This presentation covers the two processes that fall under the Initiating Process Group
1. Develop Project charter
2. Identify Stakeholders
Additionally, it covers the ITTO of the processes
340
Capital
Budgeting
Techniques:
Certainty and Risk
Chapter Across the Disciplines
Why This Chapter Matters To You
Accounting: You need to understand cap-
ital budgeting techniques in order to
develop good estimates of the relevant
cash flows associated with a proposed
capital expenditure and to appreciate how
risk may affect the variability of cash
flows.
Information systems: You need to under-
stand capital budgeting techniques,
including how risk is measured in those
techniques, in order to design decision
modules that help reduce the amount of
work required in analyzing proposed capi-
tal projects.
Management: You need to understand
capital budgeting techniques in order to
understand the decision criteria used to
accept or reject proposed projects; how to
apply capital budgeting techniques when
capital must be rationed; and behavioral
and risk-adjustment approaches for deal-
ing with risk, including international risk.
Marketing: You need to understand capi-
tal budgeting techniques in order to
understand how proposals for new prod-
ucts and expansion of existing product
lines will be evaluated by the firm’s deci-
sion makers and how risk of proposed pro-
jects is treated in capital budgeting.
Operations: You need to understand capi-
tal budgeting techniques in order to
understand how proposals for the acquisi-
tion of new equipment and plants will be
evaluated by the firm’s decision makers,
especially when capital must be rationed.
9
LEARNING GOALS
Calculate, interpret, and evaluate the
payback period.
Apply net present value (NPV) and
internal rate of return (IRR) to relevant
cash flows to choose acceptable
capital expenditures.
Use net present value profiles to
compare the NPV and IRR techniques
in light of conflicting rankings.
Discuss two additional considerations
in capital budgeting—recognizing
real options and choosing projects
under capital rationing.
Recognize sensitivity analysis and
scenario analysis, decision trees, and
simulation as behavioral approaches
for dealing with project risk, and the
unique risks that multinational
companies face.
Understand the calculation and
practical aspects of risk-adjusted
discount rates (RADRs).
LG6
LG5
LG4
LG3
LG2
LG1
CHAPTER 9 Capital Budgeting Techniques: Certainty and Risk 341
Capital Budgeting Techniques
When firms have developed relevant cash flows, as demonstrated in Chapter 8,
they analyze them to assess whether a project is acceptable or to rank projects. A
number of techniques are available for performing such analyses. The preferred
approaches integrate time value procedures, risk and return considerations, and
valuation concepts to select capital expenditures that are consistent with the
firm’s goal of maximizing owners’ wealth. This section and the following one
focus on the use of these techniques in an environment of certainty. Later in the
chapter, we will look at capital budgeting under uncertain circumstances.
We will use one basic problem to .
Part of a lecture series on fundamental project management concepts, the lecture presents an overview of project selection methods: scoring,benefit contribution, and economic models.
According to Project Management Institute (PMI), the Initiating Process Group is the first step to complete the five PMBOK's Project Management Process Groups. The Initiating Process Group consists of (Developing a Project Charter & Identify Stakeholders) those processes performed to define a new project or a new phase of an existing project by obtaining authorization to start the project or phase.
This presentation covers the two processes that fall under the Initiating Process Group
1. Develop Project charter
2. Identify Stakeholders
Additionally, it covers the ITTO of the processes
340
Capital
Budgeting
Techniques:
Certainty and Risk
Chapter Across the Disciplines
Why This Chapter Matters To You
Accounting: You need to understand cap-
ital budgeting techniques in order to
develop good estimates of the relevant
cash flows associated with a proposed
capital expenditure and to appreciate how
risk may affect the variability of cash
flows.
Information systems: You need to under-
stand capital budgeting techniques,
including how risk is measured in those
techniques, in order to design decision
modules that help reduce the amount of
work required in analyzing proposed capi-
tal projects.
