation of the

21 1
 business case, project structures and plans, controlling and monitoring progress,
problem referral and resolution, formal closure and post implementation review
• senior user; the board member responsible for providing user resources, ensuring
project products or services meet user expectations and deliver expected benefits
• senior supplier; the board member representing the interests of those designing,
developing, facilitating, procuring and implementing. Is also responsible for
the quality of products or services supplied
• project manager (PM); responsible for day-to-day project management, the PM has
been given authority by the board to run the project within agreed constraints
• project team; responsible for the production of products or services defined by the
project manager within the time, cost and quality constraints set by the board; the
team reports to the project manager
• project assurance; owned by the board but often delegated, it must be independent of
the project manager; project assurance provides assurance that the project is being
properly managed and includes frequent checking of the quality of the project’s
products or services
• project support; the role can include administrative help for the project manager and
board but may extend to administration of planning, control and configuration
systems. Depending on skills and experience the role may extend to advice, guidance
and limited support on a range of project areas.

Introduction to Project Management Life Cycle

Projects are part and parcel of our professional life. In the world of ever-changing technology
and business trends, project management is in great demand. In this Topic, we are going to
learn about the Project management life cycle.

According to PMI, a project is defined as temporary with a definite beginning and end in
time. Also, the project is unique without routine operation and meant to meet the singular
goal with a specific set of operations. PMI further defines project management as the
application of knowledge, skills, tools, and techniques to project activities to meet the project
requirements.

Whether the project is software development, or new product launch, or even a movie, its
management will progress through five life cycle phases.

Phases of Project Management Life cycle

Here are the five life cycle phases of project management:

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1. Initiation Phase
This is the starting point of the project. The project gets conceptualized in this phase. In this
stage, the following steps are implemented:

• The project idea is either created or the client approaches the idea. The idea can be the
solution to an existing problem or a new opportunity in business (e.g., new
smartphone model launch)
• A business case document is created providing the solution to implement the idea
after the brainstorming sessions consisting of the team, client, and project managers.
• Project managers and concerned teams check the feasibility of implementing the
project in terms of profits, cost, timeline, resources, etc.
• Once the project has passed this feasibility test, it is proposed for approval from the
leadership team of the company/business unit.
• During approval, SOW for the project is signed, and the budget is allocated.

After the successful completion of the above steps, the project is moved to the planning
phase.

2. Planning Phase
This is the second phase of project management. During this phase, a detailed project plan is
created. This plan includes tasks, resources required, timelines, cost, etc. In addition, further
planning for prioritizing requirements is done. Gantt chart, which indicates timelines for the
various task, is one of the important documents created for planning. Different plans that are
created depending on the type of project are:

• Communication Plan: A good communication plan ensures the success of the

project. It determines how the information is to be shared amongst the various groups
involved (setting up the mail, Skype, creating a distribution list, etc.) The escalation
matrix is part of this plan that is used to escalate teams for issues.

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 • Resource Plan: It identifies resources required for project and consumption and
schedule to procure the resources. The mapping of human resources is outlined in this
plan.
• Quality Plan: The plan consists of a detailed description of quality standards
adopted, quality testing, and assurance used to maintain the standards.
• Deployment Plan: It includes the outline of deploying the project deliverables. The
approach towards deployment, the responsibility of team members during and after
the deployment, issue tracking, and support on project post completion of the project.

Post the completion of various plans; risk management is carried out depending on the
criticality of the project. Identifying the potential threats and analyzing the impact of such
threats occur from the part of this sub-phase. A risk management report is prepared with a
plan to mitigate future threats.

3. Execution Phase
Done with the project idea finalization and planning. Now it’s time to set to work. In this
phase, previous planning is put into action. This phase depends highly on planning. Better the
plan better will be the execution. Project managers follow the below steps in this process:

• Resource allocation and ensuring its timely delivery.

• Assigning the tasks to team members on a daily basis
• Taking daily meetings
• Creating a status report based on daily meetings and the progress of the project.

Here the entire team comes to the picture as it starts with actual work (e.g. development of
software, manufacturing). Daily targets are set; the team has to ensure to meet them; in case
of delay, they have to report to project managers.

4. Monitoring and Controlling Phase

This phase is merged with the execution phase because both occur at the same time. The
main objective here is to ensure that execution is carried out as per the plan. Timelines and
costs adhere. Below points are implemented during monitoring:

• Set the key performance indicators (KPI’s).

• Compare the progress plan or status report with the project plan to measure KPI’s.
• For any deviation from the project, reduce the deviation and redefine KPI’s.
• Update the plan for any changes to meet the deadline.
• Monitor budget utilization.
• Monitor the quality of the project.

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5. Closure Phase
Now that project is completed, and it is time to deploy the project to the client or launch in
the market. This is where the collaborated efforts come to a fruitful end!! A deployment plan
created in the planning phase comes into action. The closure phase has:

• Releasing the deliverables(product/service) to the stakeholders.

• Communicating the closure to stakeholders and business partners.
• Signing off business documents.
• Releasing the team members and closing the contracts.
• Payment and documentation filing.
• Documenting lessons learned and best practices adopted during the project so that it
can be used for future reference for other projects.
• Setting up support and maintenance structure as per the requirement.

So above are the project life cycle phases. Although initiating a new project may seem a
gigantic task but by breaking it into phases ensures the achievable target. But these phases
aren’t mutually exclusive; they may overlap in practice. The execution and control phases
that we have seen above occur at the same time. Likewise, the same thing can happen in other
phases too.

What Is Project Selection?

Project selection is the process of evaluating and choosing projects that both align with an
organization’s objectives and maximize its performance.

Prioritization refers to ranking or scoring projects, based on certain criteria, to determine the
order of execution. However, the terms “prioritization” and “selection” are often used
interchangeably, as the two processes are intertwined.

Selection and prioritization are important elements of project portfolio management (PPM),
an approach that connects the execution of projects with high-level business strategy. As per
the 2017 PMI report, 37% of project failures are attributed to a lack of clearly defined
objectives and discipline when implementing strategy. This demonstrates how crucial the
PPM function is.

PPM implementation can be time consuming, which is why establishing a project

management office (PMO) that works on selection and prioritization can be extremely
beneficial.

Benefits of Project Selection and Prioritization

Project selection and prioritization are all about having a game plan that accounts for both
capacity and strategy. Let’s take a look at the benefits that companies stand to gain when
these are balanced right.

25 1
Better ROI: The fundamental outcome of any project selection process is to increase the
ROI. Several selection criteria and prioritization methods, discussed later in the article, can be
used to weigh projects against each other, based on their returns.

Increased efficiencies: By investing effort upfront to evaluate the project pool, companies
weed out inefficiencies that may creep up later due to not having enough capacity for
execution.

Strategic alignment: A project that does not cater to organizational goals, even if executed
flawlessly, is a waste of time. The right selection helps companies stay on track with their
goals.

Consistency and transparency: A standard selection approach helps the PMO benchmark
projects against well-defined criteria rather than use ad-hoc processes that lead to inconsistent
approvals. The upside of this consistent approach is transparent downstream communication,
as project managers get clarity on why a certain project was approved or rejected.

Shorter time-to-market: As companies become larger, they struggle to maintain an

aggressive time-to-market, with a sea of projects competing for attention. Prioritization of
projects gives companies the first-mover advantage, enabling them to reach customers before
competition.

Successful project delivery: When organizations have good project selection and
prioritization processes in place, it leads to the successful delivery of projects.

Project Selection Criteria for Portfolio Management

Ideally, deciding whether to go ahead with a project or not should be straightforward. But, in
reality, it’s not. The difficulty often lies in leaving projects off the table, and it takes strong
leaders with a clear vision to do that.

For example, if there are two projects—one that extends capacity or flexibility of a plant, and
another that improves efficiency and expected lifespan of that facility—which one do you
select?

The answer is not simple. It depends on which promises better ROI, the long-term goals for
the organization, etc. If there is an aim to expand the plant,, the former is a sensible option.
However, if the goal is to cut costs and increase longevity, the latter option may be preferred.

A few examples of project selection criteria are:

• What is the payback or break-even point?

• What is the impact to the organization’s growth (e.g., customer volumes)?
• Does the project contribute to innovation?
• How much risk is involved?

26 1
 • Are there sufficient resources in terms of time, budget, infrastructure, and people with
relevant expertise?
• What is the cost/benefit ratio?

Defining selection criteria is an important function of project portfolio management that’s

done in collaboration with various stakeholders, such as customers, leadership team, and
project managers. Feedback from projects executed in the past is also useful to pick the right
criteria.

Project Prioritization/Selection Methods

Project prioritization is easier to manage with a small list of say, five projects. However, as
this number grows significantly, the complexity can be difficult to handle, requiring more
concrete methods.

Here are three useful methods for project prioritization:

1. Ranking Method

The ranking method is a simple approach that arranges the projects on a scale of, say, one to
ten, based on their importance. Before assigning the rank, it’s important to ask the right
questions.

Some ranking method example questions are:

• What is the project’s rate of return?

• What are the quantitative and qualitative benefits to the stakeholders?
• How do efficiencies improve if we go ahead with the project?
• Do we have the capacity and capability to execute the project? If not, how long would
it take onboard new resources?

The advantage of this method is its quick approach that enables identification of top
priorities. It works effectively when there are limited criteria to evaluate and it’s easy to
assess the factors involved.

However, since it considers only one or two selection criteria, it could work out to be too
simplistic for complex project evaluations. In such cases, the scoring model may be a better
fit.

2. Scoring Model

The scoring model works when there are many selection criteria to consider and projects
being compared are significantly different, making the process harder. Rather than selecting
one or two criteria as in the ranking method, the scoring model considers one or two groups
of factors, such as strategic alignment, benefits, ROI, risk, etc.

27 1
In addition to assigning a rating to each criterion, every group is given a weight. For example,
benefits may have a factor of 1.5, whereas risk may have 0.75. The weighted average score is
then computed to arrive at the final project score.

The challenge with the scoring model is that its attempt to accommodate a long catalog of
criteria not only makes it more work for the PMO team, but it can also blur scoring. Along
with that, the chance of biases and guesswork in the rating and weight criteria assignments
makes it debatable whether the final score aptly reflects the project’s priority. One way to
design the model is to test against existing projects and see how accurate the score is.

Usually, the PMO tends to take a middle ground by applying the scoring model on a shorter
list of weighted criteria.

3. Analytic Hierarchy Process (AHP) Technique

AHP combines subjective elements with mathematical models to provide a more holistic
technique than the ranking or scoring methods. Used commonly in many decision-making
scenarios, it lends particularly well to complex project evaluations.

Similar to the scoring model, AHP works with a long list of selection criteria. However, it
does a pairwise comparison, pitting every two criteria against each other, which reduces the
possibility of errors and biases. After this apples-to-apples type of comparison, values are
normalized, and the weighted score is computed. (For more details on this approach, review
this detailed example from PMI).

Analytic hierarchy process’ strong reliance on quantitative techniques is its strength, as it

translates an abstract problem into numbers and makes the reason behind a decision
transparent. As the number of criteria increase, the math can get clunky. But, this isn’t
something that the right PPM tool can’t solve.

AHP is definitely a more mature and recommended approach for complex decisions than the
other two methods—it aims to understand the relative importance between two criteria rather
than rank everything in absolute terms.

There is the possibility of guesswork in this technique, though. Factoring in multiple expert
opinions and testing against existing projects for accuracy helps improve the model.

Continuous Monitoring in Project Prioritization and Selection

Project prioritization is usually perceived as an initial step, a decision point that leads to the
actual execution of the project. However, many variables may impact the selection criteria as
the project progresses. Project prioritization should instead be an ongoing process where
project scores are reviewed and updated during project development and at designated stage
gates. As project definition increases, the scoring becomes more accurate and definite.

28 1
Even after a project has begun, a new industry regulation may impact resources, processes,
etc. All dynamic factors need to be continuously monitored by the PMO to re-prioritize as
needed.

Ultimately, the goal is to strike a balance between constant disruption in schedules and
adapting to stay aligned to the business objectives by having PPM tools and processes in
place to manage the project portfolio.

29 1
 UNIT-II
ESTIMATING TIME AND COST

30 1
 UNIT-II
ESTIMATING TIMES AND COST

The Need for Project Time and Cost Estimation

In business, the purpose of most projects is to make money. That requires that the project either
earn more, or save more, than it costs to do the project. A project costs money until it is done,
and only begins to improve the company's bottom line after it is done. Also, each year, a
business has only so much money it can spend on projects. So, even before a project begins,
executives want answers to four questions:

• How much will the project cost?

• Are we sure we won't run over budget?
• How long will the project will take, and when it will be done?
• Are we sure we will not run late?

Those are very reasonable questions. We ask the same things when we take our car in for repair
or get our air conditioner fixed. Yet well over half of all projects - even well-managed ones - run
late or go over budget. So answering these questions with estimates we can rely on and commit
to is a big challenge.

In the project management world, we call executives that commit money and organizational
effort towards a project the project sponsors, and their commitment is crucial to our success as
project managers. If they don't buy in to the project, stay committed all the way through, deliver
necessary resources, and remove roadblocks, our project will fail. And their request for a time
and cost estimate is, from their perspective, entirely reasonable.

31 16
Where We Are Now

5–2

32 17
 Estimating Projects
• Estimating
– The process of forecasting or approximating the time
and cost of completing project deliverables.
– The task of balancing expectations of stakeholders
and need for control while the project is implemented.
• Types of Estimates
– Top-down (macro) estimates: analogy, group
consensus, or mathematical relationships
– Bottom-up (micro) estimates: estimates of elements
of the work breakdown structure

5–3

33 18
 Why Estimating Time and Cost Are Important

• To support good decisions.

