Tag: Cost Control and Management Accounting Osmania University b.com Notes

Project termination is one of the most serious decisions a project management team and its control board have to take. It causes frustration for those stakeholders who sincerely believed and in most cases still believe that the project could produce the results they expected, or still expect. The project manager and his or her team members, very important stakeholders of the project as well, will feel that they personally failed. They also will be scared of negative consequences for their careers; their motivation and consequently, productivity will decrease significantly.

Reason for Termination:

• Technical reasons
• Requirements or specifications of the project result are not clear or unrealistic
• Requirements or specifications change fundamentally so that the underlying contract cannot be changed accordingly
• Lack of project planning, especially risk management
• The intended result or product of the project becomes obsolete, is not any longer needed
• Adequate human resources, tools, or material are not available
• The project profit becomes significantly lower than expected, due to too high project cost or too low project revenue
• The parent organization does not longer exist
• The parent organization changes its strategy, and the project does not support the new strategy
• Force majeure (e.g. earthquake, flooding, etc.)
• Necessary conditions disappear
• Lack of management support
• Lack of customer support

To Avoid:

• A clearly communicated strategy of the organization.
• Clearly communicated reasons why and how the project supports that strategy, and under what conditions it does not.
• Clearly set and communicated project success criteria (in terms of scope, schedule, and budget), if possible, clearly set and communicated termination criteria.
• High level management attention, even for smaller projects, and even then, when everything still seems to be on track.
• Periodical review meetings with the control board.
• Open discussions with the control board about problems and possible solutions or alternatives, including termination.
• In case the project has to be terminated, a clear commitment of the control board and high-level management towards the project management team in order to enable the team to follow the project closure procedures.
• Upon successful termination, similar rewards and incentives for the project manager and his or her team as with regular project closure.

Reasons for Termination of Projects

Your competitors are doing a better job

As a project manager, you may be motivated to prove your mettle and take your company ahead in the market, but think logically and determine if it is possible. Many a times, you may be motivated at the start of the project but once you begin with it and have to face grave challenges one after another, the positive drive may fizzle out and you may be left with a project that is going nowhere. Even if you realize it midway on the project, do not hesitate to pull the plug.

Expensive or does not meet company’s goal

Make an estimate of the total cost of the project in the planning stage itself. A few thousand dollars here and there are manageable, but when you see the figure going way over your approximate value, it is better to put an end to the project right in the initiation stage. Also, if the project does not go well with the strategic plan of the company, it should not be given the green signal.

Project gets out of control

When operations get way beyond control or when damages cannot be repaired anymore, you know it is time to terminate the project.

Failure in testing process

It is sad to see a project fail during testing. However, if the team members gave it all that they could and the project still could not succeed, putting an end to the project is a sensible choice rather than spending twice the energy and resources on it again.

Important or priority project comes up

Businesses take up several projects simultaneously. However, there are some projects which need more time, energy and resources. If a certain project is stopping you from allocating the required resources in a bigger, important project, it is better to let go of the smaller project.

Process for Terminating Projects

Confirm work is done as per the requirements

Once the project is closing, all deliverables of the project must have been completed and delivered to the customer. You should also take formal acceptance of the customer for the completed work.

Complete procurement closure

Since the project is closing, you should complete any remaining payments that need to be made to the suppliers or partners. The procurement steps are also completed.

Gain formal acceptance

Formal acceptance of the project and project deliverables are taken from the customer. Usually, the customer presents a written document, it can be an email or a signed off document, which states that the project has been completed and they accept the outputs of the project.

Complete final performance reporting

The final performance of the project is calculated and recorded. These include cost performance, schedule performance, quality performance etc. For instance, whether the project has been completed under budget or if it could not be completed, how much did the project exceeded the planned budget?

Index and archive records

Collected documents are finalized. Final versions of the project management plans and all necessary documents about the project are archived in the company records.

Update lessons learned

Lessons learned is collected and gathered from all stakeholders. Lessons learned documentation is stored in the organizational process assets of the company.

Hand-off completed product

Once the project is completed, the product of the project is handed over for the use of the end customer. The handover may need a predetermined period of assistance or some documents describing how to use or how to operate with the product.

Release the resources

After the project is completed successfully, all assignments of the project resources are closed, lessons learned inputs from the project resources are collected and then these resources are released respectively.

As you see, the project closure is also as important as the other phases, so you must take these activities into consideration for better outcomes in your next projects.

Project auditing can be defined as the process of detailed inspection of the management of a project, its methodology, its techniques, its procedures, its documents, its properties, its budgets, its expenses and its level of completion.

A project audit is a key step in the process of closing a project. This audit evaluates the total project processes and outcomes. In this chapter we discussed the purpose of evaluation and the various measurement parameters used in a project audit. We also discussed the life-cycle of a project audit.

The life cycle of an audit contains six phases: audit initiation, project baseline definition, establishing a database, preliminary project analysis, preparing final report and terminating the project.

Major Goals of an Audit

1. The caliber of services and products are ensured

A project audit functions as a good guarantee application. It evaluates the task living cycle analyzing the outcomes yielded throughout the various phase, out of the look stage to setup.

When going over the style stage, a project audit reviews the concepts of the design, which includes the evaluation of alternate styles.

Also, it’s evaluated if the answer is prepared for the pilot check and lastly, throughout the setup evaluation, the review assesses as well as confirms the setup in every site in which the item is followed.

The classification of the errors over the method plays a role in the declaration of the issues and also to comprehend whether the task ought to go on by way of a go/no-go choice at every point.

2. Task management quality check

A project audit determines if the project management fulfills the requirements by evaluating whether or not it is fully compliant together with the organization’s policies, procedures, and processes. It further reviews the strategy utilized to simply help determine spaces to be able to expose the necessary enhancements.

3. Company risk identification

Audits help to identify the risk factors due to the company policy which may impact the quality, environment, time, and budget.

The review further assesses the feasibility of the task of the terminology of performance and affordability by offering transparency as well as evaluating resources, time, and costs.

4. Performance improvement

Keeping track of different phases of the Project Management Life Cycle can help the enhancement of the team’s efficiency.

The review additionally enables you to boost your finances as well as source allocation. Determining goals, preventive actions and corrective measures can result in an optimistic task result.

The troubleshooting procedure enables the team to offer answers and also aids in preventing problems that may recur down the road.

