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Thursday, November 3, 2011

Chapter 8: What the Project Manager Needs to Know

Aim: To understand what you as a Project Manager need to know about the Project Initiation phase.

The project manager is responsible for all activity that takes place during the project lifecycle. In addition, the project manager is responsible for properly managing all of the resources associated with the project. These resources can include people, equipment, money, supplies, and even influence. An important aspect of project manager responsibilities is the ability to measure the effectiveness and impact of project decisions and compare various options. Project managers need to be able to assess the potential impact of various options and select the option that makes the most sense for the project and the organization. Let’s look at a general management approach and a few specific techniques to measure and assess decisions.

Using Management by Objectives

Many organizations use a common management technique called management by objectives (MBO). MBO is not covered directly in the PMBOK, but you need to understand its general concept for the PMP exam. In very simple terms, MBO helps ensure that objectives within various areas or levels within an organization agree, or harmonize, with objectives from other areas and levels. In short, MBO gets everyone thinking with an enterprise-wide perspective.

The initiating process group is really a set of activities that directly support MBO techniques. The main purpose of initiating a project is to ensure the project is understood, provides value to the organization, and is fully authorized by the organization.
MBO is closely related to solid project management practices for several reasons:
• MBO implements goal setting and recurring reviews and suggests activities similar to the project control process.
• MBO is concerned with ensuring that goals are consistent across an organization, and one task of the project charter is to state how the project supports an organization’s overall goals.
• Both MBO and sound project management work only if management supports them at a high level.

Implementing MBO is relatively simple. Here are the basic MBO process steps:
1. Establish clear and achievable objectives
2. Periodically check whether objectives are being met
3. Take corrective actions if any discrepancies are discovered

Accounting Concepts Used with Initiating Processes

It is important for project managers to have a good general understanding of the basic accounting principles that apply to their projects. Nearly all phases of the project life cycle require some type of accounting processes and valuation. Even initiating requires projects to be evaluated for the benefit to the organization.

We discussed the two general categories of project selection methods in the previous chapter. Both benefit measurement methods and constrained optimization methods require the application of some accounting methods.

For the PMP exam, you need to understand several cost accounting concepts that are frequently used when performing the project selection process. Of the two main project selection methods, the benefit measurement methods require more cost calculations. You are not expected to be an expert at cost methods for the PMP exam. However, you need to understand all these accounting concepts and know how to use them during the project selection activity.

The table below lists the main accounting concepts you need to know for the PMP exam and how they relate to project selection.
Project Selection Accounting Concepts
Accounting Concept Description Keys for Project Selection Notes
Present value The value today of future cash flow The higher the Planned Value, the better. Planned Value = FV/(1 + r)n
Net present value (NPV) The present value of cash inflow less the present value of cash outflow A negative NPV is unfavorable; the higher the NPV, the better. Accounts for different project durations
Internal rate of return (IRR) The interest rate that makes the net present value of all cash flow equal zero The higher the IRR, the better. The return that a company would earn if it invested in the project
Payback period The number of time periods required until inflows equal, or exceed, costs The lower the payback period, the better. -
Benefit cost ratio (BCR) A ratio describing the relationship between the cost and benefits of a proposed project A BCR less than 1 is unfavorable; the higher the BCR, the better. -
Opportunity cost The difference in benefit received between a chosen project and a project that was not chosen - -
Sunk costs Money that has already been spent and cannot be recovered This should not be a factor in project decisions. -
PMI also expects a project manager to understand other accounting concepts. The table below lists some of the most common accounting concepts you need to know for the PMP exam.
General Accounting Concepts
Accounting Concept Description Notes
Variable costs Costs that change based on an organization’s activity For example, fuel costs
Fixed costs Costs that remain constant, regardless of activity level For example, rent and lease payments
Direct costs Costs that can be directly associated with the production of specific goods or services For example, labor and material costs
Indirect costs Costs that cannot be directly associated with the production of specific goods or services For example, legal costs, administration, and insurance
Working capital Total assets less total liabilities -
Straight-line depreciation A depreciation method that evenly divides the difference between an asset’s cost and its expected salvage value by the number of years it is expected to be in service
Accumulated depreciation A depreciation method that allows greater deductions in the earlier years of the life of an asset Related to: Double declining balance (DDB)
Life cycle costing Includes costs from each phase of a project’s life cycle when total investment costs are calculated
Exam Watch:
These accounting principles represent one area of project management (and general management) a project manager must understand. There are several general management concepts on the PMP exam. Don’t worry much, because the basic concepts available above should be enough for the exam.

More details on the Project Selection Process can be found by Clicking Here

Prev: Chapter 7

Next: Chapter 9

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