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Project Planning and Control
Project Planning and
Control
Fourth Edition
Eur Ing Albert Lester, CEng, FICE, FIMechE,
FIStructE, FAPM
AMSTERDAM BOSTON HEIDELBERG LONDON NEW YORK OXFORD
PARIS SAN DIEGO SAN FRANCISCO SINGAPORE SYDNEY TOKYO
Elsevier Butterworth-Heinemann
Linacre House, Jordan Hill, Oxford OX2 8DP
200 Wheeler Road, Burlington MA 01803
First published by Butterworth & Co (Publishers) Ltd 1982
Second edition published by Butterworth-Heinemann 1991
Third edition 2000
Fourth edition 2003
Copyright © 1982, 1991, 2000, 2003, Elsevier Ltd. All rights reserved
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Preface to the fourth edition
Preface to the third edition
Preface to the second edition
Preface to the first edition
Foreword to the first edition
Acknowledgements
1 Project definition
2 Business case
3 Organization structures
4 Project life cycles
5 Work breakdown structures (WBS)
6 Estimating
7 Project management plan
8 Risk management
9 Quality management
10 Change and configuration management
11 Basic network principles
12 Precedence or activity on node (AoN) diagrams
13 Lester diagram
14 Float
15 Arithmetical analysis
16 Graphical analysis, milestones and LoB
17 Computer analysis
18 Simple examples
Contents
vii
xi
xv
xvii
xix
xxi
1
5
16
20
25
38
42
46
56
58
65
81
88
96
104
112
127
135
Contents
19 Progress reporting 147
20 The case for manual analysis 156
21 Subdivision of blocks 165
22 Project management and planning 172
23 Network applications outside the construction industry 181
24 Networks and claims 196
25 Resource loading 203
26 Cash flow forecasting 211
27 Cost control and EVA 220
28 Worked examples 256
29 Example of integration of tools and techniques 289
30 Hornet Windmill 312
31 MS Project 98 339
32 Project close-out 351
33 Stages and sequence 353
34 Abbreviations and acronyms used in project management 359
Glossary 363
Bibliography 371
Index 377
Preface to the fourth
edition
About a year ago I was asked by a firm of insurance loss adjusters to
investigate the possibility of reducing the anticipated overrun caused by an
explosion at a power station. Based on previous experience of similar
problems, I asked the contractors (a firm of international design and build
constructors) to let me examine the critical path network which formed the
basis of the computer-generated bar charts previously sent to the loss
adjusters. My objective was to see whether the original sequence of
construction activities could be rescheduled to mitigate the inevitable delays
caused by long lead times of replacements and in some cases redesign of the
damaged components.
To my dismay, I discovered that there was no network. The planners
inputted the data straight into the computer, based on very detailed established
modular packages. These packages contained the sequences, interrelationships
and durations of the constituent activities.
It is a fact that most commercial computer programs recommend such a
procedure. The planner can then see the program on the screen in bar chart
form as he/she proceeds, but will only obtain a network printout (in
precedence format) after the data has been processed. In other words the
network has become virtually redundant as it has not been used to develop the
structure of the project before the data was inputted.
This procedure turns network analysis on its head and does not give a
project team the ability to discuss and refine the interrelationships to give the
optimum results in terms of time and cost. The very act of communally
drafting and developing the network generates not only an understanding and
appreciation of the problems, but also enables the overall time to be reduced
to an acceptable level by maximizing parallel working without necessarily
Preface to the fourth edition
increasing resources and costs. It is for this reason that I have retained the
chapter setting out the case for manual analysis. Even in this age of the
universal use of the PC for just about every management and operational
function of an organization, the thinking process, i.e. the basic planning and
sequencing of a project cannot be left to a machine.
One of the by-products of computerization was the introduction of
precedence or AoN (activity on node) networks. These types of networks
seem to militate against manual drafting for large projects, because drawing
and filling in of the many node boxes is very time consuming, when compared
to the drafting of arrow or AoA (activity on arrow) diagrams.
However, the big advantage of the AoN diagram is the substitution of node
numbers by activity numbers. This clearly simplifies the numbering system
and enables activities to be added or changed without affecting the numbers
of the other activities. Indeed most computer programs add the activity
numbers automatically as the data is entered.
There is no reason therefore why a simplified form of AoN network cannot
be used in the manual drafting process to give the same benefit as an arrow
diagram. A selected number of the arrow (AoA) diagram examples given in
Chapters 12 and 18 have therefore been augmented by these simplified
precedence diagrams, in the hope that the important part of network analysis,
the initial drafting, will be carried out. Unfortunately the description of the
activities will have to be written into the nodes, which will usually reduce the
number of activities that can be accommodated on a sheet of paper when
compared with an arrow diagram. A ‘marriage’ of the two methods, called the
‘Lester’ diagram is given in Chapter 13.
At the time of writing, Earned Value Analysis (EVA) has still not been fully
embraced by certain sections of industry. One reason for this may be the jargon
associated with this technique. When we developed our own EVA system at
Foster Wheeler as far back as 1978 we used the simple terms of Actual Cost,
Planned Cost and Earned Value. Unfortunately the American CSCSC system
introduced such terms as ACWP, BCWS and BCWP which often generated
groans from students and rejection from practitioners. It is gratifying to note
therefore that the campaign to eradicate these abbreviations has prompted the
British Standards Institution and the Association for Project Management to give
prominence to the original English words. To encourage this welcome trend, the
terms used in EVA methods in this book are in English instead of jargon.
Since publication of the third edition, the APMP examination has
undergone a number of changes. In order to meet the new requirements for
Preface to the fourth edition
paper 2 of the examination, some new topics have been included in this
edition and a number of topics have been enhanced. However, no attempt has
been made to include the ‘soft’ topics such as team building and motivation,
which, while important, are really part of good general management and are
certainly not exclusive to project management.
A number of chapters have been rewritten and their order rearranged to
reflect as far as possible the sequence in which the various techniques are
carried out when managing a project.
A. Lester
Preface to the third edition
The shortest distance between two points is a straight line
Euclid
The longest distance between two points is a shortcut
Lester
The first two editions of this book dealt primarily with producing planning
networks and control systems for all types of projects, whether large or small,
complex or simple.
