Project Management CTC-ITC 310 Spring 2018 Howard Rosenthal

Transcription

1 Project Management CTC-ITC 310 Spring 2018 Howard Rosenthal 1

2 Notice This course is based on and includes material from the text: A User s Manual To the PMBOK Guide Authors: Cynthia Stackpole Snyder Publisher: Wiley ISBN: , Copyright 2013 It also utilizes general information and figures from the PMBOK: A Guide to the Project Management Body of Knowledge (PMBOK 5 TH Edition) Publisher: Project Management Institute ISBN: , Copyright 2013 and A Guide to the Project Management Body of Knowledge (PMBOK 6 TH Edition) Publisher: Project Management Institute ISBN: , Copyright 2017 The article: How to manage the risks you didn't know you were taking, Hilson, David, Paper presented at PMI Global Congress 2014 North America The course also includes and intersperses some materials, most often diagrams, provided by Mr. Wysocki s PowerPoint slides, at the website: And the book Effective Project Management - Traditional, Agile, Extreme 7TH Edition Authors: Robert K. Wysocki Publisher: Wiley ISBN: , Copyright

3 Lesson Goals Understand what a project charter is Understand some of some of the facilitation techniques and quantitative analysis tools used to determine what projects are selected and to develop the project charter 3

4 Project Management Process Groups and Knowledge Areas PMBOK Std V6 Table 1-1 4

5 Develop Project Charter 4.1 Develop Project Charter The process of developing a document that formally authorizes the existence of a project and provides the project manager with the authority to apply organizational resources to project activities 5

6 Project Integration Management Overview PMBOK Guide V6 Figure 4-1 6

7 The Project Charter (1) What is the Project Charter? The charter officially authorizes the existence of the project It names the project manager and gives the PM authority to manage and apply organizational resources to project activities It is preferable to have the project manager involved in the charter creation It is created during this Develop Project Charter Process It is created based on some need, and the Project Charter must capture and explain that need It links the project to higher level organizational objectives It is signed by the performing organization s senior management and by the project sponsor It should include the very high level project requirements based on the business case It includes high level project milestones, but does not include project details The Project Charter is an input to the various planning processes It has a top-level summary budget You must have a Project Charter before moving forward with the project The Project Charter and an Assumption Log are the sole outputs of this process 7

8 The Project Charter (2) The project charter establishes a partnership between the performing and requesting organizations. In the case of formal projects a contract is normally used to establish this agreement The charter itself is not a contract This may still lead to internal agreements within an organization to ensure proper project delivery Projects are initiated due to an internal need or by external influences These needs often trigger needs analysis, feasibility studies, business case evaluation, and/or a description of the work that the project will address 8

9 Flow Diagram For Develop Project Charter PMBOK Guide V6 Figure 4-3 9

10 Inputs To The Charter - The Statement of Work The project statement of work (SOW) is a narrative description of products, services, or results to be delivered by a project. For internal projects, the project initiator or sponsor provides the statement of work based on business needs, product, or service requirements. For external projects, the statement of work can be received from the customer as part of a bid document, (e.g., a request for proposal, request for information, or request for bid) or as part of a contract. The SOW references the following: Business Need An organization s business need may be based on a market demand, technological advance, legal requirement, government regulation, or environmental consideration. Typically, the business need and the cost-benefit analysis are contained in the business case to justify the project. Product Scope Description The product scope description documents the characteristics of the product, service, or results that the project will be undertaken to create. The description should also document the relationship between the products, services, or results being created and the business need that the project will address. Strategic Plan The strategic plan documents the organization s strategic vision, goals, and objectives and may contain a high-level mission statement. All projects should be aligned with their organization s strategic plan. Strategic plan alignment ensures that each project contributes to the overall objectives of the organization. 10

11 Inputs To The Charter - The Business Case (1) The business case or similar document describes the necessary information from a business standpoint to determine whether or not the project is worth the required investment. It is commonly used for decision making by managers or executives above the project level. The business need and the cost-benefit analysis are contained in the business case to justify and establish boundaries for the project, and such analysis is usually completed by a business analyst using various stakeholder inputs. The sponsor should agree to the scope and limitations of the business case. 11