• To schedule work.
• To determine how long the project should take
and its cost.
• To determine whether the project is worth doing.
• To develop cash flow needs.
• To determine how well the project is progressing.
• To develop time-phased budgets and establish the
project baseline.

EXHIBIT 5.1

5–4

34 19
Factors Influencing the Quality of Estimates

Planning
Horizon
Other
Project
(Nonproject)
Duration
Factors

Quality of
Organization Estimates People
Culture

Padding Project Structure

Estimates and Organization

5–5

35 20
Developing Work Package Estimates

Use people
familiar with
the tasks
Use several
Include a risk
people to make
assessment
estimates

Preparing
Make no Initial
Assume normal
allowance for Estimates conditions
contingencies

Assume tasks Use consistent

are independent time units

STOPPED FOR APM811S PM ON 13/03/17 5–6

36 21
 Estimating Guidelines for Times,
Costs, and Resources

1. Have people familiar with the tasks make the estimate.

2. Use several people to make estimates.
3. Base estimates on normal conditions, efficient methods,
and a normal level of resources.
4. Use consistent time units in estimating task times.
5. Treat each task as independent, don’t aggregate.
6. Do not make allowances for contingencies.
7. Add a risk assessment to avoid surprises to
stakeholders.

5–7

37 22
 Top-Down versus Bottom-Up Estimating
• Top-Down Estimates
– Are usually derived from someone who uses
experience and/or information to determine the
project duration and total cost.
– Are made by top managers who have little knowledge
of the processes used to complete the project.
• Bottom-Up Approach
– Can serve as a check on cost elements in the WBS
by rolling up the work packages and associated cost
accounts to major deliverables at the work package
level.

5–8

38 23
 Estimating Projects: Preferred Approach

• Make rough top-down estimates.

• Develop the WBS/OBS.
• Make bottom-up estimates.
• Develop schedules and budgets.
• Reconcile differences between top-down
and bottom-up estimates

5–10

39 24
 Project Times and Costs

• Consensus methods
• Ratio methods
• Apportion method
Project Estimate
Times
• Function point methods for Costs
software and system projects
• Learning curves

5–11

40 25
 Bottom-Up Approaches for Estimating
Project Times and Costs

• Template methods
• Parametric procedures
applied to specific tasks
• Range estimates for
the WBS work packages
• Phase estimating: A hybrid

5–15

41 26
 Level of Detail

• Level of detail is different for

different levels of management.
• Level of detail in the WBS varies
with the complexity of the project.
• Excessive detail is costly.
– Fosters a focus on departmental outcomes
– Creates unproductive paperwork
• Insufficient detail is costly.
– Lack of focus on goals
– Wasted effort on nonessential activities

5–19

42 27
 Types of Costs
• Direct Costs
– Costs that are clearly chargeable
to a specific work package.
• Labor, materials, equipment, and other

• Direct (Project) Overhead Costs

– Costs incurred that are directly tied to an identifiable
project deliverable or work package.
• Salary, rents, supplies, specialized machinery

• General and Administrative Overhead Costs

– Organization costs indirectly linked to a specific
package that are apportioned to the project

5–20

43 28
 Refining Estimates
• Reasons for Adjusting Estimates
– Interaction costs are hidden in estimates.
– Normal conditions do not apply.
– Things go wrong on projects.
– Changes in project scope and plans.
• Adjusting Estimates
– Time and cost estimates of specific activities are
adjusted as the risks, resources, and situation
particulars become more clearly defined.

5–23

44 29
Estimating Database Templates

FIGURE 5.7

5–24

45 30
Introduction to Network

One of the biggest project management challenges is to meet deadlines and completing projects
on time. Creating a project network diagram can help you plan projects more accurately.

What is a project network diagram?

A network in project management displays the duration of project activities and the
dependencies between activities graphically or as a table.

In a network, nodes (rectangles) represent activities and events. Arrows connect nodes with each
other. Arrows represent the dependency between the activities or events.
People often use the terms Work Breakdown Structure and a project network diagram
synonymously. But there is an important difference between the two: A work break down
structure enables you to view the project independently from its schedule and you visualize
logical relationships in a hierarchical tree diagram. A network diagram also takes into account
the chronological order of activities and uses dependencies to display them. Bar charts such
as Gantt charts are a special type of network.
The network analysis enables the project manager to take into account various aspects when
creating a project plan:
• Dependencies between activities
• Buffer times between activities
• Earliest and latest start and end dates, as well as the duration of activities
• Critical Path

How to conduct a network analysis OR Network Computation

We’ve talked a lot about the theory but how does a network analysis actually work and what do
you have to do? We’ll show you step by step how it works using a sample project – a team
building event.

Step 1: Define activities, durations and dependencies

Create a list of all your project activities and estimate their duration. Then define the
chronological order of the activities, i.e. the dependencies between them. Enter everything into a
table:

46 31
Step 2: Display all activities in nodes (rectangles) and enter the duration (d) into the node.
Each node is displayed as follows:

• EST = Earliest Start Time = When can I start the activity at the earliest?
• EFT = Earliest Finish Time = When can I complete the activity at the earliest?
• LST = Latest Start Time = When is the latest possible date to start the activity if I want to
complete the project on time?
• LFT = Latest Finish Time = When is the latest possible date to complete an activity if I want
to complete the project on time?
• d = duration of an activity (here in hours)
• CBT = Cumulative buffer time = extra time you can use to complete an activity without
compromising the project end date
• BT = free buffer time = extra time you can use to complete an activity without
compromising the completion time of its direct successor(s)
Step 3: Link activities
Define the dependencies between activities. Predecessor and successor activities are linked by an
arrow – this enables you to see which activity or activities you have to complete before you can
start the next activity.

47 32
Step 4: Forward planning
Forward planning means that you start at the first activity and go through the activities #1-#8
chronologically. Add the EST (earliest start time) and EFT (earliest finish time). Here’s how
you calculate the times:
• EST of activity #1 is always 0
• EFT of an activity is the sum of its EST and duration >> EFT of activity #1 is: 0 + 1 (EST =
0, d = 1)
• EFT of an activity is automatically the EST of its successor activity
• If a node has more than one predecessor activity, the HIGHEST EFT is used >> EST of
activity #6 is: 26 (taken from EFT of activity #2)

Step 5: Backward planning

This step enables you to calculate the latest start time (LST) and the latest end time (LFT). Start
from activity #8 and continue until you reach activity #1. Here’s how you calculate the times:
• LFT of activity #8 is the same as its EFT and represents the starting point of the backward
planning: EFT = 66 = LFT
• LST of an activity is: LFT – duration >> LST of activity #8 = 66 – 5 = 61
• LST of an activity is also always the LFT of the predecessor activity >> LST of activity #8 =
61 so the LFT of activity #7 = 61

48 33
• If a node has more than one successor activity, the LOWEST LST is used >> activity #1 has
3 successor activities (activity #2,3,4). Out of the three successors, activity #4 has the
lowest LST (=1) so the LFT of activity #1 = 1.
• You can check whether your backward planning is correct if LST = EST = 0 for activity #1.

Step
6: Calculate the buffer times

The next step is to identify the cumulative buffer time (CBT) and the free buffer time (BT) for
all activities.
Cummulative buffer time
• Formula for the CBT is: LST – EST >> So CBT for activity #6 is: 30 (LST) – 26 (EST) = 4
The cumulative buffer time indicates how much delay there can be in completing an activity
before it jeopardizes the project’s completion.

Free buffer time

• Formula for the BT is: EST of the successor activity minus the current activity’s
own EFT. BT of activity #3 is: 26 – 16 = 10 (EST of activity #4 = 26; EFT of activity #3 is
16)
• If an activity has more than one successor, take the LOWEST EST for the calculation. E.g.
activity #4 has 2 successors (activity #5 and #6). EST of activity #6 = 26, EST of activity #5 =
21 >> BT of activity #4 is 21 – 21 = 0
The free buffer time indicates how much delay there can be in completing an activity before it
has an impact on the completion time of the next activity.

49 34
Step 7: Determine the critical path

The critical path is the longest path (i.e. the path with the longest duration) from project start to
finish. The activities and milestones on this path have no buffer time. Which means that even the
slightest delay of one activity, the project’s completion will be delayed accordingly.
• In a network diagram every activity (node) without any cumulative or free buffer time belongs
to the critical path: CBT = BT = 0. In our case those are activity #1, #4, #5, #7 and #8.
So the critical path determines the minimum project duration and enables the project manager to
identify activities that are particularly risky should delays arise there. This helps them to devise
countermeasures from the start. It’s important the they keep a close eye on the activities on the
critical path. On the other hand, if you manage to complete a critical activity earlier than
planned, you can decrease the duration of the project accordingly.

Conclusion
The network analysis is a very precise method but that means that it is also pretty complex. For
smaller projects with a smaller number of activities such as our teambuilding event, it’s feasible.
But if you have a complex project plan with a lot of activities, it’s not only complex to create a
network diagram but it’s also complex and time-consuming to keep it up to date. Which is why
most use a project management software to create a network diagram. Though it’s still helpful to
know how to conduct a network analysis manually as it helps you to understand your project
plan better. The biggest advantage of a project management tool is that it calculates end and start
times automatically according to the dependencies and constraints you’ve defined, calculates the
critical path automatically and – most importantly – it takes much less time and effort to create a
project plan.
Procedure for Network Construction in Project Management
After reading this article you will learn about the procedure for network construction.
Step 1:
The first step in network construction is to split the work contents involved in the
implementation of the project to the level of activities which represent, individually, category of
works, e.g. Preparation of Quantity Survey involving drawings and specifications; Floating of

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Tender enquiries, Analysis of Tender and further negotiation with the possible contractor; issue
of purchase orders and finalising the contract etc.
Step 2:
Arrange the activities in sequential order of operation. Establish the inter-relationship of the
activities. We will note that some of the activities are preceded by completion of other activities
except the first one when there is no other preceding activity and, hence, can be designated
START.
One activity can then be started on completion of other preceding activity or activities,
depending upon the inter-relationship, e.g. the concretes can be poured for roofing only on
completion of (1) construction of the walls and (2) construction in concrete of the stairs, when
required as per plan.
In order to minimise the project schedule, which is of utmost necessity to economise the project
cost, some of the activities can be started concurrently e.g. construction of the staircase and the
construction for the brick-walls can be carried out simultaneously.
At times, some of the activity can be carried out concurrently with an initial time allowance for
another activity, e.g. after some progress in ‘digging earth’, the ‘laying the foundation’ can also
start it will not have to wait till completion of the entire digging operation.
Step 3:
We know that an ‘event’ is an happening a particular point of time representing completion of
one or more activities and, at the same time, some other activity or activities emerge out of it, i.e.
the starting time of such other activity.
We also know the ‘tail event’ from where the activity emerges and then terminates to another
event the ‘head event’ and the head event is the tail event of another succeeding activity till we
reach the END of the project schedule. We also know that, while an activity is represented by a
straight line arrow from left to right with one arrow for each activity the event is represented by a
‘circle’.
The arrow showing an activity need not be drawn to scale. In other words, the lengths of the
arrows need not be proportionate with the duration of the activities. The arrows may be also bent
(by straight lines and not curves).
Now that we have arranged the activities in a logical sequence we can establish their
interrelationship and show the schedule of works by diagram as shown below along with
numbering the events and, in most cases, the head event having a greater number than the tail
event.

Simple Network Drawing:

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When one activity, i.e. from (2) to (3), as shown in the diagram below, is preceded by the
completion of another activity i.e. (1) to (2), Event (2) is the tail event of activity (2) to (3) and is
the head event of activity (1) to (2).

In the above diagram, activity (2) to (3) and also (2) to (4) can be started, simultaneously, on
completion of the activity (1) to (2).
Step 4:
In network construction, the following two cases are wrong and must be avoided:
1. Loops:
We have mentioned that the directions of arrows are from left to right.
Care should be taken that the arrows do not traverse right to left and form a loop as
depicted below :

In the diagram shown above, the arrow from (7) comes back to (6) and thus form a loop, which
is illogical, as it will indicate a never-ending situation—as the path will indicate an infinite circle
between (6) to (7) and back to (6).
2. Dangling:
A dangling of an activity in the network will indicate an activity left over as shown, below:

Activity (4) to (7) left at event (7) represents a ‘dangling’ and is wrong.

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Important points to follow for a better construction of network:
1. It is desirable to stretch the network diagram so that, visually, it looks lucid, without
confusion, and possibility of error is avoided.
2. As far as possible, we should avoid crossing of arrows.
3. When an event bursts with more activities emanating out of it, for better presentation, we are
to develop arrow lines representing different activities by distinct separate arrows, one
horizontal, one above, one down the horizontal line and so on.
4. It is a trial and error method by which a better presented network model may be constructed
and, hence, initially, we may start with a rough sketch, face some problem or difficulties and
then produce another one avoiding the problem, and, by this process, arrive at a decent network
construction.
We are by now ready to construct a network for a project. The entire span of the project work has
been broken to, say, ten different activities.

Activity-on-Node

Activity-on-node is a project management term that refers to a precedence diagramming

method which uses boxes to denote schedule activities. These various boxes or “nodes” are
connected from beginning to end with arrows to depict a logical progression of the
dependencies between the schedule activities. Each node is coded with a letter or number
that correlates to an activity on the project schedule.

Typically, an activity-on-node diagram will be designed to show which activities must be

completed in order for other activities to commence. This is referred to as “finish-to-start”
precedence – meaning one activity must be finished before the next one can start. In the
diagram below, activities A and D must be done so that activity E can begin. It is also
possible to create other variations of this type of diagram. For example, a “start-to-start”
diagram is one in which a predecessor activity must simply be started rather than fully
completed in order for the successor activity to be initiated.

An activity-on-node diagram can be used to provide a visual representation of the network

logic of an entire project schedule. Or, it can be used for any smaller section of the schedule

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that lends itself to being represented as having a defined beginning and end. To keep the
logic in the diagram simple, it may be most effective to include only critical path schedule
activities. The planned start date of each node may also be listed in the diagram legend in
accordance with the project management timeline.

