TRANSFORMING BUSINESSES ACROSS SECTORS AROUND THE WORLD
Subcontracts International provides project owners / sponsors / promoters a much needed project financing gateway to investors and financiers. We have been at the forefront of several project financing transactions across various sectors of the economy around the globe. Our project financing services are particularly beneficial to shovel ready or green shoot projects. We have the means as well as the necessary expertise to approach numerous Banks, Investment Bankers, Non Banking Finance Companies (NBFCs), Financial Institutions (FIs), Venture Capitalists (VCs), Private Equity Investors (PE), Ultra High Net Worth Individuals (UHNWIs), Family Businesses, Hedge Funds, Pension Funds, Underwriters, Insurance Providers, etc. with great speed and efficiency. We understand how these fund providers and investors work and what are their main areas of interest. Targeting the right source is not just important but also crucial for achieving successful financial close.
Subcontracts International offers:
1. Identification of projects with a Cash Flows Generating component and bankability potential;
2. Support of project development to achieve bankability;
3. Preparation and structure of transaction by leveraging our consulting, financial and legal expertise;
4. Finding the right investor and achieving financial close;
5. Support to the client through the project execution and construction phases.
We can be present with our services across the entire project lifecycle:
Strategy and planning: Assisting long-term planning of individual projects or a portfolio by focusing on feasibility, alignment with corporate objectives and governance procedures in order to maximize return on investment.
Financing and procurement: Raising project finance; establishing and managing the procurement process to acquire services, material or equipment to deliver the project, and prioritizing capital allocation between projects.
Project organization, execution and construction: Setting up the project for success and strengthening client capabilities to deliver on time and to budget.
Operations and maintenance: Assessing ongoing lifecycle costs and providing insights around optimizing the performance and value of assets in operation.
Asset recycling, concession maturity & decommissioning: Determining when and how to discontinue investing in an asset, and transaction advisory services for investors in infrastructure assets.
The key reasons for the underdevelopment of project financing lie in insufficient project maturity and inability to develop projects to the level necessary to achieve bankability. Access to finance is one of the main reasons that projects are not developing faster and the key stakeholders sometimes do not see a business case for financing. Moreover, lack of know-how and competence of key stakeholders require a complex multidisciplinary approach in order to guarantee project execution.
Projects, however, are funded solely on their merits. Although we do not make claims of 100% success rate in our pursuit of project finance, with our expertise and experience, our clients enjoy a definite advantage in terms of getting their projects successfully funded. Non-Recourse or Limited Recourse project finance is much more challenging to arrange when the only source of repayment will be the revenue stream, cash flows, cost savings, or equity position generated by the project itself and there is limited recourse—or none at all—to the project’s sponsors. While we’re confident of the contribution we can make toward a project’s success, we will get involved with arranging non-recourse project finance only on a mandated basis and with payment of our Engagement Fee.
The following are extremely important for achieving successful financial closure.
We have been consistently endeavoring to simplify the process of raising Project Finance for the project promoters and owners across the world. While discussing Project Finance, the significance of submitting a concise yet profoundly informative Project Proposal or Business Plan cannot be overestimated. Fund Providers as well as investors want to see a business plan that is short enough to engage investor interest and yet long enough to cover all vital project information.
We realize that it is not easy to put a winning Business Plan in place unless the Business Plan writer has been thoroughly acquainted with the project right from its inception. There are numerous consultants who would accept any Business Plan compiled by anyone. However, we generally do not. Project Finance is a challenging task and our experts would like to do it in a highly evolved manner so that chances of successful financial closure is extremely high. We accept a Business Plans compiled by either a competent project management team or a professional financial services provider with history of handling financial modeling for projects. Financial modeling combines accounting, finance, and business metrics to create an abstract representation of a company in Excel and has a wide range of uses, including making business decisions at a company, making investments in a private or public company, pricing securities, or undergoing a corporate transaction such as a merger, acquisition, divestiture, or capital raise.
We also need a Pitch Deck. A pitch deck is a brief presentation, often created using PowerPoint, Keynote or Prezi, used to provide your audience with a quick overview of your business plan with visual enhancements such as graphs, charts, and pictures. You will usually use your pitch deck during face-to-face or online meetings with potential investors, customers, partners, and co-founders.
Financial modeling, often considered synonymous to financial statement forecasting, is an effective tool for providing a clear picture of the forecasted financial performance of a company. The process results in the construction of a mathematical model that assists in firm’s decision making as well as financial statement analysis. The importance of financial modeling is mainly rooted in its capability to enable better financial decisions within a firm. It is widely used by organizations for the purpose of future planning. By simulating the impact of important variables, financial modeling allows for scenario preparation so that organization knows its course of action in various situations that may arise.
Financial modeling also plays an important role in capital budgeting. Not only does it make financial statement analysis and resource allotment for the next big investment easier, but it also helps in determining the cost of capital. It provides a thorough analysis of debt/equity structure for this purpose, along with the returns expected by investors.These days forecasts used in valuation are more often founded on fancy financial models built using elaborate spreadsheets. After the East Asian crisis of 1997, the bursting of the dot-com bubble in 2000, the global financial crisis of 2008, the European debt crisis in 2010, and innumerable other less famous valuation disasters or missed investment opportunities where debt and equity valuation failures had relied on sophisticated financial models, many would argue the relevance of such fancy business modeling.
Notwithstanding serious questions about the general efficacy of making financial projections and the dangerous ways in which people make forecasts, The fact is that financial models are becoming more and more complex and they are also being used more than ever before in all types of investment analysis. Seemingly sophisticated financial models using elaborate programming functions can appear impressive and even artistic. But these beautiful models are also often almost impossible to use in assessing risk and value.
The most important pitfall in modeling is the development of economic assumptions for prices, volumes, capital expenditures, and operating expenses that are put into the models. Mistakes include making assumptions in financial models that business entities earning a rate of return substantially higher than their cost of capital and growing quickly can continue this financial performance for a long time even when they do not have some kind of sustained competitive advantage.
