CHAPTER 1: INTRODUCTION TO PROJECT MANAGEMENT
- WHAT IS PROJECT MANAGEMENT?
Project management is an application of knowledge, skills, tools and techniques to meet the project requirements. The objective is to use the optimum resources to accomplish a goal in the minimum time.
1.1. Characteristics of Project Management
- Project Charter: The project charter is one of the special project management documents that translate the project sponsor’s business case into project objectives.
- Tools and Techniques: The management of projects uses a number of special tools and techniques, combined with subject-related knowledge and skills that have been developed over the years to manage different aspects of the project and facilitate the processing of large amounts of data. These include the CPM analysis, the Gantt chart, the resource histogram, the earned value graph and tables, activity crashing and matrix organization structures.
- Project Plan: The project plan is a special project management document integrating the knowledge areas with individual plans to form one combined baseline plan.
- Project Management Processes: The project management process is a special management technique for managing a linear sequence of steps or interrelated actions performed to achieve a specified set of projects, results or services. The project management process is subdivided into the following sub-processes (initiation, planning, execution and closing).
- Project Organization Structure: The project organization structure is a special management technique that enables the project manager to form temporary organization structures and project teams that can be designed to suit the needs of the project and the project participants. This enables the project leader to build and motivate the team and coordinate their work.
- Project Methodology: The project lifecycle format is a special management technique subdividing the project into a number of identifiable phases that each produce a distinct deliverable. This sequence of phases forms the backbone of the project methodology, interlinking all the topics within a phase and between phases.
- PROJECT LIFE CYCLE
- The project life cycle shows how a project can be subdivided into a number of phases presented sequentially along a project timeline.
- Every project has certain phases of development. A clear understanding of these phases allows managers and executives to control the project more efficiently.
- All the phases of a project from start to end are known as life cycle phases. The project life cycle i.e. the number of phases may differ from project to project.
The main phases of the life cycle are:
2.1. Project Life Cycle (4 Phases)
Phase-1: Feasibility Stage or Conception Stage
- The feasibility phase assesses the business case to confirm it is feasible to manufacture and implement.
- If there are a number of possible business case solutions, the feasibility study will rank the business cases in order of how well they are addressing the client's requirements.
- This is the phase when a problem is identified and potential solutions are suggested i.e. ideas are conceived.
- After the feasibility study, once the objectives have been clearly defined then the appraisal of the solutions is conducted in terms of risk, financial commitment and benefits.
- In case project ideas are found feasible from all considerations, it is then given a go-ahead signal.
Phase-1 of the project can be summarized as under:
(a) Identification of the need
(b) Establishment of the primary feasibility of project idea
(c) Identification of alternatives
(d) Evaluation/appraisal of the alternatives
(e) Investment decision
Phase-2: Design Stage (Planning & Scheduling Stage)/Definition Phase
- The project definition phase uses the guidelines from the feasibility study to design the product, outline the build method and develop detailed schedules and plans (baseline plan) for all the knowledge area topics required to make the project.
- Once the investment decision is taken, the design or the planning stage of the project starts.
- In this phase, original ideas are amplified to prepare 'blue print' for the next stage. It means technical parameters are frozen and basic designing is completed and specifications for equipment are finalized, costs are estimated in detail, a time schedule for the project is planned and steps are taken for raising funds and resources at the end of the design phase blueprint is ready for execution. The output of the design phase is called "Detailed Project Report (DPR)".
- Usually, DPR is further examined by the concerned organization. From the first phase to the second phase of the project life cycle, the intensity of activities continuously increases.
Phase-3: Execution or Production Phase
- The project execution phase uses the design and project plan from the definition phase, together with the execution strategy, to construct the project.
- In third phase project moves for execution or production where the emphasis is given to give physical shape to the ideas presented in DPR.
- In this phase procurement of resources (material/machinery) starts.
- The intensity of activities further builds up and reaches to peak in 3rd phase, however when execution approaches to completion the intensity of activities start falling again. This is the most important phase. The demand on the project manager is at its peak in this phase.
