project management- unit v

UNIT V

Social Cost Benefit Analysis: Concept of social cost benefit, significance of SCBA, Approach to SCBA, UNIDO approach to SCBA, Shadow pricing of resource, the little miracle approach,

Project Implementation: Schedule of project implementation, Project Planning, Project Control, Human aspects of project management, team building, high performance team.

Commercial Cost Benefit Analysis (CBA)

•Benefit > Cost is desirable here.•So it is nothing but a profitability analysis.•But what will be the costs and/or the benefits

that a society may have to bear and/or get from the proposed project are not considered here.

Social Cost Benefit AnalysisSo, to reflect the real value of a project to society, we

must consider the impact of the project on society. • Impact

• Positive or Negative • (Social Benefit) • (Social Cost)

Thus ,when we evaluate a project from the view point of the society (or economy) as a whole, it is called Social Cost Benefit Analysis (SCBA) / Economic Analysis

SCBA received a lot of emphasis in the decades of 1960s and 70s in view of growing importance of public investments.

Scope of SCBA

• SCBA can be applied to both public and private investments

• Public Investment: SCBA is important specially for the developing countries where govt. plays a significant role in the Economic development

• Private investment: Here, SCBA is also important as the private investments are to be approved by various governmental and Quasi-governmental agencies.

Objectives of SCBA :

The main focus of SCBA is to determine• Economic benefits of the project in terms of shadow

prices • The impact of the project on the level of savings and

investments in the society • The impact of the project on the distribution of

income in the society; • The contribution of the project towards the fulfillment

of certain merit wants (self-sufficiency, employment etc)

Rationale of SCBA

Basic sources of discrepancy in SCBA are:• Market imperfection• Externalities• Taxes & Subsidies• Concern for savings• Concern for redistribution• Merit wants

Market imperfection• Market prices, which form the basis for computing the monetary

costs and benefits from the point of view of the project sponsor, reflect social values only under perfect competition.

• Perfect competition is rare specially in developing economies. Therefore when imperfections exists, market prices do not reflect the social values.

• Three common market imperfections found in developing countries are :– Rationing- control over the prices. The consumer pays significantly less than the

prices prevailing in the competitive market.– Prescription of Minimum wage rate- the minimum wages paid to the labour is

more than usually prevailing wages in the competitive market.– Foreign exchange regulation- the official rate of the foreign exchange in

developing countries, which exercise close regulation over foreign exchange, is typically less than the rate that would prevail in the absence of such regulations.

Externalities

• A project may have beneficial external effects. It may create infrastructural facility like roads which will benefit the neighbouring areas. Such benefits are considered in SCBA, though these benefits are ignored by the project sponsors because they do not receive any monetary compensation for that.

• Likewise, a project may have harmful external effect like pollution. In SCBA, such cost of environmental pollution is relevant, though project sponsors may not incur any cost.

Taxes & Subsidies

• From private point of view, taxes are definite monetary costs and subsidies are definite monetary gains.

• From social point of view, taxes and subsidies are regarded as transfer payments and hence considered irrelevant.

Concern for Savings

• Private firms are not concerned how the project benefits are divided between consumption and savings.

• From Social point of view, the division of benefits from consumption and savings (lead to investment) is relevant.

• From social point of view, a rupee of benefits saved is deemed more valuable than a rupee of benefits consumed.

• In SCBA, higher valuation is placed on savings and lower valuation is put on consumption.

Concern for Redistribution

• A private firm is not bothered how the benefits are distributed among various groups in the society.

• A society is concerned how the benefits are distributed among various groups in the society.

• A rupee of benefit going to an economically poor section is considered as more valuable than a rupee of benefit going to an affluent section.

Merit wants• Goals and preferences not expressed in

the market place, but believed by policy makers to be in the larger interest.

• Eg. Govt. may prefer to promote an adult education program or a balanced nutrition program for school going children even though these are not sought by consumers in the market place.

• Not relevant from private point of view but important from social point of view.

Approaches to SCBA

Two approaches for SCBA• UNIDO Approach:- This approach is mainly based on

publication of UNIDO ( United Nation Industrial Development Organizations) named Guide to Practical Project Appraisal in 1978.

• L-M Approach :- IMD Little and J.A. Mireless approach for analysis of Social Cost Benefit in Manual of Industrial Project “ Analysis in Developing countries and project Appraisal and planning for Developing Countries.

UNIDO Approach for SCBA• The UNIDO method of project appraisal

involves five stages:1. Calculation of financial profitability of the project

measure at market prices.2. Obtaining the net benefit of the project at

economic (shadow) prices3. Adjustment for the impact of the project on

Savings and investment4. Adjustment for the impact of the project on

Income distribution5. Adjustment for Merit and Demerit Goods whose

social values differ from their economic values.

UNIDO Approach Stage - 1 Calculation of financial profitability of the project a) A good technical and financial analysis must

be done before a meaningful economic (social) evaluation can be made so as to determine financial profitability.

b) Financial profitability is indicated by the Net Present Value (NPV) of the project, which is measured by taking into Account inputs (costs) and outputs (benefits) at market price.

UNIDO Approach Stage - 2

Obtaining the net benefit of the project at economic (shadow) prices

a) The commercial profitability analysis (calculated in stage 1) would be sufficient only if the Project is operated in Perfect market. Because, only in a perfect market, market prices can reflect the social value

b) If the market is imperfect (most of the cases in reality), net benefit of the Project is determined by assigning shadow Prices to inputs and outputs.

c) Therefore, developing shadow pries is very much vital.

UNIDO Approach Stage - 2• Shadow prices reflect the real value of a resource (input or

output) to society • Shadow Prices are also referred as economic prices,

economic / accounting efficiency prices etc • Shadow prices can be defined as the value of the

contribution to the country's basic socio-economic objectives made by any Marginal change in the availability of commodities (Output) or factor of production (input).

• Example: A project of power station may increase the production of electricity which contributes to one of the socio-economic Objectives of the country.

UNIDO Approach Stage - 2Choice of Numéraire a)A unit of account in which the values of inputs and outputs are to be

expressed. To define Numéraire, following questions have to be answered:

– What unit of currency, domestic or foreign, should be used to express benefits and costs?

– Should cost and benefits should be measured in current or constant values?