5. Learning

One can learn from experience with the help of the audit process as well as from the feedback obtained. Thus, the team can contemplate their very own performance.

Types of Project Audit in Project Management

Undertaking an audit isn’t the very best of occasions for any PM without having a clear overview of the numerous kinds of audits listed in the PMBOK.

Normal Audit

This is called even simply’ an audit’ which is an element of Monitoring as well as the Controlling method team. It’s additionally called Inspection as it’s essentially a QC operation. Assessment is completed after the item is built.

Quality Audit

This is included in the execution procedure and is a critical review of the project. They find out whether the team follows the business’s process.

Risk Audit

These audits are included in the Monitoring as well as the Controlling team. These assist with total procedure advancement. Here you can additionally audit as well as evaluate the usefulness of the project risk management process as a whole.

Procurement Audit

The procurement Audit is an element of the Closing procedure team. As a component of procurements closure, an organized general comment flushes away concerns, sets up instructions mastered, ensures troubles are solved for succeeding tasks as well as identifies positive results as well as problems which justify transfer to various other procurements.

Audit policies and activation procedures

In order to achieve the benefits expected from a project audit, each stage, element and outcome of the audit process must be clearly set out and openly disclosed, including:

Audit mission statement: This document should clearly define the purposes, objectives, authority and limits of the audit operation, as well as the type of audits to be conducted.

Specification of audit competencies: A detailed specification of the auditor’s skills and experience, showing that the audit staff possess adequate expertise to audit the project.

Roles and responsibilities of the actors involved: A detailed statement of all the roles and responsibilities covered by the audit, both for the person conducting the audit and for the project team; including the project manager, team members, project sponsors, clients and any stakeholder.

‘Trigger’ audit criteria: A complete list of all the criteria on the basis of which projects will be selected for an audit. It would be too costly and time-consuming and would defeat the purpose of the audit process itself. Thus, specific criteria should be established to identify projects to be audited on the basis of risk, complexity, internal value, costs, etc.

Audit start procedures: A description of the procedures for the initiation of the audit, including the process by which individual project managers are informed of an outstanding audit and the related preparation requirements.

Audit execution procedures: A list of audit procedures that cover the methods to be used during the audit. This varies according to the type and timing of each audit, but may include personal interviews with project staff, document reviews, questionnaires and more.

Audit reporting procedures: A specification of the audit reporting procedures, which covers how and the way in which the audit results will be reported and reviewed. In order to minimize the threatening nature of the project audit, all parties should be fully aware of how the results will be disclosed and used within the organization.

Audit redress procedures: A specification of all procedures to be followed to appeal and/or dispute the reported audit results.

Project Life Cycle

Initiation

First, you need to identify a business need, problem, or opportunity and brainstorm ways that your team can meet this need, solve this problem, or seize this opportunity. During this step, you figure out an objective for your project, determine whether the project is feasible, and identify the major deliverables for the project.

Project management steps for the initiation phase

• Undertaking a feasibility study: Identify the primary problem your project will solve and whether your project will deliver a solution to that problem.
• Identifying scope: Define the depth and breadth of the project.
• Identifying deliverables: Define the product or service to provide.
• Identifying project stakeholders: Figure out whom the project affects and what their needs may be.
• Developing a business case: Use the above criteria to compare the potential costs and benefits for the project to determine if it moves forward.
• Developing a statement of work: Document the project’s objectives, scope, and deliverables that you have identified previously as a working agreement between the project owner and those working on the project.

Planning

Once the project is approved to move forward based on your business case, statement of work, or project initiation document, you move into the planning phase.

During this phase of the project management life cycle, you break down the larger project into smaller tasks, build your team, and prepare a schedule for the completion of assignments. Create smaller goals within the larger project, making sure each is achievable within the time frame. Smaller goals should have a high potential for success.

• Creating a project plan: Identify the project timeline, including the phases of the project, the tasks to be performed, and possible constraints
• Creating workflow diagrams: Visualize your processes using swimlanes to make sure team members clearly understand their role in a project
• Estimating budget and creating a financial plan: Use cost estimates to determine how much to spend on the project to get the maximum return on investment
• Gathering resources: Build your functional team from internal and external talent pools while making sure everyone has the necessary tools (software, hardware, etc.) to complete their tasks
• Anticipating risks and potential quality roadblocks: Identify issues that may cause your project to stall while planning to mitigate those risks and maintain the project’s quality and timeline.
• Holding a project kickoff meeting: Bring your team on board and outline the project so they can quickly get to work.

Execution

You’ve received business approval, developed a plan, and built your team. Now it’s time to get to work. The execution phase turns your plan into action. The project manager’s job in this phase of the project management life cycle is to keep work on track, organize team members, manage timelines, and make sure the work is done according to the original plan.

Project management steps for the execution phase

• Creating tasks and organizing workflows: Assign granular aspects of the projects to the appropriate team members, making sure team members are not overworked.
• Briefing team members on tasks: Explain tasks to team members, providing necessary guidance on how they should be completed, and organizing process-related training if necessary.
• Communicating with team members, clients, and upper management: Provide updates to project stakeholders at all levels.
• Monitoring quality of work: Ensure that team members are meeting their time and quality goals for tasks.
• Managing budget: Monitor spending and keeping the project on track in terms of assets and resources.

Closure

Once your team has completed work on a project, you enter the closure phase. In the closure phase, you provide final deliverables, release project resources, and determine the success of the project. Just because the major project work is over, that doesn’t mean the project manager’s job is done there are still important things to do, including evaluating what did and did not work with the project.

Project management steps for the closure phase

• Analyzing project performance: Determine whether the project’s goals were met (tasks completed, on time and on budget) and the initial problem solved using a prepared checklist.
• Analyzing team performance: Evaluate how team members performed, including whether they met their goals along with timeliness and quality of work
• Documenting project closure: Make sure that all aspects of the project are completed with no loose ends remaining and providing reports to key stakeholders
• Conducting post-implementation reviews: Conduct a final analysis of the project, taking into account lessons learned for similar projects in the future
• Accounting for used and unused budget: Allocate remaining resources for future projects

In the mid-1980’s, the Software Engineering Institute at Carnegie Mellon University published a framework intended to help the government assess which software contractors would be best capable of delivering complex software projects. This Capability Maturity Model was based on an assessment of the standard practices a company maintained while working on software projects. The model has since been adapted to fit a broad range of industries and functions, and there are a number of maturity models that have been developed over the years. One of these, the Project Management Maturity Model, closely aligns with the original model, but focuses specifically on the assessment of project management capabilities.

