PMP Exam Cram: Project Initiation

Date: Jan 16, 2004

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Terms you'll need to understand:

• Initiation

• Project charter

• Assumptions

• Constraints

• Management by Objectives

• Project charter

Techniques and concepts you'll need to master:

• The importance of project initiation

• The purpose and elements of a project charter

• The proper role to issue the project charter

• The importance of the project charter to the project manager

• The timing and importance of the project manager assignment

• The value of project selection methods

• The two general types of project-selection methods

• The sources of expert judgment

• The Management by Objectives (MBO) process

• The relationship of project initiation to planning activities

Project initiation is the first project management process to execute in the project lifecycle, and it will be the focus of approximately 8.5% of the exam questions. Although the exam questions regarding the Initiating process tend to be straightforward and involve only 1 of the 39 PMBOK processes (Initiation), many project managers have minimal real-life experience with these activities. And for the project managers with experience in project initiation, the terms and processes they use may not be consistent with PMI's expectations.

To streamline your exam preparations, we will focus on the "gotta-know" concepts and terms that are important to PMI, and the "common" gaps you may need to close to be ready for the exam questions related to project initiation.

The Importance of Project Initiation

Because many project managers have never completed activities in this phase (never completed a project charter, never signed a contract, and so on), let's quickly review why PMI considers project initiation an important process.

Initiation is the first step in the project management process, and it is the first step in the scope-management process. It authorizes (formally) a project to begin and links a project to the work and to the strategic objectives of the organization.

Be sure to understand that the Initiation step can occur more than once in a project. The Initiation process is also performed at the end of each project phase to get authorization to continue the project. A common term for this point is a go/no-go decision.

The Purpose of the Project Charter

The most important result of the Project Initiation phase is the project charter, which formally authorizes the work of the project to begin (or continue) and gives the project manager authority to do his job. Someone external to the team and of higher organizational rank issues this authorization.

Elements of a Project Charter

According to PMI, a project charter should possess the following characteristics at a minimum:

• It should include a description of the business need the project will meet.

• It should include a description of the product resulting from the project.

• It should be issued by a manager external to the project who can satisfy the needs of the project.

In addition to these elements, you will generally find a section describing the key objectives and goals of the project. These objectives and goals are often the key assumptions, constraints, and/or target performance metrics for the initiative. In particular, any assumption or constraint affecting the project's schedule, budget, or quality will be listed.

The Proper Role to Issue the Project Charter

The project charter must be issued by someone external to the project team and at the appropriate organizational level to satisfy the needs of the project. For example, you need someone of the proper ranking who can acquire necessary resources, influence key stakeholders, enforce accountability on all project team members, and so on.

Generally, this "someone" is from senior-level management within an organization—someone who has authority over most, if not all, of the project team members. This also means that no one on the project team (including the project manager) can issue the project charter.

The Importance of the Project Charter to the Project Manager

The project charter is highly important to the project manager for three main reasons:

• It makes the project manager's role legit. The project charter formally recognizes the project manager role and gives the project manager the authority to "get the job done."

• It makes the project legit. The project charter formally authorizes the project to exist and/or to continue.

• It sets the target for the project. The project charter provides the high-level goals and objectives the project should achieve.

The Timing and Importance of the Project Manager Assignment

Besides the project charter, the other critical output of the Project Initiation phase is the authorized assignment of the project manager. Ideally, PMI would like to see the project manager selected, assigned, or identified at the point of project initiation. PMI advocates this practice because it feels strongly that the project manager should be a key player in any and all planning activities. PMI wants to reduce the number of real-world experiences whereby the person now responsible for the project (the project manager) does not have proper input into the key planning assumptions.

The Value of Project-Selection Methods

Outside of the project charter, the other topic that is greatly emphasized by PMI within the Initiating process is project-selection methods.

PMI feels strongly that organizations should have a formal process for deciding projects to sponsor and for ensuring that projects are supportive of the organization's strategic objectives. In many organizations, some type of senior management steering committee or Program Management Office (PMO) performs this project-evaluation and -selection process.

Project-selection methods are the techniques used to execute this process, and they are organized into two major categories: benefit measurement methods and constrained optimization methods.

The project-selection method(s) used by an organization should be relevant to the objectives of the company and its managers and should be consistent with the capabilities and resources of the organization.

Two General Types of Project-Selection Methods

The two methods of project selection are benefit measurement (comparative approach) and constrained optimization (mathematical approach). Table 3.1 summarizes the key points of these two method types.

Table 3.1 Project-Selection Methods

Method Type	Examples	Notes
Benefit measurement (comparative approach)	Scoring models, cost-benefit analysis, review board, economic models.	Benefit measurement is the most common approach.
Constrained optimization (mathematical approach)	Linear programming, nonlinear programming, integer programming, dynamic programming, multi-objective programming.	Constrained optimization makes use of math models and complex criteria and is often managed as a distinct project phase.

