Project Planning and Estimation

MODULE 2: PROJECT
PLANNING AND ESTIMATION
SOMASHEKAR S M
ASSISTANT PROFESSOR (DEPT OF MECHANICAL ENGG)
NEW HORIZON COLLEGE OF ENGINEERING
Compiled by;

Module 2: Project Planning and Estimation
5th Semester BE, Mechanical, NHCE Page 1
Contents
2.1 Developing the project management plan,
2.2 Understanding stake holders,
2.3 Communication planning,
2.4 Project meeting management,
2.5 Communication needs of global and virtual project teams,
2.6 Communication technologies,
2.7 Work Breakdown Structures
2.7.1 Constructing (WBS)
2. 8 Scope planning
2. 9 Scope definition
2.10 Preparation of cost estimation
2.11 Evaluation of project profitability.
2.1 DEVELOPING THE PROJECT MANAGEMENT PLAN
Developing Project Management Plan is the process of defining, preparing, and coordinating all subsidiary
plans and integrating them into a comprehensive project management plan. The key benefit of this process is
a central document that defines the basis of all project work. The inputs and outputs for this process are depicted
in Figure
➢ Developing Project Management Plan: Inputs
Project Charter: Project Charter is the process of developing a document that formally
authorizes the existence of a project and provides the project manager with the authority to
apply organizational resources to project activities. Project purpose or justification,

The project charter is the document issued by the project initiator or sponsor that
formally authorizes the existence of a project and provides the project manager with the
authority to apply organizational resources to project activities. It documents the business needs,
assumptions, constraints, the understanding of the customer’s needs and high-level
requirements, and the new product, service, or result that it is intended to satisfy, such as:
✓ Measurable project objectives and related success criteria,
✓ High-level requirements,
✓ Assumptions and constraints,
✓ High-level project description and boundaries,
✓ High-level risks,
✓ Summary milestone schedule,
✓ Summary budget,
✓ Stakeholder list,
✓ Project approval requirements (i.e., what constitutes project success, who
decides the project is successful, and who signs off on the project),
✓ Assigned project manager, responsibility, and authority level, and
✓ Name and authority of the sponsor or other person(s) authorizing the project
charter
Outputs from Other Processes: Outputs from many of the other processes such as; Scope
management plan, Requirements management plan, Work performance information, Project
documents updates etc. are integrated to create the project management plan. Any baselines
and subsidiary plans that are an output from other planning processes are inputs to this process.
In addition, changes to these documents may necessitate updates to the project management
plan.
Enterprise Environmental Factors: Enterprise environmental factors refer to conditions, not
under the control of the project team, that influence, constrain, or direct the project. Enterprise
environmental factors are considered inputs to most planning processes, may enhance or
constrain project management options, and may have a positive or negative influence on the
outcome.
Enterprise environmental factors vary widely in type or nature. Enterprise
environmental factors include, but are not limited to:
✓ Organizational culture, structure, and governance;
✓ Geographic distribution of facilities and resources;
✓ Government or industry standards (e.g., regulatory agency regulations, codes of
conduct, product standards, quality standards, and workmanship standards);
✓ Infrastructure (e.g., existing facilities and capital equipment);
✓ Existing human resources (e.g., skills, disciplines, and knowledge, such as design,
development, legal, contracting, and purchasing);

✓ Personnel administration (e.g., staffing and retention guidelines, employee performance
reviews and training records, reward and overtime policy, and time tracking);
✓ Company work authorization systems;
✓ Marketplace conditions;
✓ Stakeholder risk tolerances;
✓ Political climate;
✓ Organization’s established communications channels
Organizational Process Assets: The organizational process assets that can influence the
Develop Project Management Plan process include, but are not limited to:
❖ Standardized guidelines, work instructions, proposal evaluation criteria, and
performance measurement criteria;
❖ Project management plan template, including:
✓ Guidelines and criteria for tailoring the organization’s set of standard processes to
satisfy the specific needs of the project, and
✓ Project closure guidelines or requirements such as the product validation and
acceptance criteria;
❖ Change control procedures, including the steps by which official organization
standards, policies, plans, and procedures, or any project documents will be modified
and how any changes will be approved and validated;
❖ Project files from previous projects (e.g., scope, cost, schedule and performance
measurement baselines, project calendars, project schedule network diagrams, and
risk registers,);
❖ Historical information and lessons learned knowledge base; and
❖ Configuration management knowledge base containing the versions and baselines of
all official organization standards, policies, procedures, and any project documents
➢ Developing Project Management Plan: Tools and Techniques
Expert Judgment: When developing the project management plan, expert judgment is
utilized to:
✓ Tailor the process to meet the project needs,
✓ Develop technical and management details to be included in the project
management plan,
✓ Determine resources and skill levels needed to perform project work,
✓ Define the level of configuration management to apply on the project,
✓ Determine which project documents will be subject to the formal change control
process, and
✓ Prioritize the work on the project to ensure the project resources are allocated to the
appropriate work at the appropriate time.

Facilitation Techniques: Facilitation techniques have broad application within project
management processes and are used to guide the development of the project management
plan. Brainstorming, conflict resolution, problem solving, and meeting management are key
techniques used by facilitators to help teams and individuals achieve agreement to
accomplish project activities.
➢ Develop Project Management Plan: Outputs
Project Management Plan: The project management plan is the document that describes
how the project will be executed, monitored, and controlled. It integrates and consolidates
all of the subsidiary plans and baselines from the planning processes.
Project baselines include, but are not limited to:
• Scope baseline: The scope baseline is the approved version of a scope statement,
work breakdown structure (WBS), and its associated WBS dictionary, that can be
changed only through formal change control procedures and is used as a basis for
comparison.
• Schedule baseline: A schedule baseline is the approved version of a schedule
model that can be changed only through formal change control procedures and is
used as a basis for comparison to actual results.
• Cost baseline: The cost baseline is the approved version of the time-phased project
budget, excluding any management reserves, which can only be changed through
formal change control procedures and is used as a basis for comparison to actual
results.
Subsidiary plans include, but are not limited to:
✓ Scope management plan
✓ Requirements management plan
✓ Schedule management plan
✓ Cost management plan
✓ Quality management plan
✓ Process improvement plan
✓ Human resource management plan
✓ Communications management plan
✓ Risk management plan
✓ Procurement management plan, and
✓ Stakeholder management plan

2.2 UNDERSTAND STAKEHOLDERS:
Projects are undertaken because someone needs the project’s output. A project must satisfy its
users to be successful. Several things can complicate this. First there may be multiple users and each may have
different wants and needs. Second, often users do not fully understand what they want because they do not
know what alternatives may be available. Third, the customer who pays for the project may not be actual person
or group who uses the result, and customer may not fully understand the user’s needs. Fourth, when someone
else is paying for the project, some users will ask for many project outcomes that are expensive or time
consuming to deliver. Finally, many stakeholders in addition to the users of project’s outcomes have an interest
in the project. Project managers need to first understand their stake holders, build relationships with them, and
then develop communications plan for dealing with them.
Identify Stakeholders
Identify stakeholders is “the process of identifying all people or organizations impacted by the
project, and documenting relevant information regarding their interests, involvement, and impact on project
success” (PMBOK). Stakeholders also include those who are affected by the process of performing the project.
This includes people who:
• Work on the project
• Provide people or resources for the project
• Have their routines disrupted by the project.
Another way to identify stakeholders is to determine whether they are internal to the organization
performing the project or external to it. Examples of project stakeholders based on these categories are
shown as below:
PROJECT STAKEHOLDERS
INTERNAL EXTERNAL
Affected by the Project Process
Owner
Sponsor
Project Manager
Functional Managers
Competing Projects
Financing Source
Project Core Team
Subject Matter Experts
Employees
Stakeholders
Suppliers
Partners
Creditors
Government Agencies
Special Interest Groups
Neighbors
Client
Professional Groups
Media
Taxpayers
Union
Competitors