The Five PMMM Levels

There are five levels in the PMMM that reflect increasingly sophisticated organizational behaviors. In order to determine the level a company operates under; it’s evaluated across a number of key areas of project management practice. The PMMM can be viewed as a continuum of behaviors rather than as a rigid scale, as most companies will typically find areas in which they do well and others where there’s room for improvement.

Typical areas of assessment will be the management of risk, scope, schedule, resource, quality, and overall project integration. The full list of key assessment areas will depend on who’s doing the actual assessment. In some cases, the type of industry the company being evaluated is involved with will determine what additional factors are measured.

The five levels used in the PMMM as proposed by the Project Management Institute are labelled Initial Process, Structured Process and Standards, Organizational Standards and Institutional Process, Managed Process, and Optimizing Process. Let’s explore what these signify.

Level 1: Initial Process

The Initial level reflects a company that operates in a relatively random manner. Since there’s very little control, it’s hard to predict how the organization will react, particularly when faced with a crisis situation. While success on projects is possible, a company stuck in the Initial level is unlikely to be able to reproduce success on a consistent basis.

Level 2: Structured Process and Standards

Companies operating in the Structured level will adhere to some basic project management practices, but often only at an individual project level. Overall project success is likely to depend on key individuals or specific management support rather than on adoption of broad standards throughout the organization. While better than a random or ad-hoc situation, organizations operating at Level 2 are still often viewed as being reactive in nature.

Level 3: Organizational Standards

As it’s name suggests, the Organizational level indicates that well-defined project management procedures are documented and used as a standard of operations. Because these procedures are defined at an organizational level, they’re more likely to be well understood and backed by management. The organization is generally seen to act proactively, not reactively.

Level 4: Managed

The Managed level reflects an organization that measures project performance using well-defined metrics. Standards are agreed to across the organization, and common metrics are used to manage business decisions and processes.

Level 5: Optimizing

A company that focuses on deliberate and continual process improvement can be said to be operating in the Optimizing level. Companies at this level will seek to continuously improve their project management performance, often using innovative techniques not seen at other organizations.

Advantages of Project Management Maturity Model:

• It consists decisive and organized steps to evolve various management planning.
• This model is certainly flexible and broad to implement in any type of organizational structure.
• This model is thoroughly easy and effective to implement and understand in real life practice.

Limitations of Kerzner Project Management Maturity Model:

• It is generic model which can be limitation for complex projects and also not useful in complex strategic management.
• Maturity level planning is considerably late in the model hence it is impair to guide organization in several critical directions.
• Project maturity model is very helpful in basic strategic policy planning hence it is not useful in directive and overall organization policy planning.

After the project is commenced the next step is to ensure that the project gets completed by achieving the desired objectives. But sometimes things go wrong when we try to implement them.

So it becomes very important to control and monitor the projects especially in the implementation stage. Another reason for this control is the amount of cost involved with the projects.

So one way of doing this is the control of in-progress projects. Therefore, it refers to the assessment and monitoring of the projects which are currently in progress. It helps to implement any changes to be done at an early stage so that if something goes wrong it can be treated well in time.

There are two aspects of control of in-progress projects:

• Establishing procedures for internal control: it refers to setting up certain procedures through which we can keep control of the ongoing project internally. It may be done through assigning a dedicated supervisor for this or can be done by investing in technology related to this.
• Regular progress reports: regular progress reports may be maintained so as to judge the daily progress of the project. This progress report can also be used to track the planned performance with the actual performance. This will help the company know about areas where we may be lacking.

Post-Completion Audit

Even after the project is completed it is so important to audit the project. The main aim is to compare the actual performance with the planned performance or we can say that to know whether the project has produced desired results or not.

If the results are desired, we aim to look for things which performed well and is there any scope for improvement or not and if the results are not desired then we may aim to find out the shortcomings due to which the project suffered and how can we improve them.

Post-completion audits also help a business find out what were the biases that we made in our judgements. We will also be able to include healthy caution.

It will also help us to determine who were the best performers who put in extra efforts to make the project success and we will also be able to serve this audit as a training ground for potential executives.

Abandonment Analysis

Project management is certainly a very dynamic process. Anything can happen in this fast-changing dynamic world. Here is where abandonment analysis comes into the picture.

Abandonment analysis is a technique which is used for existing projects and even for new projects that whether the existing project terminated or is to be continued.

The rules to consider are:

If PVCF<SV<DV then it is highly advised to divest the project because the divestiture value is highest in the case and makes the most sense to divest.

If PVCF<DV<SV then the project must be terminated because the SV value is highest and we will get the most benefit by terminating the project.

If SV<PVCF<DV then we should divest the project because at this stage we are getting the most value by divesting the project.

If SV<DV<PVCF then we should continue with the project because we will get the most benefit by continuing the project.

If DV<SV<PVCF then in this we should continue with the project as both DV and SV are lower than PVCF.

If DV<PVCF<SV then we must terminate the project because neither divesting nor continuing the project will help.

Some problems are small and can be resolved quickly. Other problems are large and may require significant time and effort to solve. These larger problems are often tackled by turning them into formal projects.

This approach defines five problem solving steps you can use for most problems.

• Define the Problem
• Determine the Causes
• Generate Ideas
• Select the Best Solution
• Take Action

Define the Problem

The most important of the problem solving steps is to define the problem correctly. The way you define the problem will determine how you attempt to solve it.

If you define the problem as poor performance by the team member you will develop different solutions than if you define the problem as poor expectation setting with the client.

Determine the Causes

Once you have defined the problem, you are ready to dig deeper and start to determine what is causing it.  You can use a fishbone diagram to help you perform a cause-and-effect analysis.

If you consider the problem as a gap between where you are now and where you want to be, the causes of the problem are the obstacles that are preventing you from closing that gap immediately.

This level of analysis is important to make sure your solutions address the actual causes of the problem instead of the symptoms of the problem. If your solution fixes a symptom instead of an actual cause, the problem is likely to reoccur since it was never truly solved.

