CONSTRUCTION TECHNOLOGY AND MANAGEMENT

UNIT-III

TOPICS: Development of Project Activity networks, Precedence Diagram Method, Critical

path method (CPM), Program evaluation and Review Technique (PERT), Line Balance
Methods in scheduling, Time Value of Money, Investment Analysis, Cost benefit analysis

Introduction:

A project generally consists of a number of well-defined manageable units or activities

which should be performed or completed in a definite sequence, for the successful completion
of the pojrc.t These activities or jobs are those operations of the project plan which take time
to carry out and on which resources are allocated.

Out of various tools or techniques of project management, bar chart technique was
probably one of the earliest one.

Bar charts /Gantt Charts:

Bar charts were introduced by Henry Gantt around 1900AD. In his work on production
control, Gantt developed the famous Gantt chart still used in many projects of moderate
magnitude.

➢ A bar chart consist of two coordinate axes, usually horizontal axis representing time
elapsed and other vertical axis represents jobs or activities to be performed.

➢ Each bar represent one specific job or activity of the project.

➢ The beginning and end of each bar represent the time of start and end time of finish
of that activity

➢ The length of the bar represents the time required for completion of the job or
activity.

Example 1: The figure show bar chart for a project which has 7 distinct jobs or activities (P, Q,
R, S, T, U, V) to be performed for its completion. The time durations required for completion of
these activities are 10, 5, 10, 7, 5, 8- and 15-unit days respectively.
Activities or jobs

P
Q
R
S
T
U
V
5 10 15 20 25
Time (Unit days)
From the above figure, we can conclude the following

i. Activities P and Q can start simultaneously, at zero time. Both the activities are
independent. However, activity Q is completed much earlier than activity P.

ii. Activity R starts only when activity Q is complete.

iii. However, activity S is independent of activity R. It starts earlier than R and is completed
earlier.

iv. Activity T starts only when the activity S is complete.

v. Activities U and R can start simultaneously, when activity Q is complete.

vi. Activity V can start when activity P and S are complete. End of activity V marks the
completion of the project.

Example 2: The below figure shows another bar chart for the project related to purchase
and installation of lathe.

The complete project consists of five distinct activities. Each activity cannot be started unless
the previous activity.

1. Call for quotations

2. Order Lathe
3. Deliver Lathe
4. Install Lathe
5. Connect to power
6. Test
1 2 3 4 5 6 7 8 9 10

Time (Weeks) →

From the above two examples, we find that there are some operations or activities
which can take place concurrently while there are some activities that succeed a preceding
activity and cannot be started unless the preceding activity is complete. The concurrent
activities or jobs are represented by bars running parallel or overlapping each other time-wise.
The other types of activities have bars that run serially one after another.

Development of a bar chart:

The following are important stages in developing a bar chart.

1. BREAK DOWN The project into its various activities or jobs or operations, each
representing manageable unit for planning and control

2. DECIDE The method to be employed in execution of the project as well

as for each activity or operation or task; also decide above the
sequence in which the activities are to be completed
 3. ASSIGN Duration of time for the completion of each activity. Once the
activities are separated and choice of method is made, it is
possible to estimate the time required for the completion of each
activity

4. REPRESENT The above information in the bar chart, indicating the relative
positions of each activity.

Example: Draw the bar chart for ‘finalization of design and work order’ for a building project.

Activity Description Time for completion

A Site selection and survey 4 weeks

B Design 6 weeks

C Preparation of drawings 3 weeks

Preparation of specifications and

D 2 weeks
tender document

E Tendering (NIT) 4 weeks

F Selection of contractor 1 week

G Award of work order 1 week

In the above project, the following inferences are observed.

• Activities A and B can start concurrently, since some parts of the architectural and
structural designs can be done even if complete survey data is not available.

• Similarly drawing work can be started as soon as survey work is over, though all
designs are not yet completed.

• Specifications (Activity D) can be finalized when once the designs (Activity B) are
completed.

• Activity E can be started only when activity D is complete.

• Activities E,F and G are to be completed in sequential order.

The bar chart representing the above sequence of activities is shown in below figure.

A.
B.
C.
D.
 E.
F.
G.
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14
Fig: Gantt Bar chart for ‘Finalization of Designs and work order’ for a building project

ELEMENTS OF NETWORK

A network is a flow diagram consisting of activities and events, connected logically and
sequentially. In the network diagram, an activity is represented by arrow while events are
represented usually by circles, as shown in figure.

