The world was created by a number of projects executed with specific requirements that generated some outcomes within certain time limits. You and I are some of the outcomes of these projects. I like to refer to the process as the Creation Program with the Creator as the Program Manager, who manages the related projects and activities in a coordinated manner. The outcome of well-managed projects is the world we live in. The point here is projects and project management have been the foundation of the world and continue to be relevant in ensuring continuity of our world.
Every project has a budget, and this budget is funded either internally or externally. This is what project finance is about. And is there any relationship between project management and project finance? This article explores the processes of project management and project finance and how to align these processes for successful project delivery. The intention of the writer is to simplify the principles and the processes to a level that can be appreciated by readers with little or no knowledge of both concepts.
Project and Project Management Process
According to the world’s leading organisation on project management, Project Management Institute (PMI), a project is “a temporary endeavour undertaken to create a unique product, service, or result.” PMI defines Project Management as “guiding project work to deliver intended outcomes”. In other words, it is the management of the work involved in ensuring that the objectives of a project are achieved. Projects are managed through well-established processes which the Project Management Book of Knowledge Sixth Edition (PMBOK 6) groups under five broad headings. Within the five process groups are forty-nine processes detailing the activities required under each process for a successful project delivery. Space will not allow us to discuss the processes in detail, but a summary has been provided below.
- Initiating – Project identification and selection, defining the project purpose. The two processes under this are Develop Project Charter and Identify Stakeholders. The Project Charter spells out the scope and objectives of the project. It also lists all the stakeholders of the project who need to be engaged and gives authority to the Project Manager.
- Planning – Creation of the Project Management Plan – the Plan that guides project execution. This is the most comprehensive process in project management and involves twenty-four processes or activities all of which cannot be listed due to space constraints. The headline activities include Develop Project Management Plan, Plan Scope Management, Plan Schedule Management, Plan Cost Management, Plan Quality Management, Plan Communication Management, Plan Risk Management, Plan Procurement Management and Plan Stakeholder Engagement. The success of every project is dependent on the efficiency of the activities at this stage.
- Executing – Implementation of the project in line with the project management plan. There are ten processes under this: Direct and Manage Project Work, Manage Project Knowledge, Manage Quality, Acquire Resources, Develop Team, Manage Team, Manage Communication, Implement Risk Responses, Conduct Procurement and Manage Stakeholder Engagement. The activities in the group are all executory.
- Monitoring and Controlling of the project work execution is to ensure that expected outcomes meet requirements. This process also takes into consideration changes needed to ensure that deliverables and outcomes are accepted. Twelve processes are involved, and they are Monitor and Control Project Work, Perform Integrated Change Control, Validate Scope, Control Scope, Control Schedule, Control Resources, Monitor Communication, Monitor Risks, Control Procurement and Monitor Stakeholder Engagement. All these activities validate the actual work being executed against the requirements in the Project Management Plan and ensure corrective actions, where required, are implemented in good time.
- Closing – Final review, completion of lessons learnt and project team dispersal. As the name the denotes, it is the end of all process and has one activity namely Close Project or Phase.
The Seventh Edition of the PMBOK (PMBOK 7) has revised the process groups into what is now known as the Project Management Principles: Stewardship, Team, Stakeholders, Value, Systems Thinking, Leadership, Tailoring, Quality, Complexity, Risk, Adaptability and Resilience and Change. Let me be quick to add that the process groups are still very relevant to project management. The principles underpin the relevance of the process groups while creating agility and adaptability.
It must be mentioned at this point that these forty-nine processes are not required to be utilised for every project. Every project is unique and requires the processes that are relevant to it. This is where Tailoring, one of the project management performance domains, comes into play. “There is no single approach that can be applied to all projects all of the time” (p.133, PMBOK 7). The size and complexity of each project determines the processes to be utilised.
Project Finance and Processes
Project Finance is generally defined as the financing of a long-term project the repayment of which is from the cash flows of the project, with or without recourse to the project sponsor. In simple terms, it is a loan granted to finance a project and the project is expected to generate enough cash flows to repay the loan without necessarily relying on the balance sheet of the company initiating the project. Some project finance loans are structured with recourse to the balance sheet of the company.
The processes of project finance are undertaken by the financial institution providing the funding and are therefore, to a very large extent, out of the control of the project sponsoring organisation and the project team. The collaboration of the project team and the financing team are key to building workable and flexible financing structures which will in turn determine the cash flows and the subsequent loan repayment. For the purposes of this article, project finance refers to project debt, which are funds provided by lender(s) to a company for a specific project the principal and interest payment of which are serviced by the company independent of the project’s ability to generate projected cash flows and does not cover special purpose vehicles (SPV) transactions which are off-balance sheet.
The processes involved in project finance can be summarised under the following headings:
- Assessment of Project Business Case – The financing team studies the project business case, which is produced by the project organisation before the project Initiating stage, and the projected cash flows to determine if it is viable project worth funding.
- Term Sheet – The lender(s) issue a term sheet to negotiate and finalise the loan terms and structure with the project organisation.
- Project Finance Documentation – Processing and completion of loan documentation consisting mainly of facility agreements and collateral documentation.
- Disbursements – Advancement of loan proceeds in line with approved terms and conditions.