In the last two paragraphs of the second edition, reference was made to
other project management skills, emphasizing that planning and monitoring
systems were only part of the project manager’s armoury. The purpose of this
book, therefore, is to explain what some of these other parts are. It was not,
however, the intention to produce a comprehensive book on project
management, but merely to update the previous edition, adding such sections
as were considered to be more closely related to project management than
general management.
An examination of courses on project management will reveal that they
cover two types of skills:
1
Soft skills such as investment appraisal, communication, team selection,
team building, motivation, conflict management, meetings, configuration
management and quality management.
2
Hard skills such as project organization, project evaluation, project
planning, cost control, monitoring, risk management and change
management.
Preface to the third edition
As the first two editions already contained such hard skills as project planning
and cost control, it seemed logical to only add those skills which would
virtually turn the book into a Hard Skill Manual. This, it is hoped, will be of
maximum value to readers who have learnt the soft skills through past
experience or from the more general management courses including the
outward-bound management courses, so popular with up and coming
managers.
The original text has been updated where considered necessary, including
the list of the currently available project management software programs,
which are however being themselves updated constantly. One important
change is the substitution of the description of the Primavera P3 program by
the Hornet Windmill program. The reason for this change is that while
Primavera P3 is still an excellent project tool, the Hornet Windmill now
includes an integrated SMAC cost control system which can accept and print
both precedence and arrow diagrams and update progress on them directly and
automatically from the SMAC returns. Unfortunately, the stipulated book size
did not allow space for both, especially as the chapter on MS Project had to
be included, simply because after being ‘bundled’ with Microsoft Office, it is
now, despite its limitations, so widely used.
When the first edition was written in 1982, the use of arrow diagrams or
Activity on Arrow (AoA) diagrams was the generally used method of drafting
networks. By the time the second edition was published, precedence diagrams
or Activity on Node (AoN) diagrams were already well established, mainly
due to the proliferation of relatively inexpensive so called project management
computer programs. While AoN has a number of advantages over AoA,
it still has two serious drawbacks:
1 When producing the first draft of the network by hand, (something which
should always be done, especially on large projects), the AoN takes up
considerably more space and therefore restricts the size of network which
can be drawn on one sheet of A1 or A0 paper (the standard size of a CP
network).
2 When the network is subsequently reproduced by the computer, the links,
which are often drawn either horizontally or vertically to miss the node
boxes, are sometimes so close together, that they merge into a thick line
from which it is virtually impossible to establish where a dependency
comes from or where it goes. As tracing the dependencies is the heart of
network analysis, this reduces the usefulness of the network diagram.
Because of these disadvantages, the AoA method was generally retained for
this third edition, especially as the new ‘Lester’ diagram described in
Preface to the third edition
Chapter 2 enables the advantages of both the AoA and AoN configuration
to be combined to give the best of both worlds. After absorbing the
fascinating capabilities of the various computer programs, there is one
important message that the author would like to ‘bring across’. This is, that
in all cases the network should be roughed out manually with the project
team before using the computer. The thinking part of project planning
cannot be left to a machine.
A. Lester
Preface to the second
edition
It is nearly 10 years since the first edition of this book was published, so that
an update is long overdue. Many of the reviewers of the first edition expressed
the opinion that the author was more than a little antagonistic to computerized
networks. In that, they were absolutely correct. The book was written during
a period when mainframe machines were still largely used and micros had
only just arrived on the scene. The problems, delays and useless paper
disgorged by the mainframe computers nearly killed network analysis as a
project control tool. Indeed, several large companies abandoned the system
altogether. The book was therefore written to show that critical path methods
and computerization were not synonymous – indeed, compared to the time
taken by the laborious business of preparing input data sheets and punched
cards, the manual method of analysis was far quicker. No apologies are
therefore made for the first edition.
Now, however, the personal computer (PC) can be found in nearly all
planning offices and many sites. The punched card has been replaced by the
keyboard, the test printout by the VDU and the punchgirl by the planner
himself. In addition, specialist software houses have produed sophisticated
programs (frequently marketed as Project Management Systems) which
enable the planner or project manager to see at a glance the effect of a
proposed change in logic or time, and produce at the end a vast range of
ouptus in tabular, bar chart, pie chart or histogram format, often in colour.
It was necessary, therefore, to modify or (in some cases) completely rewrite
several chapters of this book to bring the text up to date. For that reason, it was
decided to describe one of the better-known computer programs in some
detail, but the danger with computer systems is that they get improved and
enhanced year after year, so that even the system described may be out of date
in its present form within a year of publication.
Preface to the second edition
The bulk of the book, however, is unaltered, since the principles have not
changed and an understanding of the basic rules is still necessary to appreciate
the usefulness of CPM. Equally, the author still believes that manual analysis
of a reasonably sized network when carried out by an experienced practitioner
is almost as fast as computerized analysis, and is not subject to power failure
or data loss!
Although the NEDO report partially reproduced in Chapter 8 dates back to
1976 when planning was still bedevilled by vast programs using mainframe
computers, its inclusion in this edition is still valid, since it shows, above all,
that simple planning techniques can be used successfully on even large
contracts. This statement is as true today as it was in the mid-1970s.
Reference is made in Chapter 4 to project management systems. These are,
of course, mainly computer based planning systems, and while planning is an
important part of project management it generally only takes up a small
proportion of the project manager’s time.
It is relatively easy to produce a program and a host of attractive and
informative computer print-outs, but the main task of a project manager is to
ensure that the planned dates are, in fact, met or nearly met. This involves a
combination of technical expertise, knowledge of construction techniques, the
ability to inspire the members of the project team, communication skills,
political and diplomatic ‘nous’ commercial and contractual experience, the
capacity to reach a decision from often conflicting ‘expert’ advice, and the
application of every known method of persuasion.
The planning and monitoring systems are therefore, only an aid – albeit an
important one – to the project manager.
A. Lester
Preface to the first edition
Critical path methods were first developed in 1958 almost simultaneously by
the CEGB in England and the US Navy and Du Ponts in the United States of
America.
Since then, critical path methods under the name of CPM, CPA and PERT
have been further developed and used successfully as planning aids in a large
number of construction and manufacturing organizations for diverse purposes,
all over the world.
As a management tool, especially in project management of large capital
construction projects, network techniques are unsurpassed, provided – and
this is a very important proviso – the activities have been arranged in a
logical, practical and easily identifiable manner by people who know the
disciplines and problems involved. Unfortunately, there are numerous
instances where contractors believe that by merely producing sophisticated
computer-analysed networks, they improve their control and increase the
chances of completing on time. The fallacy of this belief is borne out by
a recent report published by the National Economic Development Office
(NEDO) which compared, among other factors, the planning techniques on
eighteen construction sites in the UK, Europe and America. Extracts of this
report are given in Chapter 8.