We realize forecasting a company’s operations into the future can be very complex since each business is unique and requires a very specific set of assumptions and calculations. We will then focus on the following:
1. Historical data – input at least 3 years of historical financial information for the business.
2. Ratios & metrics – calculate the historical ratios/metrics for the business, such as margins, growth rates, asset turnover ratio, inventory changes, etc.
3. Assumptions – continue building the ratios and metrics into the future by making assumptions about what future margins, growth rates, asset turnover, and inventory changes will be going forward.
4. Forecast – forecast the income statement, balance sheet, and cash flow statement into the future by reversing all the calculations you used to calculate historical ratios & metrics. In other words, use the assumptions that you made to fill in the financial statements.
5. Valuation – after the forecast is built, the company can be valued using the Discounted Cash Flow (DCF) analysis method.
The structuring of project financing is a framework in which ownership structure, project structure, risk structure, and financial structure decisions are made and tied together in the project's legal structure which, in turn, forms a foundation for funding the project on a limited recourse basis. The ownership structure is how the special purpose company/vehicle (SPC/SPV) is organized; that is, as a corporation, unincorporated joint venture, limited liability partnership, etc. Project structure on the other hand refers to the agreements defining responsibilities and transfer of rights and/or ownership of the SPC/SPV such as build, operate, and transfer of ownership (BOT), build, own, operate, and transfer (BOOT), build, lease, and transfer (BLT), etc.
Risk structure is the prioritization and mitigation of risks after the identification, assessment, and allocation process is completed. The project's legal structure is the web of contracts and agreements negotiated to make financing possible. Financial structure refers to the mix of financing used to fund a project, which includes equity, short‐ and long‐term loans, bonds, trade credits, etc. and the cash flows to equity providers and the lenders.
A special purpose vehicle (SPV) project company with no previous business or record is necessary for project financing. The company’s sole activity is carrying out the project by subcontracting most aspects through construction contract and operations contract. Because there is no revenue stream during the construction phase of new-build projects, debt service is possible during the operations phase only. For this reason, parties take significant risks during the construction phase. Sole revenue stream is most likely under an off-take or power purchase agreement. Because there is limited or no recourse to the project’s sponsors, company shareholders are typically liable up to the extent of their shareholdings. The project remains off-balance-sheet for the sponsors and for the government.)
Project Risk Identification, Analysis, Mitigation, and Allocation
We assist our clients with arriving at a comprehensive risk management strategy. The core of Project Finance is the analysis of project risks, namely construction risk, operating risk, market risk, regulatory risk, insurance risk, and currency risk. There are risks related to the pre-completion phase such as activity planning risk, technological risk, and construction risk or completion risk. Then there are risks related to the post-completion phase such as supply risk, operating risk, and demand risk. And then there are risks related to both phases such as interest rate risk, exchange risk, inflation risk, environmental risk, regulatory risk, political risk, country risk, legal risk, and credit risk or counterparty risk. These risks are allocated contractually to the parties best able to manage them. The process of risk management is usually based on the following interrelated steps:
Essential to structuring a project finance package are the crucial elements of successful identification, analysis, mitigation and allocation of project risks. These risks are related to events that could endanger the project during development, construction and operation.
During the development stage the main risk is rejection by the host government or by the financiers – for reasons including commercial weakness, failure to obtain licenses, permissions and clearance. Sponsors can hedge their risks by obtaining technical assistance grants for project preparation and planning.
During the construction stage the main risk is failure to complete the project with acceptable performance levels and within an acceptable time frame and budget. Sponsors can hedge construction risks by purchasing various forms of insurance and obtaining guarantees from contractors with regard to costs, completion schedule and operational performance.
After construction, the main risk is ongoing operations and performance and include technical failures, availability of funds, market demand, prices, foreign exchange rates or environmental issues. The sponsors can hedge these risks through contractual and guarantee agreements that transfer some of the risk to other parties.
Realizing Benefits Of Project Finance
Financing projects through the project finance route offers various benefits such as the opportunity for risk sharing, extending the debt capacity, the release of free cash flows, and maintaining a competitive advantage in a competitive market. Project finance is a useful tool for companies that wish to avoid the issuance of a corporate repayment guarantee, thus preferring to finance the project in an off-balance sheet manner. The project finance route permits the sponsor to extend their debt capacity by enabling the sponsor to finance the project on someone's credit, which could be the purchaser of the project’s outputs. Sponsors can raise funding for the project based simply on the contractual commitments.
Project finance also permits the sponsors to share the project risks with other stakeholders. The basic structure of project finance demands that the sponsors spread the risks through a network of security arrangements, contractual agreements, and other supplemental credit support to other financially capable parties willing to assume the risks. This helps in reducing the risk exposure of the project company.
The project finance route empowers the providers of funds to decide how to manage the free cash flow that is left over after paying the operational and maintenance expenses and other statutory payments. In traditional corporate forms of organization, corporate management decides on how to use the free cash flow — whether to invest in new projects or to pay dividends to the shareholders. Similarly, as the capital is returned to the funding agencies, particularly investors, they can decide for themselves how to reinvest it. As the project company has a finite life and its business is confined to the project only, there are no conflicts of interest between investors and the management of the company, as often happens in the case of traditional corporate forms of organization.
Financing projects through the project finance route may enable the sponsors to maintain the confidentiality of valuable information about the project and maintain a competitive advantage. This is a benefit of raising equity finance for the project (however, this advantage is quite limited when seeking capital market financing (project bonds). Where equity funds are to be raised (or sold at a later time so as to recycle capital) through market routes (for example, Initial Public Offerings [IPOs]), the project-related information needs to be shared with the capital market, which may include competitors of the project company/sponsors. In the project finance route, the sponsors can share the information with a small group of investors and negotiate the price without revealing proprietary information to the general public. And, since the investors will have a financial stake in the project, it is also in their interest to maintain confidentiality.
