Ethiopian Civil Service University (ECSU)

Institute of Public Management and Development Studies (IPMDS)

Department of Public Management

Public Sector Project Management (DM 461)

Course Reader

Prepared by: Kassa Teshager (MA)

Email: [email protected]
Telephone: +251911346214
Ethiopian Civil Service University

February 2013
Chapter 1: Overview of Project Management 4
1.1 Concepts of a Project and Project Management 4
1.2 Public Sector Vs Private Sector Projects 8
1.3 The Challenges of Public-Sector Project Management 12
1.4 Why Do Public-Sector Projects Fail? 15
1.5 The Link between Plans, Programs and Projects 20
1.6 Classification of Projects 23
1.7 The Project Life Cycle 25
Chapter Two: Project Identification 28
2.1 Project Identification and Selection 28
2.2 Sources of project ideas 28
2.3 Participatory analysis 29
2.4 Problem analysis 30
2.5 Objective analysis 33
2.6 Alternative Tree Analysis or Project Selection 34
2.7 Logical Framework Approach 35
Chapter Three: Project preparation 38
3.1 Pre-feasibility study 38
3.2 Support study 39
3.3 Feasibility study 40
3.4 Elements of feasibility study 40
3.5 Preparation of feasibility report 44
Chapter 4: Project Appraisal 46
4.1 Financial Analysis of projects 46
4.1.1 The Costs of a Project 46
4.1.2 Means of finance 49
4.1.3 Accounting Income Vs Cash Flows in a project 50
4.1.4 Project Appraisal Methods 53
4.2 Economic Analysis of a project 62
4.3 Risk and uncertainty in project Appraisal 69
Chapter 5: Project Implementation 73
5.1 Introduction 73
5.2 Project Organization 74
5.3 Project Contract Administration 76
5.4 Team Building for Project Implementation 81
5.5 Project Implementation tools 87
5.5.1 Work breakdown structure 88
5.5.2 Gantt Chart 89
5.5.3 Network Techniques 90
5.5.4 The Critical path method (CPM) 94
5.5.5 Program Evaluation and Review Technique (PERT) 98
5.5.6 Project cost analysis 98
5.5.7 Project Resource Scheduling 102
5.6 Successful Project Implementation 103
Chapter 6: Project Monitoring, Evaluation and closing 119
6.1 Introduction 119
6.2 Project Monitoring 119
6.2.1 Designing a Monitoring System 120
6.2.2 Monitoring work in progress 120
6.2.3 The steps of Project monitoring 122
6.3 Project Evaluation 123
6.3.1 Evaluation Criteria 123
6.3.2 Conducting project evaluations 123
6.3.3 When to Perform Project Evaluations 124
6.3.4 Considerations in Project Evaluations 125
6.3.5 Purposes 0f Evaluation 126
6.3.6 Processes of Evaluation 126
6.3.7 Types of Evaluation 127
6.4 Problems of Monitoring and Evaluation 128
6.5 Project Closing 131
Chapter 1: Overview of Project Management
After completing this chapter, the students should be able to:
 Define project , project management and public sector project management;
 Differentiate between plan, programs and projects in the public sector;
 Differentiate public sector project management and private sector project management
 Identify the challenges of public sector project management
 Describe the stages of project life cycle.

1.1 Concepts of a Project and Project Management

The modern concepts and methodologies of projects have been developed since the end of the 2 nd
world war. Since then, projects have been widely used to solve different kinds of technological,
economical and social problems.

What exactly is a project? Three project managers met at a training course. In the first session,
they introduced themselves and described the projects on which they were currently working:
 ‘I’m in charge of the construction of a retail development in the centre of a large town.
There are 26 retail units and a supermarket in the complex. My main responsibilities are
to co-ordinate the work of the various contractors to ensure that the project is completed
to specification, within budget and on time.’
 ‘I am directing a team of research scientists. We are running trials on a new analgesic
drug on behalf of a pharmaceutical company. It is my responsibility to design the
experiments and make sure that proper scientific and legal procedures are followed, so
that our results can be subjected to independent statistical analysis.’
 ‘The international aid agency which employs me is sending me to Central America to
organize the introduction of multimedia resources at a teachers’ training college. My role
is quite complex. I have to make sure that appropriate resources are purchased – and in
some cases developed within the college. I also have to encourage the acceptance of these
resources by lecturers and students within the college.’
On the face of it, these three projects appear to have little in common. They have been set up to
achieve very different outcomes: a shopping complex, a new drug and a new method of teaching
students. Clearly, a project is not defined by the type of outcome it is set up to achieve. It is not,
as they say, what you do, but the way that you do it.
Projects can be set up for a wide variety of purposes. They exist in all sectors of industry and in
every type of organization. Some projects are also much more complicated than others. The
Association for Project Management recognizes four levels of projects:
• An in-house project involving a single disciplinary team
• An in-house project involving a multidisciplinary team
 • A multi-company multidisciplinary project
• A multi-country multi-company multidisciplinary project.
Project management skills are needed at each of these levels, but the challenges increase as
projects become more complex. In a single disciplinary in-house project, the people involved
have probably worked together before. They understand each others’ functions and are familiar
with how things are done within the organization. At the other end of the scale, the project
manager may have to coordinate the efforts of people who:
• Are geographically distant
• Do not speak the same language
• Are working within different cultural and legal frameworks
• Are working for different organizations
• Do not understand each others’ roles.
However, all projects, whatever their scale and proposed outcome, share certain basic
characteristics.
Project is defined in different ways by different authors and all relate it to endeavor and
investment to produce a product or provide services. The following are some of the definitions of
a project as used by different authors.
PMI defines project as a “temporary endeavor undertaken to create a unique product or service”
(PMI, 2008). According to Lake (1997 :):
A project is a temporary endeavour involving a connected sequence of activities and a
range of resources, which is designed to achieve a specific and unique outcome and
which operates within time, cost and quality constraints and which is often used to
introduce change.
This is a complex definition. We need to look at its separate elements in more detail.
• Projects are temporary. They have a limited life. Unlike the ongoing operations of
organizations, projects cease when the results they were set up to achieve have been
accomplished. (However, the shopping complex, drug or teaching method will continue in
existence, perhaps for many years, after the project which brought it into being has ended.)
• Projects are established to achieve specific outcomes. In a ‘hard project’, the outcome is
something which has a physical reality, such as a building, a bridge or a new product. A ‘soft
project’, on the other hand, is designed to achieve a less tangible kind of result, such as a new
process or an organizational change. In either case, the outcomes are decided at the
beginning, at the very start of the project.
• Because projects invariably result in something new, they always bring about change of
some kind. The change may be relatively unimportant, and be easily assimilated by the
people it affects. Or it may have very significant consequences.
• A project manager therefore needs to be aware of management techniques which can be used
to overcome resistance to change.
• Every project is unique. If you have built an office building in one location and are then
asked to build an identical building on another site, you will find that you are faced with a
 new set of challenges. The geology may be slightly different. The weather conditions may
not be the same. You will probably be working with a different team, with different skills and
personalities. The uniqueness of projects calls for a distinctive approach to management.
Instead of trying to maintain an established and stable process, you must constantly think of
new solutions to new problems.
• Projects have time, cost and quality constraints. The triangle of time, cost and quality lies at
the heart of project management. It is the project manager’s task to achieve the required
outcomes within a pre-determined schedule and budget, whilst maintaining quality standards.
When a project is being planned, and also while it is underway, it is necessary to balance
these three interrelated elements.
The outcome of a project can only be achieved by the completion of a variety of separate, but
linked, activities. In a small project, these activities may be performed by the same multi-skilled
individual or individuals. More usually, they require a team of people who have different types
of technical skill or specialist knowledge. Most of the tools and techniques which are associated
with project management are used as aids to plan and monitor this sequence of activities.
As a project progresses, different types of resources are required. Among other things, these
resources may include: people with specific skills, equipment, raw materials, premises,
information and transport. Without these inputs, the activities which make up a project cannot
proceed. It is one of the chief responsibilities of the project manager to ensure that the necessary
resources are available when they are required.
Projects need leadership. Projects involve the co-ordination of different resources to achieve a
predetermined result. One person, the project manager, needs to maintain an overall vision of the
goal and a detailed understanding of the progress that has been made towards this goal. Project
teams are usually made up of people with complementary, and consequently different, areas of
expertise. It is up to the project manager to co-ordinate – and provide direction to – their efforts.
What is project management?
Projects are not a modern phenomenon. Think, for example, of the pyramids of Egypt, the
Great Wall of China or the Aztec temples. In actual fact, the results of major building projects
are all that remain of many ancient civilizations. These edifices could only have been constructed
by organizing the efforts and skills of a large number of people. They were clearly built to a
specific plan and changed the physical, and perhaps the cultural, environment. They have most
of the characteristics of the projects we recognize today. However, they were not built using the
techniques of project management.
Project management has a much shorter history. Its origins lie in World War II, when the
military authorities used the techniques of operational research to plan the optimum use of
resources. One of these techniques was the use of networks to represent a system of related
activities. In 1961 the US Navy published details of a planning technique which had been
developed on the Polaris program. They claimed that they had saved two years’ time by using
this method, which was called ‘Program Evaluation and Review Technique’, or PERT.
At about the same time, a similar technique, known as the ‘Critical Path Method’ was described
by Du Pont, a large US chemical corporation. Both these techniques used network diagrams to
plan the most effective way to use resources in complex projects. These techniques were quickly
adopted for use in many different contexts and are now indispensable tools of the trade for
project managers. It was the need to achieve results quickly which precipitated the development
of the modern techniques of project management.
In Ancient Egypt, it was possible to take a generation to build the Great Pyramid. Nowadays,
things have to happen a great deal more rapidly. In war and in business, it is essential to be ahead
of the opposition. Time also has a money value. When funds are invested in a commercial
project, they have to produce a return which is better than (or at least equal to) that which could
be achieved on the open market. The longer it takes to complete a commercial project, the higher
the returns that are expected from it.
Project management is not the same as ordinary ????, day-to-day operational management.
When you are managing the ongoing operations of an organization, your main concerns are
stability and continuity. You try to set up systems which will produce the desired results day in,
day out, month after month, perhaps even year after year. When these systems are in place, you
must constantly look for ways in which they can be refined and improved to make them more
efficient and effective, but you are, in essence, dealing with a permanent situation which will
probably outlast your own involvement with it.
Project management is different. Here, your aim is to achieve a limited set of objectives within
an agreed amount of time and an agreed budget. As a project manager, you will probably see the
project through from start to finish – and the ultimate success or failure of the scheme will have a
lot to do with the decisions you take along the way. You make the plans and you monitor the
way they are carried out.
In operational management, there are established lines of communication and command, leading
from the factory floor (or its equivalent) to the Managing Director. If you need advice or
something goes wrong, you know where you can turn to within the organization. In a project,
everything focuses on the project manager. You are at the centre of a team of people with
differing skills who may well be working together for the first time. It is your task to focus their
talents and energy on the objectives you want to achieve.
Project management demands highly developed planning skills, leadership qualities, an
understanding of the priorities and concerns of your team, a sensitivity to the culture of the
environment in which you are working, the ability to know when to take a calculated risk –
and a greatly increased level of personal commitment.
Project management is not an easy ride. But it offers opportunities and responsibilities which
are only usually available in operational management to those people who reach a very senior
level.
Defining project management
Project management is the process of planning, controlling and directing a project from its
inception to its completion, in a given time, at given cost, and for a given purpose.
The classic definition of project management, according to Lake 1997, is:
‘The application of a collection of tools and techniques to direct the use of diverse
resources toward the accomplishment of a unique, complex, one time task within time,
cost and quality constraints’ (Lake 1997)
According to PMBOK, project management is the application of knowledge, skills, tools and
techniques to project activities in order to meet project requirements [PMI, 2008]. This
definition involves different key concepts in it.
 Project requirements- refer to the whole purpose of the project –this could be to solve a
problem, address a need, or take advantage of an opportunity.
 Knowledge- refers to as acquiring an understanding of the body of knowledge in nine
areas: integration, scope, time, cost, quality, contract, resources, communication and risks.
 Skills – an ability or aptitude to perform something well
 Tools and techniques- tools refer to PM templates and checklists to follow, and techniques
describe how to use the tools or procedures to accomplish a specific activity or task.
What are public projects?
A public project is any project that is funded by a government, and is meant to be owned or
operated by that government. Most public projects relate to work a government does to fulfill a
public purpose, and commonly they include such things as road repair and construction, public
building construction, schools, and even public parks. Public sector projects are funded by
taxpayers, and therefore are subject to more open procedures than many other projects. For
example, a public project may need to publish requirements and request bids. Those bids must be
opened at a public place and then considered publicly.

1.2 Public Sector Vs Private Sector Projects

Before embarking on a study of public-sector project management, including its unique
characteristics, we should first identify how the public sector differs from the private sector.
More differences exist between private-sector organizations and public-sector organizations than
just their approach to earning and distributing revenue.
Of course, there are differences among public-sector agencies as well. Some public-sector
organizations can be defined as public enterprises that are charged with the provision of services
on a self-supporting basis. These include airlines, telecommunication, commercial banks and,
municipal utilities that provide water and sewerage, and other services. Other public-sector
organizations can arguably be described as only quasi-public. Examples of these organizations
are state- supported universities, which receive an increasingly lower percentage of their
operating funds from the states they are in.
 Some public-sector organizations provide direct services to the public, although those services
are increasingly being outsourced as well. A good example is the provision of health and
education services by state institutions.
Other public-sector agencies set standards for the industries or perform economic regulation. For
example, in USA, public service commissions at the federal and state levels set rates for gas,
electricity, and telecommunications providers. In the past decade, some of those services have
been deregulated, and market mechanisms are allowed to set rates. Nonetheless, public service
commissions still retain general oversight of the quality of services and the maintenance of
effective markets.
Some public-sector organizations are also responsible for ensuring that other agencies comply
with the myriad of laws, rules, and process requirements that have been levied on public-sector
agencies. Those organizations exercise formal and informal supervision of other agencies and
may set requirements for agency operations. Budget agencies not only prepare the budget for the
jurisdiction (e.g., the city, the state, the nation) but also are responsible for ensuring that the
agencies comply with budget requirements and conform to appropriated limits. These agencies
create or enforce many of the constraints that impact public- sector projects.
Despite this array of types of public-sector organizations, they have some shared characteristics,
particularly with regard to the management of their projects. Descriptions of those shared
characteristics follow.
The Public-Service Purpose
Although they sometimes provide services to distinct populations, all public-sector organizations
operate to serve the larger public. That service to the public complicates the management of
public agencies and public-sector projects, because it makes identifying objectives much more
complex. Not only do a variety of opinions attend the best way to serve that public, but the
public itself is difficult, to define.
For example, what is the goal of a public-sector program designed to revitalize neighborhoods?
And who is the public to be served by that program? Is the goal of the program to encourage new
investment and development in the neighborhood, which might draw new residents to the
neighborhood and consequently drive out current low-income residents? Or is the goal to make
housing affordable to current residents? The answers to those tough questions are not without
controversy and can substantially impact the direction of the program and the projects within it.
In general, public-sector agencies lack the simple measures of performance, like return on
investment (ROI), that private-sector organizations enjoy. Although simple project outcomes,
like on-budget performance and timeliness, can be measured, larger outcomes, like the impact on
public welfare, are more difficult to measure.
Overlapping Oversight Mechanisms
Public agencies are constrained by overlapping oversight structures. A public agency may
operate under
(1) The oversight of an elected executive (e.g., a governor or the President),
(2) Oversight agencies like the Government Accountability Office (GAO) or an office of the
budget at the state level,
(3) Legislative bodies and their own oversight agencies (e.g., a legislative budget office)
(4) Elected oversight officials, such as state auditors and treasurers. The constraints of these
overlapping oversight agencies are embedded in statutes, rules, executive orders, and required
processes. This overlapping oversight represents, at the operational level, the system of checks
and balances that limits the power of government agencies to operate outside the bounds of
public authorization.
As a result of this overlapping oversight, public-sector projects may be required to dedicate
substantial resources to ensuring that constraints are not violated and that oversight agencies are
placated. These constraints are, in fact, designed to limit agency discretion and operations so that
public-sector employees remain accountable. In addition, the penalties on public-sector agencies
for violating these constraints are so severe that public-sector agencies may be very risk averse,
even to the extent of choosing compliance over the attainment of business objectives. These
overlapping oversight mechanisms also increase the number of project stakeholders with an
interest in a project.
A Short Planning Horizon
Private-sector organizations like to presume that they operate at higher speed than public-sector
agencies. Sometimes they do, but there is one area in which the public sector is required to move
more quickly. Public- sector agencies have a shorter planning horizon than private-sector
organizations because of electoral cycles. Although some public-sector agencies are not subject
to election cycles, those that are subject to them are required to articulate an agenda, create plans
for implementation of that agenda, and create outcomes in four years, with a four-year grace
period if the administration is reelected.
Private-sector, for-profit organizations can establish substantially longer time horizons for
product planning and other strategic movements. Public-sector organizations cannot count on the
commitment to strategic goals beyond the term of current political officeholders and their
appointees.
A Contentious Environment
Every project is subject to conflict and differences of opinion, and private-sector projects may
not be supported by all of the organization’s stakeholders. But public-sector organizations are
subjected to an organized political opposition. That opposition, usually embedded in the
opposition party, may be on the alert for opportunities for criticism of the current administration.
In addition, the media, though not explicitly attempting to find fault with the current
administration, finds good copy” in the failures of public-sector projects. Unfortunately, failed
projects make better stories than successful projects. Both of these factors in combination cause
public-sector project managers to feel that they operate in a hostile environment and that they
need to avoid visible failure at all costs.
Overlapping Service Delivery Mechanisms
It is rare that any public-sector agency has a monopoly on providing a public service or attaining
a public goal. In the United States, for example, services provided to those with mental illnesses
may be funded by federal programs and grants, managed by state agencies, and provided by
private providers, the state agencies themselves, and county governments. Similarly, education at
any level is subject to a variety of funding mechanisms at various levels of government and is
provided to the public by an equally extensive array of organizations.
As a result, public-sector agencies have to coordinate their projects with other agencies and
consider the impact of their projects on that array of programs and providers. These overlapping
service delivery mechanisms also increase the number of stakeholders involved in a project.
Some observers might argue that another difference between public- sector and private-sector
projects is that public-sector employees are not adequately motivated. That is not the case. First,
though it is true that public-sector employees may not be motivated by short-term financial
rewards such as bonuses, they are motivated by the same drives for professionalism and career
growth that inspire private- sector employees. Second, they have learned that their motivation for
performance must be tempered with an understanding of the constraints under which they work.
Blind ambition or revolutionaries cannot be accommodated in public-sector agencies, and public-
sector employees have learned that accomplishing objectives requires sharing responsibility and
working within existing systems or shaping those systems incrementally.
Third, because of the long-term nature of most public-sector employment and the group cohesion
that characterizes many public-sector agencies, public-sector employees have strong group
norms and are motivated by a desire to support their colleagues. Although military operations are
perhaps an extreme example of public-sector projects, the behavior of soldiers in combat has
been shown to be motivated by allegiance to their comrades in small units. Public-sector project
managers may want to keep in mind that, in many cases, the allegiance to the small group
exceeds the allegiance to the larger agency or organization.
Last, public-sector employees are also motivated by a concern for the public interest.
Operationalizing that concern requires complex behaviors given the challenges inherent in
identifying the public interest and the actions that must be taken to serve that interest. Inspiring
project team members based on their public-interest motivation is, of course, more challenging
than awarding them bonuses, which is probably also impossible in public-sector agencies. It is a
factor, however, that astute project managers can apply to induce team performance.
1.3 The Challenges of Public-Sector Project Management
Private-sector project managers like to assume that their work is more demanding than projects
in the public sector. They assume that their projects are more complex, subject to tougher
management oversight, and mandated to move at faster speeds. Although private-sector projects
can be tough, in many cases, it is easier to accomplish results in the private sector than in the
public sector. Public-sector projects can be more difficult than many private-sector projects
because they:
  Operate in an environment of often-conflicting goals and outcomes
 Involve many layers of stakeholders with varied interests
 Must placate political interests and operate under media scrutiny
 Are allowed little tolerance for failure
 Operate in organizations that often have a difficult time identifying outcome measures
and missions
 Are required to be performed under constraints imposed by administrative rules and
often-cumbersome policies and processes that can delay projects and consume project
resources
 Require the cooperation and performance of agencies outside of the project team for
purchasing, hiring, and other functions
 Must make do with existing state resources more often than private- sector projects
because of civil-service protections and hiring systems
 Are performed in organizations that may not be comfortable or used to directed action
and project success
 Are performed in an environment that may include political adversaries
If these challenges were not tough enough, because of their ability to push the burden of paying
for projects to future generations, public-sector projects have a reach deep into the future.’ That
introduces the challenges of serving the needs of stakeholders who are not yet “at the table” and
whose interests might be difficult to identify. Some also cite the relative lack of project
management maturity in public organizations as a challenge of public-sector projects.
In addition to these complications, public projects are often more complex than those in the
private sector. For some projects, the outcome can be defined at the beginning of the project.
Construction projects are one example. For other projects, the desired outcome can only be
defined as the project progresses. Examples of those are organizational change projects and
complex information technology projects. Although the first type of project can be difficult and
require detailed planning and implementation, the second type, those whose outcomes arc
determined over the course of the project, are regarded as more challenging. They require more
interaction with stakeholders and more openness to factors outside of the control of the project
team.
Because of the multiple stakeholders involved in public-sector projects, the types of projects the
public sector engages in, and the difficulty of identifying measurable outcomes in the public
sector, more public-sector projects are likely to be of the latter variety and more difficult. Project
complexity and tools for managing complexity and chaos will be discussed later in this book.
As a result of the distinguishing characteristics of public-sector organizations, public-sector
projects require the management, not only of the project team, but of an entire community. Little
is accomplished in the public sector by lone individuals or even by teams working in isolation.
Instead, public-sector projects engage broad groups of stakeholders who not only have a stake in
the project but also have a voice and an opportunity to influence outcomes. In public-sector
projects, even though the project manager may be ultimately accountable, governance of the
project and credit for successes must be shared.
The good news for public-sector project managers is that the community of stakeholders, which
may seem to be a burden, can also be an opportunity and a source of resources and support.
Many of those stake- holders stand ready to provide help to the project manager as he or she
attempts to navigate the constraints affecting the project. Others can be enlisted to support the
project, and their authority can make the difference between project success and failure.
In addition to the existing challenges of public-sector projects listed previously, some factors will
place soon more stress on public-sector organizations and demand even more emphasis on solid
project management. Some of the emerging challenges for public-sector organizations will
include:
 Modest or stagnant economic growth
 Globalization and the loss of the industrial revenue base and, increasingly, the service-
sector revenue base
 A decline in real wages and pressures for tax reform
 Private-sector practices that pass the corporate safety net back to individuals, who may
then look to government for such essential security mechanisms as health coverage
 Difficulty in passing on the need for government revenue to taxpayers and a general loss
of confidence in government
 Structural limitations on revenue generation, such as Proposition 13 and property tax
indexing
 The redirection of scarce public revenues to homeland security and defense without the
imposition of war taxes
 The erosion of public-sector income as entitlement programs drain revenues in response
to an aging population
 An age imbalance, with fewer workers in the workforce to support an expanding number
of retirees and children
 Longer life expectancy, which further burdens entitlement and health programs
 Increasing costs of health care well beyond the level of inflation
 Long-delayed investments in our national infrastructure, including roads, bridges, and
water systems
In combination, these factors constitute a looming storm that will require us to question our
assumptions about government operations and services. Doing far more with much less will
require new thinking about how government performs its work. It will require more innovation
than the development of new services. It will take radical rethinking of what government does
and how it goes about getting it done. It will take recognition that the temporary budget
reductions required in these tough financial times for government are, in fact, permanent.
Private-sector organizations have already experienced similar stressors, in response to economic
concerns and a chaotic environment. Those private-sector organizations are focused on the
demands of the competitive market, which requires lean, fast-moving structures and cost
reductions. Free flows of capital and the demands for measurable financial performance in the
short term, consumer choices, universally available electronic communications, and worldwide
labor and capital markets have changed the economic climate for companies. As a result, most
private-sector organizations are adopting a short-term planning horizon, embracing the need to
shift asset risk to others, and recognizing the need to maintain lean organizational infrastructures.
A.i private-sector organizations move toward these highly competitive models of operations,
they are moving away from traditional operating models. That movement is reflected in the end
of the lifetime employment guarantee, reduced employee benefits, and the use of temporary staff
and vendors instead of long-term employees. Similarly, highly competitive private-sector
organizations are attempting to reduce their reliance on careful processes and procedures.
Instead, they are pushing responsibility for decision making to staff at the interface between the
organization and the customer.
In short, life in the private sector has become less collaborative and more competitive and less
controlled and more chaotic. As noted, many of the same pressures that have driven private-
sector organizations to adopt the listed strategies will soon impact government and the public
sector. Agencies will need to compete for ever-decreasing amounts of revenue, governments will
try to create lean government as a means of competing with other jurisdictions for jobs, and
demands on government will increase as the social safety net erodes. In short, public- sector
organizations will need to adopt some of the same strategies that private-sector organizations
have already made as those public-sector organizations face increasing resource constraints and
new demands for services. Those changes will be difficult for the public sector.
For decades, public-sector organizations have emphasized organizational models that value
stable processes and an aversion to risk. In addition, public-sector compensation systems have
valued longevity, and retirement systems have provided great benefits in the future in return for
less compensation in the short run. As a result, public- sector organizations have not been
structured to be flexible and innovative, two requirements of organizations in the new economy.
Whether government agencies want to make the transitions demanded by the coming economic
storm, environmental conditions are certain to push them there.
EXERCISE
Identity a public-sector organization. Identity the pressures (e.g., financial, competitive,
technological, workforce) that it might be facing. Create a list. For the pressures on that list,
create a second column identifying strategies (projects) for coping with those challenges.

