Project & Operations Management

Block-III
Project
&
Operations Management
Project Implementing and Closing
Project & Operations Management
Block
III
PROJECT IMPLEMENTATION AND
CLOSING
UNIT 11
Project Cost Management 1-22
UNIT 12
Project Risk Management 23-55
UNIT 13
Project Quality Management 56-90
UNIT 14
Project Auditing 91-119
UNIT 15
Project Closing 120-139
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BLOCK III: PROJECT IMPLEMENTATION AND
CLOSING
The third block of the course on Project & Operations Management deals with
project implementation and project closing. This block contains five units. The
first unit in this block explains project cost management. The second unit
focuses on project risk management. The third unit examines project quality
management. The fourth and fifth units of the block discuss project auditing and
project closing, respectively.
The first unit, Project Cost Management, discusses the process of managing
costs, and planning the resources. The unit also deals with the concepts of cost
estimating, cost budgeting, and cost control. Finally, the unit discusses cost
overruns and their implications.
The second unit, Project Risk Management, deals with the definition of risk, and
examines the concept of tolerance for risk. The unit also defines risk
management, and explains decision making under the conditions of certainty,
risk, and uncertainty. The unit provides an idea about the risk management
methodology, and the concept of insurance for projects.
The third unit, Project Quality Management, defines quality and discusses the
international quality standards. The unit deals with the cost of quality, and
explains the various project quality management concepts. It also explains the
different project quality control tools. The unit examines the concepts of process
capability, acceptance sampling, quality circles, and just-in-time management,
and total quality management.
The fourth unit, Project Auditing, explains project evaluation and its purpose.
The unit discusses project auditing, and the construction and use of audit report.
The unit also provides an idea about the responsibilities of the auditor, and
discusses the project audit life cycle. It also deals with the essentials of an audit,
and the concept of performance measurement.
The fifth unit, Project Closing, provides an idea about closing a project. The unit
explains the various ways in which a project can be closed. The unit also deals
with the reasons for terminating an unsuccessful project. It discusses the process
of closing a project.
Unit 11
Project Cost Management
Structure
11.1 Introduction
11.2 Objectives
11.3 Process of Cost Management
11.4 Resource Planning
11.5 Cost Estimating
11.6 Cost Budgeting
11.7 Cost Control
11.8 Cost Overruns and their Implications
11.9 Summary
11.10 Glossary
11.11 Self-Assessment Exercises
11.12 Suggested Reading/Reference Material
11.13 Answers to Check Your Progress Questions
11.1 Introduction
In the last unit of the previous block, we have discussed about project control. In
this unit, we will discuss project cost management. Project cost management
includes all the processes that are required to ensure that the project is completed
within the approved budget. After each phase of the project is completed, cost
management estimates the resources (people, equipment and materials) that were
already spent and the budget needed for all subsequent project phases.
As the project progresses, the project manager notes the differences between the
planned and the actual costs. He then measures the impact of these differences
on the overall project budget. Changes are made to the budget, if necessary,
using cost control procedures, with the permission of the client and other
stakeholders.
Estimating the cost of a project is difficult as it is affected by different factors
like inflation, the exchange rate, demand and supply conditions, seasonal effects,
etc. Other than these external factors, internal factors like mismanagement of
various resources, failure to complete activities within the specified time,
mishandling of equipment and employee absenteeism increase project costs.
Cost management is an important concern for the project manager, as costs directly
affect the profits of the firm. However, merely reducing costs should not be the
objective of the project manager. If costs are minimized by reducing the number of
reviews and inspections, the project output is likely to be of poor quality.
Project Implementation and Closing
If a project incurs higher costs than originally envisaged, the project client loses
confidence in the firm and the firm earns a bad reputation. Thus, the process of
cost management requires proper planning and implementation at every stage of
the project, if the project is to be a success.
This unit will discuss the process of managing costs, and resource planning. We
will discuss the concepts of cost estimating, cost budgeting, and cost control.
Finally, we would be discussing cost overruns and their implications.
11.2 Objectives
By the end of this unit, students should be able to:
 explain the process of cost management.

 define resource planning.
 discuss the concepts of cost estimating, cost budgeting, and cost control.
 define cost overruns, and identify their implications.
11.3 Process of Cost Management
The process of cost management involves four steps – resource planning, cost
estimating, cost budgeting and cost control. Resource planning identifies the
resources required and the quantities required of each of these, for the
completion of the project. Cost estimating is calculating the approximate costs of
all project activities, while cost budgeting is the assigning of costs to each
project activity. Cost control involves taking necessary steps to keep project
costs within permissible limits.
11.4 Resource Planning

Resource planning is the process of identifying what project resources are required
and in what quantities. Resources normally include money, manpower, machinery
and materials. For instance, the construction of a cement plant requires skilled
workmen, some initial investment, machines like concrete mixers and various
construction materials. The project manager should have a thorough knowledge of
all the project activities in order to allocate the resources properly.
Resource planning is done after considering the Project Scope Statement, the
Work Breakdown Structure of the Project, Historical Information, Description of
the Resource Pool, and Organizational Policies.
Project Scope Statement: The scope statement allows all project stakeholders to
gain an understanding of the project. It explains why the project has been taken
up and what the main objectives of the project are. Both these aspects have to be
considered during resource planning.
Work Breakdown Structure (WBS): The WBS is a deliverable-oriented
grouping of project elements. Each descending level of WBS represents an
increasingly detailed description of a project component (the component may be
a product or service). As it describes all the project activities, it gives the project
manager an idea of the resources that will be required.
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Historical Information: The project manager studies similar projects that were
successfully implemented earlier. This gives him an idea of the resources he will
require to execute the current project.
Description of Resource Pool: Here, the project manager specifies what project
resources he will require and in what quantities. For example, the skill levels of
the workmen, and the kind of machinery and materials to be used, are listed. The
resource pool description is specific to each project.
It also varies from one phase of the project to another. For example, in the
planning phase of an engineering design project, only senior engineers are
required. While the project is being executed, junior engineers can also be used
for activities like inspection, quality testing, etc.
Organizational Policies: The project manager has to abide by the organizational

policies while developing resources plans. Policies regarding the purchase of
supplies and staffing should be considered. For instance, if a firm has a long-
term contract with a specific supplier for the procurement of raw materials, the
project manager must go to the same supplier.
While allocating resources for various project activities, the project manager
identifies the alternative ways of completing each activity and makes use of the
opinions of experts in various fields.
11.4.1 Identification of Alternatives
There may be several ways of completing a particular project activity. The

resources required vary with each method. The project manager uses techniques
like brainstorming and focused group interviews to identify different methods of
completing different activities. For example, the project manager may hold
discussions with his team members to identify the suppliers in the market from
whom they can procure the required raw materials.
11.4.2 Expert Opinions
The project manager consults experts like consultants and researchers, to

determine what inputs he will require to implement the project. The ideas given
by these experts help the project manager to come up with better resource plans.
Sometimes, the project manager may get contradictory views about resource
allocation. When this happens, the project manager should choose a suitable
approach after a careful analysis of his own constraints.
The ‘Resource Planning’ process thus specifies the project resources required to
execute a project. The resource plan shows the type of resources required and the
quantities in which these are required. These resources are obtained either
through staff acquisition or by procurement.
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Check Your Progress

1. Which of the following options depicts the correct sequence of steps in the
process of cost management?
i. Cost budgeting
ii. Cost estimating
iii. Cost control
iv. Resource planning
a. Option i followed by ii followed by iii and iv
b. Option iv followed by ii followed by i and iii
c. Option iii followed by ii followed by i and iv
d. Option ii followed by iii followed by i and iv
2. _____________ includes all the processes that are essential to ensure that
the project is completed within the approved budgets.
a. Resource planning
b. Project cost management
c. Cost budgeting
d. Cost control
3. Which of the following options provides an understanding of the project and
is part of the resource planning of a project?
a. Project scope statement
b. Work breakdown structure
c. Organizational policies
d. None of the above
4. _______________ is considered as the deliverable-oriented grouping of
project elements.
a. Project scope statement
b. Organizational policies
c. Work breakdown structure
5. Which of the following steps in the process of cost management involves
taking necessary steps to keep the project costs within the permissible
limits?
a. Cost budgeting
b. Cost estimating
c. Cost control
d. Resource planning
6. The step in cost management that involves identifying the project resources
required and in specific quantities is ___________.
4
a. cost estimating
b. cost budgeting
c. resource planning
d. cost control
11.5 Cost Estimating
After the resource requirements are identified, the project manager develops an
estimate of the costs of the resources required to execute the project. This
includes identifying and evaluating various cost alternatives. The project
manager considers the WBS, resource rates, activity duration estimates,
historical information and the chart of accounts in estimating the costs.
The WBS is used to ensure that cost estimates are made for all the identified
activities. The resource rates show the cost of each unit of resource such as labor
cost per hour, the cost of one litre of lubricant oil, etc. The project manager
considers the activity duration estimates for all the project activities to know by
what time the resources should be made ready.
The project manager also considers historical information in estimating the cost
of the project. He studies project files, and commercial cost estimating databases
of past projects. A good overall understanding of similar projects undertaken in
the past proves helpful. The chart of accounts is a numbering system used to
monitor project costs by category (labor, supplies, materials, etc.) It is a coding
structure that the firm uses to report financial information in its ledger. Some of
the techniques used by the project manager to estimate costs are -- analogous
estimating, bottom-up estimating, parametric modeling, and computerized tools.
11.5.1 Analogous Estimating
In analogous estimating, the project manager considers similar projects to

estimate the costs of the project. Based on the actual costs incurred in that
project, the project manager prepares the cost estimates by considering the
parameters like time value of money, inflation rate, etc. Though this type of
estimating is easy and economical, but it is less accurate than the other methods.
Normally, this technique can be used only in consultation with an expert. The
difficulty in using this approach lies in finding a similar project and determining
its actual costs. This technique is also called the top-down estimating.
11.5.2 Bottom-up Estimating
In bottom-up estimating, the cost of each element of the project is calculated

separately and all these costs are added up to estimate the total project cost. The
smaller the work elements of the project, the greater the accuracy of the estimate.
5
11.5.3 Parametric Modeling

In parametric modeling, cost estimates are made using mathematical models. For
instance, if, according to the estimates of the project manager, the cost of
constructing a building is Rs. 20,000 per square yard, a sum of Rs. 20 million is
required for constructing a 1000 square yard building. Even if the estimates
made with these models are not exact, they give the project manager a rough
idea about the costs that are likely to be incurred.
Parametric modeling provides reliable estimates when – the model is developed
on the basis of accurate historical information; all project parameters are
quantifiable; and the model is scalable (can be applied to all projects irrespective
of their size).
11.5.4 Computerized Tools
The project manager can use computerized project management software
packages like Project 2000 to estimate the project costs. These software
packages compute various costs once the relevant data is provided. The project
manager prepares the cost estimates, supporting details and the cost management
plan of the project on the basis of techniques discussed above. The cost estimates
for all the project resources are expressed in terms of rupees dollors, etc.
The project manager provides supporting details for the project cost estimates.
He describes the work estimated (based on the WBS), the basis of estimation,
specifies the assumptions made in the estimation and calculates the range of
possible estimates. The project manager also prepares a cost management plan
that describes how cost variances can be managed. This plan is highly detailed
and prepared in such a way as to meet the requirements of the project
stakeholders. A good cost management plan lets the stakeholders know how the
project manager is going to estimate project costs.
Example: Hotel Corporation of India

Hotel Corporation of India (HCI) was set up in July 1971 as a wholly-owned
subsidiary of Air India, with the objective of running hotels, motels and flight
kitchens as well as other activities to assist AI’s business. The different
projects of HCI and their time and cost overruns are given below:
Time Cost Overrun
Project Overrun (% increase
(in months) over estimate)
Centaur Hotel Bombay Airport (CHBA) 7 -
Centaur Hotel Juhu Beach (CHJB) 85 132.05
Centaur Hotel Delhi Airport (CHDA) 10 35.45
Centaur Lake View Hotel Srinagar 37 85.92
(CHLV)
Chefair Flight Catering Bombay 73 71.00
(CFCB)
Chefair Flight Catering Delhi (CFCD) 37 65.20
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Source: Report of the Comptroller and Auditor General of India-Union Government

No. 1 (Commercial) 1995.
These cost and time overruns were due to price escalations, change in project
scope, budget omissions, under estimation etc. In several cases, HCI’s
resources had been mismanaged. Given below are a few examples of
mismanagement of resources:
 HCI had begun the construction of the CHJB in 1980, without getting the
plans approved by the Bombay Metropolitan Regional Development
Authority (BMRDA) and the Municipal Corporation of Greater Bombay.
Later, the authorities made changes in the plans and HCI had to alter its
construction plans. It finally got final clearance in June 1982.
 However, the implementation of the project was delayed due to revisions in
drawings, designs, etc. To make these revisions, the consultants demanded
a higher fee. HCI has also faced similar problems with its contractors and
architects during the construction of CHLV. The contractors who had
completed the structural work of the hotel asked for more money and even
a huge amount of material belonging to HCI was stolen.
 The CHLV had imported laundry equipment in December 1983 at a cost of
Rs 7.2 million. After May 1985, due to poor occupancy, low voltage power
supply and the absence of trained staff, the equipment was used only to a
limited extent. While on the one hand the laundry equipment was not fully
utilized, on the other hand, between April 1984 and November 1986, the
laundry services were entrusted to a private firm at Srinagar, involving an
expenditure of Rs 0.37 million. During the period 1984-85 to 1987-88 the
revenue earned by the hotel from laundry services was a mere Rs 0.63
million. The interest charges alone for these four years, on the investment
(at 18% per annum) amounted to Rs 5.2 million.
 HCI had begun the construction of CHDA on land belonging to the
International Airport Authority of India, without getting the building plans
approved by the Municipal Corporation of Delhi (MCD). Following this,
the MCD imposed a penalty of Rs 3.12 million on HCI. This was reduced
later to a token penalty of Rs 0.31 million, after extensive deliberations,
and at the instance of the Ministry of Tourism and Civil Aviation.
 HCI entered into a contract with the Delhi Electricity Supply Undertaking
(DESU) for supply of 4161 kW of electricity, effective from September
1982. This was expected to meet the electricity requirements of laundry
equipment and a discotheque. However, as the laundry and the
discotheque were not constructed, the actual usage of power was turned
out to be much less than 4161 KW. In February 1984, HCI asked DESU
to reduce the contracted demand to 2100 kW. However, DESU did not
agree to this, as the agreement between HCI and DESU lay down that the
demand level could not be altered.
 In September 1986, HCI procured 23 cold storage units at a total cost of
Rs 3.6 million and installed them at CFCB. The units were not operated
during the first year. Only five cold storage units were in use, two had
been given on hire to ITDC, three were kept as standby, and the
remaining were kept idle. Thus, the investment of Rs 2.81 million in the
13 cold storage units that were not put in operation lying unused.
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Activity: Today, leading English daily in northern India has 16 editions to

cater to readers all over North India. Recently, the management of the Today
Group decided to start a new edition in South India to increase its circulation
and sales. The chairman of the Today Group, Babu Ramji appointed Subhash
Chakravarthy as the project manager and asked him to estimate the costs of
the project. What are the alternative techniques available to Chakravarthy to
estimate the costs of the project? What are the requirements that
Chakravarthy needed for cost estimating?
Answer:
Check Your Progress

7. In which method of cost estimating, the cost of each element of the project
calculated separately and then added up to estimate the total project cost?
a. Analogous estimating
b. Bottom-up estimating
c. Parametric modeling
8. Under which of the following methods does the project manager estimate
the costs by considering similar projects?
a. Analogous estimating
9. In parametric modeling, which of the following conditions need to be
fulfilled in order to give reliable estimates?
a. The project parameters should be quantifiable
b. The model should be developed on the basis of accurate historical
information
c. The model should be scalable
d. All of the above
10. Which of the following techniques for estimating costs is also called the
‘top-down estimating’ technique?
a. Parametric estimating
c. Analogous estimating
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11.6 Cost Budgeting

In the process of cost budgeting, the project manager allocates the costs to
individual work items, based on the cost estimates made. The cost allocated for
each individual work becomes the cost baseline for that work. These cost
baselines are used to measure the cost performance of the project. The Work
Breakdown Structure and the cost estimates made (in the ‘cost estimating’
process) help the project manager to determine the amount of resources to be
allocated for each project work element. The project schedule helps him to
assign costs to the time period during which the costs will be incurred. The
project manager can also use techniques like Analogous Estimating, Bottom-up
Estimating, Parametric Modeling, and Computerized Tools (discussed earlier) in
cost budgeting.
11.6.1 Preparation of Cost Baseline

The ‘cost baseline’, an output of cost budgeting, is a time-phased budget that
periodically measures and monitors the cost performance of the project. It also
describes how costs are going to be incurred over a period of time. It is usually
displayed in the form of an S-curve. For large and complex projects, multiple
cost baselines are prepared for various aspects of the project. The project
manager should ensure that costs are being incurred as per the cost baseline.
11.7 Cost Control

The project manager uses cost control to manage the factors that bring about
changes in the cost baseline in such a way as to make sure that the changes are
beneficial. Cost control also helps him to determine whether the cost baseline
has changed and to manage the changes whenever they occur.
The project manager tries to determine how cost variances are likely to occur.
Some of the steps that the project manager can take to control project costs are:
 Defining the project scope precisely and clearly

 Using a relevant and reliable database
 Designing an organization structure that is appropriate for the current project
 Monitoring and controlling deviations from the project plan
 Periodically evaluating and monitoring cost performances
 Checking whether the changes are recorded in the cost baseline
 Selecting vendors and project consultants carefully
11.7.1 Cost Change Control System

The cost change control system describes the procedures that bring about
changes in the cost baseline. The system includes the paper work, the tracking
systems, and the approval levels necessary for authorizing changes. The system
must be integrated with the overall change control system, if it is to be effective.
9
11.7.2 Performance Measurement

Techniques like variance analysis, trend analysis, and earned value analysis help
the project manager to understand the cost performance. Variance analysis
compares the actual project results to the planned results. The cost variations are
measured at every stage of the project and the causes of these variances are
determined. Trend analysis examines the project results over a period of time to
find out if the cost performance is improving or not.
Earned value analysis is a technique that measures the project performance by
integrating the scope, cost and schedule measures of the project. According to
this analysis, three values are important. These are: Budgeted Cost Work
Schedule, Actual Cost Work Performed (ACWP) and Earned Value (also called
Budgeted Cost of Work Performed, (BCWP)).
The Budgeted Cost Work Schedule is the approved cost estimate planned for a
project activity for a given period. The Actual Cost Work Performed is the total
costs (both direct and indirect) incurred while implementing an activity in a
given period. The Earned Value is a percentage of the total budget equal to the
percentage of work completed.
These three values along with certain measures like Cost Variance (BCWP-
ACWP), the Schedule Variance (BCWP-BCWS) and the Cost Performance
Index (BCWP/ACWP) help the project manager to determine whether the work
is progressing according to the schedule and whether it is within the budget. The
cumulative Cost Performance Index for the entire project (total of BCWPs of all
project activities divided by total of all ACWPs) forecasts the project cost at
completion.
The project manager prepares revised cost estimates, budget updates, and
Estimates At Completion (EAC) and decides what corrective actions should be
taken. The project manager prepares revised cost estimates by making
modifications to the current cost information. These revised cost estimates
should be communicated to all project stakeholders.
In budget updates, changes are made to the approved cost baseline. The EAC is a
forecast of the total project costs on the basis of the project performance. Here,
the completion times are estimated as actual work completed plus a new estimate
for remaining work. The project manager also documents all the lessons he has
learnt in controlling project costs.
Check Your Progress

11. ___________ is the process by which the project manager allocates costs to
individual work items, based on the cost estimates made.
a. Cost budgeting
b. Cost baseline
d. Analogous estimating
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12. The analysis which determines whether the cost performance is improving
or not by examining the project results over a period of time is called
________________.
a. variance analysis
b. trend analysis
c. earned value analysis
13. The full form of ACWP is _____________.
a. Actual Cost Work Performed
b. Actual Cost Work Paid
c. Actual Cost Week Paid
14. Procedures that bring about changes in the cost baseline are called
______________.
a. cost control
b. cost change control system
c. cost budgeting
d. All of the above
15. The full form of EAC is ______________.
a. Estimates At Confirmation
b. Estimates At Completion
c. Estimates At Control
d. Estimates At Costs
16. What is the time-phased budget that periodically measures and monitors the
cost performance of the project?
a. Cost baseline
b. Cost budgeting
d. Analogous estimating
17. The full form of BCWP is
a. Budgeted Cost Work Paid
b. Budgeted Cost Work Performed
c. Budgeted Cost Week Paid
18. Cost performance index is represented by ________________.
BCWP
a.
ACWP
BCWP
b.
BCWS
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ACWP
c.
BCWS
d. BCWP – ACWP
19. The project manager decides the corrective actions to be taken after the
preparation of which of the following?
a. Revised cost estimates
b. Budget updates
c. Estimates at completion
d. All of the above
20. What is the technique that measures project performance by integrating the
scope, cost, and schedule of the project?
a. Variance analysis
b. Earned value analysis
c. Trend analysis
21. Cost variance is represented by _________
a. BCWP – BCWS
b. BCWP – ACWP
c. BCWS – ACWP
d. ACWP – BCWS
11.8 Cost Overruns and their Implications
The extra costs incurred over the estimated costs are called cost overruns. If the
actual costs incurred are less than the estimated costs, they are called cost
underruns. In practice, this does not happen often as the human tendency is to
plan the costs at minimum level and they continue to be raised as the project
progresses.
11.8.1 Factors that Cause Cost Overruns
The important factors that cause cost overruns are described below.
Cost Escalations
The cost of a project usually increases due to the time gap between the planning
and implementation of the project. The project manager prepares a ‘cost
overruns analysis sheet’ to determine the reasons for cost overruns.
Cost escalations occur for many reasons. Some of these are:
 An increase in the unit price of materials, machinery, labor costs and overheads
 Change in scope of the project
 Increase in statutory taxes and duties like sales tax, customs tax, and excise duty
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 The impact of the adverse exchange rate variations on import of machinery and
equipment
 An increase in the cost of capital when the project is not completed in the
estimated time
The project manager must arrange for forward contracts with importers of
machinery and equipment to take care of cost overruns due to unfavorable
foreign exchange fluctuations. The project manager should prepare contingency
plans to effectively deal with when the cost overruns occur.
Time Overruns
Poor planning and failure to meet time schedules result in time overruns. The
project manager prepares a ‘time overruns analysis sheet’ to understand where
delays have occurred and the reasons for delays. Time overruns occur due to:
 A change in the scope of the project
 Ineffective project time management (which itself is the result of improper
planning and scheduling)
 Delays in starting and executing some of the project activities
 Delays in subsequent projects as a result of a delay in one project
 Use of outdated technology
 Bureaucratic/ political interference, and poor administration
To complete the project on schedule, the project manager must prepare realistic
time schedules, select capable vendors, carryout periodical monitoring of project
activities, and take quick decisions.
Scope Changes
Scope changes during the implementation of the project, that were not envisaged
during the planning stage increase project costs. Inadequate attention to detail at
the time of project formulation is the main cause of these scope changes.
Scope changes include the introduction of new features to the project product,
design modifications, increased plant capacity and extra construction works,
updated technical versions, and newly framed statutory requirements of the
government may necessitate changes in scope.
Proper assessment of the project requirements and understanding the statutory
conditions help the project manager to avoid changes in the scope of the project.
Budget under Estimation/Omission
If the budget prepared is not exact, extra costs are incurred when the project is
actually implemented. This happens when the costs are estimated on the basis of
an incorrect project scope statement, or when adequate technical information is
not available. Sometimes certain project elements might be ignored while the
budget is being prepared. All these factors finally result in an increase in the
project costs. By preparing a detailed, exhaustive checklist of all project
activities, the project manager can reduce overruns.
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Rectifications and Replacements

The project manager’s lack of experience, wrong choice of technology, defective
designs and flaws in the equipment purchased result in project cost overruns, as
drawings have to be revised, or the machinery has to be repaired. By undertaking
frequent inspections, setting up equipment carefully, ensuring that the equipment
is not damaged during transportation, and standardizing some of the processes,
the project manager can reduce these cost overruns.
Unforeseen Contingencies
Unexpected factors like natural calamities, lockouts, labor unrest, fires or
accidents cause project cost overruns. The costs arising out of these
contingencies cannot be controlled. However, the project manager can take some
preventive measures to reduce their impact.
Other Related Factors

An ineffective organization structure, outdated systems, poor decision making,
and the interference of stakeholders are other factors that push up the costs. The
project manager should be aware of all these aspects in order to be able to
minimize the cost overruns that are likely to occur in the execution of a project.
An evaluation of all the project activities, consultation with outside experts, and
a critical view of all related factors can minimize cost overruns.
Example: Overruns in Government Projects
According to the Ministry of Planning and Program Implementation, the cost

escalations of various mega projects across the country put the government
back by over Rs 1,000 billion. A review of 110 major projects, each costing
Rs 1 billion or more, estimated that the time over run was up to five years,
and cost escalation was 40 to 75 per cent. The ministry made a point that the
cost overruns were exceptionally high in the following projects: the two
nuclear power plants in Rajasthan, the modernization of the Rourkela and
Durgapur steel plants, the Kandla-Bhatinda pipeline, the Dulhasti and the
Koyalkaro hydroelectric projects, and the Kehalgaon thermal power projects.
The 19 mega railway projects alone incurred cost overruns of Rs 35 billion.

For the Jammu-Udhampur railway line project, the cost escalation was over
Rs 1.3 billion and for the Jagighopa-Guwahati, Talchar-Sambalpur, Guna-
Etawah and Madras-Trichy lines, and the MRTS line from Madras Beach to
Luz, the cost overruns were Rs 1.08 billion, Rs 1.17 billion, Rs 1 billion, Rs
1 billion, and Rs 1.08 billion respectively. The review ascribed these cost
overruns to factors such as delays in getting clearance from the regulatory
agencies for land acquisition and procurement of material, scope changes
while the project is being executed, management problems such as personnel,
labor, and contract disputes, etc.
The ninth Five-year plan focused on cutting cost and time overruns. It was
decided to scrap those projects where less than 10 per cent of the approved
14
outlay had been spent. The action plan suggested that only a limited number
of new projects should be considered for approval during the 9th plan. The
ministry has also initiated actions to wind up or privatize the most delayed
projects. According to Dr Y K Alagh, the minister of Planning and Program
Implementation, “the existing memoranda of understanding between the
ministries and the project authority only related to the target of the working of
the project in terms of production, profit or loss. But now the project
implementation guidelines should also be a part of the MoU.” This means the
project authority has to meet the approved project guidelines.
Besides modifying the MoU between the ministries and the project
authorities, the other proposal is to lay down more detailed contract
management procedures so that corruption can be minimized. Dr. Alagh
states from the current fiscal year, the implementation of his ministry’s action
plan will push up the economic growth rate in key infrastructure sectors.
Adapted from the article "Projects delays cost Rs 1000 bn; govt plan to force pace," from
www.rediff.com, dated 9 July 1997.
Activity: The Govardhan Group of Industries located near Ahmedabad,

Gujarat wanted to lay a railway line inside the company premises (500 acres)
to speed up the movement of materials and machinery among the various
departments. The management estimated that the project required a capital of
Rs. 85 lakh. But the firm did not take up the project due to lack of funds.
After two years, the management took up the project. But the firm failed to
complete the project within the budget. Discuss why the company failed.
Also, list some of the factors that lead to cost overruns.
Answer:
Check Your Progress

22. Which of the following options are the reasons for the escalation of costs
that cannot be controlled but whose impact can be reduced by taking some
preventive measures?
a. Scope changes
b. Unforeseen contingencies
c. Budget underestimation/omission
d. Use of outdated technology
15
23. What among the following options are the reasons for time overruns?
i. Change in the scope of the project
ii. Use of outdated technology
iii. Political interference
iv. Delay in starting and executing some of the project activities
a. Only i and ii
b. Only ii and iii
c. Only ii, iii, and iv
d. i, ii, iii, and iv
24. Budget underestimation and budget omission are the causes of
____________.
a. time overruns
b. rectification costs
c. estimation errors
d. cost escalations
25. The extra costs incurred over the estimated costs are called
_______________.
a. cost escalations
b. rectification costs
c. cost overruns
d. estimation errors
26. From the following options, identify which is/are responsible for project
cost overruns?
a. Cost escalations
b. Scope changes
c. Rectification costs
d. All of the above
27. Which of the following options is the reason for scope changes in the project
that occur at the time of implementation of the project?
a. Use of outdated technology
b. Bureaucratic and political interference
c. Updated technical versions
d. Poor administration
11.9 Summary
 Project cost management includes all the processes that are required to ensure
that the project is completed within the approved budget. After each phase of the
project is completed, cost management estimates the resources (people,
equipment and materials) that were already spent and the budget needed for all
subsequent project phases.
16
 The process of cost management involves four steps -- resource planning, cost
estimating, cost budgeting, and cost control.
 Resource planning is the process of identifying what project resources are
required and in what quantities. Resources normally include money, manpower,
machinery and materials.
 After the resource requirements are identified, the project manager develops an
estimate of the costs of the resources required to execute the project. This
includes identifying and evaluating various cost alternatives.
 In the process of cost budgeting, the project manager allocates the costs to
individual work items, based on the cost estimates made. The cost allocated for
each individual work becomes the cost baseline for that work.
 The project manager uses cost control to manage the factors that bring about
changes in the cost baseline in such a way as to make sure that the changes are
beneficial. Cost control also helps him/her to determine whether the cost
baseline has changed and to manage the changes whenever they occur.
 The extra costs incurred over the estimated costs are called cost overruns. If the
actual costs incurred are less than the estimated costs, they are called cost
underruns.
 The important factors that cause cost overruns are cost escalations, time
overruns, scope changes, budget under estimation/omission, rectifications and
replacements, unforeseen contingencies, and other related factors.
11.10 Glossary
 Actual Cost of Work Performance (ACWP): Total costs incurred (direct and
indirect) in accomplishing work during a given time period.
 Bottom-up Estimating: In this technique, the cost of each element of the
project is calculated separately and all these costs are added up to estimate the
total project cost.
 Budget Cost of Work Scheduled (BCWS): The sum of the approved cost
estimates (including any overhead allocation) for activities scheduled to be
performed during a given period.
 Budgeted Cost of Work Performance (BCWP): The sum of the approved
cost estimates (including any overhead allocation) for activities completed
during a given period.
 Cost Budgeting: A process of allocating the costs to individual work items,
based on the cost estimates made.
 Cost Estimating: Identifying and evaluating various cost alternatives.
 Cost Overruns: Extra costs incurred over the estimated costs.
 Cost Underruns: Actual costs incurred are less than the estimated costs.
 Resource Planning: The process of identifying the nature and quantity of
physical resources required to perform the project activities.
17

1. The process of cost management requires proper planning and
implementation at every stage of the project, if the project is to be a success.
What are the steps involved in the process of cost management?
2. The first step in the process of cost management involves identification of
the resources and their quantities. Explain the process of resource planning
in cost management. What the various aspects, which need to be considered
while planning for resources?
3. After the resource requirements are identified, the project manager develops
an estimate of the costs of the resources. Describe the process of cost
estimating.
4. Based on the cost estimates made, the project manager allocates the costs to
individual work items. Explain the process of cost budgeting. How can the
project manager control the costs?
5. Sometimes, the actual costs incurred may be more or less than the estimated
costs. What factors lead to such variations? Explain the implications of such
variations.