12 Inputs To The Charter - The Business Case (2) The business case is created as a result of one or more of the following inputs: Market demand A car company authorizing a project to build more fuel-efficient cars (i.e. hybrids) in response to gasoline shortages or a rise in gasoline prices Organizational need Due to high overhead costs a company may combine staff functions and streamline processes to reduce costs Customer request An electric utility authorizing a project to build a new substation to serve a new industrial park Technological advance An airline authorizing a new project to develop electronic tickets instead of paper tickets based on technological advances Legal requirement A paint manufacturer authorizing a project to establish guidelines for handling toxic materials Ecological impacts A company authorizing a project to lessen its environmental impact in order to comply with regulations or because it has determined that there is a benefit in being socially responsible Social need A nongovernmental organization in a developing country authorizing a project to provide potable water systems, latrines, and sanitation education to communities suffering from high rates of cholera 12

13 Inputs To The Charter - Other Agreements Agreements are used to define initial intentions for a project Agreements may take the form of contracts, memorandums of understanding (MOUs), service level agreements (SLA), letter of agreements, letters of intent, verbal agreements, , or other written agreements Typically, a contract is used when a project is being performed for an external customer Enterprise Environmental Factors The enterprise environmental factors that can influence the Develop Project Charter process include, but are not limited to: Governmental standards, industry standards, or regulations (e.g. codes of conduct, quality standards, or worker protection standards) Organizational culture and structure Marketplace conditions Organizational Process Assets Organizational standard processes, policies, and process definitions Templates (e.g., project charter template) Historical information and lessons learned knowledge base including Projects, records, and documents All project closure information and documentation Information about both the results of previous project selection decisions and previous project performance information Information from the risk management activity 13

14 Analyses Cost-benefit analyses are produced using a variety of benefit measurement methods Used to quantify the monetary benefits and expected costs that will result from a project Multiple projects are compared using these analytics as a part of the selection process 14

15 Analyses Benefit Cost Ratio The Benefit Cost Ratio (BCR) measures the ratio of benefits to cost For example if all the costs for constructing a building are $3M and you believe you can sell it for $3.93M, then the BCR = 3.93/3 = 1.31 When the project is completed these numbers are examined You may be incentivized to achieve a higher BCR Question: What does a BCR of 1.9 mean? a. The costs are greater than the benefits b. Revenue is 1.9 times the cost c. Profit is 1.9 times the cost d. Costs are 1.7 times the profit 15

16 Analyses Economic Value Added The Economic Value Added (EVA) measures how much value has been created for the shareholders EVA looks at the costs associated with the opportunity, not just the net after-tax profits EVA = (after-tax profit) (capital invested*cost of capital) If a company invested $175,000 in a project at a cost of capital of 6% and achieved a profit of $10,000 in the first year then EVA = 10,000 (175,000 *.06) = 10,000 10,500 = -500 Therefore, at least during the first year this would not be a good investment since you could have earned more by putting the money in the bank However, if a company invested $175,000 in a project at a cost of capital of 4% and achieved a profit of $10,000 in the first year then EVA = 10,000 (175,000 *.04) = 10,000 7,000 = 3,000 This is a better deal with a positive EVA relative to putting the money in the bank - This shows that interest rates are a risk that must be looked at, especially as a part of sensitivity analysis 16

17 Analyses Present Value and Net Present Value (1) Present Value (PV) is based on the time value of money Simply this means that a dollar today is worth more than a dollar tomorrow (Future Value) PV = FV/(1 + r) n where r is the rate per period and n is the number of periods Example; If you are paid back $300,000 in three years and if the going interest rate is 10% per year (compounded yearly) what is the PV PV = (300,000)/(1 +.10) 3 = $225,394 In the above example you lose. Why? If you had a simple ten percent interest compounded yearly then the $30000 would be worth *(1.1) 3 = in 3 years If you are only being paid $ then the maximum you should be paying up front is $225,394 The final price that you charge must be higher than present value of the the original investment to ensure that you recover all the costs 17

18 Analyses Present Value and Net Present Value (2) Net Present Value (NPV) is the present value of the total benefits (income/revenue) minus the costs over multiple time periods It is possible to compare projects using NPV and select the best project based on the one with the highest positive value Simple example: If the PV of a building is $ and it cost $ to build then the NPV is $ A Net Present Value (NPV) that is positive is good and negative is bad It is used both before and after the project to Decide whether to make an investment Determine if the investment panned out Note: during the evaluation NPV does not take risk into consideration, something that needs to be considered when determining your final price 18