It is always dangerous to isolate individual facets of a project from the
overall jigsaw of problems, and while it is obviously unrealistic to attribute all
successes or failures of a project to good or bad planning, there is no doubt
that planning has a considerable influence on the final result.
In areas where labour disputes are not the main cause of delay, good
planning has a direct effect on timely completion, since materials and
drawings arrive on site in good time, and the major construction sequences are
Preface to the first edition
analysed and firmed up in advance, so that the correct plant and adequate
manpower is at hand when required.
Where labour problems are the main disruptive factor, the indirect effect of
good planning is frequently overlooked, for if the materials, drawings and
access were available, bonuses could be achieved and labour unrest largely
avoided.
The NEDO report is of particular interest in that the conclusions reached
regarding planning are in line with the writer’s experience, i.e. the importance
of planning is generally accepted but the success of the planning effort is
enhanced by the speed of response and ease of comprehension, rather than the
size or sophistication of the network. If the basic network has been wrongly
conceived, all the analysis, whether manual or computerized, is just so much
waste of paper. Once an error has been found it can be fairly easily rectified
manually, but when a computer has been used, the prodigious volume of paper
that has – or is threatened – to be wasted could well deter a revision to the
network being carried out.
Most management courses run by Universities, Polytechnics, Management
Consultants, Industrial Training Boards or professional bodies incorporate at
least one session dealing with network analysis as a planning tool. However,
few of these courses can do more than introduce the student to the basic
principles and give him the opportunity to draw and analyse a few very small
networks either manually or by computer.
The object of this book is to develop the subject further with examples of
real situations showing the short cuts and pitfalls.
A. Lester
Foreword to the first
edition
by Geoffrey Trimble, Professor of Construction Management,
University of Technology, Loughborough
A key word in the title of this book is ‘control’. This word, in the context of
management, implies the observation of performance in relation to plan and
the swift taking of corrective action when the performance is inadequate. In
contrast to many other publications which purport to deal with the subject, the
mechanism of control permeates the procedures that Mr Lester advocates. In
some chapters, such as that on Manual and Computer Analysis, it is there by
implication. In others, such as that on Cost Control, it is there in specific
terms.
The book, in short, deals with real problems and their real solutions. I
commend it therefore both to students who seek to understand the subject and
to managers who wish to sharpen their performance.
Acknowledgements
The author and publishers would like to make acknowledgement to the
following for their help and cooperation in the preparation of this book.
The National Economic Development Office for permission to reproduce the
relevant section of their report ‘Engineering Construction Performance
Mechanical & Electrical Engineering Construction, EDC, NEDO December
1976’.
Foster Wheeler Power Products Limited for assistance in preparing the text
and manuscripts and permission to utilize the network diagrams of some of
their contracts.
Mr P. Osborne for assistance in producing some of the computerized
examples.
Claremont Controls Limited, Suite 43, Wansbeck Business Centre, Rotary
Parkway, Ashington, Northumberland NE63 8QZ, for the description and
diagrams of their Hornet Windmill project management software.
Microsoft Ltd. for permission to use some of the screen dumps of MS Project
98.
Extracts from BS 6079: 1996 are reproduced with the permission of BSI under
licence No. 2003DH0199. Complete editions of the standards are obtainable
by post from BSI Customer Services, 389 Chiswick High Road, London W4
4AL. Tel. 44(0)20 8996 9001.
WPMC for some of the diagrams.
Acknowledgements
A. P. Watt for permission to quote the first verse of Rudyard Kipling’s poem,
‘The Elephant’s Child’.
Daimler Chrysler for permission to use their diagram of the Mercedes-Benz
190 car.
Automobile Association for the diagram of an engine.
1 1
Project definition
Project definition
Many people and organizations have defined
what a project is, or should be, but probably the
most authoritative definition is that given in BS
6079 ‘Guide to Project Management’.
This states that a project is:
‘A unique set of co-ordinated activities,
with definite starting and finishing points,
undertaken by an individual or organization
to meet specific objectives within defined
schedule, cost and performance parameters.’
The next question that can be asked is ‘Why does
one need project management?’ What is the
difference between project management and
management of any other business or enterprise?
Why has project management taken off so
dramatically in the last twenty years?
The answer is that project management is
essentially management of change, while running
a functional or ongoing business is managing a
continuum or ‘business-as-usual’.
Project Planning and Control
Project management is not applicable to running a factory making sausage
pies, but it will be the right system when there is a requirement to relocate the
factory, build an extension, or produce a different product requiring new
machinery, skills, staff training and even marketing techniques.
As stated in the definition, a project has a definite starting and finishing
point and must meet certain specified objectives.
Broadly these objectives, which are usually defined as part of the business
case and set out in the project brief, must meet three fundamental criteria:
1 The project must be completed on time;
2 The project must be accomplished within the budgeted cost;
3 The project must meet the prescribed quality requirements.
These criteria can be graphically represented by the well-known project
triangle (Figure 1.1). Some organizations like to substitute the word ‘quality’
with ‘performance’, but the principle is the same – the operational
requirements of the project must be met, and met safely.
Figure 1.1
In certain industries like airlines, railways and mining etc. the fourth
criterion, safety, is considered to be equally, if not more important. In these
organizations, the triangle can be replaced by a diamond now showing the
four important criteria (Figure 1.2).
The order of priority given to any of these criteria is not only dependent on
the industry, but also on the individual project. For example, in designing and
constructing an aircraft, motor car or railway carriage, safety must be
paramount. The end product may cost more than budgeted, may be late in
going into service and certain quality requirements in terms of comfort may
Project definition
Figure 1.2
have to be sacrificed, but under no circumstances can safety be compromised.
Aeroplanes, cars and railways must be safe under all operating conditions.
The following (rather obvious) examples show where different priorities on
the project triangle (or diamond) apply.
Time bound project
A scoreboard for a prestigious tennis tournament must be finished in time for
the opening match, even if it costs more than anticipated and the display of
some secondary information, such as the speed of the service, has to be
abandoned. In other words, cost and performance may have to be sacrificed to
meet the unalterable starting date of the tournament.