1. Prasanna Chandra, “Projects,” McGraw Hill, Seventh Edition, 2009.
2. Robert K. Wysocki, “Effective Project Management: Traditional, Agile,
Extreme,” Wiley India, 2009.
3. Jack R. Meredith and Samuel J. Mantel Jr., “Project Management: A
Managerial Approach,” Sixth Edition, Wiley India, 2008.
4. Harold Kerzner, “Project Management – A Systems Approach to Planning,
Scheduling and Controlling,” Second Edition, 2006.
5. “A Guide to the Project Management Body of Knowledge,” Project
Management Institute, Second Edition, December 2000.
6. Joseph Weiss and Robert K. Wysocki, “Five-phase Project Management: A
Practical Planning and Implementation Guide,” Basic Books, 1992.

Following are the answers to the Check Your Progress questions given in the
Unit.
1. (b) Option iv followed by ii followed by i and iii
The four steps involved in the process of cost management are in sequence,
resource planning, cost estimating, cost budgeting, and cost control.
2. (b) Project cost management
Project cost management includes all the processes that are required to
complete the project within the approved budget. The other options given in
the question – resource planning, cost budgeting, cost control  are the
steps involved in the process of cost management.
18
3. (a) Project scope statement

The project scope statement allows all project stakeholders to gain an
understanding of the project. The work breakdown structure is the
deliverable-oriented grouping of the project elements. Organizational
policies refer to the definite course of action taken by the organization. The
project manager has to abide by these organizational policies while developing
resource plans. The policies regarding purchase of supplies and staffing should
be considered properly.
4. (c) Work breakdown structure
The work breakdown structure refers to the deliverable-oriented grouping of
the project elements. Each descending level of WBS represents an
increasingly detailed description of the project component. The project
scope statement allows all project stakeholders to gain an understanding of
the project. Organizational policies refer to the definite course of action
taken by the organization. The project manager has to abide by these
organizational policies while developing resource plans. The policies
regarding purchase of supplies and staffing should be considered.
5. (c) Cost control
Cost control refers to taking the necessary steps to keep the project costs
within the permissible limits. Cost budgeting involves assigning costs to
each project activity. Cost estimating refers to calculating the approximate
costs of all project activities and resource planning means planning for and
gathering resources to complete the project.
6. (c) resource planning
Resource planning is the primary step in the process of cost management
and involves identifying what project resources are required and in what
quantities. Cost estimating is the estimation of costs of the resources
required to execute the project. Cost budgeting is the process of allocating
costs to individual work items. Cost control is the process of controlling the
costs of the project.
7. (b) Bottom-up estimating
In bottom-up estimating, the cost of each element of the project is calculated
and then added up to estimate the total cost of the project. In the case of
analogous estimating, the project manager considers similar projects to
estimate the cost of the project. In parametric modeling, cost estimates are
made using mathematical models.
8. (a) Analogous estimating
In the case of analogous estimating, the project manager estimates the cost
of the project by considering similar projects. He/she prepares the cost
estimates by considering parameters like time value of money, inflation, etc.
19
9. (d) All of the above

The following conditions need to be fulfilled if parametric modeling is to
give reliable estimates: The model should be developed on the basis of
accurate historical information, all the project parameters should be
quantifiable, and the model should be scalable.
10. (c) Analogous estimating
The analogous estimating technique refers to estimating the cost of the
project by comparing the costs of other similar projects. As this involves
arriving at the costs of the project from the top, it is also called top-down
estimating. Parametric modeling involves estimating the cost of the project
using mathematical models. In bottom-up estimating, the cost of each
element of the project is calculated separately and then added to arrive at the
project cost.
11. (a) Cost budgeting
Cost budgeting is the process by which the project manager allocates costs
to individual work items based on the cost estimates made.
12. (b) trend analysis
Trend analysis examines the project results over a period of time to know
whether the cost performance is improving or not. Variance analysis
compares the actual project results with the planned results. Earned value
analysis measures the project performance by integrating the scope, cost,
and schedule measures of the project.
13. (a) Actual Cost Work Performed
Actual cost work performed is one of the important values in earned value
analysis. Earned value analysis is the technique that measures project
performance by integrating the scope, cost, and schedule measures of the
project.
14. (b) cost change control system
The cost change control system describes the procedures that bring about
changes in the cost baseline. The cost change control system includes the
paper work, tracking systems, and approval levels necessary for authorizing
changes. Cost budgeting refers to the allocation of costs to individual work
items. Cost control refers to the overall necessary steps to keep the project
costs within the permissible limits.
15. (b) Estimates At Completion
Before deciding what corrective action is to be taken, the project manager
prepares revised cost estimates, budget updates, and estimates at completion
(EAC).
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16. (a) Cost baseline
Cost baseline is a time-phased budget that periodically measures and

monitors the cost performance of the project. It refers to the allocation of
costs to individual work items. Parametric modeling involves estimating the
cost of the project using mathematical models. In the case of analogous
estimating, the project manager considers similar projects to estimate the
costs of the project.
17. (b) Budgeted Cost Work Performed
Budgeted cost work performed is an important part of earned value analysis.

Earned value analysis is the technique that measures project performance by
integrating the scope, cost, and schedule measures of the project.
BCWP
18. (a)
ACWP
Cost performance index is one of the measures of performance

measurement. It is represented by budgeted cost of work performed divided
by actual cost of work performed.
The project manager prepares the revised cost estimates, budget updates and
estimates at completion and then decides on the corrective actions that need
to be taken.
20. (b) Earned value analysis
Earned value analysis is a technique that measures the performance of the

project by integrating the scope, cost, and schedule measures of the project.
The three values that are important for the measurement of project
performance are: budgeted cost work schedule, actual cost work performed,
and earned value.
21. (b) BCWP-ACWP
The three values in the performance measurement are: cost variance,

schedule variance, and cost performance index. Cost variance is represented
by BCWP-ACWP, which means budgeted cost of work performed less
actual cost work performed.
22. (b) Unforeseen contingencies
Factors like natural calamities, lockouts, labor unrest, and fire accidents are
examples of unforeseen contingencies. The costs arising out of these
contingencies cannot be controlled. However, the project manager can take
some preventive measures to reduce their impact.
21
23. (d) i, ii, iii and iv
The main reasons for the occurrence of time overruns are: A change in the
scope of the project, ineffective project time management, delays in starting
and executing some of the project activities, delays in subsequent projects as
a result of a delay in one project, use of outdated technology,
bureaucratic/political interference, and poor administration.
24. (c) estimation errors

Estimation errors are one of the reasons for project cost overruns. Budget
underestimation and budget omission are the causes of estimation errors.
Time overruns are the results of unrealistic time scheduling and unforeseen
contingencies. Rectification costs are the result of flaws in the equipment
used and of the wrong choice of technology. Cost escalations are the result
of increases in the prices, taxes and duties, and exchange rate fluctuations.
25. (c) cost overruns
The extra costs that are incurred over the estimated costs are called cost
overruns. If the actual costs incurred are less than the estimated costs they
are called cost underruns. Cost escalations are the reasons for the increase in
costs that, in turn, cause cost overruns. Rectification costs are the costs that
are incurred to rectify the errors made by making wrong choices. Estimation
errors are the errors that result from underestimation of the budget.
The following are the reasons for project overruns: cost escalations, time
overruns, scope overruns, estimation errors, rectification costs, unforeseen
contingencies, and some other miscellaneous reasons like ineffective
organization structure and political interference.
27. (c) Updated technical versions

The main reasons for the changes in the scope of the project are:
introduction of new features to the project product, design modifications,
increased plant capacity and extra construction, updated technical versions,
and newly framed statutory requirements of the government. The other
options given in the question are the reasons for time overruns in the project.
22
Unit 12
Project Risk Management
Structure
12.1 Introduction
12.2 Objectives
12.3 Definition of Risk
12.4 Tolerance for Risk
12.5 Definition of Risk Management
12.6 Certainty, Risk, and Uncertainty
12.7 Risk Management Methodology
12.8 Insurance for Projects
12.9 Summary
12.10 Glossary
12.14 Answers to Exercises
12.1 Introduction
In the previous unit, we have discussed project cost management. In this unit, we
will discuss project risk management. The element of risk is inherent in every
activity of a project. The project manager should carefully handle the risks that
the project is likely to be exposed to. For projects whose duration is less than one
year, we can assume that the operating environment is known and stable. But in
the case of big projects of longer duration, it is necessary to conduct a ‘risk
analysis.’ Projects are exposed to various types of risks like technical risks,
economic risks, social risks, production risks, financial risks and human risks.
Since all risks cannot be eliminated or avoided, it is the job of the project
manager to ensure that risks do not have adverse consequences. Every project
manager follows a specialized risk management methodology that normally
consists of four processes: risk identification, risk quantification, risk response
and risk control. To relieve themselves of risk, individuals and firms insure the
projects they undertake. While insurance cannot prevent risk, it can mitigate the
risk by providing financial compensation.
This unit will discuss the definition of risk and examines the concept of tolerance
for risk. We will discuss risk management, and decision making under the
conditions of certainty, risk, and uncertainty. Finally, we would be discussing the
risk management methodology, and the concept of insurance for projects.
12.2 Objectives

 define risk and risk management.
 explain the concept of tolerance for risk.
 explain decision making under the conditions of certainty, risk, and
uncertainty.
 discuss the risk management methodology.
12.3 Definition of Risk
Risk is defined as the possibility of an outcome being different from the

expected outcome. It refers to the possibility of adverse results flowing from the
uncertainty involved in carrying out the activities. When a project or a project
activity is expected to be possible, the chance of its occurrence varies from zero
and one. Every activity of the project is always exposed to a certain degree of
risk. Damage to machinery, dramatic changes in technology, loss of human life
and stagnation of financial flows are some of the areas of risk that a project
manager should pay attention to.
Conceptually, project risk is a function of uncertainty and damage.
Therefore, Risk = f (uncertainty, damage)
Both uncertainty and the potential for damage for every project activity should
be carefully examined when conducting a risk analysis. Sometimes, risk also
refers to the cumulative effect of all the adverse, unfavorable action.
Risk also arises because of hazards, which can be defined as a source of danger.
The project manager must provide some safeguards to reduce or eliminate
hazards. So risk can also be referred to as a function of hazard and safeguard.
Therefore, Risk = f (hazard, safeguard)
12.3.1 Types of Risks
Risks are of several types. Broadly, they can be categorized into technical risks,
social risks, economic risks, political risks, production risks, marketing risks,
financial risks and human risks.
Technical Risks
Technical risks refer to the failure to meet a particular performance requirement.

Failure of the feasibility of a design and changes in technology are some of the
sources of technical risk. For example, some software modules run well when
tested individually on a limited scale, but they fail when they are integrated and
tested on a large scale. The project is also under technical risk if the technology
being used becomes outdated by the time the project delivers the final product or
service. So it is the responsibility of the project manager to continuously update
the technical aspects of the project.
24
Social Risks
Social risks refer to risks arising from changes in the needs and changing
preferences of target customers. Lack of necessary natural resources, labor unrest,
agitations and social movements against the project also constitute social risks.
Economic Risks
Economic risks refer to an increase in the rate of inflation, changes in the
economic policies of governments, and distribution of income. Since the project
manager does not have any control over these risks, he should carefully assess
such risks and should ensure that the project is not going to suffer because of
these risks.
Political Risks
Nationalization or privatization of a particular industry, political instability, trade
restriction are some examples of political risks. The project manager should
ensure that the project does not go against the political interests of the country.
Production Risks
Production risks refer to the shortage of necessary raw materials, sudden
breakdown of key machinery, and exponential rise in installation and
maintenance costs. As these risks can be controlled to some extent, the project
manager should try to reduce the effect of these risks on the project.
Marketing Risks
Marketing risks refer to failure of the developed product or service in the market
due to changes in market demand, errors in forecasting of demand, or difficulties
in distribution. The project manager should change the market strategy to deal
with these risks and generate more revenues.
Financial Risks
Financial risks refer to bad debts, change in the interest rates, wrong choice of
investments and mistakes in the accounting procedures. Consistent financial
performance assessment of the project will give the project manager a clear
picture of financial condition of the project.
Human Risks
Human risks refer to the sudden demise of a key employee, limited availability
of competent employees, inter-group politics etc. A clear, and result encouraging
HR policy coupled with employee group insurance schemes generally solves
most problems caused by such risks.
Check Your Progress

1. What is the possibility of an outcome being different from the expected
outcome called?
a. Uncertainty
b. Risk
25
c. Technical risks
d. Political risks
2. ___________ refer to the possibility of failure of the product or service in
the market due to factors like change in demand, errors in forecasting of
demand, and difficulties in distribution.
a. Financial risks
b. Marketing risks
c. Political risks
d. Economic risks
3. Identify the risks that arise from the needs and changing preferences of
target customers.
a. Technical risks
b. Economic risks
c. Social risks
d. Human risks
4. Identify the type of the risk that arises due to raw material shortage,
breakdown of important machinery, and a steep rise in the installation and
maintenance costs.
a. Marketing risks
b. Political risks
c. Social risks
d. Production risks
5. Risk = f ( ______, ______ )
i. Uncertainty, damage
ii. Certainty, safeguard
iii. Hazard, safeguard
iv. Damage, certainty
a. Only i
b. Only i and iii
c. Only ii and iii
12.4 Tolerance for Risk

There are no tools or techniques for avoiding risk completely. The project
manager must use his judgment to identify an appropriate tool for dealing with a
risk. Even though no tool can nullify a risk completely, it can lessen the adverse
impact of the risk. Project managers deal with risks in different ways, depending
on their level of tolerance for risks.
26
Project managers can be classified as risk averters, risk neutrals and risk seekers
on the basis of their attitude toward risk. The tolerance curve for each type of
manager is derived by comparing his risk preference with the utility (the amount
of satisfaction the project manager derives from a payoff). The utility can also be
referred as the tolerance for risk.
A risk averter is a person who always wishes to avoid risk. When more money is
at stake, the risk averter’s utility increases, but at a decreasing rate. A risk seeker
is a person who wishes to accept more and more risks. For such a person, the
utility increases at an increasing rate as the amount of money at stake increases.
A risk neutral person’s attitude falls midway between the risk averter’s and the
risk seeker’s attitude. His utility increases in proportion to an increase in the
amount of money at stake.
12.5 Definition of Risk Management

The PMBOK defines risk management as “the formal process by which risk factors
are systematically identified, assessed, and provided for.” Risk management is not a
separate project activity, rather, it is an aspect of project implementation. A project
manager must use several tools to manage risks in technical areas, to understand the
causes of risks, and to identify the corrective actions.
A project manager should take a proactive rather than reactive approach to
project management. Take the case of a project for developing new technology
for a particular activity. According to the schedule, the project must be
completed in six months. But the technical team feels that the development of
new technology requires eight months. If the project manager is proactive, he
might develop a contingency plan for completing the activity within six months,
either by increasing the size of the team or by outsourcing some aspects of the
development of technology. If the project manager is reactive, he will not take
any action until the problem actually occurs. Proper risk management clearly
reduces the likelihood of a risk occurring.
Check Your Progress

6. The formal process by which risk factors are systematically identified,
assessed, and tackled is known as _________________.
a. political risks
b. risk management
c. financial risks
d. economic risks
7. In the case of which of the following types of project manager does the
utility increase in proportion to an increase in the amount at stake?
i. Risk neutral
ii. Risk averter
27
iii. Risk seeker

a. i, ii and iii
b. Only i and iii
c. Only i
d. Only ii
8. A person who wishes to avoid risks completely is called a ___________.
a. risk neutral
b. risk seeker
c. risk averter
12.6 Certainty, Risk, and Uncertainty

To execute a project successfully, a project manager must be capable of taking
good decisions. Project managers take decisions under three conditions:
certainty, risk and uncertainty. Decision-making is easy under conditions of
certainty, but it is extremely difficult under conditions of uncertainty. As the
situation progresses from certainty to risk to uncertainty, the expected potential
damage to the project increases.
12.6.1 Decision Making Under Certainty

Decision making under certainty implies that the project manager is fully aware
of all the states of nature available and the expected payoffs for each state of
nature. The term ‘state of nature’ refer to a future event that is not under the
control of the decision maker. By constructing a payoff matrix for all the states
of nature, the project manager can select the best possible strategy.
To construct a payoff matrix, the project manager identifies all the states of
nature and formulates the strategies to be taken for each state of nature. All the
possible outcomes for each action, under each state of nature, are recorded to
complete the payoff matrix. Under conditions of certainty, the project manager
exactly knows which state of nature is going to occur. The project manager
selects the best course of action on the basis of the state of nature that will exist.
The following example explains the decision-making process under conditions
of certainty. For example, Midwest Laboratories wants to develop a new drug
with an investment of Rs. 5 lakh. The existing states of nature of market demand
are;
N1: strong market demand
N2: average market demand, and
N3: weak market demand
28
The company has three strategies for developing the drug, S1, S2, and S3. Table
12.1 shows the payoff matrix for the given states of nature and the three
strategies formulated.
Table 12.1: Payoff Matrix (Profit in Lakhs of Rupees)
Strategy States of Nature
N1 N2 N3
S1 2 1.5 0.5
S2 3 1.6 0.8
S3 2.5 1.4 0.8
If the project manager knows that a particular state of nature is going to exist, he
can choose the appropriate strategy. For example, if the project manager knows
N2 is the expected state of nature, he can adopt strategy S2 as it provides higher
returns than other strategies.
12.6.2 Decision Making under Risk
The PMBOK defines risk as “the totality effect of outcomes (i.e. states of nature)
that can be described within established confidence limits (i.e. probability
distributions). Under conditions of risk, the project manager is able to assign
some probability of occurrence to each state of nature. Based on this
information, the project manager calculates the ‘expected value’ for each
strategy and selects the strategy that earns higher returns.
The expected value of a strategy is calculated as the sum of the product of the
probability of a state of nature and the respective payoff value of a strategy.
Assume the probabilities of a particular state of nature are 0.25, 0.25 and 0.5.
Table 12.2 represents the payoff matrix under conditions of risk.
Table 12.2: Payoff Matrix (Profit in Lakhs of Rupees)
States of Nature
Strategy Exp.Value
N1 N2 N3
S1 2 1.5 0.5 1.125
S2 3 1.6 0.8 1.35
S3 4 3 0.1 1.8
P (N1)=0.25, P(N2)=0.25 and P(N3)=0.5
Considering the above payoff matrix, the project manager chooses strategy S3 as
it has high expected value.
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12.6.3 Decision Making under Uncertainty

Under conditions of uncertainty, the project manager does not know the
probability of occurrence of each state of nature. So the project manager uses
four types of criteria to select a strategy. They are: maximax criterion (Hurwicz
criterion), maximin criterion (Wald criterion), minimax regret criterion, and
criterion of realism.
Maximax Criterion
This criterion is also called ‘Hurwicz’ criterion. Under this criterion, the project
manager chooses the strategy that is likely to earn him the highest returns. From
Table 12.2, the project manager would choose strategy S3, as it gives higher
returns than other strategies.
Maximin Criterion
This criterion is also called ‘Wald’ criterion. Under this criterion, the project
manager identifies the minimum payoff values for each strategy and adopts the
strategy that has the highest payoff value. In Table 12.2, the minimum payoffs
are 0.5, 0.8 and 0.1. Using the maximin criterion, the project manager selects
strategy S2.
Minimax regret criterion

In this criterion, the project manager attempts to minimize the maximum regret
value (maximum opportunity loss). The regret value is obtained by subtracting
all the payoff values in each state of nature from the largest payoff value of that
state of nature. Table 12.3 is the regret table for the values given in Table 12.2.
The maximum regrets for each strategy are 2, 1.4 and 0.7. So, the project
manager chooses strategy S3 as it minimizes the maximum opportunity loss.
Table 12.3: Regret Table
Status of Nature
Strategy Max. Regret
N1 N2 N3
S1 2 1.5 0.3 2
S2 1 1.4 0 1.4
S3 0 0 0.7 0.7
Criterion of realism
This criterion is also called the ‘Laplace criterion’. According to this criterion,
each state of nature has the same probability of occurrence. So, the project
manager considers the average value of all the payoffs for each strategy and
selects the strategy that has the highest average payoff value. For Table 12.2, the
average payoffs are 1.33, 1.8 and 2.36. So, the project manager chooses strategy
S3.
30
Decision tree analysis

The project manager can use ‘decision tree analysis’ when a decision involves a
series of several interrelated decisions. The project manager computes the
‘Expected Monetary Value’ (EMV) of all strategies and chooses the strategy
with highest EMV.
Assume that the project manager has four alternative strategies, S1, S2, S3 and
S4. The resultant values for each strategy at different probability levels are R1,
R2, and R3. Assume that the probability of occurrence of these results is 0.5, 0.2
and 0.3. The payoff matrix for this problem is given in Table 12.4.
Table 12.4: Payoff Matrix
R1 R2 R3
S1 14 9 10
S2 11 10 8
S3 9 10 10
S4 8 10 11
The project manager finally selects strategy S1 as it has the highest expected
value.
Activity: The management of Asian Abrasives plans to launch a new product.

The project manager in charge of launching the new product, identified three
states of nature for the product: a low demand, a moderate demand, and a
high demand. The project manager prepared three types of strategies, S1, S2,
and S3, to improve the product's sales. A payoff matrix prepared by him is
given below. The matrix provides payoff values for each of these three states
of nature against each strategy. To choose a strategy for implementation, he
wanted to use the minimax regret criterion. What is the minimax criterion?
Explain which type of strategy is preferred using this criterion?
States of Nature
Strategy
N1 N2 N3
S1 50 30 80
S2 40 35 85
S3 60 40 65
Answer:
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Check Your Progress

9. Which of the following criteria is also called the Wald criterion under
conditions of uncertainty?
a. Criterion of realism
b. Minimax regret criterion
c. Maximin criterion
d. Maximax criterion
10. From the given payoff matrix, which strategy should the project manager
choose under conditions of certainty?
Payoff matrix (Profit in millions of rupees)
States of nature
Strategy
N1 N2 N3
S1 2 1 0.8
S2 3.5 2.5 1.5
S3 4.5 3 1
N1: Strong market demand

N2: Average market demand, and
N3: Weak market demand
a. S1
b. S2
c. S3
d. Data insufficient
11. Which of the following criteria is also called the Hurwicz criterion under
b. Minimax regret criterion
12. Under conditions of uncertainty, the project manager uses various types of
criteria to select a strategy. Which of the following is/are the criteria to
select the strategy?
i. Minimax regret criterion
ii. Maximin criterion
iii. Maximax criterion
iv. Criterion of unrealism
a. Only i and ii
b. i, ii, iii and iv
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c. Only iv
d. i, ii, and iii
13. Which of the following types of analysis is used when a decision involves a
series of several interrelated decisions?
b. Decision tree analysis
c. Maximax criteria
d. Minimax regret criterion
14. Which of the following criteria is also called the Laplace criterion under
a. Minimax regret criterion
b. Criterion of realism
15. In the case of decision-making under _________ conditions, the project
manager is fully aware of all the states of nature available and the expected
payoffs for each state of nature.
a. risk
b. certainty
c. uncertainty
Exercises
a. From the given payoff matrix, which strategy should be chosen by the
project manager under conditions of risk, assuming the probabilities of a
particular state of nature are: 0.2, 0.2, and 0.4?
Payoff Matrix
(Profit in millions of rupees)
States of nature
Strategy
N1 N2 N3
S1 3 2.5 1
S2 4 2 1
S3 5 4 0.5
b. Using the decision tree analysis, select the best strategy with the highest
expected monetary value. The project manager has four alternatives
strategies to choose from  S1, S2, S3, and S4. The resultant values for
each strategy at different probability levels are 0.4, 0.25, and 0.36.
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R1 R2 R3
S1 13 7 8
S2 10 9 7
S3 8 7 8
S4 7 8 9
12.7 Risk Management Methodology

The successful completion of a project depends on the ability of the project
manager to deal with different types of risks. It is important for a project
manager to develop a risk management strategy at the beginning of the project.
The risk management strategy should be incorporated into the process of project
implementation. The steps involved in the process of risk management are – risk
identification, risk quantification, risk response, and risk control. Each of these
steps is discussed below.
12.7.1 Risk Identification
Risk identification involves the scanning of project activities, the identification

of potential risks and documentation of risk. The task of the project manager is
to perceive that there is a possibility of risk exposure and identifying the causes
of the risks. The project manager should carefully discover all the risks that the
project is likely to be exposed to. The project manager should study the nature of
all the project activities, the manner in which they are carried out, and where
they are carried out. Once all the risks have been identified, the project manager
should carefully document all the characteristics of each risk associated with the
project. Even though some risks may have meager impact on the project, the
project manager should study the cumulative effect of these small risks. The
process of risk identification is a continuous process and should be carried out at
regular intervals.
The project manager should address both the internal and external risks of the
project. Since internal risks normally arise because of negligence or
mismanagement, the project manager should deal with such risks in a proactive
manner. Certain internal risks are part of the activity of a project. For example,
poor quality raw material is regarded as an internal risk. The project manager can
take some preventive steps or controlling techniques to deal with such risks.
External risks are beyond the control of the project manager. The project
manager should ensure that the project will not be seriously affected by the
external risks. If necessary, he should find some alternative ways of completing
the project.
Risk identification can be done either through a cause-and-effect analysis or an
effect-and-cause analysis. In a cause-and-effect analysis, the project manager
lists all the causes of risk and compares each risk with its possible effect.
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Measures are then taken to reduce the effect of each risk. In effect-and-cause
analysis, the project manager identifies the outcomes to be avoided and initiates
action to remove the causes of those risks.
To identify the potential risks, a project manager should -- analyze the project
outcome; critically view all the processes involved in a project; estimate the
costs and schedules for various activities of a project; identify the required
human resources; understand the market conditions; and study the records and
databases of old and successfully implemented projects.
The project manager should use tools and techniques like checklists and
flowcharts and conduct interviews to identify the risks involved in the project.
Checklists provide the technology required and necessary human resources to
conduct a project. A flowchart depicts how the various elements of a system are
related to one another. Interviews with various promoters and stakeholders will
also help the project manager identify the risks that are likely to arise during the
life of the project. The project manager should ensure that the process of risk
identification uncovers the sources of risk, potential risk events, and risk
symptoms.
Sources of Risk
Sources of risk are the areas of possible risk events, which are likely to affect the
outcome of the project. Team turnover, unreliable investment, new technologies
and stockholder actions are some of the sources of risks. The project manager
should broadly categorize all the sources of risks, describe all the sources of risk
with the probability of a risk to occur, range of possible outcomes, and frequency
of occurrence of risk.
Potential Risk Events