- There is a great need of continuous monitoring and control to all activities in this phase.
Phase-4: Termination or Commissioning or Handover Phase
- The project commissioning and handover phase inspects and confirms the project has been made to the approved design and then hands over the project to the client for operation.
- It is the last phase of the project cycle. During this phase the constructed facilities are tested one by one and final teething problems are solved. If trial is successful then the commissioning is complete.
- After commissioning, the project is handed over. This stage might include training of operating personnel. In this phase intensity of activities reduces to minimal at the end.
Life cycle graph between Intensity of activities and time:
Phase-I → Feasibility/ Appraisal/ Conception
Phase-II → Design/ Planning and scheduling / Development/ Definition
Phase-III → Implementation / Execution/ Production
Phase-IV → Commissioning/ Termination/ Transfer
The important elements of a project life cycle are:
1 Operations /activities; which should be performed in sequence
- Resources: manpower, material, money machinery etc.
- Constraints and external conditions.
2.2. Level of Effort (Intensity of Activities)
The project lifecycle is often presented with its associated level of effort. The level of effort could be any parameter that flows through the project that can be measured, but it is most commonly expressed as man-hours or expenses/costs. The level of effort is a useful indicator for the project manager to quantify the amount of work to be performed and the amount of work completed within each phase. These parameters can be presented as a line graph of ‘rate of expenditure' (or rate of effort) and/or a line graph of ‘cumulative expenditure’.
The accumulated effort is the sum of the effort to date. This shows a typical ‘S curve’ profile similar to that used in the earned value calculation. This is a useful feature for the project manager to note as similar projects tend to have similar levels of effort profiles.
2.3. Level of Influence Vs. Cost of Changes (Front-End Importance)
‘Cost of change' curve plotted against the project lifecycle:
- PROJECT CONTRACT
- A contract is a legal agreement. It is an exchange of promises by two or more persons/organisations.
- Section 2 (b) of the Indian Contract Act. 1872 defines contract as "an agreement enforceable by law”. The definition given by the Indian Contract Act has two distinct parts, viz,
(a) a contract is an agreement
(b) the agreement must be enforceable by law.
- Though a contract is necessarily an agreement, all agreements are not contracts. Only those agreements that are enforceable by law are contracts. For an agreement to become enforceable by law, it must satisfy certain essential elements called “essentials of valid contract”.
- A contractor is a person, a firm or a company that undertakes a contract.
Essential features of a valid contract are as under:
- There must be an offer and an acceptance of that offer (Public notice inviting tenders for the execution of work on contract basis is an offer and if a contractor submits his tender documents in response to the public notice and in accordance with the terms and conditions stipulated, it amounts to acceptance of the offer.)
- There must be an intention to create a legal relationship on the part of the parties to the contract.
- The consent of the parties to the contract shall be free and genuine.
- The parties to the contract shall be competent persons. (For example, minors and lunatics do not have the capacity to enter into any contract.)
- There must be a lawful consideration between the parties to the contract.
- The object of the contract must be lawful and not one which the law disapproves.
- The contract must not have been declared void by any law in force in the country.
- The meaning of the contract must be certain without any room for ambiguity or different interpretations.
- The terms of the contract shall be capable of performing.
- A contract shall fulfil necessary legal formalities.
3.1. Type of contracts
Broadly contracts can be divided into two types. They are:
(a) Turnkey contracts
(b) Non-turnkey contracts
(a) Turnkey Contracts
- In a turnkey contract, the entire responsibility of project execution is entrusted to the contractor. It is as if the owner comes into the picture only when the project is completed and he turns the key of the plant to start production. Till such time the project reaches a ‘ready-to-start’ stage, the contractor takes care of all aspects of project execution.
- Since the conductor of a turnkey project is expected to do everything right from scratch, the scope of the contract covers all areas of the projects, viz. design, engineering, construction, structural work, supply and erection of plant and machinery, supply of spares, testing and commissioning. Since the entire work is done by a single contractor, turnkey contract agreements invariably have a clause on a performance guarantee.