Management: You need to understand
capital budgeting techniques in order to
understand the decision criteria used to
accept or reject proposed projects; how to
apply capital budgeting techniques when
capital must be rationed; and behavioral
and risk-adjustment approaches for deal-
ing with risk, including international risk.
Marketing: You need to understand capi-
tal budgeting techniques in order to
understand how proposals for new prod-
ucts and expansion of existing product
lines will be evaluated by the firm’s deci-
sion makers and how risk of proposed pro-
jects is treated in capital budgeting.
Operations: You need to understand capi-
tal budgeting techniques in order to
understand how proposals for the acquisi-
tion of new equipment and plants will be
evaluated by the firm’s decision makers,
especially when capital must be rationed.
9
LEARNING GOALS
Calculate, interpret, and evaluate the
payback period.
Apply net present value (NPV) and
internal rate of return (IRR) to relevant
cash flows to choose acceptable
capital expenditures.
Use net present value profiles to
compare the NPV and IRR techniques
in light of conflicting rankings.
Discuss two additional considerations
in capital budgeting—recognizing
real options and choosing projects
under capital rationing.
Recognize sensitivity analysis and
scenario analysis, decision trees, and
simulation as behavioral approaches
for dealing with project risk, and the
unique risks that multinational
companies face.
Understand the calculation and
practical aspects of risk-adjusted
discount rates (RADRs).
LG6
LG5
LG4
LG3
LG2
LG1
CHAPTER 9 Capital Budgeting Techniques: Certainty and Risk 341
Capital Budgeting Techniques
When firms have developed relevant cash flows, as demonstrated in Chapter 8,
they analyze them to assess whether a project is acceptable or to rank projects. A
number of techniques are available for performing such analyses. The preferred
approaches integrate time value procedures, risk and return considerations, and
valuation concepts to select capital expenditures that are consistent with the
firm’s goal of maximizing owners’ wealth. This section and the following one
focus on the use of these techniques in an environment of certainty. Later in the
chapter, we will look at capital budgeting under uncertain circumstances.
We will use one basic problem to .
Part of a lecture series on fundamental project management concepts, the lecture presents an overview of project selection methods: scoring,benefit contribution, and economic models.
According to Project Management Institute (PMI), the Initiating Process Group is the first step to complete the five PMBOK's Project Management Process Groups. The Initiating Process Group consists of (Developing a Project Charter & Identify Stakeholders) those processes performed to define a new project or a new phase of an existing project by obtaining authorization to start the project or phase.
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1. Study Unit 2: Unit Specific Outcomes
After completing this study unit, you should be able to:
• Explain how projects are identified and selected
• Develop a project Charter for that project.
• Explain the outsourcing of projects using a request for proposal and
• Describe the proposal solicitation process
2. Study Unit 2: Assessment Criteria
• The source of projects in organisations is correctly explained.
• A selection of the appropriate project among many is done using the
correct criteria
• The project charter for the project is developed
• The use of an RFP to outsource projects is adequately explained
• The project solicitation process is fully explained.
3. INITIATING A PROJECT
• Initiating a project can be a big investment for a company but it
is a necessary investment to plan and run the rest of the
project.
• During initiating a project, the Project Manager will be creating
a collection of management products to show:
• how the project will be managed, the cost, how quality will be
checked, planned, how communication will be done, etc.
6. 2023/07/31 11
• Recognize a need, problem, or opportunity
• Clearly define the problem or need
• Quantify the problem
• Determine the budget
• Prepare a request for proposal
• Select the project(s) with the greatest benefit for the cost expended
….. FEASABILITY
7. 2023/07/31 12
So…… What do we do today !!!
Project Selection - "How can we make sure that we are doing the right
projects?"
Develop a set of criteria against which each opportunity will be evaluated
List the assumptions
Gather data and information for each opportunity
Evaluate each opportunity against the criteria
8. 2023/07/31 13
Project Selection
The leading question is: - "How can we make sure that we are doing the right
projects?"