1.4 Why Do Public-Sector Projects Fail?

Project-sector projects fail for all of the normal reasons that any project fails. Projects in all
sectors of the economy fail because they:
 Fail to identify the needs of customers or users of the product or the project
 Create overly optimistic schedules and fail to anticipate the impact of late deliverables
  Do not get the resources necessary to complete the project
 Do not devote enough time to project planning
 Are subject to changing management priorities
 Employ technology that does not work as expected
 Do not get good performance from vendors
 Get overwhelmed by competing projects and do not apply solid project pnoritization
 Do not adequately identify, analyze, and address project risks
 Make assumptions that are not validated and agreed to
 Dissolve in the face of conflict among stakeholders
 Get overtaken by unexpected events
 Do not apply solid and repeatable project management methods
 Do not have the benefit of an experienced project manager
 Do not engage and involve stakeholders throughout the project
 Do not identify lessons learned from prior projects
 Define an overly broad project scope that cannot be well-defined
In addition, public-sector projects can fail for a set of reasons related to the unique character of
public-sector projects in that regard, they:
• Run afoul of political processes
• Lack the necessary resources because of requirements to use existing staff rather than to
contract for the right expertise
• Are constrained by civil-service rules that limit assignment of activities to project staff
• Lose budget authorization
• Lose support at the change of administration due to electoral cycles
• Are overwhelmed by administrative rules and required processes for purchasing and
hiring
• Fail to satisfy oversight agencies
• Adopt overly conservative approaches due to the contentious nature of the project
environment
• Are victimized by suboptimal vendors who have been selected by purchasing processes
that are overly focused on costs or that can be influenced by factors that are not relevant
to performance
• Are compromised by the bias of public-sector managers and staff toward compliance
over performance
• Fail to identify project goals given the wide array of project stake- holders in the public
sector and the challenges of identifying public- sector goals and metrics for success
If this all sounds daunting, it should. Doing projects right in the public sector requires more than
knowledge of project management methods. It requires creativity, communications, organization,
conflict management, and hard work. It requires management of the unique constraints imposed
by public-sector organizations, which will be discussed at length later As projects get more
complex and as the number of people impacted by the projects grows, those projects will become
even more challenging. Fortunately, there is hopes.
The good news about project management is that it can be learned. That does not mean that
anybody can become a great project manager. Being a great project manager requires knowledge
of project management, Knowledge of the technology being employed, and the ability to
communicate, empathize, and manage conflict. Anyone, though, can become a better project
manager.
Because all sorts of organizations recognized that they could not keep shooting themselves in the
foot by failing at project management, they began to try to get better at it. They started studying
project management, buying project management training for their employees, and developing
project management methods and tools. Good project management became a competitive
advantage for private-sector organizations, and project management began to he viewed as a
necessary skill for managers at many levels of the organization. Project management also
became a tool for reducing the risk of failed projects and, as a result, for contributing to the
success of the organization.
Soon after, project management became a recognized discipline in organizations, universities,
and professional development programs. The list of universities offering degrees in project
management or project management concentrations within other programs is growing. And,
pulling it all together, a professional association of project managers seized the bull by the horns
and developed a worldwide standard in project management and a certification for those who
have demonstrated competence in project management. The PMI project management
Knowledge Areas are described in A Guide to the Project Management Body of Knowledge
(PMBOKL Guide—Fourth Edition).
sRecognition of the importance of project management in the public sector has also grown. PMI
has also recognized the value of government project management and has done two important
things:

 Established a government project special-interest group to allow public project managers

to share best practices and develop their skills
 Created a Government Extension to the PMBOK” Guide Third Edition which provides
information on project management within the unique environment of the public sector
and accumulates good practices that have become widely accepted in the field
Public-sector organizations have also recognized the value of good project management, as
indicated by:
 The creation of project management training programs at the state and federal levels
 The increasing recognition of the PMP” certification as a necessary qualification for
public project managers and minimum requirement for some positions
As a result, project management has become a legitimate profession and career path. As a
profession, it has created:
  Recognition by employers of the importance of project management and demand
for skilled project managers
 Academic courses and recognition
 Certification
 Research
The Value of Project Management to a Public-Sector Organization
Project management can help a public organization adapt to the changing dynamics of the
environment within which those organizations must function. As indicated earlier, it is probably
the ideal management tool for coping with the storm about to come. Project management works
under those circumstances because it:
 Defines outcomes to be achieved
 Identifies the minimal resources necessary to complete those objectives
 Allows the organization to move quickly and to hit schedule targets
 Manages the risks of goal achievement
 Focuses the organization’s attention on the goal and the required outcomes
 Creates change
In the public sector, creating a focus on outcomes is particularly important because of the
challenges public-sector organizations face in identifying and reaching definable goals. Project
management forces dialogue to identify what the organization is trying to achieve and how it
intends to achieve it. One of the most useful attributes of disciplined project management is its
ability to make managers and team members engage in “adult thinking.” Adult thinking is
different from “magical thinking,” which many organizations and managers like to engage in.
Magical thinking allows a manager or an organization to imagine that they do not have to make
choices; magical thinking implies that an organization can have things two ways at the same
time. For example, organizations or individuals engaged in magical thinking could act as if:
 The decision to add project scope or remove resources from the project will not have any
impact
 Projects can simply be added to the project inventory without having an impact on the
projects already pending
 People can work unlimited numbers of hours to accomplish new priorities
 Projects do not need to be prioritized because “it all needs to be done”
 Personnel who do not have the necessary skills will still get the job done
 Projects can be completed despite the unrealistic constraints placed on them
 Project managers will define the project perfectly without guidance (i.e., managers can
remove themselves from accountability for projects by failing to define them)
Public-sector managers, faced with many competing demands and stakeholders, are especially
prone to levying new demands on staff without eliminating existing demands or prioritizing
requirements.
Project management requires defining priorities and needs. It requires identifying needed
resources and dedicating them to the project to achieve the desired results. It does not mean that
managers cannot change priorities or projects; it simply means that the implications of those
changes must be clearly understood. At the same time that project management assigns
accountability for performance, it protects the project manager and project team by forcing a
clear description of the project and a dialogue about expectations.
The Downside of Project Management
Despite its being a potent tool to improve the operations of public-sector organizations, project
management is not perfect. Its downsides include the facts that:
 Project management can encourage short-term thinking in that the focus on task
accomplishment that project management provides is a strength and a weakness.
 Project management can require new skills that may be difficult for some managers to
adopt.
 Project management can increase stress by requiring accountability and performance,
although it can reduce stress by ending the magical thinking that public-sector managers
might have engaged in.
 Project management can provide an incentive for focusing on measurable, tangible
benefits ahead of long-term strategic needs.
 Project management, poorly applied, can create new management processes that do not
add enough value to of het their cost.
 The deployment of project management processes and methods may irritate senior
project managers who prefer to “do things their way.”
 Project deadlines can wear out, staff.
Too much project management discipline and too many processes can be applied to the extent
that the benefits of project management are no longer worth the costs. To avoid that over
commitment to project management, project management processes must be scalable based on
the risk of the project. That is to say that if a project is of low risk (e.g., it is a type of project that
the organization has had substantial success with or can expect easy success with, the project
management methods applied to it do not need to be extensive. A little project management
discipline may add value, but extensive processes will not. (Methods for creating scalable project
management based on the risks of projects are discussed later.)
For high-risk projects, the project management methods of the organization need to be applied
with greater discipline. The purpose, after all, of creating any process is to reduce risk. The same
is true of project management methods and processes; they are designed to reduce the risk of
project failure. If that risk is high, extensive processes and methods should be applied. If that risk
is low, more informal project management methods can be employed.
1.5 The Link between Plans, Programs and Projects
You have learnt planning in your Introduction to Management course. Planning, in general, is
defined as the process of determining organizational goals and the courses of actions for
attaining these goals. There are three levels of planning that are different from each other in
terms of scope, timeframe, complexity and preparation. The three levels of planning are:
1. Strategic planning is the process of setting organizational long run goals/objectives through
gathering external and internal information and developing alternative courses of actions
needed for achieving the set goals of an organization. The time frame for strategic planning is
between five to ten years. The top managers are mainly responsible for preparing strategic
plans.
2. Tactical (Intermediate planning): This is the process of translating strategic plans in to
specific objectives that must be achieved and specific actions that must be done by each
individual department/division of an organization. The time frame for tactical planning
usually covers between two and five years. Usually the middle level managers are
responsible for preparing departmental plans with the aim these plan contribute to the
achievement of organization’s broad goals.
3. Operational plans- this plan show how departmental plans can be implemented by each
section of the department on a daily basis. In most cases the time frame for this kind of
planning is between one and two years. The operational level managers are responsible for
preparing daily, weekly and monthly schedules of activities and targets of their units in line
with the objective and goal set for their departments.
Based on the above levels of planning, the essential point is to understand the logical
relationships existing between planning and projects. The first step of organizations is to
determine what and when to achieve their goals. The second step is to formulate strategies on
how to achieve their goals. Strategies answer the “how?” question of planning.
The levels of courses of actions are strategies, programs and projects. The major difference
between a project and a program is not so much in the objectives stated but lies more in scope,
details, and accuracy. A project is designed with a high degree of precision and details as regards
to its objectives, features, calculation of return and implementation plan. A Program by contrast
is general and comprehensive and aims at a broader goal often related to a sectoral policy of a
country or departmental policy of an organization. A Program may cover a large sector of the
economy, thus contributing to increased national output, and having an important impact to the
society. In most cases, it may be difficult to calculate the returns of a Program because it has no
details of activities amenable for estimating and calculating costs.
Hence, a project can be defined as a specific component of a broad Program . Program in turn
may consist of a number of specific projects. However, there is no clear line of demarcation to
separate a strategy, a program and a project. A project can be considered as a program when the
Program is addressing a narrow scope of a problem, when it is not necessary to break into major
specific components and when there is no a higher level system for which a project is a
component. Projects, which are not linked with others to form a program, are sometimes referred
to as “stand alone” projects.
Let us consider the following example how a strategy, a program and projects are interrelated.
  Government Vision: Freeing the Ethiopian People from poverty and seeing economically
strong and prosperous Ethiopian people (used as example).
 Government Goal: Improving the living standard of the Ethiopian People by 500%
within ten years (example).
 Government Strategy: Agricultural Development Led Industrialization.
 Government Program: Moving farmers from highly densely populated areas to
uninhabited arable lands (Villagisation Program, which is one of the many programs for
the above strategy)
 Government Projects: The villagization Program contains different projects such as
education projects (opening elementary and secondary schools), Road construction
project, Health projects such as establishing clinics and hospitals, Water and sanitation
projects, etc that are essential for a new village.
Though investment decision is the responsibility of the top management, project implementation
is the responsibility of the operational level management. Therefore, projects are the means by
which investment and other development objectives stated in the plans can be clarified and
realized. Sound development plans require good projects, just as good projects require sound
planning.
Almost all developing countries have national plans to speed up their economic growth and
social development. Sound planning depends on the availability of a wide range of information
about existing and potential investment opportunities and their impacts on the growth of the
national economy and other national objectives. The top management can conduct a project to
get information needed for planning. Realistic planning involves identifying the resources
(financial, human, material, plant and assets) needed for implementing a particular project.
Governments allocate financial and administrative resources among many sectors and many
competing programs. If the project needs to have a significant effect on the whole growth of the
economy, then it must be very carefully planned in coordination with other investments.
Therefore, project analysis can help to prioritize this allocation.
Effective project preparation and analysis must be set in a framework of broader development
plans. Projects must fit appropriately to the overall development strategy and a broader planning
process. In addition, projects should be planned within an appropriate policy framework of the
national plan. Usually economists state "a good policy beats a good project any day". This is
simply to mean that a policy affects the whole sub sector where as a project affects only a part of
the sub-sector. For example, setting the price of rice at an economically efficient level can make
farmers to produce the ‘right’ quantities of rice. However, providing irrigation water below cost
to compensate for the distorted price of rice will affect only those farms that receive the
subsidized water.
If there is no organic link between policies, plans and projects, then the effectiveness and
efficiency of investment decisions could be compromised. Accordingly, one has to ensure
adequate and proper responses to the following questions.
1. What is the major objective of the project? The actual aims / quotas / milestones to be
reached within a specified time, according to client requirements specified.
2. What is the basis for the demand or need for the goods/services to be produced by the
project?
3. What problem or opportunity is the project addressing?
4. How does the project contribute to the wider goals of the sector/organization/ region? I.e.
whether the project is consistent with the priorities set in policy and development plan
documents of a country, region, zone, woreda or a specific organization.
5. What alternative ways of addressing the problem/opportunity/ have been considered? What
Path (Strategy) to be followed and actions to be taken to reach the aims and objectives.
6. Why is the proposed project the most appropriate way of addressing the
problem/opportunity;
7. What is the approximate cost and timescale Schedules of the project? This is a plan showing
when individual / group activities will start and end and at what cost.
8. Who are the major stakeholders and beneficiaries of a project? In what ways are they
expected to participate?
9. Which institution is the most appropriate for implementation? This is about organizing and
Assigning specific people to a specific objective, as well as the specific responsibilities for
each task
10. Are there additional or special circumstances relevant to the project?
11. Standards and Determining quality for each action
1.6 Classification of Projects
We can classify projects based on purposes of investment, on size and on the extent of the ability
of defining goals and defining methods for achieving project goals.
1) Classification based on purpose of investment
There can be three types of projects that can be classified based on purposes of investment
 New projects: These projects are designed to establish a new productive process
independent of previous lines of production.
 Expansion projects: this is an activity for extending an existing economic activity with
the same output, technology and organization.
 Updating or maintenance projects: these are projects to replace or change some
elements in an existing activity without a major change of outputs. Updating can involve
some change in technology but within the context of an existing organization.
2) Classification based on size of projects
This is classifying projects based on the scopes of the project. As the scope varies, the amount of
resources (material, financial and human) to be used by the project also varies. Therefore, the
amount of project investment or the number of people employed in the project depicts how large
or small a project is. We use ranges of investment or ranges of employees to classify projects in
to three major categories, namely: small, medium and large projects.
3) Classification Based on definability of methods and goals
Projects can be classified based on the ability of defining goals of projects and on the ability of
defining the methods of achieving the goal of a project. We can use the goal methods matrix for
this classification as follows (Turner, 1999, pp. 25-27).

Type 2 Type 4 Projects

No Greater
Projects Research and chance
Work Product organisational for
Greater chance
methods Development change failure
for success
well defined Type 1 Type 3 Projects
Projects Systems and
Engineering development
Yes

Yes No

Project goals well defined

Type 1 Projects: For these types of projects both the goals and methods of achieving the goals
are well defined. For example, if we consider engineering projects, we can easily describe the
work methods, which include the knowledge and the technology to be used for implementing the
project, and we can easily describe the final outcome of the project. Hence, planning is simple
and an emphasis is on activity based planning.
Type 2 Projects: In these types of projects the goals are well defined but not the methods. For
example, in product development projects, the functionality of the product is known but not how
it will be achieved. Planning is difficult in such types of projects. Hence, we use the milestone
planning. Milestones are intermediate points that can be used as benchmarks (Lock, 2000)1 for
each activity in a project. The milestones, for these types of projects, represent the components
of the product to be delivered.
Type 3 Projects: In these types of projects the goals are poorly defined but the methods are well
defined. For example, in information system projects, the methodology for designing an
information system is known but the goal of the project is not clear because the users may have
difficulty in explaining their information requirement at the beginning of the project; as a result
they may change their ideas from time to time during the implementation of a project. Planning
is a little bit difficult for these types of projects. Therefore, milestone planning, representing the
completion of life cycles, is appropriate for such types of projects.

1
Lock, Dennis (2000), Project Management, 7th edition
Type 4 Projects: In these types of projects both the goals and methods of achieving the projects
are poorly defined. Projects in this group are researches or organizational change projects. Soft
systems methodologies can be used in planning. The milestone based planning for such types of
projects have gateways with go/no go decision points, through which the research project must
pass or aborted.
It is important to note three things for the classification of projects based on Goal- methods
matrix. First, type 4 projects can change their style to other types of projects as time passes and
the technology for achieving them is discovered. For example, many of the engineering projects,
such as sending man to the moon, were type 4 projects at one time. Second, a single project can
involve more than one type of projects. For example, a new project can have an engineering
work (type 1 project) and management information system development (type 3 project). Third,
the level of risk differs from one project type to the other. On one extreme, the risk of failure is
the highest for type 4 projects because the means of achieving the goal and the direction of the
project are difficult to determine and predict. On the other extreme, the risk of failure is the
lowest for Type 1 Projects because the goals and the means for achieving the goals are easily
predictable.

1.7 The Project Life Cycle

The project life cycle is the stages through which the project passes from inception to its
completion. There are five phases (stages) in the life of a project (Cleland and King, 1975)2.
 Project Identification (conceptual) phase
 Project Preparation and Analysis
 Project Appraisal and Design stage,
 Project Implementation and Control phase
 Project Finalization and Close out (Ex-post Evaluation) phase
1st The identification (conceptual) phase
The conceptual phase is the process of problem or opportunity identification phase. This is the
first phase under which the germination of a project may evolve from other researches, from
current organizational problem, or from the observation of organizational interfaces. This part
will be discussed in detail in the first section of the 2nd chapter.
s2nd The preparation and analysis phase
This is the phase of making detailed project planning because this phase gives detail answers for
questions like what to do, when to do it and how to do it. This phase is mainly concerned with
the pre-feasibility and feasibility study of a project. At prefeasibility stage, a rough assessment is
made on the financial, economical and technical viability of the project. At feasibility stage a
detail research and data gathering are made on economic, financial, technical, social and
2
Cleland, D.I. and W.R. King (1975), System Analysis and Project Management, McGraw Hill,
Newyork
environmental (ecological) impacts of the project. The technical, social and environmental
aspects of projects are discussed in detail in the 2 nd section of chapter II and the financial and
economic aspects are discussed in detail in chapter two.
3rd Appraisal and design
During appraisal a critical review is conducted to re-examine every aspect of the project and
hence to assess the appropriateness of the project before committing large sums of money.
Appraisal helps to revise and modify the plan formulated during the first two phases because
unnoticed factors can be uncovered at this stage of detail planning. A wide range of appraisal
criteria have been developed to judge the worthwhile of a project. They are divided into two
broad categories, viz., non-discounting criteria and discounting criteria. The principal non-
discounting criteria are the payback period and the accounting rate of return. The key
discounting criteria are the net present value, the internal rate of return, and the benefit cost
ratio.
After the appraisal, we develop a fuller system design and compose a capital expenditure
proposal. At the design stage the activities are scheduled, standards are set and the procedures to
be followed by each unit are documented. This part is largely discussed in chapter three.
4th The implementation phase
This phase is the most important of the project cycle. At this stage, the manager is less concerned
with planning and is more concerned with leading and controlling the operations of the project.
The duties of the project manager are:
 Motivating and leading project employees and controlling the progress of the project.
 Compiling and preparing performance and financial summary reports for project
management, higher level management and external stakeholders.
 Facilitating the evaluation of the project by concerned individuals, organizations, or
other stakeholders. For example, organizing workshops at different phases of a project so
as to get feedback and to incorporate the results of the workshop at the subsequent
phases.
 identifying deviations and problems and following up the implementation of corrective
actions,
5th The finalization and close out (ex-post evaluation) phase
This is the phase under which the handover and the post-handover review of the project take
place. Handover of the project takes place if the sponsoring organization is a government
institution or if a certain commercial corporate organization has contracted the project to
contracting or consulting firms.
The process of closing the system begins by handing over the finished project to the sponsor, by
disbanding employees, by transferring the resources to the concerned departments and if
necessary by training the employees of the sponsor how to operate the new organization if the
completed project gives rise to another lifecycle. It is also important to review the project so as to
 identify the major weaknesses and strengths encountered by the project team and to document
the methods used in solving problems. The advantages of post handover evaluation are to make
minor improvements on the project if it is possible, and most importantly, to get lesson for future
project implementation. The evaluation made at finishing and closeout phase is very crucial to
measure the effectiveness of the project, which is found by comparing the objectives and
achievements of the project.
Conclusion: There is no any clear line to demarcate the finishing of one phase and the starting of
the following phase sequentially. The following chart can show the relationship between these
phases of project life cycle. Each subsequent phase can begin in the middle of the preceding
phase.

Perceive the problem

Gather information
Define the problem Conduct detail review & Detail design
Estimate preparation and analysis phaseEstimate Costs and returns
Select a solution
Communicate the solution
Conceptual Phase Obtain funding

Preparation and analysis phase

Finish work
Appraisal and design Phase Commission facility
Disband team
Review Achievement
Estimate appraisal and design
Implementation phase
Evaluate solutions
Finalising and closeout phase
Generate solutions
Conduct feasibility study
Monitoring performance
Implement solution
Plan implementation

Year 0 Project Life Cycle Time

End Year
Chapter Two: Project Identification
After completing this chapter, the students should be able to:
 Identify feasible project ideas to solve a certain problem or exploit opportunities;
 Apply problem tree, objective tree, alternative tree and Logical Framework approach in
project identification
2.1 Project Identification and Selection
The first stage in the project life cycle is to find potential projects. Such projects usually start as
new ideas which are carefully examined and if found feasible and desirable are translated in to
projects.
2.2 Sources of project ideas
There are many sources from which ideas or suggestions for projects may come.
a. Project ideas from technical specialists
For industrial projects, ideas will visually tend to come from technical specialists, who by virtue
of their experience and/or research findings will give useful information which may lead to the
manufacturing of new products or improving the existing products.
b. Project ideas from Local leaders
For community or social projects, local leaders will usually have important ideas, which they,
together with the local people, have identified as being important in improving the welfare of the
people. In the case of social projects, depending on which one is identified, there may be a
number of other projects which are linked to the identified project. For example, a project for
constructing a dam for the generation of hydro-electric power will bring about suggestions for
the start of an irrigation project, a fishing project and a water communication project.
c. Project ideas from entrepreneurs
For commercial and industrial projects, entrepreneurship is an important source of ideas.
Entrepreneurship, according to Srivastava (1981), includes the characteristics of perception of
managerial competence and motivation to achieve results. Although entrepreneurship skills have
been passed on from one generation to another, along family and socio-economic circles, it has
been recognized that programs for entrepreneurship development will help individuals to come
up with useful ideas which can be translated into viable projects.
d. Project ideas from government policy and plan
From time to time, governments produce guidelines such as the national development plans,
sessional papers which spell out the direction of what the government is likely to do to achieve
certain targets in various sectors of the economy and guidelines to various organizations and
individuals. The information contained in these documents is useful in generating ideas for new
projects. Individuals using government policy guidelines as a source for project ideas must make
sure that they operate within the overall national policy framework as contained in the relevant
documents
2.3 Participatory analysis
Participation or stakeholder’s analysis seeks to identify the major interest groups involved (all
those affected by or involved) in the project. The conditions and characteristics of local
community groups and organizations likely to be affected are identified and analyzed to establish
whose problems merit priority solution. The idea is to involve at least a representative of each
interest group, if possible, in the subsequent analysis of problems. If not possible, the workshop
should try to perceive problems from each of their perspectives.
It should be noted that even if people come from a particular area their interests and problems
may differ, depending on the organization and on social classes to which they belong. Even
within a group, men and women can have different problems. Moreover, several groups with
conflicting interests may exist within a community and in extreme cases; some groups may even
be anti-development. Therefore, it is desirable at the outset to identify to clarify different social,
political, economic, cultural and religious background of potential target group members.
The following is an example of how the stakeholders can be categorized in to groups before
subjecting them into a detailed analysis.
a. Target Group Identification
A target group is the main group for which positive change is desired and intended by
implementing the project. Usually, it is selected from among the groups identified in the group
categorization stage of participation analysis. Selection is through a process of considering which
groups’ interests should be given the highest priority or which group is the most deserving.
Once a target group is identified, their unique or core problems. The causes of the core problem
and impact of the core problem can be identified and easily analyzed. in cases where a consensus
is hard to reach out on the deserving target group, a tentative group can be selected for the
purpose of initial analysis sand be changed later if an alternative group is found to deserve a
higher priority.
b. Group Categorization
Group categorization can be done in many ways but the following is the generally accepted one:
 Beneficiaries: groups likely to benefit from the expected projects;
 Negatively affected groups: groups likely to be adversely affected by the expected
project
 Decision makers: groups with decision making authorities
 Funding agencies: groups which can bear expenses
 Implementing agencies: groups which can implement the expected project
 Community leaders: groups representing the community
 Potential opponents: groups which may oppose or obstruct a project because before
design ; and
 Supporting groups : groups likely to cooperate with the expected project
c. Detailed group analysis
Detailed group analysis is done using several factors. Characterize the common members to be
affected by the project by considering the following major issues:
 interests;
 potential or actual conflicts;
 inter-dependencies;
 social –relationships (social capital)
Structure, organization, size and leadership are important aspects in a group. Religious and
cultural backgrounds and gender issues as well as economic, political, institutional aspects
should be given consideration.
Problems, needs and demands of the group should be identified and be related groups. Also to be
identified are: potentials, strengths, weaknesses, constraints and opportunities.
2.4 Problem analysis
Planners use a problem tree analysis techniques to identify all the problems surrounding a given
problem condition and displaying this information as a series of cause and effect relationship. A
problem tree approach can also be used for a general diagnosis of a problem in some situation or
organization. In this case no specific problem needs to be taken as the starting point. Instead all
existing problems are identified and then interrelated in the cause and effect linkages for the
situation as a whole.
The problem analysis begins with identifying a core problem. The tree is then expanded upwards
and downwards as the causes and effects of the problem are identified.
a. Procedure of a problem analysis
Begin with the specific problem or need to be solved. list all other interdependent conditions and
problems. Brainstorming or other group’s idea generating techniques can be used, or simply ask
the following questions for each problem as it is identified:
 What is this problem caused by?
 What does this problem cause?
To ensure a more complete diagnosis, include as many relevant perspectives as possible as
discussed in the participation analysis earlier.
b. The clientele- those affected by the problem
 top decision makers
 ordinary people with it eh organization or setting
 appropriate experts
 national or regional planning organization
 the view of unbiased outsiders
 others involved
Using separate sheets of paper for each, arrange identified problems and interdependent
conditions in their logical, cause and effect relationship, in the form of a “tree”. Make sure all
elements are correctly connected by arrows indicating the directions of causal linkage. The
resulting diagram represents a rough but effective casual model of the complete problem
environment from the root cause of the problem to the impact of the problem. For easy reference,
the main procedural elements are stated below as a sequence of analytical steps.
c. problem tree steps
 identify major interest groups involved (all those affected by or involved in the project
 Involve a representative of each, if at all possible, in your analysis of problems. If not
possible, try to perceive from each of their perspectives as described in the participation
analysis section.
 list as many problems as possible from each of the above perspectives, remembering that a
problem is not the absence of a solution but the difference between what is desired and
what the current state of affairs is;
 For each of the problems you have listed above ask yourselves what are (could be) the
major causes. add any new problems that you have discovered to the list;
 for each of the problems on the list ask : what are the most important problems to your list;
 Structure the above problems in cause –effect relationships, checking to see that you have
not overlooked linkages or other important causes or effects.
 Review your logic to see if your cause effect relationships are correct and to see if you have
omitted any linkage or major causes or effects. ( it may help to show it to someone who
have not been involved in its development for an objective technique); and change as
needed.
2.5 Objective analysis
An objective tree is a technique for identifying the objectives that will be achieved as a result of
solving the problems cited in the problem tree. The objectives are also displayed as a series of
cause and effect relationships.
a. procedure
 Examine the problem tree to determine which problems can be simply reversed into
objectives by restating negative conditions as positive conditions.
 Recognize that not all causal relationships are simply reversible, so that solving one problem
automatically solves those it caused. For example, although flooding destroys crops,
pumping out the water does not thereby restore the crops to health.
For such problem relationships, other types of objectives must be formulated to represent
solutions. Recognize that some problems in the problem tree may actually be symptoms of other
deeper problems. Add new objectives if these appear relevant. Determine the cause and effect
relationships among the objectives and draw the objective tree.
The level of detail required is a judgment that must be made by those developing the problem
tree. In general it is the amount of detail that permits a clear understanding of the problem and its
environment. If the analysis is too superficial, the solution chosen could itself cause a whole
series of additional problems because the cause – and –effect relationships of the first analysis
were not well-defined.
2.6 Alternative Tree Analysis or Project Selection
An alternative tree analysis is a technique for identifying alternative solutions or course of action
that can be used to achieve the same or alternative objectives and the display of this information
in a simple format.
a. Procedure
Examine the objective tree to determine which objectives are perhaps unrealistic due to resource
limitations. Using feasibility analysis tools, examine each branch of the objective tree to
determine which alternatives might represent the optimal project strategy in terms of probability
of success, cost/benefit and most effective approach.
Sometimes the branches of an objective tree are already a single project sized solution sufficient
for attaining the next higher objective. A strengths, weaknesses, opportunities and threats
(SWOT) analysis can be undertaken to establish the priority options of projects to be subjected to
further detailed quantitative analysis for implementation.