Event

Activity
Event
Event
Event

Event

Networks are two types

1. PERT network

2. CPM Network

PERT – Program Evaluation and Review Technique

CPM – Construction Project Management

Fundamentally both PERT and CPM networks are techniques of project management involving
graphical and diagrammatic representation, which management can use as an aid in planning,
scheduling and controlling of operations in a project.

Characteristics of CPM / PERT projects:

• The project should be planned by network technique should consist of clearly

recognizable jobs or operations, usually called as activities.

• These jobs, operatons or activities must have definite commencement and

completion. The start or end of an operation or activity is called an event.
 • The events must occur in a definite pattern and must be performed in a
technological sequence.

• So the basic elements of a project network are

o Event

o Activity

Example: Let us consider the project of laying a foundation. The project consists of the
following well defined operations

A. Excavation of foundation

B. Laying side boards

C. Concreting foundation

All the three operations are to be performed in a sequential order. The simplel network will be
as shown in figure.

• Here the activities – Excavate foundation, Fix side boards, Concreting foundations
are shown by arrows.

• The beginning and end of activities are events and they are shown by circles
provided at nodes

• The events of the above projects are

1. Project started or excavation started

2. Foundation excavated

3. Side boards fixed

4. Foundation concreted.
Example 2: Let us see another example, considering the project of purchasing a new heavy-
duty lathe and disposing of the old lathe. The project consists of following activities

A. Await delivery of lathe

B. Remove existing lathe

C. Install power supply

D. Install lathe

E. Connect to power

F. Dispose of existing lathe

The above project can be represented by a network shown in below figures in two types of
networks

1. Activity oriented network

2. Event oriented network

Fig: Activity oriented network

 Fig: Event oriented Network

EVENT

Definition: The commencement or completion of an activity is called as an event.

• An event is the particular instant of time at which some specific part of a plan has
been or is to be achieved.

• More specifically an event is a specific definable accomplishment in a project plan,

recognizable at a particular instant of time

Examples:

Design completed

Excavation completed

Lathe installed

Parts assembled

Pipeline laid

• An event has three basic properties.

1. An event is the start or completion of an activity.

2. An event represents a noteworthy, significant and recongnizable point in the

project. Events act as control points in a project.
 3. An event is an accomplishment occuring at an instantaneous point in time,
but requiring no time or resources itself.

• An event must satisfy the following requirements

o A significant event must be positive, specific, tangible and meaningful to the

project.

o It should be definitely distinguishable as a specific point in time.

o It should be readily understood by all concerned with the project.

• Representation of events.

o In a network diagram, events are represented by nodes. The shape of nodes

may be Circular or square or rectangular or oval.

Specifying the events:

A particular event out of various events on the network diagram may be specified as

1. Tail event

2. Head event

3. Dual role event

1. Tail event:

A tail event is the one which marks the beginning of an activity.

• If the particular tail event represents the commencement of the project, it is known as
the initial event.

• The below figure (a) shows tail event representing the beginning of a certain activity
while figure (b) shows an initial event representing the commencement of the project.
Figure (c) shows a tail event marking the beginning of 3 activities A,B and C
2. Head Event:

• All activities have a ending, i.e., again a specific point of time and is marked by an event.
Such an event is known as head event.

• If a particular head event marks the completion of the project, it is known as final event
or end event.

3. Dual role events:

• These are the activities act as head event to some activity and tail event to other activity.

• Actually most of the events serve dual function.

• All events except initial and final events are dual role events
ACTIVITY

Definition:

• An activity is actual performance of a task.

• It is the work required to complete a specific event

• An activity is a recognizable part of a work project that requires time and resources
(manpower, materials, space, facilities, etc.) for its completion.

• A significant activity must be a positive, specific, tangible and meaningful effort such
that the primary responsibility of effort can be determined.

• An activity should have a time span and a description understandable by all concerned
with the project.

Representation and identification of activities:

• In a network diagram, activities are represented by simple arrows, usually drawn left to
right.

• The length of arrow does neither represent the magnitude of work involved nor the
time required for its completion. It represents connectivity with events and sequence.
 • The activities can be identified in terms of the events they connect by the use of event
numbers.