– With reference to present or future, should costs and benefits be evaluated?

– What use-consumption or investment- will be made of the income from the project?

– With reference to which group should the income of the project be measured?


b) UNIDO Numeraire can be specified as “net present consumption in the hands of the people at the base level of consumption in the private sector in terms of constant price in domestic accounting process”.

Numeraire is determined at • Domestic currency ,rather than border price. • Present value rather than future value, because, "a

bird in the hand is worth two in the bush”• Constant price rather than current price


Concept of Tradability• Key issue in shadow pricing is whether the good is tradable or

not.• For a good that is tradable, the international price is the

measure of its opportunity cost to the country.• The import (CIF) price is less or the export (FOB) price is more

than the domestic cost of production A good/service is non-tradable; if • It import (CIF) price is greater than its domestic cost of

production and/or • its export (FOB) price is less than its domestic cost of

production.

UNIDO Approach Stage - 2General Principles of Shadow pricing : Taxes: When shadow prices are being

calculated, taxes usually pose difficulties.General guidelines of UNIDO w.r.t. taxes are:• If the project augments domestic production,

taxes should be excluded • if the project consumes existing fixed supply of

non-traded inputs, tax should be included • For fully traded goods, tax should be ignored

UNIDO Approach Stage - 2General Principles of Shadow pricing : Consumer Willingness to Pay (CWP) • What a consumer wants to spend for a

product or service • The difference between CWP and actual

payment is called consumer surplus


Shadow Pricing of Resources : • Tradable inputs and outputs • For a fully traded goods, the shadow price is

border price translated into the domestic currency at shadow foreign exchange.

UNIDO Approach Stage - 2Shadow Pricing of Resources : • Assuming that a project uses two indigenous

equipments costing Rs.5,00,000. These equipments can be exported at US $ 10,000. The Shadow foreign rate of USD 1 is equivalent to Rs. 68.

• Therefore, shadow price of these equipments (inputs) are (USD 10,000xRs.68) = Rs. 6,80,000


Shadow Pricing of ResourcesNon-tradable Inputs and outputs

Shadow Price = Cost of production + Consumer willingness to pay


Shadow Pricing of Resources : • Assuming that for a project, one-half of the required

input is collected from additional domestic production which has a Domestic cost of Rs. 2,00,000 and the rest one half is collected from diversion from other consumers who are willing to pay Rs. 3,00,000.

• Therefore the shadow price of the inputs will Be: Cost of production + consumer willingness to pay = Rs (200000+300000) = Rs. 5,00,000


Shadow Pricing of Resources : • Assuming that a newly establishes power station

having a total capacity of 100 million units electricity, charges tariff at Rs. 1 for per unit electricity consumption. The consumers of that particular area are willing to pay Rs. 1.20 for per unit.

• Therefore, the shadow price is (Rs. 1.20 x100 million) = Rs. 120 million, instead of Rs. 100 million


Shadow Pricing of Resources : Externalities • An externality is an external effect (either

beneficial or harmful) causes from a project which is - not deliberately created by the project sponsors but is an incidental outcome beyond the control of the persons who are benefited or affected by it not traded in the market place


Shadow Pricing of Resources : • Near about 1,00,000 people had lost lands 5680 acres

due to the project of River Bridge • People may be affected by erosion and flood conditions

brought about by changes to the river which result from the construction Activities of a bridge

• Environmental pollution created by brick field • A project of planting trees for commercial purpose may

give protection to the environment against the increasing global warmth.

UNIDO Approach Stage - 2Shadow Pricing of Resources : Shadow Pricing of Externalities • Although valuation of external effects is difficult as they

are often intangible in nature and there is no market price, shadow pricing of externalities may be made ;indirect

• The harmful effect of bridge may be measured by the consumer willingness to pay for the output of the people which has been reduced due to the bridge

• The cost of pollution may be estimated in terms of the loss of earnings as a result of damage to health caused by it

UNIDO Approach Stage - 2Shadow Pricing of Resources : Labour Inputs• The principles of shadow pricing of goods can be

applied to labour as well, though labour is considered as service.

• When a project hires labour it could have three possible impacts on the rest of the economy:– It may take labour away from other employments.– It may induce the production of new workers and– It may involve import of new workers.

• Shadow prices for labour is what users of labour are willing to pay.

UNIDO Approach Stage - 2Shadow Pricing of Resources : Capital • Investment of capital in a project causes to happen two

things a)Financial resources are converted into physical assets b)Financial resources are withdrawn from national pool of

savings. Thus alternative projects are foregone and there is an opportunity cost of it

• The shadow price of physical assets is calculated in the same manner in which inputs and outputs are calculated.

• The opportunity cost of capital (shadow price of capital) depends on the source from which the capital has generated.

UNIDO Approach Stage 2

• Say the NPV of a project, after Stage 2, comes out to be Rs. 200 Crore.

UNIDO Approach - Stage 3Adjustment for the impact of the project on Savings and

investment : The purpose of this stage is to • Determine the amount of income gained or lost

because of the project by different income groups (such as business, government, workers, customers etc)

Evaluate the net impact of these gains and losses on savings

Measure the adjustment factor for savings and thus the adjusted values for savings impact

Adjust the impact on savings to the net present value calculated in stage 2.

UNIDO Approach- Stage 3

Evaluation of the Net Impact on Savings • Net savings Impact of the project

= ΣΔYi * MPSi o Here, Δ Yi = change in income of group i as a

result of the project o MPSi= Marginal Propensity (tendency) to save

of group i

UNIDO Approach - stage 3Assuming that the income gained or lost by 4 group is • Workers (W) = Rs. 2,50,000, • Consumer(C) = Rs. -7,00,000, • Project (P) = Rs 10,00,000, • External (E)=Rs. 5,00,000 The Marginal Propensity to Save of these four groups is: • MPSw=0.04, MPSc=0.25, • MPSp=0.4 and MPSe = 0.3

Therefore, the net impact of the project on savings is: {250000 x0.04+(-700000) x 0.25 + 100000 x 0.4 +

500000x0.3} = Rs. 4,75,000

UNIDO Approach- Stage 3Adjustment Factor for Savings (AFs) • AFs measure the percentage by which the social

value of investment of one Re. exceeds social value of consumption one rupee.