Affected by Project Result
Internal Customer
Sponsor
Users
Client
Public
Special Interest Groups
Neighbors
Potential Customers
Note that there are potentially more types of stakeholders affected by the process of performing the
project than by the project results and more external than internal stakeholders.
Project managers and project core teams can use the examples as shown in the table above to
identify possible project stakeholders. This stakeholder analysis can be conducted as a brainstorming
session. Classic rules of brainstorming apply-initially, the emphasis is on generating a long list of
potential stakeholders in the first column of a chart. It may be easiest to construct this chart on a large
work surface such as white board or flip chart. Another suggestion is to be specific, identify
stakeholders by name when possible.
For each potential stakeholder, list the various project processes and results in which he or she
might have an interest. Consider both financial and emotional interests of potential stakeholders. The
project charter can be useful here. Many stakeholders have an interest in multiple aspects of a project.
Once the stakeholder and their interests have been listed, they may be combined into like groups with
the same interests.
Potential Stakeholders
The next step is to prioritize the stakeholders. Prioritization is important because on many
projects there are too many stakeholders to spend a great deal of time with each. While it is important
not to ignore any stakeholder, it also make sense to concentrate on those who are most vital. Bourne
and Walker developed a method that requires the project core team to determine three aspects in
prioritizing stakeholders. All three aspects can be rated on simple scale of 1 to 3, with 3 representing
the highest priority. For the first aspect, proximity, a stakeholder who has significant direct contact with
the project team would be a 3, while a much more remote stakeholder would be a 1. For the second
aspect, power, a stakeholder who could order the project shut down or changed in a major way could
be 3, and a stakeholder who could not change the project much would be 1. For the third aspect,
urgency, a stakeholder with great time sensitivity would be a 3, and a stakeholder with only routine
time needs would be a 1. The scores from three aspects are added to form a total prioritization score.
The following table shows this stakeholder identification and prioritization.

STAKEHOLDER IDENTIFICATION AND PRIORITIZATION MATRIX
PRIORITY OF STAKEHOLDER
Stakeholder: Interested in Project Process or
Result (Be specific)
Proximity Power Urgency Total
By determining who the stakeholders are and what each group wants, project managers
effectively:
• Select clear direction for further project planning, negotiating, and execution
• Prioritize among competing objectives
• Learn to recognize complex tradeoff’s and the consequences of each.
• Make and facilitate necessary decisions.
• Develop a shared sense of risk.
• Build a strong relationship with their customers
• Lead associates, customers, and suppliers with an empowering style
• Serve as good stewards of the resources of both the parent and customer organizations.
The project team should next select the top 10 to 15 stakeholders for emphasis in the remainder
of their planning. The stakeholders with the highest total scores are often considered to be primary
influencers for the project. The project manager and core team should also plan to periodically review
this prioritized list of stakeholders, as the relative importance may change as the project progresses,
especially if the project goals are not clear at the outset.
2.3 COMMUNICATION PLANNING:
Communication planning involves determining the information and communications needs of the stake
holders: who needs what information, when they will need it, how it will be given to them, and by whom.
While all projects share the need to communicate project information, the information needs and the methods
of distribution vary widely. Identifying the informational needs of the stake holders and determining a suitable
means of meeting those needs is an important factor for project success.
On most projects, the majority of communication planning is done as part of the earliest project phases.
However, the result of process should be reviewed regularly throughout the project and revised as needed to
ensure continued applicability.

Communication planning is often tightly linked with organizational planning, since the project
organizational structure will have a major effect on the project’s communication requirements.
Fig: Communication planning: Inputs, Tools and Techniques, and Outputs
➢ Inputs to Communication planning:
Project Management Plan: The project management plan is the document that describes how the
project will be executed, monitored, and controlled. It integrates and consolidates all of the
subsidiary plans and baselines from the planning processes.
Stakeholder Register: The stakeholder register provides the information needed to plan the
communication with project stakeholders.
Enterprise Environmental Factors: The communications planning process is tightly linked with
enterprise environmental factors, since the structure of an organization will have a major effect on
the project’s communication requirements.
(Enterprise environmental factors refer to conditions, not under the control of the project team, that
influence, constrain, or direct the project.)
Organizational Process Assets: Organizational Process Assets would include anything the
organization has acquired that you can use in the management of the project. They are formal and
informal plans, policies, procedures, and guidelines.
✓ All organizational process assets are used as inputs to the Plan Communications
Management process.
✓ Of these, lessons learned and historical information are of particular importance because
they can provide insights on both the decisions taken regarding communications
issues and the results of those decisions in previous similar projects.
✓ These can be used as guiding information to plan the communication activities for the
current project.

➢ Tools and Techniques for Communications Planning:
Communication requirement analysis: The analysis of the communication requirements
determines the information needs of the project stakeholders. These requirements are defined
by combining the type and format of information needed with an analysis of the value of that
information. Project resources should be expended only on communicating information that
contributes to the success of the project or where a lack of communication can lead to failure.
Communication Technology: The choice of communication technology is an important
consideration in the Communication planning. As this can vary significantly from project to
project and also throughout the life of a project, the focus is to ensure that the choice is
appropriate for the information that is being communicated.
Factors that can affect the choice of communication technology include:
✓ Urgency of the need for information
✓ Availability of technology
✓ Ease of Use
✓ Project environment
✓ Sensitivity and confidentiality of the information.
Communication Models: Their choice is contributing toward an effective and efficient
communications process, the focus is to ensure that the choice of the communication model is
appropriate for the project that is undertaken and that any barriers (noise) are identified and
managed.
The sequence of steps in a basic communication model is:
✓ Encode: Thoughts or ideas are translated (encoded) into language by the sender.
✓ Transmit Message: This information is then sent by the sender using communication
channel (medium). The transmission of this message may be compromised by various
factors (e.g., distance, unfamiliar technology, inadequate infrastructure, cultural
difference, and lack of background information). These factors are collectively termed
as noise.
✓ Decode: The message is translated by the receiver back into meaningful thoughts or
ideas.
✓ Acknowledge: Upon receipt of a message, the receiver may signal (acknowledge)
receipt of the message but this does not necessarily mean agreement with or
comprehension of the message.
✓ Feedback/Response: When the received message has been decoded and understood,
the receiver encodes thoughts and ideas into a message and then transmits this message
to the original sender.

Communication Methods: The choice of communication methods is an important
consideration in this process. As there can be many potential barriers and challenges during this
process, the focus is to ensure that the information that has been created and distributed has
been received and understood to enable response and feedback.
✓ Interactive communication: Between two or more parties performing a
multidirectional exchange of information.
Ex: meetings, phone calls, instant messaging, video conferencing, etc.
✓ Push communication: Sent to specific recipients who need to receive the information.
Ex: letters, memos, reports, emails, faxes, voice mails, blogs, press releases, etc.
✓ Pull communication: Used for very large volumes of information, or for very large
audiences, and requires the recipients to access the communication content at their own
discretion.
Ex: intranet sites, e-learning, lessons learned databases, knowledge repositories, etc.
Meetings: Communication planning process requires discussion and dialogue with the project
team to determine the most appropriate way to update and communicate project information,
and to respond to requests from various stakeholders for that information.
➢ Outputs of Communication Planning:
Communications Management Plan: The communications management plan is a component
of the project management plan that describes how project communications will be planned,
structured, monitored, and controlled. The plan contains the following information:
✓ Stakeholder communication requirements;
✓ Information to be communicated, including language, format, content, and level of detail;
✓ Reason for the distribution of that information;
✓ Time frame and frequency for the distribution of required information and receipt of
acknowledgment or response, if applicable;
✓ Person responsible for communicating the information;
✓ Person responsible for authorizing release of confidential information;
✓ Person or groups who will receive the information;
✓ Methods or technologies used to convey the information, such as memos, e-mail, and/or
press releases;
✓ Resources allocated for communication activities, including time and budget;
Project Documents Updates: Project documents that may be updated include, but are not
limited to:
✓ Project schedule, and
✓ Stakeholder register.