Usi
ng different criteria in selecting one or more clusters the following decisions were taken:
 Irrigation system: the beneficiaries indicate that this is a cluster that requires urgent
intervention. Working on irrigation issues suits the policy of both the local government and
the implementing agency. Besides the implementing organization has a vast experience in
similar projects.
  Agricultural inputs: in the workshop it was indicated that the suppliers of agricultural
inputs intend to have a more regular supply, especially when the farmers are willing to pay
a little more. When there will be sufficient water, the production will increase and thus the
farmers will have more income to invest in agricultural inputs.
 Soil fertility: working on soil fertility issues requires a special expertise and it is known
that the local government and the agricultural university run a successful project on soil
fertility management.
 Immigration: this is probably the most sensitive and difficult cluster to deal with. The
beneficiaries and the implementing organization do not see any chance for them to try and
work on this issue. It is typically a task for the politicians and the government. Therefore,
this is not taken up in the implementation of the new project. It’s simply not feasible.
Conclusion: the project will focus on the irrigation system cluster.
2.7 Logical Framework Approach
A logical framework is a four by four matrix, which enables the decision maker to identify
project purposes and goals and plan for project outputs and inputs. The log frame is useful in
planning a project and to provide measures of evaluating the project. Important assumptions
about the causal linkages in the project are stated on the log frame, and these are useful when it
comes to project implementation. It is important to understand the meaning of various terms
which are used in a log frame.
Concepts used in Logical Framework
a. The goal of a project is a value judgment which satisfies one or more human needs. a
program or sector goal is the broader objective to which a project contributes.
b. The purpose or immediate objectives of a project is the primary intention or aim ; it is the
reason why a project is designed
c. The inputs are defined as financial, human and material resources available to implement the
project as planned.
d. The outputs are the services or products that a project delivers to a target population to
produce the expected impacts
e. The sector is the largest system of which a project a part e.g. building a dam is a project in
the agriculture sector, if the main purpose is irrigation or in the energy sector if the main
purpose is the generation of hydro-electric power.
f. Objectively verifiable indicators (OVI)demonstrate that certain desired results have been
accomplished
g. Means of verification are the specific mechanisms by which quantitative indicators of the
accomplishments of the project may be observed
h. The logic: the decision maker uses two types of logic to arrive at explicit statements which
serve to help in planning or in evaluating a project in progress. A vertical and horizontal
logic.
i. A vertical logic clarifies why a project is being undertaken. It specifies a Program or sector
goal, and project purposes, outputs and inputs.
j. A horizontal logic identifies what is to be produced and the evidence that will signal
success. It lists objectively verifiable indicators, means of verification and important
assumptions.
How to prepare Logical Framework
The logical framework has four columns namely narrative summary, objectively verifiable
indicators, means of verification and important assumptions. a project is transferred into the first
vertical column of the planning matrix. This is done as follows:
 start at the top of the column and work downwards
 decide on one overall goal and one project purpose or immediate objective; and
 Where necessary, review the wording in the objective tree and make it more appropriate.
The relationship between narrative summary and assumptions columns

Structure of a Logical Framework

Example of Logical Framework
Chapter Three: Project preparation
After completing this chapter, the students should be able to:
 Identify feasibility study components
 Do feasibility study
 Prepare feasibility report
Once projects have been identified, the process of project preparation and analysis starts. The
process of project preparation and analysis includes: undertaking of pre-feasibility and feasibility
studies and preparation of the feasibility report.
3.1 Pre-feasibility study
The identification of project ideas is followed by a preliminary selection stage on the basis of
their technical, economic and financial soundness. This is known as the pre-feasibility study
stage.
The principal objectives of pre-feasibility study are to determine whether:
 All project alternatives have been examined.
 A detailed analysis through feasibility study is required.
 Functional or support studies [such as market surveys, laboratory tests or pilot tests] are
necessary.
 The investment opportunity is viable or not on the basis of the available information.
 the environmental situation at the planned site and the potential impact is in line with the
national standards
At this stage, the various alternatives in the scale of production, technology to be adopted and
location of plant should be compared and the overall project viability should be assessed.
However, the assessment of viability at this stage includes only analysis of costs and benefits of
all alternatives without going into the details of financing and organization. The emphasis here is
the overall viability of the project with little consideration as to how the project is to be financed
or organized.
A pre-feasibility study should be viewed as an intermediate stage between a project opportunity
study and a detailed feasibility study. The difference lies in the degree of detail of the
information obtained and the intensity with which project alternatives are discussed. The
structure and contents of a pre-feasibility study are, hence, the same as that of a detailed
feasibility study. Particularly, the contents of the pre-feasibility should cover the following main
components of the study.
 A clear definition of the project idea and objectives; and its scope.
 Market analysis and marketing concept.
 Raw material and supply requirements.
 Location, site and environmental impact.
 Engineering and technology (including production process)
 Organization and overhead costs.
 Human resource; especially managerial staff, (labor costs and training requirements & costs).
 Project implementation schedule and budgeting.
The financial and economic impact of each of the above-mentioned factors should be assessed. If
the opportunity study is well-prepared and comprehensive enough, the pre-feasibility stage could
be by-passed. Hence, it is not always necessary to undertake the pre-feasibility study. Rather, if
an opportunity study provides sufficient information, the pre-feasibility stage could be dropped
and the feasibility study could be conducted instead.
3.2 Support study
Support or functional studies cover specific aspects of an investment project. They are required
as prerequisite for or in support of pre-feasibility and feasibility studies. Such studies are
particularly important for large-scale investment proposals.
Examples of these studies are:
 Market studies of the product to be manufactured, including demand projections.
 Raw material and factory supply studies, covering current and projected availability of
raw materials and their respective prices.
 Laboratory and pilot-plant tests to determine the suitability of particular raw material or
products.
 Location studies where transport costs constitute a major determinant.
 Economies-of-scale studies generally conducted as part of technology selection studies.
 Equipment selection studies when large plants with numerous divisions are involved and
the sources of supplies and the costs are widely divergent.
 Environment impact assessment which covers current environmental conditions in the
area surrounding the envisaged site.
The contents of a support study vary depending on the nature and type of the project. However,
the result of such a study should be clear enough to give direction to subsequent stage of project
preparation.
3.3 Feasibility study
The major difference between the pre-feasibility and feasibility studies is the amount of work
required in order to determine whether a project is likely to be viable or not. If the preliminary
screening suggests that the project is prima facie worthwhile, a detailed analysis of the
marketing, technical, financial, economic, and ecological aspects is undertaken. Feasibility study
provides a comprehensive review of all aspects of the project and lays the foundation for
implementing the project and evaluating it when completed.
In developing countries, it is not uncommon to find a situation where only a few projects
(implemented by governments and big organizations) are sufficiently prepared and carefully
selected. This happens because of several reasons. Some of the reasons could be:
 There aren’t enough skilled people to perform this task;
 There is some unwillingness to spend money in this process and
 The use of non-numeric selection models like:
a. Sacred cow: in this model, a project is usually suggested by senior and powerful
individuals in an organization and the idea is passed to the officers below.
b. Operating necessity: in this model, projects are initiated because they are required to
keep a system in operation.
c. Competitive necessity: projects are usually initiated and given a lot of support if they
will help an organization to maintain a competitive edge over other originations.
d. Product line extension: this approach is used when a project is intended to develop
and distribute a new product(s)
e. Comparative benefit model: this model is used when a firm has several projects
which must be considered and some ranking given.
However, the application of these models to the project selection may be limited to projects,
which do not involve huge investment resources. For those projects which involve huge
resources especially those involving governments and other institutions such as that of the WB
and IMF, feasibility studies must be usually carried out before a project is selected for
implementation.
A feasibility study should provide all data necessary for an investment decision. The
commercial, technical, financial, economic and environmental prerequisites for an investment
project should therefore be defined and critically examined on the basis of alternative solutions
already reviewed in the prefeasibility study.
3.3 Elements of feasibility study
The feasibility study should contain the following elements:
1. Market analysis
2. Technical analysis
3. Organizational analysis
4. Financial analysis
5. Economic analysis
6. Social analysis, and
7. Environmental analysis
 1. Market analysis
Market analysis indicates the demand potential of the output of the project. Such potential is
determined by examining a number of factors such as the demographic statistics of the areas or
regions where the outputs will be sold, the income levels of the people in these regions and what
is contained in the development plans of these regions.
It is important to establish whether or not there are competitors who are already producing
similar outputs and how much share of the market they command. The gap in the market which
competitors are unable to satisfy will form the basis establishing the demanded potential.
In sum, the market analysis should address the following questions:
 Is the product for domestic or export consumption.
 Is the market large-enough to absorb the new product without affecting the price?
 What share of the total market will the proposed product have?
 What marketing strategies and distribution channels are required?
The objective of undertaking market analysis is, therefore, to assess whether there exists an
unsatisfied demand for the product and to determine the share that can be captured by the project
through appropriate marketing strategies.
2. Technical analysis
The technical analysis is concerned with the projects inputs (supplies) and outputs of real goods
and services and the technology of production and processing. The other aspects of project
analysis can only proceed in light of the technical analysis.
This aspect may include the works of engineers, soil scientists and agronomists in case of, say,
agricultural projects. The primary objective of technical appraisal is to evaluate the type of
technology, its capacity, and degree of integration (flexibility of manufacturing system), the
production processes involved, as well as the inputs and infrastructure facilities envisaged for
the project.
Technology is examined at two levels: first, the technology used must be suitable for the
realization of the specific objectives of a given project. The imported machinery might be
obsolete and inefficient that leads to high cost of production and maintenance. Second,
technology must be examined for suitably according to the socio-economic environment. The
imported technology may not be appropriate. for example, due to the need to provide
employment to people, government sponsored projects would usually prefer projects with
technology which is labor intensive as opposed to those which encourage less human labor.
3. Organizational analysis
A whole range of issues in project preparation revolves around the overlapping institutional,
organizational, and managerial aspects of projects, which clearly have an important effect on
project implementation. To have a chance of being carried out, a project must relate properly to
the institutional structure of the country and region. What will be the arrangements for and use
them to further the project? How will the administrative organization of the project relate to
existing agencies? Is there to be a separate project authority? What will be its links to the
relevant operating ministries?
The organizational proposal should be examined to see that the project is manageable. Are
authority and responsibility properly linked? Does the organizational design encourage
delegation of authority or do too many people report directly to the project director? Does the
project have sufficient authority to keep its accounts in order and to make disbursements
promptly? Managerial issues are crucial to good project design and implementation. The analyst
must examine the ability of available staff to judge whether they can administer such large-scale
public sector activities as a complex water project, an extension service, or a credit agency.
4. Financial analysis
It is concerned with assessing the feasibility of a new proposal for investment on the basis of
financial requirements and their availability. The project’s direct benefits and costs are estimated
at the prevailing market prices to appraise the viability of the project as well as to rank projects
on the basis of profitability. In order to measure the profitability of a business, various methods
and instruments may be used as appropriate. To facilitate the analysis and to rationalize the
conclusions, financial statements and schedules should be compiled. Financial analysis also deals
with the identification of sources of funds required for implementation of the project.
For the purpose of determining the financial viability of the project, estimates of cost of the
project, profitability, cash flow and projected balance sheets have to be prepared.
In sum, the main objective of financial analysis is to determine whether an investment proposal
described and analyzed under certain assumptions will render a return acceptable to the investor.
Hence, it is a crucial part of project appraisal to check on the assumptions that form the basis for
the estimates and forecasts in the study.
5. Economic analysis
Economic analysis is basically concerned with the following:
 how to identify effects of the project on the society ;
 qualification of the effects of the proposed projects; and
 pricing of costs and benefits to reflect their values to society
Financial analysis aims at appraising the financial and commercial feasibility of a project from
the view point of an entrepreneurs, investor or financier. On the other hand, economic evaluation
deals with the economic contribution and impact of a project at the macro or national or society
level.
The economic evaluation of a project uses the same financial statements and schedules as a
financial analysis. However, market prices and costs will have to be adjusted to eliminate
distortions resulting from social factors and government measures. In so doing, market values
are converted to economic values. For this reason, financial appraisal covers only private costs
and benefits, while economic analysis takes into account social costs and benefits.
Net private benefits and net social benefits are usually different due to the existence of market
imperfections, externalities and income redistribution. In such circumstances, social cost
analysis must depend on shadow prices (instead of market prices) to measure the net benefit to
the society.
The most important distinctions between financial and economic analysis are:
 In economic analysis, taxes and subsidies are treated as transfer payments. But in financial
analysis, taxes are treated as costs and subsidies as a return.
 In financial analysis, market prices are used. In economic analysis, however, market prices
may be adjusted to reflect social benefits. These adjusted prices are called shadow or
accounting prices.
 In financial analysis, interest paid to external suppliers of money may be deducted to obtain
the stream of benefit available to the owner of the project. But, in economic analysis, interest
on capital is never separated and deducted from gross return because it is part of the total
return to the capital available to the society as a whole.
6. Social analysis
Social Analysis examines carefully the broader social implications of proposed investments.
This includes:
 Weights for income distribution so that projects benefiting lower-income groups will be
favoured.
 Considering carefully the adverse effects of a project on particular groups of people in
particular regions.
 The impact of the project on improving the quality of life.
 Considering the contribution of alternative projects in furthering the same objectives
7. Environmental analysis
Environmental Analysis is assessing the impact of the project on nature and its habitat such as
plants (forests), water, air, wild and domestic animals, human beings, etc. Some of the examples
of the questions to be asked are:
 What chemicals and wastes are emitted from the project that will pollute air and water?
 What hazardous chemicals are used that will harm the health of employees and the
people living around the project area?
For example, a dam constructed can be the cause of the spread of malaria or increase the
incidence of schistosomiasis in regions where snail- transmitted disease is endemic. It is
recognised that projects are important vehicles for development. However, people are at the
centre of this development. Therefore, people, animal and plant life must not be affected in the
name of development.
3.4 Preparation of feasibility report
When all the various analyses have been carried out, the results must be put together in the form
of a report. It is important that the above components of feasibility report are organized logically
before being presented to financial institutions for funding or to donors for assistance. The
sections of the feasibility report are summarized as follows:
A. General information:
 analysis of industry or sector to which the project belongs;
 the gap existing between supply and demand in the industry or sector; and
 past performance of proposal ownerss
B. Preliminary analysis of alternatives:
 other alternatives which were considered besides the proposed project should be
started;
 all the relevant options analysis should be explained; and
 the rationale for the project i.e., how it addresses the existing gap should be given.
C. Project description
 location of the project
 technology to be used
 machinery and equipment needed; and
 Requirements, utilities, labor and products.
D. Marketing plan:
 demand of products
 prices and price sensitivity
 distribution arrangements
 warehousing and storage arrangementss
E. Capital requirements
 preliminary expenditure
 land acquisition and development
 plant and equipment
 construction and
 engineering and project management
F. Operating requirements and costs
 raw materials
 fuel
 utilities
 labor
 repair and maintenance costs
 selling expense; and
 other expenses depending on the project
G. Financial analysis
 This section provides information on costs of production and working results and
cash flows during the economic life of the project; and
 Financial performance may be done using any of the following tools: Payback
period, net present value, internal rate of return, return on investment and return
on capital employed.
H. Economic and social analysis:
 impact on income distribution
 development of ancillaries
 assured prices to farmers and suppliers of inputs;
 savings in forging exchange; and
 increased production
I. Environmental impact assessment
 impact or damage on the environment
 measures required to prevent damage
 costs involved in restoration of acceptable measures; and
 mechanisms for monitoring the efficiency and effectiveness of the measures
Chapter 4: Project Appraisal
After completing this chapter, the students should be able to:
 Identify the basic cost elements relevant to project appraisal and decision;
 Prepare forecasted income and cash flow statements for appraising projects;
 Use different techniques of appraising projects;
 Understand the terms and phrases used in economic analysis; and
 Appraise projects using economic analysis.
 Identify risk factors and design risk management strategies
4.1 Financial Analysis of projects
The departure points for financial analysis of projects are revenue (benefit) information collected
during market analysis; and cost information collected during the analyses of inputs of the
project such as raw materials/supplies analysis, technological (technical) analysis, social impact
analysis, environmental analysis and location and site selection analysis.
4.1.1 The Costs of a Project
It is the total outlay of all items associated with a project. These items include the estimation of
costs related to the investment of the project and costs incurred during the operation of the
project.
A. Costs relevant to the initial investment of a project
 Land and site Development: The cost of land and site development consists of cost of
land acquisition and the costs incurred for preparing the land for use. For example, cost of
leveling and costs of constructing internal roads are components of preparation costs
 Buildings and Civil Works: These costs cover the costs of constructing main buildings
and auxiliary buildings, such as laboratory, workshop, warehouses, garages etc. In
addition, costs incurred for constructing canteen, staff quarters, guesthouses and other
costs of civil engineering works are included in this category of costs.
 Plant and Machinery: The most significant component of project cost is the cost of plant
and machinery. These costs consist of the cost of imported machinery, cost of indigenous
machinery, cost of spare parts and costs related to foundation construction and machine
installation.
 Technical know-how and engineering fees: Technical consultants and engineers may be
employed for assisting the management in technical works such as preparing project
report, choice of technology, detailed engineering and selection of plant and machinery.
The fees paid to them are components of a project cost.
 Miscellaneous Fixed Assets: They are costs associated to fixed assets that are not part of
the direct manufacturing process. They include costs incurred for procuring office
equipment, laboratory equipment, workshop equipment, vehicles, etc. Costs incurred for
 procurement or uses of patents, licenses, trademarks, copyrights etc can be included in this
category of costs.
 Capital issue expenses: Expenses incurred for raising capital are known as capital issue
expenses.
 Pre-operative Expenses: Establishment expenses, rent, travel expenses, interest on
borrowings, insurance charges, miscellaneous expenses and start-up expenses are the
major components of pre-operative expenses. These expenses are incurred until the plants
and machinery are set up or ready for production. Preoperative expenses can also be
written off over a period of time.
 Provision for contingencies: Provisions for contingencies may range from 10 to 20%.
This is to protect the project from expenditures and price increases as a result of
unforeseen events such as inflation, strikes, causes of delays, etc. The percentage of
contingency can be computed on every asset block.
Other costs irrelevant to project decisions
There are many cost items that are irrelevant for project decisions. Among others, two categories
are mentioned below.
 Sunk costs: Sunk costs are expenditures, which have been incurred before appraisal and
are irrecoverable whether the project is accepted or rejected. Sunk costs should be
excluded from the cash flow of the project. Bygones are bygones. Examples of such costs
include research and development expenditure or market research costs.
 Depreciation: It is the measure of the loss of value of an asset arising from the passage
of time, obsolescence or market changes. Accountants annually deduct depreciation as
expense to calculate profits. Since this doesn’t have any impact on the cash flow of the
business, it is not considered as incremental cash flow.
B. Costs related to the operation of a project
The cost information, in relation to the operation of the project, is collected at the time of
material, supplies and human resource analysis. The quantity of products of the project is
estimated at the time of demand analysis during marketing and at the of capacity analysis during
technological analysis. We use the estimated quantities of products to estimate the inputs
required for production.
Operational costs can be classified into:
 Direct and indirect costs: Direct costs are directly attributable to the production where as
indirect costs are incurred to facilitate the production process but are not the direct inputs of
production.
 Variable costs and fixed costs: variable costs are costs that vary with the volume of the
product where as fixed costs are costs that do not vary with the volume of the product.
Cost of production comprises of three main factors: cost of materials, labor cost and factory
overhead.
Cost of production = Material cost + labor cost + factory overhead cost.
TotalCost Of Production
Cost Of Pr oduction per Unit=
Total No . of Units
Cost of Material: The quantity of material required for the estimated units of production should
be estimated based on the common consumption norms or it could also be computed by taking
the experience of the industry into account. The costs of materials are defined in CIF terms.
However, seasonal fluctuations must also be considered in estimating the cost of material inputs.
Labor Cost: It is the cost of all manpower employed in the factory. The cost of labor is
estimated on the basis of the general norms prevailing in the country or industry. The cost should
include basic pay, allowances, expected increments, pension fund contributions, fringe benefits,
etc. Moreover, vacations, overtime work, work on holidays etc should also be taken into account
for estimating the labor cost.
Overhead costs: Overheads are usually indirect costs that cannot be directly attributed to the
product. These include the expenses for power, water, fuel, repairs and maintenance, rent, taxes,
insurance on factory assets and so on. It is also valuable to consider that repairs and maintenance
expense tend to be lower at the initial years and higher at the later years of the project.
Depreciation: It is the measure of the loss of value of an asset as a result of the service the asset
gives through the passage of time. Depreciation is different from obsolescence because
obsolescence is the loss of value of a machine or equipment as a result of changes in the
technology. Accountants annually deduct depreciation as expense to calculate profits.
Depreciation is excluded from the calculation of cash flows because it doesn’t affect the cash
flow of the business. However, since tax payment is part of the cash flow of the project,
depreciation may be considered during the preparation of the income statement of the project for
the purpose of calculating taxes.
Working Capital Estimates
Finance is required to cover the operational costs between the starting of the business operation
and the receipt of the first cash inflow from the sale of the product. Working capital is the
financial requirement needed to finance the current asset of the balance sheet. In general,
working capital is an average finance tied-up in the following items during the life of the project.
 raw materials, supplies and components temporarily held in stock until usage,
 Work-in-process,
 finished goods until the time of selling,
 accounts receivable until payment made by the customer,
 Other items in the current asset of the balance sheet.
Net Working Capital = Current Assets –Current Liabilities
The major sources of financing working capital are short-term loans obtained from banks, trade
Credit, accruals and long-term sources.
In project financial analysis, the working capital is
Assumed returnable at the end of the project.
4.1.2 Means of finance
Projects receive their funds from various sources. Based on their sources of finance they can be
classified into the following categories.
1. Projects funded by the government:
These projects mainly are not commercial profit making projects: From time to time, govt.
undertakes developmental activities allocating adequate fund for each activity. Most of these
projects are aimed at enhancing the social welfare and infrastructural facilities.
2. Projects funded by international organizations
International organizations such as UNDP, UNICEF, World Bank etc also participate in the
developmental activities in various countries. They finance a number of non-commercial
projects in many countries.
3. Projects partially funded by the international organizations and partially by the
government.
4. Projects financed by individuals or groups. Including projects jointly funded by
individuals and govt.
The major sources of capital of projects that are aiming at making a commercial profit are the
following:
 Share Capital: There are two types of share capital: equity capital and preferred capital.
Equity capital represents the contribution made by the owners of the business, the equity
shareholders, who enjoy the rewards and bear the risks of ownership. Preference capital
represents the contribution made by preference share holders without enjoying any
ownership rights. Equity capital doesn’t have any fixed dividend where as preference
shares have fixed dividend.
 Bonds: These are issued by the corporation, usually with a coupon rate. Bonds are major
sources for long term finance. Both secured bonds and unsecured bonds of various types
with different maturity and interest rate may be issued by corporations.
 Term Loans: These are loans from banks and other financial institutions. Short term loans
and long term loans can be obtained from banks. Short term loans are usually used for
financing the working capital requirements or the regular operations of the firm and long
term loan is utilized for financing its long term operations.
 Trade Credit: Trade credit is one of the major sources of short term financing. It involves
buying merchandise and materials on credit. Making prompt payment as per the agreement
and maintaining a stealthy relationship will ensure that the firm could enhance its credit
worthiness.
  Accrued Liabilities: These are expenses incurred but not yet paid the payment of the
expenses would be postponed for a future date. Until it is paid, the firm is in a position to
use the amount.
 Incentive Sources: The government and its agencies may provide financial support or
incentive to certain types of promoters or for establishing industrial units in certain
locations. These incentives may take the form of seed capital assistance (Provided at a
nominal rate of interest) or capital subsidy (to attract industries to certain locations) or tax
deferment or exemption for a certain period.
 Miscellaneous Sources: A small portion of project finance may come from miscellaneous
sources like leasing, hire purchasing, and public deposits. Public deposits may represent
unsecured borrowings from the public at large.
Planning the means of finance is an important task for the project manager. When the project
has a number of alternative sources of finance, the following factors should be considered in
selecting the most suitable source.
1. Cost: The comparative cost advantage should be the prime factor to be paid attention in the
selection of the means of finance. For example, preferred shares will be more expensive
than debt capital because interest paid on debt is tax-deductible where as dividend on pref.
Stock is not.
2. Risk: A project is usually exposed to business risk and financial risk. Business risk refers to
the variability in earnings due to fluctuations in demand and supply. Financial risk
represents the risk arising from financial leverage. Using excessive debt may load a firm
bankruptcy. If the affairs of the firm can be managed at a low risk profile, debt financing
may not be detrimental.
3. Control: The project promoters would ordinarily prefer a scheme of financing which enables
them to maximize their control, current as well as potential, over the affairs of the firm. Ease
of handling is also considered in selecting a source of finance.
4. Flexibility: This refers to the ability of a firm (project) to raise further capital firm any
source of finance. Flexibility indicates that the firm does not exhaust fully its debt capacity.
5. Rules and Regulations of the govt. and financial institutions: Means of project financing
may be subject to rules and regulations of the govt. and the lending institutions. These reules
have to be thoroughly examined before selecting a source of finance. Such an examination
may provide a measure of protection to investors.
4.1.3 Accounting Income Vs Cash Flows in a project
a) Accounting Income
Estimating sales revenue and costs over years of the project operation helps to prepare projected
balance sheet and income statement and to decide on the profitability of the project. There are
three major purposes of preparing income statements:
 to determine indicators of relative efficiency,
  to determine the net profit to be incorporated in the balance sheet,
 to determine the tax liability of the project.
 To provide financial information to concerned stakeholders.
Example 1: The life of a hypothetical project is five years. The project requires an initial
investment of 100 million. Depreciation is calculated using straight-line method and the salvage
value of the project is Birr 5 million. At year zero, the project can be financed partly by investors
with the amount of Birr 60 million and partly by creditors with the amount of Birr50 million
long-term loans. The loan yields an annual interest rate of 15%. The new firm (the project) has
agreed to settle the loan in four equal installments starting at the end of the second year of the
production. Interest payment is added to the loan until payment begins.
In addition, because of the start-up time required, the firm estimates that it can sell 1 (one)
million units in the first year. However the market condition indicates that the firm can sell 1.5
million units in each of the subsequent four years. The unit price of the product is estimated at
Birr 60, which is the same for all years of the project life.
The direct operation costs for raw material and labor per unit are Birr 33. The overhead fixed
cost is 5 million for each of the five years. Tax rate is 40% of the gross profit.
Required: Prepare the forecasted income statement of the project for five years.
The following table shows the accounting income methods for measuring the performance of the
project for five years Table 1: Projected income statement for the five year time (in Millions
of Birr)