In spite of these advantages, project finance is quite complex and costly to assemble. The cost of capital arranged through this route is high in comparison with capital arranged through conventional routes. The complexity of project finance deals is due to the need to structure a set of contracts that must be negotiated by all of the parties to the project. This also leads to higher transaction costs on account of the legal expenses involved in designing the project structure, dealing with project-related tax and legal issues, and the preparation of necessary project ownership, loan documentation, and other contracts.
Understanding The Dynamics Of Project Financing
From a broad perspective and general analysis, the financial viability (or commercial feasibility) of the project is assessed by determining whether the net present value (NPV) is positive. NPV will be positive if the expected present value of the free cash flow is greater than the expected present value of the construction costs. However, in addition to or in lieu of the NPV, lenders will use debt ratios such as the Debt Service Cover Ratio (DSCR) and Life Loan Cover Ratio (LLCR) as the main ratios to measure bankability.
The DSCR measures the protection of each year’s debt service by comparing the free cash flow (more precisely, the cash flow available for debt service – CFADS) to the debt service requirement. The DSCR requires that the cash flow available for debt service is at least a specified ratio (for example, 1.2 times) of the scheduled debt service for the relevant year. The LLCR compares the overall amount of free cash flow projected for the life of the loan, duly discounted with the amount of debt under analysis. The LLCR also reflects the capacity of the SPV to meet the debt obligations over the life of the loan (considering potential re-structuring).
On the basis of the projected cash flows of the SPV, including the debt profile under analysis, lenders and their due diligence advisors will observe the value of such ratios, and accommodate the debt amount so as to meet them, considering the maximum term at which they are ready to lend. Subsequently, they will run sensitivities analysis (including break-even analysis) on the project cash flows to test the resistance of the project to adverse conditions or adverse movements of the free cash flow figures from the base case.
In determining financial viability, and related to the reliability of cash flows and the guarantees offered by the contract (especially termination provisions), the lenders will analyze the risk structure of the contract. This will include determining how achievable the performance standards in government-pays projects, or the contractual guarantees in user-pays projects, actually are. Lenders will exercise tight control of all cash flows, limiting the ability of the private partner to dispose of them — through “covenants” (for example, no distributions may be made if the actual DSCR of the previous year has not meet a certain threshold). The bank accounts through which cash flows pass will be pledged and held with a bank within the syndicate; this is in addition to other provisions to be adapted in the loan agreement.
How Project Financing Solutions By Subcontracts International Helps
Project Finance is one of the key focus areas for Subcontracts International. We have access to several project financing groups and institutions that have institutionalized capabilities to successfully manage the unique and multidimensional process of project finance transactions led by customized project structuring approach.
These groups and institutions have been the lead arrangers and underwriters of a significant amount of project debt over the years. In the Indian project finance domain, they enjoy a leadership position and are acknowledged for their comprehensive domain expertise and knowledge in the infrastructure, manufacturing and mining sectors, having ensured timely financial closure of several big ticket projects.
Whether you're investing in renewable energy, telecommunications or water supply and waste water treatment – we develop the right solution for sustainably viable, flexibly structured financing to meet the needs of your transaction.
Backed by in-depth expertise you can benefit from our wide network in emerging and developing countries, our comprehensive knowledge of sectors and industries, and our 21 locations across North America, Europe, Asia, Africa, Oceania and Latin America.
How Does One Apply For Project Finance
Once you have contacted us and shared your requirement for raising project finance, we will send you our FINANCIAL ADVISORY SERVICES TERMS AND CONDITIONS (FASTC) to review carefully. If and when you agree to our FASTC, you will receive the Client Agreement draft which you will have to fill, sign and return to us. Subsequently, you will need to submit relevant information pertaining to your project through our online Project Finance Application Form.
Our services, however, do not come for free and hence be prepared to pay our service charges when you use our services. Also, we are rather choosy about who we serve. We encourage only serious clients who understand what it takes to arrange finances for projects. Our seamless services start with our client sending us a formal Letter of Intent expressing his/her desire to hire our services and then following this up by entering into a formal service agreement with us and depositing the token Engagement Fee online prior submitting the Project Finance Application Form which is non refundable. That is not all. You would be further liable to pay a Success Fee (case specific) post successful closure of funding.
What Happens Next
Our analysts evaluate projects individually, so if you have more than one project, you should complete one copy of the form for each project for which you are seeking funding. Once your Project Finance Application Form is received by us, our analysts will review the submitted Business Plan in detail and quickly evaluate whether it is good enough to move to the next stage.
If our analysts determine that your project is unlikely to meet our criteria, we will quickly contact you, usually within a day or two, to inform you the areas of the Business Plan that needs further working.
However, if our analysts determine that your project Business Plan is bankable, we will immediately get in touch with you for further discussions to finalize the project financing strategy.
Once the above have been taken care of, we move forward and present your Business Plan to target investors/financiers.
Important To Note:
1. We quickly respond to all inquiries.
2. We do not delegate executive time to an inquiry until your project, as expressed in your fully completed Project Finance Application form, has been thoroughly evaluated by our analysts.
3. To ensure our executives do not waste time on unrealistic inquiries we do not enter discussions in any form until we have a full understanding of your project's potential and risks. We therefore do not offer meetings, hold telephone discussions or return telephone calls until we have thoroughly evaluated your project.
4. Please do not send us additional communications during the application phase as it delays the application process.
5. We do not finance projects valued at less than $5,000,000.00 (United States Dollars five million), we do not finance acquisitions and we do not finance projects in countries mentioned in this Restricted Nations list
6. All our official communications are in English. We do not offer a translation service.
Upon receipt of all the documents and information submitted by the applicant, a Funder would evaluate the project in greater detail. Generally an Appraisal meeting is convened where all the decision makers at the Funding Company officially review the project as presented to determine if the project is within their scope of funding. Subsequent to this meeting, a due diligence of the project is generally undertaken by the Funder and the Project Sponsors/Applicant pay(s) for the expenses involved in carrying out the due diligence. Such expenses are project specific.
