Module 4 – Planning the project 1 © University of Southern Queensland Module 4 – Planning the project Objectives On successful completion of this module, you should be able to: ● define an appropriate approach to the planning of a selected project ● identify the required inputs into the planning process ● define the planning processes to be undertaken ● articulate the planning outputs of a selected project ● develop an appropriate project management plan (PMP) for a selected project ● implement the PMP ● develop a simple financial viability study for a selected project. Learning resources Text Turner, RJ 2014, The handbook of project-based management: Leading strategic change in organisations, 4th edn, McGraw Hill, New York – chapter 15, 16. Selected readings Selected reading 4.1: Burke, Rory 2011, Advanced project management: Fusion method XYZ – a project methodology systems approach for the project sponsor to implement corporate strategy, chapter 4. Selected reading 4.2: Dugdale, D 1991, 'Is there a "correct" method of investment appraisal? 4.1 Introduction To date, we have examined the bigger picture of the projects that we are likely to be required to manage, and placed them into the organisational context to ensure their organisational 'fit'. We have articulated the expectations of the key sponsors in terms of an initial project brief or charter, developed guidelines and constraints as to what is to be delivered (and what isn't),Module 4 – Planning the project 2 © University of Southern Queensland and put together a project business case as a set of parameters for the following stages in the project life cycle. Key sponsors now have firm expectations in terms of what the outcomes will be, when it will be delivered, how it will be delivered, who will deliver it, what resources will be consumed, and what benefits will be delivered. In this next stage of project planning, we implement the business case to provide the essential artefacts to deliver the project. We will define the organisational unit that has project responsibility, what finances the organisation can afford to consume, what processes will take place to ensure that the project happens with the least fuss and the least exposure to risk, and how the end benefits will be measured to demonstrate project success (or failure as the case may be). In this module, we will look at what inputs are required to create a comprehensive project management plan (PMP), what processes must be undertaken, and what the outcomes provide for further decision-making and implementation purposes. 4.2 Planning inputs The planning phase sits between a good idea and a giant leap of faith when the project sponsor places her/his trust in the project manager to commit valuable resources to the project. The project manager's reputation and career is on the line. A conceptual idea has been expanded to a business case based on assumed information and the sponsor now requires the project manager to develop a plan for implementation. This is a time consuming stage which requires financial resources to be expended. Depending on the size of the project, this could represent a considerable sum. Figure 4.1 indicates how we have moved from the project charter (or business case) through to the project plan.Module 4 – Planning the project 3 © University of Southern Queensland Figure 4.1: Project integration steps – a scalable methodology guide (Source: Adapted from Chapman 1997, colour enhanced by USQ) The nature and scope of the project is now clear. It has a life cycle form which is determined by the project itself as well as the internal project management methodology by which it will be managed and delivered. Approval points (or phase gates as they are often called) define which activities can proceed based on what level of approvals from higher authorities, and these are incorporated into our project management methodology which forms part of our governance process which is discussed in a later module. Project planning is a challenging phase of the project. The project manager is under pressure from key sponsors to move the project forward once approval of the project charter and business case is given. However, these documents were mainly based on assumed information in the absence of actual data, and the planning stage is time-consuming in that it requires a vast amount of factual data to be collected, processed, analysed and documented inModule 4 – Planning the project 4 © University of Southern Queensland such a way that it allows the sponsors to commit to the project with the confidence that the outcomes will be consistent with their expectations. The means by which project managers achieve this objective is to develop a comprehensive document containing relevant information on all aspects of the project that represent some risk to the project outcomes. The inputs to this process are indicated in figure 4.4 from the PMBOK® Guide (PMI 2013). Because of the holistic nature of these planning activities, drawing information from multiple sources and making value judgements on what is the best balance to achieve project outcomes, this forms part of what is described as project integration management. Figure 4.2: Develop Project Management Plan: inputs, tools and techniques, and outputs (Source: PMI 2013, Section 4.2)Module 4 – Planning the project 5 © University of Southern Queensland 4.3 Planning processes Project planning in itself may be seen as part of risk management. Without a plan, the project team could easily launch into implementation and do whatever they think necessary to deliver the project. I suspect that many projects are actually managed in that fashion because of lack of time, lack of expertise or simply lack of knowledge on how to do it any other way. Each project represents a risk in one way or another to the sponsor. It could be cost implications that are not anticipated and represent a threat to the organisation's survival. This has happened recently