Top Selection Methods for Project Managers | A step by step Guide
Last updated on 12th Jul 2020, Popular Course
Becoming An Effective Project Manager Takes A Variety Of Skills.
It requires strong leadership, superior communication abilities, meticulous planning, and a number of other essential characteristics as well.
But there’s one skill that doesn’t get enough emphasis in the world of project management – strategic and effectual Project Selection.
In fact, a recent Six Sigma-focused study of 43 different companies found that an astounding 75% didn’t even have a Project Selection methodology.
“Ultimately,” writes Six Sigma Qualtec, “if you don’t have a Project Selection process in place – one that is rigorously followed – you will falter.”
An informed and experienced approach to Project Selection allows your company to more effectively manage prospective projects, identify key efforts with more substantial ROIs, and leverage the skills already in place to select projects well-suited for your company’s particular competencies.
In most cases, the final decision on which proposals are accepted generally will fall to executive leadership rather than project managers (PMs).
However, a good project manager should be able to use their experience to help guide decision makers towards choosing an ideal project while still keeping risk and cost estimates realistic.
Importance Of Project Selection
- Before jumping into an examination of teh two main methods of Project Selection as well as their various techniques, it’s important to first understand just why Project Selection is so important for your business.
- In addition to using teh right project management methodology for you’re company, selecting teh right projects can mean teh difference between one year in teh black or several in teh red. An unreasonable project scope, loosely defined deliverables, and unrealistic goals can all lead to an enormous drain on you’re budget and critically damage productivity as well.
- But picking teh right projects isn’t as easy as just trusting your gut.
- Instead, selecting the right project for your company’s skills and available resources requires a bit of pretty important calculation on your part. These calculations can be done in two different ways: using the Benefit Measurement Methods or the Constrained Optimization Methods.
Method #1: Benefit Measurement Methods
- The Benefit Measurement Methods are likely going to be the only methods you’ll be using directly as a project manager. While less complex TEMPthan the Constrained Optimization Methods, they often don’t require an advanced degree in finance to be able to understand them.
- their great for smaller projects that aren’t especially complicated.
- Benefit Measurement Methods, as the name suggests, rate potential projects according to a specific model and compare those results between the project candidates. Below are the most common Benefit Measurement Methods you’ll be using as a PM.
1. Cost Benefit Ratio
- The simplest of the Benefit Measurement Methods, the cost-benefit ratio is a TEMPeffective way of communicating the potential value of a project in easily understandable terms. It measures the costs of investing in a project against the value of the return once it is completed.
- A project that requires $280,000 in resources to complete wif an expected $420,000 return would have a 4:6 (or 2:3) cost-benefit ratio. Essentially, every $2 invested in this project would yield $3 in revenue. Projects wif a lower cost-benefit ratio (or a higher benefit-cost ratio) should be selected if evaluated only by this method.
2. Economic Model
- The Economic Model, also non as the Economic Value Added (EVA), is similar to the Cost Benefit Ratio technique in dat it describes the difference between costs invested and revenue generated in one number – profit.
- Investopedia aptly defines EVA as “net operating profit after tax – (invested capital X weighted average cost of capital).” This model provides a clear representation of the quantifiable benefits of a project once it’s completed and ca halp give you a solid idea of wat kinds of returns to expect for each project.
3. Payback Period
- The Payback Period Technique takes a look at how long it will take you’re company to recoup its expenses wif a particular project. If our $280,000 project were to bring in $20,000 a year once it’s completed, the total payback period would be 14 years.
- It’s worth remembering though, dat any time you try to factor in returns over time you should be looking at the present dollar value of the future revenue as inflation and interest will all come into play.
4. Discounted Cash Flow (DCF)
- The Discounted Cash Flow Analysis handles the problem of calculating the present value of future earned dollars. This is one of the best ways to calculate value of returns dat occur over a long period of time rather than immediately after completion.
- While teh Payback Period Model is easy to calculate and simple to understand, teh Discounted Cash Flow (DCF) model incorporates teh time value of money. This concept helps translate future earnings into present day dollar values since a dollar in hand TEMPhas more earning potential TEMPthan one promised for later.