Program Evaluation and Review Technique (PERT)

Program Evaluation and Review Technique (PERT) is a method used to examine the tasks in a schedule
and determine a Critical Path Method variation (CPM). It analyzes the time required to complete each
task and its associated dependencies to determine the minimum time to complete a project. It estimates
the shortest possible time each activity will take, the most likely length of time, and the longest time that
might be taken if the activity takes longer than expected. The US Navy developed the method in 1957 on
the Polaris nuclear submarine project.

History of PERT

In 1958, the U.S. Navy introduced network scheduling techniques by developing PERT as a management
control system for the development of the Polaris missile program. PERT’s focus was to give managers
the means to plan and control processes and activities so the project could be completed within the
specified time period. The Polaris program involved 250 prime contractors, more than 9,000
subcontractors, and hundreds of thousands of tasks. [1]

PERT was introduced as an event-oriented, probabilistic technique to increase the Program Manager’s
control in projects where time was the critical factor and time estimates were difficult to make with
confidence. The events used in this technique represent the start and finish of the activities. PERT uses
three-time estimates for each activity: optimistic, pessimistic, and most likely. An expected time is
calculated based on a beta probability distribution for each activity from these estimates.

Purpose of PERT Analysis

PERT Analysis informs Program Managers and project personnel on the project’s tasks and the estimated
amount of time required to complete each task. By utilizing this information a Program Manager will be
able to estimate the minimum amount of time required to complete the entire project. This helps in the
creation of more realistic schedules and cost estimates.

How to Conduct a PERT Analysis

There are two main steps when determining the PERT Estimate. These two steps are:

Step 1: Determine optimistic, pessimistic, and most likely estimates

Step 2: Calculate PERT Estimate using the PERT Formula

Step 1: Determine optimistic, pessimistic, and most likely estimates

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To conduct PERT Analysis, three-time estimates are obtained (optimistic, pessimistic, and most likely)
for every activity along the Critical Path.

Optimistic Time (O): the minimum possible time required to accomplish a task, assuming everything
proceeds better than is normally expected.

Pessimistic Time (P): the maximum possible time required to accomplish a task, assuming everything
goes wrong (excluding major catastrophes).

Most likely Time (M): the best estimate of the time required to accomplish a task, assuming everything
proceeds as normal.

Step 2: Calculate PERT Estimate

After completing Step 1, use the (optimistic, pessimistic, and most likely) estimates in the formula below
to calculate the PERT estimate for the project.

Advantages and Disadvantages of PERT Analysis

Understanding the advantages and disadvantages of utilizing PERT analysis will give program managers
and project personnel a better understanding of the realities of their schedules. It takes an experienced
program manager to truly utilize the benefits a PERT analysis can provide a project team.

Advantages: Provides Program Managers information to evaluate time and resources on a project. It
helps give them the necessary information to make informed decisions and set a realistic schedule.

Disadvantages: The analysis can be highly subjective and be influenced a few outspoken team members.
It also required a lot of time to continually update the analysis as a program progresses.

Critical Path Method (CPM) and Program Evaluation and Review Technique (PERT)

Although Critical Path Method (CPM) and PERT are conceptually similar, some significant differences
exist mostly due to the type of projects best suited for each technique. PERT is better to use when there is
much uncertainty and when control over time outweighs control over costs. PERT handles uncertainty of
the time required to complete an activity by developing three estimates and then computing an expected
time using the beta distribution. CPM is better suited for well-defined projects and activities with little
uncertainty, where accurate time and resource estimates can be made. The percentage of completion of
the activity than can be determined.

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 UNIT-III
Managing Risk
What is risk management in project management?
In project management, risk is any potential event that can impact your project, positively or
negatively. Risk management is the process of identifying and dealing with these events before or as
they happen. Risk can come in many different forms—employee sickness, inclement weather,
unexpected costs, and transportation delays among them.

No project is without risk. The ability to shepherd a project through risk is therefore one of the most
important skills project managers are expected to have.

Risks commonly affect the following aspects of a project.

• Budget: Risk can shift the amount of money you need to complete a project.
• Schedule: Schedules and timelines can face delays or unexpected changes.
• Scope: Initial goals can expand or shift away from a project’s original intentions, leading
to scope creep.

Risks can also have the following characteristics:

• External risk: An external risk is a risk outside of the control of the project team. These can
include, for example, a contracted vendor missing deadlines or inclement weather.
• Internal risk: Internal risks are risks that a project team can control. Some examples include
project members not meeting deadlines or inaccurate budget estimates.
• Positive risk (opportunity): Not all risks are bad. A positive risk, also known as an
opportunity, is an unexpected event that can have a good effect on your project. The results
of positive risk might include finishing tasks earlier than expected or under budget, or
outperforming original goals. Positive risks might happen due to internal factors, like team
members becoming more efficient with the help of a new tool, or external factors, like a
policy change that aids your project.

How to manage project risk

You’ll want to understand a typical risk management process and risk mitigation strategies. The risk
management process will help you plan for and anticipate risks, and mitigation strategies will give you
tools to deal with them if they do happen.

Risk management process

The risk management process, or lifecycle, is a structured way of tackling risks that can happen in
your project. Though you’ll find some slight variation, the risk management process, or lifecycle,
generally follows the following steps. This process can be used for both positive and negative risks.

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1. Identify risks

The first step to getting a grasp on potential risks is to know what they are. In this step, you’ll identify
individual risks that might affect your project by making a list (or spreadsheet) of risks that might
arise. Examples of common project risks include implementing a new technology program for the
project, having a poorly defined project objective or deliverable, and not having adequate measures to
protect the health and safety of project team members.

Use your own project management expertise and consult similar past projects to see what challenges
you might expect. You’ll also want to have stakeholders, team members, and subject matter experts
generate ideas with you; they may have insight into the field that you’ve overlooked.

2. Analyze potential risk impact

In the risk analysis stage, you’ll explore the probability of each risk occurring, as well as the potential
impact each risk will have on your project. You could begin putting this list of risks in a risk
register—a chart that lays out each risk, followed by information like priority level and mitigation
plans. You can record both qualitative and quantitative information.

3. Assign priority to risks

In this stage, you’ll assign priority to risks by using the probability and impact of each risk to
determine their risk levels. This means assigning each risk a high, medium, or low priority based on
the factors you’ve determined. Evaluating your risks gives your team the chance to see where to focus
their energy in mitigating risk.

4. Mitigate risks

Come up with a plan to mitigate each risk. We’ll go into how you can treat risks in more detail below.
Record these plans in your risk register as well.

5. Monitor risks

In the last step, set up a process to monitor each risk as your project begins. You can do this by
assigning team members to keep an eye on specific risks and mitigate them. This makes sure you’ll
have a constant sense of where the risks are and how likely they are to happen, so you'll be ready to
tackle them if they do occur.

Risk mitigation: The process of dealing with risks

The risk management process lays out a path for you to deal with risks before they happen. But what
are the actual ways you can mitigate them? Avoid, accept, reduce, and transfer are four common ways
to mitigate risk. Deciding which step to use for each risk isn’t an exact science, and you’ll have to use
your judgement and expertise to determine which is best. Here’s some more detail and guidance on
each mitigation tactic.

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 1. Avoid

Not all risks can be avoided, but it can be a good idea to do so when you can. Avoid a risk if there is a
high chance that a risk will happen. Has a partner vendor gained a reputation for providing low-quality
work? Try to find a different one. Are you event-planning during the rainy season? Move the event
indoors, or to a sunnier season.

2. Accept

Accepting risks can make sense if they have a low chance of happening and will have low impact on
your project. Ultimately if the risk does happen, it shouldn’t derail your project. Say you’ve ordered
sunflower arrangements for a wedding reception, but the florist says there’s a small chance they won’t
have enough and will have to replace some with tulips. Since the probability of risk is low and having
tulips instead of sunflowers won’t upend the wedding, you might accept the risk instead of troubling
yourself to find a new florist.

3. Reduce

Reducing risk means changing elements in your plan to minimize the risk’s probability of happening
or potential impact on your project. Medium and high risks are good candidates to try and reduce.
Reducing usually requires some effort or investment. For example, a project manager could hire new
team members if the team is falling behind on work.

This might also mean including risk reduction tactics in your project plan. Time buffers for complex
or time-sensitive tasks can allow you some flexibility if work starts to fall behind. Having
a contingency budget can help absorb unexpected costs if they arise.

4. Transfer

Transferring risks entails shifting the risk to another party outside of your project. This can mean
obtaining an insurance policy, or outsourcing parts of the work to a third party. The risk might still
occur, but the direct impact to your project will be absorbed by somebody outside of your project.

Risk management is an important part of project management because risk is almost inevitable in any
project. Don’t worry—it’s rare to ever completely eliminate risk. Listen to Stanton, a program
manager at YouTube, talk about his experience managing risk throughout his career in the video
below.

Tools to manage risk

Tools can provide you structure for your team’s thoughts and efforts, and serve as a point of reference
throughout a project. Here are a few you might consider using in your risk management process.
• Risk management plan: A risk management plan is generally a living document that contains all
information related to risk in your project. This can contain an executive summary, your risk register,
mitigation plans, risk owners, and any other information pertaining to risk. Project managers may
update the document as the project progresses and needs fluctuate.

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• Risk register: A risk register is a chart that contains all the risks associated with a project, as well as
their priority levels, mitigation plans, and other important details. A risk register might also be called a
risk matrix. You can find project management software that can help you compile risk registers, or
else create your own in a spreadsheet.

What Is Contingency Planning? Business & Project Contingency Plans

Contingency plans are used by smart managers who are aware that there are always risks that can
sideline any project or business. Without having a contingency plan in place, you don’t have a risk
management recovery plan, which reduces the chances of project success, even if that project plan was
made with planning software.

Contingency planning applies to any business venture. Governments, for example, use them to prepare
for disaster recovery or economic disruption, such as those caused by the coronavirus pandemic.
However, we’ll focus on business and project management contingency plans. Let’s start by defining
what a business contingency plan is.

Contingency Planning In Project Management

In project management, contingency planning is often part of risk management. Any project manager
knows that a project plan is only an outline. Sometimes, unexpected changes and risks cause projects
to extend beyond those lines. The more a manager can prepare for those risks, the more effective his
project will be.

But risk management isn’t the same as contingency planning. Risk management is a project
management knowledge area that consists of a set of tools and techniques that are used by project
managers to create a risk management plan.

A risk management plan is a comprehensive document that covers everything about identifying,
assessing, avoiding and mitigating risks.

On the other hand, a contingency plan is about developing risk management strategies to take when an
actual issue occurs, similar to a risk response plan. Creating a contingency plan in project management
can be as simple as asking, “What if…?,” and then outlining the steps to your plan as you answer that
question.

How to Create a Contingency Plan

A contingency plan is an action plan, and like any plan, it requires a great deal of research and
brainstorming. And like any good plan, there are steps to take to make sure you’re doing it right.

1. Identify and Prioritize Resources

Research your company and list its crucial resources, such as teams, tools, facilities, etc., then
prioritize that list from most important to least important.

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2. What Are the Key Risks?

Figure out where you’re vulnerable by meeting with teams, executives and stakeholders to get a full
picture of what events could compromise your resources; hire an outside consultant, if necessary.

3. Draft a Contingency Plan

If you can, write a contingency plan for each risk that you identified in the above steps, but start with
what’s most critical to your business. As time permits you can create a plan for everything on your
list. Whatever the plan, the thought behind each should be the steps necessary to resume normal
business operations, thinking about communications, people’s responsibilities, timelines, etc.

4. Share the Plan

When you’ve written the contingency plan and it’s been approved, the next step is to make sure
everyone in the organization has a copy. A contingency plan, no matter how thorough, is not effective
if it hasn’t been properly communicated.

5. Revisit the Plan

A contingency plan isn’t chiseled in stone. It must be revisited, revised and maintained to reflect
changes to the organization. As new employees, technologies and resources enter the picture, the
contingency plan must be updated to handle them.

Change control

Change control is of particular importance when the project is part of a larger programme or
portfolio because the consequential effects of unmanaged change may be far-reaching within the
planned change environment and to business-as-usual activities.

The project professional implements the following steps to control change:

• Log change request in a change register (or log).

• Initial evaluation where the change is reviewed.
• Detailed evaluation where the impact on baseline success criteria, benefits, scope,
quality, time, resources, costs, risks, stakeholder engagement or any other criteria
important to achieving the business case are considered.
• A recommendation is made to the sponsor and/or wider governance board to approve,
reject or defer the change.
• The plan is updated is a change is approved.
• Implementation where the necessary actions are taken and monitored.

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It is important to differentiate change control from the wider discipline of change management.
Change control is a subset of overall change management and it is useful to not mix up the
language. Change management is a structured approach to move an organisation from a current
state to a future desired state.

What is Project Risk Management?

Project risk management is the process that project managers use to manage potential risks that
may affect a project in any way, both positively and negatively. The goal is to minimize the
impact of these risks.
A risk is any unexpected event that can affect people, technology, resources, or processes
(including projects). Unlike a regular problem that may arise, risks are incidents that may occur
suddenly, sometimes entirely unexpected.

Project managers do not always know which risks the project is exposed to, when they occur,
and why. Due to this high degree of uncertainty, project risk management requires a serious and
in-depth approach.

In short, the Project Risk Management process consists of identifying risks, analyzing them, and
subsequently responding to any risks that may arise throughout the project life cycle.

This is done to limit the consequences of the risk as much as possible, so that objectives can be
continued to be met.
Generally speaking, risk management is not a reactive activity. To find out which risks may
arise, risk management must be included in every planning process. Which risks are there that
may influence the project, and how can these risks be controlled?