Such events occur unexpectedly, but the amount of loss they are likely to cause
for the project is very high. The departure of a key project team member, natural
disasters, government’s ban on a particular product or service that is related to
the ongoing project are some examples for potential risk events. A potential risk
cannot adversely affect all types of the projects. For example, a storm is a
potential risk event for a construction project, but not for a biological lab project.
Since the potential risk events are specific to the application area, project
managers should carefully assess the sources of potential risks for specific
projects.
Risk Symptoms
These are also called ‘triggers’. These events are not actual risk events, but they
reveal the increasing chances of risk. For example, unusual sound from some
equipment is an indication of the possible breakdown of that equipment.
Similarly, the employee’s personal problems can indicate a likely delay in the
schedule. The project manager should carefully handle the risks once he has
identified the risk symptoms.
35
After the risks have been identified, the project manager should initiate activities
that will reduce the adverse effects of the risk. Sometimes the process of
identification of risk also identifies the need to do another activity in other areas.
For example, the process of identification of risk can reveal that the work
breakdown structure may not be sufficient to identify all the possible risks.
12.7.2 Risk Quantification

The quantification of risks involves an assessment of the range of risks
associated with a possible project outcome. Sometimes, a single risk event can
cause multiple effects. For example, delay in obtaining a critical component
leads to cost overruns, schedule delays, and low quality outcome.
A small problem in a rocket may lead to the failure to launch a satellite on a
specific path. As some of the risks cannot be quantified, reliability of a product
or service should also be studied by the project manager. For example, a small
defect in an airplane might result in the death of several people.
The changing business environment and the schedule delays that have already
occurred create risks and force the project manager to consider an alternative risk
strategy. The quantification of risk also changes from one firm to other firm
based on their past experiences, nature of project and assumptions made. One
firm perceives incurring of 20 percent more overheads than expected as high risk
while another firm perceives it as low risk. So financial soundness of an
organization should also be considered before taking any decision.
Decision trees and calculation of EMV (Expected Monetary Value) are useful
for quantifying risk. Project managers also use some Operations Research
techniques like simulation, PERT and CPM, and probability distributions to
quantify risk. These techniques help project managers determine whether risk
requires attention or can be ignored.
12.7.3 Risk Response

This refers to the steps to be taken by the project manager to respond to the risks
identified and quantified. Quick response to a particular risk is likely to reduce
its impact on a project. The following data must be gathered before developing a
risk response policy:
 List of identified risks

 Probability of occurrence of each risk
 Review of the potential responses that have been identified during risk
identification stage
 List of project stakeholders who play a role in developing proper risk response
 Definition of the ‘acceptable’ level of risk.
If any of this information is missing, the response will not be developed
effectively.
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Activity: Ruvila Lubricants produces and distributes various industrial

lubricants. The management of the company wanted to launch a new
industrial lubricant ‘Lupil.’ Bipin Chandra, the company CEO, asked Andrew
Stephen, the project manager, to identify the risks involved in the project.
What is risk identification? What are the things to be uncovered in the process
of ‘risk identification’? What kind of data should Stephen collect to determine
the risk response used for the risks?
Answer:
Criteria for Selection of an Effective Response

The criteria for selection of an appropriate response is very important. The
project manager should ensure that the selected risk response has the following
characteristics:
Appropriate: The response should be appropriate for the risk, given the size and
criticality of the risk. The project manager should not spend lot of time and effort
in developing inappropriate responses to minor risks.
Affordable: The cost of responses must be estimated; responses should be cost-
effective. The amount of time, effort and money spent on addressing the risk
should not exceed the agreed budget.
Actionable: An ‘Action Window’ that defines the time within which responses
need to be completed should be developed. While some of the risks require
immediate action, others can be addressed later.
Achievable: The project manager should ensure that the developed responses are
technically feasible, and can be achieved by the project team.
Agreed: The consensus and commitment of the project’s stakeholders is essential
before developing the responses.
Accepted: Each response should be preliminarily tested before accepting it.
It is important to determine the appropriate response before implementing it. The
project manager should select an appropriate model to implement the strategy;
otherwise the implementation of one response may nullify the effect of another
response. For example, the project has removed some unproductive team
members to avoid production risks. Since the response developed by the project
manager may affect morale of the other employees, he has to face human risks.
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Example: Approaches to Effective Risk Management

Successful organizations use some of the following approaches to manage
risk effectively:
 Making the organizational culture “risk friendly.”
 Prioritizing the risk along with cost, time and scope management.
 Decision making and resource allocation are based on the results of risk
analysis.
 Using highest quality data and other resources for risk analysis.
 Encouraging professionals to see risk management as a career path.
 Making risk analysis functions independent of the organization
 Benchmarking the risk management processes throughout the organization.
 Use of continuous improvement systems.
 Encouraging professional interchanges through conferences and journals.
Abstract from the paper of David T. Hulett, “Key Characteristics of a Mature Risk
Management Process,” presented at the Fourth European Project Management
Conference, PMI Europe 2001, London, UK.
Types of Risk Responses

A project manager can consider four types of responses to risks -- risk
avoidance, risk transfer, risk mitigation, and risk acceptance.
Risk Avoidance
The project manager considers this technique as a first option as this attempts to
avoid the risk by eliminating the cause of the risk. For example, the project
manager might feel that the use of low quality cement caused the failure of the
prototype models developed. In this situation, the project manager can replace
cement with Plaster of Paris. Of course, it is not possible to eliminate or avoid
most types of risks and their causes, and so this kind of response is not often used.
The risk avoidance technique can be implemented in two ways; directly or
indirectly. The direct approach is used when the risk arises from lack of
knowledge; and the indirect approach is used when the risk arises from a
particular source. In the direct approach, uncertainty is eliminated by obtaining
more information, improving communication, and undertaking research or
prototype development. In the indirect approach, the source or cause of the risk
is removed.
Risk Transfer
This risk response method attempts to transfer the liability for risk to a third party.
But the scope of this technique is limited as only financial risk can be transferred.
The project manager makes use of the insurance mechanism, to transfer the risk to
the insurer. But this mechanism only protects against the financial risks of the
project. It is also important to remember that risk transfer not only shifts the
38
liability, but also changes ownership of the risk. This means risk transfer does not
remove the risk, but simply makes another party responsible.
Some other financial instruments used for risk transferring are performance
bonds, warranties and guarantees. The project manager should realize that
transfer of risk is limited to recovery of financial losses and does not in any way
help put the project back on schedule. The project manager also considers
techniques like self-insurance or captive insurance as an alternative mechanism
for insurance. These techniques are discussed later.
Risk Mitigation
Very few risks can be effectively addressed by avoidance or transfer responses.
The project manager can also take preventive measures to reduce the loss caused
by the risk. This is called risk mitigation. The purpose of risk mitigation is to
reduce the intensity of the risk to a point where it can be accepted.
Risk mitigation techniques can be implemented in two ways: by eliminating the
causes of the risk, or reducing the impact of the risk. By eliminating the causes
of the risk, this approach reduces the probability of the occurrence of the risk. If
the probability of the risk cannot be reduced, the technique aims at reducing the
impact of the risk.
To reduce the likelihood of losses, the project manager can use best quality
equipment, maintain the equipment and use sophisticated production processes.
As the treatment of risk differs for each risk, the risk mitigation methodology
also varies with the nature of the risk. This is the most widely used method as the
majority of the risks can be targeted through this technique.
Risk Acceptance
Sometimes the project manager is forced to accept the consequences of certain
risks. This is because the risks are the residual risks and cannot be eliminated by
using avoidance, transfer or mitigation techniques. In such a situation, the
project manager prepares a contingency plan to face the risks.
In the case of relatively low level risks, the project manager accepts them. For
example, the manager of a showroom accepts the risk of his showroom glass
windows being broken. Similarly, risks that reduce profits but do not produce
any adverse effects are also accepted. The project manager creates a separate
reserve to face these risks.
12.7.4 Risk Control
When changes in the course of the project are observed, the project manager
repeats the cycle of identifying, quantifying and responding to risks. The process
of risk control includes identifying the additional risks and their sources,
management by wandering around and developing more risk response
developments. The process of risk control results in corrective action and
revision of the risk management plan.
Corrective Actions
39
To take corrective action, the project manager prepares contingency plans and
does workarounds. Contingency plans are the alternative ways of doing the work
when the risk is faced. Workarounds are the informal checking up of the project
activities. These corrective actions help in reducing the severity of the risk.
Updates to Risk Management Plan
Evaluation of the risk event and identification of the causes for failing to respond
to a particular risk are aspects to be considered by the project manager when
revising or updating the earlier risk management plan.
Activity: Build India Ltd. manufactures industrial inverters and generators. In

2001, the company got several orders to manufacture industrial inverters and
generators from various companies. The company incurred huge losses due to
its poor risk management record. Therefore, the company management asked
Ravi Prabhakar, the project manager, to prepare effective risk responses to
deal with the risks that may arise. What are the various types of risk
responses? Discuss the criteria for selecting an appropriate risk response.
Answer:
Check Your Progress

16. Which of the following options involves the assessment of the range of risks
associated with a possible project outcome?
a. Risk response
b. Risk quantification
c. Risk transfer
d. Risk mitigation
17. Which of the following responses to risks involves taking preventive
measures to reduce the loss caused by the risk?
a. Risk avoidance
b. Risk transfer
c. Risk acceptance
d. Risk mitigation
18. Which of the data need not be collected by the project manager before
developing a risk response policy?
a. List of identified risks
b. Probability of occurrence of each risk
c. Analysis of the project outcome
40
d. Review of the potential responses that have been identified during the
risk identification stage
19. The successful implementation of a project depends on the ability of the
project manager to deal with different types of risks. Which of the following
is/are the steps in risk management?
i. Risk identification
ii. Risk quantification
iii. Risk response
iv. Risk control
a. Only i
b. Only ii and iv
c. i, ii, iii, and iv
d. Only iii and iv
20. Which of the following are the events which reveal the increasing chances
of risk?
a. Sources of risk
b. Risk symptoms
c. Potential risk events
d. Risk quantification
21. From the options given, identify the ways by which the risk mitigation
techniques can be implemented.
i. By accepting the consequences of risk
ii. By eliminating the causes of risk
iii. By transferring the liability of risk to a third party
iv. By reducing the impact of risk
a. i and iv
b. ii and iv
c. iii and iv
d. ii and iii
22. For identifying the potential risks, the project manager need not perform
which of the following activities?
a. Analyzing the project outcome
b. Understanding the market conditions
c. Estimating the probability of occurrence of each risk
d. Identifying the required human resources
23. The concept of insurance is a kind of ___________ response.
a. risk avoidance
b. risk mitigation
c. risk transfer
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d. risk control
24. __________ refer to the informal checking up of project activities.
a. Contingency plans
b. Corrective actions
c. Workarounds
25. Which of the following types of responses to risk involves shifting the risk
to a third party?
a. Risk avoidance
b. Risk acceptance
c. Risk transfer
d. Risk mitigation
12.8 Insurance for Projects

The concept of insurance is a kind of risk transfer response. Diversification of
risk is an important aspect of insurance that spreads the risks over a large group
of projects. The project manager enters into an insurance or risk pool to transfer
the risk over a wide area and over a period of time.
Basically, risks are of two types: speculative risks and pure risks. The
mechanism of insurance is applicable only for pure risks. The term ‘pure risk’
refers to those situations that involve the likelihood of incurring losses.
Speculative risk describes a situation where there is the possibility of making
profits. Risks caused by changes in technology, political upheaval etc. are
speculative risks; and damage caused by fire, earthquake or human risks such as
burglary, theft negligence etc are pure risks.
The purpose of insurance is to safeguard the business against a set of pure risks
that affect the solvency of the project. The project manager should acquaint
himself with all the aspects of insurance coverage and he should identify all the
risks that can be covered and the risks that cannot be covered by insurance
coverage. At the same time, the project manager is responsible for reducing the
severity of the risks. Some of the techniques followed by project managers to
secure the project against certain types of risks are discussed below.
12.8.1 Self Insurance

Assuming a financial risk oneself instead of paying the premium to another
company is called self- insurance. Organizations that are financially very strong
usually opt for self-insurance. Such organizations are aware of the occurrence of
risks, instead of transferring these risks to other parties, they create separate
reserves to deal with such risks.
42
Self insurance is normally done when an organization feels that the risks are not
very severe and in the case where insurance is not applicable. By making self-
insurance, a firm can save costs like agent commission, and administration costs
of the insurance company.
12.8.2 Captive Company
Big organizations create a separate entity to provide insurance to its corporate

firm and to its affiliates. The created entity works like an insurance company and
is called a captive company. There are two types of captives: pure captives and
group captives. In a pure captive, a single company provides insurance coverage
to its affiliates; and in group captives, a group of companies come together to
provide insurance coverage to their corporate offices and affiliates against
certain specified risks. But the risk diversification is not spread more in these
companies.
In the above cases, the transfer of risk is partial and limited. In order to ensure a
greater spreading of risks, the project manager has only a single option,
insurance. The project manager considers several policies to cover several
project risks. Some of the policies and the risks they cover are discussed below.
12.8.3 Fire and Natural Calamities Insurance
The policy covers all machinery and equipment (movable, immovable) against
the risks of fire, lightning, explosion of boiler and explosion of gas. Fire policies
‘A’, ‘B’, and ‘C’ are issued to cover the equipment from several risks. Fire
policy ‘A’ and Fire policy ‘B’ cover simple risks to dwellings offices, hotels,
shops and educational institutions. Fire policy A covers the following perils: (i)
fire, (ii) lightning (iii) impact damage (iv) aircraft damage, (v) riot, strike and
terrorist damage, (vi) earthquake, (vii) explosion / implosion (viii) storm, flood
and inundation (ix) landslide. Only policy A is issued to cover artisans
workshops, bio-gas plants, village and cotton industries, tiny sector or small
scale industries.
Fire policy B covers the following perils (i) fire (ii) lightning (iii)
explosion/implosion (iv) impact damage (v) aircraft damage (vi) riot, strike and
terrorist damage. The riot, strike and terrorist damage perils can be excluded
with specified reduction in the premium rate. Fire policy ‘C’ is issued to cover
industrial/manufacturing risks and storage risk from perils like fire, lightning,
explosion/implosion, impact damage, aircraft damage, riot, strike, malicious and
terrorist damage. The riot, strike, malicious and terrorist damage perils can be
excluded on specific request with a reduction in the premium rate.
The consequential loss fire insurance policy protects the loss of gross profit from
interruption of the commissioned project as a result of fire damage to the
machinery and equipment. In the case reduction in output, the financial loss is
compensated for by the insurance company.
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12.8.4 Industrial All Risks (IAR) Insurance

This is a comprehensive policy that covers perils like fire, burglary, and
machinery breakdown/boiler explosion. Various risks are covered in a single
policy, thus reducing the premium costs. This policy covers both manufacturing
and storage facilities of all industrial units anywhere in India. The policy holder
should bear 5% of the claim amount in case of material damage, three days of
gross profit in the case of business interruption, subject to a minimum of Rs. 5
lakhs and a maximum of Rs. 50 lakhs.
12.8.5 Projects and Advance Loss of Profits Insurance

This policy is especially designed for large power and construction projects, and
industrial plants. It is a comprehensive policy, provides coverage for various
perils. Under this policy, and material damage is covered until the project is
completed and tested. In addition, if there is any delay in completion of the
project because of material damage, the policy offers partial compensation for
the loss of profits. But the other policies cover the loss of profit from the day the
insured peril occurred. But this policy covers the profit risk from the date the
insurance was taken. These policies are framed to meet the insurance needs of
major global project financiers and joint venture partners who are making large
investments in India.
12.8.6 Erection All Risks (EAR) Insurance

This policy protects the property against accidents that result in damage to the
equipment and machinery while constructing or installing. These days, this
policy has become a prerequisite for receiving loans from financial institutions.
The sum insured for a project under this policy represents the value of the
project. Big projects like global infrastructural projects, power generation
plants, drugs and fertilizer plants, cement factories and oil refineries purchase
this policy to protect buildings and equipment.
12.8.7 Workmen’s Compensation Insurance

The Workmen’s Compensation Act, 1923, provides compensation to workmen
for any injury, accident, or disease arising out of and in course of the work. The
project manager purchases a policy to cover employees against specified risks.
Because of the increased use and growing complexity of machinery in today’s
projects, all firms are protecting their workmen against several risks. This also
improves the morale of the workers of the project.
The other important policies that project managers need to consider are
Contractors All Risk (CAR) policy that protects the civil contractors against
damage, Machinery Breakdown (MB) policy that provides insurance coverage
for any sudden breakdown of expensive plant machinery and equipment, Boiler
Explosion Policy indemnifies the insured against damage to the boiler or any
specified apparatus, and Electronic Equipment insurance covers the electronic
equipment such as computers, micro processors, telecommunications equipment.
44
Check Your Progress

26. In which of the following ways of providing insurance does a group of
companies come together to provide insurance to their corporate offices and
affiliates?
a. Pure captives
b. Group captives
c. Self insurance
27. Which of the following options refer to those situations that involve the
likelihood of incurring losses?
a. Risk avoidance
b. Pure risks
c. Risk control
d. Risk transfer
28. _____________ protects a company against loss of profit caused by the
commissioned project being interrupted as a result of damage to machinery
and equipment due to fire.
a. Fire policy A
b. Fire policy B
c. Consequential loss fire insurance policy
29. In insuring the risks of a project, which of the following types refer to a
company undertaking the risk on its own without paying a premium to
another company?
a. Captive company
b. Risk mitigation
c. Self insurance
30. Identify the policy that provides for compensation to workmen for any
injury, accident, or disease arising in the course of work.
a. Erection all risks policy
b. Workmen’s compensation insurance policy
c. Industrial all risks insurance policy
31. Identify the policy that protects the property against accidents that result in
damage to the machinery and equipment during construction and
installation.
a. Industrial all risks
b. Consequential loss fire insurance policy
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c. Erection all risks

d. Fire policy
32. Which of the following risks describe the possibility of making profits?
a. Pure risks
b. Speculative risks
c. Risk control
d. Risk mitigation
33. Which of the following types of insurance policy covers all the perils like
fire, burglary, and machinery breakdown/boiler explosion?
a. Consequential loss fire insurance policy
b. Fire policy A
c. Industrial all risks insurance
12.9 Summary
 Risk is defined as the possibility of an outcome being different from the
expected outcome. It refers to the possibility of adverse results flowing from
the uncertainty involved in carrying out the activities.
 Broadly, risks can be categorized into technical risks, economic risks, political
risks, production risks, marketing risks, financial risks, and human risks.
 Project managers deal with risks in different ways, depending on their level of
tolerance for risks. They can be classified as risk averters, risk neutrals, and
risk seekers on the basis of their attitude toward risk.
 The tolerance curve for each type of manager is derived by comparing his/her
risk preference with the utility (the amount of satisfaction the project manager
derives from a payoff). The utility can also be referred as the tolerance for
risk.
 Risk management can be defined as the formal process by which risk factors
are systematically identified, assessed, and provided for. Risk management is
an aspect of project implementation.
 The successful completion of a project depends on the ability of the project
manager to deal with different types of risks. The steps involved in the process
of risk management are – risk identification, risk quantification, risk response,
and risk control.
 Project managers must be capable of taking good decisions to execute a
project successfully. They take decisions under three conditions: certainty,
risk and uncertainty. Decision-making is easy under conditions of certainty,
but it is extremely difficult under conditions of uncertainty.
 The concept of insurance is a kind of risk transfer response. The project
manager enters into an insurance or risk pool to transfer the risk over a wide
area and over a period of time.
46
 Risks are basically of two types: speculative risks (situation where there is the
possibility of making profits) and pure risks (situations where there is the
likelihood of incurring losses). The mechanism of insurance is applicable only
for pure risks.
12.10 Glossary
 Decision Tree Analysis: It is used in complex situations when sequential
decisions are involved and when these decisions can be taken only after the
happening of an uncertain event in future.
 Economic Risks: An increase in the rate of inflation, changes in the economic
policies of governments, and distribution of income. Production risks
 Financial Risk: Variations in the after tax earnings or the earnings per share
of the firm caused by the capital structure.
 Production Risks: The shortage of necessary raw materials, sudden
breakdown of key machinery, and exponential rise in installation and
maintenance costs.
 Risk Averter: A person who always wishes to avoid risk.
 Risk Avoidance: A risk management response technique aimed at eliminating
the cause of a risk to avoid the risk.
 Risk Identification: It is the process of determining which risk events are
likely to affect the project.
 Risk Management: A process by which risk factors are systematically
identified, assessed, and provided for.
 Risk Mitigation: A risk management technique aimed at reducing the loss in
the case of a risk by taking the preventive measures.
 Risk Quantification: It involves assessment of the range of risks associated
with a possible project outcome.
 Risk Response: The steps by which the project manager responds to the risks
identified and quantified.
 Risk Seeker: He/she is a person who wishes to accept the risks.
 Risk Symptoms: These are also called triggers. These events are not the
actual risk events, but they reveal the increasing chances of risk.
 Risk Transfer: The risk response method aimed at transferring the liability
for risk to a third party. But the scope for this model is often limited as the
financial risk only can be transferred.
 Risk: The possibility of an outcome being different from the expected. It is a
situation where the possible events are known but which of those will actually
happen is not known.
 Social risks: Social risks refer to risks arising from changes in the needs and
changing preferences of target customers. Economic risks
 Technical risk: Risk of failing to meet technical specifications.
47

1. Every activity of a project involves the risk element. Define risk. What are
the different types of risks to which projects are exposed to?
2. The tolerance curve for each type of manager is derived by comparing
his/her risk preference with the utility. Explain how project managers can be
classified according to their tolerance to risks.
3. The successful completion of a project depends on the ability of the project
manager to deal with different types of risks. Define risk management in
projects. What are the steps involved in the process of risk management?
4. Project managers take decisions to execute a project successfully under
three conditions of certainty, risk, and uncertainty. Explain decision making
under these three conditions.
5. The project manager enters into an insurance to transfer the risk over a wide
area and over a period of time. Describe the techniques followed by project
managers to secure the project against the various types of risks.


Unit.
1. (b) Risk
Risk is the function of uncertainty. It involves the possibility of an outcome
being different from the expected outcome. Technical risks involve the
failure to meet a particular performance requirement. Political risks involve
the risk of nationalization, political instability, trade restriction, etc. Both
technical risks and political risks are part of business risks.
2. (b) Marketing risks
Marketing risks refer to the failure of the product or service in the market
due to factors like change in demand, errors in forecasting of demand, and
difficulties in distribution. Financial risks are risks due to financial factors
48
like choice of investments and mistakes in accounting procedures. Political

risks refer to the risks due to factors like nationalization, political instability,
trade restrictions, etc. Economic risks refer to risks due to changes in
inflation, changes in the economic policies of the government, and
distribution of income.
3. (c) Social risks
Social risks arise from changes in the needs and preferences of target
customers, unavailability of natural resources, and labor unrest. Agitations
and social movements against the projects also constitute social risks.
Technical risks refer to the failure to meet a particular performance
requirement. Economic risks refer to risks of an increase in inflation,
changes in economic policy, distribution of income, etc. Human risks refer
to the risk of sudden demise of the employee, lack of availability of
competent employees, inter-group politics, etc.
4. (d) Production risks
Production risks refer to the risks which cannot be controlled by the project
manager like shortage of raw materials, sudden breakdown of machinery, and
risk in installation and maintenance costs. Marketing risks refer to the risks
arising due to demand factors and difficulties in distribution. Political risks
refer to the risks due to political factors like nationalization, political
instability, trade restrictions, etc. Economic risks refer to risks due to changes
in inflation, changes in the economic policies of the government, and
distribution of income. Social risks arise from the possibility of changes in the
needs and preferences of target customers, unavailability of natural resources,
labor unrest, and agitations and social movements against the projects.
5. (b) Only i and iii
Risk is the possibility of an outcome being different from the expected
outcome. Project risk is considered as the function of uncertainty and damage.
But uncertainty and damage are considered while conducting a risk analysis of
the project. Risk may also arise due to hazards. Hazards can be defined as a
source of danger. So risk is also a function of hazard and safeguard.
6. (b) risk management
Risk management is defined as the formal process by which risk factors are
defined, assessed, and tackled. Political risks, financial risks, and economic
risks are different types of risks. Political risks refer to the risks arising out
of political factors like nationalization of a particular industry, political
instability, trade restrictions, etc. Financial risks are the risks arising due to
financial factors like an increase in bad debts, change in interest rates,
wrong choice of investments, and mistakes in accounting procedures.
Economic risks refer to the fluctuations in economic factors like inflation,
change in the government’s economic policy, and distribution of income.
49
7. (c) Only i
When more money is at stake, the risk averter’s utility increases but at a
decreasing rate. For a risk seeker, the utility increases at an increasing rate as
the amount of money at stake increases. In the case of a risk neutral, the utility
increases in proportion to an increase in the amount of money at stake.
8. (c) risk averter
Project managers are classified into risk averters, risk seekers, and risk
neutrals. A risk seeker is a person who wishes to accept more and more
risks, a risk averter is a person who always wishes to avoid risks, and a risk
neutral is a person who falls between a risk seeker and a risk averter.
9. (c) Maximin criterion
The Maximin criterion is also called the Wald criterion. Under this criterion,
the project manager identifies the minimum payoff values for each strategy
and adopts the strategy that has the highest payoff value. The Maximin
criterion finds the alternative that maximizes the minimum outcome or
consequence for every alternative. In this case, the minimum outcome is
located within every alternative and the alternative with the maximum value
is chosen.
10. (d) Data insufficient
Under conditions of certainty, the project manager can choose the strategy if
he/she knows which state of nature is going to exist. If the project manager
knows that N1 is the expected state of nature, he/she can adopt the strategy
S1 as it will provide higher returns than other strategies. However, in the
given question, the expected state of nature is not given. Hence, the data
given is not sufficient to answer the question.
11. (d) Maximax criterion
The Maximax criterion is also called the Hurwicz criterion. Under this
criterion, the project manager chooses the strategy that is likely to earn
him/her the highest returns. The Maximax criterion finds the alternative that
maximizes the outcome or consequence for every alternative. The Maximax
approach is used in cases where the project manager cannot assess the
outcome probabilities with confidence.
12. (d) i, ii, and iii
The project manager uses four types of criteria to select a strategy –
Maximax criterion, Maximin criterion, Minimax regret criterion, and
criterion of realism. Under the Maximax criterion, the project manager
chooses the strategy that is likely to earn him/her the highest returns. Under
the Maximin criterion, the project manager identifies the minimum payoff
values for each strategy and adopts the strategy that has the highest payoff
value. Under the Minimax regret criterion, the project manager attempts to
minimize the maximum regret value. The regret value is obtained by
50
subtracting the payoff value in each state of nature from the largest payoff
value of that state of nature. Under the criterion of realism, each state of
nature has the same probability of occurrence. The project manager
considers the average value of all the payoffs for each strategy and selects
the strategy that has the highest average payoff value.
13. (b) Decision tree analysis
The decision tree analysis is used by the project manager when a decision
involves a series of several interrelated decisions. The project manager
chooses the strategy with the highest ‘Expected monetary value’ (EMV).
14. (b) Criterion of realism
The criterion of realism is called the Laplace criterion. As per this criterion,
all the states of nature have the same probability of occurrence. So the
project manager considers the average value of all the payoffs for each
strategy and selects the strategy that has the highest average payoff value.
15. (b) certainty
The project manager takes a decision under three types of conditions –
Certainty, uncertainty, and risk. If the project manager takes the decisions
under certainty, he/she is fully aware of all the states of nature available and
the expected payoffs for each state of nature. Under uncertainty and risk, the
project manager is not fully aware of the states of nature available.
16. (b) Risk quantification
Risk quantification is one of the important steps in risk management. It
involves the assessment of the range of risks associated with a possible
project outcome. Risk response refers to the steps taken by the project
manager in response to the risks identified and quantified. Risk transfer and
risk mitigation are the different types of responses to risks.
17. (d) Risk mitigation
Risk mitigation involves taking preventive measures to reduce the loss
caused by the risk. Risk avoidance is the first step in risk response. It
involves avoiding the risk by avoiding the causes of risk. Risk transfer
involves the transfer of the liability to a third party. Risk acceptance
involves the project manager accepting the consequences of risk.
18. (c) Analysis of the project outcome
Following is the data that must be gathered before developing a risk
response policy: List of identified risks, probability of occurrence of each
risk, review of the potential responses that have been identified during the
risk identification stage, list of project stakeholders who play a role in
developing a proper risk response, and defining the acceptable level of risk.
Analysis of the project outcome is one of the steps to identify the potential
risks in risk identification.
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19. (c) i, ii, iii, and iv

The four steps involved in the risk management strategy are risk
identification, risk quantification, risk response, and risk control. Risk
identification is the first step in the process of risk management. It involves
scanning the project activities, identifying potential risks, and documenting
the risks. Risk quantification involves an assessment of the range of risks
associated with a possible project outcome. Risk response follows risk
quantification and refers to the steps taken by the project manager to
respond to the risks identified and quantified. The last step in the risk
management process is risk control. This involves identifying additional
risks and their sources, management by wandering around, and developing
more risk response tools.
20. (b) Risk symptoms
Risk symptoms are the events which reveal the increasing chances of risk.
Risk symptoms are also called ‘triggers.’ Sources of risk are the possible
risk events which may affect the outcome of the project. Risk quantification
involves an assessment of the range of risks associated with the project
outcome.
21. (b) ii and iv
The two ways by which risk can be mitigated are by eliminating the causes
of risk and by reducing the impact of risk.
22. (c) Estimating the probability of occurrence of each risk
The project manager should carry out the following activities to identify the
potential risks in risk identification: analyzing the project outcomes, critically
viewing all the processes involved in the project, estimating the costs and
schedules of various activities of the project, identifying the required human
resources, and studying the records and databases of old and successfully
implemented projects. Estimating the probability of occurrence of each risk is
the data to be gathered before developing the risk response policy.
23. (c) risk transfer
The concept of insurance is a kind of risk transfer response among the
various risk responses. This involves transferring the financial risk to a third
partner. Risk avoidance is avoiding the risk by making efforts to eliminate
it. Under risk mitigation, the project manager can take preventive measures
to reduce the loss caused by the risk. Risk control refers to the control of the
risk by identifying, quantifying, and responding to the risks.
24. (c) Workarounds
Workarounds refer to the informal checking up of project activities.
Contingency plans are the alternative ways of doing work when a risk is
faced. Contingency plans and workarounds fall under the head of corrective
actions in risk control.
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25. (c) Risk transfer

Risk transfer involves shifting the risk to a third party. Only financial risks
are transferred to a third party. Risk avoidance is the first step in risk
response. It involves avoiding the risk by avoiding the causes of risk. Risk
acceptance involves the project manager accepting the consequences of the
risk. Risk mitigation involves undertaking preventive measures to reduce the
loss caused by the risk.
26. (b) Group captives
Captive insurance companies are divided into two types: Pure captives and
group captives. Group captives refer to the coming together of a group of
companies to provide insurance to their corporate office and affiliates. In the
case of a pure captive, a single company provides insurance coverage to its
affiliates. Self insurance refers to a company assuming the financial risk on
its own instead of paying the premium to another company.
27. (b) Pure risks
Risks are divided into pure risks and speculative risks. Pure risks are the
risks that involve the likelihood of incurring losses. Risk avoidance, risk
control, and risk transfer are the various types of responses to risk.
28. (c) Consequential loss fire insurance policy.