Financial Due Diligence
Financial due diligence requires that, during loan preparation and processing, sufficient analysis is undertaken to enable an informed assessment to be made with respect to project financial viability and long-term sustainability, and that the borrowers’ financial and project management systems are, or will be, sufficiently robust to ensure that funds are used for the purpose intended and that controls will be in place to support monitoring and supervision of the project.
There are Guidelines that provide the framework for financial due diligence, namely completion of a financial management assessment (FMA) of the executing agency (EA) and/or implementing agency (IA), financial evaluation of the project, and assessment of implementation arrangements (from a financial perspective, including disbursement and auditing arrangements).
The methodology note provides specific guidance in four primary aspects of financial due diligence:
1. financial management assessment,
2. project cost estimates and financing plan,
3. financial analysis, and
4. financial evaluation.
It also provides guidance on assessing disbursement auditing arrangements. This financial due diligence methodology note offers a suggested approach for operationalizing the standard project preparation and loan processing requirements of the Guidelines. the Guidelines, together with the methodology note, should be seen as a reference guide to assist staff in conducting an appropriate degree of financial due diligence during project preparation and processing, and should guide staff in determining the appropriate level of financial management safeguards required for a given project and/or EA and/or IA. The advice, directions, and recommendations provided should not be regarded as a substitute for the professional judgment of SUBCON staff.
Financial Management Assessment
Effective financial management within the EA and/or IA is a critical success factor for project sustainability, both in the effective use of funds and in the safeguard of assets once created. Irrespective of how well a particular project or program is designed and implemented, if the EA and/or IA does not have the capacity to effectively manage its financial resources, the benefits of the project are unlikely to be sustainable.
The objective of the financial management assessment (FMA) is to ensure that the EA and/or IA has, or will have, sufficiently strong and robust financial management systems and procedures in place to ensure sustainability of project investments and benefits over time.
The FMA is a review of the entity’s systems for financial and management accounting, reporting, auditing, and internal controls. It also involves an assessment of the entity’s disbursement and cash flow management arrangements, and governance and anticorruption measures. The FMA is not an audit; it is a review designed to determine whether or not the entity’s financial management arrangements are sufficient for the purposes of project implementation.
Approach and Methodology
The first step is to determine whether an FMA has recently been completed by any other credible financial institution (Bank, NBFC, VC or PE agencies) , the objective being to avoid duplicating diagnostic work that already exists. If an FMA exists, this should be reviewed and, in particular, any work done to overcome previously identified weaknesses should be checked. The original FMA can then be updated accordingly.
While planning to rely on the work of another lender , SUBCONTRACTS INTERNATIONAL would thoroughly review the agency’s assessment report to determine whether or not the results of the FMA are reasonable and can be accepted by SUBCONTRACTS INTERNATIONAL.
If an FMA has never been completed, or if there have been significant on-ground changes which render an existing FMA obsolete, then the following approach to the FMA is recommended:
Review the Economic Sector diagnostic studies specific to the country where the project is located, including the country financial accountability assessment, country procurement assessment report, country governance assessment, and diagnostic study on accounting and auditing.
Early in project preparation, have the borrower/project promoter complete a Financial Management Assessment Questionnaire (FMAQ).
Review responses to the FMAQ, determine what (if any) additional information is required in order to be able to conclude whether or not the financial management arrangements (a) are capable of recording all transactions and balances, (b) support the preparation of regular and reliable financial statements, (c) safeguard the entity’s assets, and (d) are subject to audit.
Review past audit reports and audit management letters to assess what concerns have previously been raised on systems and internal controls.
Form a conclusion with respect to whether or not the financial management arrangements and financial and project accounting systems can be relied upon for the purposes of the project.
If issues and/or weaknesses are identified, determine the most appropriate mitigation measures (e.g., restructuring finance sections, increasing finance staff, filling vacant posts, developing new systems, developing financial reporting, training, etc.).
Determine whether, given the findings, it is necessary to include a project component to strengthen financial management in the EA and/or IA and/or establish or strengthen a project implementation or project management office via either technical assistance or consultant support within the project.
1. Due Diligence service is rendered by an accredited Due Diligence service provider appointed by the Funding Partner Company. Due Diligence is by far the most important exercise in the funding consideration process.
2. The charges for the Due Diligence are to be borne by the applicant. These charges are specific for every case and the applicant is given prior notice of this.
3. It is extremely important that the applicant understands clearly the processes of Due Diligence is to secure a successful transaction and mutual business relationship between the applicant and the Funding Partner Company.
4. The Funding Partner Companies provide finance to viable projects on precise terms. There are no general terms. Everything is specific to the project under consideration.
Once the Due Diligence is successfully completed, a Funding Offer is officially made from Funding Partner Company to the applicant (Project Owner(s)/ Promoter(s)). The Project Owner(s)/Promoter(s) are issued an Invitation Letter for a table meeting in the Funding Partner Company’s office which can be in any country. Post a personal interview of the project owner(s)/promoter(s) ,the Loan Agreement/MOU is drafted and signed. Insurance requirements too would be discussed and finalized at this meeting.
Post successful completion of all of the above processes, funding disbursement would commence within the specified time frame.
Project finance is the process of financing a specific economic unit that the sponsors create, in which creditors share much of the venture’s business risk and funding is obtained strictly for the project itself. Project finance creates value by reducing the costs of funding, maintaining the sponsors financial flexibility, increasing the leverage ratios, avoiding contamination risk, reducing corporate taxes, improving risk management, and reducing the costs associated with market imperfections. However, project finance transactions are complex undertakings, they have higher costs of borrowing when compared to conventional financing and the negotiation of the financing and operating agreements is time-consuming.