Year 1 2 3 4 5
Sales in Units 1 1.5 1.5 1.5 1.5 The above
table
Sales Revenue (Birr 60 * Units) 60 90 90 90 90
shows that
Operating Costs (Birr 33 * Units) 33 49.5 49.5 49.5 49.5 the project
has a
Gross profit 27 40.5 40.5 40.5 40.5
nominal
Overhead costs 5 5 5 5 5 cumulative
Depreciation 19 19 19 19 19 of Birr
23.1
Operating Income (EBIsT) 3 16.5 16.5 16.5 16.5 million net
Interest on loan 7.5 8.6 6.9 4.9 2.6 profits by
the end of
Earnings Before Tax (EBT) -4.5 7.9 9.6 11.6 13.9 the fifth
Taxes (40%) -1.8 3.16 3.84 4.64 5.56 year.
b) Cash
Earnings After Tax (EAT) -2.7 4.74 5.76 6.96 8.34
Flows
Cumulative EAT -2.7 2.04 7.8 14.76 23.1
The financial analysis of any project involves the examination of its cash flows: it is a process of
review of costs and benefits, measured in terms of cash outflows and cash inflows. There are
two categories of cash flows. The cash inflow of a project includes the project revenues,
government grants, resale/scrap values of assets, tax receipts and other cash inflows as a result of
accepting a project. The cash outflow of a project includes initial investments in acquiring the
assets, project costs (labour, materials, etc.), working capital investments, tax payments and any
other cash outflows as a result of accepting the project.
The cash flow method is more useful than the accounting income statement methods in
appraising project financial viabilities. One of the benefits of cash flow statement is it
eliminates the influences of subjective factors such as estimation of accruals, methods of
depreciation and non-cash items where as accounting profit is influenced by all these factors.
Another benefit is cash flow method is more appropriate than the Accounting method for
calculating the financial viability of a project by considering the time value of money.
Example 2: Let us pick our example of the hypothetical project mentioned in the previous
section. We assume all the sales revenue, operating expense and overhead expense are in cash. It
is estimated that the new firm needs to maintain current assets at the average amount of Birr19
million the first year and to increase it by the amount of Birr 9.5 million the second year. After
the second year, the balance of the working capital will remain unchanged. The tax is paid the
following year after realized except the tax for the fifth year, which is paid together with the tax
for the fourth year.
The following is an example of the cash flow statement of the hypothetical project which we
mentioned in earlier section.
The advantage of projected cash flow statement is to establish an early warning system for the
project management team so as to predict the time of either excess fund or shortage of funds. At
the time of excess fund investors consider where to invest and the time of shortages of finances
investors plan how to finance the deficiency. The last row of the above table shows the net cash
flows pertinent to the investment made by the investors.
In project financial analysis, cash flows related to the initial investment and the operation of the
project are considered more relevant to appraise the performance of the total investment. The
above two tables provide us the information needed to prepare the cash flows related to the total
initial investment of a project as shown in the following table.

Table 2: Cash Flows Related to the costs and benefits of the Project

Year 0 1 2 3 4 5
Investment Costs -100          
Working Capital 0 -19 -9.5     28.5
Sales Revenue 0 60 90 90 90 90
operating costs 0 -33 -49.5 -49.5 -49.5 -49.5
Overhead costs 0 -5 -5 -5 -5 -5
Tax 0 0 0 -1.6 -3.64 -10.20
Salvage value 5
Annual Incremental Cash flow -100 3 26 34.14 31.66 58.8

The student has to note that the item depreciation is excluded in both cash flow tables and the
principal loan repayment is omitted from the calculation of cash flows in table 3. Because the
cost of capital is used in discounting, loan interest payment is also excluded from the calculation
so as to avoid any double discounting in determining the actual value of the project.
4.1.4 Project Appraisal Methods
Once the streams of costs and benefits of a project are estimated, there are different methods of
analysing the financial feasibility of a project. The most common methods are:
1. Accounting Rate of Return
2. Payback period
3. Net present value method
4. Benefit cost ratio
5. Internal Rate of Return
6. Discounted payback period
The first two methods are classified as non-discounted cash flow methods and the last four
methods are classified as Discounted Cash Flow Methods. The Discounting Cash Flow (DCF)
method is based on the belief that the use of money has an opportunity cost. The opportunity
cost is usually the interest foregone. Rather than using the operating income as in accrual
accounting, the DCF uses the cash inflows and outflows for determining the benefits of a project.
The approach of this method is to convert all future cash flows of each project to the present
value so as to compare the profitability of different investment opportunities by bringing their
benefits in to the same time scale. The discounting rate may also be the required rate of return.

1. Accounting Rate of Return (ARR)

The Accounting Rate of Return, also referred to as Rate of Return on Investment (RORI), is the
ratio of average annual profits, after depreciation, to the capital invested. However, ARR has
many variations of use which makes inconsistent use of this ARR by different organizations. The
following are some of the variations (Lucey, 1992)3.
 Profits may be before or after tax,
 Capital may or may not include working capital,
 Capital invested may mean the initial capital investment or the average of the capital
invested over the life of the project.
Some of the formulas for computing the ARR are shown below.
Average Income After Tax *100
ARR=
Initial Investment
Average Income AfterTax
ARR=
Average Investment , where
Average investment = beginning investment - salvage value
2
The decision criterion is the higher the ARR, the better the project is.
Example: The solution for this method is found from the forecasted accounting income statement
table (1). (NB Initial investment is 100million).
Year 1 2 3 4 5
Earnings After Tax (EAT) -2.7 4.74 5.76 6.96 8.34
Cumulative EAT -2.7 2.04 7.8 14.76 23.1
a. ARR based on the initial investment
First we calculate the average yearly income as 23.1milion = 4.62milion/year.
5
Second we divide the yearly income to the initial investment as follows.
ARR = 4.62million *100% = 4.86%
100 million – 5 million
Therefore the accounting rate of return of the project is 4.86 % per year.
b. Based on the average investment:
Average investment = 100million - 5million = 47.5 million
2
ARR = 4.62 million * 100% = 9%
47.5 million
The main Advantage of ARR is that it is very simple to calculate and use. However, ARR has the
following disadvantages.
3
Lucy, T. (1992), Quantitative Techniques, 4th edition.
  It does not consider the time value of money,
 It uses the accounting profit as a measure of return of the project,
 There is no uniform method of calculating ARR.
2.Payback Period
The payback period is the length of time required to recover the initial investment. Unlike
accounting rate of return, it uses project cash flows. According to the payback criterion, the
shorter the payback period, the more desirable the project is. If the net cash inflow is uniform
each year, then the payback period of a project can be found by dividing the initial investment by
the uniform net cash inflow.
Intial Investment
Payback Period=
AnnualUniformCash Inflow
Ex. A project whose investment outlay is 100 million is expected to have a uniform annual net
cash inflow of 25 million for five years.
100 million
Payback Period= =4 Yrs .
25 million
If the cash flows of a project are not uniform, the payback period is calculated by accumulating a
series of cash flows until the amount reaches the initial investment.
Example: Consider Table 3 above. Find the payback period of the project.
Year 0 1 2 3 4 5
Annual Incremental Cash flow -100 3 26 34.14 31.66 58.8
Cumulative incremental flow -100 -97 -71 -36.86 -5.2 53.6

The payback period = 4 years + 5.2 * 12 = 4 yrs and 1 month

58.8
Exercise 1: Consider the following table consisting of the lives and after tax net cash inflows of
three projects under appraisal. (All the negative cash inflows are initial investment or cash out
flows).

Years 0 1 2 3 4 5
Project 1 -30000 4000 8000 15000 15000 7000
Project 2 -30000 6000 15000 9000 5000
Project 3 -30000 5000 12000 12000 12000 6000
Find the project that will be selected using the payback period?
Advantages
1. It is simple to apply. It doesn’t involve tedious calculations.
2. It is helpful in weeding out risky projects that usually bring substantial cash inflows in later
years than earlier years of the operations of the project.
3. It can be used to assess the effect of an investment proposal on liquidity of the firm- the
firm’s ability to meet its financial obligations.
Disadvantages
1. It ignores the time value of money.
2. It overlooks cash flows beyond the payback period.
3. Since it focuses on a project’s capital recovery, it may divert attention from profitability
4. Though it measures a project’s liquidity, it does not indicate the liquidity position of the firm
as a whole.
3. Net Present Value (NPV) method
NPV is the difference between the present values of the yearly net cash inflows and the initial
investment outlay. It is calculated using the following equation.
CF 1 CF 2 CF n
NPV = + +.. .+ −I
1+k (1+k )2 (1+k )n 0

( )
n
CF
NPV = ∑ ( 1+ kt )t −I 0
t=1

CFt = cash flow of the tth period, k is cost of capital (Required Rate of Return or discount rate),
t is the number of periods between 1 and n.
The above formula shows that we follow three steps to find the NPV of the project.
1. we multiply the cash flow of each year by the discount factor of the same year to convert
to its present value
2. We add the products to get the total value of the project.
3. We subtract the initial investment made at year zero from the total present value to get
the NPV
If we consider the initial investment as one of the cash flows, we can use the following formula
and arrive at the same solution as the above formula.

(∑ )
n
CF t
NPV =
t=0 (1+ k )t

Example:
Take our previous example of the 100 million initial investments. Find the NPV of the project if
the cost of capital (discount rate) is 10%.
Year (t) Cash flow Discount factor Present Value
(in Millions of Birr) 1 (In Millions of
(1+k )t Birr)

0 -100.00 1.0000 -100.00

1 3.00 0.9091 2.73
2 26.00 0.8264 21.49
3 34.14 0.7513 25.65
4 31.66 0.6830 21.62
5 58.80 0.6209 36.51
Total NPV 8.00

The rules for deciding on the financial feasibility of the project are the following:
1. If the NPV is positive, accept the project.
2. If the NPV is negative, reject the project.
3. If the NPV is zero, be indifferent
Based on these rules, our project is accepted at 10% discount rate since it has a positive NPV of
8 million.
Uniform cash flows:
We can use the following simple annuity formula if the net cash inflow is estimated as uniform
(even) for all project years.

NPV =CF
k (
1−(1+k )−n
−I 0 ) Where CF is the uniform cash flow starting from year one, k is cost
of capital (discount rate), n is the number of periods.
Example: Take our previous example of the 100 million initial investments. Find the NPV of the
project if it has an annual uniform net cash inflow of Birr 26 million for five years and if the cost
of capital is 10%.

NPV =26 (
1−(1+0. 1)−5
0.1 )
−100=−1 . 44

Using the present value annuity factor The present value annuity factor is obtained by
referring to the table of the present values of annuities.
Example: The present value annuity factor for the 10% discount rate and for five years cash
flow of Birr1 is 3.7908 (obtained from the present value annuity table). 3.7908 can also be found
by adding the individual discount rates (0.9091+0.8264+0.7513+0.6830+0.6209 = 3.7908).
Using the annuity table, the NPV of the project is calculated as follows.
NPV =26∗3.7908−100=−1.44
Decisions: The project is rejected with the discount rate of 10%.
Exercise 2: Consider the following table consisting of the years and cash inflows of three
projects under appraisal. (All the negative cash inflows are initial investment or cash out flows).
Years 0 1 2 3 4 5
Project 1 -30000 4000 8000 15000 15000 7000
Project 2 -30000 6000 15000 9000 5000
Project 3 -30000 5000 12000 12000 12000 6000
If the projects are mutually exclusive, find the project that will be selected using the NPV
method. The discount rate is 8%.
Advantages
The NPV constitutes a very sound investment appraisal criterion. The following merits can be
pointed out for this method.
 The time value of money is taken into account.
 The cash flows from the beginning to the end of the project are considered.
 It focuses on the profitability of the project.
 It is particularly useful for the comparison and selection from among mutually exclusive
projects or when capital rationing is used. (Mutually exclusive proposals involve ‘either
or’ situations in which only one project can be selected. Capital rationing is the term used
where all profitable projects cannot be initiated because of the limitation in fund. In
capital rationing, more than one project, that can maximise the total profit, can be
selected up to the limit of the available fund).
 It discounts cash flows by the cost of capital which gives explicit recognition to financing
costs and the returns required by shareholders or investors,
 Since the NPV is expressed in Dollar or Birr, the managers can understand it more easily
than percentages.
Disadvantages.
 The NPV method can be employed in selecting from mutually exclusive projects only
when the projects are of the same size. If the investments are different, deciding the
desirability of the project based on the NPV will be misleading.
  The NPV method assumes that funds are reinvested at the cost of capital. The actual
reinvestment rate may differ from the cost of capital, there by distorting the NPV.
 The cost of capital is assumed to remain constant throughout the life of the project. But
usually the cost of capital changes over the life of the project as a result of inflation and
risk factors.
 A project with zero NPV can be accepted because the zero NPV indicates that the project
produces the required rate of return and no more. It does not mean that the project has a
zero dollar return.
4. Benefit Cost Ratio (BCR)
Benefit – cost ratio is also referred to as profitability index. It is an extension of the NPV
approach to compare the profitability of investment alternatives before arriving at investment
decision.
s There are two ways of defining the benefit cost ratio.
1) The first definition of BCR relates the present value of benefits to the initial investment.
PVCI
BCR =
I
Where PVCI is present value of benefits and I is initial investment.
2/Net Benefit Cost Ratio (NBCR): The NBCR relates NPV to initial investment.
Example: Consider a project with initial investment of Birr 50000 and the following Cash
inflows. Discounting rate is 12%
Year 1 2 3 4
Cash inflow 12500 10000 30000 25000

1. Benefit Cost Ratio

PVCI 12500 10000 30000 25000
BCR= ( + + + )÷50000
I (1. 12) (1 . 12)2 (1. 12)3 (1 .12 )4
=
11160+8000+21428+15924 56512
=1 . 13
=
50000 =
50000 s
2. NBCR = 1.13 –1 = 0.13

Decision rules
1. When BCR > 1 or when NBCR > 0, accept the project
2. When BCR < 1 or when NBCR < 0, reject the project
3. When BCR = 1 or when NBCR = 0, be indifferent
Exercise 3: Use the NPVs found for projects in exercise 2 and select a project based on BCR and
NBCR method.
Advantages of BCR Method
1. BCR indicates a relative and not absolute measure of profits i.e. the benefit per dollar (Birr)
of investment. Thus it is considered superior to NPV method because NPV indicates the
absolute measure of profit.
Disadvantages
1. This method cannot be employed when a package of smaller projects is to be considered
in relation to a large project.
5.Internal Rate of Return (IRR)
IRR is the discount rate that makes the present value of cash inflows equal to the present value of
cash outflows. Previously, we find the IRR of a project by trying different discount rates until
we discover the discount rate that makes the NPV zero. However, today it is easier to find IRR of
a project using Excel Application.
Example: Let us take our previous example project whose initial investment was Birr100million.
Year 0 1 2 3 4 5
Annual Incremental Cash flow -100 3 26 34.14 31.66 58.8
PV of Cash flows at 7.25% -100 2.67 20.59 24.06 19.86 32.82

The NPV of our hypothetical project at the rate of 12.37% is:

-100 + 2.67 +20.59 + 24.06 + 19.86 + 32.82 =0
Hence, the IRR of the project is 12.37%.
Trial and Error calculation of IRR
If we want to identify the IRR without computer help, we use trial and error method as the
following example.
Example: Find the IRR of a project with 20million initial investment and with the following
table of cash flows.

Year 1 2 3 4
Cash flow 6000 6000 8000 9000

1. Try to compute the NPV with 12% discount rate.

( 6000 6000
+ +
8000
+
9000
1 .12 (1 .12 ) (1. 12) (1 .12 )4
2 3 )
−20000=5357+4800+5714 +5732−20000=1603

2. Since the NPV is still positive, (1603), try again with a higher discount rate: 15%

( 6000 6000
+ +
8000
+
9000
1 .15 (1 .15 ) (1. 15 ) (1 . 15)4
2 3 )
−20000

(5217 + 4545 + 5263 + 5142) –20000 = 167

3. Still the NPV is positive. Try again with a higher discount rate i.e. 16%.

( 6000 6000
+ +
8000
+
9000
)
1 .16 (1 .16 )2 (1. 16 )3 (1. 16 )4
−20000

5172 + 4444 +5095 + 4945 = 19656

= 19656 – 20000 = -344
Thus, it can be concluded that the IRR is between 15% and 16%
However, the exact percentage can be computed using interpolation techniques as:
Present value at 15% = 20167
Present value at 16% 511
A one percent difference (16%-15%) corresponds to a difference of Birr511. The difference
between the target present value 20000 and the PV of 20167 (discounted at 15%) is 167.
Therefore, we get the percentage difference of:
167
×1=0 . 33%
511
Adding this number to 15%, we get the IRR approximately 15.33%.
Other method of Estimating IRR
We can estimate the starting discounting rate by following the following steps.
Step 1: Compute the average annual cash flow
6000+6000+8000+ 9000 29000
=7250
=
4 =
4
Step 2: Divide the initial outlay by the average annual cash inflow.
20000
=2. 759
=
7250
Step 3: Look at the present value annuity table on the line (row) of the year which corresponds
to the life of the project find 2.759 or its approximate. Identify the percentage that corresponds
to 2.759 by tracing up the column title. Then 16% is treated as the starting discount rate.
Decision Rules
The IRR is the rate of return earned on the investment made in the project. In other words, it is
an interest rate that represents the compound rate of return on an investment. Thus, acceptance
and ranking of project proposals involve comparing the IRR with the cost of capital or any other
chosen rate. The following are the rules for accepting or rejecting a project proposal based on
the IRR
1. If IRR > cost of capital, accept the project
2. If IRR < cost of capital, reject the project
3. If IRR = cost of capital, be indifferent.
(However, it doesn’t mean a loss).
Advantages of IRR
1. It gives due consideration for the time value of money
2. It recognizes the total cash flows during the project life
3. It conveys the direct message about the yield on the project. Hence, investors, who think in
terms of rate of return, can understand it easily.
sDisadvantages
1. It involves tedious work through trial and error and interpolation (This argument is very old
because we can use sophisticated mathematical software, like Excel, to calculate IRR easily)
2. The IRR does not reflect the scale, or dollar size
3. It assumes that all proceeds are reinvested at the particular IRR, whereas the NPV approach
assumes reinvestment at the cost of capital.
If there are non-conventional cash flows, that is, if there are positive and negative cash flows in
different years, it can produce multiple rates.
Discounted payback period
To overcome the limitations of the payback period, the discounted payback period method has
been suggested. .
Example:
Project Year Cash In flow PV of $1 at PV of cash Cumulative cash
10% inflow savings

0 -10000 1.000 -10000 -10000

1 5000 0.909 4545 -5455
2 6000 0.826 4956 -499

3 8000 0.751 6008 5509

4 7000 0.683 4781 10290
5 6000 0.621 3726 14016
 Payback Pd = 2 Yrs +
( 6008 )
499

= 2 Yrs + .083 Yr = 2.083 Yrs OR 2 yrs and one months

4.2 Economic Analysis of a project
For revenue earning private enterprises, the overriding objective is financial viability (i.e.
making profit). Therefore, a private investor ends at the financial analysis (discussed so far).

When measuring the benefits and costs to the nation we do economic analysis. In measuring the
profitability of projects from stand point of view of the society, we find that the market prices
(which we have used for financial analysis) for inputs and outputs may not be acceptable
measures of true costs and benefits to the society (or for carrying out economic analysis).

Therefore, we have to note that market prices are often distorted by:

1. Taxes 5. Monopolistic/Oligopolistic measures

2. Subsidies 6. Rent, Interest
3. Quotas 7. Protection, etc.
4. Regulatory measures
To deal with these problems we use Shadow prices or Accounting Prices:

Shadow prices: It is the price used for analysing the cost and benefit of a project when the
market price is felt to be a poor estimate of the economic value of a project. It is generally used
as a synonym for "accounting prices". Shadow price measures the value of commodity from
point of view of the society or the economy of a nation. After estimating the shadow prices, we
measure the viability of the project through the normal process of calculating NPV, IRR or CBR.

In economic analysis we consider the benefits of the project to the society such as:

 Employment creation
 Foreign Exchange generation or saving
 Contribution to different sectors: such as health, education, etc.
 Multiplier effect (on other economic variables in the economy)
 Linkages (both forward and backward linkages)
 Economies and diseconomies of scale
 Externalities, etc.
After considering all these variables, the project may turn out to be unviable economically.

4.2.1 How to do economic analysis?

sThe starting point for economic appraisal of the project will be a set of resources flow valued at
market price of particular year. Then we have to break costs and benefits in to different
components. In this we:
1. Eliminate all transfer payments from the net cash flow statements (transfer payments include
taxes, subsidies, social security, etc.)
2. Distinguish foreign exchange cost and revenues from domestic cost and revenue and then
apply appropriate shadow prices of foreign exchange to get real value
3. Distinguish between tradable goods and non-tradable goods and then apply appropriate
shadow prices for both types of goods
4. Desegregate labour input in to say skilled and unskilled and apply relevant shadow wage
rate to different categories of labour inputs (b/c the shadow wage rate for unskilled is
completely different from that of the skilled labour)
5. Apply relevant shadow price for land
6. Carry out the PV calculations of the adjusted resource flows using the social rate of discount
(r) to calculate economic NPV, CBR and IRR.
7. Adjust the outcome of the above calculation to take in to account externalities, which have
not been already incorporated in the shadow pricing system.
8. Consider the economic impact of the project on the following:
 Savings in the society - if the project contributes to saving then put a positive
premium and add it to the benefits; if not increase the cost side.
 Investment - if the project contributes to reinvestment, then put a positive premium
and include in the benefit side.
 Interpersonal Income distribution - if the project contributes to income distribution,
then put a positive premium and include in the benefit side.
 Regional Income distribution - if the project is generating income to distressed
regions, put a positive premium and add to the benefit. If it is adding income to the
well off to do region, then discount a premium and add it to the costs.
 Aggregate Foreign Exchanges Costs & Benefits: if the project brings in foreign
exchange, put a positive premium (Benefit). But if it depletes the foreign exchange
reserve, put a negative premium.
 Impact of the project on Government revenue and Expenditures: If projects lead to
government expenditure, discount that.
 Impact of the project on employment: if the project creates employment opportunity,
put a positive premium and add to the benefit side.
Additional issues in Economic Analysis:
 SUNK COST- these are costs, which have been incurred to the project prior to the
time of analysis. These costs should not be included to the cost of the project or for
the purpose of deciding whether to proceed with the project or not, because in
economics we are interested on incremental (marginal) costs.
 CONSUMER SURRLUS - is the difference between what consumers are prepared
to pay & what actually they pay. This surplus should be included in the benefit side.
At times it can be negative & should be included in the costs.
 EXTERNALITIES - are costs & benefits that the project causes to other people or
organizations. This should be included in the economic analysis.
 CONTINGENCY - includes only what is actually used. Contingency that is not used
is excluded in the analysis.
 INFLATION- to deal with inflation we use constant prices (while current market
prices are used in Financial analysis).
 4.2.2 Economic/Shadow Prices:
Most economic resources have several economic uses. When you put the resource to one use, it
is not available for other uses. Money is fungible - you can use it for many things. Opportunity
Cost is the value of the resource if it were used in its next best alternative use. To obtain shadow
price, we have to make three types of adjustments to the market prices. These are:

a. Economic Transfers
b. Goods (Commodities)
c. Factors of production
a. Economic Transfers

These are items which do not refer to the use of resources but merely transfers purchasing power
from one group to another within the economy. Therefore, income is neither created nor
expended.