• In above figure, the activity connecting 2,3 is designated as activity (2,3)

Inter-relationship:

• A project may consist of a number of activities or jobs.

• Based on the interdependency, we can categorize the activities as

1. Parallel Activities

2. Serial activities

1. Parallel activities:

o The activities which can be performed simultaneously and independently to

each other are known as parallel activities.

o For example, in below figure, A & B are parallel activities and P&Q are serial
activities.

Predecessor Activity:

• Activity that requires to be

performed before another job or
activity can begin is called
predecessor activity to that activity.

• The activity or activities that are

required to be performed
immediately before another
activity, without an intervening
activity are known as immediate
predecessor activities to that
activity.

Successor Activity:

• The activity or activities that can be performed after the performance of other activity
are known as successor activities to that activity.

• The activity or activities that immediately follows other activity without any intervening
activity are known as immediate successor activities to that activity.

• Redundancy exists when among the number of predecessor activities of any given
activity, one of the activity is a predecessor to some other activity in the same set.

• Let us consider a network shown in below figure. The table indicates the predecessors
and successor activities to each activity.
Dummy Activity:

• A dummy is a type of operation in network which doesn’t require any time or resources.

• It is just a device to identify a dependence among operations.

• A dummy is thus a connecting link for a control purposes or for maintaining uniqueness
of the activity.

• A dummy is also represented by arrow but since it is not an activity, it is represented by

dashed arrow.

• Dummy is identified by the numbers of the terminal node.

In above example,

A – Await delivery of new machine

B – Install new machine

C – Remove existing machine

D – Dispose of existing machine.

• Activities A and B are to be performed serially.

• Similarly activities C and D have to be performed serially.

• Both the sets can be performed simultaneously.

• However, from practical considerations, we find that activity D of set 2 cannot be

performed unless activity A of set 1 is completed.

• Hence a dummy link is used, joining node 2 to node 5, indicating that activity D cannot
be started unless event 2 is over.

Uses of Dummy activities:

• Dummies serve two purposes in a network

▪ Grammatical purpose

▪ Logical purpose

• Grammatical purpose

o A dummy is used to prevent two arrows having common beginning and end
points.

o For example consider the arrows of activities A and B; both start from node 1
and end at node 2.

o Due to this, uniqueness in identification of activities is lost.

o This inconvenience frequently leads to mistakes.

o This trouble can be avoided by using a dummy link as illustrated in below figure,
giving grammatically correct and clear representation.
• Logical purpose:

o Dummies are also used to give logical clear representation in a network having
an activity common to two sets of operations running parallel to each other.

o For example, consider two activities Q and R having common end node. Activity
Q has O and P as successor activities, while activity R has P and N as successor
activities.

o The below figure (a) shows the illogical representation of the activities, because
the activity P cannot have dual identity. It should have unique identity.

o The uniqueness can be maintained by introducing two dummies P1 and P2 as

shown in figure (b)

• Rules for Dummy activities:

o While planning a network, a natural question that arises is where to provide

dummies.

o Provision of redundant dummies in the network may create confusion

o For that, the simple rule is that, during the initial stage of developing a network,
liberal use of dummies should be made to fulfill the requirements of inter-
relationships between various activities and between various sets of activities.

o This may result in the introduction of some unnecessary dummies, which can be
removed by the use of following rules.

1. Rule 1:

▪ If a dummy job is the only one emanating from its initial node, it can be
removed and the activity terminating at that node can be directly
connected to that node, to which the dummy was terminating.

▪ For example, consider initial drawing of partial network shown in below

figure, the dummy P1 is the only job emanating from its initial node.

▪ It can be removed and activity P can be directly connected to the forward

node (3), as shown in figure (b).

▪ It should be noted that the same treatment cannot be given to dummy

A1, since other jobs or activities (such as B) are also emanating from the
same node.

2. Rule 2:

▪ If a dummy job is the only one terminating into a node, the dummy can
be removed and the two node at the two ends of dummy can be merged
into one.

▪ For example, activity A was initially joined to activities C, D and B by three

dummies, A1, A2, and A3 respectively.

▪ Since dummy A3 is the only one terminating to node 2, it can be removed

and the nodes 1 and 2 situated at the two ends of dummy A3 can be
combined as shown in below fig (b)
 3. Rule 3:

▪ If two or more activities, emanating form different nodes have identical

set of predecessors some of which also appear in different predecessor
sets of other activities, the two activities should emanate from a single
node.