Generate Ideas

Once the hard work of defining the problem and determining its causes has been completed, it’s time to get creative and develop possible solutions to the problem.

Two great problem solving methods you can use for coming up with solutions are brainstorming and mind mapping.

Select the Best Solution

After you come up with several ideas that can solve the problem, one problem solving technique you can use to decide which one is the best solution to your problem is a simple trade-off analysis.

To perform the trade-off analysis, define the critical criteria for the problem that you can use to evaluate how each solution compares to each other. The evaluation can be done using a simple matrix. The highest ranking solution will be your best solution for this problem.

Take Action

Once you’ve determined which solution you will implement, it’s time to take action. If the solution involves several actions or requires action from others, it is a good idea to create an action plan and treat it as a mini-project.

Using this simple five-step approach can increase the effectiveness of your problem solving skills.

Techniques:

Gantt chart

A Gantt chart helps you visualize the project schedule. It’s a bar chart you can use to understand the various relationships between correlating activities and study their current statuses.

This project management tool can be custom-made to suit your personal preferences and to adequately advise you on how to deal with specific projects. Software versions allow you to manage activities within your defined plan and measure them against time constraints.

This will enable you to create a yardstick to measure the performance of each subtask or primary task within your project, helping you realize existing problems with a mere glance over the progress report. If any assignment is taking longer than expected, it shows that you need to put your attention toward that particular task, or you may be required to redirect more resources to meet with predefined objectives.

Ishikawa diagram

Also known as a fishbone diagram, this is a fundamental technique used by project managers to identify the reasons behind any defects, failures, and unsolicited variations. By showing cause and effect, the Ishikawa diagram can help you design better products and prevent potential factors from bringing about mistakes and shortcomings within your project.

Many software developers and companies use the Ishikawa diagram to perform software testing. Project managers also use it to deal with concerns such as low developer velocity as well as slow resource procurement. This tool is quite adaptable in its basic form and theory, which enables you to use it in many ways.

Root cause analysis

A simple yet powerful process for practical problem solving, root cause analysis is a four-step methodology to identify project troubles. This tool is used to distinguish the root cause from other causal factors so that corrective actions can be determined and taken. By knowing the root cause of a fault or problem, you can choose the most practical solution that meets your specific requirements.

This also helps you get out in front of problems. For example, the goal of incident management is to resume a faulty IT service as soon as possible (being reactive); by addressing an outage’s root causes, you can solve the problem for good (being proactive).

Project finance is the long-term financing of infrastructure and industrial projects based upon the projected cash flows of the project rather than the balance sheets of its sponsors. Usually, a project financing structure involves a number of equity investors, known as ‘sponsors‘, and a ‘syndicate‘ of banks or other lending institutions that provide loans to the operation. They are most commonly non-recourse loans, which are secured by the project assets and paid entirely from project cash flow, rather than from the general assets or creditworthiness of the project sponsors, a decision in part supported by financial modelling; see Project finance model. The financing is typically secured by all of the project assets, including the revenue-producing contracts. Project lenders are given a lien on all of these assets and are able to assume control of a project if the project company has difficulties complying with the loan terms.

Generally, a special purpose entity is created for each project, thereby shielding other assets owned by a project sponsor from the detrimental effects of a project failure. As a special purpose entity, the project company has no assets other than the project. Capital contribution commitments by the owners of the project company are sometimes necessary to ensure that the project is financially sound or to assure the lenders of the sponsors’ commitment. Project finance is often more complicated than alternative financing methods. Traditionally, project financing has been most commonly used in the extractive (mining), transportation, telecommunications, and power industries, as well as for sports and entertainment venues.

Risk identification and allocation is a key component of project finance. A project may be subject to a number of technical, environmental, economic and political risks, particularly in developing countries and emerging markets. Financial institutions and project sponsors may conclude that the risks inherent in project development and operation are unacceptable (unfinanceable). “Several long-term contracts such as construction, supply, off-take and concession agreements, along with a variety of joint-ownership structures are used to align incentives and deter opportunistic behaviour by any party involved in the project.” The patterns of implementation are sometimes referred to as “project delivery methods.” The financing of these projects must be distributed among multiple parties, so as to distribute the risk associated with the project while simultaneously ensuring profits for each party involved. In designing such risk-allocation mechanisms, it is more difficult to address the risks of developing countries’ infrastructure markets as their markets involve higher risks.

A project can only come together with all the necessary materials and labor, and those materials and labours cost money. Putting together a budget that keeps costs to a minimum, while maximizing the project’s quality and scope can be challenging. This is why proper cost estimation is important.

Cost estimation in project management is the process of forecasting the financial and other resources needed to complete a project within a defined scope. Cost estimation accounts for each element required for the project from materials to labour and calculates a total amount that determines a project’s budget. An initial cost estimate can determine whether an organization greenlights a project, and if the project moves forward, the estimate can be a factor in defining the project’s scope. If the cost estimation comes in too high, an organization may decide to pare down the project to fit what they can afford (it is also required to begin securing funding for the project). Once the project is in motion, the cost estimate is used to manage all of its affiliated costs in order to keep the project on budget.

Project Cost Estimation is a crucial process that involves approximating the overall expenditure of a project. The accuracy and effectiveness of cost estimation and budgeting in project management depend on the precision and comprehensiveness of the project scope, known as the scope baseline. This scope defines the project’s boundaries, constraints such as timelines, available resources, and budget limitations.

To determine the project’s costs, the risk register plays a pivotal role. It aids in calculating various cost estimates, including expenses associated with contingency plans and those incurred to mitigate risks. By analyzing potential risks and their financial impact, project managers can better plan for unforeseen events and allocate resources more effectively.

There are two key types of costs addressed by the cost estimation process:

• Direct costs: Costs associated with a single area, such as a department or the project itself. Examples of direct costs include fixed labor, materials, and equipment.
• Indirect costs: Costs incurred by the organization at large, such as utilities and quality control.

Various cost types into categories:

• Labour cost: The cost of team members working on the project, both in terms of wages and time.
• Equipment cost: The cost of resources required for the project, from physical tools to software to legal permits.
• Cost of supplies:
• Travel cost
• Training cost
• Overhead cost, etc.