- Monitoring of project execution – Monitoring of the project execution to ensure that is line with agreed specifications and loan disbursement or utilisation milestones
- Completion and Commissioning
- Operationalisation
- Loan repayment
The Case for Process Alignment
The discussions in the preceding paragraphs show two sets of processes with one target – a project. Both processes have a single objective – the success of a project that will generate the expected outcomes, although this is approached from different focus areas. Sometimes, due to the differences in the focus areas, a project management team may see a project as successful because the final deliverable meets requirements and is accepted by the sponsoring organisation. The project finance team may see the same project as challenged, because of schedule delays and budget overruns which will in turn delay commencement of the operations and subsequently, the loan repayment with all the accompanying risks.
Collaboration between the two teams to ensure process alignment is therefore very crucial for all stages of the project especially the Planning, the Executing and the Monitoring and Controlling stages.
The Initiating Stage of a project involves identifying who the stakeholders are and developing the Project Charter that authorises the project and the Project Manager. Stakeholders’ expectations are identified and aligned with the project purpose during this stage. It is very important at this stage to recognise the financing institution and the contractor as interested and influential stakeholders and put in place an effective and efficient engagement plan for them.
The Planning Stage of a project takes care of all aspects of the project: scope, schedule, cost, quality, the resources required, communications, risk, procurement and stakeholder engagement. It is at this stage that the project team determines how long it will take to complete the project taking into consideration the resources to be procured, the quality standards to be built in, the procurement processes and the associated risks of the project. It is important for the Deal Team, the Project Team and the Contractor to collaborate closely at this stage. For instance, through the collaboration, the Deal Team will be able to guide the project team in planning the schedule by providing their timelines for approval and disbursement procedures. This will ensure a final schedule management plan (SMP) that reflects realistic timelines to keep the project on schedule. Some projects can be delayed for weeks, if not months, because of lack of alignment of the processes at the planning stage. Long lead items are one of the major causes of schedule delays in projects. Effective coordination between the teams in respect of the timing of funding availability and the procurement of such items will ensure efficient procurement planning to enable the project to run on schedule. The Term Sheet and the other finance documentation should factor all these in the loan structure and the disbursement milestones. This ensures that project schedules are aligned with disbursement timelines and in the absence of any “unknown unknown” risks, a timely completion of a project.
The Executing Stage can be described as the commencement of project work. Collaboration, stakeholder management and communication between the Deal Team, the Project Team and the Contractor are very vital at this stage if the project is to remain on schedule, within budget and the outcome is to meet requirements. The loan disbursements by the Deal Team in line with the project milestones, as specified in the loan agreements, should harmonise with the schedule of the Contractor and the Project Team if the collaboration and alignment are planned well into the project. The Project Performance Domains as provided by the PMBOK 7 are critical at this stage especially the Project Development Approach and Lifecycle, Project Work and the Delivery. The development approach is selected at the planning stage, and it is based on the nature of the product, service or results of the project. Three main approaches come into play: the Predictive, the Hybrid and the Adaptive. Time and space limitation would not allow us to delve deep into these approaches, but the choice of an approach depends on some factors including but not limited to requirements certainty (well-known and easy to define), scope stability (fixed or subject to variations) and the delivery cadence (timing and frequency of deliverables). Infrastructure and other construction projects have defined requirements and stable scope and therefore tend to use the predictive approach. In such situations the expected outcomes of the Deal Team and the Project Team, as defined in the project management plan are likely to remain largely the same with minimal changes that may not impact milestones and disbursements. The collaboration however becomes difficult for projects with less stable scope and uncertain requirements. This requires the use of the adaptive approach with constant amendments to the project management plan with its implication on scope, schedule and cost. The Deal Team in such situations is also required to go through their approval process to amend loan amounts and disbursement milestones. Financial institutions generally deem such projects as risky due to schedule delays and cost overruns. Such projects are delivered in iterations in short intervals for review and feedback from stakeholders. Depending on the level of uncertainty of requirements and scope, Agile approach, which is also under the adaptive methodology is preferable. It is therefore very necessary at the planning stage to structure the term sheet to cater for a loan amount that may be increased up to a certain ceiling based on projected amendment to the not-so-certain scope. The structure should also make room for speedy but prudent approval of disbursement milestone amendments. Without these measures, the project execution is bound to have significant challenges.
Monitoring and Controlling is very crucial if the project is to deliver the product, service or result with the expected outcomes. Quality is planned and built into a product, and this is ensured at the monitoring and controlling stage. The two teams need to work together closely at this stage to ensure that what is being built or produced is in line with the expected outcomes. The collaboration and alignment at this stage has great advantage for the project financing institution, the project team and the contractor. For the Project Team and the Contractor, it guarantees to a significant extent, an outcome that will be acceptable. For the financing team, it takes away the need to advance additional funds to correct defects that may be required to ensure the final product is able to generate the expected cash flow. The contractor also reduces the risk of defaulting on performance and retention bonds because of defects in the outcome.
The Project Closing stage verifies that all processes required to be performed as planned and defined in the project management plan have been completed. All project documentation including contracts are checked to ensure all outstanding conditions are appropriately closed out to prevent any obligation arising out of contracts that remain open after project closing. The final project report is then issued after all the close outs and the organisational records are updated as appropriate.
“Teamwork makes the dream work” is the title of a book by John C. Maxwell and it aptly describes the collaboration discussed in the above paragraphs which ensures process alignment as a requirement for successful project delivery.
The author is with the Project Management Institute, Ghana Chapter