Using Expert Judgment for Project Initiation

Expert judgment is mentioned in this chapter because project initiation is the first PMBOK process that lists expert judgment as a primary tool or technique. In this case, as in most, expert judgment is used to evaluate the inputs into the process. Specifically, expert judgment is used to assess the product description, the project-selection criteria, and the validity of the historical information. In addition, expert judgment could be used to identify key assumptions and constraints. Anyone with specialized knowledge and/or experience relevant to the goals of the project can be used as a source of expert judgment. Common sources include the following:

• Subject matter experts (SMEs) within the organization

• Consultants

• Stakeholders, including customers

• Professional and trade associations

• Industry groups

Management by Objectives

Because one of the goals of Management by Objectives (MBO)—a business management technique you probably studied in school and/or utilize in some capacity within your organization today—is to ensure that objectives (goals) of one level within an organization are supportive of and aligned with the objectives of the other, we'll review MBO in this chapter. After all, one of the main purposes of the Project Initiation process is to ensure that authorized projects support the strategic objectives of the sponsoring organization.

MBO is not covered explicitly by the PMBOK. However, PMI expects project managers to understand this management philosophy and how it aligns with managing projects.

For the exam, you need to understand three philosophical points and three general process steps.

The management philosophy points are as follows:

• Because MBO uses goal setting and periodic reviews, it is a natural fit for managing projects.

• A project must be consistent with corporate objectives.

• Due to its top-down nature, MBO only works if management supports it.

And here are the MBO process steps:

• Establish clear and achievable objectives.

• Periodically check whether objectives are being met.

• Take corrective actions on any discrepancies.

The Relationship to Planning Activities

Because many project managers have limited project initiation experience, and because many organizations have differing views on what project initiation entails, it is not always clear how project initiation relates to project planning. When you review the following list of common project management activities performed during the Initiating phase, you can understand why the line between these two major activities is not clear:

• Determining business need

• Collecting historical info

• Determining project objectives and goals

• Resolving conflicting high-level goals

• Developing product descriptions

• Determining deliverables

• Determining process outputs

• Documenting constraints

• Documenting assumptions

• Defining strategies

• Identifying performance criteria

• Determining resource requirements

• Defining budgets

• Producing formal documentation

• Finalizing and gaining approval of the project charter from stakeholders

In fact, there is considerable overlap in the sets of project management activities. The main point to remember is that many of the initiation activities are further refined during project planning, especially estimating, defining assumptions, and determining deliverables.

Project Selection Accounting Concepts

One area, in particular, where much overlap exists between the Initiating and Planning processes is project selection. Earlier in this chapter, you reviewed the two general categories of project selection methods—benefit measurement methods and constrained optimization methods (refer to Table 3.1)—and the key elements of each that you need to know for the PMP exam.

Also, for the PMP exam, you will need to understand several cost accounting concepts that are frequently used when performing the project-selection process, especially any of the benefit measurement methods. You are not expected to be a cost accountant or even to perform the associated accounting calculations. However, you are expected to understand each of these accounting concepts and to know how to use them during the project-selection activity. Table 3.2 summarizes these accounting concepts and how they relate to project selection.

Table 3.2 Project Selection Accounting Concepts

Accounting Concept	Description	Keys for Project Selection	Notes
Present value (PV)	Value today of future cash flows.	The higher the PV, the better.	PV= FV/(1+r)n
Net present value (NPV)	Present value of cash inflow (benefits) minus present value of cash outflow (costs).	A negative NPV is unfavorable. The higher the NPV, the better.	Accounts for different project durations.
Internal rate of return (IRR)	The interest rate that makes the net present value of all cash flow equal zero.	The higher the IRR, the better.	The return that a company would earn if it invests in the project.
Payback period	The number of time periods needed to hit the break-even point.	The lower the payback period, the better.
Benefit cost ratio (BCR)	A ratio identifying the relationship between the cost and benefits of a proposed project.	A BCR less than 1 is unfavorable. The higher the BCR, the better.
Opportunity cost	The difference in return between a chosen investment and one that is passed up.
Sunk costs	A cost that has been incurred and cannot be reversed.	This should not be a factor in project decisions.

In addition to the accounting concepts directly related to project selection, PMI expects a project manager to understand other accounting concepts. Table 3.3 summarizes these additional accounting concepts.

Table 3.3 Other Relevant Accounting Concepts

Accounting Concept	Description	Notes
Variable costs	A cost that changes in proportion to a change in a company's activity or business.	Example: fuel.
Fixed costs	A cost that remains constant, regardless of any change in a company's activity.	Example: lease payment.
Direct costs	A cost that can be directly traced to producing specific goods or services.	Example: team member salaries.
Indirect costs	A cost that cannot be directly traced to producing specific goods or services.	Example: insurance, administration, depreciation, and so on.
Working capital	Current assets minus current liabilities.
Straight-line depreciation	A method of depreciation that divides the difference between an asset's cost and its expected salvage value by the number of years it is expected to be used.	This is the simplest method.
Accelerated depreciation	Any method of depreciation that allows greater deductions in the (DDB) earlier years of the life of an asset.	Double declining balance.
Lifecycle costing	This includes costs from each phase of a project's or product's lifecycle when total investment costs are calculated.

Exam Prep Questions

Question 1

Which of the following must be included in the project charter?