AFs = (MPC x MPcap) - 1 ( CRI- MPcap) x MPS• Here,

MPC = Marginal Propensity to Consume MPS = Marginal Propensity to Saving MPcap = Marginal Productivity of Capital CRI = Consumption Rate of Interest (Social Discount Rate)

UNIDO Approach – stage 3 Adjustment Factor for Savings (AFs)• Assuming that MPC, MPS, MPcap and CRI of an

economy is given: • MPC = 70%, MPS = 30%, • MPcap=25% and CRI=10% Therefore, adjustment factor for savings is AFs is

Afs = (70% x 25%) - 1 = 2.88 ~ 3.00[10% - 25%]x30%

Adjusted Value of the impact of the project on savings:

• Adjusted value of Savings = (Net impact on savings X AFs) = Rs. 4,75,000 x 3 = Rs. 14,25,000

UNIDO Approach - stage 3 :

• This Rs. 14,25,000 is now added to the NPV of the project calculated in stage 2 (Rs.200 crore)

• Therefore, the adjusted NPV at this stage will be

Rs. (200+.1425) = Rs. 200.1425 crore

UNIDO Approach- Stage 4Adjustment for the impact of the project on Income

distribution Govt. considers a project as an investment for the

redistribution of income in favour of economically weaker sections or economically backward regions

This stage provides a value on the effects of a project on income distribution between rich and poor and among regions

Distribution Adjustment Factor (Weight) is calculated and the impacts of the project on income distribution have been valued by multiplying the adjustment factor with the particular income of a group. This value will then be added to the net present value re-calculated in stage three to produce the social net present value of the project.

UNIDO Approach - Stage 4Determination of Weights • If there are only two groups in a society, poor and rich, the

determination of weight is just an iterative process between the analysts (at the bottom) and the planners (at the top). This is called "bottom-up" approach.

• When more than two groups are involved, weights are calculated by the elasticity of marginal utility of income. The marginal utility of income is the weight attached to an income is:

Wi =(b/ ci)^n • where Wi = weight of income at ci level • ci = level of income of group i • b = base level of income that has a weight of 1 (one)• n = elasticity of the marginal utility of income

UNIDO Approach - Stage 4 :• Assuming that the worker group gains an income of

Rs 2,50,000 from a project, the base level of income is Rs. 50,000 which has a weight if 1 and elasticity of Marginal Utility of Income is 0.20.

• Wi = (50,000/2,50,000) ^ 0.20 = 0.72• Now, weight is 0.72• Therefore, value of the impact of the project on

income distribution to this group is • Rs 250000x0.72 = Rs. 180000Now this value will be added to the net present value adjusted

in stage three. Therefore, Adjusted NPV in this stage will be Rs (200.285+ 0.018) = Rs. 200.303 crore

UNIDO Approach- Stage 5Adjustment for Merit and Demerit Goods : • If there is no difference between the economic value of

inputs and outputs and the social value of those, the UNIDO approach for project evaluation ends at stage four.

• In practical, there are some goods (merit goods), social value of which exceed the economic value (e.g oil, creation of employment etc) and also there are some goods (demerit goods), social value of which is less than their economic value (e.g., cigarette, alcohol, high -grade cosmetics etc)

• Adjustment to the NPV of stage 4 is required if there is any difference between the social and economic value

UNIDO Approach- Stage 5

The steps of adjustment procedure are: • Estimating the present economic value • Calculating the adjustment factor • Multiplying the economic value by the

adjustment factor to obtain the adjusted value • Adding or subtracting the adjusted value to or

from the NPV of the project as calculated in stage four.

UNIDO Approach - Stage 5An alcohol factory is being constructed. The present

economic value of the project is Rs. 200.303 crore (Adjusted NPV up to stage 4). The output of the project has no social value than its cost of production.

The output of the project has a social value which is less than the economic value by 40%. Therefore cost of production is the 60% of the economic price.

Therefore, adjustment factor is: ((60/100)-1) = -0.4Therefore, the adjusted value = (Rs. 200.303 crore x (- 0.4))

= Rs. -95.11 crore The NPV of the project in terms of socially acceptable

consumption is Rs. (200.303 - 95.11) = Rs. 105.193 crore.

L-M Approach :

• I.M.D. Little and James A. Mirrless have developed an approach to SCBA which is famously known as L-M approach.

• The core of this approach is that the social cost of using a resource in developing countries differs widely from the price paid for it

• Hence, it requires Shadow Prices to denote the real value of a resource to society.

L-M Approach :

Feature of L-M Approach : • L-M Numeraire is present uncommitted social income. • L-M methods opt for savings as the yardstick of their

entire approach. Present savings is more valuable to them than present consumption since the savings can be converted into investment fore future

• L-M approach rejects the 'consumption' Numeraire of UNIDO approach since the LM exponents feel that the consumption of all level is valuable

L-M Approach :

Features of L-M Approach : • This approach measures the cost and benefits

in terms of international or border prices. • Why do they prefer Border Prices?• It is because that the border prices represent

the correct social opportunity costs or benefits of using or producing traded goods.

L-M Approach :Social Cost Benefit Analysis (SCBA) : • The resources of input and output of a project are classified

into: o Labour o Traded goods o Non-traded goods • Therefore, to find out the real value of these resources, the

following values are to be calculated o Shadow wage rate (SWR) o Shadow price of traded goods o Shadow price of Non-traded goods

L-M Approach :

a. Shadow Wage Rate (SWR) : • The reason for computing the SWR is to

determine the opportunity cost of employing an additional worker in the project. For this we have to determine

• The value of the output foregone due to the use of a unit of labour

• The cost of additional consumption due to the transfer of labour

L-M Approach :b) Shadow price of Traded Goods Shadow price of traded goods is simply its border or

international price. • if a good is exported, its shadow price is its FOB Price • if a good is imported, its shadow price is its CIF price. c) Shadow price of Non-traded goods • Non-traded goods are those which do not enter into

international trade by their very nature. (e.g., land, building, transportation)

• Hence, no border price is observable for them.