2.4 PROJECT MEETING MANAGEMENT
Planning and conducting projects requires a variety of meetings, such as meetings to:
• Establish project plans
• Conduct the project activities
• Verify progress
• Accept deliverables
Meetings are an important process on projects since many important decisions are made at meetings
and much time of expensive project personnel is invested in meetings.
Improve Project Meetings
Project meetings should be conducted in an efficient and effective manner as possible. One way
to improve the project improvement process is to apply the simple and effective plan-do-check-act
(PDCA) model.
PDCA MODEL: The idea behind process improvements with the PDCA is that any process practiced
repeatedly, focusing on reusing and adapting things that worked well and avoiding things that did not
work well, improves over time. The following Fig, depicts PDCA model as it is applied to project
meetings
PDCA MODEL APPLIED TO PROJECT MEETINGS
Do: conduct meeting,
write minutes
Plan: prepare advance
agenda
Act: perform in-between
meeting tasks
Check: evaluate meeting
The Meeting
Cycle

Project meeting agenda template:
When applying the PDCA improvement model specifically to improving project meetings, the first
step is the planning the project meeting in advance. The project manager makes sure that the agenda is prepared
and distributed ahead of time. If a project team is meeting often, this advance agenda preparation may be done
at the end of one meeting for the next meeting. That way, everyone understands beforehand what will be
covered in the upcoming meeting and has the opportunity to be prepared. The agenda also can be helpful in
deciding whether to invite a particular subject matter expert (SME) or other guest to the meeting. A project
meeting template is shown in below figure.
Project Team_________________ Date______________ Time___________ Place _____________
PURPOSE:
Topic Person Time
Review agenda ______________________ 2 min
_______________________ ______________________ _____
_______________________ ______________________ _____
_______________________ _______________________ ______
Summary
Meeting evaluation
The top part of the agenda contains meeting logistics. The second item on the template asks for the
meeting purpose. If a project manager cannot state in a sentence or two why he wants to conduct project
meeting, perhaps the meeting is not necessary. The body of the agenda has three columns. First is a list of the
topics. This starts with a quick review of the agenda, because projects often move quickly and this provides an
opportunity to add or delete an item from the agenda. The major topics of the meeting are listed next in the
order in which they will be covered. Often, remaining items from previous meetings or other urgent matters
top the list. However, the project manager wants to be sure to cover the most important matters even if they
may not have the same sense of urgency. The second-to-the-last item on the standard agenda is the meeting
summary. The project manager summarizes the major decisions that were made as well as work assignments
that were distributed. This helps people remember what they agreed to do. The final item on the agenda is an
evaluation of the meeting. This is explained in the check step of the PDCA model.
The second column lists the person responsible for each topic on the agenda. Typically, the project
manager takes care of the meeting start and close, but individual project team members may be assigned
PROJECT MEETING AGENDA TEMPLATE

specific action items. When people know in advance that they are responsible for an action item, they are more
likely to be prepared. Additionally, if the advance agenda is available for key project stake holders to see, some
of the stakeholders may contact the responsible person in advance to provide input. This is a good way to keep
stakeholders engaged.
The third column is a time estimate for each item. While the project manager does not need to be a slave
to the clock, recognition of how long team members are in meetings and how many items are accomplished
goes a long way. People are more likely to attend meeting if they are sure it will end on time.
Project meeting minuted template
The second step in the PDCA process- “do”-means to conduct the meeting and to capture minutes as the
meeting is conducted. Many project teams rotate the role of minutes’ taker so each team member feels equal.
A template for taking project minutes is shown in below fig.,
PROJECT MEETING MINUTES TEMPLATE
Project Team______________________ Date__________________ Time___________________
Members present:
___________________________________________________________________________________
___________________________________________________________________________________
___________________________________________________________________________________
Decisions Made:
Issues Log:
Resolved Issues __________________________________________________________________
New Issues ______________________________________________________________________
Action Item Person Responsible Completion Date
Meeting Evaluation

Issues Management
The project minutes mirror the agenda to the extent that both refer to the same meeting. The top part of
the minutes from its logistics, just as in the agenda. From the point forward, however, the contents vary. The
four primary types of information captured in a project meeting are:
1. Decisions made
2. New issues surfaced and old issues resolved
3. Action items agreed to
4. An evaluation of the meeting
Issues
First, any decisions that were made should be documented. Second, any new issues that surfaced or
existing issues that were resolved should be recorded. An issue is ‘a point or matter in question or in dispute,
or a point or matter that is not settled and is under discussion or over which there are opposing views or
disagreements’. An issues log is a living document that lists open issues and states when and how they are
resolved. Issues logs benefit a project in at least two ways. First, when an important issue-but not one that can
be solved in the immediate meeting- is introduced, the project manager can add it to the open issues and not
spend time on it in the current meeting when more pressing matters need to be settled. Second, the issues log
ensures that important issues ae not forgotten. An issues log template is as shown below
.
PROJECT ISSUES LOG
OPEN ISSUES
NAME DATE OPENED ORIGINATOR POTENTIAL IMPACT PROGRESS
CLOSED ISSUES
NAME DATE OPENED ORIGINATOR POTENTIAL IMPACT PROGRESS

Action Items
The third type of project information is action items. Each of these is a task that one or more members
of the project team agree to perform by a specific date. These are recorded, and the project manager reminds
the team at the end of each meeting what each member agreed to do. The final item to be recorded on
project meeting minutes is an evaluation of both good points from the project meeting that the team would
like to repeat or at least adapt and poor points from the meeting that the team would like to avoid in the
future. An experienced team can collect these points in a minute or two; the time they save in future
meetings often pays great dividends. An easy way to capture these evaluations is a Plus-Delta template as
shown in fig below.
PROJECT MEETING PLUS-DELTA EVALUATION TEMPLATE
When the assessing the project meeting with a Plus-Delta method, a project manager can simply draw
the form on a flip chart or marker board. Then, each person is asked to offer their opinion on at least one thing
that either was good (+) that he would like to see repeated or one thing that was poor (∆) that kept the team
back somehow and he would like to see overcome in future meetings. The key to making this work for the
project manager is how he responds to any deltas. If the project manager responds defensively, the team
members may not want to offer further suggestions. On the other hand, if the project team members feel their
suggestions are seriously considered, they try to make improvement suggestions and future meetings will be
better.
Finally, the “act” part of the PDCA cycle for project meetings is for every team member to complete
the action items they promised and for the project manager to communicate with the team members to make
sure nothing is holding them back from their commitments. Wise project managers keep active but informal
contact with the team members between meetings to ensure action items are completed on time. When all steps

of the PDCA cycle are applied to project meetings, the meetings to improve; the team members gain
satisfaction; and the project makes better progress.
2.5 COMMUNICATIONS NEEDS OF GLOBAL AND VIRTUAL PROJECT TEAMS
As organizations change more rapidly, more projects are started with team members from various parts
of the larger organization, from various organizations, and even various parts of the world. These project teams
certainly have the advantage of utilizing talent from a wide pool of resources. Project team members often
enjoy greater autonomy and stimulation on these teams.
Virtual teams
These advantages, however, come with added challenges. Since this team is not all co-located, the
project managers relies even more on persuasion than usual to accomplish work. In contemporary project
management, project managers use less onerous command and control than they might have a few years ago.
This trend is even truer with global and virtual teams. A virtual team is “a group of persons with a shared
objective who fulfill their roles with little or no time spent meeting face to face.” When project team operate
in a virtual mode, many of the following characteristics are present:
• Team members are physically dispersed
• Time boundaries are crossed
• Communication technologies are used
• Cultural, organizational, age, gender, and functional diversity is present
Cultural Differences
Cultural patterns differ in various parts of the world so project team members need to be more sensitive
to how their actions are interpreted. For example, in some cultures looking a person in the eye signifies you
are paying close attention, while in other parts of the world people may look slightly downward in deference
to authority. In those cultures, looking a person in the eye might be considered a challenge. When people do
not have face-to-face contact, they do not have the opportunity to see and learn from a person’s body language.
Project managers working with global and virtual project teams need to be especially mindful of the
increased need for communications using methods other than face to face. The various methods regarding
charter development along with stakeholder analysis and communications planning are even more critical on
virtual and global teams. The more unusual a team is, the more critical charters and communications vehicles
become. The following table lists some of the extra communications challenges posed by virtual and global
project teams.

