Project Management and Big Project Financing - Essay Example

Project Management and Big Project Financing Abstract: Project management is the basic tool used by different companies in the present-day world for the successful execution of any project. Based on this surmise, this document explains how project management concepts, theories, and techniques can be applied to manage a project effectively. Project management concepts, theories, and techniques have also been critically examined and analyzed throughout the document. Importance has also been placed upon the complexity of project finance management which remains a very crucial and pivotal part of any project management process. 1.1 Introduction: Used as an ‘isolated concept’ before the Cold War, today, project management is the preferred approach to planning, designing, and executing any project successfully. The need for project management, especially project finance management, is highly significant. With ‘uncertainty’ deeply embedded in almost all projects, there is a great need for management of ‘performance, cost, time, and scope requirements’ by specialized teams (Chapman, 1996; Lewis, 2002). Thus, project management, which consists of several stages and plans, helps in solving problems that are faced during the planning and implementation of any project, be it small-scale projects or large-scale ones such as water and power plant, petrochemical plants, and many others. 1.2 Project Management and Big Project Financing: ‘Project management is the discipline of defining and achieving targets while optimizing the use of resources (time, money, people, materials, energy, space, etc) over the course of a project (a set of activities of finite duration)’. Research reveals that there are two types of approaches used by project management: the traditional approach, which follows ‘a sequence of steps to be completed’ that includes ‘project initiation (Kick-off), project planning, project production or execution, project monitoring or controlling, and project completion’, and the ‘flexible product development approach or agile software development approach’, which views a project as ‘a series of relatively small tasks conceived and executed as the situation demands… rather than as a completely pre-planned process’. With its techniques and approaches, project management helps in ‘planning the work, assessing risk, estimating resources, organizing the work, acquiring human and material resources, assigning tasks, controlling project execution, reporting progress, and analyzing the results based on facts achieved’. It facilitates ‘planning, scheduling, and controlling of all activities that must be done to achieve project objectives’ (Lewis, 2002). Project financing management, which include estimating costs, both initial capital and maintenance costs; ‘planning for and anticipating the unforeseen’; and other financial matters, constitutes an extremely important part of project management process, especially in the case of large-scale projects where ‘waste, excessive cost and delays can result from poor coordination and communication among specialists’ (Hendrickson, 2003). 1.3 Big Projects and their Management: 1.3.1 Big projects: nature, scope, and risks involved Projects usually differ in size, types, and requirements, and hence, they demand different management techniques. Therefore, the ‘methods of procuring professional services, awarding construction contracts, and financing the constructed facility’ can be quite different from one project to the other (Hendrickson, 2003). In any project, especially in large-scale ones where the economic and financial stakes are extremely high, uncertainty exists in the early stages of a project. As stated by Chapman in his book Project Risk Management: Processes, Techniques, and Insights, ‘in the earliest stages… the purpose for which the project is required and the parties who will be involved may not be clear’ (3). An analysis of his discussion reveals that such ‘uncertainty’ in large-scale project can only be removed ‘during design and planning by attempting to specify what is to be done, how, when, by whom, at what cost’ (4). According to Chapman, ‘the one-off, change-inducing nature of projects, the need to organize a variety of resources under significant constraints, and the central role of objectives in project definition’ require ‘formal project management’ (1996). Project management, with project finance management ingrained in it, helps to successfully plan, design, and create a large-scale project with relatively less trouble and more ease. High-scale projects such as oil refineries; steel mills, chemical processing plants, and coal-fired or nuclear power plants involve a ‘high degree of technological complexity’ and need to be dealt with much care. Research shows that ‘although the initiation of such projects is also affected by the state of the economy, long range demand forecasting is the most important factor since such projects are capital intensive and require considerable amount of planning and construction time’ (Hendrickson, 2003). Hence, project management helps in managing large-scale projects and avoiding losses as it is intricately woven with the ‘mission-oriented nature of a project’. Such management involves project organization which plans, organizes, designs, and creates projects successfully and which is ‘generally…terminated when the mission is accomplished’ (Hendrickson, 2003). According to the Project Management Institute, ‘Project management is the art of directing and coordinating human and material resources throughout the life of a project by using modern management techniques to achieve predetermined objectives of scope, cost, time, quality and participation satisfaction’ (Hendrickson, 2003). Through its techniques, project management accomplishes and greatly affects the time, cost, quality, scope, and risk of a project. Studies show that conflicts do exist with regard to the aforementioned factors in any project, which have to dissolve at the onset of the project by careful management such as ‘making necessary tradeoffs or creating new alternatives’ (Hendrickson, 2003). 