Engineering Finance
Lessons



Engineering Projects

We concentrate in this course on the project. Although not the only type of work handled by engineers, creative activities often take place with the confines of a project. In this section we describe the characteristics of a project and the activities that take place during the project life-cycle.
Goals
Browser Page
  • For a given situation, identify each of the characteristics of a project that are listed below.
  • Distinguish between mass production, batch oriented production, and projects.
  • List the kinds of risks associated with a project.
  • List the time phases of a project and point out what happens in each.
Text

The first chapter of our text provides general descriptions of the broad scope of activities that might be identified as projects. In particular learn how to distinguish between a project and mass and batch oriented production, learn about the time phases of projects, and learn about the risks associated with projects.

.
Chapter 1
.
Examples

Projects arise in many contexts. Our text provides some examples.

Selecting a software package
Developing a new office plan or layout
Implementing a new decision support system
Introducing a new product to the market
Designing an airplane, a supercomputer, or a work center
Opening a new store
Constructing a bridge, dam, highway or building
Relocating an office or a factory
Performing major maintenance or repair
Starting a new manufacturing or service facility
Producing and directing a movie

The Project Management Institute (PMI) is a large professional organization devoted to developing methodologies for project management and providing educational services.

.
Project Management Institute
.
Characteristics

Some characteristics of projects and terms appropriate to the discussion are described in this section. Click on the icon to open a window about how the characteristics are emphasized in this course.

. browser
Characteristics for this Course
.


Organization

The project takes place in an organization. The organization is the society in which the problem arises or for which the solution is important.  The organization may be a corporation, a branch of government, a non-profit institution, a department within a firm, a group of employees, or perhaps even a household or individual. The organization is important because the project results will depend on the goals and point of view of the organization.

Problem

The project addresses some opportunity or requirement recognized within the organization. It may involve a new product, current operations or proposed expansions or contractions due to expected market shifts. It may become apparent through creative insight, marketing suggestions, consumer complaints or employee suggestions. It may be a conscious effort to improve efficiency or a response to an unexpected crisis.  It is impossible to circumscribe the breadth of circumstances that might be appropriate for this discussion, for indeed projects arise in every area of human activity.

Decision Maker

The project is to deliver a solution that is appropriate to alleviate, correct, improve, or otherwise address the problem.  An individual, committee, or organization is identified as interested and capable of proposing and implementing the necessary actions.  We call the latter individual or collection of persons the decision maker.

Team

An individual or group will usually be called upon to aid the decision maker by proposing one or more solutions. Although the project may be assigned to an individual we use the term team for this role.  Teams may have a number of members, each bringing unique skills and perspectives. The decision maker may be part of the team. Typically some team member, perhaps the engineer, has special skills in economic analysis, mathematics, data gathering, and computer implementation. 

Specifications

The organization or decision maker must provide the specifications of what the project must accomplish, performance that the solution must obtain, restrictions on the resources that may be used and measures with which the project will be judged. If the specifications are not clear or incomplete, the decision maker and team must work to clarify the specifications before much work is done.

Solution

The project is to deliver a solution to the problem that meets the specifications. Because of the variety of types of problems it is difficult to delimit the range of deliverables. Usually the project will deliver a single solution, but in some cases multiple solutions might be presented to the decision maker. The solution may be a decision not to proceed, but normally the project will deliver a proposal for action, the design of system, a system ready for deployment, a facility ready for use, a product ready for production. Although often projects end when the operation phase begins, some projects may continue through additional parts of the product life cycle.

Time Frame

The project will take place during a finite interval. The figure below shows the life cycle associated with a product or facility from conception through retirement. The titles at the bottom divide the life cycle into the acquisition and operation phases. A given project may comprise all or some of the corresponding activities. For an organization, engineering projects are often limited to the activities in the acquisition phase while production, maintenance, and disposal fall within the jurisdiction of the operating divisions.

Project LCC

Financial Implications

Projects often involve significant costs and revenues. Capital costs are investments made during the early phases and are usually completed when the operation phase begins. The life-cycle costs include costs and revenues throughout the entire life cycle. Decisions made during the acquisition phase must consider the entire life cycle since most life cycle costs are committed during the acquisition phase. The chart shows almost 75% of the costs committed by the end of this phase with only about 15% actually spent. Almost all revenues are received during the operation phase. The revenues for a project may actually be savings in operating costs relative to the costs of current operations. Although the project may finish with the end of the acquisition phase, the analysis, justification and evaluation of the project must consider the entire life cycle.

Alternatives

One of the responsibilities of the engineer will be to develop alternative solutions. Although a problem may be technically challenging, there is usually more than one way to solve it. Each alterative must meet the specifications of the project and alternative solutions will often differ with respect to economics. For some projects, an alternative may be to choose to not proceed.

Management

Large projects are complex, requiring the cooperation of many individuals and organizations. The term project management refers to the general management of those that are involved with the performance of the project, but it has been particularly applied to the timing of the activities that may be necessary to accomplish the project.

Implementation

A solution usually implies change for some individuals in the organization.  Because resistance to change is common, the implementation of a solution is perhaps the most difficult part of a project.  Some say it is the most important part.  Although not strictly the responsibility of the analyst, the solution process itself can be designed to smooth the way for implementation.  The persons who are likely to be affected by the changes brought about by a solution should take part, or at least be consulted, during the project.

Risk

Since many of the estimates for project economics and management relate to events that occur in the future, there is always risk that the estimates may be wrong. In most situations, the only certainty is that there will be errors. The term risk is used for when probabilities can be ascertained for unknown futures.

Projects encountered in the practice of engineering are large and complex. In a single university course we cannot hope to mirror practice. Rather, we use small and probably unrealistic examples. Many problems are inventions of your professor or the textbook's authors. Our purpose is to introduce the quantitative procedures used for the economic analysis of project solutions. In the last part of our course we use other small examples to introduce the quantitative tools of project management. The text expands on what we provide in these lessons, and on-the-job practice will ultimately introduce the engineer to reality. We hope that this course helps the transition to reality.

Most of examples describe hypothetical corporations or corporate decision makers when the stated goal is to make money for the organization's owners. The methods are also appropriate for government and non-profit institutions where the goals are not so clear. We assume that these organizations are interested in using their funds efficiently. Comparing alternatives in terms of cost when the alternatives all reach a common goal is well within the capabilities of our methods.

One can also identify projects at the personal level such as building or buying a house, raising a child or even living one's life. We often use examples from personal finance to motivate our discussions. Every engineer should be able to responsibly manage his or her funds, whether small or large. Many of the methods described have relevance to personal finance.

Summary
. Browser Page
Projects Summary
.
Problems

The development of this course was a project supported by the Mechanical Engineering Department using Project Proceed funds. The linked document holds a description of the project using the terms listed above.

. browser
Development of Web-based ME353
.

As part of the first homework, develop a page similar to the example for some project you have been involved in. If no project comes to mind, select a project from the list at the start of this lesson and make up a hypothetical description.

Navigation

Return to Top of Page

Engineering Finance
by Paul A. Jensen
Copyright 2005 - All rights reserved

Front Page Lessons Resources