Develop a Project Charter

00:01 This module covers the project integration management knowledge area and specifically within that knowledge area, the developed project charter process.

00:12 The Project Integration Management Knowledge Area is the first of the 10 PMBOK guide knowledge areas. It is the knowledge area that covers the high level work that a project manager must do.

00:23 It's the work that affects all other areas of the project.

00:27 It recognizes the interdependencies between all of the other knowledge areas and that we shouldn't treat them as individual discrete areas, and that we should recognize the ways in which they connected and all affect each other.

00:39 So while the Project Integration Management Knowledge Area looks at the high level work that affects the whole of the project, the other nine knowledge areas covered the detail work things like scope management, cost management, time management, quality management, etc..

00:58 So the Project Integration Management Knowledge Area has six processes within it.

01:03 It has the developed project charter process, which is initiating process.

01:07 It has developed Project Management Plan Process, which is a Planning process, direct and manage project work, which is an executing process.

01:15 It has two monitoring and controlling processes.

01:18 The Monitor and Control Project Work process.

01:21 And the Perform Integrated Change Control process.

01:24 It has a single closing process, the closed project or phase process. Let's start with the first of these develop project charter process.

01:38 In terms of the exam, the development of the project charter is incredibly important and therefore focus on this.

01:46 The difficulty is rated as medium because you may not do a project charter at the moment or you may call it something else.

01:53 Memorization is low.

01:54 It's all fairly easy to understand and that in that regard.

01:59 So let's start at the beginning.

02:01 The domain tasks which align with the developed project charter process are the following all initiating domain tasks first task one Perform Project Assessment based upon available information, lessons learned from previous projects and meetings with relevant stakeholders in order to support the evaluation of the feasibility of new products or services within the given assumptions and or constraints.

02:27 So those domain tasks are all supported by the developed project charter process.

02:34 The key themes of the Develop Project Charter process are only choose projects that deliver organizational strategy.

02:43 Use the project charter to describe the expected project benefits have a clearly defined project selection and prioritization process and ensure that all projects without exception have an agreed and approved project charter.

03:02 The inputs into the developed project Charter process include, if available, a project statement of work.

03:11 Now a project statement of work can be many things, but it's generally a high level narrative or text based description of the work to be done on the project. It could be a simple paragraph or two, or it could be several pages long, but at this stage it's not complete because the full Planning work hasn't been done.

03:30 So you may have access to a project statement of work.

03:34 You may also have access to a business case of any sort as an input into the development of the Project Charter.

03:41 Now, a business case can be anything as simple as a work order authorizing the project and justifying why the project is being undertaken.

03:50 Or I've seen instances where a business case is in fact a separate project entirely and runs to many pages and is quite a complex document.

03:59 A third input that you may have that may be useful into the developed project charter process is any agreements that you have done.

04:07 These can be the form of contracts or any other written agreements which initiate the project that you may have signed.

04:13 There are also Standard and put such as the enterprise, environmental factors, things like market conditions, local legislation, industry regulations that you need to take into account in the development of the project charter.

04:27 You may also go looking for any relevant organizational process assets that your organization has things like a project management plan or a project management methodology, or a blank charter template that gets filled out.

04:45 So we take these inputs.

04:46 The project statement of work, the business case, the agreements, the enterprise, environmental factors and organizational process assets, if they are available to us and if they are relevant to us and we apply the relevant tools and techniques to them to determine and develop our project charter, the relevant tools and techniques that we may choose to apply to those particular inputs are expert judgment.

05:13 Now, throughout the whole of the Bot guide, you'll find that expert judgment is the most used tool and technique, and it actually refers to a whole range.

05:24 Of tools and techniques.

05:25 Don't forget, you are an expert.

05:28 Your project team members are experts.

05:31 Other people within the organization are experts.

05:34 Your project sponsor. As an expert, the client is an expert.

05:37 External consultants are all experts.

05:40 You will choose which experts you need and consult with them to get their judgment on how to develop your project charter and get it approved.

05:50 You may also choose to use a wide variety of facilitation techniques.

05:54 These are techniques such as meetings or brainstorming techniques, lateral thinking, those sorts of things are all facilitation techniques.

06:03 They're a way to get information and agreement out of experts, so choose them wisely and use them appropriately.