L-M Approach :

Accounting Rate of Return (ARR): : This is the rate used for discounting social

profits. • Experience is the best guide to the choice of

ARR • ARR should be such that all mutually

compatible projects with positive present social value can be undertaken

UNIDO VS. L-M

Similarities • Calculation of Shadow prices to reflect social

value • Usage of Discounted Cash Flow Techniques

UNIDO VS. L-M

• Differences :UNIDO L-M

Domestic currency is used as Nemeraire

International price is used as Nemeraire

Consumption is the measurement base

Uncommitted social income is the measurement base

SCBA objectives are met through stage by stage

At one place all SCBA objectives are fulfilled.

Assignment- II

• Explain different forms of project organization structures with their advantages and disadvantages.

• Last date for submission: 6th November 2015

Project Planning

• Projects involving few activities, resources, constraints and inter-relationships can be visualized easily by the human mind.

• Whenever project size as well as complexity increases, informal planning needs to be replaced by formal planning.

• Without effective planning, there will be a chaos and ineffective project execution. It will result in losses to the firm/organization/business.

If you fail to plan, you plan to fail.

Contd..

• Functions of Planning:– It provides a basis for organizing the work on the

project and allocating responsibilities to individuals.

– It is a mean for communication and coordination between all those involved in the project.

– It induces people to look ahead.– It instills a sense of urgency and time

consciousness.– It establishes the basis of monitoring and control.

Contd..• Areas of Planning:

– 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 etc) 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.

Contd..

• Project Objectives and Policies:– Often the focus of project planning is on questions like who

does what and when.– Before operational planning is done, objectives and policies

needs to be properly articulated.– What are the technical and performance objectives?– What are the time and cost goals?– How much work should be outsourced?– What will be the terms of contract?– Well defined objectives and policies help the decision

makers to make decisions during the project.

Contd..• Work Breakdown Structure:

– It is the logical and systematic breakdown of the project into its component parts. Big picture into small pieces which needs to be put in right places at right time.

– It is constructed by dividing the project first into major parts, then subsequently divide these parts into sub-parts. This is done till breakdown is done in terms of manageable units of work for which responsibility can be defined.

– WBS helps in • Effective planning by dividing the work into 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 Organization:• The project organization represents formally how the project personnel and outside

agencies are going to work. The WBS defines the works to be done in a detailed manner.

• To assign responsibilities for the tasks to be done, WBS should be integrated with project organization structure.

Contd..• Life Cycle of a Project:

– Important stages of a life cycle project are• Project development and preliminary engineering• Bidding and contract negotiation• Engineering design• Purchase and procurement• Construction• Commissioning

– In planning these stages, a manager needs to bear in mind two concepts- the rolling wave concept and the integration concept.

– According to rolling wave concept, when detailed planning is done for project development and preliminary engineering, summary planning would be done for the remaining stages. When actual work commences, detailed planning would be done in the next stage which is concerned with bidding and contract negotiation.

– According to integration concept, planning for all stages must be integrated, even though detailed planning will be done according to rolling wave concept. This is done to understand the inter relationships among various parts of the project.

• Tools for Planning:– The oldest formal planning tool is the bar chart

(sometimes referred to as Gantt chart or the multiple activity chart)

– In recent times, network techniques have received a considerable attention.

• Bar Chart• Network Techniques

64

Bar ChartAdvantages:

Simple to understandUsed to show progressUsed for manpower planning

Disadvantages:It cannot show inter-relationship between & among activities for complex and large projects.Physical size limit to this chart.Frequent changes and updating is not so easy.

65

Network Techniques• Advantages

– Can effectively handle inter relationships among activities

– Identification of critical parts of the project

– Can handle large and complex projects

– Can be computerized and updated.

• Disadvantages– Being more complicated

from bar chart, therefore not easily understood.

– No operation schedule is define which tells who does what and when.

Scheduling, PERT, Critical Path Analysis 66Chapter 8

Example of Network – More Complex

Contd..• Hierarchy of Plans:

– Large project contains thousands of activities therefore it is not easy to comprehend and visualize all the activities by human mind.

– There is a need to have hierarchy of plans at different levels illustrating detail activities.

– I level Plans: • Highly summarized plan.• Shows broad activities with elementary breakdown details.• It can serve as basis for rough estimates for overall resources and outlays.• Only major relationships are suggested along with critical path.

– II level Plans: • Activities of level I plan are shown in greater detail.• Permits more detail examination of various stages of the project.• Act as a tool for middle management planning, decision making and control.

– III level plans:• This plan is constructed in terms of accounts.• Useful for lower level of management.• It helps in week to week or sometimes day to day planning and control/

PROJECT MANAGEMENTCPM & PERT TECHNIQUES

CRITICAL PATH METHODS(CPM)

HISTORY : It was developed by J.E.KELLY of REMINGTON-RAND and M.R.WALKER of DU PONT and the emphasis was

on the trade-off between the cost of project and its overall completion time. The first test was made in 1958,when CPM was applied to the construction of a new chemical plant.

DEFINITION: Critical path is the sequence of activities between a project’s

start and finish that takes the longest time to complete.

Network Planning Methods

Methods used for network planning are:CPMPERT

Managing a project with network planning methods involves four steps: 1. Describing the Project.2. Diagramming the Network.3. Estimating time of completion.4. Monitoring Project Progress.

Network Diagram

Concepts• Activity• Precedence relationship• Successor• Event

Guidelines for network diagram

1. Before an activity can begin, its preceding activities must be completed.

2. Arrows indicate logical precedence.3. Flow of the diagram is from left to right.4. Arrows should not intersect.5. Dangling should be avoided.

Time Estimation

Planning the schedule of the project

Time estimates include:1) Total time for completion.2) ES- Earliest start time: the earliest time at which the activity

can start given that its precedent activities must be completed first.

3) EF-Earliest finish time: equals to the earliest start time for the activity plus the time required to complete the activity.

4) LF- Latest finish time: the latest time in which the activity can be completed without delaying the project.

5) LS- Latest start time: equal to the latest finish time minus the time required to complete the activity.

6) FORWARD PASS: The early start and early finish times are calculated by moving forward through

the network and considering the predecessor activities.Considers maximum

7) BACKWARD PASS: The latest start and finish times are calculated by moving backward through the

network. Considers minimum

8) SLACK TIME: Slack time for an activity is the difference between its earliest and latest start

time or between the earliest and latest finish time. Critical path is the path of activities having zero Slack time.