19 Analyses Present Value and Net Present Value (3) Example: A friend needs $500 now, and will pay you back $570 in a year. Is that a good investment when you can get 10% elsewhere? Money Out: $500 now You invested $500 now, so PV = -$ Money In: $570 next year Calculate PV (of the $570) = $570 / (1+0.10) 1 = $570 / 1.10 = $ The Net Amount is: $ $ = $18.18 So, at 10% interest, that investment is actually worth $18.18 In other words it is $18.18 better than a 10% investment, in today's money a good investment 19

20 Analyses Present Value and Net Present Value (4) Net Present Value is sensitive to the interest rate: Example: A friend needs $500 now, and will pay you back $570 in a year. Is that a good investment when you can get 15% elsewhere? Money Out: $500 now You invested $500 now, so PV = -$ Money In: $570 next year Calculate PV (of the $570) = $570 / (1+0.15) 1 = $570 / 1.15 = $ The Net Amount is: $ $ = -$4.35 So, at 15% interest, that investment is actually worth- $4.35 In other words it is $4.35 worse than a 15% investment, in today's money a bad investment 20

21 Analyses Present Value and Net Present Value (5) One more example that is a little more realistic: Andres invests $2,000 now, receives 3 yearly payments of $100 each, plus $2,500 in the 3rd year. What is his NPV if he uses a 10% interest rate throughout? Let us work year by year (remembering to subtract what you pay out): Now: PV = -$2,000 Year 1: PV = $100 / 1.10 = $90.91 Year 2: PV = $100 / = $82.64 Year 3: PV = $100 / = $75.13 Year 3 (final payment): PV = $2,500 / = $1, NPV = ( $ $ $ $1,878.29) -$2,000 = $ Looks like a good investment. Class Exercise: What happens at 6%? 21

22 Analyses Present Value and Net Present Value (6) Class Exercise Invest $2,000 now, receive 3 yearly payments of $100 each, plus $2,500 in the 3rd year. Use a 6% Interest Rate throughout Let us work year by year (remembering to subtract what you pay out): Now: PV = -$2,000 Year 1: PV = $100 / 1.06 = $94.34 Year 2: PV = $100 / = $89.00 Year 3: PV = $100 / = $83.96 Year 3 (final payment): PV = $2,500 / = $ NPV = ( $ $ $ $ ) -$2,000 = $ Looks like an even better investment 22

23 Analyses Internal Rate of Return (1) The formal definition of the Internal Rate of Return (IRR) states that it is the interest rate at which the NPV of all positive and negative cash flows from a project or investment equal zero. Some places state that a higher IRR is better but this can be misleading in many cases However, the basic idea is sound, in that you have more opportunity to come out ahead if the interest rate is higher 23

24 Analyses Internal Rate of Return (2) Example: Sam is going to start a small bakery! Sam estimates all the costs and earnings for the next 2 years, and calculates the Net Present Value: At 6% Sam gets a Net Present Value of $2000. But the Net Present Value should be zero, so Sam tries 8% interest: At 8% Sam gets a Net Present Value of $1600 Now it's negative! So Sam tries once more, but with 7% interest: At 7% Sam gets a Net Present Value of $15 Close enough to zero, Sam doesn't want to calculate any more. This tells us that if the IRR is more than a little over 7% then the investment isn t worth it 24

25 Analyses Payback Period The length of time it takes a project to recoup its cost before accruing profits You would like the payback period to be as short as possible, but there are situations where it could make sense to delay the initial payback if you can increase the final NPV 25

26 Analyses Return On Investment This Return on Investment (ROI) is a percentage measuring the return you make when investing in something ROI = ((benefit cost)/cost)*100 % If a company invests $100,000 in process improvement and saves $120,000 in the first year, then ROI = ((120, ,000)/100,000)*100 = 20% What happens if it recoups only $90,000 of the costs? 26

27 Analyses Opportunity Cost Defines the cost of a missed opportunity when selecting one (or more) projects over another set of one (or more) projects A company has has two projects to choose from. Project A has an NPV of $30,000 and Project B has an NPV of $45,000. The Opportunity Cost of picking Project B is $30,000 the lost opportunity You can lose opportunities when you don t have enough resources to go after all the potential opportunities 27

28 Analyses Sunk Cost Sunk costs are expended costs You are halfway through a project that was budgeted at $100,000 and have already spent $200,000. Is the fact that the project is already over budget to be considered in determining whether to continue. No. In accounting, the money is already spent. However, if you can show that future investments won t improve the NPV then you may cancel the project. 28