Fire policies A, B, and C are issued to cover the equipment against several
risks. Consequential loss fire insurance policy protects a company against
the loss of gross profit caused by an interruption of the project as a result of
fire damage to the machinery and equipment.
29. (c) Self insurance
Self insurance refers to a company assuming the financial risk on its own
instead of paying a premium to another company. A captive company refers
to a separate entity created to provide insurance to its corporate firm and
affiliates. Risk mitigation is one of the responses to risk.
30. (b) Workmen’s compensation insurance policy
The Workmen’s Compensation Act 1923 provides compensation to
workmen for any injury, accident, or disease arising in the course of work.
The erection all risks policy protects the property against accidents that
result in the damage to the equipment and machinery during construction
and installation. Industrial all risks is a comprehensive policy that covers
perils like fire, burglary, and machinery breakdown/boiler explosion.
31. (c) Erection all risks
The erection all risks policy protects the property against accidents that
result in damage to the equipment and machinery during construction and
installation. The industrial all risks policy covers perils like fire, burglary,
53
and machinery breakdown/boiler explosion. Fire policies A, B, and C are

issued to cover the equipment against several risks. Fire policy A covers
fire, lighting, impact damage, aircraft damage, riot, strike, and terrorist
damage, earthquake, explosion/implosion, storm, flood and inundation, and
landslide. Some of the risks to artisans workshops, bio-gas plants, village
and cotton industries, and small scale industries are covered by only policy
A. Fire policy B covers fire, lighting, explosion/implosion, impact damage,
aircraft damage, riot, strike, and terrorist damage. But the riot, strike, and
terrorist damage perils can be excluded with specific reduction in the
premium rate. Fire policy C covers industrial/manufacturing risks and
storage risks from perils like fire, lighting, explosion/implosion, impact
damage, aircraft damage, riot, strike, malicious and terrorist damage. The
riot, strike, malicious and terrorist damage perils can be excluded on specific
request with a reduction in the premium rate.
32. (b) Speculative risks
Risks are divided into pure risks and speculative risks. Speculative risks are
the risks that describe the possibility of making profits. Risk mitigation and
risk control are the various types of response to risk.
33. (c) Industrial all risks insurance

Industrial all risks is a comprehensive insurance policy that covers perils
like fire, burglary, and machinery breakdown/boiler explosion. Fire policies
A, B, and C are issued to cover the equipment against several risks.
Consequential loss fire insurance policy protects a company against loss of
gross profit caused by an interruption to the project as a result of fire
damage to the machinery and equipment.

Following are the answers to the Exercises given in the unit.
A. S3
P (N1) = 0.2, P(N2) = 0.2, and P(N3) = 0.4.
Expected value of S1 = 3 × 0.2 + 2.5 × 0.2 + 1 × 0.4 = 1.5
Expected value of S2 = 4 × 0.2 + 2 × 0.2 + 1 × 0.4 = 1.6
Expected value of S3 = 5 × 0.2 + 4 × 0.2 + 0.5 × 0.4 = 2.0
The project manager chooses strategy S3 as it has the highest expected
value.
B. S1
Assume that each strategy is represented by four different tasks A, B, C,
and D.
EMV(A) = 0.4×13 + 0.25 ×7 + 0.36 ×8 = 9.83
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EMV(B) = 0.4×10+0.25×9+0.36×7 = 8.77

EMV(C) = 0.4×8+0.25×7+0.36×8 = 7.83
EMV(D) = 0.4×7+0.25×8+0.36×9 = 8.04
Strategy S1 should be selected by the project manager as it has the highest
expected value.
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Unit 13
Project Quality Management
Structure
13.1 Introduction
13.2 Objectives
13.3 Definition of Quality
13.4 International Quality Standards
13.5 The Cost of Quality
13.6 Project Quality Management Concepts
13.7 Project Quality Control Tools
13.8 Process Capability
13.9 Acceptance Sampling
13.10 Quality Circles
13.11 Just-In-Time Management
13.12 Total Quality Management
13.13 Summary
13.14 Glossary
13.1 Introduction
In the previous unit, we have discussed project risk management. In this unit, we
will discuss project quality management. Earlier, project firms believed that
higher quality increased project costs. But now they realize that improved
quality increases business volumes. The growing size and complexity of projects
have forced firms to concentrate more on quality at every stage. Otherwise, the
cumulative effect of each defect in the various stages will lead to a considerable
reduction in the quality of project end product.
‘Quality’ is relative and different people have different definitions of quality.

The project manager however, has to be very specific regarding the quality of a
project. He can use several techniques to meet the quality requirements. Project
quality management includes all the processes required to ensure that the project
meets the specific requirements of its stakeholders. The project manager should
prepare a quality plan and communicate it to team members and ensure that the
plan is being implemented properly.
This unit will discuss quality and the international quality standards. We will
discuss the cost of quality, and explain the various project quality management
concepts. We shall then move on to discuss the different project quality control
tools. Finally, we would be discussing the concepts of process capability,
acceptance sampling, quality circles, just-in-time management, and total quality
management.
13.2 Objectives
By the end of this unit, the students should be able to:
 define quality, and explain the international quality standards.

 discuss the concept of cost of quality.
 reproduce the project quality management concepts.
 identify the various project quality control tools.
 explain process capability and acceptance sampling.
 discuss the concepts of quality circles, just-in-time management, and total
quality management.
13.3 Definition of Quality

The ISO 9000 defines ‘quality’ as ‘the totality of features and characteristics of a
product or service that bears on its ability to satisfy stated or implied needs.’
The client looks at quality as:
Conformance to specifications: The project manager mentions the project end
product and its clear specifications in the POS. The client expects the product or
service to match the specifications provided in the POS. To him, quality is the
conformance of the end product’s specifications as mentioned in the POS.
Value for money: Clients may define quality as a value or how well the product
or service fulfills the intended purpose for the price they are willing to pay. If
they feel that the price of the product or service is higher than the utility they
derive, then they may conclude that the project is of less quality.
Fitness for use: The client considers the features of a product or the convenience
of a service to decide the project quality. The aspects include appearance, style,
durability, reliability, and serviceability, etc.
Support: Often the support a company provides to its product or service is
considered as the quality. For instance, if the project manager provides servicing
facility at a low price or free of cost, the client feels that quality of the product
(project) is high.
Psychological impression: Clients evaluate the quality of a product or service
based on some psychological impressions: physical ambience, the firm’s image,
etc. For instance, well-dressed, courteous, and friendly project team members
make a positive impact on clients who associate these attributes with quality.
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13.4 International Quality Standards
ISO 9000 Standards are a set of international quality management system

standards and guidelines. ISO stands for International Organization for
Standardization. It is located in Geneva, Switzerland and was established in
1947. The standards are applicable to all kinds of organizations in areas such as
manufacturing, processing, servicing, electronics, computing, financial services,
accounting, banking, retailing, aerospace, construction, exploration,
pharmaceuticals, petrochemicals, shipping, telecommunications, research and
development, health care, agriculture, software development, instrumentation,
biotechnology, insurance etc. ISO published its first quality standards in 1987
and revised them in 1994. These standards are referred to as the ISO 9000
Standards:
ISO 9000: This provides a roadmap for the other standards within the series and
defines key terms.
ISO 9001: This defines the model for a quality system for companies that
design, produce, install, and service products.
ISO 9002: This is a quality system model for quality assurance in production
and installation.
ISO 9003: This is a quality system model for quality assurance in final
inspection and testing.
ISO 9004: This quality system provides quality management guidelines for
firms that wish to develop and implement a quality system, to determine the
extent to which each quality model is applicable.
ISO 14000: This provides standards for managing environmental impacts,

including management system, environmental performance evaluation,
environmental labeling, and life cycle assessment.
The ISO protocol requires that all standards to be reviewed at least every five
years to check whether they should be retained, revised or withdrawn. The 1994
version of ISO standards were revised by ISO Technical Committee, TC 176 in
year 2000.
In order to reflect the modern management approaches and also to improve
organizational practices, the Committee felt the need for some structural
changes, while maintaining the essential requirements of past standards. One of
the primary objectives of the ‘Year 2000’ revisions to the ISO 9000 standards is
to simplify the structure and reduce the number of standards. This was done by
the replacement of ISO 9001:1994, ISO 9002:1994, ISO 9003:1994 standards by
a single quality management system (QMS) requirement standard, ISO 9001:
2000.
58
Example: The Revised ISO Standards

Standards and guidelines Purpose
ISO 9000:2000, Quality Establishes a starting point for
management systems - understanding the standards and defines
Fundamentals and vocabulary the fundamental terms and definitions
used in the ISO 9000 family to avoid
misunderstandings in their use.
ISO 9001:2000, Quality This is the requirement standard to
management systems - assess the firm’s ability to meet
Requirements customer and applicable regulatory
requirements and thereby address
customer satisfaction. It is now the only
standard in the ISO 9000 family against
which third-party certification can be
carried.
ISO 9004:2000, Quality This standard provides guidance for the
management systems - Guidelines continual improvement of quality
for performance improvements management system to benefit all parties
through sustained customer satisfaction.
ISO 19011, Guidelines on Quality Provides guidelines for verifying the
and/or Environmental system's ability to achieve the defined
Management Systems Auditing quality objectives. You can use this
(currently under development) standard internally or for auditing your
suppliers.
ISO 10005:1995, Quality Provides guidelines to assist in the
management - Guidelines for preparation, review, acceptance and
quality plans revision of quality plans.
ISO 10006:1997, Quality Ensures the quality of both project
management - Guidelines to processes and project products.
quality in project management
ISO 10007:1995, Quality Ensures that a complex product
management - Guidelines for continues to function when components
configuration management are changed individually.
ISO/DIS 10012, Quality Provides guidelines on the main features
assurance requirements for of a calibration system to ensure that
measuring equipment - Part 1: measurements are made with the
Metrological confirmation system intended accuracy.
for measuring equipment
ISO 10012-2:1997, Quality Provides supplementary guidance on the
assurance for measuring application of statistical process control
equipment - Part 2: Guidelines for when this is appropriate for achieving
control of measurement of the objectives of Part 1.
processes
59
Standards and guidelines Purpose

ISO 10013:1995, Guidelines for Provides guidelines for the
developing quality manuals development, and maintenance of
quality manuals, tailored to your specific
needs.
ISO/TR 10014:1998, Guidelines Provides guidance on how to achieve
for managing the economics of economic benefits from the application
quality of quality management.
ISO 10015:1999, Quality Provides guidance on the development,
management - Guidelines for implementation, maintenance and
training improvement of strategies and systems
for training that affects the quality of
products.
ISO/TS 16949:1999, Quality Sector specific guidance to the
systems - Automotive suppliers - application of ISO 9001 in the
Particular requirements for the automotive industry.
application of ISO 9001:1994
Adapted from www.iso.ch.
Check Your Progress

1. The totality of features and characteristics of a product or service that has a
bearing on its ability to satisfy stated or implied needs is referred to as ____.
a. standards
b. quality
c. prevention
2. Which of the following quality standards provides for managing
environmental impacts, environmental performance evaluation,
environmental labelling, and life cycle assessment?
a. ISO 14000
b. ISO 9000
c. ISO 9001
d. ISO 9002
3. The client looks for various aspect of quality such as physical ambience, the
firm’s image, and friendliness of the project team members. These aspects
are collectively known as ______________.
a. value for money
b. psychological impression
c. fitness for use
d. support
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4. The full form of ISO is ______________.

a. International Standardization Organization
b. International Organization for Standardization
c. International Services Organization
d. International Secret Organization
5. The client judges product quality by looking at the features of the product or
the convenience of a service. This angle from which the client looks at
quality is called _______________.
a. conformance to specifications
b. value for money
c. fitness for use
d. Support
6. The ISO protocol requires all the standards to be reviewed every _________
years to determine whether they should be retained, revised, or withdrawn.
a. three years
b. two years
c. five years
d. six years
7. Identify the standard for quality system for organizations that design,
produce, install, and service products.
a. ISO 9000
b. ISO 9001
c. ISO 9002
d. ISO 9003
13.5 The Cost of Quality

Every firm incurs costs when it attempts to improve quality. This is referred to as
‘cost of quality’. Costs are of two types: ‘cost of conformance’ and ‘cost of non-
conformance’. Conformance costs are the costs that firms incur for the means
employed to achieve quality. These costs include costs of training, inspection,
testing and auditing. Non-conformance costs are those costs that are incurred for
improving the quality of a product that has fallen below the desired quality level.
These costs include repairs, reworks, complaint handling, etc. Alternatively, the
costs of quality can be classified as follows -- costs of prevention, costs of
appraisal or detection, and costs of failure.
13.5.1 Costs of Prevention

Prevention costs are the costs incurred by a company to prevent defective goods
and services from being produced and delivered to the customer. These costs
include costs of redesigning the process to remove the causes of poor quality,
training project team members, identifying right suppliers, process studies, etc.
61
13.5.2 Costs of Appraisal

Appraisal costs are incurred while assessing the level of quality attained by the
operating procedures of the firm. These costs are associated with the evaluation
of the product’s performance to see if it meets the client requirements or not.
These costs include materials inspection, in-process testing, maintenance of test
equipment, etc.
13.5.3 Costs of Failures

Costs of failure are two types: internal failures and external failures. Internal
failure costs result from defects that are discovered during the production of a
product or service and when the product is under the control of the firm. They
include costs of rework, repair, corrective actions, etc. External failure costs
arise when a defect is discovered after the customer has received the product or
service. Costs in this category include costs of returned material, warranty
charges, legal expenses from law suits and costs of concessions made to
customers.
To arrive at the optimal cost of quality, the project manager calculates the total
cost of quality at various defect rates. The project manager aims at that defect
rate where the total cost of quality is minimum.
13.6 Project Quality Management Concepts

It is the project manager’s responsibility to ensure that the project attains the
desired level of quality. Quality cannot be ensured through continuous inspection
alone; it can be only achieved with the help of proper planning. Quality planning
process is a part of ‘planning phase’ of the project and it is done on the basis of
cost, time and scope of the project. The project manager studies the following six
quality management concepts -- quality policy, quality objectives, quality
assurance, quality control, quality audit, and quality program plan.
13.6.1 Quality Policy

The quality policy is a document created by quality experts and backed by the
top management. It states the quality objectives of the firm, the acceptable levels
of quality, the responsibilities of the project team, etc. It also provides guidelines
for important quality matters and promotes consistency throughout the
organization.
If the project firm does not have quality policy or if the project involves multiple
firms, the project manager and his team develop a quality policy (in consultation
with quality experts) for the project. The project manager should formally
disclose the quality policy of the project to all stakeholders.
Implementing the quality policy is very important. The top management should
periodically review the performance of middle and lower level management to
ensure that the activities are in line with the overall quality objective of the firm.
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A good quality policy provides guidelines to improve the quality of the project;
promotes consistency across all projects of the firm; explains to outsiders how
the firm views quality; and provides for changes and updates in the policy.
13.6.2 Quality Objectives
Quality objectives are a part of the firm’s quality policy. The quality policy
consists of the firm’s quality objectives, and the time required meeting those
objectives. The project manager should set the quality objectives so as to meet
the expectations of project stakeholders. The quality objectives of a project
should be understandable, achievable, measurable and time-bound. These
objectives should be conveyed to the project team in order to motivate them to
meet the quality requirements.
Some examples of the quality objectives of a firm are: training the project team
on the quality policy and quality objectives before the end of the current fiscal
year, and setting up baseline measurements for all processes in the current
quarter.
13.6.3 Quality Assurance
Quality assurance means evaluating the quality performance of the project

periodically to ensure that the project meets the relevant quality standards.
Quality assurance attempts to ensure that the scope, cost, and time of the project
match the client’s requirement.
The project manager establishes the administrative procedures and identifies
quality standards to ensure that the scope statement is in line with the client’s
requirements. The project manager together with his team prepares the quality
processes (procedures) and determines whether they really ensure the required
level of project quality.
A quality assurance system should – list the quality objectives of the project and
identify the required quality standards; collect data continuously for
improvement of quality; establish performance measures; include all project
functional areas; and conduct quality audits at regular intervals.
13.6.4 Quality Control
Quality control is the process of monitoring specific project results and

identifying ways to eliminate the causes of unsatisfactory results. It is a
collection of activities and techniques used to create specific quality
characteristics in the project’s end product.
Quality control is a technical aspect of the quality management process and it
includes setting up quality processes and procedures. These procedures ensure
that the project delivers quality output at every stage of the project. It compares
the actual results with the standard results at the end of every phase and
measures are then taken up to rectify the problems. The project manager can
employ techniques like inspection, control charts, and pareto charts in quality
control.
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A quality control system should -- select the activities to control; set standards to
provide basis for corrective actions; establish procedures to measure quality; and
compare actual results with standard results at every stage of the project.
13.6.5 Quality Audit

Quality audit is an organized, independent evaluation procedure to ensure that
the project standards match the quality requirements. The audits may be random
or periodic and may be conducted by a qualified in-house auditor or an
independent authority. A good quality audit ensures that -- a project activity
meets the desired quality; rules and regulations pertaining to quality
management are followed; quality improvement opportunities are identified; and
corrective actions are taken to meet desired quality.
13.6.6 Quality Program Plan

The quality program plan is a plan of action prepared by the project manager and
his team by breaking down project objectives into a work breakdown structure.
Project activities are broken down into lower level activities until specific quality
actions can be identified.
A quality program plan enables the project manager to assure the client that he
has a roadmap for delivering a quality product or service. Such a plan will make
the client feel confident about the project’s ability to deliver a product/service
that will satisfy his needs.
A good quality plan should -- list the features desired by the customer; respond
to changing customer needs; and ensure that the quality procedures are enough to
meet quality objectives.
13.6.7 Quality Control in Outsourcing

Outsourcing has become a widely practiced strategy in operations management
to gain competitive advantage through speed, agility, flexibility and expertise.
While it is a standard practice in software industry in the form of off-shoring, it
is also very high in the automobile industry. The mass manufacturing strategy of
the industry and the deployment of such techniques like Lean and JIT call for
planned outsourcing. Of late, recalls have become a regular activity in the
automobile industry. A detailed root cause analysis of the reasons for recalls
established that most of the problems are quality related, impacting not only
customer confidence and satisfaction, but have a serious bearing on safety. Some
of the manufacturers indicated that anxiety to reduce costs and delivery on time
and the pressure to localize sources generally leads to trade-offs with quality.
In Indian industry, that too in the manufacturing sector, outsourcing is done to
the small and medium enterprises, which do not have adequate infrastructure and
skilled manpower to ensure efficient process management and quality assurance.
Therefore it is the responsibility of the organization to take necessary initiatives
to bring in quality culture in these outsourced locations. The requirements
include quality planning in outsourcing, vendor management covering
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identification, evaluation, qualification, and rating and disqualification criteria.

Another important responsibility is training the workforce of the vendor in
quality tools and techniques and process control techniques.
The advent of ISO 9000 standards and the availability of a structured approach
to quality management provided necessary guidelines to all types of
organizations. Implementation, certification and maintenance of the quality
management system (QMS) thus became an essential road map for ensuring the
quality of goods and services. The process approach adopted by these standards
facilitates implementation of the Plan-Do-Check-Act methodology for
continuous improvement.
Source: Google Images
Check Your Progress

8. Which of the following options consist of the firm’s quality objectives, and
the time required to meet those objectives?
a. Quality policy
b. Quality objectives
c. Quality assurance
d. Quality audit
9. The organized, independent evaluation procedure to ensure that the project
standards meet quality requirements is called ________________.
a. quality control
b. quality program plan
c. quality assurance
d. quality audit
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10. _____________ attempts to ensure that the scope, cost, and time of the
project match the client’s requirements.
a. Quality assurance
b. Quality policy
c. Quality audit
d. Quality control
11. The costs incurred by a firm to improve quality are called costs of quality.
The costs incurred on the means to achieve quality are called
_________________.
a. conformance costs
b. non-conformance costs
c. costs of prevention
d. costs of failure
12. Which of the following are the features of a good quality policy?
i. Providing guidelines to improve the quality of the project
ii. Promoting consistency across all projects of the firm
iii. Explaining to outsiders how the firm views quality
iv. Providing for changes and updates in the policy
a. Only i and ii
b. Only ii and iii
c. i, ii, iii, and iv
d. Only i and iv
13. What are the costs that are incurred on assessing the level of quality attained
by the operating procedures of the firm?
a. Conformance costs
b. Costs of appraisal
c. Costs of prevention
d. Non-conformance costs
14. The costs of returned material, warranty charges, legal expenses on lawsuits,
and costs of concessions made to customers are examples of
____________________.
a. costs of appraisal
b. external failure costs
c. internal failure costs
d. costs of prevention
15. Which of the following features should a good quality plan have?
i. It should be responsive to customer needs
ii. It should list the features desired by the customer
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iii. It should ensure that the quality procedures are stringent enough to meet
quality objectives
iv. It should include all project functional areas
a. i, ii, iii, and iv
b. Only ii and iii
c. i, ii, and iii
d. Only iv
13.7 Project Quality Control Tools

Statistical methods play a key role in identifying, analyzing, and controlling the
quality of different project activities. These tools help the firm in gathering data,
identifying patterns of data and measuring variation.
Data tables, and Pareto charts are some useful tools for identifying patterns in
data; histograms, scatter diagrams, and control charts are tools used in data
analysis; and ‘cause and effect analysis’, and ‘trend analysis’ are used both in
data identification and data analysis.
13.7.1 Data Tables

Data tables are statistical tools used to collect and present data in a systematic
way. Generally, data tables are designed for collecting situation/product specific
data. These are effective when data has to be organized and presented for the
first round reviews.
A checklist is a form of data table that is used to record the frequency of
occurrence of a certain product’s quality characteristic. Suppose a textile firm
wants to record the defects in different aspects like tears in fabric, discolored
fabric, broken fiber board and ragged edges.
13.7.2 Cause and Effect Diagrams

After identifying a problem, the project manager determines the cause of the
problem. Cause-and-effect diagrams help identify the relationship between a key
quality problem and its potential causes. These diagrams are also called
fishbone diagrams or Ishiwaka diagrams. There are six steps in the construction
of a cause-and-effect diagram:
Identifying the quality problem: The project manager uses statistical process
control tools like pareto chart, histograms (discussed later) and brainstorming
etc, to identify the quality problem.
Forming inter-disciplinary team: The project manager forms an inter-
disciplinary team from technical and management areas and encourages
discussions to determine the causes of the problem.
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Drawing problem box and prime arrow: The quality problem is labeled in the
problem box (as fish’s head) and a prime arrow is drawn to represent major
categories of quality problems. Delivery delay is the fish head.
Specifying major categories: The project manager identifies the major
categories for the given quality problem (shown in the problem box). Usually,
the major categories include materials, production methods, business
environment, machinery, human resources, etc. which are represented as the
structural ‘bones’ of the fish in the diagram.
Identifying causes of defects: The project manager identifies the causes that
contribute to defects in each of the major categories and lists them down. The
causes are shown as the ‘ribs’ of the fish. The project manager follows three
types of approaches in listing the causes of defects. They are: random method,
systematic method and process analysis method.
In random method, all major causes in each category are listed at random. In
systematic method, the causes are listed in descending order of their importance.
In process analysis method, the causes are listed on the basis of the sequence of
the process.
Identifying corrective actions: By determining the causes contributing to
defects, the project manager prepares a corrective action analysis. The problem
box then becomes the corrective action box and corrective actions are shown in
the place of defects.
13.7.3 Histograms
Histograms are graphical representations of data as a frequency distribution.
When there are a large number of variable data, the histogram summarizes the
data into a number of groups.
13.7.4 Pareto Chart

When the project manager identifies several quality problems that need to be
addressed, then he has to decide which quality problems should be targeted first.
The project manager constructs a Pareto chart to prioritize the quality problems.
In this chart, all the quality problems (defect types) are plotted along the
horizontal axis in descending order.
The chart has two vertical axes - the one on the left side shows number of
defectives (frequency) and the axis on the right side show the cumulative
percentage of frequency. The cumulative frequency curve identifies the factors
that the management has to address immediately.
13.7.5 Scatter Diagrams

A scatter diagram is a plot of two variables showing how they are related. Data
is represented on XY plane and the relationship between the two variables is
understood on the basis of how they are distributed.
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The relationship between these variables can be of several types:
 No correlation between the variables when the data points are scattered,
 Curvilinear relationship when the data points are in a U-shaped pattern,
 Positive and negative correlation if the patterns of data points have positive and
negative slopes respectively.
13.7.6 Trend Analysis

This is a statistical tool that uses mathematical techniques to forecast future
outcomes on the basis of historical data. It quantifies the relationships between
the data, and establishes an equation that best describes the distribution of data
points. The trend line provides a clear, consistent relationship between the
dependent (output) and the independent (input) variables.
13.7.7 Control Charts

A control chart is a graphical representation of the results of a process over a
period of time. Control charts are used to monitor the production process
continuously to see whether the quality of the output is within the acceptable
limits.
A typical control chart consists of three horizontal lines:
 A central line which indicates the desired standard or control level of the
process.
 An upper control limit that indicates the upper limit of tolerance.
 A lower control limit indicating the lower limit of tolerance.
The central line as well as the upper and lower limits are established by computations
based on the past records for a specific production process. The control charts are two
types.
 Control charts for variables

 Control charts for attributes
Control Charts for Variables

These are aimed at achieving and maintaining satisfactory quality levels for a
given process whose product is amenable to quantitative measurements like
thickness, length, diameter, etc. The control charts used for variables are:
Control charts for mean (X) and Control charts for range (R).
X – bar Chart: This is the control chart to determine mean variations. Samples
are taken and ‘mean average’ is considered to draw the charts. The central line
shows the average quality of the process. The upper and lower control limits are
arrived at by adding and subtracting 3 standard deviations to the average. The
upper and lower limits are shown as dotted lines and the central line is shown as
a dark line.
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R- Chart: An R- chart is a plot of the range (dispersion) with in each sample.