Types of Financing, Sources of Finance

1. Non Recourse Loan: A loan in which the lender cannot claim more than the collateral as repayment in the event that the loan is enforced.
2. Full Recourse Loan: A loan in which the lender can claim more than the collateral as repayment in the event that the loan is enforced. Thus, a full recourse loan places the Sponsor’s assets at risk.
3. Limited Recourse Loan: A loan in which the lender can claim more than the collateral, subject to some restrictions, as repayment in the event that the loan is enforced.

Project Financing Participants and Agreements

Additional Equity Investors: In addition to the sponsors, there frequently are additional equity investors in the project company. These additional investors may include one or more of the other project participants.

Sponsor/Developer: The sponsors or developers of a project financing is the party that organizes all of the other parties and typically controls, and makes an equity investment in, the company or other entity that owns the project. If there is more than one sponsor, the sponsors typically will form a corporation or enter into a partnership or other arrangement pursuant to which the sponsors will form a “Project company” to own the project and establish their respective rights and responsibilities regarding the project.

Construction Contractor: The construction contractor enters into a contract with the project company for the design, engineering, and construction of the project.

Operator: The project operator enters into a long-term agreement with the project company for the day-to-day operation and maintenance of the project.

Feedstock Supplier: The feedstock suppliers enter into a long-term agreement with the project company for the supply of feedstock (i.e., energy, raw materials or other resources) to the project (e.g., for a power plant, the feedstock supplier will supply fuel; for a paper mill, the feedstock supplier will supply wood pulp).

Product Off taker: The product off takers enters into a long-term agreement with the project company for the purchase of all of the energy, goods or other product produced at the project.

Lender: The lender in a project financing is a financial institution or group of financial institutions that provide a loan to the project company to develop and construct the project and that take a security interest in all of the project assets.

Techniques used to estimate project cost

To estimate project costs, various techniques can be employed, some of which include:

1. Analogous Estimating: This technique relies on expert judgment and information from similar previous projects. The cost of a current project is estimated based on the cost of similar past projects, with adjustments made for any differences.
2. Parametric Estimating: Past data and historical records are used to estimate costs for the current project. Mathematical models and algorithms are applied to calculate costs based on relevant parameters.
3. Bottom-Up Estimating: This technique is considered the most reliable when the project scope is well-defined. Cost estimates are derived by breaking down the project into work packages or deliverables, and then estimating the cost for each resource or component.
4. Three-Point Estimation: This method involves using three estimates – optimistic, pessimistic, and most likely – to calculate the expected cost, taking into account the uncertainties associated with the project.
5. Reserve Analysis: Reserve analysis involves setting aside contingency reserves to account for potential cost overruns or risks that may impact the project’s budget.
6. Cost of Quality: This technique considers the cost of ensuring quality throughout the project lifecycle. It involves investing in prevention, appraisal, and failure costs to maintain high-quality deliverables.
7. PERT Estimating: Program Evaluation and Review Technique (PERT) utilizes a probabilistic approach to estimate project costs, incorporating uncertainty and risk factors in the estimation process.
8. Vendor Bid Analysis: When external vendors are involved in the project, analyzing their bids and proposals can provide valuable insights into the estimated costs of specific project components.

Each of these techniques has its strengths and weaknesses, and the choice of method depends on factors like project complexity, data availability, and the level of accuracy required for cost estimation. By employing a combination of these techniques, project managers can arrive at more reliable cost estimates and better manage project budgets.

Impact of Risk Handling Measures

Risk management is the identification, evaluation, and prioritization of risks (defined in ISO 31000 as the effect of uncertainty on objectives) followed by coordinated and economical application of resources to minimize, monitor, and control the probability or impact of unfortunate events or to maximize the realization of opportunities.

Risks can come from various sources including uncertainty in international markets, threats from project failures (at any phase in design, development, production, or sustaining of life-cycles), legal liabilities, credit risk, accidents, natural causes and disasters, deliberate attack from an adversary, or events of uncertain or unpredictable root-cause. There are two types of events i.e. negative events can be classified as risks while positive events are classified as opportunities. Risk management standards have been developed by various institutions, including the Project Management Institute, the National Institute of Standards and Technology, actuarial societies, and ISO standards. Methods, definitions and goals vary widely according to whether the risk management method is in the context of project management, security, engineering, industrial processes, financial portfolios, actuarial assessments, or public health and safety.

Strategies to manage threats (uncertainties with negative consequences) typically include avoiding the threat, reducing the negative effect or probability of the threat, transferring all or part of the threat to another party, and even retaining some or all of the potential or actual consequences of a particular threat. The opposite of these strategies can be used to respond to opportunities (uncertain future states with benefits).

Certain risk management standards have been criticized for having no measurable improvement on risk, whereas the confidence in estimates and decisions seems to increase.

A successful risk management program helps an organization consider the full range of risks it faces. Risk management also examines the relationship between risks and the cascading impact they could have on an organization’s strategic goals.

This holistic approach to managing risk is sometimes described as enterprise risk management because of its emphasis on anticipating and understanding risk across an organization. In addition to a focus on internal and external threats, enterprise risk management (ERM) emphasizes the importance of managing positive risk. Positive risks are opportunities that could increase business value or, conversely, damage an organization if not taken. Indeed, the aim of any risk management program is not to eliminate all risk but to preserve and add to enterprise value by making smart risk decisions.

“We don’t manage risks so we can have no risk. We manage risks so we know which risks are worth taking, which ones will get us to our goal, which ones have enough of a payout to even take them,” said Forrester Research senior analyst Alla Valente, a specialist in governance, risk and compliance.

Thus, a risk management program should be intertwined with organizational strategy. To link them, risk management leaders must first define the organization’s risk appetite i.e., the amount of risk it is willing to accept to realize its objectives.

The formidable task is to then determine “Which risks fit within the organization’s risk appetite and which require additional controls and actions before they are acceptable,” explained Notre Dame University Senior Director of IT Mike Chapple in his article on risk appetite vs. risk tolerance. Some risks will be accepted with no further action necessary. Others will be mitigated, shared with or transferred to another party, or avoided altogether.

Every organization faces the risk of unexpected, harmful events that can cost it money or cause it to close. Risks untaken can also spell trouble, as the companies disrupted by born-digital powerhouses, such as Amazon and Netflix, will attest. This guide to risk management provides a comprehensive overview of the key concepts, requirements, tools, trends and debates driving this dynamic field. Throughout, hyperlinks connect to other TechTarget articles that deliver in-depth information on the topics covered here, so readers should be sure to click on them to learn more.