What is a risk?

A risk is anything that may affect a project’s performance, budgets, or timeline when it
materialists. Risks are therefore possibilities; there is a possibility that a certain incident may
affect the project.

In practice, risks are often associated with problems that need to be addressed. Risk
management is therefore the process of identifying, analysing, and responding to risks before
they actually become problems.
Who conducts Project Risk Management?

Although Project Risk Management works the same for every project, it can take different forms.
Different types and sizes of projects require a different approach to risk management.

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In many large-scale projects, a relatively large amount of attention is paid to comprehensive risk
management and mitigation strategies for when problems arise.

For smaller projects, a simple prioritized list of high, medium, and low priority risks is sufficient.
Project Risk Management: Risk management vs project management

Risks are inevitable in organizations, and virtually every other project is exposed to risks. The
project manager has the responsibility to ensure that the impact of risks is minimized.

project risk management consists of the following steps.

• Risk identification
• Risk analysis
• Risk assessment
• Risk management
• Risk monitoring
Step 1: Risk identification

The first step in Project Risk Management is identification. When identifying risks, the assessor
may work in different ways. For example, they may look up information about similar projects in
the past. Various brainstorming techniques are also used to refresh team members’ knowledge of
past projects and risks, or to share new innovative mitigation strategies.
There are different types of risks, such as operational or business risks. Different risks are borne
by different people. The risks that often directly affect a project include:

• Financial risks (budgeting)

• Legal risks
• Supplier risks
• Physical risks to employee
• Strategic risks
Step 2: Risk Analysis

After various risks have been identified, it is important to evaluate them. Risk analysis is usually
done in a qualitative or quantitative way. Subsequently, risks are categorised based on two
criteria: the probability that the risk will actually occur, and the severity of its impact. Both
criteria are assigned a value, ranging from high, medium, to low.

The risk is then assigned a category and processed in a matrix.

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Qualitative Risk Analysis

Qualitative Risk Analysis is a subjective evaluation of the probability and impact of each risk.
Responses are subsequently devised for the various risks, or alternatively a risk is analysed
again, but in a quantitative way.

An advantage of the qualitative Risk Analysis method is that it is relatively quick and easy to
implement. It is also ideally suited for people who do not have skills in calculating opportunities
and statistics.

A qualitative risk analysis also has drawbacks, however. The results can be ambiguous or
difficult to explain, for instance.

Quantitative Risk Analysis

Quantitative Risk Analysis is the numerical analysis of the probability and impact of identified
risks. The main focus is on which risks and activities contribute most to achieving the project
objectives.

Quantitative Risk Analysis is less ambiguous and can be easily explained on the basis of input:
numbers. The probability and impact can be analytically combined in a correct way.
Contingency plans can be drawn up on the basis of the data resulting from quantitative risk
analysis.

A disadvantage of quantitative risk analysis is that the development of models and simulations is
time-intensive and external expertise is often required.

Step 3: Risk response

As soon as it is clear where the greatest risks come from and which is the most important to deal
with quickly, corrective measures must be taken. When it comes to risks within project
management, the project manager has four options for responding to a risk. These are explained
below.

Option 1: Avoiding the risk

Avoiding a risk means that the chance that the risk will occur is reduced to as close to zero as
possible. Usually risk avoidance involves making different decisions or making some
adjustments to the original project plan.

Suppose a project manager is warned by someone about an increased risk of bankruptcy with
certain suppliers, he or she can then make the decision to choose another supplier. This avoids
the risk of the impact of bankrupt suppliers.

Option 2: Limiting the impact of the risk

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Limiting a risk means reducing the impact of a risk incident. By mitigating risks, you ensure that
the impact of a risk is reduced.

An example of this is a project risk in the test phase of, for example, a product. By testing more
and better, risks are not prevented, but every effort has been made to limit the possible
consequences of a negative event that may occur.

Option 3: Transferring the risk

Transferring a risk involves moving responsibility for dealing with the consequences of a risk to
someone else. A well-known example of this is taking out insurance.

For example, a private individual can take out luggage insurance so that he or she does not have
to deal with any financial consequences. The impact of the risk of something happening to the
luggage is then dealt with by the insurance company.

The private individual receives compensation for the damage suffered in the event that the risk of
luggage theft or damage becomes reality.

Option 4: Accepting the risk

The final option for dealing with risks is to simply accept the impact an event can have once it
becomes reality. Accepting risks may be sensible if the chances of a risk are relatively low and
the costs of mitigating it are high.

Accepting a risk is not the same as not making a decision or hiding from a problem. In many
ways, it is a risky response to a risk, but risks are always weighed and factored in.

Step 4: Implementing a risk response

The fourth step is to implement responses to various risks. Each risk response is part of the
project management plan. A risk response may come in many forms:

• A budget allocated for a specific risk

• A task assigned to a specific person
• Development or implementation of a new process
In project risk management, it is important that a responsible person is assigned to each risk. It is
this person who supervises the risk and specifically works on controlling and managing a risk.

This person communicates with all stakeholders about the status of the risk and the impact that
the risk may have and what the response looks like.
This risk manager collects as much information about the risk as possible. This approach should
be applied across the whole board of project management activities. Each risk response must
become a small sub-project, as it were.

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Tips for risk responses

Consider the project objectives

In order to establish the optimal risk-response strategy, it is important that the main goals of the
project are considered.

Trade-offs will probably be necessary because it is difficult to always have time, quality, and
costs go according to plan. Understanding the deep goals of a project will help the project team
plan the right response to the right risk.

Prioritise risks
Giving priority to a certain risk is important because it ensures that certain resources are
allocated to a particular function or task.

If it is a risk with a high probability of occurrence and high impact, it goes without saying that
sufficient resources must be deployed to minimise both the impact and probability.

Involve stakeholders
The more collaboration and communication between project team members and other key
stakeholders, the faster and more effective potential risk identification and better risk response
planning.
Step 5: Monitoring the risk

As with all control processes and road maps in project manager and other business situations, it
is important that both measures taken and the current situation are monitored.

This is important to ensure that risk responses remain effective, fast, and efficient. The status of
the risks and expect impact and probability must be constantly monitored.

There should be considerable dynamism in this during the project life cycle. If the risks are too
high at a certain moment, you will have to act on them. At worst, risks endanger the feasibility of
a project. All information that may relate to a risk must therefore be assessed.

Effective Project Risk Management methods

It is important to identify the main risks so that the team can effectively prepare responses to
them. In other words, it is crucial to identify the most impact ful risks. Various tools can be used
for this.

Failure Mode and Effect Analysis (FMAE)

FMAE can be used in identifying risks as a way to find cause-effect relationships of risks that
may impact a project.

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Failure Mode and Effect Analysis (FMAE) is also used to perform qualitative risk analysis. The
advantage of FMAE is that it adds the dimension of risk detection. For instance, how likely is a
potential risk to be detected?

In this way, three parameters are kept for all risks: the probability that the risk will become
reality, the impact of the risk if it occurs, and the probability of detection of the risk.

Risk Bow Tie diagram

The Risk Bow Tie diagram is a tool that visualizes the risk in an easy-to-understand way. The
diagram is in the form of a snare, and shows a clear division between proactive and reactive risk
management.

The strength of the snare diagram is that it provides an overview of several plausible scenarios in
one image. This provides a simple and visual way of presenting risks.

Decision Analysis

Decision Analysis formally identifies and analyses important aspects of a particular risk. The
method follows a specific step-by-step plan to guide the project team through the risk decision-
making process. The RACI matrix (responsible, accountable, consulted, informed) helps to
identify and define the different roles in the decision-making process

Resources allocation

Resource allocation helps you to choose the best available assets for multiple projects and
manage them throughout the work, so you can avoid under or overutilization of your employees.
Sadly, not all project managers use it to their advantage. Only 26% of companies always use
resource management to estimate and allocate resources, and 36% of them do it often, according
to PMI survey. At the same time, less than 60% of projects meet the original budget and barely
50% of them are being completed on time, the same study says.
From this topic you will learn:
• How does it look resource allocation in project management
• Common resource allocation problems
• How to implement it at your organization,
• How is resource allocation important for project managers
• How to allocate resources effectively
If this is the case with you or your company, you should definitely learn more about resource
allocation and resource planning. Especially, as the very same study says that resource and task
dependencies, inadequate resource forecasting, and limited resources account for many projects’
failures.
Resource allocation – the definition and meaning

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Resource allocation—part art, part science as some call it—is recognizing the best available
resources for the project, assigning them to your team and monitoring their workload throughout
the work, and re-assigning resources if needed.
“In project management, resource allocation or resource management is
the scheduling of activities and the resources required by those activities while
taking into consideration both the resource availability and the project time”
Proper allocation of resources increases the effective use of resources available across the
company to maximize their utility.
Gone are the days of using Excel spreadsheets to manage resources. Today, there are many tools
meant specifically to improve resource allocation with calendars, time trackers, and custom
reports.

But, as always, there are some pitfalls to avoid. Let’s take a look at them now before we move
any further.
Resource allocation in project management – problems and challenges
Resource management is prone to several challenges that you need to be aware of to properly
allocate resources and manage them throughout the project.
1. Client changes
As a project manager, you might have already experienced how changes to the scope, timeline or
budget can affect project delivery. With resource allocation, it’s actually the same – having an
up-to-date resource calendar will help you to smoothly adjust resources once the changes appear.
2. Availability of resources
Starting off a new project, ideally, you could use any resources you need that are available at
your company. But what if your agency is running multiple projects and you have to negotiate
over the same resources with other PMs? Or what if a given team member is out on their sick
leave? Availability changes and you have to monitor it all the time to spot threats to your
project’s delivery.
3. Project dependencies
Allocating resources you need to include project dependencies, which are a form of a
relationship between the tasks or activities in the project. For example, in IT projects there are
tasks that can only be done after some other ones are completed, so there’s no point to hog
resources early on.
4. Project uncertainties
Even if you’ve checked all the boxes when starting off a project, agreed on the timeline, the
budget, and the scope, there’re always things you can’t predict. Resource management requires
you to be able to respond to project uncertainties, e.g. by shifting resources from other projects
or re-assigning them.
5. Priorities across the company
If your company runs multiple projects simultaneously, you and your peers may have to share
limited resources, very often in a similar time frame. But even if you manage to negotiate over
resources you both need, there may be a change in priorities regarding one of the projects.

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Resource allocation in project management: how to allocate resources
Let’s take a look at how to effectively use resources at your disposal.
1. Know the project and the team
Only by knowing the scope and resources available at your company, you can properly assign
team members to your project.
Start by creating a high-level plan of the project, consisting of its requirements and deliverable.
At this point, the rule of thumb is to not get carried away and over-allocate resources for the
project. Actually, resource-hogging is considered a mistake projects managers make to protect
themselves from uncertainties. But, in turn, it makes project estimates and long-term plans
inaccurate, affecting the company’s bottom line.
Always think of the big picture while allocating resources. Check the bookings already made by
other PMs to spot resources you may both need, in case you should adjust your schedule to that.
Knowing when your team members have their days off helps, too. See the yellow entries below?
You need to include them in your estimate, as that’s exactly when these employees will be
unavailable. Similarly, you can spot national holidays taking place during your project.

2. Uncover risks early on

We’ve talked about it a bit in the challenges section. As a project manager, you are well aware of
risks like client reviews, delays, personal emergencies, competing projects, etc. They interfere
with the allocation of resources, too.
Once one of the above-mentioned challenges occurs, you need to adjust your bookings. Having a
high-level overview of resources at your organization will help you find other resources more
quickly, re-allocate resources, extend or cut existing bookings, or even delete some if needed.

3. Keep track of the project

Remember how resource allocation is about improving the effectiveness of your team’s utility?
Now is the time to check how you’re team is doing. You can do it by measuring resource
utilization.
Start with tracking the time and workload. In Teamdeck, you can easily spot employees with too
much or too little (which can also be an issue) to do. Remember the availability bar? Overtime is
marked with red color, while the unutilized time is white.
Measuring resource utilization, you can also use a simple formula:
Resource utilization = Busy time / Available time
This way you can quickly find out whether your team is booked to their full potential, or not.
During the project it’s also recommended to compare estimates with actuals once in a while, and
re-allocate resources if you need to. Chances are that because of some changes you need to
adjust bookings to avoid under or overutilization of your resources, and to meet project’s
requirements.
Setting up regular check-ins with your team will help you to spot these threats, too.
As a project manager, you may also be responsible for tracking your project’s budget. You can
do it based on your team’s timesheets, multiplying the number of hours they’ve spent on the

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project by the rate you charge your client per hour. Again, by comparing estimates with actuals,
you can see if you’re on the budget, or not.

4. Analyze the project

Using the data you’d gathered during past projects will give you a huge advantage. Based on that
data, you will be able to better plan and manage your future projects. Having a tool with custom
reports helps a lot, as you can then organize that data to calculate different metrics,
like employee payroll or sales KPIs.

Benefits of resource allocation

As you can see, by following the right processes and using a complete resource management
tool, you can make resource allocation easier and benefit from it in many ways:
• It improves the visibility of all resources across the company
• You can avoid under and over-utilization easier
• It helps to keep bookings more accurate
• It’s easier to negotiate bookings with other PMs

Analysis of project risks, Market risk, Frim risk

Risk analysis involves examining how project outcomes and objectives might change due to the impact of
the risk event. Once the risks are identified, they are analysed to identify the qualitative and quantitative
impact of the risk on the project so that appropriate steps can be taken to mitigate them.

Analysis of project risks

A project risk analysis monitors projects' performance from start to completion to eliminate or minimize
loss or business failure. The causes of risks vary depending on the type, complexity and duration of the
project. A project risk analysis aims to identify potential threats, evaluate the consequences and plan
mitigation measures. In this article, we give you insights into why organizations should analyze and solve
project risks and provide examples of some common risks encountered in project management.

