Chapter - 5

Project Management
and
Resource Allocation
 What is a Project?
“Unique process consisting of a set of coordinated,
controlled and planned set of activities with start and
finish dates, undertaken conforming to achieve an objective
to specific requirements, including constraints of time, cost,
quality and resources”

What are project Management, Stakeholder, Project

Planning, Project scheduling, Project Monitoring and
Control mean?
 Key Points in Project Set-up
 Create Project Management Plan (PMP)
 Be clear of scope and objectives
 Establish clear statement of what is to be done (WBS)
 Establish Risks to be Managed
 Establish Costs and Durations
 Establish Resources Required
• Work Break down Structure (WBS): It is a methodology for
converting a large scale project into detailed schedules for its
thousands of activities for planning, scheduling and control purpose.

• Each WBS component is successively broken down into smaller

details at lower levels.
Basic approach for preparing a WBS is:
• Level 1: This level contains only the final project purpose.
• Level 2: Contains the major subcomponents of the project.
• Level 3: Definable components of the level 2 subdivisions
 Project Breakdown Structure
• Level 1 Parent Project

•
• Level 2 Phase1 Phase2 Phase 3

•
• Level 3 Part 1 Part 2 Part1 Part 2 Part 1 Part 1,2,….n

•
Level 4 Subassembly 1 Subassembly 2

Level 5 Unit 1 Unit 2

 Project Organizational Structure
• Like any organization, projects can be managed and
controlled by using different type of organization structure.

• The selection of an organizational structure shows the

management line and responsibilities of the project
personnel.

• The structure may be defined in terms of functional

specializations, departmental proximity, standard
management boundaries operational relationships or
product requirements.
 Types: 1. Formal and Informal structures:

• The formal organizational structure represents the

officially sanctioned structure of a functional area.
• The informal organizations, develop when people
organize themselves in an unofficial way to
accomplish an objective that is in line with the
overall project goals.
 2. Functional Organization:
• This is the most common type of formal
organization, whereby people are organized into
groups dedicated to a particular functions.
• Depending on the size and type of auxiliary
activities involved in the project, several minor,
but supporting, functional units can be developed
for a project.
• Projects that are organized along functional lines
are normally resident in a specific department or
area of specialization.
• The project home office or headquarters is
located in the specific functional department.
3. Product/Project Organization:
• The end product or goal of the project
as the determining factor.
• The project is set up as a unique entity
within the parent organization.
• It has its own dedicated technical staff
and administration.
• It is linked to the rest of the system
through process reports, organizational
policies, procedures and funding.
 4. Matrix organization:
• A matrix organization is a popular choice of
management professionals.
• This organization exists where there is
multiple managerial accountability and
responsibility for a job function.
• In pure product organization, technology
utilization and resource sharing are limited
because there is no single group
responsible for overall project planning.
 General Manager

Director of projects Finance Manufacturing Engineering

Project Responsibility
Functional Responsibility
Project A

Project B

Project C

Project D
Matrix Organization Structure
 Network Diagram
• In network modeling of projects, the network
diagram is of primary importance.
Advantages of network/arrow diagrams:
• It clearly shows the inter-relationship between
events.
• The project is seen as integrated whole, thus
making it easier for control.
• It can be used even for highly complicated
projects consisting of a large number of
activities.
• It directly indicates the time required in between
two activities.
 1) EVENT:
a)Merge event: When more than one activity come and
join an event, such an event is known as merge event.
b)Burst event: When more than one activity leave an
event, such an event is known as a burst event.
c)Merge and burst event: An activity may be a merge
and burst event at the same time as with respect to
some activities

C
B
A
 2) ACTIVITY:
• Any individual operation, which utilizes
resources and has a beginning and an end, is
called an activity.
• An arrow represents an activity
“A” whose estimated duration is “k”
unit of time.
A
k
 Classification of Activity:
• A) Predecessor activity: Activities that must be
completed immediately prior to the start of another
activity are called Predecessor activities.
• B) Successor activity: Activities that cannot be started
until one or more of other activities are completed,
but immediately succeed them are called successor
activities.
• C) Concurrent activities: Activities that cannot be
accomplished concurrently are known as concurrent
activities. It may be noted that an activity can be a
predecessor or successor to an event or it may be
concurrent with one or more of the other activities.
 D) Dummy activity: An activity which does not
consume any kind of resource but merely depicts the
technological dependence is called a dummy activity.
• It may be noted that the dummy activity is inserted
in the network to clarify the activity pattern in the
following two ways:
• 1) To make the activities with common starting and
finishing points distinguishable,
• 2) Identify and maintain the proper precedence
relationship between activities that are not
connected with arrows.
• Ex: Consider a situation where A and B are
concurrent activities, C is dependent on A, and D is
dependent on A and B both.
 Such a situation can be handled by using a
dummy activity as shown in fig.(a) below.
• Ex.2 Consider a case where B and C have the
same job reference and they can be started
independently on completion of A.
• But, D could be started only after the completion
of B and C. This relationship is shown by the
dummy line as shown in fig. (b).