STEPS IN DETERMINING CRITICAL PATH

• Specify the individual activities.

• Determine the sequence of the activities.

• Draw the network diagram.

• Estimate the activity completion time.

• Identify the critical path.

• Update the CPM diagram.

78

NETWORK TECHNIQUES

PERT CPM

-Program Evaluation and Review Technique- developed by the US Navy with Booz Hamilton Lockheed - on the Polaris Missile/Submarine program 1958

Critical Path MethodDeveloped by El Dupont for Chemical Plant Shutdown Project- about same time as PERT

Both use same calculations, almost similarMain difference is probabilistic and deterministic in time estimationGantt Chart also used in scheduling

79

• Graphical portrayal of activities and event• Shows dependency relationships between

tasks/activities in a project• Clearly shows tasks that must precede

(precedence) or follow (succeeding) other tasks in a logical manner

• Clear representation of plan – a powerful tool for planning and controlling project

NETWORK

Scheduling, PERT, Critical Path Analysis 80

Example of Simple Network – Survey


Example of Network – More Complex


DEFINITION OF TERMS IN A NETWORK• Activity : any portions of project (tasks) which

required by project, uses up resource and consumes time – may involve labor, paper work, contractual negotiations, machinery operations Activity on Arrow (AOA) showed as arrow, AON – Activity on Node

• Event : beginning or ending points of one or more activities, instantaneous point in time,

also called ‘nodes’

• Network : Combination of all project activities and the events

ACTIVITYPRECEEDING SUCCESSOR

EVENT


Emphasis on Logic in Network Construction

• Construction of network should be based on logical or technical dependencies among activities

• Example - before activity ‘Approve Drawing’ can be started the activity ‘Prepare Drawing’ must be completed

• Common error – build network on the basis of time logic (a feeling for proper sequence ) see example below

WRONG !!!

CORRECT

Scheduling, PERT, Critical Path Analysis

84

Example 1- A simple networkConsider the list of four activities for making a simple product:

Activity Description Immediatepredecessors

A Buy Plastic Body - B Design Component - C Make Component B D Assemble product A,C

Immediate predecessors for a particular activity are the activities that, when completed, enable the start of the activity in question.


85

Sequence of activities

• Can start work on activities A and B anytime, since neither of these activities depends upon the completion of prior activities.

• Activity C cannot be started until activity B has been completed

• Activity D cannot be started until both activities A and C have been completed.

• The graphical representation (next slide) is referred to as the PERT/CPM network


86

Network of Four Activities

1 3 4

2

A

B C

D

Arcs indicate project activities

Nodes correspond to the beginning and ending of activities


87

Example 2Develop the network for a project with following activities and immediate predecessors:

Activity Immediate

predecessors A - B - C B D A, C E C F C G D,E,FTry to do for the first five (A,B,C,D,E) activities


88

Network of first five activities

1 3 4

2

A

B

C

D

5

E

We need to introduce a dummy activity


89

•Note how the network correctly identifies D, E, and F as the immediate predecessors for activity G.

•Dummy activities is used to identify precedence relationships correctly and to eliminate possible confusion of two or more activities having the same starting and ending nodes

•Dummy activities have no resources (time, labor, machinery, etc) – purpose is to PRESERVE LOGIC of the network

Network of Seven Activities1 3 4

2

A

B

C

D

5

E7

6F

G

dummy


90

EXAMPLES OF THE USE OF DUMMYACTIVITY

Dummy

RIGHT

11

2

Activity c not required for e

a

b

c

d

e

a

b

c

d

e

WRONG!!! RIGHT

Network concurrent activities

1 2 1

2

3

a

WRONG!!!

a

b b

WRONG !

RIGHT


91

Scheduling with activity timeActivity Immediate Completion

predecessors Time (week) A - 5 B - 6 C A 4 D A 3 E A 1 F E 4 G D,F 14 H B,C 12 I G,H 2

Total …… 51This information indicates that the total time required to complete activities is 51 weeks. However, we can see from the network that several of the activities can be conducted simultaneously (A and B, for example).


92

Earliest start & earliest finish time• We are interested in the longest path through the

network, i.e., the critical path.

• Starting at the network’s origin (node 1) and using a starting time of 0, we compute an earliest start (ES) and earliest finish (EF) time for each activity in the network.

• The expression EF = ES + t can be used to find the earliest finish time for a given activity. For example, for activity A, ES = 0 and t = 5; thus the earliest finish time for activity A is

EF = 0 + 5 = 5


93

Arc with ES & EF time

1

2

A [0,5]

5

Activity

ES = earliest start time

EF = earliest finish time

t = expected activity time


94

Network with ES & EF time

1

3

4

25

7

6

A[0,5] 5

B[0,6] 6

C[5,9] 4

D[5,8] 3

E[5,6] 1 F[6,10]

4

G[10,24]

14 H[9,21]

12

I[24,26]

2

Earliest start time rule: The earliest start time for an activity leaving a particular node is equal to the largest of the earliest finish times for all activities entering the node.


95

Activity, duration, ES, EF, LS, LF

2

3

C [5,9]

4 [8,12]

Activity

ES = earliest start time

EF = earliest finish time

LF = latest finish timeLS = latest start time


96

• To find the critical path we need a backward pass calculation.

• Starting at the completion point (node 7) and using a latest finish time (LF) of 26 for activity I, we trace back through the network computing a latest start (LS) and latest finish time for each activity

• The expression LS = LF – t can be used to calculate latest start time for each activity. For example, for activity I, LF = 26 and t = 2, thus the latest start time for activity I is

LS = 26 – 2 = 24

Latest start & latest finish time


97

Network with LS & LF time

1

3

4

25

7

6

A[0,5]

5[0,5

]

B[0,6] 6[6,12]

C[5,9]4[8,12]

D[5,8]3[7,10]

E[5,6]1[5,6]F[6

,10]

4[6,10]

G[10,24]

14[10,24] H[9,21]

12[12,24]

I[24,26]

2[24,26]

Latest finish time rule: The latest finish time for an activity entering a particular node is equal to the smallest of the latest start times for all activities leaving the node.