Examples:

o Taxes such as import duties, export duties, income tax, VAT, transaction tax, etc.
o Subsidies
o Free services
o Incentives
o Interest on loans and repayment on loans
o Indirect cost and benefits and control prices
These are either to be subtracted from or add to market prices to get shadow prices.

b. Goods (Commodities)

The shadow price of a commodity is its value in the best alternative use i.e the opportunity cost
of the resource. Conventionally boarder prices are used for the social opportunity cost of
resources, and they are expressed in terms of foreign exchange.

1. Tradable goods
 Goods which can be exported or imported. Here the shadow prices are the border
prices. FOB or CIF prices are used.
 The border price adjusted for transport and distribution costs is known as border parity
price. So we use border parity (i.e. FOB/CIF + Transport & Distribution Cost).
Note: If the goods, which could be is imported, are produced locally and if the goods, which
could be exported, are consumed locally, then we have to take in to account transport and
distribution costs from consumption and production centre.

Conversion Factor: is a number, usually less than 1, used to multiply the domestic market
prices of goods/services and to get the equivalent border prices so as to correct the distortions in
domestic prices of the same goods/services. Conversion Factor is a ratio of shadow price (SP) to
market price (MP).
 SP
CF=
MP ; SP=MP∗CF

Example: The CIF price of imported machinery is $ 1000. But after a tariff, the total cost of the
machinery was $1250. Ignoring handling, transporting and other costs, the conversion factor for
the machinery will be

$1000
CF= =0.8
$1250
The value of the machinery at shadow prices will be 0.8 x 1250 = $1,000

The following formula helps to get the shadow price of a commodity by including its
transporting and distribution costs.

SP i=BPi +(T i CF T +Di CF D ) Where: BP is border price, T is transport cost, CF T

is conversion factor for transport cost, D i is Distribution cost, CFD is
conversion factor for distribution cost.

BP=WP∗OER ; Where: WP = World Price and OER= Official Exchange rate

Example: Given the following information find the CF.

 An import substitute project produces an output with a CIF price in local currency
of 100 per unit and a domestic ex-factory price of 120.
 Transport and distribution costs from the port to consumers are 15 per unit at
domestic market prices.
 The project is located close to the consumption centre and from the project to
consumers these costs are only 5 per unit.
The shadow price of the output of the project is therefore the CIF price plus the net saving
in transport and distribution cost of 10. The net cost saving of 10 is at domestic market
prices and must be converted to a world price equivalent. It the CF for transport and
distribution is 0.8, the shadow price of the good is calculated as follows.

108
−0.90
SP = 100 + (15 x 0.8 - 5 x 0.8) = 108 and CF = 120

2. Non-Traded Commodities
 Are commodities that cannot be exported because their cost of production and
international transport cost is too high (above the fob price) and their import value is too
low (below the CIF price of similar commodity).
 Different non-tradable goods may be valued by different principles of shadow
pricing. For example if the impact of additional production is to increase consumption within the
country, then the relevant shadow price is the marginal consumer willingness to pay. Another
example is if additional production replaces the same non-tradable good within the economy, the
alternative production costs of the avoided becomes the shadow price (UNIDO, 1978). For non-
traded commodities we usually calculate the conversion factors reflecting the long-run marginal
cost of production which becomes the shadow price of non-traded commodities.
3. Factors of production
Shadow price of factors of production (which include labour, foreign exchange, domestic capital
and land) must be derived from broad analysis of conditions prevailing in the economy. As a
result compilation of such shadow prices is difficult, debatable and often less than accurate.

a. Labour For labour we must first of all know the employment condition in the economy. For
example,
 We have to identify the people who are underemployed, disguisedly employed and
openly unemployed.
 Underemployed - people who work hard but not getting the going wage rate.
They have more than needed capacity for the job.
 Disguised unemployment - their withdrawal from work does not reduce
production.
 Identify source of labour because different location have different marginal product,
i.e the labour is segregated.
 Identify seasonal employment fluctuation in the market
 Distinguish between skilled and unskilled labour, and also distinguish the difference
between skills, because some skills are scarce and others are abundant.

Now we are able to calculate the value of that labour on its alternative activities.
Shadow wage rate (SWR) is the production forgone in the other alternative activities
elsewhere in the economy. Add cost of transport, training, accommodation and change in
consumption pattern.
SWR= ∑ ai .M i .CF L , CFL = SWR / MWR
Where: ai = the proportion of new workers coming from activity i
mi = output forgone at market prices for workers drawn
From activity i
CFL= conversion factor for labour
MWR = market wage rate.
b. Foreign Exchange Rate s
The shadow exchange rate where foreign exchange is freely available is equal to the market
exchange rate, i.e. SER = MER.s
But when there is shortage and restriction, the black market for foreign exchange emerges.
And the shadow exchange rate is equal to the black market exchange rate adjusted for risk
factor. That is,
M +T m M +T M + X +S X −T X
SER = xOER SER = xOER
M or X +M
 Where: M = value of import; Tm = tax on M; X = value of export; T X = tax
on X; SX = subsidy on X; OER = Official Exchange Rate
c. Domestic Capital: Domestic capital has several meaning. It could be physical assets or fund
available for investment. In our case it refers to the fund/ money for investment, so that the
market for capital is the market for funds/ money. And the market price for it is the interest
rate.
In a perfectly competitive capital market, the interest rate will be equal to the rate of return on
additional project, i.e the marginal return of capital. Thus the marginal interest rate is equal to
the shadow interest rate when you have a perfectly competitive capital market.
But in real world, you do not have a perfectly competitive market. This is because:
 All of the capital market are often fragmented; with different borrowers facing
different rate of interest. (i.e. no single (r) in the market for the country).
 The market is influenced by risk, inflation, taxes, subsidies and monetary policies. For
instance, the higher the risk and inflation rate, the higher (r).
 The supply of local funds for investment is generally scarce in poor countries, this
affects (r).
 Some capital market is controlled by the government, e.g. the deposit (r) is controlled
by the NB of Ethiopia, and it is 3%.
 The demand for funds is based on expectation of financial returns not economic
returns.s
Thus, we need to make some adjustment and calculate the shadow interest rate/ discount rate
which (by definition) reflect the opportunity cost of committing investment funds to a new
project. You can have different opportunity cost depending on the source of funds and how their
use on new projects affects other activities.

r = q x CFq
Where: q is the return on marginal public sector projects at domestic prices or the return on
marginal private sector projects at domestic prices
CFq = the conversion factor required to express this return at world price
d. Land
Land is a major item for agricultural projects while it is a minor item for industrial projects. In a
competitive land market, price of land would be equal to the expected future gains from the
purchase or rental of additional units of land. But it is not the case in the real world, i.e. we do
not have a perfect land market:
- Especially in urban area where land market may be dominated by speculative purchases
by buyers whose intention is to hold the land and influence the price.
- Also in the rural areas land use may follow from custom of culture rather than economic
calculations.
Again we need to calculate the shadow price of land.
The shadow price of land is given by its opportunity cost which is the net income at world price
that could be obtained from the land on its most likely alternative non-speculative use.
Procedures for the application of shadow prices:
  Identify items requiring adjustment
 Substitute shadow prices for market value, i.e. make adjustment for prices of all those
items.
 Do your analysis, i.e. the resulting cash flow in its adjusted form is now discounted using
the shadow price of capital (r) (or alternatively you can discount and then calculate
shadow prices) and the NPV, IRR, etc will be calculated.
4.3 Risk and uncertainty in project Appraisal
The techniques of project analysis have been considered so far as if the basic data which they
have used are known with certainty. However, both technical and economic information is used
in the form of forecasts and is subject to considerable uncertainty. It is possible to conceive of
different values, based on experience, for the fundamental technical relations in any productive
process, and for the project costs and benefits at either market or shadow prices. Variation in
some technical or economic values will be more significant than others. Moreover, some will be
subject to greater uncertainty or a greater range of likely values. An initial attempt to identify
those variables that are likely to affect most the project outcome is provided by sensitivity
analysis.
In implementation, a number of variables are likely to vary simultaneously, in either
complementary or contradictory fashion moreover, they will do so with different likelihood. A
second technique of risk analysis investigates the effects of consumptions of events with
different probabilities. This technique can be applied particularly to the most significant
variables identified through sensitivity analysis. One of the real advantages of careful economic
and financial project analysis is that it may be used to test what happens to the earning capacity
of the project if events differ from quests made about them in planning.
It is possible that an investment goes ahead on the bases of favourable appraisal of the project.
But subsequently ex-post evaluation may indicate that the appraisal was faulty and the project
should not take place.
There are a number of areas which might account for the faulty prediction of economic
performance, i.e., sources of error may be in any of the following:
 Prediction of technical performance:
 Underestimation of the length and time of construction
 Underestimation of the project life time
 The quality & quantity of raw materials,
 Supply of imported inputs and spare parts - receipt of the wrong inputs and spare
parts.
 Wrong assumptions of the physical quality and quantity of your product
 Wrong rate of production expansion (production capacity)
 Problem with the quality of the management skills.
 Prediction of the market situation:
  Wrong estimation on cost of investment
 " " about the volume of demand (over ambition)
 " " of cost of inputs (price of inputs may increase)
 " " of operating costs
 " " the value of output
 Estimation of shadow price
 Prediction of macroeconomic conditions surrounding the project
 For example, availability may not be as predicted
 Inflation rate may rise above expected
 Interest rate, example, deposit rate decrease from 6% to 3%
 Changes in laws and regulations
 Weather may also affect particularly agricultural projects
There are several ways of incorporating uncertainty:
 To add an item called "Contingency" (in %)
 To add "a risk premium" to the discount rate, i.e. use a higher discounting rate (NPV
decreases)
 To shorten the "life of the project"
 Use “Sensitivity Analysis".
Sensitivity Analysis
Measures of project worth are first calculated using the best estimate of inputs and outputs and
the discount rate. The project decision will be based on these best estimates. However, what
would be the effect on the project worth measure of variation in the estimates?
How sensitive is a project's net present worth at financial prices and economic values, or its
financial and economic rate of return or net benefit-investment ratio; might be:
- an increase in construction costs,
- an extension of the implementation period,
- a fall in prices, etc.
It is analytical tool to test systematically what happens to the earning capacity of the project if
events differ from the estimates made about them in planning. It is a means of dealing with
uncertainty about future events and values. Economic analysis of a project is necessarily based
on uncertain future events and imperfect data. So it is desirable that the cost benefit analysis
(CBA) takes in to account the range of possible variation in the values of basic elements. In a
feasibility study, a sensitivity analysis is applied to major variables on which we have based the
CBA. The key variables to which sensitivity analysis could be applied include: Price of inputs,
Price of output, Operating Costs, Sales volume and Initial cost outlay
Reworking an analysis to see what happens under these changed circumstances is called
sensitivity analysis. It is one means of drawing attention to a central reality of project analysis:
Projections are inevitably subject to a high degree of uncertainty about what actually happen.
All projects should be subjected to sensitivity analysis. In agriculture for example, projects are
sensitive to change in four principal areas: Price of output and inputs, delay in implementation,
costs overrun & yield.
The application of sensitivity analysis involves varying one project item at a time and measuring
the effect on project worth. Because this is easier to interpret in absolute terms, the project worth
measure generally employed in sensitivity analysis is the net present value (NPV).
The technique of sensitivity analysis is not complicated. The analyst simply calculates the
measure of project worth over again using the new estimates for one or another element of cost
or return.
An alternative way to present the results of sensitivity analysis is to ask by how much a project
item needs to change before the project decision is affected. This variation of sensitivity analysis
is called the switching value. In straight forward sensitivity analysis we choose an amount by
which to change an important element in the project analysis and then determines the impact of
that change on the attractiveness of the project. In contrast, when we calculate a switching value
we ask how much such an element would have to change in an unfavorable direction before the
project would be longer meet the minimum level of acceptability as indicated by one of the
measures of project worth. Then those responsible for determining whether to proceed with the
project can ask themselves how likely they feel it is that there will be a change of that magnitude.
Risk Analysis
Risk analysis involves a fuller assessment of possible variation. Its purpose is to provide a
probability estimate of how likely a project decision is to bewaring. Risk analysis begins from
the best estimates contained in the initial resource flow and from the effect of variation given by
sensitivity analysis; but now different variables are considered simultaneously.
Some project items can be estimated with greater certainty than others. Although it is convenient
to use the same range of variation for each variable considered in risk analysis, the probability of
the different values in the range occurring will differ. For example, given the optimism with
which projects are often prepared, some items like investment costs are more likely to vary
upwards rather than downwards from the best estimate, whilst others like revenue are more
likely to be below rather than above the best estimate. A probability should be attached to the
best estimate and each variation, to reflect the likelihood with which the different value in the
range will occur. The sum of these probabilities must total 1.0 for each variable.
The effect of varying values within a range can be calculated through sensitivity analysis. It is
additional probability estimates associated with each variation that represent the essential feature
of risk analysis. Where do these probability estimates come from? For some variables they may
come from past evidence, for example, of fluctuations in prices, outputs, or of, material ratios in
different production processes. For other variables, intuitive guesses may have to be made on
the basis of experience.
Risk analysis is most important for marginal projects, with a rate of return just above the
discount rate. For projects with a much larger rate of return the probability of a negative NPV
with variation in the major variables is likely to be on decision among alternative marginal
projects.
Identifying the effects of variation in major variables, and investigating the likelihood of their
combined variation, provides considerable information on the risks associated with a project. It
indicates where the risk might be reduced.
Risk can be reduced at both the analysis and implication stage of a project. The project results in
many cases can be improved by a redesign of the project. Alternative technologies, locations,
output mixes and scales should be investigated.
Risk reduction can also be achieved by choosing projects for which there are well-known
precedents. Replication of small-scale projects rather than commitment to a few large-scale
projects can reduce risk. Copying and adapting from imported technologies under supply and
management contracts can also reduce production and marketing risks. These forms of dealing
with risk, however, can't easily be incorporated into project analysis calculations or decisions on
individual projects. Moreover, such approach toes the potential benefits of developing new
technologies or learning-by-doing.
Chapter 5: Project Implementation
After completing this chapter, the students should be able to:
 Describe the work breakdown structure and project specifications for effective
implementation;
 Apply implementation planning tools like Gantt chart, network techniques, Critical Path
Method (CPM), program evaluation and review technique (PERT) in a specific projects;
and
 Describe the project cost-time relationshipss
5.1 Introduction
Project implementation refers to the execution of all tasks that are necessary to make the project
operational. The duration of the implementation phase stretches from the decision to invest in a
project to the commencement of operations. The project implementation stage brings the project
from the feasibility study stage to the execution stage.
The implementation planning of the project is part of the feasibility study. The responsibility for
implementing the project is usually entrusted with an implementation team. The team comprises
of a number of experts in various fields such as finance, technology, law and engineering, etc.
Once the decision for implementing the project is taken, it is necessary that the preparation for
starting the project is made. The preparation includes obtaining government approvals, fulfilling
legal processes, collecting and planning finance, construction and installation, supply of
materials, making the organizational set up, acquisition of land and technology and so on. s
Pre-requisites for successful project implementation
Time and cost over- runs are very common in a number of projects, especially in developing
countries. In addition to such run-over’s, many government projects fail in attaining their goals.
Some of these social projects do not reach its completion stage. Luck of fund and other necessary
facilities force the projects to stop their operations after a certain period of commencement. What
can be done to minimize time and cost over runs and to prevent the projects from their premature
death thereby improve the prospects of successful completion of projects? While a lot of things
can be done to achieve this goal, the most important ones appear to be the following:
 Adequate formation
 sound project organization
 proper implementation planning
 timely available of funds
 judicious equipment tendering and procurement
 efficient contract management
 effective monitoring
5.2 Project Organization
The basic building blocks of the traditional forms of organization are a functional division of
management and a well defined hierarchical structure. Typically a firm is organized in to various
departments, such as production, purchasing, marketing, finance, personnel, engineering and,
research and development. Some of those departments have line function and the others a staff
function. Line managers have the principal responsibility for achieving the goals of the firm and
are vested with decision making authority. Staff managers primarily serve in an advisory
capacity –of course, within the staff departments they enjoy administrative powers.
The traditional form of organization is quite appropriate for handling established operations
which are characterized by a continuous flow of repetitive work, with each department attending
to its specific functions- in such a setting , relatively stable inter departmental and inter personal
relationships emerge. However, the traditional form of organization is not suitable for project
management because of the following reasons:
 Project is a non routine, non repetitive undertaking often plagued with many
uncertainties
 The relationships in project setting are dynamic, temporary, and flexible, and
 A project requires a coordination of the efforts of persons drawn from different functional
areas and contributions of external agencies. However, the traditional form has no means
of integrating different departments at levels below the top management, and it doesn’t
facilitate effective communication, coordination control when several functional
departments, with different professional backgrounds and orientations are involved in the
project work under time and cost pressures, which often call overlap, at least partial, of
the development, design, procurement, construction and commissioning work.
Hence there is a need for entrusting an individual (group) with the responsibility for integrating
the activities and functions of the various departments and external organizations involved in the
project work. Such an individual may be called the project manager or project coordinator.
Depending on the authority that is given to the person responsible for the project, the project
organization may take one of the following three forms:
 Line and staff organization
 Divisional organization
 Matrix organization
Line and staff organization
In this form of project organization, a person is appointed with the primary responsibility of
coordinating the work of the people in the functional departments. Such a person, referred to
commonly as the project coordinator, acts essentially in a staff position to facilitate the
coordination of line management in functional departments. The project coordinator doesn’t have
authority and direct responsibility of the line management. He serves as a focal point for
receiving project related information and seeks to promote the cause of the project by rendering
advice, sharing information, and providing assistance. He may gently coax line executives to
strive for the fulfillment of project goals. Deprived of formal organizational authority, he may
find it difficult to exert leadership and feel unsure of his role. His influence would depend on his
professional competence, closeness to top management, and persuasive abilities. Clearly, this is a
week form of organization which may be employed mostly for small projects- it is certainly not
suitable for large projects.
Divisional organization
Under this form of project organization, a separate division is set up to implement the project.
Headed by the project manager, this division has its complement of personnel over whom the
project manager has full line authority. In effect, this form of organization implies the creation of
a separate goal oriented division of the company, with its own functional departments. While the
project manger still has the problem of coordinating the inputs of other organizations involved in
the project, he has total formal control over the division he heads.
A very strong form, the divisional project organization facilitates the process of planning and
control, brings about better integration of efforts, and strengthens the commitment of project
related personnel to the objectives of the project. It considerably improves the prospect of
fulfilling the time and budget targets.
This form of organization, however, may entail an inefficient use of resources of the firm. It may
result in an unnecessary duplication of specialists in the company, because of the necessity to
allocate them in total to each project. further it may be difficult to achieve a higher degree of
specialization of expertise because the divisional project organization may have to manage with ,
say, one mechanical engineer, rather than two specialists.
Matrix organization
The line and functional form of organization is conducive to an efficient use of resources but is
not suitable for an effective realization of project objectives. The divisional form of organization,
on the other hand, is suitable for an effective realization of project objectives but is not
conducive to an efficient use of resources. The matrix form of project organization seeks to
achieve the twin objectives of effect use of resources and effective realization of project
objectives- at the cost of greater organizational complexity, of course.
In a matrix organization, the personnel working on the project have a responsibility to their
functional superior as well to the project manager. This means that the authority is shared
between the project manger and the functional managers. The authority and influence of the
project manager cut across the traditional vertical line of command.
The matrix form of organization is incongruent with the traditional organization theory: there is
dual subordination, responsibility and authorities are not commensurate; the hierarchical
principle is ignored. This clearly implies that the matrix form of organization involves greater
organizational complexity and creates an inherently conflict full situation. Yet it seems to be
better vehicle for the simultaneous pursuit of the twin objectives-efficient utilization of resources
and effective attainment of project objectives.
5.3 Project Contract Administration
From the viewpoint of a project, contracting is the process of establishing a relation between the
owner and the contractors to execute the project work, especially construction. It is essential that
both the parties sign the contract so that the requirements of the parties can be communicated
each other. Usually, the contents of a contract include name and address of both the parties,
subject of the agreement, deadlines for the different stages of fulfillment of the agreement,
financial aspects and other necessary conditions such as violation of contract etc.
There are several approaches in contracting. Some of them are:
1) Entrust the total responsibility for engineering, procurement and construction to consortium
of contractors who may divide the total responsibility among themselves.
2) Divide the project into engineering, construction, supplies etc. and entrust the responsibilities
to suitable suppliers and contractors.
3) Accomplish a portion of the work yourself with your own departmental organization and
contract out the balance to one or more agencies.
Contracting Schedule
A carefully worked out contract schedule will reduce the extend of project overruns that take
place due to the related award of contracts. Contract should be awarded sufficiently in advance
of the starting date of the work so that the contractor is able to mobilize his resources and move
in before the starting date without any emergency. Any crisis situation will reduced the overall
efficiency of the work. A contracting schedule contains:
 the work code
 work packages; volume of main activities and budget estimate
 starting and finishing dates and
 the names of people who prepared the bid documents and awarded the contract.
Contracts for supplies also should be scheduled to have timely supply of materials, giving
consideration to lead time delivery time.
Contracting Procedure
There may be directive from the government with regard to the contracting procedures The
World Bank , Asian Development Bank, UNDP etc. have their own detailed procedures. Some
of the financing institutions require particular procedure for contracting these procedures are
designed with clear objectives to achieve. These objectives are:
 to elicit competitive bids
 to provide equal opportunity and equal treatment to all eligible tenderers
 to accept the tender at the lowest cost.
The following are the usual steps in contracting:
1. Work packaging and scheduling
The total work of the project is expected to be divided into separate packages. So that they could
be awarded to contractors. It may be divided into either specialized Activity Packages like
construction, civil engineering works, painting etc. or unit packages like administration
building, by - product plant, steel melting shop etc. What should be kept in mind while doing
work packaging is that as far as possible, one work package must be independent of other
packages. Each package must be well-defined with their scope. Specialized nature of the work,
especially form the angle of technology, should be paid attention in packaging the work. Size of
each package should be neither too large nor too small for one or more reputed contractors to
handle.
Every package should be scheduled with reference to all activities involved in its
accomplishment and to suit the overall schedule of the project. The schedule must clearly show
the starting and finishing time of each individual package. Each package of work should be
contracted in advance so that it could be completed within the specified time.
2. Preparation of Tender Documents
The preparation of tender documents requires serious attention because it aims at furnishing the
prospective contractors with the details of the contract. Contractors must be able to understand
the scope of the contract fully and to fill in the bid documents without any mistake. Tender
documents usually contain the following.
a) Instruction to tenderers
Instructions to tenderness may cover; tenderer's qualifications, guidelines for preparation of
the tender, the number of copies to be submitted, price basis to be adopted, tender
evaluation criteria, bid bond requirement, dates for closing the tender sale, submission of
bids, and opening the bids.
b) Model Form of tender
The prescribed form of tender should be included in the tender documents.
c) Drawings and specifications
They are the most important parts of tender documents. Specifications should be complete
and unambiguous and set out the way in which all work should be done. With respect to
goods, they should specify physical and chemical properties regarding work, they should
specify, standards, methods, quality and quantity. Specifications should cover also site
conditions soil conditions etc. which are very important in determining the work volume and
cost. The documents which are clear and complete can avoid a lot of unpleasant disputes
during the execution of work.
d) Schedule of Rates:
Albeit irrelevant in certain types of contract, the tender documents generally include a
schedule of owner's rates for different types of work. These rates are meant for tender's
guidance.
e) General conditions of contract
It is a document like the standard form of contract and contains the general terms and
conditions of the contract such as terms of payment, rights and obligations of parties,
procedure for settling claims and disputes, performance security and other conditions which
are generally applicable to all contractors.
f) Special conditions of contract
The conditions those are specially applicable to a particular package and not generally to all
packages are referred to as special conditions of contract. They may include procedure for
inspection and testing, special requirements of insurance, specific terms of payment, etc.
g) Specimen of Bank guarantee
Tender documents usually include specimens of Earnest Money Bank Guarantee, or Security
Deposit Bank Guarantee or Advance Payment Bank Guarantee. Sometimes only SDBG will
accompany the tender documents.
3. Determination of Contractor's Qualifications
One of the modern contracting approaches is to invite submissions for prequalification
before issuing a tender. The criteria for qualification of contractors for every work package
should be determined in advance. The contract will be given only to a party possessing
those qualifications. This technique is employed with a view of avoiding incapable
contractors. However, prequalification is not compulsory. The minimum qualifying
requirements should include a contractor's qualification, experience, employees, financial
stability and plant and equipment. For example, the World Bank's criteria for
prequalification and the points for each criterion are given below.