- Turnkey contracts maybe for the whole project or even for a sub-unit of the main project. Turnkey contract for a sub-unit is undertaken when such sub-unit is a separately identifiable component of the total project and whose performance can be assessed independently of other units of the project.
(b) Non-turnkey Contracts
- Non-turnkey contracts are preferred when the projects are small-sized, the know-how for the project is available with the promoters and when there is a strong, competent and capable project team available with the organisation.
- In a non-turnkey arrangement, the total project is divided into suitable work packages. The packages that need to be given to contractors are identified. A contractor may be entrusted with one or more work packages, however, the responsibility for overall supervision and performance of the project will test with the In-house project department.
The following are some of the non-turnkey contracts:
- Item rate contract: The contractor is required to quote his best rates against each item as given in the tender schedule.
- Percentage rate contract: In this, the contractor is required to quote his fixed percentage of the total estimated cost of work.
- Lump-sum contract (Fixed price): In this, the contractor is required to quote a fixed lump sum value for the whole work. It is generally used for small scale projects.
3.2. PROJECT TENDER
Tender is on offer in writing by the tenderer (the person who offers the tender) to execute some specified work or to supply some specified good at certain rates within a fixed time frame under certain conditions of the agreement.
3.2.1. Tender Notice or Notice Inviting Tender (NIT)
The tender notice is a public notice and is published in leading newspapers and e-portals. This is a popular method used by Government Departments and Public Sector Enterprises. The tender notice contains the following information:
(a) Name of the organisation calling for tenders and the designation of the officer concerned who is inviting tenders.
(b) The nature of work, the place of work and the estimated cost of work.
(c) Cost of tender documents and drawings/plans.
(d) Last date and time of receipt of tenders, place and availability of tender forms.
(e) Type of specifications and time of completion.
(f) Amount of Earnest Money Deposit (EMD) to be paid and the method of payment of EMD.
(g) Amount of security deposit to be deposited by the successful tenderer.
(h) Date, time and place of opening tenders.
3.2.2. Tender Documents
Tender documents are meant to keep the tenderers informed about the general and specific conditions applicable for tenderers. Tender documents usually consist of the following.
(a) A letter of invitation to the tenderers
(b) Specimen tender form
(c) General instruction to the tenders
(d) Details of civil/structural work along with a complete set of civil/structural drawings.
(e) Details and specifications of machinery/equipment to be supplied if any
(f) Draft contract agreement
(g) Arbitration authority who will decide in case of dispute
(h) Time schedule for completion of work
(i) Amount of earnest money to be deposited and the form in which it is to be deposited.
3.2.3. Pre-Qualification of Tenderers
- Pre-qualification of tenderers is done only in bigger and complex projects. The objective of prequalification is to ensure that only competent tenderers participate in the tenders. The following information is gathered from the intending tenderers for deciding as to whether they are competent enough to participate in the tenders:
- The financial capacity of the contractors for carrying out the work.
- Infrastructure available with the contractors in terms of machinery, equipment, qualified personnel, manpower etc.
- Previous experience in having handled projects of similar nature. After assessing the qualifications of the intending tenderers, those who are found competent are chosen and only the selected persons are allowed to participate in the tenders.
3.2.4. Earnest Money Deposit (EMD)
- It is the amount to be deposited by all the tenderers when they submit their tender. The EMD amount varies from 1 % to 3% of the tender value. Once the contract is finalized, the EMD remitted by all the unsuccessful tenderers is returned back. The EMD of the successful tenderer is retained as a measure of caution so that he will not withdraw his offer. In the event of the successful tenderer withdrawing his offer, or refusing to take up the work, the EMD retained will be forfeited. A tenderer can withdraw his offer before acceptance of the tender. Once a particular tender is selected and communicated and if the successful tenderer withdraws his offer after the communication, he has to forego his EMD.