Note that each project management need has specific increased challenge-for example, the third need,
relationship building, needs more time since people do not have the advantage of full face-to-face
communication. Project managers and teams can enhance stakeholder satisfaction by learning the cultural
ethics and values of all their stakeholders, working hard to establish trust, and ensuring that they use fast and
reliable information systems.
Countries and Project Communication Preferences
It is helpful if the project team members can meet each other face to face even one time. While this can
be very expensive, it may be much less expensive than not performing well on the project. Sometimes, the core
project team is assembled to write and approve the project charter. The core team members then know each
other and are inclined to give each other the benefit of doubt if there is a misunderstanding. Another method
there is frequently used is to confirm meetings and calls with quick meeting minutes or email follow-ups. By
documenting decisions, it is easier to remember what happened to uncover lessons learned when the project is
complete.
While abundant differences occur between people from various countries, the method and timing of
project communications are of interest here. For example, Mueller and Turner studied how cultural differences
impact preferred modes of project management communication. They examined how collectivism versus
individualism in various cultures accept unequal power and ambiguity, impact project management
preferences. The results show that country preferences on frequency and types of communications for each
group as shown in table below.
COUNTRIES AND PROJECT COMMUNICATION PREFERENCES
COUNTRY GROUP PREFERENCES
1. Japan, Taiwan, and Brazil 1. Face-to-face, analytical at milestones
2. Hungary and India 2. Written status reports, fixed intervals
3. The Netherlands and Germany 3. Detailed progress reports, fixed intervals
4. Australia, United States, Canada, New Zealand,
United Kingdom
4. Continuous phone updates, with written backup
INCREASED CHALLENGES FOR VIRTUAL AND GLOBAL PROJECT TEAMS
PROJECT MANAGEMENT NEED INCREASED CHALLENGES
1. Initiate Project 1. More unique project needs
2. Understand Stakeholders 2. More difficult to understand
3. Build relationships 3. Needs more time
4. Determine communications needs and methods 4. More unique needs, more reliance on electronic
means
5. Establish Change Control 5. More facilitating than directing
6. Manage the meeting process 6. Less nonverbal clues, interest may wander
7. Control issues. 7. With less group interaction, harder to identify

2.6 COMMUNICATIONS TECHNOLOGIES
Perhaps one of the most exciting and rapidly changing aspects of project management work is
communication technologies. In 1970’s people who worked on projects used carbon copies extensively, careful
printing was practiced so as to not mistake a number in a calculation, bidder’s construction contracts needed
to physically drive to a plans room to view plans and specifications so they could bid on upcoming projects,
and people would proof contracts and letters multiple times since there were no spell checkers. In the late
1980s, on one of the first multibillion-dollar bank acquisition projects, the biggest argument among the project
team was whether they could afford to buy a fax machine for their “war room” where they coordinated all of
their onsite project activities. In the 1990s, databases, email, and other electronic means of storing data and
communicating become more widespread.
Current Technology Types
A project manager needs to determine what uses he or she has for communications technology. Project
team members and other stakeholders need to be able to respond each other wherever they are. They need to
able to work creatively together, have access to project documentation, and yet protect confidentiality and
version control. When project team has team members and other stakeholders from multiple organizations,
they need to ensure that the communications systems are compatible. One important consideration to keep in
mind is that communications technology should make the project easier-not harder. Do not select the most
current technology for its own sake. Select whatever technology will help get the job done. Reliable
communications technologies that enable effective information sharing are essential. A project with multiple
geographically dispersed, technologically savvy team members working on complex, interdependent tasks that
require rapid decision making might require different communications technologies than a co-located project
team working on a simple routine project
COMMUNICATIONS TECHNOLOGIES USED BY PROEJCTS
COMMUNICATION TECHNOLOGY EXAMPLES
Automated workflow Automator
Blog Twitter
Bulletin board
Calendaring system Windows live calendar, Google calendar
Database Oracle
Desktop videoconference
Electronic blackboard
Email Gmail, Hotmail
Fax
Forums http://www.pmforum.org
Groupware Lotus notes, Microsoft exchange
Instant messaging MSN Messenger, Yahoo Messenger, AIM, Google
talk
Internet
Intranet

Shared database Sharepoint
Shared document repository
Shared white board
Social network Linkedin, Qzone, Friendster, Orkut, VK, Badoo
Telephone/Teleconference
Voice mail
Voice over internet protocol (VOIP) Skype, Vonage
Web based project management software MS Project server, Primavera, Copper Project, room
2.7 WORK BREAKDOWN STRUCTURES (WBS):
It is a tool that project teams use to progressively divide the deliverables of a project into smaller and
smaller pieces. Classically, and still today on large projects, the WBS is created after the scope is defined. In
contemporary project management, particularly on small and middle-sized projects, the WBS may be created
concurrently with the scope statement.
The WBS is normally developed by listing-deliverables-first major deliverables and then progressively
smaller ones until the team feels that every deliverable has been identified. Managers of small projects
sometimes perform another process concurrent with WBS development: defining activities and milestones.
Activity is defined as the process of identifying specific actions to be performed to produce the project
deliverables. Many people find that work activities can be easily defined once the various deliverables are
itemized. Developing the WBS and defining activities form an example of how to separate work processes are
sometimes performed together and sometimes separately.
The reason for using a WBS are many. It is widely considered to be one of the most essential project
management tools. Planning projects requires discipline and visibility. A WBS can be used as pictorial
representation of project deliverables. By using a systematic for creating a WBS, project team members can
ensure that they remember all deliverables that need to be created. Deliverables that are not planned, but need
to be, often add to schedule delays and budget overruns.
The WBS is basis for all subsequent planning of such important functions as schedule, resources, cost
quality, and risk. It serves as an outline for integrating these various functions. The WBS is easily modified
and can thus handle the changes that can often happen on projects. The impact of these changes is then shown
in the schedule, budget, and other control documents. If a problem occurs during project execution, the WBS
is helpful in understanding exactly where and why the problems occurred. This helps to manage the quality of
the project deliverables and keep all other facets of the project on schedule while the isolated problem is fixed.
The WBS is also helpful in project communications. Typically, many stakeholders help develop the
WBS, and this effort helps them understand the project. Software such as Microsoft project enables a WBS to
be shown in its entirety to people who need to understand the details, but it allows project details to be hidden
so that others can see the big picture.

2.7.1 CONSTRUCTING WORK BREAKDOWN STRUCTURES (WBS):
When a project team needs to construct a WBS, it needs to include in its planning team a subject matter
expert (SME), who bring expert or technical assistance to the project and understands how each portion of the
work will be accomplished. Teams approach these in two ways. Some teams include only the core team
members and plan the WBS as far as they can. At that point, different core team members are assigned to
assemble the SME’s they need to plan the remaining details. Other teams invite the SME’s to the WBS planning
meeting right from the start and utilize their input right away. The choice of how to include SME’s often is
determined by the size and complexity of the project and by the cultural norms of the company.
The planning team uses a top-down approach in creating the WBS. This is easy to start when the type
of project is familiar and at least some members of the planning team are likely understand the general flow of
work. If the project is similar to others performed, either template or the WBS from a previous project can be
used as a starting point, with the team then asking what else this project needs and what items from the template
or previous project can be skipped. Templates and pervious examples can save teams a great deal of time, but
they must be used with caution because of each project is different.
Sometimes, however, a project is so different from previous work that the team finds it useful to jump-
start the WBS construction by brainstorming a list of project deliverables just to understand the overall
structure of the project. However, once the overall structure is understood, the team proceeds with the typical
top-down approach for the remainder of the WBS construction. The steps in WBS construction are as follows;
1. Identify Major Deliverables: The team defines the project product by reviewing the project planning
completed so far. The team members review the project charter, requirements matrix, and scope statement so
that they can state what the project’s major deliverables will be. Many projects may have primary and
additional deliverables dealing with documentation and customer enablement. These could include training,
service, or other means of helping the customer use the project’s product effectively.
One of the first decisions to be made is how to organize the second level of the WBS (first level is the
overall project). Three methods are as shown in below table.
W B S ORGANIZATION EXAMPLES
PROJECT PHASE
DESIGN COMPONENTS
/DELIVERABLES
WORK FUNCTION/
SUB PROJECT
Project Management
Contract
Foundation
Framed House
Project Management
Kitchen
Bedrooms
Bathrooms
Project Management
Carpentry
Plumbing
Electrical
One method is by project phase, with the second level being the signing of a contract, building the foundation,
and framing the house. Alternatively, the second level can be organized by design components, such as kitchen,