10 common types of project risks

Some commonly experienced project risks include:

1. Technology risk

The technological aspect of running a project is a complex deliverable because there is a high turnover of
new and advanced technologies. The tech aspect of a project poses a critical threat to data security,
organization services, compliance and information security. Risks associated with technology are more
challenging because implementing new IT programs often requires fresh personnel training and software
acquisition. There are also other technological-related risks like service outages that might lead to delays
and project failure.

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2. Communication risk

Effective and timely communication is a significant work ethic that you must strictly observe when you
are in charge of a project. Setting up meetings with stakeholders, such as project donors, helps you track
any changes, reassign tasks and foster a cohesive team environment. With all the communication channels
and gadgets at our disposal, sometimes team members neglect the critical components of effective
communication, leading to loss of data or misinformation and eventual project disruption.

3. Scope creep risk

Uncontrolled and unauthorized change to the initial intended project scope may lead to the extra cost of
additional features, products or functions. Almost all projects face this risk, and sometimes it poses an
irreversible challenge because some of the added functions are significant to the project and desirable to
the project's success.

4. Cost risk

A shortage or mismanagement of project funds resulting from an inflated budget or other constraints is a
threat to the project's completion. When the project cost is higher than the budgeted funds, the risk might
shift to other operations and workforce segments. The reduction of the funds may also contribute to an
occurrence of a scope risk.

5. Operational risk

A project may stall or terminate if there is a poor implementation of critical operations and core processes
such as production or procurement. The risks could result in a direct or indirect loss owing to inadequacy
or failed qualitative, quantitative or strategies. Depending on the project type, operational risks are:

• IT system risk
• Human and process direct implementation risk
• Human and process indirect implementation risk
• Financial capacity risk
[Link] and safety risk

Health and safety is a type of risk that can compromise a company's compliance rules. An organization
should have its health and safety standards monitored and evaluated regularly to identify potential risks
that can lead the company to losses or fines. The risk can also lead to staff or customers' health
complications where a company's reputation might be at stake. The management is responsible for
establishing continuous health and safety risk monitoring in the company premises and its products or
services.

7. Skills resource risk

Leveraging on internal staff is a potentially high-project risk because sometimes the project activities are
staggered in different waves at various locations, requiring in-house personnel attendance. The overlap of

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the waves becomes a potential distress source. Staff incompetence in various project divisions is another
risk that may contribute to the additional cost of personnel retraining or transfers.

8. Performance risk

When a project is unlikely to achieve the results as intended, there is a perceived performance risk. The
risk has an inherent impact on the overall performance of the business. Such a problem may lead to the
additional need for financing, a likely penalty for nonperformance and it may also leverage the
competitors' performance.

9. Market risk

When a project fails to meet the stated results, market risk is likely to occur. Competitors might take the
advantage to cripple the business and eliminate it from the market. Another market risk could occur in
commodity and foreign market treads, which might not favor the project's initial estimates. Liquidity,
credit and fluctuation of interest rates also pose as a potential market distracter to the project's product
sales.

10. External hazards risk

A likely adverse event beyond the control of the project management is a potential risk. Such risks
manifest in various types and forms, including terrorism, storms, floods, vandalism, earthquakes and civil
unrest. A project may stall or discontinue when such events occur. By employing appropriate monitoring
measures, organizations can prevent heavy damage or losses resulting from an unforeseen external
hazard.

Six guidelines to solve project risks

The uncertainty is inherent in parts of large and most technological projects. The risks often land the
organization into trouble due to failure or inadequate project risk mitigation and contingency measures.
Here are six project risk mitigation measures that will keep your project on track.

1. Identifying the risks

Prepare and review a list of all possible risks likely to disrupt the project. Ensure that the key stakeholders
understand the project's objectives and design by conducting a series of brainstorming sessions. A
conclusive report from the meetings should indicate all levels of risks .

2. Prioritize and report the risks

Because the risks have varying impacts on the project, select and develop a workable mitigation strategy
that can cause the highest loss. It is prudent to structure a scale and rank the risks to focus their input from
the highest threat so that an in-depth discussion with the project steering committee can focus their input.
Reporting the risks also helps the project managers keep track of every activity, which provides an
accountability platform.

3. Link the possibility of each risk with its impact

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Each risk can contribute to a low, medium or high impact. As a team, you can develop a probability
matrix that measures the risks versus the impact. Such a matrix or an application will assist in decision-
making regarding the likelihood of risk compared to its effect to establish timely measures. Linking a risk
to its potential impact is also essential because it provides the management with a roadmap to the project's
activities for an effective monitoring purpose.

4. Develop and cultivate responses to the risks

By completing a project risk response strategy, you avert a potential threat from happening or minimize
the adverse effects should the problem be unavoidable. It is also prudent to regularly review and monitor
the risks to ensure that opportunities to stop a potential threat are not missed.

5. Have a contingency plan for each risk

In case a risk occurs, the team should have a quick and reliable contingency plan ready for action. The
plan should neutralize or prevent further damage and prevent a continuation of a crisis. Bring all
stakeholders into the planning and implementation of a contingency plan. A contingency plan should seek
to answer the following questions:

• What should be done to reduce a likelihood of a risk?

• What should be done to manage risk if it occurs?

• What should be done to utilize effectively the opportunities brought about by a risk?

6. Record and track risks alongside their associated tasks

Recording the risks in terms of their associated task or process level helps the management track potential
risks. It is important to record the identified risks in the risk register and store them in the project's central
server throughout the project. Because each task may have a different individual to monitor, it is easy to
track each potential risk and develop a response. The records also allow the stakeholders to focus on the
prevailing situation concerning the project progress.

Market Risk

Market risk includes risks posed from competition, commodity markets, interest rates, foreign exchange,
and liquidity and credit risks. This project risk is more unpredictable and difficult to plan for, but there are
ways in which project managers can protect their business.

Firm Risk

The firm risk stems from a technological modification in production method, managerial unskillfulness,
the availability of raw material, labor issues and changes in consumer preferences.

Firm risk is an exclusive associated peculiar to a firm or a trade. The firm risk stems from managerial
unskillfulness, technological modification within the production method, the handiness of raw material,
changes in consumer preference, and labor issues. The nature and magnitude of the on top of mentioned
factors dissent from trade to trade, and company to company. They need to be analyzed individually for
every trade and firm. The changes in consumer preference have an effect on consumer products like tv

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sets, washer, refrigerators, etc. quite they have an effect on the iron and steel industry. Technological
changes have an effect on the information technology trade quite that of consumer product trade. Thus, it
differs from trade to trade. Financial leverage of the businesses that's the debt-equity portion of the
businesses differs from one another. The nature and mode of raising finance and paying back the loans,
involve a risk component. Of these factors from the firm risk and contribute some n the entire variability
of the comeback. Broadly, firm risk can be classified into

• Business risk

• Financial risk

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 UNIT-IV
FINANCING OF PROJECTS
What is Project Finance?
Project finance is a means of funding projects that are typically infrastructure heavy, capital-
intensive or related to public utilities. During its lifetime, these projects are treated as distinct
entities from its parent. A project finance venture undertaken is completely an off-balance sheet
item for the parent. Therefore, all financing this entity avails, must be repaid exclusively out
of its own cash flow and subject to its own assets. The assets of the parent cannot encroach for
payback of its subordinate’s liabilities even if the venture fails. Popular sectors where project
finance finds its applications include real estate, mining, telecommunication and power to name
a few.

Advantages of Project Finance

Effective Debt Allocation
Project finance enables the sponsors to raise debt over and above the capacity of the parent.
This borrowing can be viewed in an individual capacity and is not impacted by the credit
reputation of its sponsors. Therefore, more beneficial and flexible terms of credit can be
negotiated depending solely on the merit and potential of the project under review.

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Risk Management
As already discussed, what makes project finance truly special is the separation of the legal
identity of the parents and SPV. This provides enormous diversification and dilution of the risk
element. The shareholders of the parent company are immune against the fluctuations in the
fate of the project. The liability is limited to the amount of equity contributed by the sponsors.
Additionally, the risk is also reduced upon involve of multiple entities. More than one
companies may often form a joint venture to form a single SPV. Thus, the same amount of risk
when distributed among a larger number of participants reduces each party’s exposure.

Economies of Scale
An SPV, when floated by more than one parent, is very likely to demonstrate economies of
scale. Two contemporary organizations will only agree to come together for a common goal
when they see a significant benefit flowing from the association. Especially in the case of
manufacturing and construction industries, one entity can hugely benefit at the expense of
another and vice-a-versa. For example, an extraction company and a mine owner may agree to
combine for the sale of extracted material. Vertical synergies will come into play. Both entities
will be able to achieve the scale and profits they could not have achieved in their individual
capacity. Also, they will also hold better bargaining power with vendors as well as buyers.

Disadvantages of Project Finance

Complexity
Project finance is a notch above a simple transaction of credit. It is based upon several contracts
between multiple parties, each of them involving complex negotiations. It may be difficult to
maintain a record of the flow of funds among the parties involved if proper discretion is not
exercised. Also, an imaginary entity(SPV) is used to route all transactions. Therefore, it
becomes important to have dedicated resources that monitor the flow of exchanges at all times.

Compliance and Documentation

At all stops, setting up an SPV faces resistance. Banks and financial institutions perform
extreme due diligence and checks before extending even a penny of credit. This is mainly for
the reason that an SPV holds separate legal status. The bank can make recoveries only against
the asset and cash flows of the SPV. Therefore, they must be doubly sure of the future prospects
and soundness of the operating plans. All these checks are time-consuming and expensive.
Obviously, the SPV and its sponsors have to bear the brunt of this excruciating process.

Also, a project finance venture sets off the radars of the government. The government is
extremely vigilant when it comes to sanctioning the creation of an SPV. This is because several
parallel organizations that come into being have been known to evade taxes, circumvent money

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and indulgence is gross negligence of regulations. A potential SPV must, therefore, be patient
and comply with all conditions imposed to win over its trust.

Constant Expert Assistance

Project finance involves complex transactions and multiple parties. Therefore, availing the
services of professionals and experts is inevitable. Setting up a dynamic model for availing
credit and conducting business involves huge cost. Think of this cost as the fancy and
outrageous fees paid to investment bankers and other professionals who make the project
finance happen.

CAPITAL STRUCTURE

What is Capital Structure

The most crucial component of starting a business is capital. It acts as the foundation of the
company. Debt and Equity are the two primary types of capital sources for a business. Capital
structure is defined as the combination of equity and debt that is put into use by a company in
order to finance the overall operations of the company and for its growth.

Types of Capital Structure

The meaning of Capital structure can be described as the arrangement of capital by using
different sources of long term funds which consists of two broad types, equity and debt. The
different types of funds that are raised by a firm include preference shares, equity shares,
retained earnings, long-term loans etc. These funds are raised for running the business.

Equity Capital
Equity capital is the money owned by the shareholders or owners. It consists of two different
types
a) Retained earnings: Retained earnings are part of the profit that has been kept separately by
the organisation and which will help in strengthening the business.
b) Contributed Capital: Contributed capital is the amount of money which the company owners
have invested at the time of opening the company or received from shareholders as a price for
ownership of the company.

Debt Capital
Debt capital is referred to as the borrowed money that is utilised in business. There are different
forms of debt capital.

1. Long Term Bonds: These types of bonds are considered the safest of the debts as they
have an extended repayment period, and only interest needs to be repaid while the
principal needs to be paid at maturity.

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 2. Short Term Commercial Paper: This is a type of short term debt instrument that is used
by companies to raise capital for a short period of time

Optimal Capital Structure

Optimal capital structure is referred to as the perfect mix of debt and equity financing that helps
in maximising the value of a company in the market while at the same time minimises its cost
of capital.
Capital structure varies across industries. For a company involved in mining or petroleum and
oil extraction, a high debt ratio is not suitable, but some industries like insurance or banking
have a high amount of debt as part of their capital structure.

Financial Leverage
Financial leverage is defined as the proportion of debt that is part of the total capital of the firm.
It is also known as capital gearing. A firm having a high level of debt is called a highly levered
firm while a firm having a lower ratio of debt is known as a low levered firm.

Importance of Capital Structure

Capital structure is vital for a firm as it determines the overall stability of a firm. Here are some
of the other factors that highlight the importance of capital structure

1. A firm having a sound capital structure has a higher chance of increasing the market
price of the shares and securities that it possesses. It will lead to a higher valuation in
the market.
2. A good capital structure ensures that the available funds are used effectively. It prevents
over or under capitalisation.
3. It helps the company in increasing its profits in the form of higher returns to
stakeholders.
4. A proper capital structure helps in maximising shareholder’s capital while minimising
the overall cost of the capital.
5. A good capital structure provides firms with the flexibility of increasing or decreasing
the debt capital as per the situation.

Factors Determining Capital Structure

Following are the factors that play an important role in determining the capital structure:

1. Costs of capital: It is the cost that is incurred in raising capital from different fund
sources. A firm or a business should generate sufficient revenue so that the cost of
capital can be met and growth can be financed.
2. Degree of Control: The equity shareholders have more rights in a company than the
preference shareholders or the debenture shareholders. The capital structure of a firm
will be determined by the type of shareholders and the limit of their voting rights.

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 3. Trading on Equity: For a firm which uses more equity as a source of finance to borrow
new funds to increase returns. Trading on equity is said to occur when the rate of return
on total capital is more than the rate of interest paid on debentures or rate of interest on
the new debt borrowed.
4. Government Policies: The capital structure is also impacted by the rules and policies
set by the government. Changes in monetary and fiscal policies result in bringing about
changes in capital structure decisions.

What Is Equity Capital?