1. Risk analysis

2. Budget estimates

3. Product description

4. Scope statement

Answer C is correct. The product description is one of the three requirements of the project charter, as described by the PMBOK. The other alternatives may appear in some organization's charters, but these vary and are not mandated by PMI. Therefore, answers A, B, and D are incorrect.

Question 2

An organization is starting a PMO. For the initial phase, the PMO director has decided to roll out the use of project charters. As a project manager, why would you be encouraged by this plan?

1. The project charter allows you to establish the business need for the project.

2. The project charter ensures that a preliminary budget and schedule are developed.

3. The project charter authorizes you to use organizational resources to accomplish the objectives of the project.

4. The project charter allows you to get senior management buy-in for your project management approach.

Answer C is correct. Answer A is incorrect because the project manager cannot establish the business need alone. Remember that the charter is issued by someone external to the team. Answer B is incorrect because the project charter does not require a preliminary schedule and budget. Answer D is incorrect because the project management approach would be defined in the project plan.

Question 3

You have created the project charter but could not get it approved by senior management. Your manager and his boss have asked you to begin the project anyway. Which of the following actions is the best thing to do?

1. Focus on other projects that have a signed charter.

2. Start work on critical path tasks.

3. Update your Project Risk Log.

4. Show your manager the impact of proceeding without approval.

Answer D is correct. Remember the importance PMI places on effective communications and on "doing the right thing." Answers A and D are incorrect because these would not be the best actions to take next. Answer B is incorrect because you have not dealt with the "lack of senior management approval" issue yet.

Question 4

What is the most important criterion when an organization chooses a project-selection model?

1. Organizational fit

2. Flexibility

3. Cost

4. Capability

Answer A is correct. The most important factor is that the project-selection method be "realistic" for the organization. It needs to be consistent with its goals and objectives, and it needs to account for the capabilities of the organization. Answers B, C, and D are all incorrect because although they are key criterion when choosing a project-selection model, they are irrelevant if the model is not first an effective organizational fit.

Question 5

A project is an ideal environment in which to apply the technique of MBO because:

1. Top management policy and goals should flow down through the management hierarchy.

2. Project management involves setting organizational objectives.

3. All projects should be strongly oriented toward goals and objectives.

4. Projects are generally handled in a matrix management environment.

Answer C is correct. The approach of goal/objective setting and periodic evaluations are common to both MBO and project management. Answer A is incorrect because projects use more than functional management hierarchy structures. Answer B is incorrect because project management is focused on executing organizational objectives and not on setting them. Answer D is incorrect in much the same way that Answer A is incorrect. You cannot rely on a top-down organizational flow in project environments.

Question 6

All of the following are examples of benefit-measurement methods of project selection except which one?

1. Scoring models

2. Multi-objective programming

3. Economic models

4. IS steering committee review

Answer B is correct. Multi-objective programming is the only constraint optimization method listed. Answers A, C, and D are all incorrect because they are not constraint-optimization methods.

Question 7

The project charter should by issued by whom?

1. One or more functional managers

2. The head of the performing organization

3. A manager external to the project

4. The CFO

Answer C is correct. The other answers could be accurate in specific situations, but their role alone does not meet the key criterion of being "external" to the project team. Answers A, B, and D are incorrect because these individuals are not external to the project.

Question 8

Which of the following is not a scope-management process?

1. Scope planning

2. Scope reporting

3. Initiation

4. Scope verification

Answer B is correct. Answers A, C, and D are incorrect because they are explicitly defined by the PMBOK as scope-management processes, including Initiation, which is the first step in the scope-management process.

Question 9

In which scope-management process are SMEs first used?

1. Scope planning

2. Scope definition

3. Initiation

4. Scope verification

Answer C is correct. Initiation is the first step in the scope-management process, and expert judgment is one of the techniques routinely utilized. Answers A, B, and D are incorrect because they would come after the Initiation process.

Question 10

From the point of initiation, why should assumptions be documented?

1. Assumptions limit the project team's options for decision making.

2. Assumptions might prove to be incorrect. The ability to identify these assumptions allows for baseline adjustments in case of project crisis.

3. Assumption analysis is a key technique of risk identification.

4. In case of schedule or budget overruns, the documentation of assumptions provides an accountability trail.

Answer C is correct. Answer A is incorrect because "constraints" limit your options. Answer B is incorrect because it's not the correct process for adjusting project baselines. Answer D is incorrect because, although it's a tempting answer based on real-world experience, it's not the answer PMI is looking for, and it would be more applicable to project controlling.

Need to Know More?

Project Management Institute. A Guide to the Project Management Body of Knowledge (PMBOK Guide), 2000 Edition. ISBN 1880410230.

The PMI Bookstore (http://www.pmibookstore.org)

Offers general project management reference materials and other self-study texts.

PMI eLearning Connection (http://www.pmi.org)

Offers virtual, online seminars and study programs.

Commercial PMP Prep Courses

Search PMI (http://www.pmi.org) for a listing of PMI Registered Education Providers that offer PMP exam-prep courses. Many of the courses are now offered "online" and better support your lifestyle.

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