bedrooms and bathrooms. Finally, the third level can be organized by work function. A house project organized
this way might have carpentry, plumbing and electrical as third-level elements.
Organizing by project phase has the advantage of using the milestones in the project charter as an
organizing example. It also facilitates rolling wave planning where the work to be accomplished in the near
term is planned in detail…while the work far in the future is planned at a relatively high level… the detailed
planning for work to be performed… in the near future is done as work being completed during the current
time period. If the planners of above table used rolling wave planning, the work associated with the contract
would be planned in detail worked out as the project team worked on the contract. Rolling wave planning
allows a team to get a quick start on a project-especially one where details of later phases may depend on the
results of work performed during early phases. Rolling wave planning helps a project team avoid either of two
extremes. One extreme is to never start doing anything because of the plan is not yet complete, which is also
known as analysis paralysis. The opposite extreme is not planning at all because of fear that planning will take
too long; this is known as ready, fire, aim.
Organizing by either phase or design components help to focus communications on project deliverables
and their interactions. Organizing by work function allows the functions to focus on their specific activities,
but often does not promote cross-functional discussion. Handoffs of work from one group to another are not
always as smooth. Therefore, if a project manager decides to organize the WBS by work function, extra care
needs to be taken in establishing inter-functional communications.
Note that one additional second-level item is shown all three methods- that of project management.
This includes the work of planning and managing the effort and includes preparing documents, attending
meetings, integrating diverse portions of the project, handling documentations and so on. Since much of the
work involved in project meeting is level of effort, this section may not be decomposed. If the work of the
managing project is left out, it is more likely that project will not be completed on time and within the budget.
2. Divide into Smaller Deliverables: Once the major deliverables have been defined, it is time to break them
into smaller deliverables or components. The team members can use the top-down approach, asking what all
the components of each major deliverable are. Alternatively, the team members may use bottom-up approach
by brainstorming a list of both interim and final deliverables that they feel need to be created. Each deliverable
can be written on an individual Post-it Note. These deliverables are then assembled on a large work space
where team members group the smaller deliverables either under the major deliverables that have been
previously identified or into additional related groups that are then headed by major deliverables.
3. Continue Until Deliverables are the Right Size: At this point, the WBS has been formed and can be
reviewed for completeness. Once it is determined to be complete, the team can ask if the deliverables at lowest
level need to be divided again to be at the proper size for further planning and control as described above. The
below table shows, level-two components, such as product design, are too high of level.

Therefore, at least one further level is included. If some of these components, such as product goals, are still
too broad, yet another level would need to be developed.
4. Review: At this point, several things should be considered to ensure that the WBS is structured properly.
One consideration with WBS construction is the parent-child concept. The higher level is considered the parent
and the lower level elements are considered children. For ex, ‘‘Framed house’’ is a parent to the children;
“framing contractor”, “wood”, and “assembled frame.” “Framed house,” in turn, is a child to “HOUSE.” The
framed house component is not complete until all of its children components are complete. The team asks if,
once these elements are complete, the framing is complete. In an effort to simplify the WBS, where only one
child element for a parent exists, you would not break it down. In fact, a good rule of thumb is to have
somewhere between three and nine child elements for each parent. The fewer levels a WBS has, the easier to
understand.
Each component in the WBS needs to have a unique name. If two elements have the same name, it is
confusing. Therefore, two similar components may be “draft report” and “final report,” instead of merely
calling each “report.” The team also assigns a unique number to each component. In one common numbering
system, the number for a child item starts with the number assigned to its parent and adds a digit.
Different organizations sometimes develop their own unique variations of project planning and control
techniques.
PARTIAL WBS OF CAR DEVELOPMENT PROJECT
Car Development Project
Project Management
Product Design
Product Goals
Concept Design
Modeling Design
Vehicle Integration
Engineering feasibility
Detailed Engineering Design
Performance Development
Regulatory Certification
Process Development
Prototype
Production Materials Procurement
General Materials Procurement
Trial Manufacture

2.8 SCOPE PLANNING:
Defining and managing the project scope influences the project’s overall success. Each project requires
careful balance of tools, data sources, methodologies, processes and procedures and other factors to ensure that
the effort expended on scoping activities is commensurate with the project’s size, complexity and importance.
For example, a critical project could merit formal, thorough, and time intensive scoping activities, while a
routine project could require substantially less documentation and scrutiny. The project management team
documents these scope management decisions in the project scope management plan. The project scope
management plan is a planning tool describing how the team will define the project scope, develop the detailed
project scope statement, define and develop the work breakdown structure, verify the project scope and control
the project scope. The development of project scope management plan and the detailing of project scope begin
with the analysis of the information contained in the project charter, the preliminary project scope statement,
the latest approved version of the project management plan, historical information contained in the
organizational process assets, and any relevant enterprise environmental factors.
Fig: Scope planning: Inputs, Tools and Techniques, and Outputs
➢ Scope planning: Inputs
Project Management Plan
Approved subsidiary plans of the project management plan are used to create the scope
management plan and influence the approach taken for planning scope and managing project
scope.
Project Charter
The project charter is used to provide the project context needed to plan the scope management
processes. It provides the high-level project description and product characteristics from the
project statement of work.
Enterprise Environmental Factors
The enterprise environmental factors that can influence the Plan Scope Management
process include, but are not limited to:

✓ Organization’s culture,
✓ Infrastructure,
✓ Personnel administration, and
✓ Marketplace conditions.
Organizational Process Assets
The organizational process assets that can influence the Plan Scope Management
process include, but are not limited to:
✓ Policies and procedures, and
✓ Historical information and lessons learned knowledge base
➢ Scope planning: Tools and Techniques
Expert Judgment
Expert judgment refers to input received from knowledgeable and experienced parties.
Expertise may be provided by any group or person with specialized education, knowledge, skill,
experience, or training in developing scope management plan.
Meetings
Project teams may attend project meetings to develop the scope management plan.
Attendees at these meetings may include the project manager, the project sponsor, selected project
team members, selected stakeholders, anyone with responsibility for any of the scope
management processes, and others as needed.
➢ Scope planning: Outputs
Scope Management Plan
The scope management plan is a component of the project or program management plan
that describes how the scope will be defined, developed, monitored, controlled, and verified. The
scope management plan is a major input into the Develop Project Management Plan process, and
the other scope management processes. The components of a scope management plan include:
✓ Process for preparing a detailed project scope statement;
✓ Process that enables the creation of the WBS from the detailed project scope
statement;
✓ Process that establishes how the WBS will be maintained and approved;
✓ Process that specifies how formal acceptance of the completed project deliverables
will be obtained; and
✓ Process to control how requests for changes to the detailed project scope statement
will be processed.