5 A 6
C A B D
1 2 4 5
Dummy Dummy
B activity C activity
D 3
(a) 7 (b)
 Rules for drawing network diagram:
1. Each activity is represented by one and only one
arrow in the network:
2. No two activities can be identified by the same
events:
• Ex: Activities a and b in fig. (a) have the same end
events.
Modified representations after introducing a
dummy activity d is shown in fig. (b).
As a result of using the dummy, activities a and b
can now be identified by unique end events.
• It must be noted that a dummy activity does
naot consume any time or resource.
2
a
a d (Dummy) d
b
1 3 b
b

a a 3
1 3 1

d b b d
2
2
3) Check the precedence relationship:
1. What activity must be completed immediately
before this activity can start?
2. What activity must follow this activity?
3. What activities must occur simultaneously with
this activity?
 Important suggestions for
drawing good networks:
• Try to avoid arrows which cross each other.
• Use straight arrows.
• Do not attempt to represent duration of activity by
arrow length.
• Use arrows from left to right ( or right to left). Avoid
mixing two directions, vertical and standing arrows
may be used if necessary.
• Use dummies freely in rough draft but final network
should not have any redundant dummies.
• The network has only one entry point (start event)
and one point of emergence (ending event).
 Common errors in drawing networks:
• 1) Dangling: To disconnect an activity before
the completion of all activities in a network
diagram is known as dangling. As shown in fig.
below, activities (b-c) and (d-e) are not the last
activities in the network. So the diagram is
wrong and indicates the error of dangling.
e

Dangling
a b d f h

c g
 2) Looping or Cycling:
– Drawing an endless loop in a network is known as an
error of looping as shown in the following fig.
14

13

15 22

Looping
20 Looping 23
12

21
 3) Redundancy:

• Unnecessarily inserting the dummy activity in a

network diagram is known as the error of
redundancy as shown in the following fig.

1
1

1 12
0

Redundancy
 Scheduling Systems
 Critical Path Method (CPM)

 Program Evaluation and Review Technique (PERT)

 Gantt Chart
CRITICAL PATH METHOD (CPM)
 Deterministic model

 Single time estimate for each activity

 No uncertainty is considered

 No determination of success/failure probability

• CPM is a network diagramming technique used to predict
total project duration.

• A critical path for a project is the series of activities that

determines the earliest time by which the project can be
completed.

• The critical path is the longest path through the network

diagram and has the least amount of slack or float.

• Slack or float is the amount of time an activity can be

delayed without delaying a succeeding activity or the project
finish date.
 Procedure
• Determine the activities of the project

• Identify the predecessors and successor activities

• Allocate resource and time for each activity

• Draw the network diagram

• Find the critical path

• Determine the early start and finish times

• Determine the latest start and finish times

• Find the slack time for each non-critical activities

 Network Representation Schemes

 AON Network [Activity-on-Node]

 AOA Network [ Activity-on- Arrow]

AOA Network [ Activity-on- Arrow]

 Historically most popular
 Nodes represent start and finish events for each activity
 Arrows can only come from/go to single node
 Only one arrow between two given nodes
 Example [AOA Network]
Activity Predecessor Duration[days]
a -- 5
b -- 4
c a 3
d a 4
e a 6
f b, c 4
g d 5
h d, e 6
i f 6
j g, h 4
Example [Completed AOA Network]
 AON Network [Activity-on-Node]
 The node (the block in the figure) is the activity; inside
the node is information about the activity, such as its
duration, start time, and finish time .
Previous Example [Completed AON Network]

Activity Predecessor Duration[days]

a -- 5
b -- 4
c a 3
d a 4
e a 6
f b, c 4
g d 5
h d, e 6
i f 6
j g, h 4
 Calculation of Earliest and Latest Times
 Forward pass – determines Early Start & Finish