Project Finance as the process of financing ‘a particular economic unit in which a lender is satisfied to look initially to the cash flows and earnings of that economic unit as the source of funds from which a loan will be repaid and to the assets of the economic unit as collateral for the loan’. Thus, the funding does not depend on the reliability and creditworthiness of the sponsors and does not even depend on the value of assets that sponsors make available to financiers.
Definitions of Project Finance emphasize the idea that lenders have no claim to any other assets than the project itself. Therefore, lenders must be completely certain that the project is fully capable of meeting its debt and equity liabilities through its economic merit alone. The success of a Project Financing transaction is highly associated with structuring the financing of a project through as little recourse as possible to the sponsor, while at the same time providing sufficient credit support through guarantees or undertakings of a sponsor or third party so that lenders will be satisfied with the credit risk. Finally, the allocation of specific project risks to those parties best able to manage them is one of the key comparative advantages of Project Finance.
There are five distinctive features of a Project Financing transaction. First, the debtor is a project company (special purpose vehicle – SPV) that is financially and legally independent from the sponsors, i.e., project companies are standalone entities. Second, financiers have only limited or no recourse to the sponsors – the extent, amount and quality of their involvement is limited. Third, project risks are allocated to those parties that are best able to manage them. Fourth, the cash flow generated by the project must be sufficient to cover operating cash flows and service the debt in terms of interest and debt repayment. Finally, collateral is given by sponsors to financiers as security for cash inflows and assets tied up in managing the project.
Commonly referred as “off-balance-sheet” financing, Project Finance is often used to segregate the credit risk of the project from that of its sponsors so that lenders, investors, and other parties will appraise the project strictly on its own merits. It involves the creation of an entirely new vehicle company, with a limited life, for each new investment project. Project companies are legally independent entities with very concentrated equity ownership and have higher leverage levels.
The core of Project Finance is the analysis of project risks, namely construction risk, operating risk, market risk, regulatory risk, insurance risk, and currency risk. There are risks related to the pre-completion phase such as activity planning risk, technological risk, and construction risk or completion risk. Then there are risks related to the post-completion phase such as supply risk, operating risk, and demand risk. And then there are risks related to both phases such as interest rate risk, exchange risk, inflation risk, environmental risk, regulatory risk, political risk, country risk, legal risk, and credit risk or counterparty risk. These risks are allocated contractually to the parties best able to manage them. The process of risk management is usually based on the following interrelated steps:
This process is crucial in Project Financing transactions and they must be identified and allocated to create an efficient incentivizing tool for the parties involved.
The phrase “project management” is a simple description of a complex activity. Before you can even plan the project, you must get it approved by stakeholders and sponsors. So, you’re sort of a salesman. Then you must plan it, schedule it, budget it, all within the confines of what has been approved. Next, you need to assemble a team to accomplish those tasks, and you must monitor their progress and report back on it to the project executives. It helps if you can break down these many components into a dozen key project management principles. It helps if you can break down these many components into a few key project management principles.
Key Project Management Principles
1. Success Principle
Even before you manage a project, you must commit yourself to success in that endeavor. Your goal as a project manager is the successful completion of the project.
This isn’t merely about keeping the project on schedule and within budget. Many a project has come in on time and with money to share, but the goal was never fully achieved. That is project failure.
2. Project Manager Principle
Projects are set to fail if they’re not lead by a project manager. The project manager comes up with the plan to achieve the goals of the project, and they manage the team assembled to complete those tasks.
You, as a project manager, are responsible for getting the sponsors on board, communication, risk management, budgeting, scheduling, the whole kit and caboodle.
Therefore, you need to have a skill set that includes technical knowledge, managerial experience, interpersonal skills and so much more. The most important thing to remember is never become complacent, always be learning.
3. Commitment Principle
Are you committed to the project? You better be! But so must every other person involved in the project.
You must have the sponsor and the team on board, too, or else you don’t have a viable project. This commitment is crucial before the project is even planned, let alone executed.
By commitment, we mean an agreement on project goals and objectives, scope, quality and schedule. Once you have these you’re ready to work.
4. Structure Principle
This is the first thing you’ll have to think about when managing a project. The structure will basically stand on three pillars: your project goal, resources and time.
What you must know is the reason for the project, which might seem obvious, but this question defines the project and leads to its structure.
The next step is understanding how long it will take to accomplish that goal, so you’ll need to have a timeline that’s broken up by milestones, marking major phases in the project.
You will also need a Gantt Chart. The Gantt chart offers a spreadsheet to the left and a timeline populated with that data to the right. There, tasks are points in time, beginning with a start data and ending with its deadline. This chart allows you to easily organize your projects and the tasks within them.
Furthering the structure, tasks that are sequentially dependent on one another can be linked to avoid leaving teams idle by delaying work. The larger project can also be broken down by milestones, so the major phases of the project are clearly delineated.
5. Definition Principle
You have a structure, but you must move into the definition phase to fully grasp the project. That’s a principle often passed over at the expense of the project.
It’s easier said than done, however, with many voices offering differing opinions of what the project is. Your job as project manager is to make it clear what the project is about, which can be problematic when there are many stakeholders.
Defining the project is not a one-time event, but something that must be revisited throughout the project. You must make sure that everyone, especially your team, has a clear definition in mind so they can work productively.
6. Transparency Principle
By transparency, we mean that you must report on the progress of the project to your sponsors and stakeholders. You can’t hide anything from them, or at least you do at your own risk, for it’ll inevitably come back to haunt you.
Of course, your sponsors and stakeholders don’t need you to drown them in minutia about the project. They want to see the broad strokes regarding progress, budget and schedule.
Save the details for your team. Yes, you must be transparent with your team. They need reports too, but you want to have those reports customizable to create effective reports that hits the target audience for whom they’re intended.
7. Communication Principle
While reporting to the various participants in the project is key, there must be a primary communication channel between yourself and the project sponsor. This is the only way to ensure that project decisions are properly implemented.