1.3.2 Organization of project: A large-scale project requires proper organization, from inception to completion. The entire project is divided into different stages with different functions, which are overseen and performed by specialized and multi-disciplinary project team members. Studies reveal that there have been new approaches in the project management practice. Such techniques include ‘management process approach’, which ‘emphasizes the systematic study of management by identifying management functions in an organization and then examining each in detail’; ‘management science and decision support approach’, which ‘contributes to the development of a body of quantitative methods designed to aid managers in making complex decisions related to operations and production’; ‘behavioral science approach for human resource development’, which ‘entails getting things done through the actions of people’; and ‘sustainable competitive advantage’, which involves ‘primarily from good management strategy’(Hendrickson, 2003). In a project management process, a project can be decomposed into different stages too, and processed either in sequence, where each stage can be carried out in sequence; or in parallel sequence, where all stages are independent and can be carried out at the same time; or in staggered sequence, where the stages are overlapping and take place according to situation and demand. Organization of projects, especially large-scale ones such as a ‘mega’ or ‘macro’ project usually faces problems of resource supply, severe ‘climatic conditions’, lack of enough specialized workers, and lack of ‘construction managers’ to supervise large projects, among other factors. Therefore, it is extremely necessary to organize and find out proper team and resources from the conception of any large-scale project. 1.3.3 Choice of team and project manager The choice of team and project manager remains among the most crucial decisions which have to be taken in the organization of a project, especially large-scale projects. Usually, selection of project team and project manager depends greatly on the nature and scope of a project. During the course of a project, from conception to completion, a range of specialized, multi-disciplinary professionals work in it. Some professionals which have a key role in a project management team include financial planning consultants, who ‘evaluate the economic and financial feasibility’ of the project; architectural firms; design firms; construction managers; operation and maintenance managers; lawyers and law firms, who help in sorting and looking after the legal complications; and above all the project managers. The role of project manager in a project can hardly be undermined. According to Hendrickson, ‘the project manager, in the broadest sense of the term, is the most important person for the success or failure of a project’ (2003). They help in making decisions which should be ‘based on competent economic evaluation with due consideration for adequate financing, the prevalent social and regulatory environment, and technological considerations’ and thus, help in avoiding many problems which can arise due to ineffective management, from the conception of a project (Hendrickson, 2003). Integration management, scope management, time management, cost management, quality management, human resource management, communications management, risk management, and procurement management are some areas on which a project manager focuses. The project manager who plans, organizes, and controls the project, should always be given the power to exert ‘interpersonal influence in order to lead the project team’ (Hendrickson, 20030. This helps in resolving conflicts, if any arise at any point, and enables the project manager to complete the project. It is extremely important to realize that many problems during the course of a project stem from differences, lack of motivation, and lack of coordination among project participants. Hence, with their multi-disciplinary knowledge and specialization, such project teams can plan, design, coordinate actions, and help to successfully implement project management techniques and make the project a success. At the same time, they can also disrupt the normal functioning within any project and bring great damages to the project. Research shows that such problems among project team participants, involved in ‘the design/construct process’ can disrupt the normal process of project management. As stated by Hendrickson, ‘when problems occur, discussions often center on responsibilities rather than project needs at a time when the focus should be on solving the problems. Cooperation and communication between the parties are discouraged for fear of the effects of impending litigation… the net result has been an increase in the costs of constructed facilities’ (2003). Therefore, research shows that great care has to be taken while choosing and managing a project team in any project. 1.3.4 Cost estimation and project finance management Cost estimation or project finance management includes a judicious estimation and management of initial capital or costs and subsequently, maintenance and operation costs. It mainly involves controlling the budget of a project. Such an estimation and management establishes ‘the base line of the project cost at different stages of development of the project… it represents a prediction provided by the cost engineer or estimator on the basis of available data’ (Hendrickson, 2003). According to Hendrickson, cost estimation or project finance management can be carried out by following one or a combination of techniques such as the following: ‘production function’, which establishes ‘the relationship between the output of a process and the necessary resources’; ‘empirical cost inference’, which ‘requires statistical techniques which relate the cost of constructing or operating a facility to a few important characteristics or attributes of the system’; ‘unit costs