▪ This node can be connected to their predecessor activities by dummies.

▪ For example, consider a partial network situation shown in below figure

(a), in which two activities B and

Developing a Project Activity Network:

1. Identify Project Activities:

• Start by breaking down the project into smaller, manageable activities.

• Identify the tasks, work packages, or milestones required to achieve the project
objectives.

• Activities should be defined in a way that allows for clear understanding and
measurement.

2. Determine Activity Dependencies:

• Identify the dependencies between activities.

• Analyze the logical relationships and sequence in which activities need to be

performed.
 • Consider factors like mandatory dependencies (e.g., pouring foundation before
erecting walls) and discretionary dependencies (e.g., preferential order of
activities).

3. Define Activity Durations:

• Estimate the duration for each activity.

• Use historical data, expert judgment, or estimation techniques like PERT

(Program Evaluation and Review Technique) to determine realistic duration
estimates.

• Consider factors like resource availability, constraints, and uncertainties.

4. Construct the Network Diagram:

• Start by drawing a node for each activity, representing them as boxes or circles.

• Connect the nodes with arrows to represent the dependencies between

activities.

• Label the arrows with the type of dependency (FS, SS, FF, or SF).

• Include duration estimates for each activity.

5. Analyze the Network:

• Review the network diagram to identify critical activities and the critical path.

• The critical path is the longest sequence of dependent activities that determines
the project's overall duration.

• Identify activities with zero float or slack, as any delay in these activities will
directly impact the project's timeline.

• Analyze the network to identify potential risks, bottlenecks, or opportunities for

optimization.

Significance of Network Techniques:

Network techniques are effective tools for planning, scheduling and controlling
construction jobs. The planning commission of Government of India, Bureau of Public
Enterprises, Indian Road Congress and many other professional organizations have been
advocating the use of network techniques for project management.

Limitations of Bar charts:

Although bar charts are used in a number of projects for planning, scheduling and controlling
the work, their utility is limited due to the following reasons.

1. Bar chart does not show clearly the inter-relationships of all activities. This requires the
dependence of one activity upon another to be remembered by the planner. This is
extremely difficult when a project involves a large number of activities.
 2. When a delay occurs in a large project, many activities tend to be crashed unnecessarily
as it is almost impossible to remember which activities in the bar chart are
interdependent.

3. The horizontal lines in the bar chart can be readily juggled to fit them within the
specified or compressed period of completion.

4. Bar charts do not indicate critical areas of work which primarily constrain project
completion and require greater attention of the management. In the absence of such
indication, the management is compelled to concentrate on all activities at all times with
equal attention.

Consequently, optimizing the use of resources is difficult because it is not possible to identify
non-critical areas from where resources may be diverted to critical areas.

Netwoirk techniques provide a rational approach to the planning and controlling of

construction works. The application of such techniques is inevitable when there is a constraint
on resources and a need for higher productivity.

Types of network techniques in Project management

The two commonly used network techniques are CPM and PERT.

• CPM stands for Critical Path Method

• PERT stands for Program Evaluation and Review Technique.

While essentially both are identical, there are some minor differences between the two
techniques. A compnarison between CPM and PERT is as follows.

CPM PERT

CPM is activity oriented PERT is event oriented

Single time estimates are used for the The time estimates for activities are
various activities. i.e., the time estimates probabilistic. The following three time
are deterministic estimates are used for each activity.

1. Optimistic time t0

2. Pessimistic time tp

3. Most likely time tm

CPM is used for repetitive types of projects PERT is used for research and
where the time estimates for various development type of project which are the
activites are either known or can be first of their own kind and where prior data
determined fairly accurately about he activity time is not available
 CPM places emphasis upon optimizing PERT lays emphasis on reducing project
allocation of resources and minimizing completion time without cost constraint.
overall project cost

PROGRAM EVALUATION AND REVIEW TECHNIQUE (PERT)

Introduction:

PERT was developed by US Navy while working on Polaris Missile Program during 1957-
58. This is used for projects which are non repetitive in nature. Such projects are characterized
by an extreme degree of uncertainty both in the development of the system and int eh time
duration of various activities.

Three time estimates are used to determine the expected or average time of each activity. The
expected time forms the basis of PERT networks.