when the global financial crisis caused many property markets to collapse with property projects mid-stream. The projects had to be either completed at more cost with an uncertain future for their sale, or halted temporarily until the market improved, adding considerably to holding costs. It could be performance implications in that the project deliverable does not do what it was intended to do, or not well enough. Information systems projects often fail with regard to some functionality. Aviation projects often are not able to do what was expected. Organisational restructures may be no more efficient than before and revert to previous models. The nature of the project and the sponsor expectations will influence the processes by which the PMP is developed, with the emphasis on the important aspects of the project. The various elements of the PMP (based around the knowledge areas of the PMBOK® Guide (PMI 2013) in some way or another), will be developed as indicated in figure 4.2 to create a comprehensive plan that is suitable for the key sponsors for decision-making on whether to commit or not. That is the decision that has serious implications for the organisation and is often referred to as the 'go/no go' decision. Gray and Larson (2000) provide some guidelines for the PMP development process as follows: Important planning decisions are made when answering the following project-related questions: How will the project plan be developed? Who will develop the project plan, and how involved will the customer be? What project management software package will be used, if needed? Who on the project team will be responsible for entering the planning information? Who will have input on the plan? What specifically are the roles and responsibilities of each team member? How will team members be informed of decisions? Understanding that cost, time, and quality (performance) are all important, what are the priorities?Module 4 – Planning the project 6 © University of Southern Queensland What are the deliverables of the project planning process? What format is appropriate for each of these deliverables (e.g., milestone charts) Who will approve and certify at the completion of each deliverable? Who receives each deliverable? (Gray & Larson 2000, p. 301) Reading activity Read the set text by Turner, chapter 15 and 16, on the project life cycle and the design phase. 4.4 Planning outcomes The main outcome from the planning process is the project management plan (PMP) which is comprised of many sub-plans relating to the key aspects of the project which influence project deliverables and performance. 4.4.1 The project management plan (PMP) However, like many aspects of project management, there is no universal agreement on what constitutes a PMP. The term may be used in many ways to mean many different things, country by country, industry by industry. The PMP might be called by many names such as: ● The project plan (PP) ● The project management plan (PMP) ● The project master plan (PMP) ● The project action plan (PAP) ● The project execution plan (PEP) ● The project implementation plan (PIP) The important issue is that some form of document is produced and agreed to by the project sponsor and major stakeholders prior to commitment to the major implementation phase of the project. The PMBOK® Guide (PMI 2013) defines a PMP as a document that 'defines how the project is executed, monitored and controlled, and closed' (PMI 2013, Section 4.2). It provides information on: ● how the project will be managed, as well as ● how the product or service itself will be produced.Module 4 – Planning the project 7 © University of Southern Queensland The PMP is a consistent and coherent document that is used to: ● Guide project execution ● Document project planning assumptions ● Document project planning decisions ● Facilitate communications among stakeholders ● Define key management reviews as to content, extent, & timing ● Provide a baseline for progress measurement & project control. The PMP development process includes all of the actions necessary to define, integrate, and coordinate all subsidiary plans into a single document – the PMP – although, in many instances where the project is of significant size, the PMP may be made up of multiple documents or of appendices to a parent document. 4.4.2 Contents of a PMP The contents of a PMP will vary depending upon the application area and complexity of the project. It is a guide for the definition and control of the work so Barkley (2006) suggests that it should include: ● control points, for instance, stage-gateway reviews, to ensure that management authorizes movement from one phase or stage to another ● reporting and monitoring strategies, including the use of earned value to integrate cost, schedule, and quality performance, which should be made explicit. It should also include: The project management processes selected by the project management team The level of implementation of each selected process The descriptions of the tools and techniques to be used for accomplishing those processes How the selected processes will be used to manage the specific project, including the dependencies and interactions among those processes, and the essential inputs and outputs How work will be executed to accomplish the project objectives How changes will be monitored and controlled How configuration management will be performed How integrity of the performance measurement baselines will be maintained and used The need and techniques for communication among stakeholders The selected project life cycle and, for multi-phase projects, the associated project phasesModule 4 – Planning the project 8 © University of Southern Queensland Key management reviews for content, extent, and timing to facilitate addressing open issues and pending decisions. (Source: Barkley 2006) The PMP has many purposes and is intended for multiple audiences. For instance the PMP is used as a decision-making document for higher