(In practice, the increased cost may well be a matter of further negotiation
and the temporarily delayed display can usually be added later during the non-
playing hours.)
Cost bound project
A local authority housing development may have to curtail the number of
housing units and may even overrun the original construction programme, but
the project cost cannot be exceeded, because the housing grant allocated by
central government for this type of development has been frozen at a fixed
sum. Another solution to this problem would be to reduce the specification of
the internal fittings instead of reducing the number of units.
Performance (quality) bound project
An armaments manufacturer has been contracted to design and manufacture a
new type of rocket launcher to meet the client’s performance specification in
terms of range, accuracy and rate of fire. Even if the delivery has to be delayed
Project Planning and Control
to carry out more tests and the cost has increased, the specification must be
met. Again if the weapons were required during a war, the specification might
be relaxed to get the equipment into the field as quickly as possible.
Safety bound project
Apart from the obvious examples of public transport given previously, safety
is a factor that is required by law and enshrined in the Health & Safety at Work
Act.
Not only must safe practices be built into every project, but constant
monitoring is an essential element of a safety policy. To that extent it could be
argued that all projects are safety bound, since if it became evident after an
accident that safety was sacrificed for speed or profitability, some or all of the
project stakeholders could find themselves in real trouble, if not in jail.
A serious accident which may kill or injure people will not only cause
anguish among the relatives, but, while not necessarily terminating the
project, could very well destroy the company. For this reason the ‘S’ symbol
when shown in the middle of the project management triangle gives more
emphasis of its importance (see Figure 1.1).
It can be seen therefore that the priorities can change with the political or
commercial needs of the client even within the life cycle of the project, and
the project manager has to constantly evaluate these changes to determine the
new priorities. Ideally, all the main criteria should be met (and indeed on
many well-run projects, this is the case), but there are times when the project
manager, with the agreement of the sponsor or client, has to take difficult
decisions to satisfy the best interests of most, if not all, the stakeholders.
2 2
Business case
Before embarking on a project, it is clearly
necessary to show that there will be a benefit
either in terms of money or service or both. The
document which sets out the main advantages
and parameters of the project is called the
Business Case and is (or should be) produced by
either the client or the sponsor of the project who
in effect becomes the owner of the document.
A business case in effect outlines the ‘why’
and ‘what’ of the project as well as making the
financial case by including the investment
appraisal.
As with all documents, a clear procedure for
developing the business case is highly desirable
and the following headings give some indication
of the subjects to be included:
1 Why is the project required?
2 What are we trying to achieve?
3 What are the deliverables?
4 What is the anticipated cost?
5 How long will it take to complete?
6 What quality standards must be achieved?
7 What are the performance criteria?
8 What are Key Performance Indicators
(KPI)?
Project Planning and Control
9 What are the main risks?
10 What are success criteria?
12 Who are the main stakeholders?
In addition any known information such as location, key personnel, resource
requirements etc. should be included so that the recipients, usually a board of
directors, are in a position to accept or reject the case for carrying out the
project.
Investment appraisal
The investment appraisal, which is part of the business case, will, if properly
structured, improve the decision-making process regarding the desirability or
viability of the project. It should have examined all the realistic options before
making a firm recommendation for the proposed case. The investment
appraisal must also include a cost/benefit analysis and take into account all the
relevant factors such as:
Capital costs, operating costs, overhead costs
Support and training costs
Dismantling and disposal costs
Expected residual value (if any)
Any cost savings which the project will bring
Any benefits which cannot be expressed in monetary terms
To enable some of the options to be compared, the payback, return on capital,
net present value and anticipated profit must be calculated. In other words, the
project viability must be established.
Project viability
1 Return on investment (ROI)
The simplest way to ascertain whether the investment in a project is viable is
to calculate the return on investment (ROI).
If a project investment is .10 000, and gives a return of .2000 per year over
7 years,
(7 . .2000) – .10 000
the average return/year =
7
.4000
= = .571.4.
7
Business case
The return on the investment, usually given as a percentage, is the average
return over the period considered . 100, divided by the original investment,
i.e.
average return . 100
return on investment % =
investment
.571.4 . 100
= = 5.71%.
.10 000
This calculation does not, however, take into account the cash flow of the
investment which in a real situation may vary year by year.
2 Net Present Value
As the value of money varies with time due to the interest it could earn if
invested in a bank or other institution, the actual cash flow must be taken into
account to obtain a realistic measure of the profitability of the investment.
If .100 were invested in a bank earning an interest of 5%
The value in 1 year would be .100 . 1.05 = .105
The value in 2 years would be .100 . 1.05 . 1.05 = .110.25
The value in 3 years would be .100 . 1.05 . 1.05 . 1.05 = .115.76
It can be seen therefore that, today, to obtain .115.76 in 3 years it would cost
.100. In other words, the present value of .115.76 is .100.
Another way of finding the present value (PV) of .115.76 is to divide it by
1.05 . 1.05 . 1.05 or 1.157, for
115.76
115.76
= = .100.
1.05 . 1.05 . 1.05 1.157
If instead of dividing the .115.76 by 1.157, it is multiplied by the inverse of
1.157, one obtains the same answer, since
1
.115.76 . = .115.76 . 0.8638 = .100.
1.157
The 0.8638 is called the discount factor or Present Value Factor and can be
quickly found from discount factor tables, a sample of which is given in
Figure 2.1.
7
Table A Present value of .1
Years
Hence 1% 2% 4% 6% 8% 10% 12% 14% 15% 16% 18% 20% 22% 24% 25% 26% 28% 30% 35% 40% 45% 50%
1 ....
2 ....
3 ....
4 ....
5 ....
0.990
0.980
0.971
0.961
0.951
0.980
0.961
0.942
0.924
0.906
0.962
0.925
0.889
0.855
0.822
0.943
0.890
0.840
0.792
0.747
0.926
0.857
0.794
0.735
0.681
0.909
0.826
0.751
0.683
0.621
0.895
0.797
0.712
0.636
0.567
0.877
0.769
0.675
0.592
0.519
0.870
0.756
0.658
0.572
0.497
0.862
0.743
0.641
0.552
0.476
0.847
0.718
0.609
0.516
0.437
0.833
0.694
0.579
0.482
0.402
0.820
0.672
0.551
0.451
0.370
0.806
0.650
0.524
0.423
0.341
0.800
0.640
0.512
0.410
0.328
0.794
0.630
0.500
0.397
0.315
0.781
0.610
0.477
0.373
0.291
0.769
0.592
0.455
0.350
0.269
0.741
0.549
0.406
0.301
0.223
0.714
0.510
0.364
0.260
0.186
0.690
0.476
0.328
0.226
0.136
0.667
0.444
0.296
0.198
0.132
6 ....