Computation of Expected time:

1. Optimistic Time Estimate (t0): It is the shortest possible time for completing an activity if
everything proceeds as planned without any problem i.e., the activity is performed under ideal
conditions.

2. Most likey Time Estimate (tm): It is the time for completing an activity under normal
conditions. In this case, conditions are not ideal and minor mishaps may occur.

3. Pessimistic Time Estimate (tp): It is the maximum time required to complete an activity
under abnormal or extremely adverse conditions in which everything goes wrong.

The expected time estimate for each activity is completed on the basis of statistics as
below.

Where,

te = Expected time estimate

t0 = Optimistic time estimate

tm = Most likely time estimate

tp = Pessimistic time estimate

Eg: Estimate the expected time Estimate of each of the following activities from the three
time estimates
 S.No Activity to tm tp

1 Driving precast piles for a bridge abutment 22 30 50

2 Erecting roof trusses for a factory shed 11 14 17

3 Concreting foundation of Turbo-generator 3 5.25 6

4 Fabricating sheet metal A.C.ducts for an auditorium 12 16 17

Construction projects are most of a repetitive nature and data concerning various activities is
generally available. PERT therefore is not commonly used in construction projects.

CRITICAL PATH METHOD:

CPM was developed in 1956, in USA by a team of engineers working for Dupont
Corporation and Remington Rand. The method was successfully tried for the construction of a
chemical plant in Louisville, USA. The method was also used with extraordinary success for
carrying out the repair of a unit in a chemical plant, resulting in nearly 30% reduction in the
shut down time. The usefulness of CPM was thus fully established.

In India, CPM is widely used for project management by number of private and public
organizations. Use of CPM provides meaningful answers to such questions as

1. What will be the completion time of the project

If there is a delay in one activity, will the entire project be delayed? ifso, by how much?

What ist he most economical way to speed up the project?

How to schedule material deliveries so as to have materials when needed but avoid costly
storage for long periods?
 Application of CPM results in better decisions and a saving in the overall project cost.
CPM is extensively used in the construction industry due to the repetitive nature in construction
works.

Network Techniques:

Terminology

(a) Activity: Performance of a specific task, operation, job or function which consumes time
and resources and has a definite beginning and end is called an activity. For example,
excavating foundation, lay brick work, backfill trench, fix shuttering, fix reinforcement,
concrete wall etc. are all activities.

(b) Event: An instantaneous point in time marking the beginning or end Of One or more
activities is called an event. An event consumes no time or resources. For example, excavation
completed, brick work laid, shuttering fixed, wall concreted etc. are all events.

(c) Network: A network is the diagrammatic representation Of a work plan showing the
activities, step-by-step, leading to the established goal. It depicts the inter-dependence
between the various activities, i.e. which activities can be done together and which activities
must precede or succeed others.

Line Balance Method in Scheduling

1. Introduction:

• Scheduling is the process of assigning tasks to resources over time to optimize

efficiency.

• Line balancing is a technique used in scheduling to distribute tasks evenly

among workstations in a production line.

• The line balance method aims to minimize idle time and maximize throughput
by achieving a balanced workload across workstations.

2. Key Concepts:

a. Workstation: A physical location or station where tasks are performed.

b. Task: A specific job or operation that needs to be completed.

c. Cycle time: The time required to complete one cycle of operations at a workstation.

d. Precedence relationship: The order in which tasks must be performed.

e. Workload: The amount of work assigned to a workstation.

3. Steps in Line Balancing:

a. Determine the tasks: Identify the individual tasks required to complete a product or
service.
 b. Define task times: Determine the time required to complete each task based on
historical data or time studies.

c. Establish precedence relationships: Identify any dependencies or order constraints

between tasks.

d. Calculate the required cycle time: Sum up the task times for a workstation to
determine the total time required per cycle.

e. Calculate the minimum number of workstations: Divide the total task time by the cycle
time to determine the minimum number of workstations needed.

f. Allocate tasks to workstations: Assign tasks to workstations while considering

precedence relationships and workload balancing.

g. Evaluate line balance: Check if the workload is evenly distributed across workstations
and make adjustments if necessary.

h. Optimize line balance: Use optimization techniques (e.g., trial and error, heuristic
algorithms) to improve the line balance.