98

Slack or Free Time or FloatSlack is the length of time an activity can be delayed without affecting the completion date for the entire project. For example, slack for C = 3 weeks, i.e Activity C can be delayed up to 3 weeks

(start anywhere between weeks 5 and 8).

ES5

LS8

EF9

LF-EF = 12 –9 =3

LS-ES = 8 – 5 = 3

LF-ES-t = 12-5-4 = 3

LF12

2

3

C [5,9]

4 [8,12]


99

Activity schedule for our exampleActivity Earliest

start (ES)Latest start (LS)

Earliest finish (EF)

Latest finish (LF)

Slack(LS-ES)

Critical path

A 0 0 5 5 0 YesB 0 6 6 12 6C 5 8 9 12 3D 5 7 8 10 2E 5 5 6 6 0 YesF 6 6 10 10 0 YesG 10 10 24 24 0 YesH 9 12 21 24 3I 24 24 26 26 0 Yes


100

IMPORTANT QUESTIONS• What is the total time to complete the project?

– 26 weeks if the individual activities are completed on schedule.

• What are the scheduled start and completion times for each activity?– ES, EF, LS, LF are given for each activity.

• What activities are critical and must be completed as scheduled in order to keep the project on time?– Critical path activities: A, E, F, G, and I.

• How long can non-critical activities be delayed before they cause a delay in the project’s completion time– Slack time available for all activities are given.


101

Importance of Float (Slack) and Critical Path

1. Slack or Float shows how much allowance each activity has, i.e how long it can be delayed without affecting completion date of project

2. Critical path is a sequence of activities from start to finish with zero slack. Critical activities are activities on the critical path.

3. Critical path identifies the minimum time to complete project

4. If any activity on the critical path is shortened or extended, project time will be shortened or extended accordingly


102

5. So, a lot of effort should be put in trying to control activities along this path, so that project can meet due date. If any activity is lengthened, be aware that project will not meet deadline and some action needs to be taken.

6. If can spend resources to speed up some activity, do so only for critical activities.

7. Don’t waste resources on non-critical activity, it will not shorten the project time.

8. If resources can be saved by lengthening some activities, do so for non-critical activities, up to limit of float.

9. Total Float belongs to the path

Importance of Float (Slack) and Critical Path (cont)


103

PERT For Dealing With Uncertainty• So far, times can be estimated with relative certainty, confidence

• For many situations this is not possible, e.g Research, development, new products and projects etc.

• Use 3 time estimatesm= most likely time estimate, mode.a = optimistic time estimate,b = pessimistic time estimate, and

Expected Value (TE) = (a + 4m + b) /6Variance (V) = ( ( b – a) / 6 ) 2

Std Deviation () = SQRT (V)

6

cpessimistilikelymost 4optimistic timeExp.


104

Precedences And Project Activity Times

Immediate Optimistic Most Likely Pessimistic EXP Var S.Dev

Activity Predecessor Time Time Time TE V

a - 10 22 22 20 4 2

b - 20 20 20 20 0 0

c - 4 10 16 10 4 2

d a 2 14 32 15 25 5

e b,c 8 8 20 10 4 2

f b,c 8 14 20 14 4 2

g b,c 4 4 4 4 0 0

h c 2 12 16 11 5.4 2.32

I g,h 6 16 38 18 28.4 5.33

j d,e 2 8 14 8 4 2


105

The complete network

2 6

1 3 7

4 5

a(20,4)

d(15,25)

e(10,4)

f(14,4)

j(8,4)

i(18,28.4)

g(4,0)

h(11,5.4)

c(10,4)

b(20,0)

Immediate

Activity Predecessor

a -

b -

c -

d a

e b,c

f b,c

g b,c

h c

I g,h

j d,e


106

Figure 8-13 The complete Network

2 6

1 3 7

4 5

b(20,0)

d(15,25)

e(10,4)

f(14,4)

j(8,4)

i(18,28.4)

g(4,0)

h(11,5.4)

c(10,4)

CRIT. TIME = 43

EF=20 35

43

2410

20

a(20,4)


107

Critical Path Analysis (PERT)

Activity LS ES Slacks Critical ?

a 0 0 0 Yes

b 1 0 1

c 4 0 4

d 20 20 0 Yes

e 25 20 5

f 29 20 9

g 21 20 1

h 14 10 4

i 25 24 1

j 35 35 0 Yes


108

Assume, PM promised to complete the project in the fifty days. What are the chances of meeting that deadline? Calculate Z, where Z = (D-S) / V Example, D = 50; S(Scheduled date) = 20+15+8 =43; V = (4+25+4) =33 Z = (50 – 43) / 5.745 = 1.22 standard deviations. The probability value of Z = 1.22, is 0.888

1.22


109

What deadline are you 95% sure of meeting Z value associated with 0.95 is 1.645 D = S + 5.745 (1.645) = 43 + 9.45 = 52.45 days Thus, there is a 95 percent chance of finishing the project by 52.45 days.

© Wiley 2010

Step 1-Define the Project: Cables By Us is bringing a new product on line to be manufactured in their current facility in existing space. The owners have

identified 11 activities and their precedence relationships. Develop an AON for the project.

Activity Description Immediate Predecessor

Duration (weeks)

A Develop product specifications None 4B Design manufacturing process A 6C Source & purchase materials A 3D Source & purchase tooling & equipment B 6E Receive & install tooling & equipment D 14F Receive materials C 5G Pilot production run E & F 2H Evaluate product design G 2I Evaluate process performance G 3J Write documentation report H & I 4K Transition to manufacturing J 2

© Wiley 2010

Step 3 (a) (Con’t): Calculate the Project Completion Times

• The longest path (ABDEGIJK) limits the project’s duration (project cannot finish in less time than its longest path)

• ABDEGIJK is the project’s critical path

Paths Path durationABDEGHJK 40ABDEGIJK 41ACFGHJK 22ACFGIJK 23

Calculating Slack

Activity Late Finish

Early Finish

Slack (weeks)

A 4 4 0B 10 10 0C 25 7 18D 16 16 0E 30 30 0F 30 12 18G 32 32 0H 35 34 1I 35 35 0J 39 39 0K 41 41 0

© Wiley 2010

Revisiting Cables By Us Using Probabilistic Time Estimates

Activity Description Optimistic time

Most likely time

Pessimistic time

A Develop product specifications 2 4 6B Design manufacturing process 3 7 10C Source & purchase materials 2 3 5D Source & purchase tooling & equipment 4 7 9E Receive & install tooling & equipment 12 16 20F Receive materials 2 5 8G Pilot production run 2 2 2H Evaluate product design 2 3 4I Evaluate process performance 2 3 5J Write documentation report 2 4 6K Transition to manufacturing 2 2 2

Using Beta Probability Distribution to Calculate Expected Time Durations

• A typical beta distribution is shown below, note that it has definite end points

• The expected time for finishing each activity is a weighted average

6

cpessimistilikelymost 4optimistic timeExp.