The range of a sample is the difference between the highest and lowest values.
For example, the range of a sample: 12.0, 12.4, 12.5 and 12.6 is (12.6 – 12.0),
i.e. 0.6. The range is calculated for all the samples, and the average range of all
samples gives the central value of R-chart. The upper and lower control limits
are obtained by adding and subtracting 3 standard deviations to the central value.
The range values of all samples are marked in the chart to observe, whether the
process is in control or not.
Control Charts for Attributes
Control charts for attributes are used to measure quality characteristics for
classifying an item as defective or non-defective. The most commonly used
control charts for attributes are:
 Control chart for the number of defectives per unit, i.e. c-chart. This chart is
used when products have more than one defect per unit. For example, a
television picture tube may have more than one defect. When the management
wants to analyze the number of defects per unit, this chart is used.
 Control chart for fraction defective, i.e. p-chart. Fraction defective is the number
of defective units divided by the sample size. Here, the quality characteristic is
counted rather than measured. Then the entire item or service is declared good
or bad. For example, in the banking industry, the number of non-endorsed
deposits or the number of incorrect financial statements sent are counted. The
method involves selecting a random sample, inspecting each item and
calculating the fraction defective.
 Control chart for number of defectives, i.e., np-chart. This chart shows the actual
number of defectives found in each sample. This is commonly used when the
sample size for all samples is constant.
Activity: The management of Sahara International Airlines noticed an

increase in the number of delayed flight departures. It called the heads of all
departments and brainstormed to list all possible causes for the problem. The
group categorized the problem into areas such as materials, procedures,
personnel and equipment. The causes for problems in each major category
were presented in a cause-and-effect diagram (fishbone diagram). Describe
the procedure for constructing a cause-and-effect diagram and represent
various causes for the given problem.
Answer:
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13.8 Process Capability
Process capability is the ability of an existing manufacturing process to produce

a product that conforms to the design specifications. Since there can be
variations during manufacturing, the process capability can help specify product
uniformity. It is calculated on the basis of various quality characteristics of the
product of the process, and it is given by the mean value plus or minus three
standard deviations. i.e,
(USL  LSL)
Cp 
6σ
Where, USL is Upper Specification Limit
LSL is Lower Specification Limit
USL and LSL are the specifications given by the client.
The project manager can use Cp while selecting production process for his
project. He can compare Cp values of various production processes and select
the one that suits the client’s quality specifications.
Some of the generally accepted rules for Cp are:
If Cp> 1.33, the production process is within customer specifications;
If 1.33 Cp> 1.0, then the production process can be marginally acceptable. But
there is likelihood of the client rejecting products from this process.
If Cp 1.0, the production process must be rejected.
Let us now look at how a project manager can use the above formula to select a
production process. Suppose a client orders for steel bars of length 10 inches and
he accepts .05 inches variation in length. If the existing process has standard
deviation of 0.009, then the Cp value of the process is 

0.05  (0.05) =
6(0.009)
1.851. Since the Cp value is more than 1.33, the project manager is confident
that the selected process would produce the product within the customer
specifications.
Check Your Progress

16. The control chart that is used when the products have more than one defect
per unit is known as the ___________.
a. np-chart
b. C-chart
c. X-chart
d. R-chart
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17. There are six steps in the construction of a cause-and-effect diagram. What
is the last of these steps?
a. Identifying the causes of defects
b. Specifying major categories
c. Identifying corrective actions
d. Identifying the quality problem
18. Which type of relation does the following scatter diagram represent?
a. Negative correlation
b. Curvilinear correlation
c. Positive correlation
d. No correlation
19. Which of the following statistical methods help in summarizing the data into
groups when the data is variable and large in number?
a. Data tables
b. Histograms
c. Pareto chart
20. _________ are the statistical tools used to collect and present data in a
systematic way.
a. Data tables
b. Histograms
c. Pareto chart
21. The control chart used for fraction defective is known as _____________.
a. np-chart
b. P-chart
c. X-chart
d. R-chart
22. Which of the following options show the relationship between two variables
on the basis of how they are distributed by plotting the data on a XY plane?
a. Histograms
b. Pareto charts
c. Scatter diagrams
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23. Which type of control chart shows the number of defects in each sample?
a. np-chart
b. X-bar chart
c. R-chart
24. What is the statistical tool that uses mathematical techniques to forecast
future outcomes on the basis of historical data?
a. Trend analysis
b. Control charts
c. Scatter diagram
d. Pareto chart
25. The control chart that determines the mean variations of samples is known
as ____________
a. the X-bar chart
b. the R-chart
c. control charts
d. trend analysis
Exercise
A. XYZ is glass manufacturing company. A client orders a steel bar of length
15 feet and the acceptable level of variation is 0.06 feet. The existing
process has a standard deviation of 0.07. What is the value of process
capability (Cp)?
13.9 Acceptance Sampling

Acceptance sampling is a product quality control technique that monitors the
quality of a product after it has been produced. This technique is also employed
to decide whether to accept or reject a lot on the basis of random samples drawn
from a lot. The project manager can either go in for 100% inspection (by
incurring huge costs on inspection) or 0% inspection (by allowing defects).
Neither of these options is very sound. Therefore, the project manager opts for
“acceptance sampling” as a compromise between the two options. A sample of
the shipment is inspected and if the number of defective items is more than a
stated number, known as acceptance number, the shipment is not accepted.
There are three types of sampling plans. They are: single sampling, double
sampling and multiple sampling. In single sampling, the project manager either
accepts or rejects a lot after inspecting a single sample chosen from the lot. In
double sampling, a single sample is tested. If results are not favorable, then a
second sample is tested. In multiple sampling, several samples are tested.
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13.9.1 Outcome of Acceptance Plan
Whatever be the sample size, sampling errors are likely to occur. A good lot
might be rejected when the sample selected contains a large number of
defectives. Similarly, a bad lot might be selected if the sample selected contains
less number of defectives. Producer’s risk and consumer’s risk are the two
outcomes of acceptance plan.
Producer’s Risk
This is the risk to the producer (any firm or department that produces goods for
another firm or another department) that arises because of rejection of a good lot.
If the project manager chose a sample of 5 from a lot of 100 and all chosen items
are defective then the lot will be rejected even if the remaining items are good. It
is also known as risk. The error made by the producer in this context is called
Type I error.
Consumer’s Risk
This is the risk to the consumer (any firm or department that receives an item
from the producer) that arises because of the selection of a bad lot. It is also
known as risk. The error made by the consumer here is called Type II error.
To derive a sampling plan, the producer and consumer should specify the level
of the and risk, and the lot quality level to which these risks pertain.
Therefore, there is a need to define “good lot” and “bad lot” in terms of the
percent defective in the population. The usual values of producer’s risk and
consumer’s risk are 5 percent and 10 percent respectively.
13.9.2 Operating Characteristic (OC) Curve
Operating characteristic curve is a probability distribution that is a function of

sample size ‘n’ and the acceptance number ‘c’ expressed as a percentage of
items in a lot of incoming goods. The curve explains how well a sampling plan
discriminates the good lots from bad lots. If the project manager uses the Total
Quality Control (TQC) principle of 100 percent inspection, then all the incoming
goods should be checked. However, in case of large shipments, 100 per cent
inspection is not possible. So, the project manager chooses a sample size, ‘n’ and
an acceptance number ‘c’ to determine whether to accept or reject the lot.
The project manager determines the values of ‘n’ and ‘c’ on the basis of four
performance requirements: Acceptable Quality Level (AQL), Lot Tolerance
Percent Defective (LTPD), consumer’s risk ( ) and producer’s risk ( ). AQL
is the quality level desired by the consumer. LTPD is the quality level at which
one considers that a lot is bad and if exceeded will be rejected. If the producer
and the consumer accept a lot even with 1 defective item of 100 items, then
AQL is 0.01. If they agree to reject a lot in which there are more than 5
defective items out of 100 items, then LTPD is 0.05.
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13.10 Quality Circles

A quality circle is a group of employees, normally from a single department who
voluntarily meet periodically to discuss the quality issues in their department.
Quality circles effectively address two issues: the well-being of the employee at
personal level and the well-being of the company. The activities of quality
circles include identifying problems related to quality, analyzing data,
recommending solutions, and carrying out changes approved by the
management. This helps the management to understand the reasons behind the
employees’ failure to meet the required quality levels.
The advantages of quality circles are – improved quality of project products and
services; better understanding among employees; better employee performance;
and improved morale of employees. Each department of the project will maintain
its own quality circle to meet the output specifications. Quality circles have
proved very successful in Japan. However, their efficiency depends on how they
are handled.
Activity: Indhra Machine Works undertakes projects for manufacturing

machine tools. For many years the company used ordinary lathe and milling
machines for manufacturing tools. To survive in the current competitive
environment, the management of the firm has modernized the company's
manufacturing process. It has replaced its machines with modern equipment,
e.g., Computer Numerically Controlled (CNC) machines, robots, etc. This
change has led to an increase in production, however, the firm is having
problems maintaining the required quality levels. Several lots of products
have been rejected by its customers. The management of the firm has realized
that even though the workmen in the production department were trained to
use the new equipment, they have not yet become fully accustomed to the
new production system. So the management has started encouraging each
department to form quality circles to reduce quality problems. Do you think
quality circles can improve the situation? How?
Answer:
Check Your Progress

26. The risk that arises because of the rejection of a good lot is called ________.
a. consumer’s risk
b. producer’s risk
c. acceptance sampling
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27. The product quality control technique that monitors the quality of a product
after it has been produced is called ___________.
a. P-chart
b. acceptance sampling
c. R-chart
28. The probability distribution that is a function of sample size ‘n’ and the
acceptance number ‘c’ expressed as a percentage of items in a lot of
incoming goods is called ______________.
a. quality circles
b. operating characteristic curve
c. just-in-time management
29. In which type of sampling does the project manager either accept or reject a
lot after inspecting a sample chosen from the lot?
a. Single sampling
b. Double sampling
c. Multiple sampling
30. Groups of employees from normally a single department who meet
periodically to discuss the quality issues in their department are called
___________.
a. quality circles
b. total quality management
c. re-engineering
13.11 Just-In-Time Management

Just-in-time (JIT) is an operations philosophy based on continuous improvement
of organizational processes by reducing wastage from all project operations. It is
an integrated set of activities designed to achieve high- quality production using
minimal inventories. The principle here is not to produce anything until it is
required. This result in eliminating costs associated with maintenance, storage,
etc. Under JIT purchasing, firms reduce their procurement costs by developing
long-term relationships with a few supplies.
Shiego Shingo of Toyota Motor Company identified seven wastes that the
manager should watch out for to ensure continuous improvement of quality.
They are – waste of overproduction; waste of waiting of machinery (idle time);
waste of transportation; waste of processing itself; waste of stocks; waste of
motion/movement; and waste of making defective products.
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There are two important concepts in JIT manufacturing: value-added

manufacturing, and stockless production. In value-added manufacturing the
project manager aims at eliminating any step in the manufacturing process that
does not add value to the end product. For example, processes like process
delays, work-in-progress inventories, excessive paper work, etc., are eliminated.
In stockless production, the project manager maintains less inventories and
reduces waste considerably.
Various purchasing characteristics under the procedures of JIT management are
discussed below --:
Purchase lot size: JIT purchasing practices involve procuring of products in
small lots with frequent deliveries. This practice ensures lower storage and
maintenance costs, which are normally high in a traditional purchasing system.
Rejections from suppliers: In traditional purchasing systems, firms rely on
multiple sources of supply for each part or item, on short-term contracts. But in
JIT system, suppliers who are located close by are selected. In these systems,
firms rely on a single source of supply and make long term contracts.
Conditions with suppliers: Both traditional and JIT purchasing systems
emphasize product quality, delivery performance, and price. But the conditions
with suppliers about the rejection of incoming parts and materials are different in
JIT systems. Any product without an acceptable quality level or which arrives
late is rejected.
Mode of transportation: In JIT systems, determining the mode of transportation
is based on both inbound and outbound freight, and on time delivery. But the
delivery schedule is given by the buyer.
Product specification: In JIT systems, the buyer relies more on performance
specifications than on product design, and the supplier is encouraged to be more
innovative. But in traditional systems, product specifications are very rigid.
Several organizations prefer JIT manufacturing systems because of the following
advantages:
 Cost of materials is reduced in JIT systems as this system involves lower

inventory carrying costs, lower storage and maintenance costs and lower scrap
and waste.
 Since the contract between supplier and buyer is long term, the supplier provides
quality materials.
 JIT purchasing systems also provide increased responsiveness from the
suppliers as they are geographically close. Flexibility is also ensured as
materials are purchased only when there is a need.
 Administrative efficiency is also possible in JIT systems as the delivery
schedules are more flexible and there is less paper work.
 Production is improved because of fewer inspections, easier receiving, and
better plant layout.
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 As the required materials are not purchased all at once, the capital requirements
of the firm are reduced considerably.
Example: JIT at Toyota

The philosophy of JIT was pioneered by the Toyota Motor Company and
several firms implemented it successfully. Taichi Ohno of Toyota Motor
Company pioneered the concept of JIT management. According to Ohno,
methods like economic order quantities will not work in Japan as Japan's total
domestic demand is low and the domestic market demands production of
small quantities of different models. Accordingly, Ohno devised a new
system of production that aimed at eliminating waste. According to Ohno,
waste includes time, costs, and materials. He identified overproduction, time
spent in waiting, transportation/movement, and defects as the main sources of
waste.
Waste can be eliminated by:
 Purchasing items only when they are needed
 Automating the production system
Since the demand in Japan is low, manufacturers have no other option but to
reduce costs to increase their profits. Toyota understood this and it changed
its factory layout. Earlier, machines with similar functions (e.g. presses,
lathes, etc.) were placed together. Therefore, items had to be transported back
and forth as and when needed. Now, various machines were clustered
together at a single place to reduce the transportation of items from one place
to another.
To help the workforce adapt to the new production environment, Ohno introduced
the analogy of teamwork similar to a baton relay race. Factory floor workers were
encouraged to think of themselves as members of a team - passing the baton
(processed items) between themselves with the goal of reaching the finishing line
fast. To have control over production, Toyota introduced the kanban system. The
kanban is a rectangular piece of paper within a transparent vinyl envelope that
contains information to a worker about what items to collect or what items to
produce.
In Toyota, two types of kanban are used to control the flow of items:
 a withdrawal kanban- which is a list of items that should be withdrawn from
the preceding step in the process
 a production ordering kanban - which is a list of items to be produced.
Kanbans control movement throughout the factory. If a defective component
is found while processing a production ordering kanban, then the quantity
specified on the kanban is not produced. Another aspect of the Toyota
production system is to reduce the setup times of the machines and processes.
All production processes were re-engineered to reduce the setup before
processing of a new item.
Adapted from http://www.ms.ic.ac.uk/.
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Activity: Indus Projects Ltd. is involved in projects like constructing National

Highways. The firm has a traditional purchasing system. On several occasions,
the firm’s suppliers failed to send the required materials on time. The firm is
also incurring heavy storage and maintenance costs because it purchases in bulk
to get quantity discounts. The company recruited Ram Sinha as the project
manager. Sinha decided to replace the current purchasing system by a JIT
purchasing system. Discuss how a JIT purchasing system can help project firms
handle inventory problems.
Answer:
13.12 Total Quality Management

Total Quality Management (TQM) is a philosophy that seeks organization-wide
improvement of quality by involving every individual in the firm to improve the
quality at every stage of the production process. The concept focuses on ensuring
that the products meet the set of specifications required by the customers.
The concept divides customers into two categories: external customers and
internal customers. External customers are those who consume final goods and
services offered by the company. Each department considers employees in other
departments who continue the product processing as internal customers.
To improve the quality of the product, firms:
 Build teams and empower employees

 Solicit ideas to improve organizational activities
 Adopt practices like benchmarking, and bench trending to improve quality of
the products to meet future market trends.
 Increase employee participation through initiatives like quality circles, self-
managed groups etc.
 Use process management techniques to improve customer service and reduce
cycle time.
 Develop and train staff to improve customer service
 Adhere to widely accepted international standards.
 Apart from these activities, firms can take up the following activities to improve
quality in long-run:
 Interact constantly with end customers to understand their latent needs and
demands
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 Maintain closer relationships with suppliers to improve product/service quality.

 Update information and communication technologies to improve customer
service.
 Organize training, education programs, and knowledge development workshops
for employees.
 Focus on productivity, timeliness, flexibility and profitability.
Check Your Progress

31. The philosophy that seeks improvement in quality throughout the
organization by involving every individual at every stage of production
process is called _________.
a. business process re-engineering
b. total quality management
c. just-in-time management
32. Under which concepts of manufacturing under JIT does the manager aim to
avoid any step in the manufacturing process that is not useful?
a. Stockless production
b. Value added manufacturing
c. Total quality management
13.13 Summary
 Quality has been defined by the ISO (International Organization for
Standardization) 9000 as the totality of features and characteristics of a product
or service that bears on its ability to satisfy stated or implied needs. The client
looks at quality as conformance to specifications, value for money, fitness for
use, support, and psychological impression.
 ISO 9000 Standards are a set of international quality management system
standards and guidelines.
 Every firm incurs costs when it attempts to improve quality, and these costs are
referred to as ‘cost of quality’.
 Costs are of two types: ‘cost of conformance’ and ‘cost of non-conformance’.
Conformance costs are the costs that firms incur for the means employed to
achieve quality like costs of training, inspection, testing, and auditing. Non-
conformance costs are those costs that are incurred for improving the quality of
a product that has fallen below the desired quality level like repairs, reworks,
and complaint handling.
 The costs of quality can also be classified as follows -- costs of prevention, costs
of appraisal or detection, and costs of failure.
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 The project manager should ensure that the project attains the desired level of
quality. Quality can be achieved only through proper planning. The project
manager studies the following six quality management concepts -- quality
policy, quality objectives, quality assurance, quality control, quality audit, and
quality program plan.
 Statistical methods play a key role in identifying, analyzing, and controlling the
quality of different project activities. These tools help the firm in gathering data,
identifying patterns of data and measuring variation.
 Data tables, and Pareto charts are some useful tools for identifying patterns in
data; histograms, scatter diagrams, and control charts are tools used in data
analysis; and ‘cause and effect analysis’, and ‘trend analysis’ are used both in
data identification and data analysis.
 Process capability is the ability of an existing manufacturing process to produce
a product that conforms to the design specifications. Since there can be
variations during manufacturing, the process capability can help specify product
uniformity.
 Acceptance sampling is a product quality control technique that monitors the
quality of a product after it has been produced. This technique is also employed
to decide whether to accept or reject a lot on the basis of random samples drawn
from a lot.
 Sampling plans can be of three types -- single sampling, double sampling and
multiple sampling.
 A quality circle is a group of employees, normally from a single department
who voluntarily meet periodically to discuss the quality issues in their
department. Quality circles help the management to understand the reasons
behind the employees’ failure to meet the required quality levels.
 Just-in-time is an operations philosophy based on continuous improvement of
organizational processes by reducing wastage from all project operations. The
principle is not to produce anything until it is required.
 Total quality management is a philosophy that seeks organization-wide
quality at every stage of the production process. The concept focuses on
ensuring that the products meet the set of specifications required by the
customers.
13.14 Glossary
 Acceptance Sampling: A product quality control technique that monitors the
quality of a product after it has been produced.
 Appraisal costs: Costs incurred while assessing the level of quality attained by
the operating procedures of the firm. These costs are associated with the
evaluation of the product’s performance to see if it meets the client requirements
or not.
 Cause and Effect (or fishbone or Ishikawa) Diagrams: After identifying a
problem, the project manager determines the cause of the problem. These
diagrams help identify the relationship between a key quality problem and its
potential causes.
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 Checklist: A form of data table that is used to record the frequency of

occurrence of a certain product’s quality characteristic.
 Conformance and non-conformance costs: Costs are of two types:
conformance and non-conformance. Conformance costs are the costs that firms
incur for the means employed to achieve quality. Non-conformance costs are
those costs that are incurred for improving the quality of a product that has
fallen below the desired quality level.
 Consumer’s Risk: The risk to the consumer (any firm or department that
receives an item from the producer) that arises because of the selection of a bad
lot.
 Control Chart: A graphical representation of the results of a process over a
period of time.
 Data Tables: Statistical tools used to collect and present data in a systematic
way.
 Histograms: Graphical representations of data as a frequency distribution.
When there are a large number of variable data, the histogram summarizes the
data into a number of groups.
 Internal and external costs of failure: Costs of failure are two types: internal
failures and external failures. Internal failure costs result from defects that are
discovered during the production of a product or service and when the product is
under the control of the firm. External failure costs arise when a defect is
discovered after the customer has received the product or service.
 Just-in-time: An integrated set of activities designed to achieve high-quality
production using minimal inventories. The principle here is not to produce
anything until it is required.
 Operating Characteristic Curve: A probability distribution that is a function
of sample size (n) and the acceptance number (c), expressed as a percentage of
items in a lot of incoming goods.
 Pareto Chart: The project manager constructs a Pareto chart to prioritize the
quality problems. In this chart, all the quality problems (defect types) are plotted
along the horizontal axis in descending order.
 Prevention Costs: Costs incurred by a company to prevent defective goods and
services from being produced and delivered to the customer.
 Process Capability: The ability of an existing manufacturing process to
produce a product that conforms to the design specifications.
 Producer’s Risk: The risk to the producer (any firm or department that
produces goods for another firm or another department) that arises because of
rejection of a good lot.
 Quality Assurance: The process of evaluating the total performance of the
project regularly, in order to ensure that the project conforms to the quality
standards.
 Quality Audit: An organized, independent evaluation procedure to ensure that
the project standards match the quality requirements.
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 Quality Circle: A group of employees, normally from a single department who

voluntarily meet periodically to discuss the quality issues in their department.
 Quality Control: The process of scrutinizing specific project results in order to
check their compliance with the quality standards.
 Quality Policy: It is a document created by quality experts and backed by the
top management. It states the quality objectives of the firm, the acceptable levels
of quality, the responsibilities of the project team, etc.
 Quality Program Plan: A plan of action prepared by the project manager and
his/her team by breaking down project objectives into a work breakdown
structure.
 Quality: It is the totality of features and characteristics of a product or service,
which influence its ability to satisfy a stated or implied need.
 Scatter Diagrams: A plot of two variables showing how they are related. Data
is represented on XY plane and the relationship between the two variables is
understood on the basis of how they are distributed.
 Total Quality Management: A philosophy that seeks organization-wide
quality at every stage of the production process.
 Trend Analysis: A statistical tool that uses mathematical techniques to forecast
future outcomes on the basis of historical data. It quantifies the relationships
between the data, and establishes an equation that best describes the distribution
of data points.

1. The growing size and complexity of projects have forced firms to
concentrate more on quality at every stage. Define quality. What are the
International quality standards?
2. Every firm incurs costs when it attempts to improve quality, and these costs
are called as costs of quality. What are the various types of costs? Explain
the different types into which the costs of quality are classified.
3. The project manager has to ensure that the project attains the desired level of
qauality. Describe the detail the various quality management concepts.
4. The project manager uses project quality control tools and statistical
methods to gather data, identify patterns in the data, and measure variation.
Discuss these project quality control tools.
5. Describe the following concepts in detail.
a. Process capability
b. Acceptance sampling
c. Quality circles
d. Just-In-Time management
e. Total Quality Management
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Unit.
1. (b) quality
According to ISO 9000, quality refers to the totality of features and
characteristics of a product or service that has a bearing on its ability to
satisfy stated or implied needs. ISO 9000 is a group of standards for quality
management systems. It is maintained by the International Organization for
Standardization. The standards are applicable to all types of organizations in
areas such as manufacturing, processing, servicing, electronics, computing,
petrochemicals, shipping, etc.
2. (a) ISO 14000
ISO 14000 is one of the industrial and commercial standards which fall under
the ISO 9000 standards. It provides standards for managing environmental
impact, environmental performance evaluation, environmental labelling, and
lifecycle assessment. These standards help organizations to minimize the
negative effects on the environment to comply with the applicable laws and
environmentally oriented requirements, etc.
3. (b) psychological impression
Physical ambience, the firm’s image, and the friendliness of project team
members are some of the aspects which create a psychological impression
on the mind of the client.
4. (b) International Organization for Standardization
ISO stands for the International Organization for Standardization. It is an
international standard-setting body comprising representatives from various
standards organizations. The purpose of the organization is to propagate
standards in businesses worldwide. It was established at Geneva in 1947.
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5. (c) fitness for use

Fitness for use is one of the angles from which the client looks at quality.
The client considers the features of the product or the convenience of a
service to decide project quality. Some of the aspects of fitness for use
include appearance, style, durability, reliability, and serviceability.
Conformance to specifications refers to the product or service matching the
specifications in the project overview statement (POS). Value for money
refers to how well the product or service fulfills the purpose for which the
project is intended in relation to the price the client is willing to pay.
Support refers to the help extended by the project manager to the client with
reference to the project.
6. (c) five years
The ISO protocol requires that all standards should be reviewed at least
every five years to check whether they should be retained, revised, or
withdrawn. The 1994 version of the ISO standards were revised by the ISO
technical committee (TC, 176). ISO TC 176 was the umbrella committee
under which the ISO 9000 series of quality management and quality
assurance standards were developed. The committee developed standards
and guidance documents in the year 2000.
7. (b) ISO 9001
The ISO 9001 standard defines the model for a quality system for
companies that design, produce, install, and service products. It lists out a
number of requirements regarding products and services, which an
organization needs to fulfill to achieve the satisfaction of customers. ISO
9000 is a group of standards for quality management systems. It is
maintained by the International Organization for Standardization. The
standards are applicable to all types of organizations in areas such as
manufacturing, processing, servicing, electronics, computing,
petrochemicals, shipping, etc. The ISO 9002 standard defines the model for
quality system for production and installation. The ISO 9003 standard
defines the model system for quality assurance in final inspection and
testing.
8. (a) Quality policy
Quality objectives are a part of the firm’s quality policy. It specifies the
quality objectives of the firm and the time required to meet those objectives.
The quality policy is a document which states the quality objectives of the
firm, the acceptable levels of quality, the responsibilities of the project team,
etc. Quality assurance means evaluating the quality performance of the
project periodically to confirm that the project meets the relevant quality
standards. Quality audits are organized, independent evaluation procedures
to ensure that the project standards meet the quality requirements.
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9. (d) quality audit

Quality audits are organized, independent evaluation procedures to ensure
that the project standards meet quality requirements. Quality control refers
to the process of the collection of activities and techniques used to create
specified quality characteristics in the project’s end product. A quality
program plan is the breaking down of project objectivities into a work
breakdown structure. Quality assurance refers to evaluating the quality
performance of the project periodically to ensure that the project meets
quality standards.
10. (a) Quality assurance

Quality assurance means evaluating the quality performance of the project
periodically to confirm that the project meets the relevant quality standards.
Quality assurance confirms that the scope, cost, and time of the project meet
the client’s requirements. Quality policy is a document which states the
quality objectives of the firm, acceptable levels of quality, the responsibilities
of the project team, etc. Quality audits are organized, independent evaluation
procedures to ensure that the project standards meet the quality requirements.
Quality control refers to the activities and techniques used to create specified
quality characteristics in the project’s end product.
11. (a) conformance costs
Conformance costs are the costs incurred on the means to achieve quality.
Non-conformance costs are called costs that are incurred on improving the
quality of a product that has fallen below standards. Costs of prevention are
the costs that are incurred on preventing defective goods and services from
being produced and delivered to the customer. Failure costs are divided into
internal failure costs and external failure costs. These are the costs that are
incurred on rework, warranty charges, legal expenses, concessions made to
the customers, etc. for defective products.
12. (c) i, ii, iii, and iv

The features of a good quality policy are: Providing guidelines to improve
the quality of the project, promoting consistency across all projects of the
firm, explaining to outsiders how the firm views quality, and providing for
changes and updates in the policy.
13. (b) Costs of appraisal
Costs of appraisal are the costs incurred on assessing the level of quality
attained by the operating procedures of the firm. Conformance costs are the
costs that are incurred on the means to achieve quality. Costs of prevention are
the costs incurred on preventing defective goods and services from being
produced and delivered to the customer. Non-conformance costs are the costs
incurred on improving the quality of a product that has fallen below standards.
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14. (b) external failure costs