7 ....
8 ....
9 ....
10 ....
0.942
0.933
0.923
0.914
0.905
0.888
0.871
0.853
0.837
0.820
0.790
0.760
0.731
0.703
0.676
0.705
0.665
0.627
0.592
0.558
0.630
0.583
0.540
0.500
0.463
0.564
0.513
0.467
0.424
0.386
0.507
0.452
0.404
0.361
0.322
0.456
0.400
0.351
0.308
0.270
0.432
0.376
0.327
0.284
0.247
0.410
0.354
0.305
0.263
0.227
0.370
0.314
0.266
0.225
0.191
0.335
0.279
0.233
0.194
0.162
0.303
0.249
0.204
0.167
0.137
0.275
0.222
0.179
0.144
0.116
0.262
0.210
0.168
0.134
0.107
0.250
0.198
0.157
0.125
0.099
0.227
0.178
0.139
0.108
0.085
0.207
0.159
0.123
0.094
0.073
0.165
0.122
0.091
0.067
0.050
0.133
0.095
0.068
0.048
0.035
0.108
0.074
0.051
0.035
0.024
0.088
0.059
0.039
0.026
0.017
11 ....
12 ....
13 ....
14 ....
15 ....
0.896
0.887
0.879
0.870
0.861
0.804
0.788
0.773
0.758
0.743
0.650
0.625
0.601
0.577
0.555
0.527
0.497
0.469
0.442
0.437
0.429
0.397
0.368
0.340
0.345
0.350
0.319
0.290
0.263
0.239
0.287
0.257
0.229
0.205
0.183
0.237
0.208
0.182
0.160
0.140
0.215
0.187
0.163
0.141
0.123
0.195
0.168
0.145
0.125
0.108
0.162
0.137
0.116
0.099
0.084
0.135
0.112
0.093
0.078
0.065
0.112
0.092
0.075
0.062
0.051
0.094
0.076
0,061
0.049
0.040
0.086
0.069
0.055
0.044
0.035
0.079
0.062
0.050
0.039
0.031
0.066
0.052
0.040
0.032
0.025
0.056
0.043
0.033
0.025
0.020
0.037
0.027
0.020
0.015
0.011
0.025
0.018
0.013
0.009
0.005
0.017
0.012
0.008
0.006
0.004
0.012
0.008
0.005
0.003
0.002
16 ....
17 ....
18 ....
19 ....
20 ....
0.853
0.844
0.836
0.828
0.820
0.728
0.714
0.700
0.686
0.673
0.534
0.523
0.494
0.475
0.456
0.394
0.371
0.350
0.331
0.312
0.292
0.270
0.250
0.232
0.215
0.218
0.198
0.180
0.164
0.149
0.163
0.146
0.130
0.116
0.104
0.123
0.108
0.095
0.083
0.073
0.107
0.093
0.081
0.070
0.061
0.093
0.080
0.069
0.060
0.051
0.071
0.060
0.051
0.043
0.037
0.054
0.045
0.038
0.031
0.026
0.042
0.034
0.028
0.023
0.019
0.032
0.026
0.021
0.017
0.014
0.028
0.023
0.018
0.014
0.012
0.025
0.020
0.016
0.012
0.010
0.019
0.015
0.012
0.009
0.007
0.015
0.012
0.009
0.007
0.005
0.008
0.006
0.005
0.003
0.002
0.005
0.003
0.002
0.002
0.001
0.003
0.002
0.001
0.001
0.001
0.002
0.001
0.001
21 ....
22 ....
23 ....
24 ....
25 ....
0.811
0.803
0.795
0.788
0.780
0.660
0.647
0.634
0.622
0.610
0.439
0.422
0.406
0.390
0.375
0.294
0.278
0.262
0.247
0.235
0.199
0.184
0.170
0.158
0.146
0.135
0.123
0.112
0.102
0.092
0.095
0.083
0.074
0.066
0.059
0.064
0.056
0.049
0.043
0.038
0.053
0.046
0.040
0.035
0.030
0.044
0.038
0.035
0.028
0.024
0.031
0.026
0.022
0.019
0.016
0.022
0.018
0.015
0.013
0.010
0.015
0.013
0.010
0.008
0.007
0.011
0.009
0.007
0.006
0.005
0.009
0.007
0.006
0.005
0.004
0.008
0.006
0.005
0.004
0.003
0.006
0.004
0.005
0.003
0.002
0.004
0.003
0.002
0.002
0.001
0.002
0.001
0.001
0.001
0.001
0.001
0.001
26 ....
27 ....
28 ....
29 ....
30 ....
0.772
0.764
0.757
0.749
0.742
0.598
0.586
0.574
0.563
0.552
0.361
0.347
0.333
0.321
0.308
0.220
0.207
0.196
0.185
0.174
0.135
0.125
0.116
0.107
0.099
0.084
0.076
0.069
0.063
0.057
0.053
0.047
0.042
0.037
0.033
0.033
0.029
0.026
0.022
0.025
0.026
0.023
0.020
0.017
0.015
0.021
0.018
0.016
0.014
0..012
0.014
0.011
0.010
0.008
0.007
0.009
0.007
0.006
0.005
0.004
0.006
0.005
0.004
0.003
0.003
0.004
0.003
0.002
0.002
0.002
0.003
0.002
0.002
0.002
0.001
0.002
0.002
0.002
0.001
0.001
0.002
0.001
0.001
0.001
0.001
0.001
0.001
0.001
0.001
40 .... 0.672 0.453 0.208 0.097 0.046 0.022 0.011 0.005 0.004 0.003 0.001 0.001
50 .... 0.608 0.372 0.241 0.054 0.021 0.009 0.005 0.004 0.001 0.001
Figure 2.1
Business case
It will be noticed from these tables that 0.8638.5 is the PV factor for a 5%
return after 3 years. The PV factor for a 5% return after 2 years is 0.9070 or
1 1
= = 0.9070.
1.05 . 1.05 1.1025
In the above example the income (5%) was the same every year. In most
projects, however, the projected annual net cash flow (income minus
expenditure) will vary year by year and to obtain a realistic assessment of the
Net Present Value (NPV) of an investment, the net cash flow must be
discounted separately for every year of the projected life.