authorities in governance roles. They will require comprehensive information but only the information needed for their decision-making processes. This would be presented in a way that is suitable for that audience and would not contain a lot of technical background information used to arrive at key recommendations for the sponsor. A PMP intended for implementation by the project team might not include sensitive financial data at an organisational level such as financial viability studies. A version of the PMP might be used to gain financial support for a project from an external funding source, and is unlikely to contain sensitive (and unnecessary) data relating to the organisation and the project. Another version of the PMP might be used to brief project consultants and again, components relevant to such audiences will be carefully selected. For ease of reference and to allow the document to be tailored in ways that are appropriate for the respective audiences, the PMP may contain a higher-order summary (like an executive summary) with a collation of subsidiary plans which reflect the knowledge areas of the PMBOK® Guide (PMI 2013) and might include: ● Project scope management plan ● Schedule management plan ● Cost management plan ● Quality management plan ● Process improvement plan ● Staffing management plan ● Communication management plan ● Risk management plan ● Procurement management plan. Within these sub-plans, there might be more detailed documents including components such as: ● Milestone list to provide key dates by which events are anticipated or by which progress must take place to meet other criteria ● Resource calendar to identify and confirm availability of key resources, both physical and personnel, to achieve deadlines ● Schedule baseline to provide guidance on likely completion dates, or to confirm ability to meet key deadlines and milestones which may affect things such as approvals, funding, weather events, opening dates (e.g. Olympics)Module 4 – Planning the project 9 © University of Southern Queensland ● Cost baseline to confirm the extent and timing of financial resources which is critical for other stakeholders such as project funding authorities ● Quality baseline to establish what is expected and/or required for adequate performance of the project deliverable ● Risk register to confirm that major risk events have been considered and evaluated. Development of the respective components of the PMP might be carried out by external stakeholders with the relevant expertise and knowledge. Much of the technical data will come from stakeholders who are not part of the internal project team. Discussion about the specific knowledge areas to be covered by the PMP is covered in subsequent modules in these study materials. 4.4.3 Structure of a PMP The actual PMP structure will be determined by the organisational culture and the methodology that has been adopted. The most important thing is that the PMP is meaningful for each of its intended audiences. There are no hard and fast rules but an indicative structure might look like the following: ● Overview or executive summary – a brief description of the project and its deliverables, and a list of major milestones ● Objectives – a detailed description of the project's deliverables and outcomes, (Mission Statement) ● General approach – where technical and managerial approaches are defined ● Contractual – where the procurement process is described, and the specific legal aspects defined ● Schedule – an outline of all schedules and milestones, using an action plan based on a WBS ● Resources – estimates of capital and operating expenses. ● Personnel – describing the project work force, and requirements for special skills, expertise etc. ● Evaluation methods – describing evaluation methods and standards for the completed project. ● Potential problems – identifying any likely risk events that could adversely affect the project. Reading activity Read selected reading 4.1: Burke 2011, chapter 4, pp. 48–57, for some additional views on how to develop a PMP and what should go into it.Module 4 – Planning the project 10 © University of Southern Queensland 4.5 Implementation of the project plan The completed PMP is a blueprint for the following stages of the project. It is comprehensive and once approved, allows members of the project team to proceed with their respective responsibilities. Once again, it is normal for a stage gate review to take place with the key sponsors and stakeholders giving authorisation to proceed as per the PMP, in terms of what is to be delivered, as well as how it is to be delivered and by whom. When the relevant higher authority has granted approval, project team members are able to proceed immediately with the execution of the PMP as set out in the conditions of approval. This stage of execution, monitoring and control is discussed in a later module of these study materials. Learning activity 1 Find a PMP from your workplace (or from the internet) suitable for analysis. It should be of an adequate size (but not too large) to allow you to compare the actual PMP with what theory suggests should be developed to increase the likelihood of successful project outcomes. 