Factors Points
Organization and Planning 10
 Management Structure
 General Implementation Program
 Plans for subcontracting
 History of Default
Personnel 15
 Experience/ qualification of key personnel
 Adequacy of specialized staffing
Major plant and equipment 15
 Adequacy
 Age/condition
 Source of availability
Experience 30
 Technical references
 Value of completed contracts of similar type
 Average percent of work under subcontractor
Financial Condition 30
 Bank reference
 Average annual turnover
 Working capital
 Quick Ratio
 Value of contracts completed in last 5 years
A contractor who is interested in participating in the prequalification invitation, can have a
self- check based on the above criteria. If prequalification is included in the contracting
procedure advertisement should be made for submission of application. After the evaluation
of applications, the contractors will be short-listed. Such a list will help the organization for
inviting tenders only from the short-listed contractors thereby avoiding incapable contractors.
4. Tender Invitation
If contractors are short-listed through prequalification procedures, send them equerry letters
to understand their interest in participating in the tender. An open tender may be advertised
in the absence of such a list. The invitation to tender should be properly worded and should
not give room for any dispute or disadvantage.
5. Tender submission
Tender is usually submitted in sealed envelopes. The required number of copies of tender
documents together with all other necessary documents will be submitted by tenderers on or
before the last date for submission. The invitation to tender or the tender documents will
clearly say the requirements and last date for submitting a tender.
 6. Tender Opening
Unless a justifiable confidentiality is to be maintained , like in a national defense project,
tenders should be opened in the presence of tenderers or their authorized representatives.
The date and time of tender opening will be notified to the tenderers in advance either
through separate notice.
7. Evaluation and recommendation
The Project Manager and the interested department heads have to participate in the
evaluation of tenders. One of the very important tasks in the evaluation process is to add the
costs of the elements, that the tenderers have not included, with the tenderer's prices. Such
costs may be insurance costs, shipping costs, taxes, special packing charges, inspection fees
etc. Costs of excluded components shall be added at the maximum market price. The other
areas of observation in the evaluation process are the quantity, the quality and the other
technical specifications. Sometimes, the project will have a preprinted bid comparison and
evaluation form designed, including all requirements of all the departments.
8. Award of contract
Usually contract is awarded to the tendered who offers the lowest price. In certain projects,
the bidders may be called by the project manager for negotiations with a view to bringing
down the price or lettering the conditions quoted. However, in projects, financed by the
World Bank, negotiation is not encouraged. The World Bank enters into negotiations in the
appointment of consultants.
9. Signing of Agreement with detailed contract conditions.
A contract agreement is a document by which the contractor covenants with the project to
execute the defined work and the project covenants with the contractor to pay the agreed
contract price. The details of the contract and all major and minor conditions will be
contained in the annexure or appendices. These annexure include the tender invitations,
tender documents, the tender specifications, general and special conditions of contract and
the contractor's acceptance.
The content of the contract may differ from project to project. However, the executives who
prepare the contract agreement must bear in mind that harsh conditions and pitfalls can
harm the project.
Thus the contracting procedure plays the key role in the success of contract management.
Unless much attention is in each step in the contracting procedure unnecessary conflict may
occur between the project and the contractors. Such a conflict may lead to the project to its
prematured death.
5.4 Team Building for Project Implementation
Project human resource management involves all the processes that are required to make the
most effective use of the individuals associated with the project. Good leaders are essential for
the successful management of projects. To effectively manage a project, these leaders require a
group of dedicated individuals, committed to achieving project goals. While selecting good staff
is important, it is equally important to assign them the right jobs. The project manager plays a
key role in the success of a project. Project managers should be able to analyze project risk and
uncertainty. Generally, the project organization establishes a committee to screen candidates for
the post of project manager.
The project office is the entity in an organization that helps the project manager carries out his
tasks. The people in this office are dedicated to the achievement of the project goals. It is also
their responsibility to maintain a good working relationship between the project and functional
managers.
Team building can be defined as the "process of planning and encouraging working
practices that are effective and which minimize the difficulties that obstruct the team's
competence and resourcefulness.” Complex projects involve multifunctional tasks that
demand a high level of innovation and state-of-the-art technology. Such projects require
teams of specialists with diverse skills. The benefits of team building are: Effective use of
time, improved job satisfaction and improved self esteem and well being. The team
building process is based on the type of the project, the leadership style of the project
manager and on the type of individuals involved in the team
Stages in team building:
There are four major stages:
 Forming (collection): The team starts as a collection of people when individuals
come together either at once or over a period of time. At this stage, members look
polite towards each other, and somewhat guarded and trying to find out more about
the others.
 Storming (grouping): Individuals become more open and trustworthy towards each
other; and they start to know the interests, personalities, values and skills of each
other. The openness is helpful in providing positive criticisms on the leadership style,
and this openness may result in conflict, confrontation and feelings of frustration.
 Norming (developing team): If positive leadership emerge (whether designated,
volunteered, shared or otherwise) the group may move from stage II to stage III. At
this stage members begin to establish norms, goals, roles and procedures within the
group. Decision-making and problem solving may be stressful or laborious but more
successful than the previous stages.
 Performing (High performance team): Fully formed teams with established
standards. Very few members make it to this stage. They work out problems, goals,
issues and difficulties together. They move forward to high performance. Members in
the team are aware of the potentials that may accrue through the application of
teamwork, self-study, shared leadership and effort, high moral and excellent
productivity. Conflict may occur but members value resolution of conflicts and want
to remain loyal to the team.
 Ground rules for an effective team building:
 The purpose of the team is known and understood by all members;
 High transparency on the problems of the performance of the team;
 Effective leadership,
 Member roles are known to each other and there is high coordination of roles in
the team.
 Availability of adequate financial and human resources for the team to function
properly;
 Awareness and full participation of members in the decision making process of
the team;
 Provision of help to each other, even if it requires overtime, inconveniences or
extra effort;
 Voluntary provision of skills, experiences, ideas and information to other team
members; and the ability of members to listen and try to understand the opinions,
ideas and needs rather being unnecessarily critical and defensive;
 Good system of information sharing and feedback mechanism so as to keep
members on new developments and changes;
 Commitment and trust among team members to develop consensus on an issue,
even if it takes a little more time.
 The ability of developing synergy (the whole is greater than the sum of its parts)
in the team.
These five stages of team formation mirror the four stages of the project life cycle, although all
five can take place within a single project stage. There are several group working techniques,
which the manager can use to shorten the forming, storming and norming stages, such as the
application of the start-up workshops.
Having formed the group, the manager’s role is to ensure it continues to operate at the plateau of
effectiveness. First the manager must be able to determine just how effective the team really is.
On a simple level, this can be assessed by the way in which the team achieves its agreed targets,
and by the way in which the individual’s and group’s aspirations and motivational needs have
been satisfied. The team leader and the line management of the organization must ensure that
both corporate and personal objectives are met. If only the corporate goal is met, with time
there will be an erosion of morale and effectiveness followed by staff attrition. Often, however,
it is only possible to measure achievement of these objectives at the end of the project, when it is
too late to take corrective action. Hence, we must also have measures by which to judge the
cohesion and strength of a group during the project indicators of team effectiveness include:
 Attendance: low absenteeism, sickness, accident rates, work interruptions and labour
turnover
 Goal clarity: Individual targets are set, understood and achieved; the aims of the group are
understood; each member of the team has a clear knowledge of the role of the group
 High outputs: Commitment to goal achievement, a search for real solutions, analytical,
critical problem solving using knowledge and skill, the search for widely tested and supported
solutions.
 Strong group cohesion: openness and trust among members, sharing of ideas and
knowledge, lively and constructive meetings, shared goal.
Leading Projects
One of the most elusive of topics, often authors start off by saying they are going to discuss
leadership, and end up describing management. Leadership is different from management.
Somebody can be a good, effective manager, without being and inspirational leader; and yet
other people can be inspirational leaders, while being fairly chaotic managers.
Covey said that there are three elements of leadership, which he called ethos, pathos and logos.
Unfortunately the majority of Western managers use only the last of these. They try to persuade
their subordinates by the logic of the situation. However, this is not totally effective, without the
other two. The effective manager is good on the logos, but to be an inspirational leader, he or
she must first convince with ethos and pathos.
1. Ethos is the leader’s basic value set. The leader must demonstrate to the team that he or she
has values and beliefs worth working for. The leader must communicate his or her values to
the team, to motivate them to work towards the project’s goals.
2. Pathos is the leader’s relationship with the team. Once the leader has demonstrated to the
team inclusive ethical, moral and cultural values, he or she then needs to win their backing
and support. Once the leader has convinced the team with his or her value set, and once he or
she has developed a relationship with the team, then the team are ready to be persuaded by
logic. Without the ethos and the pathos, the logos will flow off the team like water off a
duck’s back. Logos remains a necessary condition for inspirational leadership, but on its
own it is an insufficient condition.
What this might mean for project manager is as follows. Ethos can work on several levels. First,
the project manager must convince the wider team (Primary, secondly, he or she must gain
commitment of the team to overall management approach, and gain support for it as a way to
deliver a successful outcome for the organization. Thirdly, the project manager must
demonstrate their overall ethical and cultural values, showing an inclusive style that recognizes
the contributions of others, and convinces the team that they will be properly rewarded. Then
the manager needs to build the pathos that is relationships, between themselves and the project
team members, and between the individual members of the team. Both the ethos and the pathos
can be achieved through a well-designed start-up process. Once the manager has won support
for his or her personal values and values for the project, and once people are working well
together as a team, then the team members will be open to persuasion on individual issues that
need resolving on the project.
The Effective Project Manager
Now let us consider what makes an effective project manager. Handy, suggests that there are
three possible criteria for effective leaders:
 Leadership traits: Effective managers have certain common traits
 Leadership style: Effective managers adopt certain styles
 A contingent approach: Effective manager adapt their styles to suit the circumstances.
Traits of Effective Project Manager
There are six traits of effective project managers:
 Problem –solving ability and results orientation
 Energy and initiative
 Self-assured leader
 Perspective
 Communication
 Negotiating ability
Problem-solving ability and results orientation
Effective managers are usually of above-average intelligence, and able to solve complex
problems, by analyzing the current situation and recognizing patterns, Problem solving pervades
project management. The achievement of the project’s purpose is a problem, as is the
completion of each stage of the life cycle. Furthermore, the control processes is also one of
problem solving, planning recovery to overcome variances from the plan. Without a problem
solving ability a project manager would be lost. This ability at problem solving should be
coupled with results orientation. The purpose is not to complete work for work’s sake, but to
achieve the desired ends. The solution to the problems should deliver the planned objectives and
defined purpose not necessarily complete the originally agreed work. The end justifies the
means or All’s well that ends well.
Energy and initiative
The project manager must also have the ability to continue working and managing under
considerable pressure and against considerable odds. This requires the manager to be energetic
and fit. This energy will be coupled with initiative to see the need for action, and have the
resolve to take it.
Self-assured leader
Managers must have the self-assurance to know that what they are doing is right. This does
not mean they must be extrovert or brash; a manager can be self-effacing while still self-assured.
They must take action resolutely, confident in their opinions and judgment. Sometimes it is
better to take action, based on incomplete information, being ready to modify the action as new
information comes to light, than to dither endlessly looking for the perfect solution. Self-assured
managers also delegate readily to their project team, confident in the ability of the team’s
members, and their own ability to motivate the team. Sometimes, especially in the IT
industry, you see good technologists promoted into managerial positions who are very reluctant
to delegate, because they believe, quite rightly, that they can do the work better than any else.
They work themselves into an early grave, while their team members are idle and consequently
de-motivated.
Perspective
Managers need to be able to look beyond the team, and to see how they fit into the organization
as a whole. This need for perspective extends to the project work. The manager must be able to
move freely through all three levels of the project hierarchy, and above as well, to understand the
detail work of the project and how it will deliver the project’s objectives, and to understand
how the project’s objectives will meet the needs of the parent organization. This ability is
known as a helicopter mind.
Communication
Similarly, the manager must be able to communicate at all levels of the organization, from
managing director down to the janitor. They must be the project’s ambassadors, selling it to
senior managers to win their support; they must be able to talk to their peers, functional
managers and resource providers to win their cooperation. They must brief and motivate the
team; and they must talk to the janitor, because often the latter knows better than anyone how the
project is progressing.
Negotiating ability
In Parts Two and Three the project plan was said to be a contract. It is a contract between the
project manager (showing what the manager and the team will deliver to the organization), and
the project’s sponsor (showing the support that person or group will give to enable the project
manager to deliver the contracted result). Like all contracts this must be negotiated through
bipartite discussions. Project managers rely on their ability to negotiate, because they do not
have the direct line authority over their resources as functional managers do. They must win and
maintain the commitment and cooperation of other people through their ability to negotiate and
persuade.
Style of Effective Project Managers
Project managers can adopt four styles. The table below shows the appropriate management
styles and team structures at different project stages.
Stage Style Team
Feasibility Laissez-faire Egoless

Design Democratic Matrix

Implementation Autocratic Task hierarchy

Clouse –out Bureaucratic Task force

Laissez-faire: Laissez-faire managers allow the team to mange themselves. They behave like all
the other members of the team, and are there to advice if required. This style is appropriate
during the early developmental or feasibility stages of a project, or on research projects.
Democratic: Democratic managers consult their team, and then decide the best course of
action. Note that this style is different from the laissez-faire style above, which is almost
anarchic, not democratic. This style may be appropriate during the feasibility and
planning stages of a project, when you want to encourage people to contribute their ideas.
Autocratic: Autocratic manager dictate to the team what should be done and how. This
style may be appropriate during the execution and close-out stages of a project, when the
specification and design of the facility has been decide, real money is being spent, and so
early completion is required at achieve the returns.
Bureaucratic: Bureaucratic manager through rules and procedures. This style is appropriate on
projects with low risk, for which there will be little change, because the bureaucratic manager is
unable to respond to change. This means it will also be appropriate during the closeout stages
of a project.
5.5 Project Implementation tools
Project involves few activities, resources, constraints and inter-relationships can be visualized
easily by the human mind and planned informally. However, when a project crosses a certain
threshold level of size and complexity, informal planning has to be substituted by formal
planning. The need for formal planning is indeed much greater for project work than for normal
operations. Without effective planning, there may be chaos.
Areas of planning
Comprehensive project planning covers the following:
 Planning the project work: the activities relating to the project must be spelt out in
detail. They should be properly scheduled and sequenced.
  Planning the manpower and organization: the manpower required for the project
(managers, technologists, operators and others) must be estimated and the responsibility
for carrying out the project work must be allocated.
 Planning the money: the expenditure of money in a time- phased manner must be
budgeted
 Planning the information system: the information required for monitoring the project
must be defined.
Project objectives and policies
Often the focus of project planning is on questions like who does what and when. Before such
operational planning is done, the objectives and policies guiding the project planning exercise
must be articulated. The questions to be answered in this context are:
 What are the technical and performance objectives?
 What are the time and cost goals?
 To what extent should the work be given to outside contractors?
 How many contractors should be employed?
 What should be the terms of contract?
Well defined objectives and policies serve as the framework for the decisions to be made by the
project manager. Throughout the life of the project, he has to seek a compromise between the
conflicting goals of technical performance, cost standard and time target. A clear articulation of
priorities of management will enable the project manager to take expeditious actions.
5.5.1 Work breakdown structure
The work breakdown structure, as its name suggests, represents a systematic and logical
breakdown of the project into its component parts. It is constructed by dividing the project in to
its major parts, with each of these being further divided in to sub parts. This is continued till a
breakdown is done in terms of manageable units of work for which responsibility can be defined.
Thus the work breakdown structure helps in:
 Effective planning by dividing the work in to manageable elements which can be planned
budgeted and controlled.
 Assignment of responsibility for work elements to project personnel and outside
agencies.
 Development of control and information system.
WBS and project organizations
The project organization represents formally how the project personnel and outside agencies are
going to work. The work breakdown structure defines the works to be done in a detailed manner.
To assign responsibility for the tasks to be done, the work breakdown structure has to be
integrated with the project organization structure. This calls for blending the vertical breakdown
of the work with the project organization structure. This results in delineation of project tasks
which are the specific responsibilities of organizational units/managers.
The technical name given to such a project task is cost account. A cost account represents a unit
of work (i) which is defined in fairly concrete terms, (ii) for which a single person is responsible,
and (iii) for which a budget of expenditure and manpower requirement can be prepared
meaningfully.
5.5.2 Gantt Chart
Gantt/Bar chart: this is a pictorial device in which the activities are represented by horizontal
bars on the time axis. The left hand end of the bar shows the beginning time, the right hand end
the ending time. The duration of the activity is indicated by the length of the bar. The manpower
required for the activity is shown by a number on the bar.

A Gantt chart is a graphical representation of the duration of tasks against the progression of
time. A Gantt chart is a useful tool for planning and scheduling projects. A Gantt chart is
helpful when monitoring a project's progress.
The advantages of the bar chart are:
 It is simple to understand
 It can be used to show progress
 It can e used for manpower planning
The bar chart, however, suffers from some disadvantages which limit its usefulness:
 It cannot show interrelationship among activities on large , complex projects;
 There may be a physical limit to the size of the bar chart, which may limit the size of the
project that can be planned with this technique; and
 It cannot easily cope with frequent changes or updating.
5.5.3 Network Techniques
These are more sophisticated the traditional bar chart. In these techniques, the activities, events,
and their relationships are presented by a network diagram, also called an arrow diagram.
The advantages of network techniques are:
 They can effectively handle inter relationships among project activities
 They identify the activities which are critical to the completion of the project on time ad
indicate the float (spare time ) for other activities
 They can handle very large and complex projects and
 They can be easily computerized and updated
While the network techniques are a superior tool for project planning, they suffer from several
drawbacks:
 Being more complicated than the traditional bar chart they are not easily understood by
the project personnel, and
 They do not define an operational schedule which tells who does what and when.
Basic Network terminologies
Activities and Events:
a) An activity is a task or a job that takes time and resources: Example: Excavate the land,
Dig foundations, Lay foundations, Build a wall, etc. It is represented in a network by an
arrow.
The tail of the arrow shows where the task begins and the head of the arrow shows where
the task ends. The arrow doesn’t have any relationship with a scale.
In a network analysis, it is important to establish:
 The activities involved in the project,
 Their logical relationship, ex. Building a wall comes after laying the foundation.
 An estimate of the time that an activity is going to take

b) An event is a point in time and indicates the start or finish of an activity or activities,
e.g. wall built, foundations dug, etc. An event is represented in a network by a circle.

The establishment of activities automatically determines events because they are the start
and finish of activities.
Dummy activity: an activity that does not consume time or resources. It shows merely the
dependencies or proper relationship between activities. A dotted arrow represents it.
Network: this is the combination of activities, dummy activities and events in logical
sequence according to the rules of drawing networks. Example:

Rules for drawing networks:

 A complete network should have one point of entry – a start event, and one point of
exit – a finish event.
 Each activity must have one preceding (tail) event and one succeeding or head
event. Many activities may have the same tail event and many may have the same
head event.
 No activity can start until its tail event is reached.
 An event is not complete until all activities leading in to it are complete.
 A series of activities which lead back to the same event are not allowed.
 All activities must be tied in to the network; all must contribute to the progress of
the project, danglers are not allowed.
Activity Identification
 Short description: example, Lay foundation, erect frame, etc.
 Alphabetic or numeric code: example, A, B, C, etc., or 100, 101, 108 etc.
 Using tail and head event numbers: example, 1-2, 2-3, 3-4, 3-6, etc
Example,
A building project consists of the following activities:
 A = Lay foundation
 B = Erect framework
 C = install millwork
 D = install wiring
 E = install plumbing
 F = plaster walls
  G = install siding
 H = decorate the interior
 I = finish the exterior
The interrelationship among these activities is as follows:
1. A should precede B
2. B should precede C, D, E, F, and G
3. C, D, E and F should precede H
4. G should precede I

Given the above interrelationship the network diagram for the project is:
A Network Diagram
4

H
1 A 2 3 7 9
B D
E
F 5

G 6
I

Network Exercise 1:

Activity Preceding Activity

A -
B _
C A
D A
E A
F C
G C
H C
J B, D
K F, J
L E, H, G, K
M E, H
N L, M

Answer:
3
M
7
E 8
A 1 H
0 L N
C
4 G 6
D
B F
2
J 5 K

Time analysis:
Time can be estimated in two ways:
 Single time estimates for each activity: this can be based on the judgment of
individual responsible or by technical calculations using data from similar projects.
 Multiple time estimates for each activity: three time estimates are made for each
activity. They are Optimistic (O), most likely (ML) and pessimistic (P). These three
estimates are combined to give an expected time as follows:
O+4 ML+P
Expected Time=
6
For example if O is 6 days, ML is 10 days and P is 15 days then the expected time
is calculated as follows.
6+4∗10+15
Expected Time= =10 . 17 days
6
Used of time estimates: estimating the probability of completing the project by a scheduled
date using the multiple estimates.
Time units: all time estimates should be in the same units.
 5.5.4 The Critical path method (CPM)
The Critical path of a network gives the shortest time in which the whole project can be
completed; it is the chain of activities with the longest duration times. There may be two
critical paths and the critical path can pass through a dummy.
Earliest start time (EST): the earliest possible time at which a succeeding activity start.
Calculating the EST is called the forward pass.
 Start from event 0 and add the duration to get the earliest start time of the
subsequent activity
 Where two activities arrive at an event, the largest route must be taken.
 The EST of the exit event is the shortest time to finish a project.
Latest start times (LST): is the latest possible time at which a preceding activity can
finish without increasing the project duration. Notes on calculating LST (termed the
backward pass)
 Start at the finish (exit) event and insert the LST (the total project duration) and work
backward through the network deducting each activity duration from the previously
calculated LST.
 The lowest number is taken as LST if the tails of two activities share the same event.
The Critical path is determined by selecting the chain of activities where their ESTs are
equal to their LSTs. The other activities with differences in their ESTs and LSTs are non-
critical activities.

3 3
B D
2 4

0 1 3 4 5
A C E F
0 0 1 1 1 3 4 6 1 7 7 2 9 9

The Critical paths of this project are A, B, D and F. the total duration of this project is 9
days. The non-critical paths are C and E.
Float: Float or spare time is associated with non- critical activities. There are three types of
floats: total floats, free float and independent float.
 Total float is the amount of time a path of activities could be delayed without
affecting the overall project durations.
Total Float = Latest finish time – Earliest Start time – Activity duration
For example total float for activity C and E is 7-1-4 = 2 days.
 Free float is the amount of time an activity can be delayed without affecting the
commencement of a subsequent activity at its earliest start time, but may affect float
of a previous activity.
Free float = Earliest finish time- earliest start time – activity duration
For example free float for activity E is 7-4-1 = 2 days
 Independent Float is the amount of time an activity can be delayed when all
preceding activities are completed as late as possible and all succeeding activities
completed as early as possible. Independent float therefore does not affect the float of
either preceding or subsequent activities.
Independent float=earliest finish time-latest start time-activity duration
Example, Independent float for activity E is 7-6-1 = 0 days.

A c t i v i t y Duration E S T L S T E F T L F T T F F F I F
A 1 0 0 1 1 - - -
B 2 1 1 3 3 - - -
C 3 1 1 4 6 2 - -
D 4 3 3 7 7 - - -
E 1 4 6 7 7 2 2 -
F 2 7 7 9 9 - - -
Multiple time analysis

1
3

C
A D F
0.5,1,1.5
2,3.5,4 5.6,7,15 3,4.5,5.4

0 2 4
E
B
5,6,8
4,5,6
Activity Expected duration
O+ 4 ml + p
ED=
6
A 3.33
B 5.00
C 1.00
D 8.10
E 6.17
F 4.40

The critical path B, D and F. Project duration = 5+8.1+4.4 = 17.5

To calculate the probability that the project can be completed within 19 days:
1. Calculate the SD of each activity on the critical path using the formula:
Pessimistic Time−Optimistic Time
6
6−4
=0 . 33
a. Activity B =
6
15−5 .6
=1. 57
b. Activity D =
6
5 .4−3
=0.4
c. Activity F =
6
2. Find the combined standard deviation of all activities on the critical path.

√ 0.332 +1.572+0.42=1.65weeks
3. Find the number of standard deviations that the scheduled date is away from the
expected duration.
19−17 . 5
=0 .91
1 . 65
4. Look up this value in a table of areas under the normal curve to find the probability. In
this case the probability of achieving the scheduled date of week 19 is 82%.
Exercise 2
Activity Preceding Activity durations (Weeks)
Activity
A - 9
B _ 3
C A 8
D A 2
E A 3
F C 2
G C 6
H C 1
J B, D 4
K F, J 1
L E, H, G, K 2
M E, H 3
N L, M 4

Required: Find the critical path and the duration for this project.
5.5.5 Program Evaluation and Review Technique (PERT)
5.5.6 Project cost analysis
Cost analysis objective:
 To calculate the cost of various project durations
 To find the cheapest way of reducing the overall duration
Penalties and bonuses: a common feature of many projects a penalty clause for delayed
completion and/or a bonus for earlier completion.
Costs and networks- basic definitions
Project cost comprises direct costs and indirect project costs. As we shorten project
duration, direct costs increase whereas indirect costs decrease. Therefore, there is optimal
project duration where the total project cost becomes the minimum.
Project direct cost- time relationship
The following are the definitions and explanation of terminologies used in the direct cost-
project time relationship.
a) Normal cost: The costs associated with a normal time estimate for an activity.
Often the normal time estimate is set at the point where resources (men, machines,
etc) are used in a most efficient way.
b) Crash cost: they are caused by extra wages, overtime premiums and extra facility
costs. They are associated with minimum possible time for an activity.
c) Crash time: the minimum possible time that an activity is planned to take.
Applying extra resources usually brings this about.
d) Cost slope: this is the average cost of shortening an activity by one time unit.
Crash Cost−Normal Cost
Cost Slope=
Normal Time−CrashTime
e) Least cost scheduling or crashing: The process by which we can find the least
cost method of reducing the overall duration of a project.
Example: Given the information below, find the maximum length of the schedule and
the minimum cost schedule when the indirect cost is Birr70 per day.

Preceding Time Cost

A ctivit y Slope
Activity Normal Crash Normal Crash
A - 4 2 150 350 100
B - 8 6 100 200 50
C A 2 1 50 90 40
D B 10 5 100 400 60
E B 5 1 100 200 25
F C, E 3 1 80 100 10
Total Direct Cost 0

Solution: Step one: Draw the network and determine the critical path.
2

4 13
A (4) C (2)
4
F(3)
0 13 15 5
0 0 18 18
E (5)

B (8) 1
 D (10)
8 8
Step 1: The first is to determine the normal costs and normal durations of the project.
 The critical paths are B and D
 Normal project duration is 18 days
 Direct Cost = Birr 580
 Indirect cost = 70X18= 1260
 Total project cost = Birr1840
Step 2 Reduce the least cost slope Critical Activity B by two days (NB: you have to
identify the new critical paths in each of the following steps).
 The critical paths B and D (Not changed)
 Project duration 16 days
 Direct cost = normal cost + crush cost = 580+100 = 680
 Indirect Cost = 70X16 = 1120
 Total project cost = 1120 + 680 = 1800
Step 3: Since we have fully used the crash time for B, now crash critical activity D by two
days (NB we cant crash activity D by more than two days because the two days
crash on activity D has made activities E and F critical paths)
 Two Critical paths. The first is B and D; and the second is B, E and F.
 Project duration 14 days
 Direct cost = Cost of step 2 + crash cost = 680+(60*2=120) = 800
 Indirect Cost = 70X14 = 980
 Total project cost = 980 + 800 = 1780
Step 4: Three crashing days remain from activity D. We select one either E or F with the
least cost slope to crash it together with activity D. Therefore, we can crash two
days of activity D and only two days of Activity F. (NB: when ever you crash,
check if the non-critical activities become critical activities).
 Two Critical paths. The first is B and D; and the second is B, E and F.
 Project duration is 12 days
 Direct cost = Cost of step 3 + crash cost (crash cost of D + Crash cost of F) =
800 + (60+10)*2 days = 940
 Indirect Cost = 70X12 = 840
 Total project cost = 940 + 840 = 1780
Step 5: We can further crash by one more day activity D but not activity F (Activity F is
fully crashed). Activity D can be crashed together with activity E and gives the
following result.
  Two Critical paths. The first is B and D; and the second is B, E and F.
 Project duration is 11 days
 Direct cost = Cost of step 4 + crash cost (crash cost of D + Crash cost of E) =
940 + (60+25)*1 days = Birr1025
 Indirect Cost = 70X11 = 770
 Total project cost = 1025+ 770 = 1795.
Conclusion: The student should note that the total project cost starts to increase at step 5
when compared to step 4. Then the optimal solution for this project is the values of step 6
as follows. Project duration = 12 days; Total project cost = 1780
Exercise: Given the following table of information, find the maximum length of the
schedule and the minimum cost schedule when the indirect cost is Birr120 per day.