Equity or shares are a unit of ownership in a company, and equity capital is raised by issuing
shares to shareholders. It is also referred to as share capital. Shareholders are the owners of a
business, and bring in capital, take risks and directly or indirectly run the business. When a
company is formed, the memorandum of association defines how much capital the company
can raise from its shareholders. This is called “authorised capital”. Firms issue a part of
authorised capital to raise money from prospective shareholders. This is called “issued capital”.
A company can change its authorised capital, subject to shareholders’ approval. Equity capital
is also called as residual capital. This means that shareholders have last right on the assets of a
company.
In the event of closure of a company, shareholders are paid in the end, after meeting other
claims. The equity capital of a company is not constant as it keeps changing due to various
corporate events, such as a rights issue and additional issuance of shares.

What is Preference Capital?

The Preference Capital is that portion of capital which is raised through the issue of the
preference shares. This is the hybrid form of financing that has certain characteristics of equity
and certain attributes of debentures.

The preference capital is similar to the equity in the sense: the preference dividend is paid out
of the distributable profits, it is not obligatory on the part of the firm to pay the preference
dividend, these dividends are not tax-deductible.

The portion of the preference capital resembles the debentures: the rate of dividend is fixed,
preference shareholders are given priority over the equity shareholders in case of dividend
payment and at the time of winding up of the firm, the preference shareholders do not have the
right to vote and the preference capital is repayable.

What Is a Debenture?

A debenture is a type of bond or other debt instrument that is unsecured by collateral. Since
debentures have no collateral backing, they must rely on the creditworthiness and reputation
of the issuer for support. Both corporations and governments frequently issue debentures to
raise capital or funds.

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Methods of offering term loans
What is a Term Loan?

A term loan is a commercial credit that has fixed repayment conditions, such as a
predetermined loan period and interest rate. Borrowers must return the loan in regular monthly
installments or EMIs until the debt matures.
How does a Term Loan Work?

Due to various factors such as predetermined loan amount and payback schedule, and interest
rates, these loans are one of the most efficient types of loans available to businesses. Numerous
factors must be recognized for the firm to grasp how term lending operates. A term loan has
five components: the loan amount, the interest rate, the loan period, the repayment schedule,
and whether the loan is secured or unsecured.

This loan's repayment value is fixed. This amount is determined by the type of loan chosen and
the borrower's eligibility. The interest rate on this company loan might be fixed or fluctuating.
Whichever rate the borrower chooses is entirely up to the borrower. Additionally, the loan
length is predetermined. Across the loan period, the firm must return the loan amount in EMIs
by the set repayment plan.

Term Loan Example: Retail

Working Capital Loans: Businesses who want immediate funding to sustain cash flow or pay
day-to-day company expenses choose working capital loans. Working capital loans are
typically referred to as short-term loans since they must be returned within 12 months after
loan disbursement.

Overdraft: It is another type of loan in which the financial institution establishes a credit limit
based on the requirement and charges interest on the amount utilized, rather than on the entire
given withdrawal limit. The payback period might be as little as one month or as long as twelve
months. Each year, the borrower must renew the limit with the lender.

Equipment Financing: Businesses and companies can utilize this sort of loan to finance
equipment or vehicles used for a variety of activities, including agriculture, farming,
commercial transportation, and building. The value of the equipment finance loan may vary
between Rs. 1 lakh and Rs. 10 crores. The rate of interest on a term loan is determined by the
individual's background and business type.

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FlexiLoans Term Loan Features
Interest Rates Reduced

When taken out for a longer period, term loans provide cheaper interest rates than those with a
shorter term. Additionally, interest rates are fixed and do not fluctuate over the life of the loan.

Enhanced Flexibility

Term loans provide significant flexibility. There is much room for negotiation on everything
from the period to the principal and interest rate. The higher your business's credit score, the
more leeway you have with loan conditions.

Increases Cash Flow

When a firm obtains a term loan, it effectively frees up cash flow for other purposes, as the
loan amount covers the funding requirements for big capital expenditure. For example, a
business can obtain a term loan to finance a recruiting round. This will cover the expenditures
associated with the time required to educate employees before they can begin contributing to
the bottom line.

Speedy Approval

Generally, short-term loans are authorized within a day or two. Even long-term loans do not
take an extended period to approve. As a result, term loans are a considerably faster method of
funding when compared to other possibilities.

Preserves Ownership Equity

Because term loans are a type of debt financing, they do not affect the corporation's shareholder
equity, which stays intact. Furthermore, unlike equity funding, business owners do not have to
give any influence over operations.

Flexi Loans Term Loan Benefits

Term loans are a key component of project finance. The following are some of the benefits of
term loans:

From the Borrower's Perspective

• Cheap: It is a less expensive source of medium-term borrowing.
• Tax Advantage: Interest on a term loan is a tax-deductible expense, and hence there is
a tax advantage on interest.
• Adaptable: Term loans are loans that are negotiated between borrowers and lenders.
As a result, the terms and conditions of these types of loans are not restrictive, allowing
for some degree of flexibility.

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From the Lender's Perspective:
• Assured: Banks and other financial organizations give term loans in exchange for
collateral—thus, term loans are secured.
• Regular Sources of Income: The borrower is required to pay interest and repay
principal regardless of its financial situation—this ensures the lender receives a regular
and constant revenue.
• Adaptation: Financial institutions may require borrowers to convert term loans to
equity to avoid default. As a result, they might get the authority to manage the
company's affairs.

Types of Term Loan

Businesses can pick from a variety of different forms of term loans. They are frequently tailored
to the needs of borrowers depending on parameters such as the amount of capital required by
the business, the borrower's repayment capability, and the corporation's economic health in
terms of profits and cash on hand. The majority of the loan's terms, including the interest rate
charged, are determined by these criteria. The most often used categorization scheme for term
loans is by loan tenure. As a result, the following types of term loan exist:

Short-Term Loans: These are short-term loans with a maximum duration of 2 years.
Typically, these loans have a term of one to two years. These loans are typically utilized to
meet the business's day-to-day demands or meet the firm's working capital requirements. A
firm can obtain a short-term loan from a variety of sources. They include commercial banks,
trade credit, and bill discounting.

Generally, short-term business loans have a higher interest rate than some other types of term
loans, owing to the shorter repayment period. These loans may even require weekly repayments
if the loan term is extremely brief. Any business considering such a loan should keep in mind
that these loans include interest, but the costs are also greater if the firm fails on any payment.

Medium-Term Loans: These are loans with a term of between two and five years. These loans
can be considered a combination of short- and long-term loans. Typically, firms obtain these
sorts of loans to renovate or repair a fixed asset. Consider the refurbishment of a showroom as
an example. These loans have certain features of both short- and long-term loans. While the
interest rates are greater than those on long-term loans, the information required during the loan
application procedure is far less demanding than on longer-term loans.

Long-Term Loans: These are loans with a length of more than five years in the majority of
circumstances. Tenure periods may potentially exceed 25 or 30 years, depending on the nature
of the obligation. Due to the larger ticket sizes and accompanying risks, most long-term loans
are secured, requiring collateral. Home loans, auto loans, and loans against property are all
examples of these types of loans. Rates are also cheaper when loans are secured. Even long-
term loans, however, might be unsecured in some instances. Interest rates are typically higher
in these instances owing to the increased risk.

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Term loans in India are divided into two categories:

Secured Loan: If an individual wants to obtain a secured loan from banks or NBFCs, they
must offer collateral security to the lender. Collateral might include equipment, machinery, raw
materials, stock, or residential/commercial real estate.

Unsecured Loan: The majority of financial institutions offer unsecured business loans,
meaning the lender does not need any collateral or security. Banks and non-bank financial
companies (NBFCs) charge reasonable interest rates on business loans, as there is no risk to
the borrower.

Working Capital Advances

Working capital advances by commercial banks represent the most important source for
financing current assets.

Forms of Bank Finance: Working capital advance is provided by commercial banks in three
primary ways:

(1) cash credits/overdrafts,

(2) purchase / discount of bills.

In addition to these direct forms, commercial banks help their customers in obtaining credit
from other sources through the letter of credit arrangement.

Cash Credits/Overdrafts: Under a cash credit or overdraft arrangement, a pre-determined

limit for borrowing is specified by the bank. The borrower can draw as often as required
provided the out standings do not exceed the cash credit/overdraft limit. The borrower also
enjoys the facility for repaying the amount, partially or fully, as and when he desires. Interest
is charged only on the running balance, not on the limit sanctioned. A minimum charge may
be payable irrespective of the level of borrowing for availing of this facility. This form of
advance is highly attractive from the borrower’s point of view because while the borrower has
the freedom of drawing the amount in installments as and when required, the interest is payable
only on the amount actually outstanding.

Loans: These are advances of fixed amounts to the borrower. The borrower is charged with
interest on the entire loan amount, irrespective of how much he draws. In this respect, this
system differs markedly from the overdraft or cash credit arrangement wherein interests is
payable only on the amount actually utilized. Loans are payable either on demand or in
periodical installments. When payable on demand, loans are supported by a demand
promissory note executed by the borrower. There is often a possibility of renewing the loan.

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Purchase /Discount of bills: A bill arises out of a trade transaction. The seller of goods draws
the bill on the purchaser. The bill may be either clean or documentary (a documentary bill is
supported by a document of title to goods like a railway receipt or a bill of lading) and may be
payable on demand or after usance period which does not exceed 90 days. On acceptance of
the bill by the purchaser, the seller presents it to the bank for discount/ purchase. When the
bank discounts/purchases the bill, it releases the funds to the seller. The bank presents the bill
to the purchaser (acceptor of the bill) on the due date and gets its payment.

Letter of Credit: A letter of credit is an arrangement whereby a bank helps its customer to
obtain credit from its (customer’s) suppliers. When a bank opens a letter of credit on favor of
its customer for some specific purchases, the bank undertakes the responsibility to honor the
obligation of its customer, should the customer fail to do so.

Sanction and Terms mad conditions:

Once the application is duly processed, it is put up for sanction to the appropriate authority.
The sanctioning powers of various officials like Branch Manager, Regional Manger, General
Manager, etc., are defined by virtue of the position they occupy.

If the sanction is given by the appropriate authority, along with the sanction of advance the
bank specified the terms and conditions applicable to the advance. These usually cover the
following:

(1) the amount of loan or the maximum limit of the advance,

(2) the nature of the advance,

(3) the period for which the advance will be valid,

(4) the rate of interest applicable to the advance,

(5) the primary security to be charged,

(6) the insurance of the security,

(7) the details of the collateral security, if any, to be provided,

(8) the margin to be maintained, and

(9) other restrictions or obligations on the part of the borrower.

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It is a common banking practice to incorporate important terms and conditions on a stamped
security document to be executed by the borrower. This helps the bank to career the required
charge on the security offered and also obligates the borrower to observe the stipulated terms
and conditions.

Financing for Infrastructure Projects: Sources and Benefits

Are you looking for ways to finance infrastructure projects? But don't know where to begin?
A short period of time has passed since the financing for infrastructure projects was the
public sector's responsibility only. But as the world progressed, there was a need for the private
sector to take the initiative in investing money in projects for the infrastructure sector as well.
This initiative has changed the game of the infrastructure sector, such as telecom, power, and
transportation, especially in developing countries.

The issue arises because the public sector solely cannot finance these infrastructure projects
as it does not have enough finances to meet the requirement. Private sector participation is
necessary to develop world-class infrastructure like those of developed countries. Developing
countries need more infrastructure projects in order to meet the demand of the increasing
population.

Definition of infrastructure lending:

1. Various institutions such as banks, financial Institutions, and NBFC, fall in the category
of "infrastructure lending," or provide financing for infrastructure projects.
In simple words, the borrower company is engaged in the following tasks:

• Development
• Operation and Maintenance

Development, operation, and maintenance of the infrastructure projects come under the
following sectors:

• Roads including tolls, bridges, or a railway system

• Highway projects and activities related to it are an integral aspect.

• Port, airport, inland port, or waterway

• Water supply, irrigation projects, sanitation, and sewage system

• Telecommunication system: Basic, cellular and Radio

• Generation, distribution and transmission of power

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The names of eligible infrastructure projects are decided by the department of economic affairs,
Ministry of Finance and a ‘Harmonized List’ of infrastructure projects is issued from time to
time for necessary action by all the stakeholders.

Characteristics of infrastructure projects:

They are highly capital intensive. They have a long operating life, and huge sunk costs are
involved in them. Traditional infrastructure projects were under the control of the only
government. Most infrastructure projects are based on the public-private partnership (PPP)
model. So careful evaluation of complexities is required before financing for infrastructure
projects.

Types of financing by banks:

The financial requirements for infrastructure projects are fulfilled by the banks. Capital
finance, term loan, project loan, shares are acquired as a part of the project finance package.
The banks are involved in the following types of financing for infrastructure projects:

• Takeout financing - Banks enter into takeout financing arrangements with

the help of institutions like IIFCL.
• Inter-institutional guarantees - As per the instructions from RBI, banks are
permitted to issue guarantees in favor of other banks or lending institutions.
Provided the banks that issue guarantees take a share in the funds to the
extent of 5 percent of the overall project cost and undertake normal credit
appraisal,monitoring and follow up on the project.
• Financing promoters' equity - The promoters' contribution towards a
company's equity capital should come from their own resources, and
permission to take up shares of other companies is restricted.
What services must be offered by financial institutions while looking out for financing for
infrastructure projects?
• Identifying the projects with cash flows: Emphasis is given to revenue
generation and bankability potential.
• Organize, prepare, and form a transaction structure by discussing it with the
consulting financial and legal experts.
• Identify the right investors and achieve financial closure.
• Render support to the client through the execution and construction phase
Benefits of different sources of financing for infrastructure projects
1. Length: Agreement to finance infrastructure via public finance is time-consuming
and must go through budget review before approval.
2. Contractual Inflexibility: Regulatory reviews allow changes that you won't find in
other forms of private financing companies.
3. Off-balance sheet: If risks are transferred to the private sector, private finance
infrastructure does not add to the standard measures of the public sector's debts.
These things would be politically beneficial.