06:11 So once you've taken the relevant inputs into the Develop Project charter process applied the tools and techniques appropriately to them, you will develop the Project Charter.

06:25 The project charter is an output, it is the single output from the developed project charter process.

06:31 The project charter is the foundational document for any project.

06:37 Every project must have a project charter.

06:40 So in the exam, if you come across a question that presents a scenario where perhaps you've taken over a project and you discover it doesn't have a project charter, the correct response is to stop.

06:53 And initiate and develop a project charter and get it agreed upon before proceeding.

06:58 This is because the Project Charter is the document that officially starts the project.

07:04 It is developed and approved by the project's sponsor.

07:08 It appoints the project manager and lists the level of delegated authority and responsibility.

07:15 It proves the project exists and list the information known at the time of project initiation about the project.

07:22 So remember that the project charter is the foundational document for a project, and all projects must have one.

07:33 In relation to project selection methods which help develop the project charter for the exam, you'll need to know how they work.

07:42 First up, all projects start as potential challenge opportunity idea. How do they go from these into an approved portfolio of projects? The first thing we must take into account is whether or not they develop and deliver our organization strategy.

08:01 Remember, project management is a strategic enabler.

08:06 This means that it delivers our organization strategy.

08:10 So the first thing we check when we're presented with all of these possible ideas challenges, opportunities that may become approved projects is first and foremost, whether or not they deliver our organization strategy.

08:22 We should be able to get all of our projects back to a defined element of our project strategy.

08:29 Once we've done that, and maybe we've excluded a few opportunities at this point, we then go on to assess our potential projects by financial and or non-financial criteria in order to end up with an approved portfolio of projects.

08:45 So these are all of the projects that we have chosen to approve to proceed. The only sorts of projects which can get around this process of strategic alignment and financial and non-financial criteria assessment are emergency works or compliance projects.

09:05 Perhaps the government has changed some legislation and you have to undertake a project to comply with that legislation.

09:11 And that case, obviously, it probably doesn't deliver your organization's strategy, nor meet normal financial or non-financial criteria.

09:22 In terms of the project selection methods, particularly the financial techniques used for the exam, you need to be aware of the following financial terms and what they are for the exam.

09:36 The first one is a benefit cost ratio, and this is simply the ratio of the project benefits to the project cost.

09:45 Obviously, before proceeding, we expect the benefits of the project to outweigh the costs of doing it.

09:54 Another financial metric, which we may choose to use, if appropriate, is economic value add or EVA.

10:01 And this is a simple assessment of how much value the project will add to the organization.

10:07 Obviously, the greater, the better.

10:12 A third financial metric that we could choose to use once again, stressing, if appropriate, is the internal rate of return or IRR.

10:21 Now this defines the expected percentage return on any project investment.

10:26 Your finance department and your organization will probably tell you what the expected internal rate of return is for a project because most organizations will have a defined expectation of what this figure is and they simply won't approve any projects that do not meet this requirement.

10:44 And when selecting between different projects, choose the one with the higher internal rate of return.

10:53 Other financial metrics that we may choose to use in helping us to select projects include opportunity cost.

11:00 So that if we choose to do Project A over Project B, the opportunity cost. Is the money we would have earned by doing Project B? Return on investment, this, once again, is a metric that you'll probably find your finance department has set for you, and it determines what the percentage financial return expected on any investment in your project.

11:24 So check with your finance department what your ROIC or return on investment is expected to be.

11:32 The payback period, this is simply how quickly you will get back the money on the project that you've spent.

11:41 There are many complicated ways to calculate this, but in terms of the exam, the easiest way to calculate this is to simply figure out how many time periods it takes to recoup the initial investment.

11:53 Let's take a look at a simple example.

11:57 Say your project was going to cost you one hundred and fifty thousand dollars.

12:02 And as a result of doing this project, you expect it to generate either increased revenue or perhaps cost savings of $85,000 in year one.

12:13 Forty five thousand dollars a year to $20,000 in year three and $12,000 a year for.

12:20 So what we want to do is to add up the revenue or cost savings until we hit the amount that we've spent in this case, $150000.

12:29 So if we do that, we can find out that the payback period for this project is around the three year mark.

12:36 That's when the revenue or cost savings generated equals the initial outlay spent on the project.

12:43 A slightly more complicated metric to use, and you may get a question in the exam about this is present value.