Preceding Time Cost

A ctivit y Slope
Activity Normal Crash Normal Crash
A - 4 3 360 420 60
B - 8 5 300 510 70
C A 5 3 170 270 50
D A 9 7 220 300 40
E B, C 5 3 200 360 80
1250

5.5.7 Project Resource Scheduling

This shows how project resources (men of varying skills, machines of all types, the
required materials, finances and spaces) could be scheduled over project duration so as to
deal with resource constraints.
Resource scheduling example:
Activity Preceding Duration (days) Labour
activity Requirements
A - 1 2 men
B _ 2 1 man
C A 1 1
D - 5 1
E B 1 1
 F C 1 1

Required:
1) Draw the network and Identify the critical path.
2) Find the resource schedule if the maximum resource available is 2
men.

1
3
1 3
C (1) 2 4
A (1) F (1)

0 4
D (5)
0 0 5 5

B (2) E (1)
2

2 4

Draw the activity times on the Gantt chart or bar chart based on their EST
5.6 Successful Project Implementation

The process of project implementation, involving the successful development and introduction of
projects in the organization, presents an ongoing challenge for managers. The project
implementation process is complex, usually requiring simultaneous attention to a wide variety of
human, budgetary, and technical variables. As a result, the organizational project manager is
faced with a difficult job characterized by role overload, frenetic activity, fragmentation, and
superficiality. Often the typical project manager has responsibility for successful project
outcomes without sufficient power, budget, or people to handle all of the elements essential for
project success. In addition, projects are often initiated in the context of a turbulent,
unpredictable, and dynamic environment. Consequently, the project manager would be well
served by more information about those specific factors critical to project success. The project
manager requires the necessary tools to help him or her focus attention on important areas and
set dfferentia1 priorities across different project elements. If it can be demonstrated that a set of
factors under the project manager’s control can have a significant impact on project
implementation success, the project manager will be better able to effectively deal with the many
demands created by his job, channeling his energy more efficiently in attempting to successfully
implement the project under development.
Development of the Ten-Factor Model of Project Implementation
Project information was obtained from a group of over 50 managers who had some project
involvement within the last two years. Participants were asked to consider a successful project
with which they had been involved and then to put themselves in the position of a project
manager charged with the responsibility of successful project implementation. They were then
asked to indicate things that they could do that would substantially help implementation success.
This procedure, sometimes called Project Echo, was developed by Alex Bavelas (4). Responses
were then sorted into categories by two experts. Both experts sorted the responses into the
categories and inter rater agreement based on percentage of responses similarly sorted across the
total number was 0.50, or 119 cu of 236. Eliminating duplications and miscellaneous responses,
a total of 94 usable responses were classified across 10 factors. These 10 factors formed the basis
for the conceptual model and the diagnostic instrument for measuring relative strength of each
factor.
The first factor that was developed was related to the underlying purpose for the implementation
and was classified Project Mission. Several authors have discussed the importance of clearly
defining goals at the outset of the project. Moms (15) classified the initial stage of project
management as consisting of a feasibility decision. Are the goals clear and can they succeed?
Bardach’s (3) six-step implementation process begins with instructions to state the plan and its
objectives. For both these authors and the purposes of our study, Project Mission has been found
to refer to the condition where the goals of the project are clear and understood, not only by the
project team involved, but by the other departments in the organization. Underlying themes of
responses classified into this factor include statements concerning clarification of goa’c c well as
belief in the likelihood of project success.
The second factor discerned was that of Top Management Support. As noted by Schultz and
Slevin (19), management support for projects, or indeed for any implementation, has long been
considered of great importance in distinguishing between their ultimate success or failure. Beck
(6) sees project management as not only dependent on top management for authority, direction,
and support, but as ultimately the conduit for implementing top management’s plans, or goals,
for the organization. Further, Manley (14) shows that the degree of management support for a
project will lead to significant variations in the clients’ degree of ultimate acceptance or
resistance to that project or product. For the purposes of our classification, the factor Top
Management Support refers to both the nature and amount of support the project manager can
expect from management both for himself as leader and for the project. Management’s support
of the project may involve aspects such as allocation of sufficient resources (financial,
manpower, time, etc.) as well as the project manager’s confidence in their support in the event of
crises.
The third factor to be classified was that of Project Schedule/Plans. Project schedule refers to the
importance of developing a detailed plan of the required stages of the implementation process.
Ginzberg (8) has drawn parallels between the stages of the implementation process and the
Lewin (12) model of Unfreezing-Moving-Freezing, viewing planning and scheduling as the first
step in the “Moving” stage. Koib and Frohman’s (11) modeL of the consulting process views
planning as a two-directional stage, net only as necessary to the forward-going change process,
but as an additional link to subsequent evaluation and possible reentry into the system. Jutt (16)
further emphasizes the importance of process planning, breaking down planning into four stages:
formulation, conceptualization, detailing, and evaluation. As developed in our model, Project
Schedule! Plans refer to the degree to which time schedules, milestones, manpower, and
equipment requirements are specified. Further, the schedule should include a satisfactory
measurement system as a way of judging actual performance against budget and time
allowances.

The fourth factor that was determined is labeled Client Consultation. The ‘client” is referred to
here as anyone who will ultimately be making use of the result of the project, as either a
customer outside the company or a department within the organization. The need for client
consultation has been found to be increasingly important in attempting to successfully implement
a project. Indeed, Manley (14) found that the degree to which clients are personally involved in
the implementation process will cause great variation in their support for that project. Further, in
the context of the consulting process, Koib and Frohman (11) view client consultation as the first
stage in a program to implement change. As this factor was derived for the model, Client
Consultation expresses the necessity of taking into account the needs of the future clients, or
users, of the project. It is, therefore, important to determine whether clients for the project have
been identified. Once the project manager is aware of the major clients, he is better able to
accurately determine if their needs are being met.

The fifth factor was concerned with Personnel issues, including recruitment, selection, and
training. (See Table 20-1.) An important, but often overlooked, aspect of the implementation
process concerns the nature of the personnel involved. In many situations, personnel for the
project team are chosen with less-than-full regard for the skills necessary to actively contribute to
implementation success. Some current writers on implementations are including the personnel
variable in the equation for project team performance and project success. Hammond (9) has
developed a contingency model of the implementation process which includes “people” as a
situational variable whose knowledge, skills, goals, and personalities must be considered in
assessing the environment of the organization. Only after such a diagnosis takes place can the
project management team begin to set objectives and design the implementation approach. For
the model, Personnel, as a factor. is concerned with developing a project team with the requisite
skills to perform their function. Further, it is important to determine whether project management
has built sufficient commitment toward project success on the part of team members.
Source: Slevin and Pinto, (1986, pp. 57—58), From the article “The Project Implementation
Profile: New Tool for Project Managers” which appeared in Project Management Journal,
September, 1986.

The sixth factor to be discussed was labeled Technical Tasks. It is important that the
implementation be well managed by people who understand the project. In addition, there must
exist adequate technology to support the project. Technical Tasks refers to the necessity of not
only having the necessary personnel for the, implementation team, but ensuring that they possess
the necessary technical skills and have adequate technology to perform their tasks. Steven Alter
(2), writing on implementation risk analysis, identifies two of the eight risk factors as being
caused by technical incompatibility: the user’s unfamiliarity with the systems or technology, and
cost ineffectiveness.
In addition to Client Consultation at an earlier stage in the project implementation process, it
remains of ultimate importance to determine whether the clients for whom the project has been
initiated will accept it. Client Acceptance refers to the final stage in the implementation process,
at which time the ultimate efficacy of the project is to be determined. Too often project managers
make the mistake of believing that if they handle the other stages of the implementation process
well, the client (either internal or external to the organization) will accept the resulting project. In
115 “intermediaries” to act as a liaison between the designer, or implementation team, and the
project’s potential users as a method to aid in client acceptance.
The eighth factor to be considered is that of Monitoring and Feedback. Monitoring and Feedback
refer to the project control processes by which at each stage of the project implementation, key
personnel receive feedback on how the project is comparing to initial projections. Making
allowances for adequate monitoring and feedback mechanisms gives the proj ect manager the
ability to anticipate problems, to oversee corrective measures, and to ensure that no deficiencies
are overlooked. Schultz and Slevin (19) demonstrate the evolving nature of implementation and
model- building paradigms to have reached the state including formal feedback channe between
the model builder and the user. From a budgeting perspective, Souder et al. (23) emphasize the
importance of constant monitoring and “fine-tuning” of the process of implementation. For the
model. Monitoring and Feedback refers not only to project schedule and budget, but to
monitoring performance of members of the project team.

The ninth factor was that of Communication. The need for adequate communication channels is
extremely important in creating an atmosphere for successful project implementation.
Communication is not only essential within the project team itself, but between the team and the
rest of the organization as well as with the client. As the factor Communication has been
developed for the model, it refers not only to feedback mechanisms, but the necessity of
exchanging information with both clients and the rest of the organization concerning project
goals, changes in policies and procedures, status reports, etc.

The tenth and final factor to emerge from classification of the model is Trouble Shooting. As the
participants in the study often pointed out, problem areas exist in almost every implementation.
Regardless of how carefully the project was initially planned, it is impossible to foresee every
trouble area or problem that could possibly arise. As a result, it is import ant that the project
manager make adequate initial arrangements for “troubleshooting” mechanisms to be included in
the implementation plan. Such mechanisms make it easier not only to react to problems as they
arise, but to foresee and possibly forestall potential trouble areas in the implementation process.

THE MODEL

As Figure 20-2 shows, a framework of project implementation has been developed for heuristic
purposes, based on the ten factors discovered in our analysis. Some general characteristics of the
model should be noted:

fact, as several writers have shown, client acceptance is a stage in project implementation that
must be managed like any other. As an implementation strategy, Lucas (13) discusses the
importance of user participation in the early stages of system development as a way of improving
the likelihood of later acceptance. Bean and Radnor (5) examine the use of 176
Figure 20-2. Ten key factors of the project implementation profile. (Copyright © 1984 Randall
L. Schultz and Dennis P. Slevin. Used with permission.)

1. The factors appear to be both time sequenced and interdependent.

Conceptually, one could argue that the factors are sequenced to occur (or be considered) in a
logical order instead of randomly or concurrently. To illustrate, consider that, according to the
framework, it is first import ant to set the goals or define the mission and benefits of the project
before seeking top management support. Furthermore, one could argue that unless consultation
with the project’s clients has occurred early in the process, chances of subsequent client
acceptance and use, denoting successful implementation, will be negatively affected.
Nonetheless, it is important to remember that in actual practice, considerable overlap and
reversals can occur in the ordering of the various factors and the sequencing as suggested in the
framework is not absolute.

2. The factors for a project implementation can be laid out on a critical path.
Related to the temporal aspect, the factors of project implementation can be laid out in a rough
critical path, similar to the critical path methodology used to develop a new product or to
determine the steps in an OR] MS project. In addition to the set of seven factors along the critical
path, ranging from Project Mission to Client Acceptance, other factors such as Communication
and Monitoring and Feedback are hypothesized to necessarily occur simultaneously and in
harmony with the other sequential factors. As several project managers have indicated to us over
the course of this research, it is important that Communication always occur or that
Troubleshooting be available throughout the implementation process. It should be noted,
however, that the arrows in the model represent information flows and sequences, not necessarily
causal or correlation relationships.
3. The model allows the manager to actively interact with and systematically monitor his project.

The sequence of a project implementation is an important consideration for any project manager.
Not only are there a prescribed set of steps to be taken in the project implementation process, but
because of the order of the steps to be taken, the manager is provided with a checklist for
determining the status of the project at any given stage. This monitoring capacity,’ enables the
manager to determine where the project is in terms of its life cycle and how rapidly it is moving
forward. Further, the manager has the ability to determine the chances for successful
implementation given attention has been paid to the proper sequencing of steps and consideration
of relevant critical success factors in the implementation process.

A 100-item instrument (10.items per factor) was developed and has been used to measure the
relative level of each of these critical success factors (21). This instrument was further refined
and reduced to a 50-item instrument (5 items per factor) and is a useful diagnostic tool for
project implementation. This instrument has been included in its entirety along with percentile
norms for over 400 projects as an implementation aid for project managers.
Table 20-2 demonstrates the results of a recent study in which the ten critical factors were
assessed in terms of their overall contribution to project success (17). A data base of over 400
projects were sampled in an effort toward empirical verification of the importance of each of the
ten initially developed critical success factors. As can be seen, each of the ten factors was found
to be significantly related to project success. Further, the cumulative r-square value, representing
total amount of the variance explained by the ten factors, was .6 15. In other words, over 61% of
the causes of project implementation success can be explained by the ten critical success factors.

STRATEGY AND TACTICS

As one moves through the ten-factor model shown in Figure 20-1, it becomes clear that the
general characteristics of the factors change. In fact, the factors can be grouped into meaningful
patterns, or more general sub-dimensions. As Table 20-3 shows, the first three factors, (Mission,
Top Management Support, and Schedule) are related to the early “plan- fling” phase of the
implementation process. The second dimension composed of the other seven factors (Client
Consultation. Personnel, etc.), may be seen as concerned with the actual process, or “action,” of
the implementation.

Strategy and Tactical Critical Success Factors

These factors seem less planning in nature and more based on the operationalization of the
project implementation process. These “planning” versus “action” elements in the critical
implementation success factors show significant parallels to the distinction between strategy and
tactics in the strategic management field. Strategy is often viewed as the process of deciding on
overall organizational objectives as well as planning on how to achieve those goals. Tactics are
seen as the deployment of a wide variety of human, technical, and financial resources to achieve
those strategic plans. Strategy, then, is concerned with the up- front planning, while tactics are
specifically focused on how best to operationalize, or achieve, those plans.

It is important that managers understand the differences between strategic and tactical issues.
Both are vital to project success, but differentially so as the project moves forward to
completion. One method for clarifying the distinction raised between strategy and tactics is
through the development of a taxonomy that demonstrates the diverse nature of the two
functions. This taxonomy is especially useful if applied to the project management context
because it has important implications for determining the relationship between strategy and
tactics and the previously mentioned planning versus action aspects of the implementation
process. Table 20-4 shows a sample of ten issues which have differing implications for project
implementation when approached from either a strategic or a tactical viewpoint.

From a conceptual standpoint, the first three critical success factors are primarily “strategic” in
nature, while the last seven are more “tactical.” Using the model and the measurement
instrument (See Appendix), it is possible to monitor the level of strategy (sum of percentile
scores on the first three factors) and tactics (sum of percentile scores on the last seven factors) as
the project moves forward in time. In addition to showing the Project Implementation Profile,
Appendix I also exhibits the set of percentile scores for each of the critical success factors, based
on a data base of 418 projects. The manager is able to assess scores on each of the ten factors for
his specific project and compare those percentile scores with this previously gathered sample of
projects.

STRATEGY-TACTICS INTERACTION

In addition to the above conceptualization regarding project implementation as a two-stage

process, involving initial strategic actions and supporting tactical activities, there are further
implications for project performance based on a consideration of strategic and tactical issues.
Figure 20-3 shows the breakdown of strategy and tactics by high and low scores depending upon
the level to which these issues were addressed in the project implementation. A high “score” on
strategy would imply that the strategy is well developed and effective, as is the similar case with
tactics. This value could be assessed either in a subjective or intuitive manner or more
systematically, through use of a project implementation assessment instrument. For example, it
may be determined by the project manager that one or more factors within the strategic or
tactical clusters is deficient, based on a data base of similar, successful projects. Such
deficiencies could have serious implications for the resulting viability of the project under
construction.

It may further be possible to speculate on some of the likely outcomes for projects being
implemented, given the various combinations of strategic and tactical scores. Figure 20-3
demonstrates the four possible combinations of performance of strategic and tactical activities. It
is important to note that the values “high” and “low” in Figure 20-3 are meant to imply strategic
and tactical quality, that is, effectiveness of operations performed under the two clusters.

Four types of errors may occur in the implementation process. The first two error types were
originally proposed in the context of the development of the field of statistics and statistical tests.
The last two error types have been suggested as the result of research on implementation and
other organizational change paradigms.

In an organizational setting,

Type I error occurs when an action should have been taken and was not. To illustrate, consider a
situation in which strategic actions have been adequately performed and suggest development
and implementation of a project. Type I error will occur when little action is subsequently taken
and the tactical activities are inadequate to the degree that the project is not developed. Type II
error, in the context of project implementation, is defined as taking an action when, in fact, none
should be taken. In practical terms,

Type II error would likely occur in a situation in which project strategy was ineffective,
inaccurate, or poorly done. However, in spite of initial planning inadequacies, goals and
schedules were operational zed during the tactical stage of the implementation.
Type III error may also be a consequence of low strategy effectiveness and high tactical quality.
Type III error has been defined as solving the wrong problem, or “effectively” taking the wrong
action. In this scenario, a problem has been identified, or a project is desired, but due to a badly
performed strategic sequence, the wrong problem has been isolated and the subsequently
implemented project has little value in that it does not address the intended target. Again, the
implications for this error type are to develop and implement a project (tactics), often involving
large expenditures of human and budgetary resources, for which inadequate or incorrect initial
planning and problem recognition was done (strategy).
Strategy/tactics effectiveness matrix

The final type of error that is likely to be seen in project implementation is Type IV error. Type
IV error can be defined as taking an action which solves the right problem but the solution is not
used by the organization. An example of Type IV error would occur following an effective
strategy that has correctly identified the problem and proposed an effective, or “correct” solution;
in this case, a project. Type IV error would result if, following the tactical operationalization, the
project was not used by the clients for whom it was intended.

In addition to commenting on possible types of error which may be associated with each cell in
Figure 20-3, it is important to understand some of the other aspects of likely outcomes for
projects falling within each of the four cells.
Cell 1: High Strategy—High Tactics

Quadrant I shows the setting for those projects which have been rated highly effective in
carrying out both strategy and tactics during the implementation process. Not surprisingly, we
would expect that the majority of projects corresponding to this situation would be successfully
implemented. In addition to high quality strategic activities (Mission, Top Management Support,
Project Schedule) these projects have also been effectively operationalized. This
operationalization has taken the form of a “high” rating on tactical issues (Client Consultation,
Personnel, etc.). As stated, it would be reasonable to expect resulting projects to generally show
a high frequency of implementation success.

Cell 3: Low Strategy—Low Tactics

The reciprocal of the first case is in the third quadrant and consists of a situation in which both
strategic and tactical functions were inadequately performed. It would be expected that projects
falling into this quadrant would have a high likelihood of implementation failure. Not only is
initial strategy low, or poorly performed, but subsequent tactics are also ineffective.

Cell 4: High Strategy—Low Tactics

While the results of projects rated as high strategy—high tactics and low strategy—low tactics
may be intuitively obvious, perhaps a more intriguing question concerns the likely outcomes of
projects found in the “off diagonal” of Figure 20-3, namely, high strategy—low tactics and low
strategy—high tactics. It is interesting to speculate on the result of these “mixed” scenarios in
attempting to assess project success. In fact, it has been found that project implementation efforts
falling within these two cells often tend to exhibit characteristics of unique, but fairly consistent,
patterns.

Cell 4 refers to the situation in which the project strategy was effectively performed but
subsequent tactics were rated as ineffective. As can be seen from Figure 20-3, in addition to a
high likelihood of Type I and Type IV errors, one would expect projects classified in this
quadrant to exhibit a strong tendency toward “errors of inaction” such as low acceptance and low
use by organization members or clients for whom the project was intended. Little is done in the
way of effective tactical project implementation following initial competent strategic activities.
Low acceptance and use are likely outcomes because tactical duties, including Client
Consultation and “selling” of the final project, are poorly performed.

Cell 2: Low Strategy—High Tactics

The final cell represents the reverse of the previous case. In this alternative, project strategy is
poorly conceived or initial planning is inadequately developed but tactical operationalization is
effectively managed. One of the likely outcomes for projects classified into this cell is what are
referred to as “errors of action.” Because of poor strategy, a project may be initially developed
and rushed into its implementation without clear ideas of its purpose. In fact, the project may not
even be needed by the organization. However, tactical follow-up is well managed to the point
where the inadequate or unnecessary project is implemented. This scenario represents a classic
example of the “errors of action” in many areas of modern management. The mind-set is often
one of “Go ahead and do it” rather than spending enough time early in the project’s life to fully
develop the strategy and assess whether or not the project is needed and how it should be
approached.

STRATEGY AND TACTICS OVER TIME

Strategy and tactics are both essential for successful project implementation, but differently so at
various stages in the project life cycle. Strategic issues are most important at the beginning of the
project. Tactical issues become more important towards the end. This is not to say that there
should not be a continuous interaction and testing between the strategic and tactical factors.
Strategy is not static and often changes in the dynamic corporation, making continuous
monitoring essential. Nevertheless, a successful project manager must be able to transition
between strategic and tactical considerations as the project moves forward.
As Figure 20-4 shows, a recent study of over 400 projects has demonstrated that strategic issues
become less important and tactical issues become more important to project success over the life
of a project (17). The importance value shown in Figure 20-3 has been measured by regress ion
beta weights showing the combined relationships between strategy, tactics, and project success
over the four project life-cycle stages. During the early stages, conceptualization and planning,
strategy is shown to be 185
of significantly greater importance to project success than are tactics. As the project moves
toward the final termination stage, project strategy and tactics achieve almost equal importance.
It appears that throughout the project, initial strategies and goals continue to clrive” the project
tactics. In other words, strategy continues to influence and shape tactics. At no point does
strategy become unimportant to project success, while tactics increase in efforts to operationalize
strategic demands.

These changes in the importance of strategy and tactics to project success have important
implications for the project manager. The successful manager must be versatile and able to adapt
to these changing circumstances. A project manager who is a brilliant strategist but an ineffective
tactician has a strong likelihood of committing errors of Type I and Type IV as the project moves
downstream. In addition, these errors may occur after substantial resources have already been
expended and commitment made for the project. In contrast, the project manager who is
excellent at tactical execution but weak in strategic thinking has a probability of committing
errors of Type II and Type III as shown in quadrant 2, Figure 20-3. These errors will more likely
occur early in the process, but perhaps stay somewhat undiscovered because of the effectiveness
of the manager’s execution skills.

IMPLICATIONS FOR MANAGERS

Based on the demands facing project managers and the discussion of strategy and tactics which
has been developed in this chapter, there are several conclusions which can be drawn relative to
project critical success factors, along with practical implications for managers to help control the
project implementation process.

1. Use a Multiple-Factor Model

Project management is a complex task in which the manager must attend to many variables. The
more specific one can be with regard to the definition and monitoring of those variables, the
more likely a successful outcome for the project will occur. Earlier in this chapter, we had listed
a set of ten critical success factors which have been empirically shown to be strongly related to
project success, as demonstrated by recent research. In addition to simply providing a list of
factors for the project manager to consider, our research has also led to the development of a
process framework of project implementation. Within this framework, the ten critical success
factors are shown to contain a degree of sequentiality, in that the various factors become more
critical to project success at different points in the project life cycle. As a result, it is important
for the project manager to make use of a multiple-factor model, first to understand the variety of
factors impacting on project success, and then to be aware of their relative importance across
stages in the project implementation process.
3. Think Strategically Early in the Project Life Cycle

Another important implication in our discussion of project strategy and tactics is the breakdown
of the ten critical factors into two distinct sub dimensions, relating to the concepts of strategy and
tactics. Further, it was shown that it is important to consider the “strategic” factors early in the
project life cycle, during the Conceptualization and Planning stages when they become most
important. As a result, it is necessary to accentuate the strategy factors (Mission, Top
Management Support, and Schedule/Plans) during these early stages. It is argued that at this
time, these factors are the most significant predictors of project success.

A practical suggestion for organizations implementing projects would be to bring the project
manager and his team on board early in the project life cycle (preferably during the
Conceptualization phase). Many managers make the mistake of not involving members of their
project teams in early planning and conceptual meetings, perhaps under the assumption that the
team members should only concern themselves with their specific jobs. In fact, it is very
important at an early stage that both the project manager and the project team members “buy in”
to the goals of the project and the means to achieve those goals. The more project team members
are aware of these goals, the greater the likelihood of their taking active part in the monitoring
and troubleshooting of the project and, consequently, the higher the quality of those activities for
the project implementation.

3. Think More Tactically as the Project Moves Forward in Time

As Figure 20-4 shows, by the later “work” stages of execution and termination, strategy and
tactics are of almost equal importance to project ‘implementation success. Consequently, it is
important that the project manager shift the emphasis in the project from “What do we want to
do?” to “How do we want to do it?” The specific critical success factors associated with project
tactics tend to reemphasize the importance of focusing on the “How” instead of the “What.”
Factors such as Personnel, Client Consultation, Communication, Monitoring, etc., are more
concerned with attempts to better manage the specific action steps in the project implementation
process. While we argue that it is important to bring the project team on board during the initial
strategy phase in the project, it is equally important to manage their shift into a tactical, action
mode in which their specific project team duties are performed to help the project toward
completion.