4.6 Project screening and selection If it has not already happened in the project initiation stage, it is likely that various project options will be considered as part of the planning stage to arrive at a PMP for the project to be recommended for approval. Project appraisal is another important aspect of project management but it is not covered well in project management texts. Unless the project manager has a reasonable understanding of the criteria by which a project adds value to the stakeholders, then the emphasis might incorrectly be placed on how to manage, rather than what needs to be managed. Managing the wrong project well is not necessarily in the sponsor's best interests. The project sponsor will expect some form of financial business case to be included in the PMP to confirm that the project is worth doing. Detailed examination of financial appraisal of projects is provided in MGT8025 Project Scope, Time & Cost Management, so the following information in this section is provided as an introduction only. If you are interested in this side of project management, you should consider studying some economics courses where financial appraisal is examined in more detail. Each proposal must undergo an ever increasingly rigorous process of analysis before gaining approval to proceed. In the first instance the feasibility of the proposal is examined – is it possible? If, on the basis of current knowledge, experience and technology, the proposal is theoretically possible then we must ask the simple question – is it economically viable?Module 4 – Planning the project 11 © University of Southern Queensland 4.6.1 Motives and criteria for project screening and selection If we consider that there are three major types of project proponent organisations, namely the government, private and not-for-profit sectors, then different motives and screening and selection criteria emerge. ● The government sector must seek to meet major political, cultural, social, economic and educational objectives on behalf of the electorate. ● The private sector must seek to meet major organisational objectives on behalf of the shareholders, most of which will be value or profitability related. ● The not-for-profit sector consists of charities, social organisations, trade associations and unions and political organisations. These organisations are usually driven solely by the needs of their constituents. Meredith and Mantel (2003, p. 43) indicate that selection and screening models can be divided into two main categories: 1. non-numeric or qualitative models 2. numeric or quantitative models. Non-numeric models include (p. 46): ● the 'sacred cow' (the CEO's personal area of interest) ● the operating necessity (compliance with changed regulations and laws) ● competitive necessity (to continue to be competitive in the business sector) ● the product line extension. Numeric models include (p. 49): ● payback period ● accounting rate of return (ARR) ● net present value (NPV) ● internal rate of return (IRR). Incremental cash flows In evaluating a project we are interested only in those actual cash flows that change if the project is undertaken and these are called the incremental cash flows. The most common cash outlays considered in the capital budgeting decision are: ● the initial cost of the investment ● incremental operating costs needed for the investment ● maintenance and repairs associated with the investment ● any increase in working capital required to support the investment.Module 4 – Planning the project 12 © University of Southern Queensland Typical cash inflows associated with the investment decision are: ● incremental revenues from the investment ● resulting cost reductions ● revenues gained from the disposal of the asset or, alternatively, any residual value at the end of the asset's useful life if there is no disposal of the asset ● any decrease in working capital that may occur during or at the end of the asset's life. Opportunity costs have been defined as 'benefits foregone by using limited resources for a particular purpose' (Horngren & Foster 1987, p. 958). For example a new project could utilise spare factory capacity and achieve a net cash flow of $2 million per annum. Had the project not been undertaken such capacity could have yielded a cash flow of $500,000 in the form of rental revenue. In evaluating the project such benefit foregone should be included. There are differing and conflicting views on whether interest payments should be included as part of the cash flows. In a non-discounted analysis, they can be considered as they do not conflict with the discounting calculations. In a discounted cash flow analysis, it is important not to include the effect of interest payments twice and understanding the selection of the discount rate is critical. The calculation of net present value and internal rate of return automatically considers payment of interest as well as repayment of capital. If interest payments are included we are double counting. Cash flow analysis may be carried out pre-tax or post-tax, or both, as the evaluation may yield different results. Calculation of taxation benefits and liabilities is quite complex, and should be left to those with expertise in this field. 4.6.2 Traditional cash flow analysis We have available to us a range of financial assessment tools, ranging from the 'quick and dirty' to the more sophisticated. In this section, we will only discuss briefly four types of financial appraisal. These are divided into the following categories: Traditional methods ● Accounting rate of return (ARR) ● Payback method. Discounted cash flow analysis ● Nett present value (NPV) ● Internal rate of return (IRR). Accounting Rate of Return (ARR) is sometimes called 'Return on Investment' (ROI). The method of calculation varies widely, which is in itself a deficiency. Many of these terms are hardly precise, and this contributes to the shortcomings of the ARR as a precise method of project appraisal. Accounting Rate of Return = Profit/Capital Investment × 100%Module 4 – Planning the project 13 © University of Southern Queensland The Payback Method refers to how quickly the 'original investment outlay' is recovered. Usually annual, after-taxation, net cash flows are divided into the capital outlay and expressed as 'years to payback'. 