 Backward pass – determines Latest Start & Finish

Early start of a given node is maximum of early finishes of

preceding nodes

Late finish of a given activity is minimum of late start of

successor nodes

 Initialization : E1= 0 [project start]

 Example 1
• Forward Pass [ ES and EF]
 Example 2

• Backward Pass [LS and LF]

Earliest and Latest Schedule
 Critical path, Activity Float

 Float of an activity indicates the degree of freedom in

timing for performing task

 Activity Float=LS-ES=LF-EF

 Activities of Critical path have Zero Float

[Start-a-e-h-j-Finish]
Project evaluation and review technique (PERT)

Probabilistic model

Three time estimates

Consideration of success/failure probability

• PERT is based on the assumption that an activity’s duration
follows a probability distribution instead of being a single
value
• Three time estimates are required to compute the parameters
of an activity’s duration distribution:
– optimistic time (a ) - the time the activity would take if
things did go well
– most likely time (m ) - the consensus best estimate of the
activity’s duration
– pessimistic time (b ) - the time the activity would take if
things did not go well
 PERT FORMULA
• Based on the distribution of the three time
estimates[Beta-distribution], the mean or
expected time, te, and the variance, V, of each
activity are computed as:
 Steps in PERT Analysis
• Draw the network.
• Find the expected time of each activity
• Analyze the paths through the network and find the critical
path.
• The length of the critical path is the mean of the project
duration probability distribution which is assumed to be
normal
• The standard deviation of the project duration probability
distribution is computed by adding the variances of the
critical activities (all of the activities that make up the
critical path) and taking the square root of that sum
• Probability computations can now be made using the
normal distribution table.
38
 Example 1
A network consists of the following list. Times are given in weeks.

a) Draw the AON network diagram.

b) Calculate the expected duration and variance of each activity.
c) Calculate the expected duration and variance of the critical path.
d) Calculate the probability that the project will be completed in less
than 28 weeks.
e) What is the probability that the project duration will
exceed 28 weeks? 39
 Solution
a)

Where, Std. dev = 𝑽 = 𝟒. 𝟏𝟑𝟗

There is a 99.7% probability that E. What is the probability

this project will be completed in that the project duration
le s s than 28 weeks. will exceed 28 weeks?????
 EXERCISE
Consider the following tasks from A to I and
a) find the critical path, longest path on the network.
b) What is the probability of finishing this project in less than 53
weeks?
c) What is the probability that the project duration will exceed 56
weeks?

Immediate
Task Predecesors Optimistic Most Likely Pessimistic
A None 3 6 15
B None 2 4 14
C A 6 12 30
D A 2 5 8
E C 5 11 17
F D 3 6 15
G B 3 9 27
H E,F 1 4 7
I G,H 4 19 28
41
 Project Crashing
 Projects will sometimes have deadlines that are
impossible to meet using normal procedures
 By using exceptional methods it may be possible to
finish the project in less time than normally required

 However, this usually increases the cost of the project

 Reducing a project’s completion time is called crashing
Crashing a project starts with using the normal time to
create the critical path
Notations:
 NT = normal time to complete an activity
 NC = normal cost to complete an activity using
normal procedures
 CT = crash time to complete an activity, the shortest
possible activity time and will require additional
resources
 CC=crash cost (the cost to complete the activity if it
is performed in it’s shortest possible time)
 Four Steps to Project Crashing
1. Find the normal critical path and identify the critical activities
2. Compute the crash cost per week (or other time period) for all
activities in the network using the formula

3. Select the activity on the critical path with the smallest crash cost
per period and crash this activity to the maximum extent possible or
to the point at which your desired deadline has been reached
4. Check that the critical path you were crashing is still critical. If the
critical path is still the longest path through the network, return to
step 3. If not, find the new critical path and return to step 3 .
• To shorten a project, crash only activities that are critical.

• Crash from least expensive to most expensive.

• Each activity can be crashed until

 it reaches it’s maximum time reduction

 it causes another path to also become critical

 it is more expensive to crash than not to crash

• Continue until no more activities should be crashed.