4. Make Strategy and Tactics Work for You and Your Project Team

One of the points we have attempted to reinforce in this chapter is that either strong strategy or
strong tactics by themselves will not ensure project success. When strategy is strong and tactics
are weak, there is a great potential for creating strong, well-intended projects that never get off
the ground. Cost and schedule overruns, along with general frustration, are often the side effects
from projects which encounter such ‘err ors of inaction.” On the other hand, a project which
starts off with a weak or poorly conceived strategy and receives strong subsequent tactic al
operationalization has the Likelihood of being successfully implemented, but solves the wrong
problem (Type III error). New York advertising agencies can tell horror stories of ad campaigns
which were poorly conceived but still implemented, sometimes costing millions of dollars, and
were subsequently assessed a disaster and scrubbed.

In addition to having project strategy and tactics working together, it is important to remember
(again following the diagram in Figure 20-4) that initially conceived strategy should be used to
drive” tactics. Strategy and tactics are not independent of each other, but should be used together
in sequence. Hence, strategy, which is developed in the earliest stages of the project, should be
made known to all project team members during the entire implementation process. At no point
do the strategic factors become unimportant to project success, but instead they must he
continually assessed and reassessed over the life of the project. Using the example of a military
scenario, tactics must be used in constant support of the overall strategy. Strategy contains the
goals that were initially set and are of paramount importance to any operation.

5. Consciously Plan for and Manage Your Project Team’s Transition from Strategy to
Tactics

The project team leader needs to actively monitor his or her project through its life cycle.
Important to the monitoring process is the attempt to accurately assess the position of the project
in its life cycle at several different points throughout the implementation process. For the project
manager, it is important to remember that the transition between strategy and tactics involves the
inclusion of an additional set of critical success factors. Instead of concentrating on the set of
three factors associated with project strategy, the project manager must also include the second
set of factors, thus making use of all the ten factors relating to both strategy and tactics.

An important but often overlooked method to help the project leader manage the transition from
strategy to tactics is to make efforts to continually communicate the changing status of the
project to the other members of the project team. Communication reemphasizes the importance
of a joint, team effort in implementing the project. Further, it reinforces the status of the project
relative to its life cycle. The project team is kept aware of the specific stage in which the project
resides as well as the degree of strategic versus tactical activities necessary to successfully
sequence the project from its current stage to the next phase in its life cycle. Finally,
communication helps the project manager keep track of the vano us activities performed by his
or her project team, making it easier to verify that strategic vision is not lost in the later phases of
tactical operationalization.

CONCLUSIONS
This chapter has attempted to better define the process of project implementation through
exposing the manager to a set of empirically derived factors found to be critical to project
success. A ten-factor model has been presented showing these key factors and their hypothesized
interrelationships. In addition, a diagnostic instrument, the Project Implementation Profile, has
been presented in its entirety as a potential tool for project management and control (See
Appendix). It is suggested that the PIP be used on a regular basis as a monitor of these ten key
behavioral factors. It was shown that these factors may be sub- dimensionalized to include those
activities related to initial project strategy and subsequent tactical follow-up. These dimensions
of strategy and tactics are useful for the project manager in that they prescribe a two-stage
process to successful project implementation.
The ability to transition successfully between early strategy and later tactics is an important
characteristic for project managers to possess. Figure 20-3 showed a 2-by-2 diagram of likely
outcomes for projects when strategy and/or tactics were poorly performed. Figure 20-4
demonstrated the relative importance of strategy and tactics over four distinct stages in the
project life cycle, showing that strategy is of great importance initially and decreases over the life
cycle while tactics steadily increase in importance. Finally, some specific suggestions were
presented for project managers, in an effort to help them better manage the transition which
projects go through over their life cycle.

As was stated initially, the project management process represents a complex task. The project
manager is continually assaulted with a wide variety of demands on his time and resources.
Because of the dynamic nature of most projects, it is becoming increasingly difficult for the
project manager to keep adequate control over every aspect in the project which requires
attention. This chapter has offered some suggestions to project managers who are intent on better
understanding their project during its implementation process, but are at a loss as to how to go
about attempting to more adequately ensure project success.
Chapter 6: Project Monitoring, Evaluation and closing
After completing this chapter, the students will be able to:
 Identify the usefulness of project impact evaluation
 discuss the ways of project auditing and closing out of projects

6.1 Introduction
This Chapter defines monitoring, evaluation and closing and explains their roles in project
management. It sets out the basic steps involved in design of a project-level monitoring,
evaluation and closeout system, and highlights the main benefits of effective monitoring,
evaluation and closeout as well as the main pitfalls to be avoided.

6.2 Project Monitoring

Once a project has been planned and financial support been secured, the most important part
begins - implementation. It is very rare for any project to go exactly according to plan. In fact it
is not uncommon for a project to take on a direction and a momentum that was completely
unanticipated during planning. Project management now has the important and difficult task of
establishing sufficient controls over the project to ensure that it stays on track towards the
achievement of its objectives. This is done by monitoring, which can be defined as the
systematic and continuous collection, analysis and use of information for management control
and decision-making.

Monitoring is an internal activity of project management, the purpose of which is to determine

whether project activities have been implemented as planned. It seeks to oversee whether
resources are being mobilized as intended and products are being delivered on schedule. It
involves the provision of regular feedback on the progress of project implementation and the
problems faced during implementation. Monitoring consists of operational and administrative
activities that track resource acquisition and allocation, delivery of services and cost records. It
helps to pinpoint problems requiring corrective and timely action and it is also important in the
context of coping with uncertainty in implementation.

There are two types of monitoring: namely performance monitoring and process monitoring. The
purpose of performance monitoring is to assess the extent to which project inputs are being used
in accordance with the approved budget and timetable and whether the intended outputs are
being produced in a timely and cost effective manner. It may also assess whether project benefits
are reaching the intended target group. It is intended to improve project supervision, and it is
essential that management receive constant feedback on key indicators of project performance so
that problems can be detected and corrections made.

There are a number of techniques that help us undertake performance monitoring of a given
project. The main ones include:
 Project breakdown structure
 Bar charts (Gantt charts)
 Network techniques (PERT and CPM)
 6.2.1 Designing a Monitoring System
There are five steps in the design and specification of a project-level monitoring system:
 Analyze project objectives to clarify project design. Good monitoring depends on
clearly stated objectives. The logframe approach helps to ensure that objectives are
correctly written and that actions are designed to lead to outputs and objectives. This
logical sequence simplifies the choice of monitoring indicators.
 Review implementation procedures to determine information needs at the different
levels of the project management structure. The level of detail of information required,
and the frequency of reporting, will vary according to the level of management.
Essentially, this step means matching information needs to decision-making roles.
 Review indicators for use in measuring achievement of objectives. Within the project
implementation team the priority focus will be on physical and financial monitoring of
activities and results. The tools for this are good record keeping for comparison of actual
expenditure against budgets, and progress against the project’s activity schedule.
 Design report formats to provide managers at different levels within the project with
access to relevant and timely information which facilitates easy analysis.
 Prepare an implementation plan for the monitoring system, which specifies the
necessary staff, skills and training required, and clearly allocates information collection
and reporting responsibilities.

6.2.2 Monitoring work in progress

Project control is the process of collecting information related to the performance of the system,
comparing it with the desired level of performance and taking corrective action to decrease the
gap between the actual and the desired performance levels. Control is aimed at managing the
deviations in cost, time and performance of a project. The basic purpose of control is to regulate
and control the firm's core assets such as physical, financial and human resources. A control
system should be cost effective. Since it is closely related with the behavior of the humans
involved in the project it should be designed in such a way that it balances the degree of control
exercised and the risks involved. The reasons for measuring duration and cost deviations are to
identify deviations from the curve early, dampen oscillation, facilitate early corrective action,
and estimate weekly schedule variance and to determine weekly effort variance. There are three
types of control processes, cybernetic controls, go/no-go controls and post controls.
The most important reason for deviations from the budget is scope creep. One factor that causes
scope creep is the absence of a detailed definition of scope. Repeated attempts by the project
team and the client to improve the product/service are another. Depending on the degree of detail
and the frequency of reporting, project status reports can be classified into five categories. They
are current period reports, cumulative reports, exception reports, stoplight reports and variance
reports. A project undergoes the different kinds of reviews during its life-cycle. They are Status
reviews that review the status of cost, performance, schedule and scope of the project, A design
review that reviews the design of a product or service to ensure that it meets client requirements
and a process review that reviews the processes and checks for the possibility of any
improvements.
Therefore, the project manager mainly focuses on controlling three categories of a project during
implementation.
Cost control: Cost is the simplest measurable component in a project. Cost components are
plants and assets, labor, material, overhead costs, interest paid for borrowed money, inflation,
contingency, insurance, salaries paid to project management staff and experts and other
coverage’s. During implementation project cost information is collected, classified and
summarized by the project accounting section if the project is large enough to have its
accounting section or by the accounting section of the main organization if it is small size.
Performance Control: Performance includes the amount of human effort expended in
accomplishing a project. The involvement of the human element makes difficult to control the
performance of the project easily. Therefore, the project manager should have the
communication skill essential to lead, coordinate, and motivate project staffs so that staffs can
exert their maximum effort for the success of the project.
Time control: Time has only one direction. It is moving in to the future. The project manager
doesn’t have the power to control the passage of time. The project manager can’t recover lost
time. However, an effective project manager pays much attention on how he can wisely manage
his time. As regards to projects, we use durations to measure the time between the starting and
completion of a project. The project manager can control the duration of a project using schedule
of activities prepared using PERT (Program Evaluation and Review Technique), CPM (Critical
Path monitor Method) and Gant chart diagrams. PERT and CPM contain the duration estimate of
each activity. These techniques help project managers to pay more managerial attention to the
critical activities of the project than to the non-critical activities. The actual duration taken by
each activity is measured and compared to the estimated duration. If the deviation is too large, it
may dictate re-planning the activities. Re-planning here should be understood as continuity to the
original plans but not to substitute them. The original plans are the baseline for comparison and
they should remain at least in the document so as not to lose the track of controlling the project.

6.2.3 The steps of Project monitoring

Traditionally, the phrase project control has been used to mean project implementation planning
and control. Thus, the above sequences of activities of planning and controlling can be
summarized using the following steps of control.
1. Setting standards: standards are set based on cost, schedule, and performances. In any
project control system, the objective would be to bring perfect correlation of the costs
incurred, time utilized, and performance attained with that of the estimates of costs, durations
and performance. There are different standards such as schedule standards, technical
performance standards, standard costs, budgets, etc. Setting standards help us to identify the
indicators that enable us to monitor the progress of the project.

2. Monitoring progress: Monitoring is the measurement through time that indicates the
movement toward the objective or away from it. It has the objective of creating data, which
 are to be compared to an explicit standard. There are different techniques of monitoring the
progress of a project towards its objective. For example, the work value method is useful to
measure the relationship of performance achieved with the budget used. We don’t discuss
work value method in this section.
3. Evaluating progress: Evaluation is putting the monitored data to use and thus giving them
value. Evaluation is the process of comparing the actual cost, time and performance
information with the estimated cost, time and performance set during the first step of
controlling. By doing so, we determine the deviations or the gap between the actual and the
estimate. Evaluation is where the learning occurs, questions answered, recommendations
made, and improvements suggested. However it is important to note that evaluation doesn’t
have any foundation without monitoring.
This is because monitoring creates the raw data that is useful for evaluation. Without
monitoring, evaluation remains the domain of speculation.
4. Taking actions: based on the results of the evaluation, there are three options of decisions. If
there are no or little deviations between the standards and the actual, then the decision is to
maintain the existing performance. If the standard is significantly less than the actual, then
the decision can be to modify the standards. If the standard is significantly higher than the
actual then the decision may be to increase momentum or to modify the standard if the
standard is believed unattainable.

6.3 Project Evaluation

Evaluation can be defined as a periodic assessment of the relevance, efficiency, effectiveness,
impact, economic and financial viability, and sustainability of a project in the context of its
stated objectives. The purpose of evaluation is to review the achievements of a project against
planned expectations, and to use experience from the project to improve the design of future
projects and programs. Evaluation draws on routine reports produced during implementation and
may include additional investigations by external monitors or by specially constituted missions.

6.3.1 Evaluation Criteria

A major issue that affects any evaluation is the choice of criteria. The Commission uses the
following criteria:
 Relevance - the appropriateness of project objectives to the problems that it was
supposed to address, and to the physical and policy environment within which it operated
 Project preparation and design – the logic and completeness of the project planning
process, and the internal logic and coherence of the project design
 Efficiency - the cost, speed and management efficiency with which inputs and activities
were converted into results, and the quality of the results achieved
 Effectiveness - an assessment of the contribution made by results to achievement of the
project purpose, and how assumptions have affected project achievements
 Impact - the effect of the project on its wider environment, and its contribution to the
wider sectoral objectives summarized in the project’s Overall Objectives
 6.3.2 Conducting project evaluations
To ensure project success, you need periodic project evaluations to verify that work is being
accomplished as planned. Even though you constantly collect data about costs, schedules, and
work accomplished, you should plan specific reviews as a chance to step back and take a good
look at the project to be sure everything is progressing as it should.

A project is like a journey, and project plans (such as work breakdown structures, schedules, and
cost reports) serve as road maps to help team member’s measure their precise location. Project
reviews are checkpoints along the way to ensure the project is on course. If the project has
deviated from course, the review can identify the variance and help you make the proper
adjustments. Project reviews also help motivate team members, customers, and project sponsors.
The evaluations provide feedback that helps everyone stay focused on the project objectives.
People work best when they know how they are progressing toward the goal. Feedback helps
people stay committed and motivated. People thrive on constructive feedback.

6.3.3 When to Perform Project Evaluations

Project work should be evaluated in four general ways: ongoing reviews, periodic inspections,
milestone evaluations, and final project audit.

Ongoing Reviews
Work on the project should be reviewed constantly by project team members as part of an
ongoing quality assurance program. Even though others may inspect for quality at specified
checkpoints, the responsibility for quality rests with individual workers. They must feel a
commitment to produce quality work, even if no one were to inspect it! Quality must be
incorporated into the project from the beginning. It cannot be “inspected in” later. Ongoing
reviews should ensure that the standards included in the project scope statement are being
applied to the work. Such standards may include safety regulations, security issues, licensing
requirements, environmental considerations, and legal requirements. Ongoing reviews should
also verify that finances are being handled according to guidelines and that other project data,
such as schedule data, are being reported correctly.
Periodic Inspections
Team leaders, functional supervisors, or quality inspectors should review project work
periodically (both scheduled and unscheduled) to ensure that project objectives are being met.
These may be daily, weekly, or monthly inspections according to the needs of the project. Since
it is generally not feasible to inspect every bit of work produced, it should be determined at the
beginning of the project what will be inspected at what frequency.

Milestone Evaluations
Additional project evaluations should take place when milestone events are reached (for
example, at the conclusion of each major phase of the project). Such an evaluation is used to
certify that all work scheduled for that phase of the project has been completed according to
specifications.

Final Project Audit

A final audit should be made at the conclusion of the project to verify that everything was
completed as agreed upon by the project sponsor, customer, and project team. This audit
provides information that may be used in project closure and acceptance. This is also a time to
gather and document lessons learned during the project. What was done well? What could be
improved? What could be learned from this project to help future projects?

6.3.4 Considerations in Project Evaluations

Each of the four types of project evaluation should consider quality of work, team performance,
and project status.
Quality of Work
Each evaluation should review the work performed to ensure it meets specifications.
The project scope statement specifies the project scope and quality goals. The audit should
determine whether proper quality has been maintained, or whether quality has been
compromised to meet schedule and cost objectives. For example, in a home construction project,
quality evaluations should determine if the proper materials have been used, or if lower-grade
lumber was substituted to make up for cost overruns. Also, an audit would ensure that the
construction complies with all building codes and industry standards, and that workers did not
produce inferior work in an attempt to meet the schedule.

Team Performance
Sports teams review game films periodically to evaluate their performance and see where they
need to improve. Without this kind of review, they may become very good at playing badly.
Project teams also need to evaluate whether they are performing as well as they can. Such
reviews may focus on efficiency and effectiveness of the work performed. They may analyze the
work processes to determine if there is a more efficient workflow. These reviews may be
conducted by the project team members themselves, the project manager, independent auditors,
or other specialists.

COMPARISON WITH PAST PERFORMANCE _ If consistent data are gathered over time,
periodic reviews provide a history to which current performance may be compared. This
comparison over time shows whether team performance is improving or declining.

COMPARISON WITH BENCHMARKS _ Team performance may also be compared with that of
other companies or industry standards. Benchmarking is the process of defining a standard or
point of reference to measure quality or performance. A survey of comparable companies
showing their performance or quality levels could be used as a reference point in evaluating your
project. If the industry standard to construct a comparable building is $75 per square foot, you
could measure your results against that to see if you are doing as well as the industry average.

Project Status
The project status review compares the planned with actual results and notes the variances. It
reports any deviations in the schedule, cost, scope, or performance, and whether such deviations
appear to be likely in the future.
Special attention should be given to activities on the critical path, because any delay in these
activities will cause the project to be late (unless, of course, subsequent activities are completed
in less than the scheduled time). Also give special attention to activities with high risk. Early
identification and mitigation of problems can minimize their impact on your project.
 Exercise 6.1
Blankets, Inc. is upgrading its order processing system. You are assigned to manage the
project, which includes six months of software development and two weeks of training.
Describe below the evaluations you plan to perform for the project. For each, consider the
quality of work, team performance, and project status.

6.3.5 Purposes of Evaluation

Purpose of Evaluation
• To identify the constraints or bottlenecks that hinder the project in achieving its
objectives.
• To assess the benefits and costs that accrue to the intended direct and indirect
beneficiaries of the project.
• To draw lessons from the project implementation experience and using the lessons in the
planning of other projects in that community and elsewhere. 
• To provide a clear picture of the extent to which the intended objectives of the activities
and the project have been realized.
• To provide feedback on project outcomes and successes to the community involved.

6.3.6 Processes of Evaluation

• Evaluation can and should be done: before, during, and after implementation.
a) Before project implementation, evaluation is needed in order to:
• assess the possible consequences of the planned project(s) to the people in
the community over a period of time;
• make a final decision on what project alternative should be implemented;
and
• assist in making decisions on how the project will be implemented.
b) During project implementation: Evaluation should be a continuous process and should take
place in all project implementation activities. This enables the project planners and implementers
to progressively review the project strategies according to the changing circumstances in order
to attain the desired activity and project objectives.
C) After project implementation: This is to retrace the project planning and implementation 
process, and results after project implementation. This further helps in:
• identifying constraints or bottlenecks inherent in the implementation phase;
• assessing the actual benefits and the number of people who benefited;
• providing ideas on the strength of the project, for replication; and
 • Providing a clear picture of the extent to which the intended objectives of the
project have been realized.

6.3.7 Types of Evaluation

• As mentioned earlier, project evaluation is the assessment of the extent to which the
project has met its objectives (i.e. has been effective, economical and efficient).
• There are two evaluation types: summative and formative.
• Formative Evaluation: Formative evaluation is a method of judging the worth of a
project while the project activities are happening. Formative evaluation assesses the
project as it is being put in place and during its early operation. Formative evaluation
assesses current, ongoing project activities, provides an internal process that compares
the planned project with the actual program, and measures the progress made toward
meeting the project goals.
• This evaluation type helps identify problems threatening the project's viability, enabling
the project manager and planning group to make mid-course corrections. Formative
evaluation focuses on the process. The objectives of formative evaluation are:
• to find out the extent of program implementation; and
• to determine improvements and adjustments needed to attain the project
objectives
• Summative Evaluation: Summative evaluation is a method of judging the worth of a
program at the end of the program activities. It is used to access the projects success
after the project has ended and to make decisions about the future of the project.
Summative evaluation will attempt to determine: the success of the project, goals being
met, participant satisfaction and benefit, effectiveness, end results versus cost, and
whether the program should be repeated or replicated. The focus of summative evaluation
is on the outcome .
• Questions appropriate for a summative evaluation include:
• was the project successful? What were the strengths and weaknesses?
• to what extent did the project or program meet the overall goal(s)?
• did participants benefit from the project? In what ways?
• what components were most effective?
• were the results worth the costs?
• how will you share what you have learned?
• The objectives of summative evaluation are to find out the extent to which project
objectives are achieved; and to help you decide whether a project activity or any of its
 parts should be revised, continued, or terminated. Finally, a close examination of the
formative and summative evaluation results is necessary to understand the successes and
failures of the project

6.4 Problems of Monitoring and Evaluation

The problems associated with MIE can be classified in to four major groups.

a) Organizational and Political Problems

Central M/E Agencies (CMEA) arc frequently perceived as a threat or as a powerful resource
that needs to be controlled. As a result CMEA’s are often switched from one
ministry or department to another or have their powers or resources greatly reduced. Other
organizational problems arise when the M/E functions are located in an appropriate agency,
when functions arc assigned to different agencies and thus arc difficult to coordinate, or when
coordination problems restrict the flow of information between the
central agency and the intended users. It is also common to find NGO’s many of which have
extensive evaluation experience —excluded from collaborating in the evaluation of
public sector programs. Donor agencies have considerable influence on the content and
organization of M/E systems. The fact that donors and borrowers often need different
kinds of information can create a further set of problems.

b) Managerial Problems

Many M/E agencies at the project sectoral and national levels have failed to establish clear
procedures for identifying the main users of the information they produce, for comparing the
importance of studies requested by different national and international
-— organizations and for defining the kinds of information required by each potential user.
Consequently the potential users compliant that the studies do not provide the information they
require for that information is produced to late or in a form that is not easily understood. The
highly centralized nature of many CMEAs means that M/E
information is used mainly by central government agencies to control line ministries and project
Units and is not considered a management tool to be used by project managers.
Many managers thus see M/E as a threat, or at least an inconvenience and they are unwilling to
cooperate in data collection or analysis. This has also created concern about the quality and
reliability of the M/E information provided by line agencies. Even though a broad range of
federally and state funded programs have mandated that such evaluations be conducted, and even
though the potential utility of evaluation is widely recognized, many programs managers still
seem reluctant to initiate evaluations, for the following reasons:

Minimization of accountability

The pressure to reduce the size of government has brought a new sense of risk. Managers are
aware that legislators and budget departments are seeking programs that can be cut or scaled
down. Consequently there is a fear that any kind of evaluation result could be used to justify
closing the program. At the same time, no benefits are expected from a positive evaluation.
  Lack of confidence that evaluation products will yield practical benefits, exceeding their
costs.

 Lack of rewards associated with Sponsoring evaluations

 Length of time required to begin an evaluation

The process of obtaining approval to conduct an evaluation and then to complete the
procurement process for contracting consultants is often very slow and cumbersome. Many
managers do not feel the evaluation results are likely to justify the effort involved.

 Length of lime to produce results

Another set of managerial problems relate to the difficulties of recruiting and retaining
qualified staff for the MJE units. Often the kinds of researchers required for these units are
not appropriately defined in the civil service structure. As a result it can be difficult to offer,
competitive employment conditions. Also the lack of clearly defined career for evaluators
can discourage the qualified staff from entering this field.

c) Problem of Focus

CMEA usually focus on the monitoring of project implementation, and few studies are
conducted to determine how programs operate, how they are sustained, or whether they are
able to produce the intended impacts. Thus, although a great deal of information is collected
on whether programs are implemented on time and within their budgets, little is known about
the massive social and economic development programs actually achieve the intended
objectives and produce the benefits or changes for which they were designed.

One reason for this implementation bias is that most developing countries the capital
investment budget is Usually far greater than the operations or revenue budgets from which
funds arc obtained for operations and maintenance. Because most government resources go
into project implementation, this is the area in which there is most demand for careful
monitoring and bccausc international aid agencies are mainly involved with project
implementation, they too arc more interested in monitoring implementation. Many M/E units
are thus located in agencies created to over see project implementation. Since many of these
agencies are disbanded once implementation is completed they
cannot manage long term impact evaluations.

Another constraint on the use of evaluation is that most governments and implementing
agencies focus more on the assessment of inputs than on the evaluation of outputs and
products. This limits the demands for evaluations of the quality or cost effectiveness of
outputs or the estimation of impacts.
 A broader problem ariss from the fact that most governments and policy makers operate
1w ithin a one year or at the most two year time horizon. Most countries continue to
- operate on annual budget cycles, and consequently planners and operational agencies
• tend to focus on the short term implementation objectives. This means that one of the most
powerful applications of evaluations — mainly long term prospective studies — is rarely
used. It is pointed out that some of the more innovative local and state authorities have
moved towards ten year planning and budget cycles. This approach when combined
with strategic planning can generate a whole new range of prospective and retrospective
evaluation studies that will help planners and managers project the future on the basis of
systematic analysis of past and present experience.

d) Methodological Problems

During the l970s a number of large scale impact evaluations using quasi experimental
designs were financed by international aid agencies in sectors such as health, housing and
-- 1 agriculture. The results of most of these evaluations were disappointing, and now many
government authorities and donors argue it is impossible for rigorous impact evaluations to
be cost effective and operationally useful. Thus the proponents of impact evaluations are
required to defend the technical feasibility of rigorous impact evaluations, while at the same
time responding to criticisms that the result of such evaluations are too academic or arrived
too late to be of any operational use. Some of the other methodological problems include the
mono-method bias, that arises from relying on a single (small number of) data collection
methods; the preference for the quantitative methods and the tendency to ignore many
valuable qualitative methods; the preference for static comparisons between points in time
rather than an analysis of process of change and excessive reliance on computers and the lack
of concern for the constraints that computerization imposes on the kinds of data collected or
on the quality and validity of data.

6.5 Project Closing

In this section, we discussed the need for project closing and the ways in which a successful or
an unsuccessful project can be terminated. We focused on situations, under which a project can
be closed, the process of closing and preparing a final project report.
A successful project can be closed either by extinction or by addition or by integration; whereas
an unsuccessful project can be terminated by starvation. A project can be said to be closed
successfully only when it has a proper final report in place.
A final report contains all the knowledge gained from the processes of the project. Project final
report along with the project records is the best source to gain experience from previous projects
and improve the way future projects are handled.
A final project report contains a section on performance of the project wherein the delivered
output is compared with the planned output, a section on the performance or the administration
of the project, a section on the organizational structure adopted and its implications on the
performance of the project and finally a section on the confidential information to be reported to
the top management and the recommendations of the project manager on ways of improving the
processes.
Project Closure Checklist
 Exercise 6.2
Consider the upgrade project for the order processing system for PE described in
Exercise 6.1 [six months of software development and two weeks of training]. Explain
how you would close this project in an effective way.