© Wiley 2007

Calculating Expected Task Times

Activity Optimistic time

Most likely time

Pessimistic time

Expected time

A 2 4 6 4B 3 7 10 6.83C 2 3 5 3.17D 4 7 9 6.83E 12 16 20 16F 2 5 8 5G 2 2 2 2H 2 3 4 3I 2 3 5 3.17J 2 4 6 4K 2 2 2 2

6

4 cpessimistilikelymost optimistictime Expected

© Wiley 2010

Estimated Path Durations through the Network

• ABDEGIJK is the expected critical path & the project has an expected duration of 44.83 weeks

Activities on paths Expected durationABDEGHJK 44.66ABDEGIJK 44.83ACFGHJK 23.17ACFGIJK 23.34

© Wiley 2010

Estimating the Probability of Completion Dates

• Using probabilistic time estimates offers the advantage of predicting the probability of project completion dates

• We have already calculated the expected time for each activity by making three time estimates

• Now we need to calculate the variance for each activity• The variance of the beta probability distribution is:

– where p=pessimistic activity time estimate o=optimistic activity time estimate

22

6opσ

© Wiley 2007

Project Activity Variance

Activity Optimistic Most Likely

Pessimistic

Variance

A 2 4 6 0.44B 3 7 10 1.36C 2 3 5 0.25D 4 7 9 0.69E 12 16 20 1.78F 2 5 8 1.00G 2 2 2 0.00H 2 3 4 0.11I 2 3 5 0.25J 2 4 6 0.44K 2 2 2 0.00

© Wiley 2010

Variances of Each Path through the Network

Path Number

Activities on Path

Path Variance (weeks)

1 A,B,D,E,G,H,J,k

4.82

2 A,B,D,E,G,I,J,K 4.96

3 A,C,F,G,H,J,K 2.24

4 A,C,F,G,I,J,K 2.38

© Wiley 2010

Calculating the Probability of Completing the Project in Less Than a Specified Time

• When you know:– The expected completion time– Its variance

• You can calculate the probability of completing the project in “X” weeks with the following formula:

Where DT = the specified completion date EFPath = the expected completion time of the path

2PσEFD

time standard pathtime expected pathtime specifiedz PT

path of varianceσ 2Path

© Wiley 2010

Example: Calculating the probability of finishing the project in 48 weeks

• Use the z values in Appendix B to determine probabilities• e.g. probability for path 1 is

Path Number

Activities on Path

Path Variance (weeks)

z-value Probability of

Completion1 A,B,D,E,G,H,J,k 4.82 1.5216 0.93572 A,B,D,E,G,I,J,K 4.96 1.4215 0.92223 A,C,F,G,H,J,K 2.24 16.5898 1.000

4 A,C,F,G,I,J,K 2.38 15.9847 1.000

1.524.82

weeks 44.66weeks 48z


131

Comparison Between CPM and PERT

CPM PERT1 Uses network, calculate float or

slack, identify critical path and activities, guides to monitor and controlling project

Same as CPM

2 Uses one value of activity time Requires 3 estimates of activity timeCalculates mean and variance of time

3 Used where times can be estimated with confidence, familiar activities

Used where times cannot be estimated with confidence.Unfamiliar or new activities

4 Minimizing cost is more important Meeting time target or estimating percent completion is more important

5 Example: construction projects, building one off machines, ships, etc

Example: Involving new activities or products, research and development etc


132

BENEFITS OFCPM / PERT NETWORK

Consistent framework for planning, scheduling, monitoring, and controlling project.

• Shows interdependence of all tasks, work packages,

and work units.

• Helps proper communications between departments and functions.

• Determines expected project completion date.

• Identifies so-called critical activities, which can delay the project completion time.


133

• Identified activities with slacks that can be delayed for specified periods without penalty, or from which resources may be temporarily borrowed

• Determines the dates on which tasks may be started or must be started if the project is to stay in schedule.

• Shows which tasks must be coordinated to avoid resource or timing conflicts.

• Shows which tasks may run in parallel to meet project completion date

BENEFITS OFCPM / PERT NETWORK (cont.)

134

PERT Step 5 – Probabilities

• Determine probability of meeting a date by using the table data – Denote the sum of all expected durations on the critical path as S – Denote the sum of all variances on the critical path as V – Select a desired completion time, denote this as D – COMPUTE: (D-S)/square root (V) = Z ( the number of std. deviations that the due date is

away from the expected date))• Enter a standard normal table to find a probability that corresponds with Z

• For our project, figure a probability based on the most likely time, 15 days: (15-15.51)/square root(2.53) = (15-15.51)/1.59=-.3207 (Z)

• A corresponding probability is 37.7% (Rounded)• This process can be repeated for any date desired

21 1exp(22

z

P Z z Z dZ

Manually computing probability using data compiled in your table

135

PERT Step 5 – Probabilities Computing probability in Excel using data compiled in your table

• Microsoft Excel has normal distribution functions built in and can compute PERT probabilities

• By creating a table as a spreadsheet, the addition of a few simple formulae will do the rest of the work

• Create a table as a template that can be used over and over again – simply change the input

Activity

Precedence

Normal time (week)

NormalCost (Rs)

A - 3 300B A 3 30C A 7 420D A 9 720E D 5 250F B,C,E 6 320G F 4 400H F 13 780I G 10 1000Total 4220

1

8

7

6

3

5

4

2

Overhead cost as per the given data- Rs.50Paths in the network diagram :A-D-F-G-I = 32A-D-F-H = 31A-C-F-H = 29A-C-F-G-I = 30A-B-E-F-H = 30A-B-E-F-G-I = 31