Without having a singular way to disseminate what the sponsor wants to the project manager, you’re not being efficient or effective in administrating the project. Even if there are multiple sponsors, they must speak with one voice or risk sending the project into chaos.
You have the responsibility to set this line of communication in place, finding the right person, with the right skills, experience, authority and commitment in the executive team to facilitate this important task.
8. Progress Principle
To progress in a project, a project must have well-defined roles, policies and procedures in place. That means that everyone must know what they’re responsible for and who they answer to. There needs a delegation of authority for any project to function.
It also means that you must have thought out how you’re going to manage the scope of work, maintain the quality of the project, define its schedule and cost, etc. Without these things being figured out at first, you’re putting the project at risk.
9. Life Cycle Principle
The life cycle of a project are its phases, from planning to initiation, monitoring to closing. Each phase of the project is dependent on planning it and then doing it.
Milestones determine the start and end of these project life cycles. You can think of them as signposts on the drive to reach your project’s destination.
10. Culture Principle
For a project to work, you must have a culture that supports the needs of all those involved. It might sound like mollycoddling—this is work, after all—but you don’t want anything to disrupt the effective productivity of your team.
A supportive work environment means a project team that is going to work better. As project manager, you must understand this dynamic and have it backed by management on all levels. Style is substance in this case, so make sure the management style is suited to the project.
11. Risk Principle
Risk is part of life, and it’s certainly a part of any project. What you must do is, before the project even starts, figure out what are the potential risks inherent in the work ahead. Identifying them is a not an exact science, of course, but you can use historic data and knowledge from you, your team and sponsors to uncover where risk lies. Using a risk register template helps you capture all this information.
It’s not enough to just know that risk might rise at this or that point in a project, you also should put in place a plan in which to resolve the issue before it becomes a problem. That means giving each risk a specific team member who is responsible for watching out for it, identifying it and working towards its resolution.
Naturally, you’re not going to foresee every risk, hopefully you’ll have at least identified the big ones. That’s why you must have an eye out for any irregularities. Have your team trained to be your eyes and ears on the project front. The sooner you identify a risk, whether expected or not, the faster you can resolve it and keep the project on track.
12. Accountability Principle
As you progress through your project, you’re going to need a metric to measure success. This is how you can hold your team and yourself accountable. Therefore, you want to have ways to measure the various aspects of your project and determine if the actual figures reported are in line with the ones you planned.
The great thing about accountability in a project is that it gives you the means to identify those team members who are top performers. They can then be rewarded. Everyone likes acknowledgement. While the underachievers can be given the training or direction they need to get more effective in their performance.
Defining Scope Of The Project
The first and important step of the project management is the scope (goals and objectives) definition. It is a core process of the project planning. The whole work that is necessary for the product manufacturing, is, therefore, defined and detailed described. The project team can comprehend what must be done; the planning effort is optimized, the control method for the project is chosen and the momentum of the project is developed.
The sub-units are structured and the transparency about the objective and temporal overall project is created. As a result the basis is created for the division of the work in the project. The scope definition focuses on the “product” or “work schedules”. The first element is a product-oriented structural plan or the product bill of material. The second one is a development-oriented structural plan. Both plans can run parallel or mutual in some projects and are a combination of two orientations. The scope definition is normally the first step in the project planning process and creates the foundation of the whole panning process. The project planning can probably be unsuccessful, if the process of the scope definition is poorly executed.
The very basics of project management are as follows: a project is a temporary endeavor with a defined beginning and end (usually time-constrained, and often constrained by funding or deliverables) that an organization takes to meet unique goals and objectives, typically to bring about beneficial change or add value.
The primary challenge of project management is to achieve all of the project goals and objectives while honoring the pre-defined constraints. The primary constraints are scope, time, quality, and budget. The secondary—and more ambitious—challenge is to optimize the allocation of necessary inputs and integrate them to meet pre-defined objectives.
For a successful project, the following project management principles are necessary assets when charting a path to completion. These principles of project management can be applied to any level or branch of a project that falls under a different area of responsibility in the overall project organization:
Project management typically revolves around three parameters – Quality, Resources, and Time. A project structure can usually be successfully created by considering:
a) Project Goal
An answer to the question “What has to be done” is usually a good starting point when setting a project goal. This question leads to the project structure plan. This plan consists of work packages which represent enclosed work units that can be assigned to a personnel resource. These work packages and their special relationships represent the project structure.
b) Project Timeline and Order
A flowchart is a powerful tool to visualize the starting point, the endpoint, and the order of work packages in a single chart.
c) Project Milestones
Milestones define certain phases of your project and the corresponding costs and results. Milestones represent decisive steps during the project. They are set after a certain number of work packages that belong together. This series of work packages leads to the achievement of a sub-goal.
The definition phase is where many projects go wrong. This can happen when no clear definition, or when the definition is muddled due to the involvement of too many stakeholders. A successful definition must involve the entire team at every step to facilitate acceptance and commitment to the project.
The project manager is responsible for the achievement of all project goals. These goals should always be defined using the SMART paradigm (specific, measurable, ambitious, realistic, time-bound). With nebulous goals, a project manager can be faced with a daily grind of keeping everything organized. It will work decidedly to your advantage to clearly define goals before the project begins.
Transparency About the Project Status
Your flowcharts, structure plan, and milestone plan are useful tools to help you stay on track. As a project manager, you should be able to present a brief report about the status of the project to your principal or stakeholders at each stage of the project. At such meetings, you should be able to give overviews about the costs, the timeline, and the achieved milestones.
It’s the duty of the project manager to evaluate risks regularly. You should come into every project with the knowledge that all projects come with a variety of risks. This is normal. Always keep in mind that your project is a unique endeavor with strict goals concerning costs, appointments, and performance. The sooner you identify these risks, the sooner you can address negative developments.