Risk response plan

Risk response planning combines our efforts thus far into a viable risk response for each threat and opportunity we’ve identified as falling within the range of our risk tolerance threshold. Risk response planning increases the probability and/or impact of opportunities identified within the predetermined tolerance range of our risk register, and reduces the probability and/or impact of any threats.

There are four mitigation strategies to consider when developing a Risk Response Plan for both threats and opportunities.

Response to threats:

• Avoid: change plans
• Mitigate: reduce the probability and/or impact of the threat on the project
• Transfer: assign the risk to someone else
• Accept: do nothing

Response to opportunities:

• Exploit: make the opportunity more likely
• Enhance: increase the value of the opportunity to the project
• Share: partner with someone who can capture the opportunity
• Accept: do nothing

Risk monitoring

The last step is risk monitoring. The project manager monitors the risk register, executing on response plans, as well as documenting subsequent threats and opportunities as they become known throughout the project life cycle.

Risk planning is like any other project planning process, and is never really done until the project itself is complete; therefore, a project manager’s risk monitoring is finished only when the project is complete.

Work break Down Structure

A work-breakdown structure (WBS) in project management and systems engineering is a deliverable-oriented breakdown of a project into smaller components. A work breakdown structure is a key project deliverable that organizes the team’s work into manageable sections. The Project Management Body of Knowledge (PMBOK 5) defines the work-breakdown structure as a “hierarchical decomposition of the total scope of work to be carried out by the project team to accomplish the project objectives and create the required deliverables.”

A work-breakdown structure element may be a product, data, service, or any combination of these. A WBS also provides the necessary framework for detailed cost estimation and control while providing guidance for schedule development and control.

Breaking work into smaller tasks is a common productivity technique used to make the work more manageable and approachable. For projects, the Work Breakdown Structure (WBS) is the tool that utilizes this technique and is one of the most important project management documents. It singlehandedly integrates scope, cost and schedule baselines ensuring that project plans are in alignment.

The Project Management Institute (PMI) Project Management Book of Knowledge (PMBOK) defines the Work Breakdown Structure as a “deliverable oriented hierarchical decomposition of the work to be executed by the project team.” There are two types of WBS:

1) Deliverable-Based

2) Phase-Based.

The most common and preferred approach is the Deliverable-Based approach. The main difference between the two approaches are the Elements identified in the first Level of the WBS.

How to Make a Work Breakdown Structure

A good Work Breakdown Structure is created using an iterative process by following these steps and meeting these guidelines:

Gather critical project documents.

Identify content containing project deliverables, such as the Project Charter, Scope Statement and Project Management Plan (PMP) subsidiary plans.

• Identify Key Team Members
• Identify the appropriate project team members.
• Analyze the documents and identify the deliverables.

Define Level 1 Elements

Define the Level 1 Elements. Level 1 Elements are summary deliverable descriptions that must capture 100% of the project scope.

Verify 100% of scope is captured. This requirement is commonly referred to as the 100% Rule.

Decompose (Breakdown) Elements

Begin the process of breaking the Level 1 deliverables into unique lower-Level deliverables. This “breaking down” technique is called Decomposition.

Continue breaking down the work until the work covered in each Element is managed by a single individual or organization. Ensure that all Elements are mutually exclusive.

Ask the question, would any additional decomposition make the project more manageable? If the answer is “no”, the WBS is done.

Create Wbs Dictionary

Define the content of the WBS Dictionary. The WBS Dictionary is a narrative description of the work covered in each Element in the WBS. The lowest Level Elements in the WBS are called Work Packages.

Create the WBS Dictionary descriptions at the Work Package Level with detail enough to ensure that 100% of the project scope is covered. The descriptions should include information such as, boundaries, milestones, risks, owner, costs, etc.

Create Gantt Chart Schedule

Decompose the Work Packages to activities as appropriate.

Export or enter the Work Breakdown Structure into a Gantt chart for further scheduling and project tracking.

Several startup valuation methods are available for use by financial analysts. Startups, in the most general sense, are new business ventures started up by an entrepreneur. They usually tend to focus on developing unique ideas or technologies and introducing them into the market in the form of a new product or service.

Business valuation is never straightforward for any company. For startups with little or no revenue or profits and less-than-certain futures, the job of assigning a valuation is particularly tricky. For mature, publicly listed businesses with steady revenues and earnings, normally it’s a matter of valuing them as a multiple of their earnings before interest, taxes, depreciation, and amortization (EBITDA) or based on other industry-specific multiples. But it’s a lot harder to value a new venture that’s not publicly listed and may be years away from sales.

Asset Based

This approach focuses on the fair market value (FMV), or the net asset value (NAV) of the company. calculated the total assets less the total liabilities to figure out the cost of re-creating the company. There is little room left to decide which of the assets or liabilities of the company has to be included in the company valuation and how exactly we measure the worth of each.

Other than this, there are two other methods of valuation that are used. The market approach, which looks at what similar businesses in the market are worth, and the earnings approach, which estimates the total amount of money that they business might produce in the future.

The actual value in the asset-based approach to calculate the company valuation could be much higher than the sum of all the recorded assets of the business. Let us take for instance the balance sheet of the company. The balance sheet may not always have all the significant assets like the company’s methods of conducting business and internally developed products.

This happens as only the records which the owner has paid for appear on the company’s balance sheet. So, if there are other assets of the business, they are not recorded in the balance sheet. Other than this, some companies may have special products or services that make them unique. Putting a price on these for selling the business can be difficult.

Adjusted Net Asset Method

The adjusted net asset method can be used when a company has been generating losses, is not operating or the company only holds investments or real estate. This is one of the methods of valuation that is utilized for getting the estimated value of the business.

To get the fair market value, we would have to get the difference between the fair market value of the total assets and the total liabilities of the company. Let us understand how it is done.

Finding the Fair Market Value of Assets

The asset-based method of valuation starts by preparing a financial image of the business from the information that we have on the balance sheet. The current asset value would be different compared to the acquisition costs. Even though the balance sheet has all the assets and liabilities listed on it at historical cost, correctly utilizing this approach is based entirely on recasting those costs and obtaining the current value.