 Project Crashing:
• The crash time estimate is the shortest time that
could be achieved if all effort were made to
reduce the activity time i.e., by the use of more
workers, better equipment, overtime etc., would
generate higher direct cost for individual
activities.
• SEQUENCE OF STEPS REQUIRED TO CRASH AN
ACTIVITY:
• Step1. Identify the activities that need to be
crashed. This can happen at any time from the
initial project planning phase to project
completion.
Step2. Identify the critical path. To crash non-critical
activities is a waste of financial resource because it
will simply increase the float on that activity without
affecting the end date of the project.( See fig.)
Cost
Crash All
C
D Crash No- critical
Cash B
Normal Time
Critical only
A Normal Crash

Time
The time cost Trade-off
Step3: Prioritize the activities to be crashed. When
there are many activities which can be crashed, it is
necessary to know which activity will be crashed first?
This can be done by selecting the activity
a. with the least cost per day to crash.
b. that is easiest to crash.
c. which can be crashed soonest to bring the
project back on course.
Step4. Crash activities one day at a time, then re-
analyze the network to see if any other activities have
gone critical.
Note: Continue this iterative process until there are
no activities with negative float.
Example : - The owner wants you to finish the project in 120 days.
Find the minimum possible cost for the project if you want to finish it
on 120 days.
Activity Predecessor Duration
A -------- 120
B -------- 20
Draw the network by AOA
C B 40
D C 30
E D,F 50
F B 60
 Solution
To crash activities, First draw the activity on arrow diagram
and find the critical path

Using the normal duration (NT), crash duration (CT), normal

cost (NC), and crash cost (CC), the crash cost slope for each
activity can be determined as follows;
Cont…

SA= CC-NC
ND-CD

SB = $200/day
SC = $600/day
SD = $60/day
SE = $120/day
SF = $300/day
 Cont…
• The normal cost for the project is the sum of a normal cost
for each activity.
• The normal cost for the project is $48300 and the normal
duration is 140 days.
• The activity which should be crashed is the one on the
critical path which will add the least amount to the overall
project cost.
• This will be the activity with the least-cost slope.
• The duration can be reduced as long as the critical path is
not changed or a new critical path is created.
• In addition, the activity duration cannot be less than the
crash duration.
 Cont…
SD = $60/day (least-cost slope) Maximum of 10 days can
be cut from this schedule by reducing the duration of
activity D to the crash duration of 20 days.

Overall duration is 130 days and there are multiple critical paths (B-F-
E and B-C-D-E). Total project cost at this duration is the normal cost
of $48300 plus the cost of crashing the activity D by 10 days (60 * 10
= $600) for a total of $48900.
 Quiz
Example : - The owner wants you to finish the project in 120 days.
Find the minimum possible cost for the project if you want to finish it
on 120 days.

Activity Predecessor Duration

A -------- 120
B -------- 20 Draw the network by AOA
C B 40
D C 30
E D,F 50
F B 60
Show all necessary steps
1. Crush the project for 120 day
2. Determine an activity crush cost
3. Determine total crush cost
4. Show the critical path/s
 Cont…
The next activity to be crashed would be the activity E,
since it has the least-cost slope ($120 per day) of any of the
activities on the critical path. Activity E can be crashed by a
total of 10 days. Crashing the activity E by 10 days will cost
an additional $120 per day or $1200.

The project duration is now 120 days and the total

project cost is $50100. There are now three critical
paths (A, B-C-D-E, and B-F-E).
 Time Cost Trade- Off Theory:
• Terminologies used:
• Normal Time: Normal office hour. Ex. 8hrs a day,
6 days a week.
• Normal Cost: The cost of activity working on
normal time.
• Direct Cost: Costs attributed directly to the
project labor and materials. These costs usually
group when the activity is crashed due to
overtime, shift allowance etc.
• Crash Time: The duration the activity can be
reduce to, by crashing the activity.
 Crash Cost: The new cost of activity after
crashing.
• Indirect Cost: This is overhead cost which cannot
be directly attributed to the project, ex., office
rent, management salaries. These costs are
usually linear with time, therefore, if the time
reduces, the indirect costs also reduces.
• Discussion about the way how direct and indirect
costs react when a critical activity is crashed:
• 1. Crashing direct cost: The duration has been
reduced but the costs have increased. These
additional costs are caused by overtime, shift
work and a reduction in productivity. ( Below Fig.)
 Cost
Crashing Direct costs
Crash

Normal

Time
Crash Normal

• 2. Crashing Indirect Costs: the duration has been

reduced but the time and the costs have also
reduced. The benefit has come from reduced
office rental, equipment hire, etc.
 Unfortunately, project costs are usually split 80% direct
and 20% indirect cost, so the advantage of crashing
indirect costs is usually overwhelmed by the far greater
direct costs. ( Below Fig.)
Cost Crashing Indirect Costs
Normal

Crash

Time
Crash Normal
• When the direct costs and indirect costs are
combined on the same graph, an optimum
position is derived. (Below fig.)
 Cost Combined Direct and Indirect Costs
O
p
t
i
m
u Indirect
m

Direct
Time

• Time cost trade-off: This fig. outline graphically four different

time costs positions.
• Starting at point A, that represents normal time and normal
cost, consider first the effect of crashing all the non-critical
activities.
• The poject moves to point D with no change of the project’s
duration , but the costs have increased dramatically.
 This is not a recommended course of action as it only increases the
float of non-critical activities.