✓ This process is directly linked to the Perform Integrated Change Control process
Requirements Management Plan
The requirements management plan is a component of the project management plan that
describes how requirements will be analyzed, documented, and managed. The phase-to-phase
relationship, strongly influences how requirements are managed. The project manager chooses
the most effective relationship for the project and documents this approach in the requirements
management plan. Many of the requirements management plan components are based on that
relationship.
Components of the requirements management plan can include, but are not limited to:
✓ How requirements activities will be planned, tracked, and reported;
✓ Configuration management activities such as: how changes to the product will be initiated,
how impacts will be analyzed, how they will be traced, tracked, and reported, as well as the
authorization levels required to approve these changes;
✓ Requirements prioritization process;
✓ Product metrics that will be used and the rationale for using them; and
✓ Traceability structure to reflect which requirement attributes will be captured on the
traceability matrix.
2. 9 DEFINE SCOPE
Define Scope is the process of developing a detailed description of the project and product. The key
benefit of this process is that it describes the project, service, or result boundaries by defining which of the
requirements collected will be included in and excluded from the project scope. The inputs, tools and
techniques, and outputs of this process are depicted in Figure. Following figure depicts the data flow diagram
of the process.

➢ Define Scope: Inputs
Scope Management Plan
The scope management plan is a component of the project management plan that establishes
the activities for developing, monitoring, and controlling the project scope.
Project Charter:
The project charter provides the high-level project description and product characteristics. It
also contains project approval requirements. If a project charter is not used in the performing
organization, then comparable information needs to be acquired or developed, and used as a
basis for the detailed project scope statement. Organizations that do not produce a formal project
charter will usually perform an informal analysis to identify the content necessary for further
scope planning.
Requirements Documentation
This documentation will be used to select the requirements that will be included in the project.
Organizational Process Assets
Organizational process assets can influence how scope is defined. Examples include, but are
not limited to:
✓ Policies, procedures, and templates for a project scope statement;
✓ Project files from previous projects; and
✓ Lessons learned from previous phases or projects.
➢ Define Scope: Tools and Techniques
Expert Judgment
Expert judgment is often used to analyze the information needed to develop the project scope
statement. Such judgment and expertise is applied to any technical detail. Such expertise is provided
by any group or individual with specialized knowledge or training, and is available from many sources,
including but not limited to:
✓ Other units within the organization;
✓ Consultants;
✓ Stakeholders, including customers or sponsors;
✓ Professional and technical associations;
✓ Industry groups; and
✓ Subject matter experts.

Product Analysis
For projects that have a product as a deliverable, as opposed to a service or result, product
analysis can be an effective tool. Each application area has one or more generally accepted methods for
translating high-level product descriptions into tangible deliverables. Product analysis includes
techniques such as product breakdown, systems analysis, requirements analysis, systems engineering,
value engineering, and value analysis.
Alternatives Generation
Alternatives generation is a technique used to develop as many potential options as possible in
order to identify different approaches to execute and perform the work of the project. A variety of
general management techniques can be used, such as brainstorming, lateral thinking, analysis of
alternatives, etc.
Facilitated Workshops
The participation of key players with a variety of expectations and/or fields of expertise in these
intensive working sessions helps to reach a cross-functional and common understanding of the project
objectives and its limits.
➢ Define Scope: Outputs
Project Scope Statement
The project scope statement is the description of the project scope, major deliverables,
assumptions, and constraints. The project scope statement documents the entire scope, including project
and product scope. It describes, in detail, the project’s deliverables and the work required to create those
deliverables. It also provides a common understanding of the project scope among project stakeholders.
It may contain explicit scope exclusions that can assist in managing stakeholder expectations. It enables
the project team to perform more detailed planning, guides the project team’s work during execution,
and provides the baseline for evaluating whether requests for changes or additional work are contained
within or outside the project’s boundaries.
The degree and level of detail to which the project scope statement defines the work that will
be performed and the work that is excluded can help determine how well the project management team
can control the overall project scope. The detailed project scope statement, either directly, or by
reference to other documents, includes the following:
✓ Product scope description. Progressively elaborates the characteristics of the product,
service, or result described in the project charter and requirements documentation.

✓ Acceptance criteria. A set of conditions that is required to be met before deliverables are
accepted.
✓ Deliverable. Any unique and verifiable product, result, or capability to perform a service that
is required to be produced to complete a process, phase, or project. Deliverables also include
ancillary results, such as project management reports and documentation. These deliverables
may be described at a summary level or in great detail.
✓ Project exclusion. Generally, identifies what is excluded from the project. Explicitly stating
what is out of scope for the project helps to manage stakeholders’ expectations.
✓ Constraints. A limiting factor that affects the execution of a project or process. Constraints
identified with the project scope statement list and describe the specific internal or external
restrictions or limitations associated with the project scope that affect the execution of the
project, for example, a predefined budget or any imposed dates or schedule milestones that are
issued by the customer or performing organization. When a project is performed under an
agreement, contractual provisions will generally be constraints. Information on constraints
may be listed in the project scope statement or in a separate log.
✓ Assumptions. A factor in the planning process that is considered to be true, real, or certain,
without proof or demonstration. Also describes the potential impact of those factors if they
prove to be false. Project teams frequently identify, document, and validate assumptions as
part of their planning process. Information on assumptions may be listed in the project scope
statement or in a separate log.
Although the project charter and the project scope statement are sometimes perceived as containing a
certain degree of redundancy, they are different in the level of detail contained in each. The project
charter contains high level information, while the project scope statement contains a detailed
description of the scope elements. These elements are progressively elaborated throughout the project.
Following table describes some of the key elements for each document.

2.10 PREPARING COST ESTIMATION:
Cost estimating involves developing an approximation (estimate) of the costs of the resources needed
to complete project activities. In approximating cost, the estimator considers the causes of variation of the final
estimate for purpose of better managing the project.
When a project is formed under contract, care should be taken to distinguish cost estimating from
pricing. Cost estimating involves developing an assessment of the likely quantitative result-how much will it
cost the performing organization to provide the product or service involved? Pricing is a business decision-
how much will the performing organization charge for the product or service-that uses the cost estimates as
but one consideration of many.
Cost estimating includes identifying and considering various costing alternatives. For example, in most
application areas, additional work during a design phases are widely held to have the potential for reducing the
cost of the production phase. The cost estimating process must consider whether the cost of the additional
design work will be offset by the expected savings.
➢ Inputs to Cost Estimating
Work breakdown structure: A WBS is a deliverable-oriented grouping of project components
that organizes and defines the total scope of the project; work not in the WBS is outside of the
project. It is used to organize cost estimates and to ensure that all identified work has been
estimated.
Resource requirements: The resource planning process is a description of what types of resources
are required and in what quantities for each element at the lowest level of the WBS. Resource
requirements for higher levels within the WBS can be calculated based on the lowest level values.
These resources will be obtained either through staff acquisition or procurement.

Resource rates: The individual or group preparing the estimates must know the unit rates (e.g.,
staff cost per hour, bulk material cost per cubic yard) for each resource to calculate the project costs.
If actual rates are not known, the rates themselves may have to be estimated.
Activity duration estimates: Activity duration estimating is the process of taking information on
project scope and resources and then developing durations for input to schedules. It will affect cost
estimates on project, where the project budget includes allowance for the cost of financing.
Estimating publications: Commercially available data on cost estimating.
Historical information: Information on the cost of many categories of resources is often available
from one or more of the following sources.
▪ Project files-one or more of the organizations involved in the project may maintain records
of previous project results that are detailed enough to aid in developing cost estimates. In
some application areas, individual team members may maintain such records.
▪ Commercial-cost estimating databases-historical information is often available
commercially.
▪ Project team knowledge- the individual members of the project may remember previous
actuals or estimates. While such recollections may be useful, they are generally far less
reliable than documented results.
Chart of accounts: A chart of accounts describes the coding structure used by the performing
organization to financial information in its general ledger. Project cost estimates must be assigned
to the correct accounting category.
Risks: The project team considers information on risks when procuring cost estimates, since risks
can have a significant impact on cost. The project team considers the extent to which the effect risk
is included in the cost estimates for each activity.
➢ Tools and Techniques for Cost Estimating:
Analogous estimating: Analogous estimating, also called top down estimating, means using the
actual cost of a previous, similar project as the basis for estimating the cost of the current project.
It is frequently used to estimate total project costs when there is a limited amount of detailed
information about the project (e.g., in the early phases). Analogous estimating is a form of expert
judgment.
Analogous estimating is generally less costly than other techniques, but it is also generally less
accurate. It is most reliable when a) the previous projects are similar in fact and not just in
appearance, and b) the individuals or groups preparing the estimates have the needed expertise.
Parametric modeling: Parametric modeling involves using project characteristics (parameters) in
a mathematical model to predict project costs. Models may be simple (residential home construction
will cost a certain amount per square foot of living space) or complex (one model of software
development costs uses thirteen separate adjustment factors, each of which has five to seven points
on it)
Both the cost and accuracy of parametric models vary widely. They are most likely to be reliable
when a) the historical information used to develop the model was accurate, b) the parameters