Managing Project Disturbances
It’s not very likely that you have enough personal capacity to identify every single risk that may occur. Instead, work to identify the big risks and develop specific strategies to avoid them. Even if you’re no visionary, you should rely on your skill set, knowledge, and instincts in order to react quickly and productively when something goes wrong.
Responsibility of the Project Manager
The Project Manager develops the Project Plan with the team and manages the team’s performance of project tasks. The Project Manager is also responsible for securing acceptance and approval of deliverables from the Project Sponsor and Stakeholders. The Project Manager is responsible for communication, including status reporting, risk management, and escalation of issues that cannot be resolved in the team—and generally ensuring the project is delivered within budget, on schedule, and within scope.
Project managers of all projects must possess the following attributes along with the other project-related responsibilities:
Project success is a multi-dimensional construct that can mean different things to different people. It is best expressed at the beginning of a project in terms of key and measurable criteria upon which the relative success or failure of the project may be judged. For example, some generally used success criteria include:
Structuring Project Finance
The structuring of project financing is a framework in which ownership structure, project structure, risk structure, and financial structure decisions are made and tied together in the project's legal structure which, in turn, forms a foundation for funding the project on a limited recourse basis. The ownership structure is how the special purpose company (SPC) is organized; that is, as a corporation, unincorporated joint venture, limited liability partnership, etc. Project structure on the other hand refers to the agreements defining responsibilities and transfer of rights and/or ownership of the SPC such as build, operate, and transfer of ownership (BOT), build, own, operate, and transfer (BOOT), build, lease, and transfer (BLT), etc.
Risk structure is the prioritization and mitigation of risks after the identification, assessment, and allocation process is completed. The project's legal structure is the web of contracts and agreements negotiated to make financing possible. Financial structure refers to the mix of financing used to fund a project, which includes equity, short‐ and long‐term loans, bonds, trade credits, etc. and the cash flows to equity providers and the lenders.
Risk is part of your planning makeup. When you start the planning process for a project, one of the first things you think about is: what can go wrong? It sounds negative, but it’s not. It’s preventative. Because issues will inevitably come up, and you need a mitigation strategy in place to know how to manage risks on your project.
But how do you work towards resolving the unknown? It’s sounds like a philosophical paradox, but it’s not. It’s very practical. There are many ways you can get a glimpse at potential risks, so you can identify and track risks on your project.
Project risk management is the process of identifying, analyzing and then responding to any risk that arises over the life cycle of a project to help the project remain on track and meet its goal. Risk management isn’t reactive only; it should be part of the planning process to figure out risk that might happen in the project and how to control that risk if it in fact occurs.
A risk is anything that could potentially impact your project’s timeline, performance or budget. Risks are potentialities, and in a project management context, if they become realities, they then become classified as “issues” that must be addressed. So risk management, then, is the process of identifying, categorizing, prioritizing and planning for risks before they become issues.
Risk management can mean different things on different types of projects. On large-scale projects, risk management strategies might include extensive detailed planning for each risk to ensure mitigation strategies are in place if issues arise. For smaller projects, risk management might mean a simple, prioritized list of high, medium and low priority risks.
It’s crucial to start with a clear and precise definition of what your project has been tasked to deliver. In other words, write a very detailed project charter, with your project vision, objectives, scope and deliverables. This way risks can be identified at every stage of the project. Then you’ll want to engage your team early in identifying any and all risks.
You can’t be afraid to get more than just your team involved to identify and prioritize risks. Many project managers simply email out to their project team and ask their project team members to send them things they think might go wrong on the project, in terms of a risk to the project But what you should do is actually get the entire project team together, some of your clients’ representatives on the project, and perhaps some other vendors who might be integrating with your project. Get them all together and do a risk identification session.
And if you’re not working in an organization with a clear risk management strategy in place, talk openly to your boss or project sponsor about risk. You want them to be aware of what risks are lurking in the shadows of the project. Never keep this information to yourself. Else, you’ll just be avoiding a problem that is sure to come up later.
And with every risk you define, you’ll want to put that in your risk tracking template and begin to prioritize the level of risk. Then create a risk management plan to capture the negative and positive impacts to the project and what actions you will use to deal with them. You’ll want to set up regular meetings to monitor risk while your project is ongoing. It’s also good to keep communication with your team ongoing throughout the project. Transparency is critical so everyone knows what to be on the lookout for during the project itself.
Of course, not all risks are negative. Positive risks can be a boon for your project, and will likely be managed differently than your typical negative risk.
Not all risk is created equally. As mentioned, risk can be either positive or negative, though most people assume risks are inherently the latter. Where negative risk implies something unwanted that has the potential to irreparably damage a project, positive risks are opportunities that can affect the project in beneficial ways.
Negative risks are part of your risk management plan, just as positive risk should be, but the difference is in approach. You manage and account for known negative risks to neuter their impact, but positive risks can also be managed to take full advantage of them.
There are many examples of positive risks in projects: you could complete the project early; you could acquire more customers than you accounted for; you could imagine how a delay in shipping might open up a potential window for better marketing opportunities, etc. It’s important to note, though, that these definitions are not etched in stone. Positive risk can quickly turn to negative risk and vice versa, so you must be sure to plan for all eventualities with your team.
Like everything else on a project, you’re going to want to strategize and have the mechanisms in place to reap the rewards that may be seeded in positive risk. Here are three excellent tips:
We’ve all been conditioned to think of risks as negative. But risk is a way to safeguard yourself by preparing for the possibility of failure or danger. If you have prepared for risk, understand its potential to both serve and derail your project, then risk can help you widen the aperture and see things that may have beforehand been invisible.
Can your organization also improve by adopting risk management into its daily routine? The answer is a resounding, Yes! As a project manager you can help move your organization towards a stronger risk management culture through incorporating organizational learning from your previous projects.
Building a risk management protocol into your organization’s culture by creating a consistent set of standard tools and templates, with training, can reduce overhead over time. That way, each time you start a new project, it won’t be like having to reinvent the wheel. You’ll have a head start and a path already in place to more efficiently and quickly address the specific risks of your individual project.