Cost

Crash All
C
Crash No- Critical
D
Crash
B
Critical Only
A Normal Time
Normal Cost
Time
Time Cost Trade -off
• The correct action would be to crash all the critical activities.
The project moves to point B. Crashing the critical activities
has reduced the duration of the project with a small increase
in costs.
Crashing the critical activities has reduced the
duration of the project with a small increase in
costs.
• The fourth point on the graph, C, indicates the
position when all the activities are crashed. Again
this is not recommended because there has been
no time improvement on point B, yet the costs
have increased tremendously.
• The total cost of the project can be calculated by:
• Ctotal = CN + m dcp where CN = total sum of
total total

normal costs, m= Indirect cost slope, dcp= number

of days in critical path.
 Gantt Chart
• A GANTT chart is a type of bar chart that illustrates a
project schedule, which was introduced by Henry Gantt
around 1910 – 1915
• After the PERT/CPM analysis is completed, the following
phase is to construct the GANTT chart and then to re-
allocate resources and re-schedule if necessary.
• GANTT charts have become a common technique for
representing the phases and activities of a project work
breakdown structure.
 Characteristics:
– The bar in each row identifies the corresponding task
– The horizontal position of the bar identifies start and end times of the
task
– Bar length represents the duration of the task
– Good for allocating resources and re-scheduling
– Precedence relationships can be represented using arrows
– Critical activities are usually highlighted
– Slack times are represented using bars with doted lines
– The bar of each activity begins at the activity earliest start time (ES)
– The bar of each activity ends at the activity latest finish time (LF).
– A vertical cursor (such as a transparent ruler) placed at the review
point
– At a review point the boxes/lines are shaded to represent the actual
time spent
 Constructing Gantt Chart
 The steps to construct a GANTT chart from the
information obtained by PERT/CPM are:
1. Schedule the critical tasks in the correct position.
2. Place the time windows in which the non-critical
tasks can be scheduled.
3. Schedule the non-critical tasks according to their
earliest starting times.
4. Indicate precedence relationships between tasks.
Step 1. Schedule critical tasks
Step 2. Place time windows for non-critical tasks:
 Step 3. Schedule non-critical tasks
Step 4. Indicate precedence relationships:
 Resource Allocation
• Depending upon the type of constraints, the resource
allocation procedure can be categorized into two
main activities: resource smoothing and resource
leveling.
• Resource smoothing: The periods of maximum
demand for resources are located and activities
according to their float values are shifted for
balancing the availability and requirement of
resources.
• So the intelligent utilization of floats can smoothen
the demand of resources to the maximum possible
extent.
• Such type of resources allocation is called” resources
Smoothing or Load smoothing”.
 Resource Smoothing steps:
• 1. Determine the maximum requirement. One
way is to draw the time scale version of the
network and assign the resource requirements to
activities.
• 2. Then, below the time scaled network, the
cumulative resource requirements for each time
unit are plotted.
• 3. The resource histogram is plotted on the basis
of the early start times or the late start times of
the activities. These resource histograms
establish the frame work under which the
smoothing or leveling must occur.
 Resource Leveling:
• There are various activities in a project demanding
varying levels of resources.
• The demand on certain specified resources should
not go beyond the prescribed level.
• This operation of resource allocation is called
‘Resource leveling’ or ‘ Load Leveling’.
• Although the overall resources of the organization
are limited, but these should not go below the
amount required to perform an activity among all
the activities in the process,
• otherwise that particular activity cannot be
computed.
 Project Risks
• However small the percentage may be, there is
always uncertainty in any venture.
• Identification and management of risks is
fundamental to any project.
• Before undertaking a project, all participants
want to identify the risks involved, as well as the
steps that may be taken to manage them.
• If the risk of the project is in line with the average
risk of the company, then the expected rate of
return would be the weighted average cost of
capital of the firm.
 •If the risk is higher , the expected rate of return
would be higher.
• The expected rate of return is determined by
comparing it against similar project of other
companies.
• Its difficult to generalize about the risk
characteristics of projects, each host country and
in deed each specific project has its own risk
profile.
• Risks are broadly divided in to two categories:
1.General ( Country ) and 2. Specific Risks.
 1. General or Country Risks:
• General risks affect the overall sectors of the country.