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 4. Transferred responsibility: Responsibility of investment in infrastructure can be
shifted to the private sector.
A great deal of money is involved in turning the idea of a project into a reality. Not only does
it necessitate a lot of funds but extensive planning as well. So before obtaining financing for
infrastructure projects from a lending company or bank, meticulous planning is required. It
would leave no stone unturned in turning your dream project into a success and offer you good
returns once the project is completed. Compare the benefits and drawbacks of multiple
financial institutions and whatever suits you the best choose that option.

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 UNIT V
Financing infrastructure projects and Venture capital

What is financing of infrastructure projects?

Project finance is the funding (financing) of long-term infrastructure, industrial projects, and
public services using a non-recourse or limited recourse financial structure. The debt and equity
used to finance the project are paid back from the cash flow generated by the project.

Benefits of different sources of financing for infrastructure projects

1. Length: Agreement to finance infrastructure via public finance is time-consuming

and must go through budget review before approval.
2. Contractual Inflexibility: Regulatory reviews allow changes that you won't find in
other forms of private financing companies.
3. Off-balance sheet: If risks are transferred to the private sector, private finance
infrastructure does not add to the standard measures of the public sector's debts.
These things would be politically beneficial.
4. Transferred responsibility: Responsibility of investment in infrastructure can be
shifted to the private sector.
A great deal of money is involved in turning the idea of a project into a reality. Not only does
it necessitate a lot of funds but extensive planning as well. So before obtaining financing for
infrastructure projects from a lending company or bank, meticulous planning is required. It
would leave no stone unturned in turning your dream project into a success and offer you good
returns once the project is completed. Compare the benefits and drawbacks of multiple
financial institutions and whatever suits you the best choose that option.

What is Configuration Management in Project Management?

A configuration is the set of characteristics that define a final product or deliverable. This
includes all functional and physical specifications. Physical specifications may include the
color, size, weight, shape, and materials. Functional specifications dictate the ability of the
product to achieve a certain outcome. Take a car for example: Physical specs may call for a
red, four-door vehicle. Functional specs could include the ability to reach 60 mph in 10 seconds
and meet emissions standards.

What is project configuration management?

Project configuration management is managing the configuration of all the project’s key
products and assets. This includes any end products that will be delivered to the customer, as

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well as all management products, such as the project management plan and performance
management baseline. Implementation of configuration management and project change
management need to happen hand-in-hand. Any change must be monitored and assessed to
determine its impact on project configuration. The two processes are so interrelated that project
configuration management has been said to be “like change management on steroids.”

Five steps of the configuration management process

There are five key steps to project configuration management:

1. Planning: A configuration management plan details how you will record, track,
control, and audit configuration. This document is often part of the project quality
management plan.

2. Identification: All configuration requirements on a project should be identified and

recorded. This includes functionality requirements, design requirements, and any other
specifications. The completion of this process results in the configuration baseline for
the project.

3. Control: As the project scope is altered, the impact on the configuration must be
assessed, approved, and documented. This is normally done within the project change
control process.

4. Status accounting: Track your project’s configuration at all times. You should be able
to tell your configuration's version and have a historical record of the old versions. It’s
crucial to have an account of all versions so you can trace changes throughout the
project.

5. Audit: This includes any tests to prove that the product conforms with the configuration
requirements. Let’s say you built a report that must run within 10 seconds. The audit
tests to see if the finished report actually runs that fast. Often, audits and checks will be
built in at the completion of major project phases. This is so you can identify issues
early.

The key difference to configuration management for Agile projects is in the identification step.
Using Agile, the initial identification of specifications will be very general. It will be modified
and updated frequently as the project progresses.

•
PROJECT FINANCE FOR DUMMIES

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PARTIES TO A PROJECT FINANCING

Project finance transactions are complex transactions that often require numerous players in
interdependent relationships. Because of this complexity, not all projects follow the same
structure and not all of the participants described below partake in all projects. A typical project
finance structure looks like as follows:

Typical project finance structure: principal parties and various contracts

The description of each of the parties involved is as follows :

Project Company. The project company is the legal entity that will own, develop, construct,
operate and maintain the project. The project company is generally an SPV (Special Purpose
Vehicle) created in the project host country and therefore subject to the laws of that country
(unless appropriate ‘commissions’ can be paid so that key government officials can grant
‘exceptions’ to the project). A project company can be created in one of two ways:

• when the host government solicits bids and selects the best candidate among the
bidders;
• or a company or group of companies may initiate a project on their own, with or
without soliciting host government involvement.
However, most projects have government involvement and backing. The SPV will be
controlled by its equity owners.

Sponsors. The equity investor(s) and owner(s) of the Project Company can be a single party,
or more frequently, a consortium :

• Industrial sponsors, who see the initiative as linked to their core business

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 • Public sponsors (central or local government, municipalities, or municipalized
companies), whose aims center on social welfare
• Contractor/sponsors, who develop, build, or run plants and are interested in
participating in the initiative by providing equity and/or subordinated debt
• Purely financial investors

Lenders. Typically including one or more commercial banks and/or multilateral agencies
and/or export credit agencies and/or bond holders.

Host Government. It is the government of the country in which the project is located. The host
government is typically involved as an issuer of permits, licenses, authorizations and
concessions. It also might grant foreign exchange availability projections and tax
concessions. It might also be involved as an off-take purchaser or as a supplier of raw materials
or fuel.
Offtaker. More typically found in utility, industrial, oil & gas and petrochemical projects. One
or more parties will be contractually obligated to ‘offtake’ (purchase) some or all of the product
or service produced by the project.
Suppliers. One or more parties provide raw materials or other inputs to the project in return
for payment.
Contractors. The substantive performance obligations of the Project Company to design and
build (D&B), and operate the project will usually be done through engineering procurement
and construction (EPC) and operations and maintenance (O&M) contracts respectively.

The description of each of the contracts/agreements is as follows :

Shareholders' agreement. A shareholders' agreement sets out the respective rights and
obligations of the sponsors with respect to each other and the project company, with a strictly
controlled dividend policy. In project financing, special attention is paid to the handling of
potential conflicts of interests. This is especially the case where both private sector sponsors
and the host government are equity holders.
Loan agreements. A credit agreement is the principal legal document between the banks and
the project company that details the express terms on which the banks will advance funds to
the project company together with any associated security documents. Some of the issues
parties will need to consider are:
• the currency of the loans (should they be denominated in the principal currency of
expenditure or the currency of the projected revenues?);
• the manageability of the drawdown and reporting requirements from the project
company's point of view;
• and whether any control amount requirements reflect local legal requirements.

Offtake agreement. Revenue risk can be managed through an offtake agreement between the
host government authority/power distribution company and the project company by providing

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the project company with a sufficient pre-determined revenue stream to ensure payment of its
project obligations, operating costs and a return for its sponsors. An offtake agreement will
typically take the form of a "take-or-pay" agreement, which provides that the offtaker has the
option of either taking the project's product or paying for the product (even if it is not taken) at
the agreed tariff. Long-term agreements such as these would normally be entered into for gas
or electricity generation projects, since sales would not be made on a spot or retail market.

Construction agreement. A construction contract between the project company and the
construction company will typically be in the form of a comprehensive turnkey contract, which
should ensure that the contractor will deliver a completed and operational facility. The turnkey
model provides for the project, capable of meeting its projected operating standards and
contractual obligations, to be handed over and be ready for immediate operation. For that
reason, it is not unusual for sponsors to try and shift all completion- related risks onto the
contractor.

Supply agreements. A supply agreement between the project company and the supplier varies
in sensitivity depending on the raw material or fuel used by a project and the source and
ownership of supplied material. Security of supply and price certainty is of key importance for
the project. It is also important that pricing and adjustments of terms are capable of being
passed through under the offtake agreement in order to protect the project’s revenue projections
and debt servicing capacity.
Operating and maintenance (O&M) agreement. An operating and maintenance agreement
between the project company and the operator allocates facility operational risks and aims to
ensure that the operator meets performance guarantees tied to maximizing revenues.

Project agreement. A project agreement between the host government and the project
company depends on the degree of the government's involvement. Two major cases usually
occur :
• The host government agrees to be the offtaker, purchasing all or part of the output
of the project, sometimes at a set price. These projects are often in the energy, oil
and mining industries, where a product or service is the output. For the provision of
public facilities where usage risk inherently cannot be transferred to the private
sector, such as schools and hospitals, the private-sector investor is paid by the host
government for constructing the facility to the required specification and making it
available for the period of the contract, as well as for provision of services such as
maintenance, cleaning and catering.
• The host government can enter in a Concession Agreement with the project
company, which allows the collection of tolls from users; it does not usually involve
any payment by or to the host government.

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Project Contract Types

Contracts are legally binding agreements between at least 2 different legal entities named a
buyer and a seller. The buyer wishes to buy certain goods or services from a seller. The seller,
in return for the goods or services provided, expects monetary or other values to be paid to
them.

When a buyer and seller agree to work together as mentioned above, both sides will have
expectation to receive some value from the other party. And both sides also have certain
obligations to fulfil towards each other. A legally binding contract will help protect the rights
of both sides by ensuring both sides fulfil their obligations. In case of any issues, any of the
aggrieved side can take legal recourse.

Elements of a legally binding contract

Contract is an elaborate document containing the detailed scope of work along with all other
agreed terms and conditions, stating the rights and obligations of both sides.

A legally binding contract will have the following components:

• There must be an offer from one side. The offer must be a genuine offer.
• There must be acceptance from the other side. The acceptance must be a willing
acceptance without any kind of pressure.
• There must be equal exchange of values between both the sides.
• Must be signed by authorized personnel.
• The work in the contract must be legally allowed work. There can’t be a legal contract
for illegal work.

While all the above elements must be present in a legally binding contract, it is said that the
consideration is the most important factor, as that defines the benefits received by both sides.
It is also said that the consideration must be win-win for both sides.

Contract Types

There are three broad categories of contracts as mentioned below:

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 • Fixed Price Contract (FP)
• Time and Material Contract (T&M)
• Cost Reimbursable Contract (CR)

Fixed Price Contract

Fixed Price contracts are used when the scope of work is clearly defined and the requirements
are well understood. Once the scope is clearly defined, then it is expected that the seller will
come up with a fixed price quotation for the agreed scope of work. The seller needs to
understand the requirements and also all the associated risks which may occur during the
project work, while making a fixed prices quotation. Hence for a fixed prices contract the seller
also needs to be very matured and capable.

Once agreed, it becomes a win-win for both sides. The buyer is assured of a fixed price to be
paid once the defined scope of work is completed by the seller. The payments will be made
based on delivering well defined outcomes. The seller here assumes all the cost related risk
once agreed. The seller may lose money in this kind of a contract, at the same time the seller
may make maximum profit also in this kind of contract if they can complete the work in less
cost.

It will take solid maturity and clarity on both sides to come up with fixed-price contracts.
Negotiation may take some time. Fixed price contracts once finalized, will use change requests
for any kind of changes to be made in scope or any other terms and conditions.

There are 3 different flavours of fixed-price contract as below:

• Firm Fixed Price Contract (FFP)

• Fixed Price with Incentive (FPIP)
• Fixed Price with Economic Price Adjustment (FP-EPA)

Time and Material Contract (T&M)

Time and Material contracts are very popular contract type which is used for regular purchases
for standard items. Items may include augmenting temporary manpower for the project with

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well-defined skills and expertise level. Item also includes standard materials which may be
needed for consumption in the project.

In T&M contracts, the organization will select some preferred suppliers of such manpower and
materials. The vendors will be selected based on their capabilities and experience. There will
be a negotiated price (or rate) for such supplies. The final price paid will be for the amount of
quantity of such resources consumed or purchased.

Managing T&M contracts is pretty simple. T&M contract uses both the flavours of fixed price
and reimbursement based on consumption.

Cost Reimbursable Contract (CR)

In cost reimbursable contract the buyer pays the actual cost incurred by the seller and an
additional fee or profit. There are 2 components paid separately in this kind of contract. While
actual cost is reimbursed as per actual, the fee amount is somewhat decided upfront.

This kind of contract is used when the requirements are not clear. The team also does not much
clarity about the details of how the product will be developed. Hence in absence of clarity on
all accounts, this becomes the best possible arrangement.

Cost reimbursable contracts are used for new research and development, proof of concept
developments which requires immense innovation without a guarantee of predicted outcome.

Following are some of the flavours of Cost-Reimbursable contracts.

• Cost plus percentage of cost (CPPC)

• Cost plus fixed fee (CPFF)
• Cost plus Incentive Fee (CPIF)
• Cost plus award fee (CPAF)

Cost plus contracts puts all the risk on the buyer, as the seller is assured of all the actual cost
plus some fee. The entire responsibility lies on the buyer. These contracts sometime can be
misused also. As the seller will not bother much about cost control, as they are assured of all
actual costs. This requires the buyer to audit and micro manage all the expenses.

Infrastructure financing scenario in India.

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India’s infrastructure at the beginning of the century was in need of a total overhaul. It was a
drag on the rapid growth of the country’s economy and adversely affected the lives of Indian
citizens. The government looked to public-private partnerships to promote investment and
revitalise its transport and energy sectors.
The initiative

The India Infrastructure Finance Company Ltd (IIFCL) was established in January 2006 as a
wholly-owned Government of India company. It began operations in April 2006 with the
objectives of:

Increasing private sector participation in infrastructure development through public-private

partnerships (PPPs).
Containing and reducing the fiscal deficit through private sector participation.
To improve lending terms for infrastructure projects.
The creation of the IIFCL was intended to address regulatory and other restrictions and to raise
affordable long-term funding from the financial markets to lend to PPP projects, while keeping
the intermediation costs to a minimum.