Example: Consider a production line with the following tasks, task times, and precedence
relationships:

Task Task time Predecessor

A 30 -
B 20 A
C 40 A
D 15 B,C
E 25 D

Step-by-step line balancing: a. Determine tasks: A, B, C, D, E. b. Define task times: A

(30s), B (20s), C (40s), D (15s), E (25s). c. Establish precedence relationships: B depends on A,
C depends on A, D depends on B and C, E depends on D. d. Calculate required cycle time:
Sum of task times = 30 + 20 + 40 + 15 + 25 = 130 seconds. e. Calculate minimum number of
workstations: Total task time / cycle time = 130 / 130 = 1 workstation. f. Allocate tasks to
workstations:

• Workstation 1: A, B, C, D, E (as all tasks can be completed within the cycle time).
g. Evaluate line balance: Check if the workload is evenly distributed and adjust
if needed. h. Optimize line balance: Use optimization techniques to minimize
idle time or balance the workload further if required.

The line balance method in scheduling helps distribute tasks evenly among
workstations in a production line. It aims to minimize idle time, maximize throughput, and
achieve a balanced workload across workstations. The steps involved include determining
tasks, defining task times, establishing precedence relationships, calculating cycle time,
allocating tasks to workstations, evaluating line balance, and optimizing as necessary.

Line balancing is an iterative process, and adjustments may be required based on real-
time data, changing priorities, or other factors. The line balance method provides a framework
to optimize the scheduling of tasks in a production line.

Time Value of Money in Construction Project Management

Introduction:

❖ The Time Value of Money (TVM) is a fundamental concept in finance that is applicable
to construction project management.
❖ TVM recognizes that the value of money changes over time due to factors such as
inflation, interest rates, and opportunity costs.
❖ Understanding TVM is crucial for construction project managers to make informed
financial decisions and evaluate project feasibility.

Key Concepts:

a. Present Value (PV): The value of future cash flows discounted to their current worth.

b. Future Value (FV): The value of an investment or cash flow at a specific point in the future.

c. Discount Rate (DR): The rate used to convert future cash flows into their present value.

d. Net Present Value (NPV): The difference between the present value of cash inflows and
outflows.

e. Internal Rate of Return (IRR): The discount rate at which the NPV of an investment becomes
zero.

Time Value of Money Principles:

a. Future Value: Money today is worth more than the same amount in the future due to the
potential to earn returns.

b. Present Value: Future cash flows must be discounted to reflect their current value.

c. Compounding: The process of earning returns on both the initial investment and
accumulated interest over time.

d. Discounting: The process of reducing future cash flows to their present value by applying a
discount rate.

e. Opportunity Cost: The potential return foregone by investing in one option rather than
another.

TVM Applications in Construction Project Management:

a. Cost Estimation: TVM helps project managers accurately estimate the present value of future
project costs.
b. Investment Analysis: TVM techniques such as NPV and IRR help evaluate the financial viability
of construction investments.

c. Cash Flow Analysis: TVM assists in analyzing and comparing project cash flows over time.

d. Project Valuation: TVM enables project managers to determine the present value of a
construction project's expected future cash flows.

e. Project Decision-Making: TVM provides a framework for comparing alternative construction

projects and selecting the most financially beneficial option.

TVM Calculation Methods:

a. Present Value (PV) Calculation: PV = FV / (1 + DR) n, where FV is the future value, DR is the
discount rate, and n is the time period.

b. Future Value (FV) Calculation: FV = PV * (1 + DR) n, where PV is the present value, DR is the
discount rate, and n is the time period.

c. Net Present Value (NPV) Calculation: NPV = Sum of PV of cash inflows - Sum of PV of cash
outflows.

d. Internal Rate of Return (IRR) Calculation: IRR is the discount rate at which the NPV of cash
flows becomes zero.

Consider a construction project in India that requires an initial investment of ₹10,00,000. The
project is expected to generate annual cash inflows of ₹3,00,000 for 5 years. The discount rate
is 10%.