The following example will make this clear.
Year Income Discount Discount NPV
. rate factor .
1 10 000 5% 1/1.05 = 0.9523 10 000 . 0.9523 = 9 523.8
2 11 000 5% 1/1.052 = 0.9070 10 000 . 0.9070 = 9 070.3
3 12 000 5% 1/1.053 = 0.8638 12 000 . 0.8638 = 10 365.6
4 12 000 5% 1/1.054 = 0.8227 12 000 . 0.8227 = 9 872.4
Total 45 000 39 739.1
One of the main reasons for finding the NPV is to be able to compare the
viability of competing projects or different repayment modes. Again an
example will demonstrate the point.
A company decides to invest .12 000 for a project which is expected to give
a total return of .24 000 over the 6 years. The discount rate is 8%.
There are two options of receiving the yearly income.
1 .6000 for years 1 & 2 = .12 000 2 .5000 for years 1, 2, 3 & 4 = .20 000
.4000 for years 2 & 3 = .8000 .2000 for years 5 & 6 = .4000
.2000 for years 5 & 6 = .4 000
Total .24 000 .24 000
The DCF method will quickly establish which is the most profitable option to
take as will be shown in the following table.
Project Planning and Control
Year Discount
factor
Cash flow A
.
NPV A
.
Cash flow B
.
NPV B
.
1
2
3
4
5
6
Total
1/1.08 = 0.9259
1/1.082 = 0.8573
1/1.083 = 0.7938
1/1.084 = 0.7350
1/1.085 = 0.6806
1/1.086 = 0.6302
6 000
6 000
4 000
4 000
2 000
2 000
24 000
5 555.40
5 143.80
3 175.20
2 940.00
1 361.20
1 260.40
19 437.00
5 000
5 000
5 000
5 000
2 000
2 000
24 000
4 629.50
4 286.50
3 969.00
3 675.00
1 361.20
1 260.40
19 181.50
Clearly A gives the better return and after deducting the original investment
of .12 000, the net discounted return for A = .7437.00 and for B =
.7181.50.
The mathematical formula for calculating the NPV is as follows:
If NPV = Net Present Value
r = the interest rate
n = number of years the project yields a return
B1, B2, B3 etc. = the annual net benefits for years 1, 2 and 3 etc.
NPV for year 1 = B1/(1 + r)
for year 2 = B1/(1 + r) + B2/(1 + r)2
for year 3 = B1/(1 + r) + B2/(1 + r)2 + B3/(1 + r)3 and so on
If the annual net benefit is the same for each year for n years, the formula
becomes
NPV = B/(1 + r)n
As explained previously, the discount rate can vary year by year, so that the
rate relevant to the year for which it applies must be used when reading off the
discount factor table.
Two other financial calculations need to be carried out to enable a realistic
decision to be taken as to the viability of the project.
3 Payback
Payback is the period of time it takes to recover the capital outlay of the
project, having taken into account all the operating and overhead costs during
10
Business case
this period. Usually this is based on the undiscounted cash flow. A knowledge
of the payback is particularly important when the capital must be recouped as
quickly as possible as would be the case in short-term projects or projects
whose end products have a limited appeal due to changes in fashion,
competitive pressures or alternative products. Payback is easily calculated by
summating all the net incomes until the total equals the original investment,
e.g. if the original investment is .600 000, and the net income is .75 000 per
year for the next ten years, the payback is .600 000/.75 000 = 8 years.
4 Internal Rate of Return (IRR)
It has already been shown that the higher the discount rate (usually the cost of
borrowing) of a project, the lower the Net Present Value (NPV). There must
therefore come a point at which the discount rate is such that the NPV
becomes zero. At this point the project ceases to be viable and the discount
rate at this point is the Internal Rate of Return (IRR). In other words it is the
discount rate at which the NPV is 0.
While it is possible to calculate the IRR by trial and error, the easiest
method is to draw a graph as shown in Figure 2.2.
The horizontal axis is calibrated to give the discount rates from 0 to any
chosen value, say 20%. The vertical axis represents the NPVs which are +
above the horizontal axis and – below.
Discount rate
%
IRR %
Figure 2.2 Internal Rate of Return (IRR) graph
Project Planning and Control
By choosing two discount rates (one low and one high) two NPVs can be
calculated for the same envisaged net cash flow. These NPVs (preferably one
+ve and one –ve) are then plotted on the graph and joined by a straight line.
Where this line cuts the horizontal axis, i.e. where the NPV is zero, the IRR
can be read off.
The basic formulae for the financial calculations are given in Figure 2.3.
Investment appraisal definitions
NPV (Net Present Value) = Summation of PV’s – Original Investment
Net Income = Incoming moneys – Outgoing moneys
Payback Period = No. of years it takes for Net Income to
equal Original Investment
Profit = Total Net Income – Original Investment
Total Net Income
Average Return/Annum =
No. of years
Average Return . 100
Return on Investment % =
Investment
=
Net Income . 100
No. of years . Investment
IRR (Internal Rate of Return) = % Discount Rate for NPV = 0
Cost/benefit analysis
Once the cost of the project has been determined, an analysis has to be carried
out which compares these costs with the perceived benefits. The first cost/
benefit analysis should be carried out as part of the business case investment
appraisal, but in practice such an analysis should really be undertaken at the
end of every phase of the life cycle to ensure that the project is still viable. The
phase interfaces give management the opportunity to proceed with, or
alternatively, abort the project if there is an unacceptable escalation in costs or
a diminution of the benefits due to changes in market conditions such as a
reduction in demand caused by political, economic, climatic, demographic or
a host of other reasons.
It is relatively easy to carry out a cost/benefit analysis where there is a
tangible deliverable producing a predictable revenue stream. Provided there is
Business case
an acceptable NPV, the project can usually go ahead. However, where the
deliverables are intangible, such as better service, greater customer satisfaction,
lower staff turnover, higher staff morale etc., there may be considerable
difficulty in quantifying the benefits. It will be necessary in such cases to run
a series of tests and reviews and assess the results of interviews and staff
reports.
Similarly while the cost of redundancy payments can be easily calculated,
the benefits in terms of lower staff costs over a number of years must be
partially offset by lower production volume or poorer customer service.
