Project Charter – and how to develop it!
This is the first step in the initiating group and is a process called develop project charter.
The inputs to the charter are normally documented decisions, and can include the following:
- Contract (where applicable)
- project statement of work
- enterprise environmental factors
- organisational process assets
- The project statement of work (S. O. W.)
This is normally written by the project sponsor or whoever initiated the project. If the project is external then it will be written normally by the buyer.
Project Charter inputs
The statement of work should contain the following information:
product scope description (writing product descriptions). These can serve as the S. O. W. (if the project is contracting to a vendor)
This is the organisations strategic plan, and the project manager will need to make reference to it). This merely ensures that the project is in line with the organisation’s strategic direction.
These other factors that are outside of the project, and hence the project must make sure that it is aligned with them within the project charter. They include:
- Organisational culture and structure
- governmental or industry standards
- human resources
- personnel administration
- organisations work authorisation system
- marketplace conditions
- stakeholder risk tolerance
- commercial databases
- project management information systems
All of these aspects can influence the way that the project is managed.
Organisational process assets
These are, as the name suggests, valuable information that can be used on each project within the project charter, and are updated and added to if appropriate on each project, thus increasing these assets for future projects. They can be such aspects as:
- approaches, or standards.
Other aspects include:
- project management policies
- safety policies
- performance measurement criteria
- financial controls
- communication requirements
- issue and defect management procedures
- change control procedures
- risk control procedures
- procedures used for authorizing work
- historical information (these should be examined when starting a project)
- lessons learned reports
- Tools and techniques for the project charter
Most organisations are” opportunity rich and resource limited”. This normally means that not all projects can be done — due to resource constraints. There needs to be some method will prioritizing possible projects. Often projects are selected as a preference by those with power and authority within an organisation.
PMBOK® identifies two categories of selection method for the Project Charter:
Project Charter – Benefit measurement methods
These methods are known as decision models and calculation methods — these will now be discussed:
Project Charter – Mathematical models.
Mathematical modelling uses advanced techniques that are beyond the scope of PMP. For the record, they include linear, dynamic, integer, non-linear, and/or multi objective programming.
Project Charter – Benefit measurement methods.
I will discuss seven methods. It should be understood, that an organisation may have its own unique algorithms for determining benefit measurement.
Cost – benefit analysis.
This method, as the name suggests, compares the outflow of costs against the inflow of cash revenue streams over an agreed time period.
The timeframe selected, should include not just the project time scale, but also the full of operational life of the endproduct. Similarly, the costs should include not just the project budget but also the costs to maintain and support the product in its operational life.
Another key advantage of using cost benefit analysis, is that it takes into consideration the time value of money.
If I were to loan you $1000, and you took one year to repay it, then in one years time it may only be worse to be, say, $950. A” discount factor” is used for every year shown in cost benefit analysis so that the cumulative total of the full product life is not just the numeric some of costs out and revenue in, but the discounted value of that as viewed from the present day.
This unique value is called” the net present value”, or NPV. When checking the business Case viability at regular intervals during the project, cost benefit analysis should form part of that review to ensure that the project and the endproduct remains viable, desirable, and achievable.
Weighted scoring models.
A scoring system is determined by management based on key business aspects. For example profit margin, profit potential, marketability, ease of creation, competitors, business area dynamics, etc.
Each of these criteria is assigned a weighting depending upon its importance to the organisation. Assuming that there are say, five projects under consideration for funding, then each project would be assigned a number, again, say 1 – 10.
A simple matrix or table is produced with each row showing the different criteria and each column showing the project scoring number. These are multiplied together and shown as a total at the bottom of each column. The highest score shows the best project choice.
Project Charter – Cash flow analysis techniques
These include the final four techniques that we will discuss:
Projects will involve some form of funding at initiation, and the payback period is simply the length of time then it takes all the company to recoup these initial costs. For example, if the initial project funding is $100,000 and the revenue stream is $20,000 a month, then the payback period is five months
As you can see, this method does not consider revenue streams of the payback, and is therefore the least accurate of all these techniques.
Discounted cash flows.
You remember the time value of money? If I was a bank, I would charge interest to borrowers. This is because for every dollar I loan them, it will be worth less for every year by wait for the loan to be repaid. This extra amount that I should charge for the loan can be calculated by a well-known formula:
Let me state that formula:
The future value (FV), of the investment equals the present value (PV) times 1 (plus the interest rate) raised to the value of the number of time periods (n) in which the interest is paid. Again, this formula would be applied to several projects to see which is the best investment.
Net present value.
I have already discussed this in the cost benefits section. It can of course be used as a completely separate algorithm to determine the value of a project and and its investment of the time.
Internal rate of return (IRR)
This is the most complicated of all the cash flow techniques. It will normally require a financial calculator such as a spreadsheet to determine the best investment. It will not be discussed in detail here, but it is determined by calculating the discount rate when the present value of the cash inflows equals the original investment. In summary:
- IRR is the discount rate when NPV equals zero
- IRR assumes that cash inflows are reinvested at the IRR value
- the project with the highest IRR should be chosen
Project Charter – Summary.
The project charter is the official and formal written agreement and recognition that a project exists. The charter is normally created by senior management and given to the project manager along with the authority to assigned resources.
It is worth considering the key stakeholders that are required for any project:
- The project manager
- the project sponsor
- the project champion
- functional managers
the project charter document should include the following information:
- Purpose or justification for the project
- business needs of the project
- business justification for the project, including return on investment analysis
- high-level project description product description
- objectives and success criteria that must be completed satisfactorily according to stakeholders, sponsor, and customer expectations
- stakeholder influences
- involvement of other departments
- constraints and assumptions
- initial summary milestone schedule
- the initial budget summary
- name of the project manager and their authority levels
The project charter should be signed off from the project sponsor, senior management, and key stakeholders.
This indicates that they agree and support the project. Remember, like all documents, the project charter may change during the life of the project.
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David spent 25 years as a senior project manager for US multinationals and now develops a wide range of project-related video training products under the Primer brand. In addition, David runs training seminars across the world, and is a prolific writer on the many topics of project management. He currently lives in Spain with his wife Jude.