used in the model are readily quantifiable, and c) the model is scalable (i.e., it works as well for
a very large project as for a very small one)
Bottom-up estimating: This technique involves estimating the cost of individual activities or work
packages, then summarizing or rolling up the individual estimates to get a project total.
The cost and accuracy of bottom-up estimating is driven by the size and complexity of the
individual activity or work package: smaller activities increase both cost and accuracy of the
estimating process. The project management team must weigh the additional accuracy against
the additional cost.
Computerized tools: Computerized tools, such as project management software spreadsheets and
simulation/statistical tools are widely used to assist with cost estimating. Such products can simplify
the use of the tools and thereby facilitate rapid consideration of many costing alternatives.
Other cost estimating methods: For example, vendor bid analysis.
➢ Outputs from Cost Estimating
Cost estimates: Cost estimates are quantitative assessments of the likely costs of the resources
required to complete project activities. They may be presented in summary or detail.
Costs must be estimated for all resources that will be charged to the project. This includes, but
is not limited to, labor, materials, supplies, and special categories such as inflation allowance or
cost reserve.
Cost estimates are generally expressed in units of currency (dollars, euros, yen etc.) to facilitate
comparisons both within and across projects. In some cases, the estimator may use units of measure
to estimate cost, such as staff hours or staff days, along with their cost estimates to facilitate
appropriate management control. Cost estimating generally include considering appropriate risk
response planning, such as contingency plans.
Cost estimated may benefit from being refined during the course of the project to reflect the
additional detail available. In some application areas, there are guidelines for when such
refinements should be made and what degree of accuracy is expected. For example, The Association
for the Advancement of Cost Engineering (AACE) International has identified a progression five
type estimates of construction costs during engineering order magnitude, conceptual, preliminary,
definitive, and control.
Supporting detail: Supporting detail for the cost estimates should include:
▪ A description of the scope of work estimated. This is often provided by a reference to the
WBS.
▪ Documentation of the basis for the estimate, i.e., how it as developed.
▪ Documentation of any assumptions made.
▪ An indication of the range of possible results; for example, Rs 10,000 ± Rs 1000 to indicate
that item is expected to cost between Rs 9000 and Rs 11000.

The amount and type of additional details vary by application area. Retaining even rough
notes may prove valuable by providing a better understanding of how the estimate was
developed.
Cost management plan: The cost management plan describes how cost variances will be managed
(e.g., different responses to major problems than to minor ones). A cost management plan may be
formal or informal, highly detailed or broadly framed, based on the needs of the project stake
holders. It is subsidiary element of the project plan.
2.11 EVALUATION OF PROJECT PROFITABILITY:
The following points highlight the top four methods of evaluating and ranking profitability of
investment projects. The methods are: 1. Pay Back Period (PBP) Method 2. Average Annual Rate of
Return (AARR) 3. Net Present Value (NPV) 4. Internal Rate of Return (ARR).
Method # 1. Payback Period Method (PBP):
The payback period method is concerned with the recoupment (return) of the original investment made
in a project. It lays emphasis on calculating the length of time it would take to recover the original investment.
It involves calculation of the cash flows which would arise from investment in each year of the life of a project.
These cash flows are accumulated year by year till the time they equal the amount of the original
investment made in the project. The length of time it takes to obtain the necessary cash flows equal to the
original investment, determines the payback period for the project. PBP is also used to rank projects. For
example, projects which repay within 3 years are preferred to those which take longer to pay back.
For example, if a project requires an annual investment of Rs. 25,000 crores and is expected to generate
an annual cash inflow of Rs. 5,000 crores for 10 years, the payback period can be calculated as under;
Pay Back Period (PBP) = Initial Investment/Annual, Cash Inflow
Or P = C/A1
Where, P = Pay Back Period;
С = Initial Investment or the cost of capital project; and
A1 = Annual Cash Inflow
Or, P = 25,000/5,000 = 5
Thus, the PBP of this project is 5 years.

Accept or Reject Criterion:
PBP is used as a criterion to accept or reject an investment proposal. PBP calculated for a proposal is
to be compared with some predetermined target period. If PBP is less than the target period, the proposal may
be accepted. If PBP is more than the target period, the proposal may be rejected. By this method, proposals
may be ranked. The lower the PBP, the more profitable the projects proposal.
Merits of Payback Period Method:
The merits of this method are as follows:
1. This method is very easy to understand, calculate and apply.
2. Under this method, the firm can judge the tied-up of its funds and the risk period relating to its various
projects.
3. This method emphasises on early returns and neglects distant returns.
4. This method takes less time in the calculation of project proposals so that the cost of analysis is low.
5. It is a more appropriate method for future planning in a fast changing industrial environment because it
considers uncertainty in investment decisions.
6. This method is also useful when the firm does not want to take risk or early return on its investment or where
the risk of obsolescence is high.
Weaknesses of Payback Period Method:
This method has the following shortcomings:
1. This method is based on the assumption that capital investment of short PBP is superior to capital investment
of long PBP. But this is not always true.
2. This method ignores those cash flows that arise after the payback period.
3. It does not measure the return on capital investment.
4. This method does not consider the timing of the occurrence of cash flows that arise from the project.
5. This method does not consider the time-value of money and neglects opportunity cost of funds.
6. This method ignores those cash flows which arise from the sale of useless and discarded material after the
project is finished.

7. It is not an appropriate method of measuring the profitability of an investment project because it does not
consider all cash flows from the project.
Method # 2. Average Annual Rate of Return (AARR):
This method is based on the accounting concept of return on investment or rate of return. It refers to
the percentage of the annual net income earned on the average funds invested in a project. The annual return
of a project is the percentage of net investment in the project.
It can symbolically be expressed as follows:
AARR = Average Annual Return/Average Investment in the Project x 100
For example, if average annual return of a project is Rs. 10,000 while the initial cost of project is
Rs.1, 0, 000, the annual rate of return will be as under:
AARR= 10,000/1,00,000 x 100
Thus, the average rate of return is 10%.
The calculation of AARR consists of the following three stages:
1. To subs-tract initial investment from gross total income during the life of the project.
2. To divide net income by life years of the project for achieving per year average income.
3. To divide average annual income by initial investment and obtain return on investment.
AARR is compared with the cut off or the pre-determined rate of return. If AARR is more than the pre-
determined rate of return, the project will be accepted otherwise rejected.
Merits of Average Annual Rate of Return:
1. This method is easy to understand and calculate.
2. It is based on accounting data that are always available.
3. It is contrary to the payback period method. It considers all the benefits arising out of the proposal throughout
its life.
Limitations of Average Annual Rate of Return:
In spite of the above merits, this method has the following limitations:

1. This method does not consider the time value of money. It gives equal importance to all returns of the project
arising throughout the whole period.
2. This method is unable to compare the projects of different time periods.
3. It is not based on cash flows but on accounting profit.
4. The use of average profit is misleading because it does not consider year-to-year pattern of profits.
Method # 3. Net Present Value Method (NPV):
The net present value (NPV) method is an important criterion for project appraisal. Profitability of a project is
evaluated by this method. It is also called as present value method. Net present value is calculated by using an
appropriate rate of interest which is the capital cost of a firm. This is the minimum rate of expected return
likely to be earned by the firm on investment proposals.
To find out the present value of cash flows expected in future periods, all the cash outflows and cash inflows
are discounted at the above rate. Net present value is the difference between total present value of cash outflows
and total present value of cash inflows occurring in periods over the entire life of the project.
When the net present value is positive, the investment proposal is profitable and worth selecting. But if it is
negative, the investment proposal is non-profitable and reject-able.
To calculate net present value index of different investment proposals, the following method can be used:
NPV= Total Present Value of All Cash Flows/ Initial Investment
NPV method considers the time value of money. It compares time value of cash flows.
NPV = Present value of Gross Earnings – Net Cash Investment NPV can be found out from the following
formula:
NPV= A1/(1+ r)1
+ A2/ (1 + r)2
+ A3 (1 + r)3
+ …..An/ (1+r)n
– C
Where A1, A2, A3 etc. are the cash inflows at the end of first, second and third year respectively
n = Expected life of investment proposals;
r = Rate of discount which is equal to the cost of capital;
С = Present value of costs.
Thus, NPV = Sum of Discounted Gross Earnings – Sum of Discounted Value of Cost For example, if the initial
investment cost of a project is Rs.100 crores, cash inflow in the coming years is Rs.125 crores and the market
rate of interest is 10% p.a., NPV will be as follows:

NPV = 125/ (1 + 0.10)1
– 100
= 125 x 10/11-100
= 113.64-100=13.64
The decision criterion relating to NPV may be as under:
(a) If NPV > 0, the project is profitable.
(b) If NPV < 0, the project will not be profitable.
(c) If NPV = 0, the project may or may not be started.
If the decision is to be taken between two projects, the project with high positive NPV would be selected rather
than the other.
Merits of NPV:
NPV method has the following merits:
(i) This method considers time value of money.
(ii) It considers the cash flows of the project in different time periods,
(iii) It is more scientific than traditional methods.
(iv) NPVs of different projects can be added to arrive at the cumulative NPV for a business.
(v) Intermediate cash flows are reinvested at the discount rate.
(vi) The calculation of NPV allows expected change in discount rate.
(vii) The discount rate (r) used for discounting future cash flows is, in fact, the minimum necessary rate of
return which consists of both net of return and premium required to set off the risk.
(viii) The discount rate applied in the NPV method is the capital cost of the firm.
(ix) The use of NPV is the most profitable in view of the maximum profit.
Demerits of NPV:
There are also some demerits of this method:

(i) It is difficult to calculate the profit cost with this method.
(ii) It is difficult to work out especially the cost of equity capital by this method.
(iii) It is not applicable without the knowledge of cost of capital.
(iv) It favours long-run projects.
(v) When projects with different investments are compared, this method does not give correct result.
(vi) Its assumption that the intermediate cash flows are reinvested on the capital cost of the firms is not always
true.
(vii) This method gives different rankings in the case of complicated projects in comparison to other methods.
Method # 4. Internal Rate of Return (IRR) Method:
This method refers to the percentage rate of return implicit in the flows of benefits and costs of projects.
A. Margin defines the internal rate of return (IRR), “as the discount rate at which the present value of return
minus costs is zero”. In other words, the discount rate which equates the present value of project with zero is
called IRR.
Thus, IRR is the discount rate which equates the present value of cash inflows with the present value
of cash outflows. IRR is also based on discount technique like NPV method.
Under this technique, the future cash inflows are discounted in such a way that their total present value
is just equal to the present value of total cash outflows. It is assumed that the management has knowledge of
the time schedule of occurrence of future cash flows but not of the rate of discount.
IRR can be measured as:
A1/ (1+ r) 1
+ A2/ (1 + r) 2
+ A3 (1 + r) 3
+ …...An/ (1+r) n
-C=0
Where, A1, A2 A3, etc. are the cash inflows at the end of the first, second and third year respectively. For
example, if Rs. 1,000 crores are invested in a project, they become Rs. 1,200 crores at the end of the first year.
Now the rate of return is calculated as follows:
C=A1/ (1+r) 1
Where, 1= Cash outflow or initial capital investment;
A1= cash inflow at the end of First year;
R= rate of return obtained from investment.

Thus, Rs. 1,000= Rs. 1,200/ (1+r)1
Or, 1,000+1,000 r = 1,200
Or, 1,000 r = 1,200-1,000
Or, 1,000 r = 200
r = 200/ 1, 00= 0.20 or 20%
If the return is obtained for more than one year, the rate of return can be calculated as under:
C=A1/ (1+ r) 1
+ A2/ (1 + r) 2
+ A3 (1 + r) 3
+ …...An/ (1+r) n
A capital project is acceptable only when its internal rate of return (IRR) is more than the desired rate of return.
It the relative profitability of the first project is higher than the second, the first will be superior and will be
selected. If the net present values of two alternative projects are given, the choice of the projects will depend
on the discount rate.
This is illustrated in Figure 1 where the rate of discount is measured along the horizontal axis and NPV on the
vertical axis.
The curve AA1 depicts investment of project A and the curve BB1 of project B. The IRR of project В is higher
than that of project A because the discount rate or is higher than Or1. At Or2, the IRR of both the projects is
equal. But if the discount rate falls below Or2 to Or3, projects will be chosen because its NPV is higher by ba.
Making a choice between two projects on the basis of changes in the discount rate is called switching and re-
switching.
Merits of IRR Method:

This method has the following merits.
1. This method does not consider the time-value of money.
2. The calculation of cost of capital is not an essential condition for using this method.
3. It considers the cash flows occurring over the entire period of the project.
Limitations of IRR Method:
But this criterion has certain limitations:
1. Once a rate of return is assumed for the calculation of the profitability of a project, it is not possible to change
it.
2. It is difficult to calculate the rate of return on a long-gestation project which does not yield benefits for a
number of years.
3. If projects are mutually exclusive, this criterion favours that project which has a lower capital cost than
others Thus it cannot be applied to highly capital-intensive projects.
4. The use of IRR for public investment does not lead to correct decisions because the definition of IRR implies
that intermediate receipts and outlays are also discounted at the internal rate. But it is not possible to discount
intermediate benefits and costs of public investment at the internal rate of return.
5. There are often such projects on which the entire investment outlay cannot be made in the first period. It
becomes difficult to calculate IRR in all such cases.
6. The IRR criterion is suitable for such investment projects which are wholly independent of others. But public
investments are not independent of each other. Often they are alternatives. Therefore, it is difficult to make a
choice between two alternative investments on the basis of their alternative internal rates of return.
7. Layard points out the problem of capital rationing where projects cannot be selected on the basis of ranking
in order of rate of return. Such projects can only be selected on the basis of their net present value.
Relation between NPV and IRR:
The relation between NPV and IRR is also depicted in Figure 2. As NPV falls, the discount rate
increases and a situation arise when NPV becomes negative. The rate at which NPV changes from positive to
negative is the IRR. That project will be selected whose IRR is higher than its discount rate.
So the right criterion for the choice of a project is r > i. This is illustrated in the figure where IRR is
taken as 10 per cent and the discount rate as 5 per cent in the case of project A. This project will be selected
for development as long as its NPV > 0 and г (10%) > i (5%).

If two projects are Rate of Discount complex, these two criteria can give different results. But for the
majority of projects, they are interchangeable. However, difficulties arise when two or more projects have to
be compared and their lengths of life and capital investments differ.
Of the two criteria, NPV is more commonly used for project valuation in private and public sectors.
But the NPV criterion is technically superior, since the IRR can give an incorrect result in special
circumstances.
Conclusion:
NPV and IRR are different from each other. NPV is an absolute amount while IRR is a rate of return.
Therefore, it is no use in comparing the ranking of investment projects with them. The projects should be
evaluated by using these techniques separately.
Some investment proposals can be evaluated in a better way by the NPV criterion while others by the
IRR criterion. The firm can then integrate the results of these techniques on the basis of the actual cost of
capital for ranking the projects.

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