Step 1: Calculate the Present Value (PV) of Cash Inflows:

PV of cash inflows = ₹3,00,000 / (1 + 0.10) 1 + ₹3,00,000 / (1 + 0.10) 2 + ₹3,00,000 / (1 + 0.10) 3

+ ₹3,00,000 / (1 + 0.10) 4 + ₹3,00,000 / (1 + 0.10) 5

Step 2: Simplify the calculation:

PV of cash inflows = ₹3,00,000 / 1.10 + ₹3,00,000 / (1.10)2 + ₹3,00,000 / (1.10) 3 + ₹3,00,000 /

(1.10) 4 + ₹3,00,000 / (1.10)5

Step 3: Compute the PV of cash inflows:

PV of cash inflows = ₹2,72,727.27 + ₹2,47,933.88 + ₹2,25,394.44 + ₹2,04,904.04 +

₹1,86,276.40

Step 4: Calculate the total PV of cash inflows:

PV of cash inflows = ₹11,37,235.99

Step 5: Evaluate the Net Present Value (NPV):

NPV = PV of cash inflows - Initial Investment

NPV = ₹11,37,235.99 - ₹10,00,000

NPV = ₹1,37,235.99

Step 6: Interpret the NPV:

A positive NPV of ₹1,37,235.99 indicates that the project is financially viable. The
project is expected to generate a surplus amounting to ₹1,37,235.99 after considering the time
value of money and the discount rate of 10%.

In real-life project management, more factors and considerations, such as taxes,

inflation, and other costs, need to be taken into account to arrive at a comprehensive financial
evaluation.

Investment Analysis in Construction Management

Introduction:

Investment analysis is a crucial aspect of construction management that involves assessing the
financial feasibility and potential returns of construction projects.

It helps project managers make informed decisions about resource allocation, project
selection, and risk management.

Investment analysis considers factors such as project costs, cash flows, discount rates, and
financial indicators.

Key Concepts:

a. Initial Investment: The upfront cost required to initiate a construction project, including
land acquisition, permits, design, and construction costs.

b. Cash Flows: The inflows and outflows of cash throughout the project's lifecycle, including
revenue, expenses, and investments.

c. Discount Rate: The rate used to discount future cash flows to their present value,
considering the time value of money.

d. Net Present Value (NPV): The difference between the present value of cash inflows and
outflows, indicating the project's profitability.
e. Internal Rate of Return (IRR): The discount rate at which the NPV of cash flows becomes
zero, providing insight into the project's rate of return.

f. Payback Period: The time required to recover the initial investment from the project's cash
flows.

g. Return on Investment (ROI): The ratio of the project's net profit to the initial investment,
indicating the efficiency of the investment.

Investment Analysis Methods:

a. Net Present Value (NPV) Analysis:

Calculates the present value of all cash inflows and outflows and compares them to determine
the project's net profitability.

If the NPV is positive, the project is considered financially viable, indicating a surplus after
considering the time value of money and the discount rate.

Decision Rule: Accept the project if the NPV is positive; reject it if the NPV is negative.

b. Internal Rate of Return (IRR) Analysis:

Determines the discount rate at which the NPV of cash flows becomes zero, indicating the
project's rate of return.

Decision Rule: Accept the project if the IRR is higher than the desired rate of return or the cost
of capital; reject it otherwise.

c. Payback Period Analysis:

Evaluates the time required to recover the initial investment from the project's cash inflows.

Decision Rule: Accept the project if the payback period is within an acceptable timeframe;
reject it otherwise.

d. Return on Investment (ROI) Analysis:

Measures the efficiency of the investment by calculating the ratio of net profit to the initial
investment.

Decision Rule: Accept the project if the ROI meets or exceeds the desired threshold; reject it
otherwise.

Factors to Consider in Investment Analysis:

a. Project Costs: Evaluate all costs associated with the project, including construction, labor,
materials, permits, and maintenance.

b. Cash Flow Projections: Develop realistic forecasts of revenue and expenses throughout the
project's lifecycle, considering inflation and market conditions.
c. Risk Assessment: Identify and assess potential risks and uncertainties that may impact the
project's financial performance.

d. Discount Rate Selection: Determine an appropriate discount rate based on the project's risk
level, cost of capital, and desired rate of return.

e. Sensitivity Analysis: Analyze how changes in key variables, such as construction costs or
revenue projections, impact the project's financial viability.

Example:

Consider a construction project with an initial investment of ₹10,00,000. The project is

expected to generate annual cash inflows of ₹3,00,000 for 5 years. The discount rate is 8%.

a. Perform NPV Analysis:

Calculate the present value of cash inflows using the discount rate and time period.

Compare the sum of the present values of cash inflows with the initial investment to determine
the NPV.

If the NPV is positive, the project is financially viable.

b. Perform IRR Analysis:

Determine the discount rate at which the NPV of cash flows becomes zero.