Critical path – A-D-F-G-I = 32

1

8

7

6

3

5

4

2

TIME ESTIMATES

o Optimistic time (to) – It is the shortest time in which the activity can be completed.

o Most likely time (tm) – It is the probable time required to perform the activity.

o Pessimistic time (tp) – It is the longest estimated time required to perform an activity.

o Expected time te = to + 4tm + tp

6

STEPS IN PERT

1. Identify the specific activities.

2. Determine proper sequence of the activities.

3. Construct the network diagram.

4. Estimate the time required for each activity.

5. Determine the critical path.

6. Update the PERT chart.

Activity Description

Precedence

Optimistic time

Most Likely time

Pessimistic time

Expected time

A Initial design

- 12 16 26 17

B Survey market

A 6 9 18 10

C Build prototype

A 8 10 18 11

D Test prototype

C 2 3 4 3

E Redesigning

B,D 3 4 11 5

F Market testing

E 6 8 10 8

G Set up production

F 15 20 25 20

1 7652

3

4

A-B-E-F-G = 60A-C-D-E-F-G = 64 (CRITICAL PATH)

Advantages of PERT

• Expected project completion time.

• Probability of completion before a specified date.

• The critical path activities that directly impact the completion time.

• The activities that have slack time and that can lend resources to critical path activities.

• Activity start and end dates.

LIMITATIONS

• The PERT Formula Requires Too Much Work.

• The network charts tend to be large and unwieldy.

• Calculating the time estimates is very complex for all the activities.

• Updating of the project is time consuming and requires high costs.

• Emphasis is laid only on time factors and cost factors are neglected.

Difference between CPM & PERT

CPM PERT• CPM works with fixed deterministic time

• PERT works with probabilistic time

• CPM is useful for repetitive and non complex projects with a certain degree of time estimates.

• PERT is useful for non repetitive and complex projects with uncertain time estimates.

• CPM includes time-cost trade off. • PERT is restricted to time variable.

• CPM- for construction projects. • PERT- used for R&D programs.

Project Control • No sooner is the project launched, control becomes the

dominant concern of the project manager. Once the launch phase is over, planning and control become closely intertwined in an integral managerial process.

• Project control involves a regular comparison of performance against targets, a search for the causes of deviation and check adverse variances.

• Two major functions:– It ensures regular monitoring of performance.– It motivates project personnel to strive for achieving project objectives.

• Everything seems right till 90%.

• Control of projects in practice tends to be ineffective. Mostly due to:

– Characteristics of the project• Many projects are large, complex undertakings involving many organizations

and people.• Keeping track of physical performance and expenditure on hundreds or

thousands of activities which are often non-routine is a stupendous task.• Coordination and communication problems multiply when several

organizations are involved in the project.– People Problems

• To control non-routine project, a manager requires an ability to monitor a wide range of disparate factors, a sensitivity to symptoms indicative of potential problems, and a faculty of comprehending the combined effect of multiple forces.

• Lack of experience, training, competence and inclination tend to loss of control of the project.

– Poor Control and Information System• Delay in reporting performance: prevents effective monitoring of the project.• Inappropriate level of detail• Unreliable information: inaccurate and unreliable information as well as data

are major problems in project control.

Human Aspects of Project Management

• A satisfactory human relations system is essential for the successful execution of a project.

• Technical problems can often be solved with additional investment of resources, people’s problems may not be amenable to a satisfactory solution in the short span of the project life.

• To achieve satisfactory human relations in the project setting, the project manager must successfully handle problems and challenges relating to:

– Authority– Orientation– Motivation– Group functioning

• Authority– Except for divisional organization, the project manager lacks desired formal authority over project

related personnel.– Without conventional leverage the project manager has to coordinate the efforts of various

functional groups within and outside the organization.– For exercising authority and influence over other professional people, project manager has to

explain the logic and rationale of the project activities.– There is a need to develop rapport among other project personnel, therefore project manager must

have skills in resolving conflicts, excellent skills in communication and persuasion, ability to act as a buffer between technical, engineering, financial and commercial people involved in the project.

• Orientation– Most of the managers working for a project are usually have technical background (engineers etc.).

• Works with physical laws, characterized by mathematical precision as his/ her tools.• Adopts a structured, mechanical approach to the problems• Seeks an enduring solution to his problem.• Attaches a high value on technical perfection.

– When a technical person assumes managerial responsibilities, the orientation changes, now the manager needs to:

• Perform the tasks of planning, organizing, directing and controlling the resources of the firm in a world of uncertainty.

• Adopt a more creative approach to solve non-programmed and unstructured problems.• Attach greater importance to efficient utilization of resources and resolution of human relation problems.

– Therefore a project manager has to strengthen the managerial orientation of project personnel so that the project goals and objectives can be efficiently achieved within the time and budget constraints.

• Motivation– The project manager functions within the boundaries of a socio-

technical system. Most of the factors of the system needs to be handled by a project manager only.

– Motivating different project personnel is important. For this a project manager should bear in mind:

• Human beings are motivated by a variety of needs (Maslow hierarchy of needs). Individuals differ as per the level of need they are into and their attitudes are also affected by it.

• Traditional approach of management is that human beings regard work as unpleasant, shirk responsibility etc. This suggests that a great deal of pressure needs to be applied to make them work. Excess pressure should be avoided because beyond a certain point, pressure is dysfunctional.

• Motivation tends to be strong when the goals are challenging yet attainable. Too demanding goal will result in frustration and conflict. SMART goals.

• Expectation of reward rather than fear of punishment.• In a project setting where hygiene factors (pay, physical working conditions

etc.) are reasonably taken care of, principal motivators would be a sense of accomplishment and professional growth. More participative form of management should be applied by the project manager.

• Group Functioning– In a large, complex project, many persons are drawn from

different functions, departments and organizations are involved. This leads to formation of groups, formal and informal.

– Organizations may be considered as systems of interlocking groups.

– Vertical (different levels in same deptt.), horizontal (Different deptt. same level or hierarchy) and mixed groups.

– Building effective groups:• Development of mutual trust• Openness and candour in communication• Cooperation and supportive behaviour• Resolution of differences by mutual negotiation

project management- unit v

Education