Earnings Based

This is another common method of valuation and is based on the idea that the actual value of a business lies in the ability to produce revenue in the future. There are a lot of methods of valuation under the earning value approach, but the most common one is capitalizing past earnings.

Capitalization of earnings is determined by calculating the NPV (Net present value) of the expected future cash flows or profits. The estimate here is found by taking the future earnings of the company and dividing them by a cap rate (capitalization rate).

In short, this is an income-valuation approach that lets us know the value of a company by analyzing the annual rate of return, the current cash flow and the expected value of the business.

This approach of the capitalization of earnings, being one of the conventional methods of valuation, helps investors figure out the possible risks and return of acquiring a company.

As soon as all the variables are known, the calculation of the capitalization rate is obtained with a simple formula. The formula is operating income divided by the purchase price. At first, the thing to be determined is the annual gross income of the investment.

After this, the operating expenses has to be subtracted to find out the total operating income. Then this value is divided by the investment’s/property’s purchase cost to find out the capitalization rate.

Disadvantages of Capitalization of Earnings Method

There isn’t one perfect method to determine a company’s value, which is why assessing a company’s future earnings has some drawbacks. At first, the method used to predict the future earnings might give an inaccurate figure, which would eventually result in less than expected generated profits.

In addition to this, exceptional circumstances can occur that eventually compromises the earnings, and affect the valuation of the investment. Further, a business that has just entered the market might lack adequate information for finding out an accurate valuation of the company.

The buyer has to know all about the desired ROI and the acceptable risks, as the capitalization rate has to be reflected in the risk tolerance, market characteristics of the buyer, and the expected growth factor of the business. For instance, if a buyer is not aware of the targeted rate, he might pass on a more suitable investment or overpay for an investment.

Discounted Cash flow Models

For most startups especially those that have yet to start generating earnings the bulk of the value rests on future potential. Discounted cash flow analysis then represents an important valuation approach. DCF involves forecasting how much cash flow the company will produce in the future and then, using an expected rate of investment return, calculating how much that cash flow is worth. A higher discount rate is typically applied to startups, as there is a high risk that the company will inevitably fail to generate sustainable cash flows.

The trouble with DCF is the quality of the DCF depends on the analyst’s ability to forecast future market conditions and make good assumptions about long-term growth rates. In many cases, projecting sales and earnings beyond a few years becomes a guessing game. Moreover, the value that DCF models generate is highly sensitive to the expected rate of return used for discounting cash flows. So, DCF needs to be used with much care.

Risk management is the practice of identifying, evaluating, and preventing or mitigating risks to a project that have the potential to impact the desired outcomes. Project managers are typically responsible for overseeing the risk management process throughout the duration of a given project.

Project risk management is the process of identifying, analyzing and responding to any risk that arises over the life cycle of a project to help the project remain on track and meet its goal. Risk management isn’t reactive only; it should be part of the planning process to figure out risk that might happen in the project and how to control that risk if it in fact occurs.

A risk is anything that could potentially impact your project’s timeline, performance or budget. Risks are potentialities, and in a project management context, if they become realities, they then become classified as “issues” that must be addressed. So risk management, then, is the process of identifying, categorizing, prioritizing and planning for risks before they become issues.

Risk management can mean different things on different types of projects. On large-scale projects, risk management strategies might include extensive detailed planning for each risk to ensure mitigation strategies are in place if issues arise. For smaller projects, risk management might mean a simple, prioritized list of high, medium and low priority risks.

To effectively manage risk, project managers must have a clear understanding of their objectives so they can identify any possible barriers that could impact the team’s ability to produce results.

Types of Project Risk

Beyond the basics of what “risk” means, project managers should also know the different types of risks they may encounter. Depending on the project type, the factors that should be considered will differ.

There are several types of risks that occur frequently, regardless of the specifics of the project. These common types of risk include:

• Cost: The risk of events that impact the budget, especially those that cause the project to be completed over budget. Errors in cost estimation commonly generate risk in addition to external factors.
• Schedule: The risk of unplanned scheduling conflicts, such as events that cause the project to be delayed. Scope creep is a common reason for scheduling issues and project delays.
• Performance: The risk of events that cause the project to produce results that are inconsistent with the project specifications.

Risk Management Process

Risk owners require several skills to manage project risk well, which include:

• Communication: Having the ability to communicate well with stakeholders, so that everyone understands the role they play in reducing the impact of risk.
• Strategic thinking: Being strategic and having the ability to problem solve and come up with solutions for the project risks identified.
• An understanding of the organisation: Knowing the businesses’ strategic direction, goals and risk appetite.
• Planning: Ensuring that the risk management plan is being actioned throughout the project lifecycle.
• Resourcefulness: Being quick to act under pressure to ensure that the project risks are addressed as soon as possible.

Risk Analysis & Identification

Identify and assess the potential risks

When it comes to identifying and assessing the potential risks related to the project, consider how a risk could occur, what the impact would be and what you can do to reduce the probability and impact (if you can) of the project risk. Understanding how much control you have over the risk is key. For some risks, you may have very little control over them. Keep in mind that along with identifying risk events, as mentioned above you should also list any project risks that can be identified as opportunities or uncertainty related to the project. Risk events and opportunities are often easier to identify as they have clear impacts, whereas uncertainty can be harder to measure as the result of a risk is unknown and is difficult to measure.

Assign a risk owner

Whether it is a dedicated risk manager, or a member of the project team, every project will need a risk owner assigned to keep track of risks throughout the project lifecycle. The risk owner is the key person who manages the risk management strategy. This doesn’t mean that the risk owner must address every risk that could impact the project, however, instead they have the responsibility of assigning ownership to team members and stakeholders, as well as updating and keeping track of the risk management plan. If you’re the risk owner, it’s key to make sure that every member of the team is aware of their role in reducing and mitigating project risk.

Draw on subject matter experts

As part of your risk management strategy in project management it is essential to touch base with subject matter experts, such as contractors and senior stakeholders. Receiving input from others will help ensure you have crossed off all the potential project risks, as you may find that others have insights into risks you may not have discovered on your own. They can also provide advice on effective strategies they have implemented in previous projects, that you could integrate into your risk management plan. Also see if your organisation has risk registers from past projects completed available to review and any lessons learned reports.