If the IRR is higher than the desired rate of return or the cost of capital, the project is financially
viable.

c. Perform Payback Period Analysis:

Calculate the time required to recover the initial investment from the project's cash inflows.

If the payback period is within an acceptable timeframe, the project is financially viable.

d. Perform ROI Analysis:

Calculate the ratio of net profit to the initial investment.

If the ROI meets or exceeds the desired threshold, the project is financially efficient.

Investment analysis provides construction project managers with a comprehensive financial

assessment of projects, enabling informed decision-making and ensuring the allocation of
resources to financially viable ventures.

Cost-Benefit Analysis in Construction Management

Introduction:
 ❖ Cost-benefit analysis is a valuable tool in construction management used to evaluate
the financial feasibility and potential benefits of a construction project.
❖ It involves comparing the costs of a project with its expected benefits to determine if
the project is economically justified.
❖ Cost-benefit analysis helps project managers make informed decisions, prioritize
projects, and allocate resources effectively.

Key Concepts:

a. Costs: The expenses associated with the construction project, including labor, materials,
equipment, permits, and overhead costs.

b. Benefits: The positive impacts or gains expected from the project, such as increased
revenue, improved efficiency, enhanced safety, and environmental sustainability.

c. Cost-Benefit Ratio (CBR): The ratio of the project's total benefits to its total costs, providing
a measure of the project's economic viability.

d. Net Present Value (NPV): The difference between the present value of benefits and costs,
accounting for the time value of money.

e. Return on Investment (ROI): The ratio of the net benefit to the total cost, indicating the
efficiency of the investment.

Steps in Cost-Benefit Analysis:

a. Identify Costs and Benefits:

Identify and quantify all relevant costs and benefits associated with the project, considering
both tangible and intangible factors.

b. Assign Monetary Values:

Assign monetary values to costs and benefits to allow for quantitative analysis.

Tangible costs and benefits are relatively straightforward to assign monetary values.

Intangible costs and benefits may require techniques such as contingent valuation or
willingness-to-pay surveys.

c. Time Value of Money:

Consider the time value of money by discounting future costs and benefits to their present
value using an appropriate discount rate.

d. Evaluate and Compare Costs and Benefits:

Compare the present value of costs with the present value of benefits to determine if the
benefits outweigh the costs.
Use metrics such as the cost-benefit ratio (CBR) or net present value (NPV) to assess the
economic viability of the project.

e. Sensitivity Analysis:

Conduct sensitivity analysis to evaluate how changes in key variables, such as cost or benefit
estimates, impact the overall cost-benefit analysis.

Decision Criteria:

a. Cost-Benefit Ratio (CBR):

If the CBR is greater than 1, the benefits outweigh the costs, indicating that the project is
economically justified.

If the CBR is less than 1, the costs outweigh the benefits, suggesting that the project may not
be economically viable.

b. Net Present Value (NPV):

If the NPV is positive, the benefits exceed the costs, indicating that the project is financially
viable.

If the NPV is negative, the costs exceed the benefits, suggesting that the project may not be
economically feasible.

c. Return on Investment (ROI):

If the ROI meets or exceeds the desired threshold, the project is considered financially efficient.

The ROI provides insights into the profitability and efficiency of the investment.

Limitations of Cost-Benefit Analysis:

a. Subjectivity in assigning monetary values to intangible costs and benefits.

b. Difficulty in accurately forecasting future costs and benefits.

c. Ignoring non-monetary factors that may be relevant to the decision-making process.

Example:

Consider a construction project with total costs of ₹10,00,000 and estimated benefits
over a 10-year period totaling ₹20,00,000. The discount rate is 8%.

a. Calculate the Net Present Value (NPV):

Determine the present value of costs and benefits using the discount rate.

Subtract the present value of costs from the present value of benefits to obtain the NPV.

b. Evaluate the Cost-Benefit Ratio (CBR):

 Divide the total present value of benefits by the total present value of costs to obtain
the CBR.

c. Analyze the Return on Investment (ROI):

Divide the net benefit (total present value of benefits - total present value of costs) by the total
cost to obtain the ROI.

Cost-benefit analysis enables construction project managers to assess the economic viability
of projects, make informed decisions, and prioritize investments based on their potential
benefits and costs. It provides a structured framework to evaluate projects and allocate
resources efficiently.