Where the benefits can only be realized over a number of years, a benefit
profile curve as shown in Figure 2.3 should be produced, making due
allowance for the NPV of the savings.
Figure 2.3
The following lists some of the benefits which have to be considered, from
which it will be apparent that some will be very difficult to quantify in
monetary terms.
Financial
Statutory
Economy
Risk reduction
Productivity
Reliability
Staff morale
Cost reduction
Project Planning and Control
Safety
Flexibility
Quality
Delivery
Social
Stakeholder analysis
Almost anyone associated with a project can be termed a stakeholder. It is
important therefore for the project manager to analyse this list of stakeholders
and as far as possible categorize them into two main groups:
1 Direct stakeholders
This group includes the sponsor, client, project manager, the project team,
construction or installation team, contractors and subcontractors, suppliers,
consultants etc. In other words people or organizations directly involved or
have a vested interest in all or some of the various phases of the project.
2 Indirect stakeholders
This group includes the support staff of an organization such as the accounts
department, HR department, secretariat, management levels not directly
involved in the project, environmental and political pressure groups and of
course the families of the members of the project team and construction/
installation team. On environmentally sensitive projects, the general public
could be termed as indirect stakeholders.
Each group can then be split further into positive and negative
stakeholders.
Positive stakeholders are concerned with the design and implementation of
the project with the object of completing the project within the specified
parameters of time, cost and quality/performance. They therefore include the
sponsor, project manager and the project and construction/installation teams.
Negative stakeholders are those who either try to modify or delay the project
or indeed prevent it from even starting. These are usually environmental or
political pressure groups, trade unions or sections of the media who, though
they may seen to be disruptive, must nevertheless be considered and given an
opportunity to state their case. In some situations, statutory/regulatory
authorities or even government agencies who have the power to issue or
14
Business case
withhold permits, access, wayleaves or other consents can be considered as
negative stakeholders. The negotiations with such organizations and the
subsequent agreements reached are an essential part of stakeholder analysis, but
it must be borne in mind that any compromises reached must be approved by the
client or sponsor.
All stakeholders, whether positive or negative, must be analysed to assess
their contribution, influence or disruptive capabilities on the project and this
will help the project manager to prioritize their needs and decide whether they
should be embraced or treated with caution. Diplomacy and tact are essential
when negotiating with potentially disruptive organizations and it is highly
advisable to enlist experts in the discussion process. Most large organizations
employ labour and public relations experts as well as lawyers well versed in
dealing with difficult stakeholders and their services can be of enormous help
to the project manager.
3 3
To manage a project, a company or authority has
to set up a project organization, which can supply
the resources for the project and service it during
its life cycle.
Organization structures
There are three main types of project organizations:
1 Functional;
2 Matrix;
3 Project or task force.
Functional organization
This type of organization consists of specialist or
functional departments each with their own
departmental manager responsible to one or more
directors. Such an organization is ideal for
routine operations where there is little variation
of the end product. Functional organizations are
usually found where items are mass produced,
whether they are motor cars or sausages. Each
department is expert at its function and the
interrelationship between them is well established.
In this sense a functional organization is
not a project-type organization at all and is only
included because when small, individual, one-off
projects have to be carried out, they may be given
Organization structures
to a particular department to manage. For projects of any reasonable size or
complexity, it will be necessary to set up one of the other two types of
organizations.
Matrix organization
This is probably the most common type of project organization, since it
utilizes an existing functional organization to provide the human resources
without disrupting the day-to-day operation of the department.
The personnel allocated to a particular project are responsible to a project
manager for meeting the three basic project criteria, time, cost and quality.
The departmental manager is, however, still responsible for their ‘pay and
rations’ and their compliance with the department’s standards and procedures,
including technical competence and conformity to company quality standards.
The members of this project team will still be working at their desks in their
department, but will be booking their time to the project. Where the project
does not warrant a full-time contribution, only those hours actually expended
on the project will be allocated to it.
The advantages of a matrix organization are:
1 Resources are employed efficiently, since staff can switch to different
projects if held up on any one of them;
2 The expertize built up by the department is utilized and the latest state-ofthe-
art techniques are immediately incorporated;
3 Special facilities do not have to be provided and disrupting staff movements
are avoided;
4 The career prospects of team members are left intact;
5 The organization can respond quickly to changes of scope;
6 The project manager does not have to concern himself with staff problems.
The disadvantages are:
1 There may be a conflict of priorities between different projects;
2 There may be split loyalties between the project manager and the
departmental manager due to the dual reporting requirements;
3 Communications between team members can be affected if the locations of
the departments are far apart;
4 Executive management may have to spend more time to ensure a fair
balance of power between the project manager and the department
manager.
Project Planning and Control
All the above problems can, however, be resolved if there is a good working
relationship between the project manager and the department heads. At times
both sides may have to compromize in the interests of the organization as a
whole.
Project organization (task force)
From a project manager’s point of view this is the ideal type of project
organization, since with such a set up he has complete control over every aspect
of the project. The project team will usually be located in one area which can be
a room for a small project or a complete building for a very large one.
Lines of communication are short and the interaction of the disciplines
reduces the risk of errors and misunderstandings. Not only are the planning
and technical functions part of the team but also the project cost control and
project accounting staff. This places an enormous burden and responsibility
on the project manager, who will have to delegate much of the day-to-day
management to special project coordinators whose prime function is to ensure
a good communication flow and timely receipt of reports and feedback
information from external sources.
On large projects with budgets often greater than .0.5 billion, the project
manager’s responsibilities are akin to those of a managing director of a
medium-size company. Not only is he concerned with the technical and
commercial aspects of the project, but has also to deal with the staff, financial
and political issues, which are often more difficult to delegate.
Types of organization
Managing
director
Functional
heads
Managing
director
Programme
manager
Project
1
Project
2
Project
3
Managing
director
DirectorProgramme
manager
Project 1 Resources
Project 2
Project 3
Resources
Resources
Functional Project Matrix
Figure 3.1
Organization structures
There is no doubt that for large projects a task force type of project
organization is essential, but as with so many areas of business, the key to
success lies with the personality of the project manager and his ability to
inspire the project team to regard themselves as personal stakeholders in the
project.
One of the main differences between the two true project organizations
(matrix and task force) and the functional organization is the method of
financial accounting. For the project manager to retain proper cost control
during the life of the project, it is vital that a system of project accounting is
instituted, whereby all incomes and expenditures, including a previously
agreed overhead allocation and profit margin, are booked to the project as if
it were a separate self-standing organization. The only possible exceptions are
certain corporate financial transactions such as interest payments on loans
taken out by the host organization and interest receipts on deposits from a
positive cash flow.