To ensure that IIFCL delivered on its mandate, a detailed framework was set out to guide its
project selection, lending principles, approval processes, and deployment of resources. There
was a new government structure for promoting PPP, including an infrastructure committee
under the chairmanship of the prime minister and a formal, streamlined mechanism for
appraising and approving PPP projects.

For infrastructure projects which were economically justified but not commercially viable, the
government introduced a scheme for providing capital grants of up to 40 percent of project
costs.

The challenge

Until recently, India's infrastructure was beset with problems and used out-of-date technology.
The roads, railways, ports, airports and power supply were inadequate and inefficient.

Before the market liberalisation of the 1990s, “infrastructure projects were typically financed
from the limited resources of the public sector, which was characterised by inadequate capacity
addition and poor quality of service”. [1] In the 1990s, the economy grew rapidly - by 7%-9%
a year - and the pressures on infrastructure increased. As a result, infrastructure came to be

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regarded as a major constraint in sustaining the rapid growth and in attracting investment or
doing business in India.

Initial reforms failed to stimulate enough private investment in infrastructure, as there was only
about US$55 billion investment during the period of the ‘tenth five-year plan' (2002-07). Total
investment was only about five percent of GDP, as compared to around ten percent in the East
Asian economies. As a result, there was a growing realisation of the need to increase the flow
of private capital into infrastructure in order to maintain growth, alleviate poverty, and improve
the quality of life.

The public impact

In the period from April 2006 to March 2015, the IIFCL had been involved in a number of
infrastructure improvements, and it had:

Raised about USD 6.5 billion from the domestic markets.

Contributed to the development of nearly 20,000 kilometres of roads.
Development several urban infrastructure projects, including metro rail projects.
Added about 50 million tons of port capacity.
Extended the Delhi and Mumbai international airports, which handle bulk of the air traffic in
the country.
Created generating capacity of more than 40,000 Mw of power.
These initiatives spurred rapid growth in Indian infrastructure lending by banks, which
increased from around US$1.4 billion in 2000 to US$173 billion in 2013.

Stakeholder engagement

The major stakeholder in launching the IIFCL platform was the Indian government of India.
The Ministry of Finance and the Prime Minister's Office played major role in its launch and
supplied investment guarantees. Other ministries supported the initiative by streamlining and
simplifying the IIFCL’s procedures. However, there was no information on the degree of
engagement of external stakeholders, such as industrial bodies and business community.
Political commitment

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The finance minister said, while presenting the Indian Union Budget for 2005-2006,
“acknowledged the need and significance of building adequate infrastructure in the country
and made the following announcement [3]: ‘The importance of infrastructure for rapid
development cannot be overstated. The most glaring deficit in India is the infrastructure deficit.
Investment in infrastructure will continue to be funded through the Budget. However, there are
many infrastructure projects that are financially viable but, in the current situation, face
difficulties in raising resources. I propose that such projects may be funded through a financial
Special Purpose Vehicle.'” This shows the government's priority in creating such a vehicle,
which eventually took shape as the IIFCL.

The government also committed to a guarantee of INR100b (USD $1.5b) as a guarantee to

IIFCL for its first year of operation, which shows that government was willing to spend capital
to support its policy.

Public confidence

In 2006, opinion polls indicated that the majority of people had confidence in the government
after Dr Manmohan Singh’s one year in office has been a [Link] period coincided with
IIFLC’s planning stage and suggested that the prime minister had the support of the public at
the time of the reform.
Clarity of objectives

The objective stated at the outset – to increase private investment in infrastructure through PPP
– was clear and formed part of the government’s policy on infrastructure investment. This
objective has been maintained throughout the IIFCL’s ten-year existence: by March 2015, “the
IIFCL had approved 342 projects that would mobilise private investment of USD 110 billion,
of which the IIFCL’s share would be about USD 12 billion”.
Strength of evidence

The government well understood the need to raise investment to push the infrastructure projects
that had become stalled without sufficient investment and PPP was an appropriate choice.
While setting up the IIFCL, the government did not look at external models, because PPP was
not a new instrument in the Indian economy. In addition, it had proved to be a successful
vehicle for other major infrastructure projects in the developing world.
Feasibility

It was argued that, by encouraging private sector involvement, efficiency gains could be
realised because private players are more focused and can bring in economies of scale.

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Additionally, the cost burden on the government would reduced, as the overall cost would be
spread over a much longer period.

However, there were challenges associated with debt financing. Since PPP projects are usually
financed on a 30:70 ratio of equity to debt, the mobilisation of the requisite funding was a
difficult task, though not infeasible.

A prominent feature of the PPP architecture was the adoption of model documents such as
model concession agreements, model RFQ, model RFP and other bidding documents. These
initiatives, especially the standardisation of documents and processes, helped in the rapid roll-
out of PPP projects.

Management

The IIFCL is chaired by S. B. Nayar, who has nearly 40 years' experience in the finance
industry, including experience in international and investment banking as well as life insurance.
He was very familiar with the IIFCL's delivery context. The IIFCL raised funds in consultation
with the Department of Economic Affairs, ensuring that there was good management control
from other areas of government.

The IIFCL's borrowings were guaranteed by the Government of India but carefully controlled
and monitored. The extent of the guarantees was set at the beginning of each fiscal year by the
Ministry of Finance, within the limits available under the Fiscal Responsibility & Budget
Management Act 2003.

Measurement

The measurement and monitoring of the IIFCL is carried out by the High Level Committee on
Financing Infrastructure. For instance, the committee recommended that the IIFCL should
“substitute its direct lending operations by guarantee operations that would enable the flow of
non-bank long-term credit for infrastructure projects, especially, insurance and pension funds.
Moreover, instead of continuing to borrow solely on the strength of sovereign guarantees, it
should start raising funds on the strength of its balance sheet”.
Alignment
There was collaboration between the IIFCL and financial institutions such as the Asian
Development Bank (ADB), the World Bank, the German development bank (KfW), and the
European Investment Bank. The IIFCL launched its credit enhancement initiative with the
support of the ADB.

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Also, private sector banks lent about USD 173 billion in 2013 for infrastructure projects.
As indicated above, he IIFCL raised funds as and when required in close consultation with the
Department of Economic Affairs, one of its internal stakeholders. This indicated a coordinated
approach within government.

What Is Venture Capital (VC)?

Venture capital (VC) is a form of private equity and a type of financing that investors provide
to startup companies and small businesses that are believed to have long-term
growth potential. Venture capital generally comes from well-off investors, investment banks,
and any other financial institutions. However, it does not always take a monetary form; it can
also be provided in the form of technical or managerial expertise. Venture capital is typically
allocated to small companies with exceptional growth potential, or to companies that have
grown quickly and appear poised to continue to expand.

Though it can be risky for investors who put up funds, the potential for above-average returns
is an attractive payoff. For new companies or ventures that have a limited operating history
(under two years), venture capital is increasingly becoming a popular—even essential—
source for raising money, especially if they lack access to capital markets, bank loans, or other
debt instruments. The main downside is that the investors usually get equity in the company,
and, thus, a say in company decisions.

• Venture capital financing is funding provided to companies and entrepreneurs. It can

be provided at different stages of their evolution, although it often involves early and
seed round funding.
• Venture capital funds manage pooled investments in high-growth opportunities in
startups and other early-stage firms and are typically only open to accredited investors.
• Venture capital has evolved from a niche activity at the end of the Second World War
into a sophisticated industry with multiple players that play an important role in
spurring innovation.

What is a Venture Capital Fund?

A venture capital fund is a type of investment fund that invests in early-stage startup companies
that offer a high return potential but also come with a high degree of risk. The fund is managed
by a venture capital firm, and the investors are usually institutions or high net worth
individuals. Below is a basic overview of a typical venture capital fund structure:

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What is a Venture Capital Firm?

A venture capital firm performs a dual role in the fund, serving as both an investor and a fund
manager. As an investor, they usually put in 1%-2% of their own money, which demonstrates
to other investors that they are committed to the success of the fund.

As the fund manager, they are responsible for identifying investment opportunities, innovative
business models, or technologies, and those with the potential to generate high returns on
investment for the fund.

Roles in a Venture Capital Firm

Typical roles in a venture capital firm include:

1. General Partners: Responsible for all fund investment decisions and normally invest
their capital in the fund.

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 2. Venture Partners: Source investment opportunities and are paid based on deals they
close
3. Principals: Mid-level, investment-focused position. With experience in investment
banking or other experience relative to the fund’s investment strategy
4. Associates: Junior staff with some experience in investment banking or management
consulting
5. Entrepreneur-in-Residence: Industry experts who are hired as advisors or consultants
to the venture capital firm temporarily, often to assist with due diligence or pitching
new startup ideas.

What Is a Venture Capital Fund?

Mechanism of venture capital funds

1. Raise funds from investors

2. Invest raised funds fully utilizing the SBI Group's expertise to identify quality companies
3. Incubate companies and provide support for public offerings
4. Realize capital gains through the sale of stocks
5. Distribute funds to investors

Raising venture capital

Different options you have when fundraising:

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• Bootstrapping – using your personal savings, revenue from your business, and, in
some cases, business loans to fund the growth of your company
• Friends & Family – the term used when you raise money from your friends and
family
• Angel Investor – a high-net-worth individual who provides financial backing for
small startups or entrepreneurs
• Venture Fund – an investment fund, led by a team of investors, who provide
financial backing for startups
• Venture Studio – similar to a venture fund, but typically provides more day-to-day
support to founders. A venture studio is akin to a co-founder, providing guidance such
as crafting a brand and marketing strategy, developing an initial product and user
experience, and contributing operational support through legal setup, accounting and
HR.

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 16. UNIVERSITY QUESTION PAPERS OF PREVIOUS YEAR: NIL
Note: This Course was newly Added in this AR20 Regulation QP will be ADD in the next
AY.

17. Question Bank

UNIT-I
1. Describe the Importance of Project management.
2. Explain the terms Program and Portfolio in Project management.
3. Explain the process Project management.
4. Identify the Project selection methods.
5. Describe Project Management classifications.
6. Elaborate the term “Project selection- Project Portfolio”.
7. Explain Project life cycle with different phases.
8. Identify and explain the Project selection methods.
9. Explain the Project Portfolio Management system.
10. Explain about the term “Project Management”.

UNIT-II
1. Explain the Factors influencing quality of estimates.
2. How to construct project network? Give example.
3. Define the term “Activity-on-Node”.
4. Briefly outline Program Evaluation and Review Technique (PERT).
5. Distinguish between Top-Down and Bottom-Up Estimating.
6. Define the term Estimates. Explain its types of estimates.
7. Explain the Procedure for Network Construction in Project Management.
8. What is the need for Project Time and Cost Estimation? Explain.
9. What is a project network diagram?
10. Why Estimating Time and Cost are important? Elaborate.

UNIT-III
1. Explain about Contingency Planning in Project Management.
2. What is risk management in project management?
3. How to manage project risk? Explain.
4. Elaborate the Risk management process.
5. Describe the project risk in detail.
6. Explain the terms Firm risk and Market risk.
7. Describe the analysis of Project risks.
8. Explain the terms Project risk and Market risk.

UNIT-IV
1. Describe the factors determining Capital Structure.
2. Explain the term Letter of Credit.
3. Explain the characteristics of infrastructure projects.
4. What is infrastructure lending.
5. Explain the disadvantages of project finance.
6. Describe the Importance of Capital Structure.

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 7. Explain the term Equity Capital.
8. Explain the methods of offering term loans.
9. Identify the working capital advances.
10. Explain different types of terms loans.

UNIT-V
1. Describe the typical Project configuration in detail.
2. List out the key project partners
3. Explain Project contracts in detail.
4. Explain the effect of infrastructure finance scenario in India.
5. What is Venture capital? Explain different methods of raising venture capital?
6. Explain the benefits of different sources of financing for infrastructure projects.
7. List out the steps involved in configuration management process.
8. Define the term venture capital fund.
9. Explain the process of venture capital investments.
10. Explain different methods of raising venture capital?

18. Assignment Questions

UNIT-I
1. Describe the Importance of Project management.
2. Explain the terms Program and Portfolio in Project management.
3. Explain the process Project management.
4. Identify the Project selection methods.

UNIT-II
1. Explain the Factors influencing quality of estimates.
2. How to construct project network? Give example.
3. Define the term “Activity-on-Node”.
4. Briefly outline Program Evaluation and Review Technique (PERT).

UNIT-III
1. Explain about Contingency Planning in Project Management.
2. What is risk management in project management?
3. How to manage project risk? Explain.
4. Elaborate the Risk management process.

UNIT-IV
1. Describe the factors determining Capital Structure.
2. Explain the term Letter of Credit.
3. Explain the characteristics of infrastructure projects.
4. What is infrastructure lending.
5. Explain the disadvantages of project finance.

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UNIT-V
1. Describe the typical Project configuration in detail.
2. List out the key project partners
3. Explain Project contracts in detail.
4. Explain the effect of infrastructure finance scenario in India.

19. Unit wise Quiz questions: Nil Due to New Course

Note: This Course was newly Added in this AR20 Regulation QP will be ADD in the next
AY.

20. Tutorial Problems:NIL

21. Known Gaps

-NA-

22. Discussion topics

1. Acceptance testing
2. Defect bash elimination
3. Testing web based systems
4. Bug racking tools
5. Six-sigma and TQM

23. References, journals, websites and e-links

TEXT BOOK(S)
1. Project management- The managerial process, Clifford F Gray, Erik W Larsom,
Gautam V. Desai, 4ed, THM
2. Project- Planning, analysis, selection , financing, implementation and review,
Prasanna Chandra, 6ed, TMH
3. Project Management- Achieving completitive advantage, Jeffrey K Pinto, 1st ed, PHP

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24. Group wise students list for discussion topic (NA)

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