External failure costs are the costs that are incurred when a defect is
discovered after the customer has received the product or service. Some
examples of external costs are: costs of returned material, warranty charges,
legal expenses on law suits, and costs of concessions made to customers.
Costs of appraisal are the costs that are incurred to assess the level of quality
attained by the operating procedures of the firm. Internal failure costs result
from defects discovered during the production of the product or service
before the product reaches the customer. Costs of prevention are the costs
that are incurred to prevent defective goods and services from being
produced and delivered to the customer.
15. (c) i, ii, and iii
The features of a good quality plan are: It should list the features desired by
the customer, respond to changing customer needs, and ensure that the quality
procedures are stringent enough to meet quality objectives. Including all the
project functional areas is one of the features of quality assurance system.
16. (b) C-chart
The C-chart is a type of control chart used to find out the number of defects
per unit. This chart is used when there is more than one defect per unit. The
np-chart shows the actual number of defects found in each sample. The X-
bar chart is the control chart to determine mean variation of samples. The R-
chart is the plot of range dispersion within each sample.
17. (c) Identifying corrective actions
The project manager prepares the corrective analysis by determining the
causes contributing to defects in the last step of preparing the cause and
effect diagrams. This process is also known as identifying corrective
actions. Identifying the quality problems using the statistical process control
tools like the Pareto chart, histograms, brainstorming, etc,. is the first step.
Specifying major categories and identifying the causes of defects are the
fourth and fifth stages.
18. (b) Curvilinear correlation
The relation between the data points is said to be curvilinear when the data
points of the scatter diagram are in a U-shaped pattern. There is said to be
no correlation if the data points are scattered. If the data points have positive
and negative slopes then they are said to have positive and negative
correlation.
19. (b) Histograms
Histograms are used to graphically represent data in the form of frequency
distribution. They help in summarizing the data into groups when the data is
variable and large in number. Data tables are statistical tools used for
collecting situation/product specific data. Pareto charts are used to prioritize
the quality problems.
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20. (a) Data tables

Data tables are statistical tools used to collect and present data in a
systematic way. Histograms are a graphical representation of data as a
frequency distribution. Pareto charts are used to prioritize quality problems.
21. (b) P-chart
The P-chart is the control chart used for fraction defective. Fraction
defective is the number of defective units divided by the sample size. The
np-chart shows the actual number of defects found in each sample. The X-
bar chart is the control chart to determine mean variation of samples. The R-
chart is a plot of the range dispersion within each sample.
22. (c) Scatter diagrams
Scatter diagrams show the relationship between two variables on the basis of
how they are distributed by plotting the data on a XY plane. Histograms are
used in graphically representing the data in the form of frequency
distribution. Pareto charts are used to prioritize quality problems.
23. (a) np-chart
The np-chart shows the actual number of defects found in each sample. The
X-bar chart is the control chart used to determine mean variation of samples.
The R-chart is the plot of the range dispersion within each sample.
24. (a) Trend analysis
Trend analysis is the mathematical technique used to forecast future
outcomes on the basis of historical data. The trend line provides a clear and
consistent relation between the output and input. Scatter diagrams show the
relationship between two variables on the basis of how they are distributed
by plotting the data on a XY plane. Control charts are used to monitor the
production process to see whether the quality of output is within the
permissible limits. Pareto charts are used to prioritize quality problems.
25. (a) the X-bar chart
The X-bar chart is a control chart to determine the mean variation of
samples. The R-chart is a plot of the range dispersion within each sample.
Trend analysis is a mathematical technique to forecast future outcomes on
the basis of historical data.
26. (b) producer’s risk
The two outcomes of the acceptance plan are: producer’s risk and
consumer’s risk. The risk that arises because of the rejection of a good lot is
called producer’s risk. The risk that arises because of the selection of a bad
lot is called consumer’s risk. Acceptance sampling is a product quality
control technique that monitors the quality of a product after it has been
produced.
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27. (b) acceptance sampling

Acceptance sampling is a product quality control technique that monitors
the quality of a product after it has been produced. It is also employed to
decide whether to accept or reject a lot on the basis of random samples
drawn from the lot. The P-chart is the control chart used for fraction
defective. Fraction defective is the number of defective units divided by the
sample size. R-chart is a plot of the range dispersion within each sample.
28. (b) operating characteristic curve

The operating characteristic curve is the probability distribution that is a
function of sample size ‘n’ and the acceptance number ‘c’ expressed as a
percentage of items in a lot of incoming goods. Quality circles are groups of
employees usually from a single department who meet periodically to
discuss the quality issues in the department. Just in time philosophy seeks to
improve the organizational process by reducing wastage in all project
operations.
29. (a) Single sampling

In single sampling, the project manager accepts or rejects a lot after
inspecting a sample chosen from the lot. Under double sampling, a second
sample is tested if the results from testing the first sample are not
satisfactory. Under multiple sampling, several samples are tested.
30. (a) quality circles

Quality circles are groups of employees usually from a single department
who meet periodically to discuss the quality issues in the department. Total
quality management is a philosophy that seeks organization-wide
improvement of quality by involving every individual to improve the quality
at every stage of production process. Re-engineering is the radical
redesigning of the organization’s business processes.
31. (b) total quality management

Total quality management is a philosophy that seeks organization-wide
improvement of quality by involving every individual to improve the quality
at every stage of production process. Just in time philosophy seeks
improvement in the organizational process by reducing the wastage from all
project operations.
32. (b) Value added manufacturing
Value added manufacturing is one of the concepts of just-in-time

management. It aims to eliminate any step in the manufacturing process that
does not add value to the end product. Stockless production inventory levels
can reduce waste considerably.
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Following are the answers to the Exercises given in the unit.
A. 0.286
Since the acceptable level of variance is 0.06 feet, the upper specification
limit and the lower specification limits are 0.06 and -0.06. The standard
deviation is taken as 0.07. The value of process capability (Cp) arrived at
is:
USL  LSL 0.06    0.06  0.12

Cp    = 0.286.
6 60.07  0.42
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Unit 14
Project Auditing
Structure
14.1 Introduction
14.2 Objectives
14.3 Project Evaluation and its Purpose
14.4 Project Auditing
14.5 Construction and Use of the Audit Report
14.6 Responsibilities of the Auditor
14.7 The Project Audit Life Cycle
14.8 The Essentials of an Audit
14.9 Performance Measurement
14.10 Summary
14.11 Glossary
14.1 Introduction
In the previous unit, we have discussed project quality management. In this unit,
we will discuss about project auditing. As discussed earlier, project control tries to
enhance the firm’s chances of meeting future project goals, on the basis of lessons
learnt in the present projects. An organization can benefit from its past experience
only when it tries to understand them through the process of evaluation. The term
“evaluate” means to make a judgment as to the worth or value of a product or an
activity. In project management context, project evaluation is the process of
appraising the progress and performance of the project in comparison to the
planned objectives.
A project can be evaluated by using evaluation tools such as Project Audits and
Project Reviews. Although many authors use the terms evaluation and audit
synonymously, an audit is a formal inquiry in to various aspects of the project. In
this unit, the word “audit” is associated with any formal inquiry into various
project aspects that are of interest to the top management.
This unit will discuss project evaluation and its purpose. We will discuss project
auditing, and the construction and use of the audit report. We shall then move on to
discuss the responsibilities of the auditor, and the project audit life cycle. Finally, we
would be discussing the essentials of an audit, and the concept of performance
measurement.
14.2 Objectives
 discuss project evaluation and its purpose.
 define project auditing.
 find out how to construct and use an audit report.
 identify the responsibilities of the auditor.
 explain the project audit life cycle.
 discuss the essentials of an audit.
 recall the concept of performance measurement.
14.3 Project Evaluation and its Purpose

Project evaluation is a process of evaluating a project’s progress and
performance in comparison with its planned progress and performance or with
that of identical projects. Also, project evaluation should be supportive to all the
management decisions that the project requires. So the manner in which a project
is evaluated should make the management feel that all the relevant data has been
considered. Project evaluation is considered to be as important as the project
itself.
The primary objective of project evaluation is to measure the degree of a
project’s success. A survey on industrial projects of different nature and size
identified four critical parameters for measuring the success of a project. A
survey on industrial projects of different nature and size identified four critical
parameters for measuring the success of a project. They are --
 Completion of a project within a given budget and time
 Extent to which the project is able to satisfy the client
 Commercial success of the project and the market share captured by the product
delivered by the project
 Ability of the product or service to succeed if it enters a new market or its ability
to lead to a new product or technology.
Apart from measuring the success of a project, project evaluation aims at
identifying the various strengths and weaknesses of a project (in various phases).
This will help the organization manage its future projects better. Project
evaluation helps the organization and project team to
 identify problems during the early stages of the project.
 ensure clarity in performance, cost and time relationships.
 enhance the performance of the project.
 explore opportunities for technology advancements in the future.
 appraise the quality of project management.
 minimize costs of the project.
 accelerate the process of achieving results.
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Project Auditing
 find, correct and avoid mistakes in the future.

 communicate information as desired by the client.
 check the firm’s interest and commitment to the project.
All the above benefits resulting from project evaluation are concerned with the
primary goals of the project team. Apart from unearthing information related to a
project’s team’s success in meeting its primary goals, “evaluation” also studies
other secondary goals that are crucial for the success of the project and the
organization. These secondary goals are not defined at the starting of the project,
but they are crucial for the well being of the organization. Secondary goals are
concerned with
 Understanding the importance and role of projects in an organization
 Improving the way in which projects are organized and managed
 Attempting to create a healthy working environment and encouraging the
creativity of the team members
 Exploring the strengths and weaknesses of the organization concerned with
projects’ team members, management and decision making processes.
 Trying to identify the risk factors associated with the projects taken up by the
organization.
 Attempting to enhance the contribution of projects towards the professional
growth of the team members.
 Identifying individuals with excellent managerial and leadership skills.
It is relatively easier to find out primary goals than to identify secondary goals.
Primary goals can be identified simply by interpreting of the project proposal or
by scrutinizing any document describing the reasons for project selection. Such
documents state the primary goals of a project. But the implicit nature of
secondary goals makes it difficult for the auditor to identify and evaluate them.
For example, the behavioral aspects of the employees working in an organization
are generally hidden. Since these secondary goals are not stated in any of the
organization’s manuals, team members are quite likely to ignore them.
People tend to meet their individual goals along with their organizational goals,
but they generally give more attention to the achievement of individual goals. A
problem may crop up when the auditor tries to discover the secondary goals of
the team members. Moreover, people are generally reluctant to reveal their
personal goals, because of the feeling that their goals are not in agreement with
the firm’s objectives. For example, people may take part in a project to gain
knowledge of new skills that improve their career prospects but they will not
reveal this to the auditor.
Lack of trust in the auditor would also create problems in identifying the
secondary goals. The presence of an auditor, external or internal, would make
team members feel uncomfortable and insecure. As a result, they would not like
to reveal their personal or secondary goals to the auditor.
On the whole, exploring secondary goals is a difficult task. Generally, project
auditors do not take secondary goals into consideration when conducting an
audit, but it is always advantageous to consider them as they provide some
qualitative information related to the success or failure of a project.
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Example: Fundamental Elements that Determine the Success or

Failure of Projects
1. A clean and objective description of the product or service to be
developed, and the project’s scope, budget and schedule will contribute
greatly to the success of the project. Lack of clarity in these aspects of
project management will lead to the failure of the project.
2. Involving people with expertise in relevant disciplines at all the
hierarchical levels of the project will help develop and preserve a
collaborative and problem-solving environment. This approach can lead
to the success of a project.
3. Proper allocation of authority and responsibility between the client’s
project manager and the contractor’s project manager will lead to speedy
and accurate decision making.
4. Making major stakeholders accountable will ensure that their
performance matches their promises. The responsibilities of the
stakeholders should be described as clearly as possible in contracts,
agreements and purchase orders.
Check Your Progress

1. Which of the following options are not the primary goals of project
evaluation?
i. To identify problems during the early stages of the project
ii. To identify the risk factors associated with the projects taken up by the
organization
iii. To enhance the performance of the project
iv. To identify the individuals with excellent managerial and leadership
skills
a. Only i and ii
b. Only ii, iii, and iv
c. Only ii and iv
d. Only iii and iv
2. Identify the statements that are true with regard to project evaluation.
i. Project evaluation is a process of evaluating a project’s progress and
performance in comparison with that of identical projects.
ii. The main objective of project evaluation is to measure the degree of the
success of a project.
iii. Project evaluation has to be supportive of all the management decisions
that the project requires.
a. Only i and ii
b. Only i and iii
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Project Auditing
c. Only ii and iii

d. i, ii, and iii
3. Which of the following options refers to the process of appraising the
progress and performance of the project with reference to the planned
objectives?
a. Project auditing
b. Project evaluation
c. Project screening
d. Project control
4. From the following options, identify the secondary goal of project
evaluation.
a. To check the firm’s interest and commitment to the project
b. To explore the strengths and weaknesses of the organization in terms of
the project team members, management and decision-making processes
c. To appraise the quality of project management
d. To explore opportunities for technology advancements in the future
5. Which of the following options are the parameters on which the success of a
project is measured?
i. Whether the project is completed within a given budget and time
ii. Whether the project is able to satisfy the client
iii. Whether the project deliverable has the ability to succeed when it enters
a new market
iv. Whether the project is commercially successful
a. Only i, ii, and iii
b. Only i, iii, and iv
6. Identify the primary goal of project evaluation from the following options.
a. To understand the importance and role of projects in an organization
b. To ensure clarity in performance, cost, and time relationships
c. To identify the risk factors associated with the projects taken up by the
organization
d. To improve the way in which projects are organized and managed
7. Which of the following options are the secondary goals of project
evaluation?
i. To attempt to enhance the contribution of projects toward the
professional growth of the team members
ii. To check the firm’s interest and commitment to the project
iii. To find and correct mistakes and avoid them in the future
95
iv. To attempt to create a healthy work environment and encouraging the

creativity of the team members
a. Only i and iv
b. Only ii and iv
c. Only iii and iv
d. Only ii, iii, and iv
14.4 Project Auditing

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.
Project auditing can be carried over on the whole project or on a part of the
project. Though a formal audit report can be presented in various formats, certain
aspects must be contained in report without fail. They are
 Present status of the project: Is the work performed ahead or behind the planned
schedule?
 Future status of the project: Will there be any significant change in the
schedule? Indicate the nature of change if there is a possibility of change.
 Status of crucial tasks: Measuring the progress of the crucial tasks on which the
success of a project depends.
 Assessing risk: What are the chances of the project failing or running into
losses?
 Information relating to other projects: What lessons can be learned from the
project audit that can be used in the future to improve the management of other
projects of the organization?
 Audit and its limitations: What are the limitations, assumptions or constraints
that have an impact on the audit data?
Though the inspection methodology for both the financial and project audit is
similar, the outcome of both the processes varies widely. The scope of a
financial audit is limited, it emphasizes on utilization and preservation of the
organizational assets. But the scope of a project audit is very wide and can
involve the whole of the project or any of its components. Though project
auditing deals with all the aspects of project management, it is not a traditional
management audit. Management audits are designed to examine the operation of
a firm’s management systems. Project auditing goes beyond this to make sure
that the project is properly managed. A management audit examines the utility of
the managerial systems, while a project audit examines the impact of managerial,
financial and technical parameters on a particular organizational climate.
14.4.1 Depth of an Audit

There are many practical constraints that limit the scope of an auditor’s
evaluation of the project. Time and money are two such constraints; they not
only limit the depth of the investigation but also affect the amount of detail
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Project Auditing
presented in the audit report. Costs are incurred as a result of the audit process
itself, (i.e., professional and clerical costs for conducting an audit) and for
gathering, storing and preserving the data to be audited.
There are two other costs that are important and are usually ignored. The first
one is the distraction caused by the auditing process to the people working on the
project. The project team members may become distracted or anxious when the
project is being audited and as a result, they pay less attention to their work and
spend more time and energy on securing themselves from the auditor’s criticism.
The second cost is the drop in the morale of the individuals working on the
project. Even though an audit report is presented in a constructive and positive
style it can demoralize team members and affect the project negatively.
The depth to which an audit is conducted varies with the situation and the needs
of the project. Although this is purely a top management decision, a project audit
generally carries out the following three levels of audit -- the general audit, the
detailed audit, and the technical audit.
The general audit is usually a brief review of the project, carried out within a
limited time period and with only a few resources. It usually touches on all the
six dimensions of the auditing report, i.e., the present status of the project; the
future status; the status of the crucial tasks; assessing the risk; information
relating to other projects and the limitations of the project.
The detailed audit is usually conducted as a follow-up to the general audit. This
detailed audit is conducted when an unacceptable level of risk has been
discovered by the general audit. The depth of a detailed audit depends on the
seriousness of the issues and their impact on the objectives of the project; the
more serious the issue, the greater the depth of the audit.
The technical audit is conducted when a detailed audit fails to evaluate the
technical aspects of a project satisfactorily because of the auditor’s lack of
technical knowledge. The project auditor then employs a technically qualified
individual to conduct the audit along certain guidelines. When highly
sophisticated and confidential technology is used, it is often difficult to find
technical auditors from the organization itself. In such cases, academic
consultants are often employed by the organization. To ensure confidentiality,
the consultants have to sign the document of nondisclosure. Although it is not a
hard and fast rule, a technical audit is generally conducted in a detailed manner.
14.4.2 Timing of the Audit

Similar to the depth, the timing of an audit is also project specific. Generally, the
first audit is conducted early in the project life cycle, as early problem detection
would make the rectification process easier. Usually, early audits concentrate on
technical issues and focus on solving key technical problems. Auditing
conducted towards the end of the project life cycle becomes a value addition to
the parent organization than to the project. As the project progresses, concern for
the technical factors takes a back seat. At this stage, adherence to the schedule
and budget become important. Also, management concerns like disposing of
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equipment and reallocating personnel become key issues when a project is

evaluated towards the end of its life cycle. Auditing conducted at different
phases of project life cycle gives specific benefits to the project and the
organization.
14.4.3 Post Project Evaluation

Post project evaluation could be necessary for the following reasons --
 It is specified by the client in the agreement and is required legally.
 It constitutes a major part of the project report. Also, it’s the key source of
information for giving feedback to the parent organization.
 It accounts for all the assets and expenses of the project.
Check Your Progress

8. Identify the process that involves a 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 control
b. Project auditing
c. Project screening
d. Project evaluation
9. Which of the following options is false with regard to the aspects that should
be covered in the formal audit report?
a. The audit report should properly assess the risk associated with the
project.
b. The audit report should include the limitations, assumptions, and
constraints that would have an impact on the audit data.
c. The audit report should include information about the other projects.
d. The audit report should include the current status of the project while it
need not include the future status of the project.
10. From the following options, identify the costs involved in the audit process.
i. Professional and clerical costs for conducting an audit
ii. Costs incurred in gathering, storing, and preserving the data to be
audited
iii. Distraction caused by the auditing process to the people working on the
project
iv. The drop in the morale of the individuals working on the project
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11. Which of the following levels of audit covers dimensions of the auditing
report such as the present status, the future status, and the status of the
crucial tasks?
a. General audit
b. Detailed audit
c. Technical audit
d. Both (a) and (b)
12. Identify the reasons that make the post project evaluation audit necessary.
i. It is specified by the client in the agreement and is required legally
ii. It constitutes a major part of the project report
iii. It accounts for all the assets and expenses of the project
iv. It is the key source of information for giving feedback to the parent
organization
13. Which of the following audits is conducted when a serious issue has been
discovered and it is known that it will have a major impact on the project?
a. General audit
b. Detailed audit
c. Technical audit
d. Both (b) and (c)
14. Which of the following statements is true regarding the timing of a project
audit?
a. An early audit in the project life cycle would help in early problem
detection and would make the rectification process easier.
b. As the audit process progresses to an advanced stage, the project
auditors concentrate on the technical issues, and therefore, focus on
solving key technical problems.
c. A project audit conducted during the end of the project life cycle checks
on whether the project is adhering to the schedule and budget.
d. All of the above
15. A detailed audit is carried out when
a. an unacceptable level of risk has been discovered by the general audit.
b. a technical audit fails to evaluate the technical aspects of a project
satisfactorily due to the auditor’s lack of technical knowledge.
c. the project auditor carries out the general and technical audits in a
satisfactory manner.
d. All of the above
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16. _____________ is a brief review of the project, carried out within a limited
time period and with only a few resources.
a. General audit
b. Detailed audit
c. Technical audit
14.5 Construction and Use of the Audit Report

The format of an audit report depends on the nature of the project under
evaluation and the purpose of the evaluation. It is always advantageous to use a
standard format for presenting audit reports. Such a format makes it easy for the
project manager and the top management to understand and comprehend it. If the
audit report is to be distributed within the organization, then the management
should prepare a distribution list. If the distribution of audit reports is restricted,
it can attract the attention of every individual thinking it to be a confidential
report, which will finally lead to interpersonal and inter-group conflicts.
Though some project managers prefer complex and custom made formats of
audit reports for their projects, it is always better to have a simple and
straightforward structure. The information should be arranged in such a manner
that it is easy to compare the planned and the actual output. The report should
focus on the deviations of the delivered output from the planned output, along
with explanations and comments. Such a simple and straight forward structure
will make it easy for management to identify problems with the project.
The audit report should not make negative comments about the people involved
in the project. The content of the report should be limited to the information and
the issues that pertain to the project. The report should be written in a
professional style without any scope for emotional overtones. A typical audit
report must provide the following basic information:
1.7.1 Introduction
This part of the report presents the framework of the project. A clear
representation of project objectives is a must in this section. In the case of highly
complex objectives, it is advisable to add an appendix to the report, providing
additional information on the project objectives.
1.7.2 Present Project Status

The project’s current status has to be reported when auditing the project. This
section of the report is concerned with the following performance measures:
Cost: This part of the audit report compares the actual costs incurred to the
planned costs. The report should also mention the timeframe during which the
comparison is made. This section usually concentrates on computing the direct
costs of the project. In case it is necessary to highlight the total costs of the
project along with the overheads, a cost data sheet should be provided as a
supplementary table.
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Project Auditing
Schedule: This part of the project audit report gives project performance in
terms of the milestones accomplished. The auditor must clearly report which
tasks have been completed and which are still incomplete. The percent of work
completed must also be stated.
Progress: This part of the audit report compares the tasks that have been
completed with the resources that have been spent to achieve this task. There
should be enough information in the report, to help the project manager zero in
on the activities or group of activities that are the sources of the problem. Also,
the information helps project managers estimate the time and expenditure
necessary to complete the remainder of the project.
Quality: The degree of importance of quality as a factor of evaluation depends
on the nature of the project. Quality can be defined as the totality of features and
characteristics of a product or service which bear on its ability to satisfy a stated
or implied need. These needs, in terms of projects, are pre-specified
characteristics. If detailed quality specifications are attached to a project, this
part of the project status report should contain a detailed review of the quality
control procedures, along with the latest results of the quality tests conducted.
1.7.3 Future Project Status
This part of the report consists of the project evaluator’s conclusions. It indicates
the progress of the project and makes suggestions regarding the remaining tasks
of the project. The purpose of the audit report is not to rewrite the project
proposals of existing projects, but to provide guidance to future projects.
1.7.4 Critical Management Issues
This part of the report should address all the critical issues that top management
has to monitor constantly. It should explain the link between the critical issues
and the project objectives. In addition, this part of the audit report should
describe the time, cost and performance trade-off in a brief manner. Such a
description would help top management make decisions in the future projects.
1.7.5 Risk Analysis
This part of the audit report describes all the major risks involved in a project. It
also discusses the impact of these risks on the time, cost and performance of the
project. The report can recommend an alternative course of action for
minimizing risks.
1.7.6 Limitations and Assumptions
This part of the report can be included in the introduction or can be placed
towards the end of the report. Though accuracy and timeliness of the audit report
is the responsibility of the project auditor, the top management is totally
responsible for the interpretation and actions taken based on the information
given in the report. Therefore, it is important to state the limitations on the
validity of the audit report.
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Example: Extent of Benefits Derived from Auditing at

Different Stages in a Project
Stage in Project Life Cycle Extent of Benefit
Initial An audit in the early stages of the project
is very valuable, especially if it is
conducted before 25% of the project has
been completed.
During feasibility study A technical audit at this stage is highly
beneficial.
Preliminary planning Beneficial for developing measurement
standards so as to validate the
performance standards set.
Scheduling phase Less beneficial because the flexibility of
the project team at this stage is usually
limited.
When project team is analyzing Beneficial to a certain extent only.
the data
Implementation phase Benefits depend on the significance of the
project processes and techniques.
Post-project Benefits are realized to the extent the
results of the audit are utilized in future
projects.
Adapted from Jack R. Meredith & Samuel J. Martel, “Project Management – A
Managerial Approach”, Fourth Edition, p.519.
Activity: Odissy Automobiles WLL is a Japan-based automobile

manufacturing company that specializes in producing 4x4 sports utility
vehicles (SUV). A month ago, the company produced and launched its new
model Odissy Roar during the Dubai shopping festival (DSF). The response
to the vehicle was tremendous. So, Odissy’s top management asked the
project manager of Roar, Shan Wang, to conduct a post project evaluation and
submit the report as soon as it is finalized. Why do you think a post project
evaluation report was required after the project had been successfully closed?
How does a project manager conduct a post project evaluation? Also, discuss
the procedure for preparing an audit report.
Answer:
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Project Auditing
14.6 Responsibilities of the Auditor

The basic responsibility of any project auditor is to convey the facts. This
responsibility is not as simple as it seems to be. It is required to acknowledge the
presence of different kinds of biases of the people involved in the project. The
auditor should be aware of his limitations and seek external help when he has to
audit aspects of the project that are beyond his area of expertise. All the
information gathered should be kept confidential until the audit report is released
officially. He should not allow any political or technical pressures to influence
his audit report.
The seriousness with which the top management and the project team regards the
audit report depends on the credibility of the information being presented in the
report. The data should be checked and calculated very carefully in order to
ensure its accuracy. It is the responsibility of the auditor to explore the ways in
which he can enhance the effectiveness, efficiency and value of the auditing
process.
The steps to be carried out in a project audit are: gathering a small team of
experienced experts; informing the project team about the project requirements;
conducting on-site project auditing; briefing the management after completing
the audit; preparing and producing an audit report as per the predetermined
format; distributing the report to the key stakeholders for their feedback; and
ensuring follow-up till the suggestions are implemented.
Example: Steps in Carrying Out a Project Audit

1. Gathering a small team of experienced experts.
2. Informing the project team about the project requirements.
3. Conducting on-site project auditing.
4. Briefing the management after completing the audit.
5. Preparing and producing an audit report as per the predetermined format.
6. Distributing the report to the key stakeholders for their feedback.
7. Ensuring follow- up till the suggestions are implemented.
Check Your Progress

17. Which of the following sections in the audit report would contain a
comparison of the actual costs incurred with the planned costs, a comparison
of the tasks that have been completed with the resources that have been
spent to achieve the task, etc.?
a. Introduction
b. Present project status
c. Future project status
d. Risk analysis
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18. Which of the following statements is not true regarding the way the audit
report is presented?
i. The format of the audit report should be custom made by the project
managers for their projects.
ii. The content of the audit report should be limited to the information and
the issues pertaining to the project.
iii. The format of an audit report depends on the nature of the project under
evaluation and the purpose of the evaluation.
iv. The audit report should contain detailed information about the people
who were responsible for making the project a success or a failure.
a. Only i and ii
b. Only i and iv
c. Only ii and iii
d. Only iii and iv
19. Following are the steps in carrying out a project audit. Put them into the
proper sequence.
i. Briefing the management after completing the audit
ii. Informing the project team about the project requirements
iii. Gathering a small team of experienced experts
iv. Ensuring follow-up till the suggestions are implemented
v. Distributing the report to the key stakeholders for their feedback
vi. Preparing and producing an audit report as per the predetermined
format
vii. Conducting on-site project auditing
a. iii-vii-ii-vi-i-iv-v
b. iii-ii-vii-i-vi-v-iv
c. iii-ii-i-vi-vii-iv-v
d. iii-vii-vi-vi-v-iv-i
20. Which of the following sections in the project audit report should describe
the trade-off between time, cost, and performance in a brief manner?
a. Risk analysis
b. Critical management issues
c. Limitations and assumptions
d. Both (a) and (c)
21. The introduction part of the audit report should contain
i. the framework of the project.
ii. a clear representation of the project objectives.
iii. the major risks involved in the project.
iv. an appendix to the report stating the complex project objectives.
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a. Only i and ii
b. Only i, ii, and iv
c. Only iii and iv
22. The project’s current status section of the audit report should contain:
i. The percentage of work completed.
ii. The limitations and assumptions taken into consideration by the project
auditor.
iii. Project performance in terms of the milestones accomplished.
iv. Detailed quality specifications along with a detailed review of the
quality control procedures and latest results of the quality tests
conducted.
a. Only i and ii
d. Only iii and iv
14.7 The Project Audit Life Cycle

Just as the project has a life cycle, a project audit too has a life cycle. A project
life cycle involves a systematic advancement of pre-defined events. The
following are the six events that constitute a project audit life cycle.
14.7.1 Audit Initiation

This step marks the beginning of the audit process. The purpose and scope of the
project audit is defined in this step. In this phase a suitable audit methodology is
selected.
14.7.2 Defining the Project Baseline

The objective of this phase is to set performance standards to enable the auditor
to measure the project performance and achievements against them. This stage in
the life cycle involves identifying the areas of performance that require
evaluation, setting standards through benchmarking, getting the performance
expectations from top management, designing a program that measures the
performance and gathering the information required.
14.7.3 Setting up an Audit Database