12:52 Present value calculates the value in today's dollars of future incoming cash flows generated by a project when a discount rate is applied.

13:01 An easy way to think about this is to think if I was able to give you a bag of money, say $10,000 today and invited you to take the $10000 today or to come back and see me in two years time, and I'll give you $12,000. That little exercise that you're doing in your mind at the moment as you're calculating the present value of $12000 in the future in today's dollars, if that $12,000 in the future was worth more than $10,000 in today's dollars, you would wait and come back in two years time and take the $12,000.

13:36 If, however, you thought that in that two years you could make the $10,000 into more than $12,000, you would take the $10,000 now.

13:45 So what we need to do is to take a formula to calculate the present value of any future cash flows.

13:53 The formula, which you need to remember for the exam, is the present value equals the future value divided by one, plus the discount rate for the number of time periods or years in the future. So remember that the present value equals the future value plus one, plus the discount rate expressed as a decimal point, so 10 % discount rate is zero point one to the power of the time periods.

14:27 So let's take a look at an example for this one.

14:30 So if we want to find out the value of five thousand income in two years time and we have a discount rate of 10 per cent, we would calculate it as follows.

14:41 If V or future value equals five thousand dollars, we divide that by one plus the discount rate of 10 per cent expressed as a decimal point zero point one.

14:52 And in this case, it's to the power of two.

14:55 Two years time.

14:56 So that becomes 5,000 divided by 1.21, and that gives us a present value of 4,132 in today's value.

15:08 For the exam, you may be presented with a similar example, so please write down that formula as part of your brain dump when you start the exam.

15:18 A slightly more complicated concept that builds on present value is net present value this time instead of simply calculating a single point in the future. What we're going to do is to take our initial cash outlay and add to it the present value of all the values of a particular time period.

15:38 It may be values one, two and three four years, one, two and three, or even up to five years. With an NPV calculation, anything greater than zero is good, and we would accept the project if our NPV calculation had a response or an answer less than zero.

15:55 We would probably reject the project if that was our only consideration for project approval. So our net present value calculation equals the sum of the initial cash outlay always expressed as a negative number.

16:11 Plus all calculated present values.

16:17 So, for example, if our initial cash outlay is $30,000 and with this project, we expect to realize income revenue or cost savings of $10,000 in year one.

16:30 $15,000 in year two and $7,000 in year three.

16:35 And we have a discount rate of eight percent.

16:38 The calculation would be as follows First up, we take our project spend of $30,000 and we express it as a negative number because it's an outgoing to that.

16:51 We add the present value of $10000 in year one fifteen thousand in year two and $7,000 in year three.

17:00 So the year one calculation is $10,000 divided by one, plus our discount rate of eight percent expressed as zero point zero eight to the power of one plus year two calculation of $15,000 Divided by one plus our discount rate to the power of two.

17:20 And add to that our year three present value of $7,000 divided by one, plus our discount rate to the power of three.

17:28 And in this instance, what we get is negative $30,000 plus $9,259, plus $12,860 plus 5,556.

17:41 And that gives us a total NPV calculation of negative $2,325.

17:50 Obviously, this calculation shows a negative NPV, and as such, if this was our only criteria for selecting a project, we probably wouldn't approve it. Now you will need to know the NPV formula also for the exam.

18:07 So practice writing down your present value formula and practice writing down the NPV formula as well.

18:16 Those are some of the financial criteria we've looked at in terms of non-financial criteria that may help you decide whether or not to approve a project, you may want to look at things like Is there an opportunity for this project to increase your market share? You may have to increase the level of environmental management or care. There may be health and safety considerations or other not for profit motivations.

18:41 All of these non-financial criteria can be used to help you select the right project and ultimately approve your project charter.

18:51 So in summary, the developed project charter process shows us that all projects must have a project charter without exception.

19:01 The project charter itself can be summary or detailed.

19:06 It could be simply half a page.

19:08 It could be several pages long, only choose projects based on strategic benefits and the benefits they deliver to your organization, strategy and, where appropriate, use a business case to document and assess all relevant considerations.

19:26 So that's been our introduction to the project management integration management knowledge area and specifically within it, the developed project charter process.

19:35 Remember the importance of the project charter and those financial and non-financial criteria you may need to use.

19:43 For the exam.