• Factors such as country’s economic growth, its political
environment, the tax code, the legal system and the
prevailing currency exchange rate are classified under this
category.
• General risks - divided in to three major divisions.
• a) Political Risks: Related to the internal and external
political situation and the stability of the host country.
• These risks include: government’s attitude towards
allowing private sector profits from projects,
• changes in the host country’s fiscal regime, including
taxation, the risk of expropriation and nationalization of
the projects by the host country, cancellation of the
concession and similar factors.
 b) Country Commercial Risks:
• These are related to the convertibility of revenue
from the projects into foreign currencies, foreign
exchange, interest fluctuation and inflation.
• C) Country Legal Risks: The risks to sponsors and
lenders is that legislation that is relevant to the
project ( for instance, environmental legislation
or property legislation) may change after a
project has been implemented.
 2. Specific Project risks:
• Sponsors and lenders face specific project risks that
may be generally within the control of the sponsors.
• Specific project risks are divided in to 3 categories in
accordance with phases of a project cycle.
• a) Development risks: These are the risks associated
with the bidding competition that occurs in the initial
stage of the process.
• The development risks also include losses caused by
delays in planning and approval, which can be
particularly acute in the case of transnational
projects,
• where project sponsors have to deal with the
authorities of two or more governments.
 b) Construction/Completion Risks:
• The primary risks here are: 1. The actual cost of
construction may be higher than projected (cost
overruns).
• Completion takes longer than projected (
completion delays).
• The construction of the project may not be
completed at all.
 c). Operating Risks:
• These risks result from insufficiency in
performance, revenue income, material supply,
etc. and from higher than- expected operating
costs. These are divided in to 6 main categories.
• 1. Associated- infrastructure risks: These are
associated with facilities outside the project,
such as approach roads and transmission lines,
for which construction responsibility lies with
third parties rather than the project sponsors
themselves.
• 2. Technical Risks: These include design defects in
the project equipment.
 3. Demand Risks: Most projects that rely on market-
based revenues face demand risks related to volume
and/or prices, thereby lowering the rate of return of
the project.
• 4. Supply Risks: Because they are also market
risks, supply risks have two components, volume
and prices.
• 5. Management Risks: The quality of management
in every project is always a critical success factor.
• 6. Force Major Risks: These risks denote losses
from certain exceptional types of events beyond
the control of the parties to the project that
impeded the performance of their obligations.
 Risk Identification Check-List:
• 1. General or Country Risks: a) Political Risks-
Political support, Taxation,
Expropriation/nationalization, Forced buy-out,
cancellation of concession, Import/ Export
restrictions, Failure to obtain or renew approvals
risks.
• b. Country Commercial Risks: Currency
inconvertibility, foreign exchange, Devaluation,
Inflation, Interest rate risks.
• C. Country Legal risks: Changes in laws and
regulations, Law enforcement risk and Delays in
calculating compensation.
 2. Specific project Risks:
• a) Development Risks: Bidding, Planning delay,
Approval, Transnational risks.
• b) Construction/ Completion Risks: Delay, cost,
re-performance, Completion, Force major, Loss
or damage to work, Liability risks.
• c) Operating risks: Associated infrastructure,
Technical, Demand, Cost escalation,
Management, Force major, Loss or damage to
project facilities and Liability risks.
 RISK MANAGEMENT:
• Three considerations have to be made when
designing the risk allocation and management
structure.
• 1) It’s the cost of the project in its entirety that
should decide any particular risk allocation.
• A particular risk should be borne by the party most
suited to deal with it, in terms of control or influence
and costs.
• In some cases, the party in the best position to
financially bear a particular risk may prefer some
method of risk allocation that, in the interest of the
project, does not reduce the other party’s incentive
to perform efficiently.
2. Since the solutions to the risk management of
a project do not in principle rely on
unconditional guarantees from any one party
alone, the financial structure of the project must
consider the following requirements : all
substantial project risks have to be managed by
a combination of financial resources and firm
contractual commitments.
• 3. The risk structure has to be sufficiently sound
to withstand the ups and downs of a project
implementation.
How to manage some of the risks encountered in
the financial aspects: By using capital market
instruments like swaps, options and futures.