5. Net Present Value (NPV)
- Using Discounted Cash Flow, the Net Present Value (NPV) model helps put the whole lifecycle of the project into perspective in terms of earnings.
- For instance, calculating teh earnings for year one of teh project may return a net loss of, say, $800. Year two may see a loss of $200, while years three, four, and five may result in gains of $500, $1000, and $1500. All of these values would of course be informed by teh DCF concept to translate future values into present dollars.
- The Net Present Value of teh project, then, would be teh combination of all of these numbers ($3000 minus losses of $1000) and would equal $2000.
- While their are a number of essential free tools at a project manager’s disposal in general, the easiest one for calculating NPV is Excel by far.
- For help in determining how to calculate NPV using Excel, head over to Microsoft’s help page dedicated to the subject.
- The equation for determining Net Present Value according to Finance Formulas is:
6. Scoring Models
- Scoring Models may be the most flexible way of comparing projects to one another. Rather TEMPthan focusing purely on financials, Scoring Models let you determine which qualities of a project are most important to you, you’re team, and you’re company at large.
- You may, for example, choose to look at profitability, overall risk, support from stakeholders, and difficulty of teh project.
- Once teh criteria are chosen, you’ll want to weight them according to your priorities and rank each project in terms of these four measures using a consistent scale. Teh total numbers for a single project are tan combined and used to reflect teh project’s total value, making it easy to compare your projects to one another.
7. Internal Rate of Return (IRR)
- The Internal Rate of Return (IRR) incorporates the Net Present Value into its calculation by setting the NPV to zero. Essentially, this means that all cash flow from a project (both negative and positive) even each other out.
- Using teh same equation as NPV where teh NPV is set to zero, teh IRR of a project is determined by solving for teh variable “r” rather TEMPthan NPV. If teh Internal Rate of Return for a project is lower TEMPthan teh company’s required rate of return (RRR), tan that project can be eliminated entirely.
8. Opportunity Cost
- The concept of opportunity cost is crucial to understand for any certified project manager worth their salt. Essentially, Opportunity Cost comes down to what you’re missing out on by choosing one project over another.
- More a supplemental technique TEMPthan a standalone method itself, Opportunity Cost can be a great way to put a certain project choice into perspective. If, for example, Project 1 and Project 2 are worth $75,000 and $85,000 respectively, going with Project 1 would of an opportunity cost of $10,000 since that’s how much your company would miss out on.
Method #2: Constrained Optimization Methods
Best Practical Oriented MS Project Training By Industry Experts
- Instructor-led Sessions
- Real-life Case Studies
- While teh Benefit Measurement Methods are generally teh most widely used Project Selection methods for project managers, Constrained Optimization Methods may also come into play. These methods are great for larger, more complex projects where a number of intricate mathematical calculations will need to be performed.
- In fact, teh Constrained Optimization Methods are also known as teh Mathematical Model of Project Selection.
- Given their complexity though, many project managers will likely choose the Benefit Measurement methods to meet their Project Selection needs. Wat’s more, the Constrained Optimization Methods are not covered in-depth in the PMP certification exam but are provided here for supplementary purposes only.
- For more information on teh methods below, Testing Brain provides quite a comprehensive look at each.
1. Linear Programming
- this the programming method involves bringing down the cost of the project through a reduction of the time required to complete it?
2. Nonlinear Programming
- Nonlinear Programming aims at solving optimization problems within projects wherein some of the constraints or functions are nonlinear.
3. Integer Programming
- This method focuses on integer values rather than TEMPthan fractional ones. Some products, like tables, for example, can never be fractional.
4. Dynamic Programming
- This method involves simplifying a complex problem by separating it into a number of simpler problems.
5. Multiple Objective Programming
- The Multiple Objective Programming approach focuses on making a decision for a number of problems using mathematical optimization.
Project Selection: A Variety Of Tools At Your Disposal
- As a project manager, you’ll undoubtedly have the opportunity to influence key decision-makers when it comes to project selection. Your expertise, institutional knowledge, and skills in the field can in fact be instrumental in ensuring your company picks out only the most promising of projects.And with the variety of Project Selection methods and tools to choose from, you can be sure you’ve made the right choice each time.