- The EMD is payable normally in the form of a pay-order/Demand Draft from a nationalized/ scheduled bank. When the EMD amount is large, EMD is also accepted in the form of a Bank Guarantee from a nationalized/ scheduled bank.
3.2.5. Security Deposit
- Security Deposit is the amount to be deposited by the successful tenderer after the contract is finalized. Normally it is about 15% of the total value of the contract. This amount is collected as a safety measure so that the contractor (successful tenderer) fulfils all the terms and conditions of the contract and completes the work in accordance with the terms of the contract. The security deposit amount will be forfeited in case the contractor fails to fulfil any of the terms of the contract. The security deposit amount will be refunded to the contractor on completion of the work and after observing the work for defects if any till the defects liability period' which is normally around six months.
3.2.6. Acceptance of Tenders
- On the appointed date, the sealed envelopes containing tenders and E.M.Ds. are opened. The envelopes containing E.M.Ds are first opened and if found in order, the other envelopes containing tender documents are opened. Opening of tenders is usually done in the presence of the tenderers.
- The valid bids received are scrutinized and evaluated by a committee of experts designated for purpose. The tender evaluation committee will have representatives from all the departments’ illegal department, finance department, operations department, purchase department etc.) And special invitees who have specialized knowledge in the concerned field. Before accepting one among the tenders received, the following aspects are to be given consideration:
(a) The financial capacity of the tenderer
(b) The technical infrastructure available with the tenderer
(c) Past performance of the tenderer in executing similar works
(d) Specifications (both general and technical) quoted by the tenderers and deviations in specifications, if any.
Apart from the above, the draft contract is to be examined and its terms studied, before accepting a tender.
The lowest tender is usually accepted provided the tenderer who has quoted the lowest amount satisfies the above criteria. For valid reasons, a tender other than the lowest can also be accepted.
3.2.7. Letter of Intent (LOI)
This is a letter issued to the successful tenderer intimating about his/her offer being accepted. LOI is issued before the signing of the contract by the two parties. The successful tenderer is required to intimate any pre-condition within the stipulated time. Issue of LOI by the project promoters and acceptance of the same by the successful tenderer does not obviate the need for signing a contract. Since LOI is not a legal document, the two parties have to necessarily execute the contract by signing the contract agreement.
3.2.8. Execution of Deed of Contract
Strictly speaking, a contract, as such, can be oral or in writing. But, if a contract is required by law to comply with certain legal formalities, it must comply with the necessary formalities as to writing, registration and attestation, if necessary. If these legal formalities are not carried out, then the contract is not enforceable at law.
3.2.9. Penalty Clause for Non-Performance of Guarantee Parameters
Apart from the clause on liquidated damages, a penalty clause for non-performance of guarantee parameters is also included in the contract. This clause provides for deduction of a certain predetermined percentage of price from the contract price for non-performance of any guarantee parameters. The percentage of deduction is to be carefully decided in consultation with the consultants and contractors in such a way that it sufficiently covers the loss due to non-performance. The percentage of deduction should be such that it neither affects the clients nor the contractors.
3.3. Types of Payments to Contractors
The following are the different modes of payment to contractors:
(a) First and the final bill
(b) Running account bill
(a) First and the final bill
This method of payment is suitable for very small, petty works. There is only a single payment to the contractor on his completion of the work.
(b) Running account bill (R.A. bill)
Running account bill refers to the account prepared at frequent and regular intervals for payment for the work done or supplies made at intervals. During the progress of the work, the contractor is paid from time to time, while the final payment is made on completion of the work. On a particular date when the bill is prepared, it is prepared for the quantity of work executed till that date and at the rates agreed in the contract. Payments are made for about 90% of the bill amount, retaining about 10%. Thus, there will be many intermediate bills and one final bill.
- Final bill is the last bill raised on completion of the work and in full settlement of the account.
- Sometimes advance payment is made on running account under special circumstances where measurements cannot be taken for certain valid reasons, but the work has progressed sufficiently.
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