for bill of quantities’, which is the sum of ‘the products of the quantities multiplied by the corresponding unit costs’; and ‘allocation of joint costs’, in which ‘each expenditure item can be assigned to particular characteristics of the operation’ (2003). Such cost estimation is of utmost importance to all projects, especially big projects and should be employed in all large-scale projects where the financial stakes and risks are very high. In all large-scale projects, project finance management is a crucial part of project management. Project finance management, in addition to cost estimation, includes procurement of loan for the project and then, its subsequent financial analysis which checks the ‘adequacy of the investment cost and financing plan’ and ‘financial viability of the project’, besides others. It is utmost necessary to consult financial consultants too, who can help to ‘evaluate the economic and financial feasibility of the constructed facility, particularly with respect to various provisions of federal, state and local tax laws which may affect the investment decision’ (Hendrickson, 2003). There are different tools of project finance management which should be used in plenty too. Such tools include ‘Gantt Charts’ which are held to be extremely functional and helpful. Gantt Charts are usually made by using MSExcel or other spreadsheets. Tools like this enable planning, administering, and reporting the complete finances of a large-scale project. Research shows that creating a cost-line for ‘main expenditure activity’ and breaking it down to ‘individual elements’ (Chapman, Alan, 2005). The main root of problems of disruption or dissatisfaction among project members can occur when there are accusations problems in managing the financial aspect of a project. Hence, it is extremely important to be on guard and use such project finance management tools carefully and minutely. Further, studies show that usually ‘during periods of economic expansion, major capital expenditures are made by industries and bid up the cost of construction. In order to control costs, some owners attempt to use fixed price contracts so that the risks of unforeseen contingencies related to an overheated economy are passed on to contractors. However, contractors will raise their prices to compensate for the additional risks’ (Hendrickson, 2003). Therefore, risks which are caused by unforeseen situations have to be taken care of by proper planning and using control systems at the conception of a project. 1.3.5 Planning and control systems to be used Research reveals that planning and control systems are a must for all projects in order to take care of unforeseen circumstances and to conduct the project operation smoothly. Large-scale projects have high risk factors such as ‘socio-economic factors, organizational relationships, and technological problems’, besides others (Hendrickson, 2003). Hence, it is highly necessary to combat problem situations that might arise in future at any stage of a project and lead to grave damages. To meet unforeseen situations, specific control systems are used. ‘Project contingency planning’ is the term used for ‘planning and anticipating the unforeseen or the possibility that things may not go as expected’ (Chapman, Alan, 2005). Such planning, according to Chapman, is vital in any task when results and outcomes cannot be absolutely guaranteed’ (2005). Thus, contingency planning or planning for the future which helps in keeping project on track and in making a come-back if initial planning goes wrong at any stage. It makes sure that ‘leeway for time, activity and resource exists to rectify or replace first-choice plans’. One of its tools such as ‘contingency budget’ is the best technique of project finance management for any project, especially large-scale ones (Chapman, Alan, 2005). 1.4 Discussion and Conclusion: An analysis of the report shows that for projects, especially large-scale projects, project management is a must. Although project management has its disadvantages which can affect a project drastically, its techniques and approaches when used and implemented from the inception of a project can lead to success. Therefore, with proper planning, coordination, and finance management, project management can help in solving many of the management problems and complete a project with maximum use of resources such as time, money, people, materials, energy, and space, among others. 1. 5 Appendices 1.5.1 Basic Ingredients in Project Management. An analysis of the diagram provided clearly indicates the basic components or parts of project management process which are so deeply ingrained in it and necessary for the successful planning, designing, and completion of any project. 1.5.2 The diagram provided below gives a clear idea of the different stages of a project. However, research shows that there are multitudes of organizing principles, with overlapping stages and functions. 1.6 References Wikipedia, Project Management, Available at http://en.wikipedia.org/wiki/Project_management Hendrickson, Chris, 2003, Project Management for Construction: fundamental concepts for owners, engineers, architects and builders, Available at http://www.ce.cmu.edu/pmbook/index.html Lewis, P. James, 2002, Fundamentals of Project Management: Developing Core Competencies to Help Outperform the Competition, American Management Association. Chapman, C.B., 1996, Project Risk Management: Processes, Techniques, and Insights, John Wiley & Sons. Asian Development Bank, 2002, Project Financial Management Systems, Financial Analysis and Financial Performance Indicators, Available at http://www.adb.org/documents/manuals/operations/om35.asp Asian Development Bank, 1997, Economic Analysis of Projects, Available at http://www.adb.org/documents/manuals/operations/om36.asp Asian Development Bank, 2002, Project Performance Management System, Available at http://www.adb.org/documents/manuals/operations/om22.asp Chapman, Alan, 2005, Project Management, Business Balls, Available at http://www.businessballs.com/project.htm Read More