Determine the probability of a project risk occurring

Once you have a list of the possible risks, the next step in your project risk assessment is ranking the risks by assigning probability. That way you will know which risks are more likely to occur and which would have the largest impact on your project. The risks that you measure that will have the highest impact, should be addressed first. There are many different formulas for measuring risk, however one of the popular ways is assigning a number to the risk.

Consider the action you will take

Once you have all the project risks ranked according to the probability of the risk occurring, the next step will be planning out the actions you will take. With some risks you may be able to eliminate them entirely, however others may need to follow a mitigation strategy.

Include risk Management in your post project review

Just as one project comes to an end, you may find yourself handed your next project, leaving little time for a post project review. However, the greatest learnings can come from analyzing how your project went, including the risk management. So, when the project comes to an end, take the time to evaluate what went well on the project, what could have been handled better and the learnings you can you take with you to your next project.

Managing Risk throughout the Organization

Building a risk management protocol into your organization’s culture by creating a consistent set of standard tools and templates, with training, can reduce overhead over time. That way, each time you start a new project, it won’t be like having to reinvent the wheel.

Things such as your organization’s records and history are an archive of knowledge that can help you learn from that experience when approaching risk in a new project. Also, by adopting the attitudes and values of your organization to become more aware of risk, your organization can develop a better sense of the nature of uncertainty as a core business issue. With improved governance comes better planning, strategy, policy and decisions.

A cost-benefit analysis is a systematic process that businesses use to analyze which decisions to make and which to forgo. The cost-benefit analyst sums the potential rewards expected from a situation or action and then subtracts the total costs associated with taking that action. Some consultants or analysts also build models to assign a dollar value on intangible items, such as the benefits and costs associated with living in a certain town.

Before building a new plant or taking on a new project, prudent managers conduct a cost-benefit analysis to evaluate all the potential costs and revenues that a company might generate from the project. The outcome of the analysis will determine whether the project is financially feasible or if the company should pursue another project.

In many models, a cost-benefit analysis will also factor the opportunity cost into the decision-making process. Opportunity costs are alternative benefits that could have been realized when choosing one alternative over another. In other words, the opportunity cost is the forgone or missed opportunity as a result of a choice or decision. Factoring in opportunity costs allows project managers to weigh the benefits from alternative courses of action and not merely the current path or choice being considered in the cost-benefit analysis.

By considering all options and the potential missed opportunities, the cost-benefit analysis is more thorough and allows for better decision-making.

The Cost-Benefit Analysis Process

A cost-benefit analysis should begin with compiling a comprehensive list of all the costs and benefits associated with the project or decision.

The costs involved in a CBA might include the following:

• Direct costs would be direct labor involved in manufacturing, inventory, raw materials, manufacturing expenses.
• Indirect costs might include electricity, overhead costs from management, rent, utilities.
• Intangible costs of a decision, such as the impact on customers, employees, or delivery times.
• Opportunity costs such as alternative investments, or buying a plant versus building one.
• Cost of potential risks such as regulatory risks, competition, and environmental impacts.

Advantages:

• Higher revenue and sales from increased production or new product.
• Intangible benefits, such as improved employee safety and morale, as well as customer satisfaction due to enhanced product offerings or faster delivery.
• Competitive advantage or market share gained as a result of the decision.

An analyst or project manager should apply a monetary measurement to all of the items on the cost-benefit list, taking special care not to underestimate costs or overestimate benefits. A conservative approach with a conscious effort to avoid any subjective tendencies when calculating estimates is best suited when assigning a value to both costs and benefits for a cost-benefit analysis.

Finally, the results of the aggregate costs and benefits should be compared quantitatively to determine if the benefits outweigh the costs. If so, then the rational decision is to go forward with the project. If not, the business should review the project to see if it can make adjustments to either increase benefits or decrease costs to make the project viable. Otherwise, the company should likely avoid the project.

The Purpose of Cost-Benefit Analysis

The purpose of cost-benefit analysis in project management is to have a systemic approach to figure out the pluses and minuses of various paths through a project, including transactions, tasks, business requirements and investments. The cost-benefit analysis gives you options, and it offers the best approach to achieve your goal while saving on investment.

There are two main purposes in using CBA:

• To determine if the project business case is sound, justifiable and feasible by figuring out if its benefits outweigh costs.
• To offer a baseline for comparing projects by determining which project’s benefits are greater than its costs.

Limitations of the Cost-Benefit Analysis

For projects that involve small- to mid-level capital expenditures and are short to intermediate in terms of time to completion, an in-depth cost-benefit analysis may be sufficient enough to make a well-informed, rational decision. For very large projects with a long-term time horizon, a cost-benefit analysis might fail to account for important financial concerns such as inflation, interest rates, varying cash flows, and the present value of money.

Alternative capital budgeting analysis methods, including net present value (NPV), could be more appropriate for these situations. The concept of present value states that an amount of money or cash in the present day is worth more than receiving the amount in the future since today’s money could be invested and earn income.

One of the benefits of using the net present value for deciding on a project is that it uses an alternative rate of return that could be earned if the project had never been done. That return is discounted from the results. In other words, the project needs to earn at least more than the rate of return that could be earned elsewhere or the discount rate.

However, with any type of model used in performing a cost-benefit analysis, there are a significant number of forecasts built into the models. The forecasts used in any CBA might include future revenue or sales, alternative rates of return, expected costs, and expected future cash flows. If one or two of the forecasts are off, the CBA results would likely be thrown into question, thus highlighting the limitations in performing a cost-benefit analysis.

Efficient Investment Analysis

Investment analysis is a broad term for many different methods of evaluating investments, industry sectors, and economic trends. It can include charting past returns to predict future performance, selecting the type of investment that best suits an investor’s needs, or evaluating individual securities such as stocks and bonds to determine their risks, yield potential, or price movements. Investment analysis is key to a sound portfolio management strategy.

The aim of investment analysis is to determine how an investment is likely to perform and how suitable it is for a particular investor. Key factors in investment analysis include the appropriate entry price, the expected time horizon for holding an investment, and the role the investment will play in the portfolio as a whole.

In conducting an investment analysis of a mutual fund, for example, an investor looks at how the fund performed over time compared to its benchmark and to its main competitors. Peer fund comparison includes investigating the differences in performance, expense ratios, management stability, sector weighting, investment style, and asset allocation.