The audit process starts only after the baseline standards have been set. The next
step in this phase is to develop a database that is to be used by the audit team.
The information stored in the database is dependent on the purpose and the scope
of the audit. Usually it contains all the information necessary to assess the
project’s management and control activities, the past, present and future status of
the project, the schedule and cost performance of the project and the quality of
105
the delivered output. The information included in the database can range from a
highly technical detailing of performance to details on interaction among the
team members of the project.
The project master plan should specify the type of information that must be
stored in the database. This will ensure the availability of the information when
needed.
14.7.4 Preliminary Analysis of the Project

This phase in the audit life cycle begins only when the baseline standards are set
and a database has been developed. In this phase the auditor analyzes the data
and reports his findings to the managers in a manner that conveys the precise
meaning of the findings of the audit. It is the responsibility of the project auditor
to report his findings and judgments to the project manager prior to the formal
release of the audit report. The project manager must be informed in advance
since the purpose of the audit is to enhance the performance of the current
project under evaluation and at the same time to improve the way future projects
are managed.
14.7.5 Preparing Audit Report

This phase of the audit life cycle involves presenting an audit report in the
format that is chosen at the beginning of the project audit. This section of the
audit report gives recommendations along with the implementation plan. If the
recommendations move beyond the scope of the organization, then they have to
be supported right from the policy-making level of management. This support
should be obtained prior to the distribution of the audit report. If the top
management does not support the suggestions, they should be modified.
14.7.6 Project Audit Termination

The audit should be terminated after it has achieved its desired task. The audit
process should be reviewed after the final audit report and the suggestions have
been released. This is done to improve the audit process.
Activity: The top management of a software development firm, while going

through an audit report submitted by an auditor from an external auditing
firm, found that some of the facts and findings were misreported and
miscalculated. What are the responsibilities of an auditor? Describe the
method that auditors should follow while auditing a project.
Answer:
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Project Auditing
14.8 The Essentials of an Audit

To be effective, accurate, credible and acceptable to the top management, project
team and the client, an audit has to be carried out by a competent audit team that
has access to all the records and files of the project.
14.8.1 Selecting a Proper Audit Team

The success of an audit depends on the selection and the composition of the audit
team. Auditors should be selected on the basis of their competence. Generally, the
size of the audit team is directly proportional to the complexity and the scale of the
project. The main task of an audit team is to examine and evaluate the project
completely and thoroughly. The team must decide what issues are to be brought to
the management’s attention. The members of the audit team should not get involved
in conflicts among project team members. Auditing is a strict and highly disciplined
function, and all auditors and team members should confirm to this discipline with
sincerity and dedication.
14.8.2 Access to Records and Files

Access to all the information and data pertaining to the project determines the
effectiveness of an audit team. In situations where the access to information is
restricted because of security reasons, forming a sub group of the audit team,
composed of the qualified individuals, is an appropriate move.
Most of the information required is sourced either from the records of the project
team or from functional departments like accounts, personnel and purchasing.
Careful and thorough information gathering would result in an effective and
highly credible audit report.
The information that is gathered should be organized and filed in a systematic
manner. Appropriate methods have to be designed to classify the information.
Safeguards have to be developed to prevent the duplication of efforts. Careful
development of procedures will ensure the standardization of processes.
14.8.3 Access to Project Personnel

There should be frequent interaction between the audit team and the members
involved in the project. Though interaction between the audit team and the client
is necessary, it is always restricted even in the case of client being represented on
the audit team. This restriction can be relaxed after obtaining permission from
top management.
While conducting the audit, the audit team will have to deal with a considerable
amount of political pressure. In situations where the project is under political
pressure, the opposing parties may also try to take the advantage of the situation.
So the audit team should avoid the involvement of such parties as much as
possible. The information conveyed (by the project manager) to the audit team is
highly confidential. Information should be used only after confirming the
reliability of the source of information. The confidentiality of such sources
should be preserved by the audit team.
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14.9 Performance Measurement

Measurement is a vital part of the audit/evaluation process. The success of a
project can be judged by measuring the project team’s ability to accomplish
various milestones. Many project milestones are tangible and hence it is easy to
find the completion of activities associated with it. Measuring the expenses
incurred against the amount allocated in the budget is slightly complicated,
requiring a thorough understanding of the methodology adopted by the
accounting department.
Even though an auditor uses the cost data sheet, which is filled with a more
accurate and precise data than what is required, there would still be some distinct
problems while measuring the time, cost and performance parameters of the
project. There would be more persistent problems in measuring, when the project
objectives are defined in terms of profits, rates of return or discounted cash
flows. Measurement problems increase when multi objective scoring models are
used rather than financial models. Also, it is comparatively easier to measure
some objective parameters. But for a credible measurement of subjective
parameters, standard measurement techniques are required. To measure various
aspects of the project, interviews and questionnaires are used for collecting data.
The scoring methodology and the criteria to be used for weighing the scores
should be determined at the project initiation phase itself.
Example: Auditing a Terminated Project at ABC Chemical Testing

Services
ABC Chemical Testing Services has entered into a contract with mould
aluminum to test the commercialization of the latter's newly invented
compound. The contract did not mention a time limit, but laid more stress on
quality and speed of testing. Payment was to be on a monthly basis. The
contract also mentioned that the client's project leader will have free access to
ABC's total testing procedures. After some time, the client's project leader
started probing into the matters of the contractor, to the extent that the
contractor's project team was forced to change the way they approached the
problem. They were even made to skip the regular verification checks all for the
sake of saving time. Even when the contractor came up with feasibility options
of commercializing the compound, the procedures were re-tested by mould
aluminum just to mention that those procedures will not work. The client had
indeed become very hard to please. The contractor was taken by surprise when
he received a letter from the client, asking for the termination of the project,
although ABC was not evidently at fault. ABC’s CEO commissioned an audit
to unearth the anomalies. The report mentioned the following:
General outline:
 The original procedure and approach to the problem was changed because of
the client's project leader. In spite of this, the project team of ABC made
good progress.
 The testing was effective.
 ABC's project team was successful in testing the compound for
commercialization many times, but they were not accepted (for no proper
reasons).
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Project Auditing
 Though ABC was not responsible for commercialization, it did suggest a few
methods.
 The client's project leader interfered way too much. He misguided the
contractor's methodology and ultimately misdirected the project.
 ABC Chemical Testing Services neither documented the ongoing project
management decisions nor did it communicate the decisions to the client.
Analysis of the client’s feedback
Additional points:
 Based on the evidence that ABC's commercialization feasibility was
implemented successfully in similar conditions, the client's criticism is
proved to be false.
 ABC's reports which were criticized by the client were actually prepared as
per the guidelines of the client's project manager. The reports were not user-
friendly; they could only be understood by the technical staff or the project
manager.
 The contractor’s project manager was not guided properly to interact with the
client.
Suggestions:
ABC needs to develop a formal procedure to identify projects involving high
risks at the time of entering the contract. ABC should also have provisions for
monitoring the deviations in the project from its initial plan. Some of the
reasons behind terminating the current project are lack of sufficient funds,
lack of time, lower probability of success, unsophisticated client and excess
interference from the client in the project activities.
Activity: System Ltd. is a software and hardware research institute based in

Hyderabad, India. The company is into developing software for cellular
equipment. Currently it is working on developing software for Delhi based
Reach Cellular. Since the project is coming to a close, the top management
sent a fax to one Sukesh Singh to audit the project. How should Singh
conduct the project audit?
Answer:
Check Your Progress

23. In which of the following phases in the audit life cycle are recommendations
made regarding the project along with the project implementation plan?
a. Preparing an audit report
b. Setting up an audit database
c. Defining the project baseline
d. Project audit termination
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24. In which of the following phases in the audit life cycle does the auditor
analyze the data and reports his/her findings to the managers in a manner
that conveys the precise meaning of the findings of the audit?
a. Audit initiation
b. Preparing audit report
c. Setting up an audit database
d. Preliminary analysis of the project
25. Which of the following statements is false about the setting up an audit
database phase of the project audit life cycle?
a. The information stored in the database is dependent on the purpose and
scope of the audit.
b. An audit database contains all the information necessary to assess the
project’s management and control activities.
c. The audit database contains only the past and present status of the
project, but does not mention the future status of the project.
d. The audit database contains information about the schedule and cost
performance of the project and the quality of the delivered output.
26. The defining of the project baseline stage involves
i. identifying the areas of performance that require evaluation.
ii. setting standards through benchmarking.
iii. getting the performance expectations from the top management.
iv. designing a program that measures the performance and gathering the
information required.
a. Only i and ii
b. Only ii and iv
c. Only iii and iv
27. Identify the statements that are not true with regard to the selection of an
audit team.
i. Generally, the size of the audit team is indirectly proportional to the
complexity and the scale of the project.
ii. The main aim of the audit team is to examine and evaluate the project
completely and thoroughly.
iii. The members of the audit team should try to solve conflicts among the
project team members.
a. Only i and ii
b. Only i and iii
c. Only ii and iii
d. i, ii, and iii
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Project Auditing
28. Following are some of the stages involved in the project audit life cycle.
Arrange them in the sequence in which they should be conducted.
i. Preparing an audit report
ii. Setting up an audit database
iii. Defining the project baseline
iv. Preliminary analysis of the project
v. Project audit termination
a. i-ii-iv-v-iii
b. ii-iv-iii-i-v
c. iii-ii-iv-i-v
d. iv-v-iii-i-ii
29. The success of an audit does not depend on
a. the selection and composition of the audit team.
b. access to all the information and data pertaining to the project.
c. the frequency of interaction between the audit team and the project
members.
d. the structure of the organization and the constitution of the top
management.
14.10 Summary
 Project evaluation is a process of evaluating a project’s progress and
that of identical projects.
 Project auditing can be defined as the process of detailed inspection of the
documents, its properties, its budgets, its expenses and its level of completion. It
can be carried over on the whole project or on a part of the project.
 Though a formal audit report can be presented in various formats, certain
aspects must be contained in report without fail. The format of an audit report
depends on the nature of the project under evaluation and the purpose of the
evaluation.
 A typical audit report must provide the following basic information:
introduction, present project status, future project status, critical management
issues, risk analysis, and limitations and assumptions.
 The basic responsibility of any project auditor is to convey the facts. All the
information gathered should be kept confidential until the audit report is
released officially. The auditor should not allow any political or technical
pressures to influence his audit report.
 Just as the project has a life cycle, a project audit too has a life cycle. The
various stages of the project audit life cycle are – audit initiation, defining the
project baseline, setting up an audit database, preliminary analysis of the project,
preparing audit report, and project audit termination.
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 To be effective, accurate, credible, and acceptable to the top management,

project team, and the client, an audit has to be carried out by a competent audit
team that has access to all the records and files of the project. The essentials of
an audit are -- selecting a proper audit team, access to records and files, and
access to project personnel.
 Measurement is a vital part of the audit/evaluation process. The success of a
project can be judged by measuring the project team’s ability to accomplish
various milestones.
14.11 Glossary
 Detailed Audit: It is usually conducted as a follow-up to the general audit,
when an unacceptable level of risk has been discovered by the general audit.
 General Audit: A brief review of the project, carried out within a limited time
period and with only a few resources.
 Project Auditing: A 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.
 Project Evaluation: A process of evaluating a project’s progress and
that of identical projects.
 Technical Audit: It is conducted when a detailed audit fails to evaluate the
technical knowledge.

1. An organization can benefit from its past experience only when it tries to
understand them through the process of evaluation, even in case of projects.
What is project evaluation? Explain the reasons why projects are evaluated.
2. Though the terms, evaluation and audit are used interchangeably, they are
different. What is project auditing? Explain the depth and timing aspects of
a project audit.
3. The format of an audit report depends on the nature of the project under
evaluation and the purpose of the evaluation. Explain the contents of an
audit report. What are the responsibilities of a project auditor?
4. Just as the project has a life cycle, a project audit too has a life cycle.
Describe the stages involved in a project audit life cycle. What do you think
are the basic requirements of an audit? Explain the role played by
performance measurement in the audit/evaluation process.

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Project Auditing


Unit.
1. (b) Only ii and iv
Project evaluation aims at identifying the various strengths and weaknesses
of the project and helps in measuring the success of the project and
managing future projects better. Some of the primary goals of project
evaluation are: to ensure clarity in performance, cost, and time relationships,
identify problems during the early stages of the project, enhance the
performance of the project, explore opportunities for technology
advancements in the future, and minimize the costs of the project. To
identify the risk factors associated with the projects taken up by the
organization and to enhance the performance of the project are the
secondary goals of project evaluation.
2. (d) i, ii, and iii
Project evaluation is an important task. It is a process of evaluating the
project’s progress and performance with reference to its planned progress
and performance or in comparison with that of identical projects. Project
evaluation should be supportive of all the management decisions that the
project requires. The main objective of project evaluation is to measure the
degree of a project’s success.
3. (b) Project evaluation
Project evaluation is the process of appraising the progress and performance
of the project with reference to the planned objectives. A project can be
evaluated using evaluation tools like project audits and project reviews.
Project auditing is a process of detailed inspection of the management of a
project, its methodology, techniques, procedures, documents, budgets,
expenses, and level of completion. Project screening refers to the screening
of the project ideas that have been collected. It helps in rejecting ideas that
cannot be considered for implementation. Project control is the process of
collecting information related to the performance of the project system,
comparing it with the desired level of performance, and taking corrective
action to decrease the gap between the actual and the desired performance
levels.
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4. (b) To explore the strengths and weaknesses of the organization in

terms of the project team members, management, and decision-making
processes
managing future projects better. Some of the secondary goals of project
evaluation are to explore the strengths and weaknesses of the organization in
terms of the project team members, management, and decision-making
processes, understand the importance and role of projects in an organization,
improve the way in which projects are organized and managed, and identify
individuals with excellent managerial and leadership skills.
5. (d) i, ii, iii, and iv
Four critical parameters have been identified for measuring the success of a
project based on a survey conducted on industrial projects of different
natures and sizes. These are: completion of the project within a given budget
and time; extent to which the project is able to satisfy the client; the
commercial success of the project and the market share captured by the
product delivered by the project; and ability of the product or service to
succeed if it enters a new market or its ability to lead to a new product or
technology.
6. (b) To ensure clarity in performance, cost, and time relationships
managing future projects better. Some of the primary goals of project
evaluation are: to ensure clarity in performance, cost, and time relationships;
identify problems during the early stages of the project; enhance the
performance of the project; explore opportunities for technology
advancements in the future; and minimize the costs of the project.
7. (a) Only i and iv
managing future projects better. The secondary goals of project evaluation
are to attempt to enhance the contribution of projects toward the
professional growth of the team members, to try and create a healthy work
environment, and to encourage the creativity of the team members. To check
the firm’s interest and commitment to the project and to find and correct
mistakes and avoid them in the future are primary goals of the project.
8. (b) Project auditing
Project auditing is a process of detailed inspection of the management of the
project, its methodology, techniques, procedures, documents, budgets,
expenses, and level of completion. It can be done for the whole project or
for a part of the project. Project control is the process of collecting
information related to the performance of the project system, comparing it
with the desired level of performance, and taking corrective action to
decrease the gap between the actual and the desired performance levels.
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Project Auditing
Project screening refers to the screening of the project ideas that have been
collected. It helps in rejecting the ideas that cannot be considered for
implementation. Project evaluation is the process of appraising the progress
and performance of the project in comparison with the planned objectives.
9. (d) The audit report should include the current status of the project
while it need not include the future status of the project.
Project auditing is 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. After a
project audit is conducted, it is presented in the form of an audit report.
Following are certain aspects that are covered in a project audit report: the
present status of the project; the future status of the project; the status of
critical tasks; the risk factor involved in the project; the information
pertaining to the other projects; and the limitations, assumptions, or
constraints that have an impact on the audit data.
Time and money are the two constraints that limit the scope of an auditor’s
evaluation of the project. These two constraints limit the depth of the
investigation and also affect the amount of detail presented in the audit
report. Various types of costs are incurred in the audit process. Some are
professional and clerical costs that are incurred on conducting the audit
while others are costs that are incurred in the course of gathering, storing,
and preserving the data to be audited. Certain other types of costs are also
incurred in the audit process. These are, however, ignored. Such costs rise
due to the distraction caused by the auditing process to the people working
on the project, and due to a drop in the morale of the individuals working on
the project.
11. (a) General audit
A project audit is generally carried out at three levels: general audit, detailed
audit, and technical audit. The general audit is usually a brief review of the
project, carried out within a limited time period and with only a few
resources. It usually touches on all the six dimensions of the auditing report,
i.e., the present status of the project, the future status, the status of the
crucial tasks, assessing the risk, information relating to other projects, and
the limitations of the project. The detailed audit is conducted when an
unacceptable level of risk has been discovered by the general audit. The
technical audit is conducted when a detailed audit fails to evaluate the
technical aspects of a project satisfactorily because of the auditor's lack of
Post project evaluation audit is carried out for the following reasons -- it is
specified by the client in the agreement and is required legally, it constitutes
a major part of the project report and is also a key source of information for
giving feedback to the parent organization, and it accounts for all the assets
and expenses of the project.
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13. (b) Detailed audit

The detailed audit is usually conducted as a follow-up to the general audit. It
is conducted when an unacceptable level of risk has been discovered by the
general audit. The depth of a detailed audit depends on the seriousness of
the issues and their impact on the objectives of the project  the more
serious the issue, the greater the depth of the audit.
14. (a) An early audit in the project life cycle would help in early problem
detection and would make the rectification process easier.
Auditing conducted at different phases of the project life cycle gives specific
benefits to the project and the organization. The timing of an audit depends
on the type of project. The first audit is generally conducted early in the
project life cycle. This would help in early problem detection, which would
make the rectification process easier. Early audits concentrate on technical
issues and focus on solving key technical problems. Auditing conducted
toward the end of the project life cycle becomes more a value addition to the
parent organization than to the project. As the project progresses,
importance is given to adherence to the schedule and budget. Management
concerns like disposing of equipment and reallocating personnel become
key issues when a project is evaluated toward the end of its life cycle.
15. (a) an unacceptable level of risk has been discovered by the general
audit.
The detailed audit is usually conducted as a follow-up to the general audit. It
is conducted when an unacceptable level of risk has been discovered by the
general audit. The depth of a detailed audit depends on the seriousness of
the issues and their impact on the objectives of the project  the more
serious the issue, the greater the depth of the audit.
16. (a) General audit
A project audit is generally carried out at three levels: general audit, detailed
audit, and technical audit. The general audit is usually a brief review of the
project and is carried out within a limited time period and with only a few
resources. It usually touches on all the six dimensions of the auditing report,
i.e., the present status of the project, the future status, the status of the
crucial tasks, assessing the risk, information relating to other projects, and
the limitations of the project. The detailed audit is conducted when an
unacceptable level of risk has been discovered by the general audit. The
technical audit is conducted when a detailed audit fails to evaluate the
17. (b) Present project status
The project’s current status has to be reported when auditing the project. In
the section on the present project status, various aspects like cost, schedule,
progress, and quality are covered. The report contains a comparison of the
actual costs incurred with the planned costs; the project performance in
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Project Auditing
terms of the milestones accomplished; a comparison of the tasks that have

been completed with the resources that have been spent to achieve this task;
and the quality aspect of the project.
18. (b) Only i and iv
The format of an audit report depends on the nature of the project under
evaluation and the purpose of the evaluation. It is advantageous to use a
standard format for presenting audit reports as this makes it easy for the
project manager and the top management to understand and comprehend it.
Though some project managers prefer complex and custom made formats of
audit reports for their projects, it is always better to have a simple and
straightforward structure that will make it easy for the management to
identify problems with the project. The audit report should not make
negative comments about the people involved in the project. The content of
the report should be limited to the information and the issues that pertain to
the project.
19. (b) iii-ii-vii-i-vi-v-iv
Project auditing can be defined as the process of detailed inspection of the
documents, its properties, its budgets, its expenses, and its level of
completion. Following are the various steps involved in the project audit:
gathering a small team of experienced experts; informing the project team
about the project requirements; conducting on-site project auditing; briefing
the management after completing the audit; preparing and producing an
audit report as per the predetermined format; distributing the report to the
key stakeholders for their feedback; and ensuring follow-up till the
suggestions are implemented.
20. (b) Critical management issues
In the section on critical management issues, the audit report should address
all the critical issues that the top management has to constantly monitor. It
should explain the link between the critical issues and the project objectives.
It should also describe the time, cost, and performance trade-off in a brief
manner. Such a description would help the top management make decisions
in the future projects.
21. (b) Only i, ii, and iv
The introduction part of the audit report presents the framework of the
project. A clear representation of project objectives is a must in this section.
In the case of highly complex objectives, it is advisable to add an appendix
to the report, providing additional information on the project objectives. The
major risks involved in the project are described in the section on risk
analysis.
22. (b) Only i, iii, and iv
The project’s current status has to be reported when auditing the project. In
the section on the present project status, various aspects like cost, schedule,
progress, and quality are covered. The report contains a comparison of the
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actual costs incurred with the planned costs; the project performance in
terms of the milestones accomplished; a comparison of the tasks that have
been completed with the resources that have been spent to achieve this task;
and the quality aspect of the project. The limitations and assumptions taken
into consideration by the project auditor are not covered in this section of
the audit report.
23. (a) Preparing an audit report
In the preparing an audit report phase of the audit life cycle, the audit report
is presented in the format that is chosen at the beginning of the project audit.
In this stage, recommendations regarding the project are given along with
the implementation plan. If the recommendations move beyond the scope of
the organization, then they have to be supported right from the policy-
making level of management. This support should be obtained prior to the
distribution of the audit report. If the top management does not support the
suggestions, they should be modified.
24. (d) Preliminary analysis of the project
In the preliminary analysis of the project phase, the auditor analyzes the data
and reports his/her findings to the managers in a manner that conveys the
precise meaning of the findings of the audit. This phase is taken up only
when the baseline standards are set and a database has been developed.
25. (c) The audit database contains only the past and present status of the
project, but does not mention the future status of the project.
An audit database is set up after the baseline standards have been set. The
information stored in the database is dependent on the purpose and scope of
the audit. The audit database contains all the information necessary to assess
the project’s management and control activities. It also contains the past,
present, and future status of the project; the schedule and cost performance
of the project; and the quality of the delivered output. The information
included in the database can range from a highly technical detailing of
performance to details on interaction among the team members of the
project.
In the defining of the project baseline stage, performance standards are set to
enable the auditor to measure the project performance and achievements
against them. This stage in the life cycle involves identifying the areas of
performance that require evaluation, setting standards through
benchmarking, getting the performance expectations from the top
management, designing a program that measures the performance, and
gathering the information required.
27. (b) Only i and iii
The success of an audit depends on the selection and composition of the
audit team. Auditors should be selected on the basis of their competence.
The size of the audit team is directly proportional to the complexity and
scale of the project. The main task of an audit team is to examine and
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Project Auditing
evaluate the project completely and thoroughly. The team must decide what
issues are to be brought to the management’s attention. The members of the
audit team should not get involved in conflicts among project team
members.
28. (c) iii-ii-iv-i-v
A project audit life cycle involves six events that constitute a project audit
life cycle. These are: audit initiation, defining the project baseline, setting up
an audit database, preliminary analysis of the project, preparing the audit
report, and project audit termination. In the audit initiation stage, the
purpose and scope of the project audit are defined. In defining the project
baseline stage, the performance standards are set to enable the auditor to
measure the project performance and achievements against them. In the
setting up an audit database phase, a database is developed for use by the
audit team. In the preliminary analysis of the project stage, the auditor
analyzes the data and reports his/her findings to the managers in a manner
that conveys the precise meaning of the findings of the audit. In preparing
audit report stage, the audit report is presented in the format that is chosen at
the beginning of the project audit. Finally, in the project audit termination
stage, the audit is terminated after it has achieved its desired task.
29. (d) the structure of the organization and the constitution of the top
management.
The success of an audit depends on the audit team, access to all the
information and data pertaining to the project, and the frequency of
interaction between the audit team and the project members. The success or
failure of an audit does not depend on the organizational structure and the
constitution of the top management. These are not essentials of an audit.
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Unit 15
Project Closing
Structure
15.1 Introduction
15.2 Objectives
15.3 Closing a Project
15.4 Ways of Closing a Project
15.5 Reasons for Terminating an Unsuccessful Project
15.6 The Process of Closing a Project
15.7 Summary
15.8 Glossary
15.1 Introduction
In the previous unit, we have discussed project auditng. In this unit, we will
discuss the process for closing a project. A project comes to a close after it
accomplishes its objectives or when it is terminated due to other reasons. Closing
a project not only marks the completion of all administrative activities, but also
audits the project performance which is a high-value learning tool for the project
manager and others.
The project manager should evaluate specific project records for a historical
understanding of the project activities which can be of use in the future. All
records without value should be scrapped and the rest should be stored for future
reference. The final task is to sell off the physical assets after making sure that
they can be of no use in any future activities and placing project team members
back in their original positions. Once the members of project team finish their
respective tasks in the project, they should be made available for other
assignments. The project manager should provide feedback on an individual’s
performance and contribution to the project to his supervisor.
This unit will discuss the closing of a project. We will discuss the various ways
in which a project can be closed. We shall then move on to discuss the reasons
for terminating an unsuccessful project. Finally, we would be discussing the
process of closing a project.
15.2 Objectives
 define closing of a project.

 discuss the various ways of closing a project.
Project Closing
 identify the reasons for terminating an unsuccessful project.

 explain the process of closing a project.
15.3 Closing a Project

The closing phase of a project has very little impact on the success or failure of
any project technically, but it certainly has an impact on the attitude of the client,
top management and the project team towards the project. It also has a
significant impact on learning the reasons behind the success or failure of the
project. During this phase, there is no joy when new things are unearthed,
because problems have either been solved already or overlooked. A project is
terminated when the work on the project has come to a point where there is no
further progress is possible. Such a situation is likely when the project is running
far behind schedule or when its resources are transfered to other projects.
Following are the steps involved in formally closing a project.
 End the external contracts of the company formally with the vendors, clients and
other parties who expect early termination of services.
 Suspend the assignments of the team members formally.
 Seek the acceptance of the client formally on the project work and the output.
 Make sure of proper installation and/or implementation of the delivered output
on time, with in budget and as per specifications.
 Make sure of the availability of sufficient project documentation that can
facilitate any change occuring in the future.
 Submit the final report and get it approved.
 Close the established relationships internally and externally
It is the project manager’s responsibility to set a formal project closing date and
get it approved by way of getting it signed by the client. The closing date should
match the one mentioned in the master plan. Also the process of closing is to be
initiated by the project manager with support from the administrative department
of the client’s firm, after getting a green signal from the client.
Check Your Progress

1. Terminating the activities of the project when work on the project has come
to a point where further progress is not possible is called ____________.
a. project termination
b. project ending
c. project closing
2. Which of the following steps should be taken before closing a project?
i. Suspending the assignments of the team members formally
ii. Seeking the acceptance of the client formally
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iii. Ending the external contracts of the company formally

iv. Submitting the final report and getting it approved
a. Only i and ii
b. Only ii and iii
c. Only iii and iv
15.4 Ways of Closing a Project

When a project has achieved all the goals and objectives set under the stipulated
cost, time and performance and the delivered output is accepted by the client,
then it is said to be a successful project. Since such projects have reached a point
from which there is no progress possible even in terms of improving the
effectiveness and efficiency of the output, the project has to be closed. The
checklist helps the project manager in assessing if the project is ready for closing
or not.
Basically there are four ways in which a project can be closed. They are --
closing by extinction, closing by addition, closing by integration and closing by
starvation.
15.4.1 Closing by Extinction

Projects are closed by way of extinction either when they are successful in
accomplishing the goals or when they fail to deliver within the budgeted time
and cost. Some of the examples where in projects can be said to be closed by
extinction are:
Successful Projects:
 A new product is produced and is launched successfully in the market.
 L&T has successfully constructed the cybertowers complex at Hyderabad and
handed it over to the government of Andhra Pradesh.
 An ERP solution is suggested and is successfully implemented in a firm.
Unsuccessful Projects:
 Kinetic Motors failed to produce a two seater car that it planned to produce.
In some cases, projects are closed suddenly and using drastic measures. This is
called killing a project. The reasons for killing a project may not be related to its
effectiveness or ability to deliver the end product.
Some Reasons for Killing a Project Are:

 Political
 Mergers and acquisitions
 Demergers
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Project Closing
Project closure by extinction is characterized by the termination of all activities

associated with the key project deliverables. But there remain the major activities
like putting back project team members to their respective departments and
disposing or distributing the assets of the project.
15.4.2 Closing by Addition
This method is adopted when “in-house” projects are to be closed. When a

project team undertakes an in-house project for implementing it in its parent
organisation and if it is successful in meeting its objectives, then the project can
be closed by incorporating it as a functional and formal part of the organisation.
When a project is closed or terminated by addition, then it is made a part of the
parent firm. But this process of merging it back with the parent firm takes place
in a slow and phased manner. The project derives support from all the functional
areas of the parent organization and once it attains a stable position
economically, then support is slowly withdrawn enabling it to function
independently within the firm.
Closing the project both by extinction and by addition share a similarity, i.e, the
project is closed when its existence is no more a viable option for the
organization.
In the process of closing a project by addition, the project can either be added to
the parent organization as a department or as an independent subsidiary
depending on the project’s ability to be economically independent. Although a
project is given financial and tactical support in the initial stages of addition to
the parent organization, it is expected to show economical independence with
time.
Transfering project resources after closing it by addition is different from that of
closing by extinction. In closing a project by addition, the resources of the
project are transferred from the account of the successful project to the account
of the newly created department or subsidiary. The addition of the project and its
subsequent transformation is supported by adequate budgetary allocations as per
the rules of the parent organization.
All the assets including the human capital of the closed project are transferred to
the new department. During the process of transition from a project to a new
department or a subsidiary, the administrative practices and the budgetary style
of the parent organization are adopted. There is also the possibility of some
individuals in the project requesting for a transfer to the other projects, because
of the sharp decline in the freedom during the transformation. It is the
responsibility of the project manager to ensure a smooth and free transition of
the project into a department. However, it is not an easy process; it is one of the
most challenging tasks for the project manager. For successfully transforming a
project into a department, the project manager should manage several political
issues diplomatically.
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15.4.3 Closing by Integration
This type of closing is used for technically complex projects which on

completion will form a part of the operating system of the parent organization or
the client. It is the responsibility of the project team to integrate the product into
the operating system of the parent or client organization. The difficulties in
integration can be minor or major. When a new machine center is installed by
the project team and they have detailed its operation and maintenance to the
customer, minor operational problems can be solved by the operations manager.
However, when a flexible manufacturing system is installed by the project team,
then the difficulty of integration is higher. The difficulty in integrating a project
is inversely proportional to the expertise and experience level of the parent or
client’s firm in technology and project integration.
The problems faced while closing a project by integration are similar to the ones
that are encountered while closing it by addition. Also the project may not
fuction as effectively as it used to function when it was in the project phase.
There is a possibility that members of the project team lose interest in the old
project as they come back to their respective departments in the organization.
Some significant issues related to the functional aspects of closing a project by
integration are:
Human capital: Where to send the project team? Should it continue as a team?
Who will perform the functions of the team if required? What should be the
guidelines for the availability of the ex-team members of the closed project for
any support required, if they are assigned any new projects?
Production: Is the training fulfilled? Is there a need for replanning the layout of
the production system? Are there any bottlenecks because of the change in the
layout? Is a new procedure in operations required? Is the new operation
integrated with the firm’s information systems?
Finance: Are the project accounts terminated and evaluated? Is there a provision
for the extra work needed by the project in the budgeting of new departments?
Are all the assets distributed as per the contract?
Engineering: Have all the drawings been filed? Is there a proper understanding
of the operating manuals and change procedures? Are the training programmes
tailored as per the needs of the new employees? Are the maintenance plans
modified according to the changes? Are there adequate number of spares in
inventory?
Information systems: Is the new system tested and evaluated thoroughly? Is the
documentation of the software complete? Is there complete integration between
the new and the existing systems? Have the end users been trained properly to
use the new system?
Marketing: Are the marketing and sales departments aware of the changes
made? What is the level of comfort for the marketing department in the new
line? Is the strategy ready to be implemented by the marketing personnel?
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Project Closing
Procurement, logistics and legal: Have the changes been communicated to all
these and other functional areas ?
15.4.4 Closing by Starvation

This method of project closing cannot be considered a closing in the strict sense,
because here the project’s existence comes to an end as a result of declining
budgets. Budget cuts are common during periods of recession and they can also
be used as a supporting reason to terminate a project.
There is substantial resistance from the top management in closing a project that
is not successful, especially when it is politically risky to acknowledge failure.
And under such circumstances, the budget of the project is cut to a level at which
progress of any activity of the project is hindered. As a result, the project is
shelved, although it may still be shown as an ongoing project.
Example: Checklist to Find the Readiness of the Project for Closing

Parameter Yes No
1. Consistency with organizational goals.
2. Practicality and Utility.
3. Management support to run the project.
4. Consistency of scope with the economic strength.
5. Consistency with all the technical issues of interest.
6. Support from the functional departments.
7. Organization project support is diluted.
8. Supporting individual project can lead to success.
9. Project involves advanced technology-ahead or outdated
technology.
10. Innovative project team.
11. Possibility of protecting new knowledge with patents and
copyrights.
12. Termination without loss of quality.
13. Ability of the current project team to continue the project.
14. Presence of skills required to execute the project fully.
15. Explore the subject area of the project thoroughly.
Note: When all the above parameters are satisfied, then the project can be said to be
terminated successfully. When majority of the parameters are satisfied, then the
project is said to be terminated under conditions of time i.e., by extinction. But when
only a few of the parameters are met, then the project is terminated because of
budgetary constraints i.e., by starvation.
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Adapted from Robert Buttrick “The Interactive Project Workout”, Financial Times
Prentice Hall, Second Edition, p 545.
Activity: Ding Dong Telecommunication Ltd. (DDTL) is a Noida based

telecommunication equipment manufacturing company. It is working on a
project for manufacturing CDMA (Code Division Multiple Access)
technology switches for a cellular company in Bangalore. A month after the
submission of the audit report, the top management of DDTL asked the
project manager to close the project. Why does the top management of the
firm want to close the project? What are the ways in which a project manager
can close a project? Specify the situations in which a project manager can
close a project?
Answer:
Check Your Progress

3. What type of project closing is used to close a project that has succeeded in
accomplishing its goals or has failed to deliver within the budgeted time and
cost?
a. Closing by starvation
b. Closing by extinction
c. Closing by integration
4. From the following options, identify the reasons for ending the project under
closing the project by extinction?
i. Mergers and acquisitions
ii. Political Pressure
iii. Introduction of a new product in the market
iv. Demergers
a. Only i and ii
b. Only i, ii, and iv
c. Only ii and iii
126
Project Closing
5. The type of project closing used to close a project when its existence comes
to an end as a result of declining budgets is known as ________________.
a. closing by starvation
b. closing by addition
c. closing by integration
d. closing by extinction
6. ___________ is the method adopted when in-house projects are closed.
a. Closing by addition
b. Closing by extinction
c. Closing by integration
d. Closing by starvation
7. Which of the following options are significant issues related to the
functional aspects of closing the project by integration?
i. Production
ii. Information systems
iii. Finance
iv. Engineering
a. Only i and ii
b. Only ii and iii
c. Only iii and iv
15.5 Reasons for Terminating an Unsuccessful Project

A project can be called an unsuccessful one when it fails to meet its established
objectives on time, budget and performance. Failure to meet any of these three
fundamental parameters can result in project failure and such projects qualify to
be closed. Some other key factors that call for project termination are:
 Probability of meeting technical objectives is very low.

 Inability of R&D to resolve the technical problems.
 Return on investment is not significant or is very low.
 High cost involved in running it as an individual project.
 Market potential of the delivered output is very low.
 Constantly changing market needs.
 Requires a very long time to gain profits
 Bears a negative impact on other projects.
 Problems created by intellectual property rights.
127
15.6 The Process of Closing a Project

The process of closing a project is equally complex and lengthy as planning the
scope of the project. So a project manager is always in need of a systematic
methodology that will help him close projects smoothly. There are also
situations where “termination managers” are employed to handle the process of
closing the project. A termination manager should be a person who is well
versed with the administrative parameters of closing and is equally good at
analyzing the organizational climate in which the successful project would be
put to work. The basic responsibilities of a termination manager are as below:
 To make sure that all tasks are accomplished, even those of external contractors
and vendors.
 Inform the client about the completion of the project and deliver the
product/project.
 Make sure that project documentation is completed along with a final auditing
of the delivered output and submit a final project report.
 Ensure that the final invoices are sent to the client and get them cleared.
 Put all the resources and assets back to their respective positions in the parent or
client’s organization.
 Get clearance from the legal consultant on the project.
 Find out all the documents that are worth storing
 Check for the proper closing of the project books.
The following are the steps to follow while terminating a project: (i) getting
client’s acceptance, (ii) installing the project’s delivered output, (iii)
documenting the project and (iv) signing and submitting the final report.
15.6.1 Getting Client’s Acceptance

It is the project manager’s responsibility to show to the client that the delivered
product or service matches the specifications set by the client. Acceptance can
either be informal or formal. Acceptance involves a test on the delivered output
to check its performance against the standards established by the client.
Informal or Ceremonial Acceptance
Informal acceptance by the customer involves no signing on the final report to
acknowledge the project’s success. Ceremonial acceptance is given by the client
in two cases. The first is wherein the client accepts the project as closed at a
particular time. The second is where there is no need to measure the conformity
of the final product.
Formal Acceptance
This is a situation in which the client has a formal acceptance methodology in
place while entering into a contract with the project manager. In many projects,
both the client and the members of the project team develop the acceptance
128
Project Closing
methodology. This happens at a very early stage in the project life cycle. This
methodology involves the project team proving to the client about the delivered
output’s conformance with the client’s specifications. This method involves a
detailed step-by-step and feature-by-feature signing off on the performance tests
conducted. The performance tests conducted are done in the presence of both the
client and the team members. The checklist should be designed in such a manner
that it requires no further interpretation to find out whether there is conformance
to performance or not.
15.6.2 Installing the Project’s Delivered Output

This is the most common step in the closing of an information system project or
a manufacturing set-up project. This phase can involve some steps or strategies
in itself. However it is considered as a single event or a process that transfers the
product into the clients control. This phase initiates several activities of closing
pertaining to documentation and preparation of the final report.
15.6.3 Documenting the Project

Documenting is the most difficult task in project closing. The following are the
reasons behind documenting a project:
 Documentation acts as a reference for any future changes in the delivered output
of the project, even after the completion of the project. Changes that arise out of
a strong reason to follow-up, repair or upgrade the project require documents for
reference. Utilizing delivered output enables the client to explore the chances of
improvement, including new features and functions.
 It provides historical data that help client’s to estimate the time and cost of
future projects. Past projects can act as an encyclopedia to provide relevant
information for all future projects, activities and tasks. But this is possible only
when a project is properly documented to be retrieved in the future. The data
containing the scheduled and actual duration, planned and actual cost of each
task etc. will prove highly valuable in planning these parameters in future
projects.
 It acts as a source of training new project managers. It teaches new project
managers valuable lessons like determining the work breakdown structure,
analyzing and examining the requests for change and taking decisions on the
same and exploring problem situations and solving them.
 It becomes an input for further training and development required by the project
team members. Project documentation helps project team members to handle
any situation. The way in which a similar situation was handled in earlier
projects will be a good reference.
 Documentation becomes the basis for evaluating the performance of the project
team members. Most of the firms use project documents as a source of
evaluating the project manager and the project team members. Functional
managers or individuals using this tool for evaluation should be extremely
careful because even the best or exceptionally good performance of the team
members may result in a failed project, or vice-versa.
129
15.6.4 Signing and Submitting the Final Report

One of the most significant characteristics of an ideal project management
system is its ability to report project history. Project history is best reported in a
final project report. It is the content of the report that is of prime concern in a
final report than the way it is organized. The topics that need to be covered in a
final report are -- the performance of the project; project performance in terms of
administration; the organizational structure; project and administrative teams;
and techniques of project management.
The Performance of the Project
One of the most important parts of the report is the comparison between the
accomplished tasks of the project and the tasks proposed. The comparison
should involve description of the reasons behind the variation of the delivered
product from the planned product. It is advisable to have a final end value
discussion. Including project performance in the final report can also give the
judgement of the project manager elaborating on the reasons for deviation, since
it is not a formal evaluation. This section of the report should also include
suggestions for future projects that may involve similar situations.
15.6.5 Project performance in terms of administration

This part of the project is often overlooked until problems crop up. Though the
administrative department of a project cannot resolve the technical issues of the
project, it can provide substantial help in implementing an appropriate
technology. After examining the administrative procedure, the practices that
worked well or not so well need to be highlighted. It is also advisable to describe
the reasons behind the effectiveness or ineffectiveness of an administrative
practice. This enables project members to discuss future strategies.
15.6.6 The organizational structure

Every organizational structure used in a project has its own merits and demerits.
This section of the report should describe the role of the organizational structure
in the success or failure of the project. Suggestions should be made if it is felt
that a slight modification or change in the organaizational structure would have
been beneficial to the project. The suggestions should be rational and
substantiated with examples.
15.6.7 Project and administrative teams

Under some circumstances, even the most competent individuals do not perform
as well as expected in a team. In such situations, a report on the performance of
the team should be given to the top management of the parent firm. Any
recommendations should be made in a confidential manner. Recommendations
can also be made by the project manager to the top management recommending
those individuals who were very effective in running a team, be retained for
future projects.
130
Project Closing
15.6.8 Techniques of project management

The quality of a project output depends on the efficiency with which it is
planned, budgeted, assigned resources and controlled. Since the quality of the
output is linked strongly with the efficiency in planning, budgeting and
controling, it is very important to check the way in which these tasks were
accomplished. The report should contain the ways of increasing efficiency of the
forecasts, budgets and schedules, if they were not upto the desired standards. The
procedures used in planning, controling and managing risk should also be
checked thoroughly.
There is also another format in which a project termination report can be made
depending on the nature of the project. All topics covered in a final project report
should be listed along with suggestions for altering the existing practices. These
suggestions should also be properly justified. It is important to mention the
remarks and suggestions on the issues of the project that performed
exceptionally well, but covering this topic in the report is usually overlooked.
The final report should also highlight all the informal methods used by the
project managers and the team members to speed up the process of preparing the
budget, scheduling and improving predictions. Such methods can be tested and if
proven successful can be instituitionalised as a part of the project management
methodology in the parent organization.
The basic purpose of a final project report is to improve the way in which future
projects are to be handled. It highlights the project and the way in which it is
executed.
Though data on the project’s results are available in reports and audits conducted
throughout the project life cycle, the project manager can certainly use his
experience to talk about result oriented projects. It is the project manager’s job to
maintain a diary on all significant issues. This practice will ensure the inclusion
of such issues in the final report. Though a project manager’s diary is not a
formal document, it is an informal collection of thoughts and remarks on the
various incidents during the project. On the whole, it prevents the ideas from
getting lost.
Example: Contents of a Project Closing Report

Section Contents
1. Business The objectives of the business as mentioned in the initial
objective project proposal, approved changes along with the reasons.
2. Closing The situation in which the project is being terminated for
statement example, on successful completion of the project or
termination of the project before completion.
3. Measuring The process of measuring the advantages offered by the
the benefits project and also the person responsible for measuring the
same. Also includes the reflection of the advantages
131
offered by the project in the existing business plan along

with the review periods.
4. Risks, All the issues and outcomes that are not yet approved along
issues and with the kind of risk involved and the reason for not being
outcomes approved. The person to be held responsible.
5. Efficiency Compare the resources and costs incurred with what is
of the actually planned in the project plan along with schedule.
project
Adapted from Robert Buttrick “The Interactive Project Workout”, Financial times
Prentice Hall, Second Edition, p 414.
Activity: Pure Acoustics Inc. is a US-based home theatre system

manufacturing company. The company had initiated a project for developing
a state-of-the-art digital signal receiver. After the design was approved, the
project team was given 18 months to complete the project. Because of high
employee turnover, the project took more than double the time, and yet there
were some problems with the functioning of the product. Soon, top
management decided to terminate the project. What are the reasons behind
terminating an unsuccessful project? Also, explain the procedure of closing a
successful project (assuming that this project was successful)?
Answer:
Check Your Progress

8. The process of closing the project is a complex and lengthy affair. The
person who is specifically appointed to close the project is called the
_______________.
a. closing manager
b. termination manager
c. project manager
9. When there is no need to measure the conformity of the final product to
predetermined standards, the kind of acceptance taken from the client for
closing the project is called
a. informal acceptance.
b. ceremonial acceptance.
132
Project Closing
c. formal acceptance.
10. From the following options, pick the ones that need to be covered in a final
project report.
i. Performance of the project
ii. Project performance in terms of administration
iii. Project and administrative teams
iv. Techniques of project management
a. Only ii
b. Only ii and iii
c. Only iii and iv
11. Which of the following steps in the closing of the project will help in
providing historical data that will help the clients estimate the time and cost
of future projects?
a. Getting the client’s acceptance
b. Documenting the project
c. Installing the project’s delivered output
d. Signing and submitting the final report
12. Which of the following options do not form the basic responsibilities of the
termination manager before he/she closes the project?
a. Getting clearance from the legal consultation on the project
b. Finding all the documents that are worth storing
c. Ensuring that the implementation of the project is profitable to the
project organization
d. Ensuring that the final invoices are sent to the client and getting them
cleared
13. There are four steps in terminating a project. Which of the following is the
last of these steps?
a. Getting the client’s acceptance
b. Signing and submitting the final report
c. Documenting the project
d. Installing the project’s delivered output
14. ____________ becomes an input for further training and development
required by the project team members.
a. Documenting the project
b. Final project report
133
15. One of the most significant characteristics of an ideal project management

system is its ability to report project history. Project history is best reported
in the __________ report.
a. project termination statement
b. final project
c. closing report
16. Identify the step in the process of closing a project that involves transfer of
the product into the client’s control.
a. Documenting the project
b. Getting the client’s acceptance
d. Signing and submitting the final report
17. ______________ involves the project team proving to the client that the
delivered output conforms to the client’s specifications.
a. Acceptance methodology
b. Formal acceptance
c. Informal acceptance
15.7 Summary
 A project comes to a close after it accomplishes its objectives or when it is
terminated due to other reasons.
 A project is terminated when the work on the project has come to a point where
there is no further progress is possible. This might happen when the project is
running far behind schedule or when its resources are transferred to other
projects.
 A project can be closed in four ways – closing by extinction, closing by
addition, closing by integration, and closing by starvation.
 A project can be called an unsuccessful one when it fails to meet its established
objectives on time, budget, and performance. Failure to meet any of these three
fundamental parameters can result in project failure and such projects qualify to
be closed.
 The process of closing a project is equally complex and lengthy as planning the
scope of the project. So a project manager is always in need of a systematic
methodology that will help him close projects smoothly.
 Termination managers are employed, in some cases, to handle the process of
closing the project. He/she should be a person who is well versed with the
administrative parameters of closing and is equally good at analyzing the
organizational climate in which the successful project would be put to work.
134
Project Closing
 Following are the steps to follow while terminating a project: (i) getting client’s
acceptance, (ii) installing the project’s delivered output, (iii) documenting the
project, and (iv) signing and submitting the final report.
15.8 Glossary
 Project closing by addition: This method is adopted when “in-house” projects
are to be closed. When a project team undertakes an in-house project for
implementing it in its parent organisation and if it is successful in meeting its
objectives, then the project can be closed by incorporating it as a functional and
formal part of the organisation.
 Project closing by extinction: Projects are closed by way of extinction either
when they are successful in accomplishing the goals or when they fail to deliver
within the budgeted time and cost.
 Project closing by integration: This type of closing is used for technically
complex projects which on completion will form a part of the operating system
of the parent organization or the client.
 Project closing by starvation: This method of project closing cannot be
considered a closing, because here the project’s existence comes to an end as a
result of declining budgets.

1. A project comes to a close after it accomplishes its objectives or when it is
terminated. Under what circumstances can a project be closed? What are the
steps involved in the formal closure of a project?
2. A project can be closed when it has reached a point where there is no
progress possible even in terms of improving the effectiveness and
efficiency of the output. What are the various ways in which a project can be
closed?
3. A project is terminated when it is running far behind schedule or when its
resources are transferred to other projects. What are the various factors that
call for project termination?
4. The process of closing a project is very complex and lengthy. Explain in
detail the steps involved in closing a project. Who is a termination manager?
What are the basic responsibilities of a termination manager?

135


Unit.
1. (c) project closing
A project’s activities are terminated when the project has come to a point
when further progress is not possible in its implementation. This is called
project closing.
The steps that are taken by a project organization before closing the project
are: Ending the external contracts of the company formally, suspending the
assignments of the team members formally, seeking the acceptance of the
client formally, making sure of the proper installation and implementation of
the delivered output, making sure that proper project documentation is done,
submitting the final report and getting it approved, and closing the
established relationships internally and externally.
3. (b) Closing by extinction
Closing by extinction is the method of closing a project when it has
succeeded in accomplishing the goals set or when it has failed to deliver
within the budgeted time and cost. Under closing by starvation, the project
comes to an end as a result of declining budgets. Closing by integration is
the type of project closing used for technically complex projects, which
become a part of the operating system of the organization.
4. (b) Only i, ii, and iv
The reasons for ending a project under closing the project under extinction
are: political pressures, mergers and acquisitions, and demergers. The
introduction of a new product is one of the reasons for closing successful
projects.
5. (a) closing by starvation

The project is closed by starvation when its existence comes to an end as a
result of declining budgets, resistance from the top management, when it is
politically risky to continue or when the projects have a negative effect on
the image of the company in the market. Closing by addition is adopted
when ‘in-house’ projects are to be closed. When a project team undertakes
an in-house project for implementing it in the parent organization and if it is
successful, the project is closed by incorporating it as a formal part of the
136
Project Closing
organization. Closing by integration is one of the methods by which the

project is closed. This method is used for technically complex projects
which become part of the organizational system of the organization. Closing
by extinction is used to close the project when it has succeeded in
accomplishing the goals set or when it fails to deliver within the budgeted
time and cost.
6. (a) Closing by addition
Closing by addition is the method followed when integrating an in-house
project into the functional and formal part of the organization. Closing by
extinction and starvation are the methods followed when it is not feasible to
run the project further. Closing by integration is the type of project closing
used for technically complex projects which will become a part of the
operating system of the organization.

Closing by integration is one of the methods by which a project is closed.
This type of closing is used for technically complex projects which become
part of the organizational system of the organization. There are some
significant issues related to the functional aspects of closing a project by
integration. They are: Human capital, production, finance, engineering,
information systems, marketing, procurement, logistics, and legal.
8. (b) termination manager

The person who is employed to look into the termination of the project is
called the termination manager. The termination manager is a person who is
well versed with the administrative parameters of project closing. A project
manager may also look after the project closing activities of the
organization. However, he/she is not specifically employed for this purpose.
9. (b) ceremonial acceptance.

Ceremonial acceptance is given by the client in two cases. The first is where
the client accepts the project as closed and the second is when there is no
need to measure the conformance of the final product to predetermined
standards. Informal acceptance is taken when there is no need to sign on the
final report to acknowledge the project’s success. Formal acceptance is
taken in situations where the client has a formal acceptance methodology in
place while entering into a contract with the project manager.

The important topics that need to be covered in the final report are
performance of the project, project performance in terms of administration,
organizational structure, project and administrative teams and techniques of
project management.
137
11. (b) Documenting the project

Documenting is a crucial and difficult step in closing the project. It enables
clients to estimate the time and cost of future projects.
12. (c) Ensuring that the implementation of the project is profitable to the
project organization
There are some basic responsibilities that a termination manager has like
making sure that all the tasks are accomplished, informing the clients about
the completion of the project, making sure that the project documentation is
completed, ensuring that the final invoices are sent to the client and cleared,
putting all the resources and assets back into the respective positions in the
parent and client’s organization, getting clearance from the legal consultant,
finding out the documents that are worth storing and checking out the proper
closing of the project books. Ensuring that the implementation of the project
is profitable to the organization is not his/her responsibility.
13. (b) Signing and submitting the final report

The four steps in the termination of a project are in sequence: Getting the
client’s acceptance, installing the project’s delivered output, documenting
the project, and signing and submitting the final report.
14. (a) Documenting the project

Documenting the project is one of the most difficult and crucial tasks in
project closing. Documenting becomes an input for further training and
development required by the project team members. It also helps the project
team members to handle any situation by giving insights into how a similar
situation was handled in earlier projects.
15. (b) final project

The ability to report project history is one of the significant characteristics
of an ideal project management system and project history is best reported
in the final project report. The project termination statement is a statement
that is agreed on and signed by the client after he/she accepts the completion
of the project to his/her level of satisfaction. The project closing report is
another form of preparing the project termination statement. In this type of
report, all the topics covered in the final report should be listed along with
the suggestions for altering the existing practices.
16. (c) Installing the project’s delivered output
Installing the project’s delivered output is the second step in the process of
closing the project. This involves transferring the product into the client’s
control. Transferring the project into the client’s control is undertaken after
the acceptance is received from the client.
138
Project Closing
17. (a) Acceptance methodology

Acceptance methodology involves the project team proving to the client that
the delivered output conforms to the client’s specifications. The situation of
formal acceptance arises when the client has a formal acceptance
methodology in place while entering into a contract with the project
manager. Informal acceptance does not require the client to sign on the
project final report to acknowledge the project’s success.
139
Project & Operations Management
Course Components
BLOCK I Project Management – An Overview
Unit 1 Introduction to Project Management
Unit 2 Project Idea Generation and Screening
Unit 3 Market and Technical Analysis of Projects
Unit 4 Financial Analysis of Projects
Unit 5 Project Selection
BLOCK II Project Planning and Control
Unit 6 Management of Project Scope
Unit 7 Identifying Project Activities
Unit 8 Activities: Sequencing, Estimating Duration, and Scheduling
Unit 9 Project Review
Unit 10 Project Control
BLOCK III Project Implementation and Closing
Unit 11 Project Cost Management
Unit 12 Project Risk Management
Unit 13 Project Quality Management
Unit 14 Project Auditing
Unit 15 Project Closing
BLOCK IV Introduction to Operations Management
Unit 16 Operations Management and Operations Strategy
Unit 17 Forecasting Demand
Unit 18 Allocating Resources to Strategic Alternatives
Unit 19 Design of Production Processes
BLOCK V Design of Facilities and Operations Planning
Unit 20 Facility Location and Layout
Unit 21 Aggregate Planning and Capacity Planning
Unit 22 Fundamentals of Inventory Control
Unit 23 Purchase Management
Unit 24 Materials Management
BLOCK VI Operations Control
Unit 25 Operations Scheduling
Unit 26 Enterprise Resource Planning
Unit 27 Supply Chain Management
Unit 28 Just-In-Time (JIT) Manufacturing System
Unit 29 Productivity and Quality Management
Unit 30 Facilities and Maintenance Management
BLOCK VII Current Trends in Operations Management
Unit 31 Trends in Operations Technology
Unit 32 Globalization and Operations Management
Unit 33 Sustainability and Operations Management

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Block-III

Ref. No. POMIFHE – 082014 B3

 explain the process of cost management.

11.4 Resource Planning

Organizational Policies: The project manager has to abide by the organizational

11.4.1 Identification of Alternatives

There may be several ways of completing a particular project activity. The

11.4.2 Expert Opinions

The project manager consults experts like consultants and researchers, to

Check Your Progress

11.5 Cost Estimating

11.5.1 Analogous Estimating

In analogous estimating, the project manager considers similar projects to

11.5.2 Bottom-up Estimating

In bottom-up estimating, the cost of each element of the project is calculated

11.5.3 Parametric Modeling

Example: Hotel Corporation of India

Source: Report of the Comptroller and Auditor General of India-Union Government

Activity: Today, leading English daily in northern India has 16 editions to

Check Your Progress

11.6 Cost Budgeting

11.6.1 Preparation of Cost Baseline

11.7 Cost Control

 Defining the project scope precisely and clearly

11.7.1 Cost Change Control System

11.7.2 Performance Measurement

Check Your Progress

11.8 Cost Overruns and their Implications

11.8.1 Factors that Cause Cost Overruns

Cost escalations occur for many reasons. Some of these are:

Rectifications and Replacements

Other Related Factors

Example: Overruns in Government Projects

According to the Ministry of Planning and Program Implementation, the cost

The 19 mega railway projects alone incurred cost overruns of Rs 35 billion.

Activity: The Govardhan Group of Industries located near Ahmedabad,

Check Your Progress

11.11 Self-Assessment Exercises

11.12 Suggested Reading/Reference Material

11.13 Answers to Check Your Progress Questions

3. (a) Project scope statement

9. (d) All of the above

16. (a) Cost baseline

Cost baseline is a time-phased budget that periodically measures and

17. (b) Budgeted Cost Work Performed

Budgeted cost work performed is an important part of earned value analysis.

Cost performance index is one of the measures of performance

19. (d) All of the above

20. (b) Earned value analysis

Earned value analysis is a technique that measures the performance of the

21. (b) BCWP-ACWP

The three values in the performance measurement are: cost variance,

22. (b) Unforeseen contingencies

23. (d) i, ii, iii and iv

24. (c) estimation errors

27. (c) Updated technical versions

By the end of this unit, students should be able to:

12.3 Definition of Risk

Risk is defined as the possibility of an outcome being different from the