4.6.3 Discounted cash flow analysis The cost of purchasing a component of our project in the future will most likely be higher than it is today. If we want to be as accurate as possible in our cash flows, we must estimate the likely increased future cost (or escalated value) of items and services to reflect this diminished purchasing power. If we commit funds today to a project, we are foregoing some alternative opportunity to utilise those funds, such as a bank deposit, which would earn us interest. We have to ensure that our chosen project investment increases sufficiently in value to offset that loss of earnings (called the opportunity cost). Alternatively, if we borrow funds for our project, we have to repay our borrowings plus some interest, which is the cost of borrowing capital. Again, we have to ensure that our project earns us enough 'profit' to offset the interest that must be paid when we repay our borrowings. Future earnings from a project come at a cost, one way or another, and to compensate for that cost, we reduce (or discount) future earnings to tell us if we made a 'real' profit or not, after we have allowed for our costs of investment. The net present value (NPV) is defined as the present value (PV) of future benefits minus the present value (PV) of the costs of those benefits. Calculation of the net present value of an investment (or any form of cash flow) requires knowledge of the following: ● amount and timing of any future cash inflows ● amount and timing of any future cash outflows ● a discount rate (generally expressed as a percentage rate). Any decisions we make based on net present values must be seen only in the context of the chosen discount rate, which can be manipulated to influence the outcome (e.g. high discount rates will substantially reduce the benefit of earnings if they are well into the future – it distorts the evaluation). If the net present value (NPV) is zero, the project is providing a return on investment (ROI) equal to the selected discount rate. If the net present value (NPV) is positive the project will be returning more than the required rate of return. There are many ways of selecting a discount rate that could be used to discount project cash flows and determine their net present value. Three common rates are: ● the risk free cost of capital, i.e. the Government Bond Rate ● the marginal cost of capital, i.e. the cost of borrowing the next dollar of capital necessary to finance the project, or in the case of major projects the cost of finance raised specifically for the project ● the weighted average cost of capital (WACC), i.e. a weighted average of the capital structure determined by the organisation's corporate financial circumstances and objectives. This takes into account the pro rata cost of borrowings and equityModule 4 – Planning the project 14 © University of Southern Queensland (shareholders expect a return on investment for equity left in the company as retained profits as it rightfully belongs to them). ● Organisations sometimes nominate a 'hurdle' discount rate that must be exceeded by the returns of any investment proposal to achieve approval. This may include the interest rate on borrowed capital, a risk factor, an inflation factor, etc. The key is to be able to interpret the result of such calculations to ensure that 'apples are compared with apples'. The Internal Rate of Return (IRR) is an alternative technique used for making capital investment decisions that also takes into account the time value of money. The internal rate of return represents a unique discount rate at which: the NPV of all the inflows equals the NPV of all the outflows The main difference between NPV and IRR is that they are measuring different things. NPV measures 'profit' in monetary terms. IRR measures a specific discount rate at which the NPV is zero, and is expressed as a percentage rate. The use of both NPV and IRR gives us a better idea than either one alone. Reading activity Read selected reading 4.2: Dugdale 1991, 'Is there a "correct" method of project appraisal?' for an overview of investment appraisal. This course does not focus on financial analysis of projects in any detail, but it is good to gain a basic grasp of what your project has to achieve to be seen as successful from a financial or economic perspective. Learning activity 2 Find a financial analysis of a project from your workplace or from the internet. Identify what criteria were set to determine if the project is successful or not. Are they financial criteria, or are they more qualitative criteria in terms of performance? How important are financial criteria? Conclusion In this module, we have looked at the more detailed planning that is required to verify that the project is worth doing. The outcome of the detailed examination of all aspects of the project is a PMP that can be used for decision-making by the key sponsors with confidence that the outcomes will be similar to those projections within the PMP. It also provides a blueprint for the project team to implement and execute the project once approval is given. The following modules look at the various knowledge areas in the PMBOK® Guide (PMI 2013) divided into what we have called the hard skills and the soft skills of project management as well as an examination of issues related to quality, risk and procurement.Module 4 – Planning the project 15 © University of Southern Queensland Reference list Barkley, BT 2006, Integrated Project Management, McGraw-Hill, New York. Burke, R 2011, Advanced project management: Fusion method XYZ – a project methodology systems approach for the project sponsor to implement corporate strategy. Chapman, J 1997, Project management scaleable methodology guide, home of principle based project management training site, viewed 23 January 2012, http://www.hyperthot.com/pm_meth1.htm. Gray, CF & Larson, EW 2000, Project management: the management process, McGrawHill/Irwin. Horngren, CT & Foster, G 1987, Cost accounting, 6th edn, Prentice Hall, New York. Meredith, J & Mantel, S 2003, Project management: a managerial approach, 5th edn, John Wiley & Sons Inc, New York. PMI 2013, A guide to the project management body of knowledge (PMBOK® Guide), 5th edn, Project Management Institute, Newtown Square, Pennsylvania. Turner, RJ 2014, The handbook of project-based management: Leading strategic change in organisations, 4th edn, McGraw Hill, New York.