Project Review & Administrative
A Project is monitored during the implementation Phase so that time & cost overrun are minimised after a project is commissioned its Performance Is Periodically Reviewed to see whether its Performance has been in line with expectations. If things turn sour, the abandonment may also have to be examined.
Various facets of Project Review: -
- Control of in progress projects: - A lot of efforts is expended in selecting capital projects, things often wrong in implementation phase. This is evident from the frequent cost &time over-runs witnessed in practice. There are two aspects of controlling in progress capital projects:
- Establishment of internal control procedures
- Use of regular progress reports
- Post-completion audits: -An audit of a project after it has been commissioned is referred to as a post audit. Regular post completion audits of capital projects are:-
- Provide a documented log of experience that may be valuable in improving future decision making
- Enable the firm in identifying individuals with superior abilities in planning and forecasting
- Help in discovering systematic biases in judgment
- Include healthy caution among project sponsors
- Serve as a useful training ground for promising executives who need broader business experience and exposure
- Abandonment Analysis
- Capital expenditure management is a dynamic process. Its cannot be regarding as a commitment till the end of project life. As time roll-on, changes occur which can alter the attractiveness of projects or entire division.
- This technique used to analyze a new project can also be used to analyze whether an existing project should be continued or terminated. Behavioural issue in project Abandonment - The investment decision should be guided by the net present value. Applied to project "continuation Vs abandonment" decision the rule says: -
- If the present value associated with abandonment is > Net present value associated with continuation.
- If the present value associated with continuation is > Net present value associated with abandonment
- Administrative aspects of capital Budgeting
- Identification of promising investment opportunities
- Classification of investment
- Submission of proposals
- Decision making
- Preparation of capital budget & appropriation
- Implementation
- Performance review
- Agency Problem
- Manager enjoys substantial autonomy and has a natural inclination to pursue their own goals. This is the agency problem.
- To prevent from being dislodged from their position, managers may try to achieve some acceptable level of performance as far as shareholder welfare is concerned.
- They seek to following:-
- Preside over a big empire that gives them
- Power, stature, and high compensation.
- Pursue pet project that draw on their special skills and competencies so that their position in the organisation is entrenched.
- Enjoy generous compensation & lavish perquisites.
- Shirk efforts because identifying & implementing high NPV projects is very demanding proposition.
- Avoid risks because acceptance of high firm-specific risks, although quite acceptable to diversified shareholders, can threaten the security of their job and the growth prospects with the firm. Agency cost can be mitigated by monitoring the action and behaviour of managers & by offering them right incentives that motivate them to maximize value.
- By monitoring: - Its helps in checking more visible agency problems like empire building, excessive perquisites, managerial absenteeism, and frauds.
- By incentive compensation: -A well-conceived incentive compensation plan goes a long way in aligning the interest of managers and shareholders. Following guidelines in compensation plan: -
- Integrated the incentive plan into total compensation architecture
- Select the right set of performance measure
- Use objective criteria
- Reward relative performance
- Lengthen the decision-making horizon of the executives
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