Figure 3.1 shows a diagrammatic representation of the three basic project
management organizations, Functional, Project (or Task Force) and Matrix.
4 4
Project life cycles
Most, if not all, projects go through a life cycle
which varies with the size and complexity of the
project. On medium to large projects the life
cycle will generally follow the pattern which has
been set out in BS 6079. This is:
1 Concept Basic ideas, business case,
statement of requirements,
scope;
2 Feasibility Tests for technical, commercial
and financial viability,
technical studies, investment
appraisal, DCF etc.;
3 Evaluation Application for funds, stating
risks, options, TCQ criteria;
4 Authorization Approvals, permits, conditions,
project strategy;
5 Implementation Development design, procurement,
fabrication,
installation, commissioning;
6 Completion Performance tests, hand-
over to client, post project
appraisal;
7 Operation Revenue earning period,
production, maintenance;
8 Termination Close-down, decommissioning,
disposal.
Project life cycles
Items 7 and 8 are not usually included in a project life cycle where the project
ends with the issue of an acceptance certificate after the performance tests
have been successfully completed. Where these two phases are included, as,
for example, with defence projects, the term ‘extended project life cycle’ is
often used.
The project life cycle of an IT project may be slightly different as the
following list shows:
1 Feasibility Definition, cost benefits, acceptance criteria, time and
cost estimates;
2 Evaluation Definitions of requirements, performance criteria,
processes;
3 Function Functional and operational requirements, interfaces,
system design;
4 Authorization Approvals, permits, firming up procedures;
5 Design and build Detail design, system integration, screen building,
documentation;
6 Implementation Integration and acceptance testing, installation,
training;
7 Operation Data loading, support set-up, hand-over.
Running through the period of the life cycle are control systems and
decision stages at which the position of the project is reviewed. The
interfaces of the phases of the life cycle form convenient milestones for
progress payments and reporting progress to top management, who can then
make the decision to abort or provide further funding. In some cases the
interface of the phases overlap, as in the case of certain design and construct
contracts, where construction starts before the design is finished. This is
known as concurrent engineering and is often employed to reduce the
overall project programme.
As the word ‘cycle’ implies, the phases may have to be amended in terms
of content, cost and duration as new information is fed back to the project
manager and sponsor. Projects are essentially dynamic organizations which
are not only specifically created to effect change, but are also themselves
subject to change.
On some projects it may be convenient to appoint a different project
manager at a change of phase. This is often done where the first four stages
are handled by the development or sales department, who then hand the
Project Planning and Control
project over to the operations department for the various stages of the
implementation, and completion phases.
When the decommissioning and disposal is included, it is known as an
extended life cycle, since these two stages could occur many years after
commissioning and could well be carried out by a different organization.
Figure 4.1 shows three typical life cycles prepared by three different
organizations. The first example from BS 6079 is a very simple generic life
cycle consisting of only five basic phases. Some of these phases are
subdivided in the next (APM) life cycle where ‘implementation’, shown in BS
6079, has been replaced by ‘design, contract & implementation’. The third life
cycle shown as formulated by the Ministry of Defence clearly shows the
phases required for a typical weapons system, where concept, feasibility and
project definition are the responsibility of the MoD, design, development and
production are carried out by the manufacturer, and in-service and disposal are
the phases when the weapon is in the hands of the armed forces.
Figure 4.1
The diagram also shows a calendar scale over the top. While this is not
strictly necessary, it can be seen that if the lengths of the bars representing the
phases are drawn proportional to the time taken by the phases, such a
presentation can be used as a high level reporting document, showing which
Project life cycles
Shutdown
Handover
Authorization
Termination
Operation
Realization
Feasibility
Conception
Phases
Figure 4.2 Project management life cycle
Milestones
phases are complete or partially complete in relation to the original
schedule.
The important point to note is that each organization should develop its own
life cycle diagram to meet its particular needs. Where the life cycle covers all
the phases from cradle to grave as it were, it is often called a programme life
cycle, since it spans over the full programme of the deliverable. The term
project life cycle is then restricted to those phases which constitute a project
within the programme, e.g. the design, development and manufacturing
periods.
Figure 4.2 shows how decision points or milestones (sometimes called
trigger points or go, no-go gates) relate to the phases of a life cycle.
Figure 4.3 shows how the life cycle of the MoD project shown in Figure 4.1
could be split into the Project life cycle, i.e. the phases under the control of the
Project Team (conception to production), the Product life cycle, the phases of
Figure 4.3 Life cycle of MoD project
Project Planning and Control
interest to the sponsor, which now includes the in-service performance, and
lastly the Extended life cycle, which includes disposal. From the point of view
of the contractor, the Project life cycle may only include design and
development and production. It can be seen therefore that there are no hard
and fast rules where the demarcation points are as each organisation will
define its own phases and life cycles to suit its method of working.
5 5
Work breakdown
structures (WBS)
Before any meaningful programme can be produced,
it is essential that careful thought is given
to the number and size of networks required. Not
only is it desirable to limit the size of network,
but each ‘block’ of networks should be considered
in relation to the following aspects:
1 The geographical location of the various
portions or blocks of the project;
2 The size and complexity of each block;
3 The systems in each block;
4 The process or work being carried out in the
block when the plant is complete;
5 The engineering disciplines required during
the design and construction stage;
6 The erection procedures;
7 The stages at which individual blocks or
systems have to be completed, i.e. the con
struction programme;
8 The site organization envisaged;
9 Any design or procurement priorities.
For convenience, a block can be defined as a
geographical process area within a project,
which can be easily identified, usually because it
serves a specific function. The importance of
Project Planning and Control
choosing the correct blocks, i.e. drawing the demarcation lines in the most
advantageous way, cannot be overemphasized. This decision has an effect not
only on the number and size of planning networks but also on the organization
of the design teams and, in the case of large projects, on the organizational
structure of the site management set-up.
Because of its importance, a guide is given below which indicates the type
of block distribution which may be sensibly selected for various projects. The
list is obviously limited, but it should not be too difficult to abstract some firm
guidelines to suit the project under consideration.
1 Pharmaceutical factory
Block A Administration block (offices and laboratories)
Block B Incoming goods area,