Things such as your organization’s records and history are an archive of knowledge that can help you learn from that experience when approaching risk in a new project. Also, by adapting the attitudes and values of your organization to become more aware of risk, means your organization can develop a better sense of the nature of uncertainty as a core business issue. With improved governance comes better planning, strategy, policy and decisions.
There are plenty of benefits to be gained from embedding risk management into the day-to-day practices of your organization. These compound one-another to have an increasing effect on the overall health and performance of your organization.
So, how do you handle something as seemingly elusive as project risk management? The same way you do anything when managing a project. You make a risk management plan. It’s all about process.
Process can make the unmanageable manageable. You can take what looks like a disadvantage and turn it into an advantage if you follow these six steps.
You can’t resolve a risk if you don’t know what it is. There are many ways to identify risk. As you do go through this step, you’ll want to collect the data in a risk register.
One way is brainstorming or even brainwriting, which is a more structured way to get a group to look at a problem.
As noted earlier, you can tap your resources. That can be your team, colleagues or stakeholders. Find those individuals with relevant experience and set up interviews so you can gather the information you’ll need to both identify and resolve. It doesn’t hurt to speak with that person in your organization who is the glass is always half-empty type. Their doom-and-gloom perspective can be surprisingly helpful to see risks that might not be evident to everyone else.
Look both forward and backwards. That is, imagine the project in progress. Think of the many things that can go wrong. Note them. Do the same with historical data on past projects. Now your list of potential risk has grown.
As you’re identifying risk, you’ll want to make sure you that your risk register isn’t filling up with risks that are really outliers and not risks at all. Make sure the risks are rooted in the cause of a problem. Basically, drill down to the root cause to see if the risk is one that will have the kind of impact on your project that needs identifying.
When trying to minimize risk, it’s good to trust your intuition. This can point you to unlikely scenarios that you just assume couldn’t happen. Remember, don’t be overconfident. Use process to weed out risks from non-risks.
Okay, you’ve got a lot of potential risks listed in your risk register, but what are you going to do with them? The next step is to determine how likely each of those risks are to happen. This information should also go into your risk register.
When you assess project risk you can ultimately and proactively address many impacts, such as avoiding potential litigation, addressing regulatory issues, complying with new legislation, reducing your exposure and minimizing impact.
Analyzing risk is hard. There is never enough information you can gather. Of course, a lot of that data is complex, but most industries have best practices, which can help you with your analysis. You might be surprised to discover that your company already has a framework for this process.
So, how do you analyze risk in your project? Through qualitative and quantitative risk analysis, of course. What does that mean? It means you determine the risk factor by how it impacts your project across a variety of metrics.
Those rules you apply are how the risk influences your activity resources, duration and cost estimates. Another aspect of your project to think about is how the risk is going to impact your schedule and budget. Then there is the project quality and procurements. These points must be considered to understand the full effect of risk on your project.
Not all risks are created equally. You need to evaluate the risk to know what resources you’re going to assemble towards resolving it when and if it occurs. Some risks are going to be acceptable. You would grind the project to a halt and possibly not even be able to finish it without first prioritizing the risks.
Having a large list of risks can be daunting. But you can manage this by simply categorizing risks as high, medium or low. Now there’s a horizon line and you can see the risk in context. With this perspective, you can begin to plan for how and when you’ll address these risks.
Some risks are going to require immediate attention. These are the risks that can derail your project. Failure isn’t an option. Other risks are important, but perhaps not threatening the success of your project. You can act accordingly.
Then there are those risks that have little to no impact on the overall project’s schedule and budget. Some of these low-priority risks might be important, but not enough to waste time on. They can be somewhat ignored, because sometimes you just should let stuff go.
All your hard work identifying and evaluating risk is for naught if you don’t assign someone to oversee the risk. In fact, this is something that you should do when listing the risks. Who is the person who is responsible for that risk, identifying it when and if it should occur and then leading the work towards resolving it?
That determination is up to you. There might be a team member who is more skilled or experienced in the risk. Then that person should lead the charge to resolve it. Or it might just be an arbitrary choice. Of course, it’s better to assign the task to the right person, but equally important in making sure that every risk has a person responsible for it.
Think about it. If you don’t give each risk a person tasked with watching out for it, and then dealing with resolving it when and if it should arise, you’re opening yourself up to more risk. It’s one thing to identify risk, but if you don’t manage it then you’re not protecting the project.
Now the rubber hits the road. You’ve found a risk. All that planning you’ve done is going to get implicated. First you need to know if this is a positive or negative risk. Is it something you could exploit for the betterment of the project?
For each major risk identified, you create a plan to mitigate it. You develop a strategy, some preventative or contingency plan. You then act on the risk by how you prioritized it. You have communications with the risk owner and, together, decide on which of the plans you created to implement to resolve the risk.
You can’t just set forces against a risk without tracking the progress of that initiative. That’s where the monitoring comes in. Whoever owns the risk will be responsible for tracking its progress towards resolution. But you will need to stay updated to have an accurate picture of the project’s overall progress to identify and monitor new risks.
You’ll want to set up a series of meetings to manage the risks. Make sure you’ve already decided on the means of communications to do this. It’s best to have various channels dedicated to communication.
You can have face-to-face meetings, but some updates might be best delivered by email or text or through a project management software tool. They might even be able to automate some, keeping the focus on the work and not busywork.
Whatever you choose to do, remember: always be transparent. It’s best if everyone in the project knows what is going on, so they know what to be on the lookout for and help manage the process.
The Executive Summary should tell the prospective investor what the project promoter wants. There must be a ONE LINE defining statement included in the summary that clearly states what the project promoter is asking for. The summary should be kept short and provide a synopsis of the entire business plan. It should provide a concise and optimistic overview of the planned business that captures the reader's attention and gives them an interest in learning more about it.
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