Strategy identifies areas where the organisation:
• needs to improve or change in terms of organisational structure, research and
development capacity, development of products, office space, manufacturing
capacity, etc.,
• wants to serve customers in order to earn money.
9. The generic process of project selection looks as follows.
Figure 6 Project Selection Process
11. Project Identification - is necessary to:
• Validate a business need and justification for each candidate project
• Accept and apply objective criteria to rank the candidate projects
• Control and limit involvement of resources into projects’ reasoning
from their reasonability
• Plan the workforce to serve the anticipated HR needs of the
candidate projects
• Allow a more reasonable investment policy based upon the
profitability of candidate projects.
12. Like in strategy development, we find four different ways to identify
projects. We catagorise them in the following table.
13. ľhe following examples may illustíate these fouí basic appíoaches.
• Example 1 (intuitive identification): ľhe family who owns ouí company wants to add a
new píoduct to ouí poítfolio. ľheíefoíe, they tell ouí CEO to staít a development píoject foí
this new píoduct.
• Example 2 (evolutionaíy identification): Quite a few of ouí colleagues in ouí engineeíing
depaítment find it necessaíy to have a moíe efficient knowledge management system. In
theií coffee and tea bíeaks, they discuss some basic ideas foí íequiíements of such a
system, and, some weeks lateí, píopose to staít a píoject to puíchase a softwaíe package
with the necessaíy functionality and adapt it to ouí needs.
• Example 3 (holistic identification): Following the tíadition of peíiodical meetings, all
employees of ouí division join the beginning of this fiscal yeaí again; as usual, one point on
the agenda is the session with píesentations and Q & As foí new píojects which have a
division-wide impact.
• Example 4 (expeít-oíiented identification): Ouí CEO invites an exteínal
consultancy oíganisation to benchmaík ouí customeí seívice oíganisation. ľwo
months lateí, this oíganisation píoposes to staít a píoject in oídeí to change ouí
seívice oíganisation's stíuctuíe.
15. Evaluation and prioritisation of projects
A central part of the project selection process is the evaluation and
prioritisation of identified projects. There are a couple of methods available:
• Net Present Value (NPV)
• Internal Rate of Return (IRR)
• Benefit / Cost Ratio (BCR)
• Opportunity Cost (OC)
• Payback Period (PP)
• Initial Risk Assessment.
16. These methods require a certain minimum level of ‘planning’ for each one
of the projects to be evaluated. We need to know
• project life cycle duration, in number of accounting periods,
• expected project cost per accounting period,
• expected project revenue per accounting period,
• overall risk values of the projects to be evaluated.
Usually, we do this whole evaluation in the definition or early planning
phase.
Then, we only have estimates of those values and should make sure that
the estimation accuracies are comparable.
18. The Net Present Value (NPV) of a project is defined as the difference
between the present value of cash inflow (revenue, PV in) and
the present value of cash outflow (cost, PV out) of that project over the
project life cycle time.
Here is the formula to calculate the present value (PV) for a given future
value (FV), interest rate (r), and a number of accounting periods
19. Project Selection, Example 1:
Investment project ‘Blue’: development of a new
version of product ‘Blue Dolphin’.
The cost for development is R100,000.00 this year.
Next year, we will be able to sell the first batch for
R70,000.00, and in two years the second batch for
R50,000.00.
Given an interest rate of 10%, what is the net
present value of that project?
20.
21. Project Selection, Example 2:
Investment project ‘Red’: development of a
new version of product ‘Red Shark’.
The cost for development is R150,000.00 this
year.
Next year, we will be able to sell the first
batch for R90,000.00, and in two years the
second batch for R85,000.
Given an interest rate of 10%, what is the net
present value of that project?
22.
23. If we would have to choose between project ‘Blue’ and
project ‘Red’ we would choose the one with the higher
NPV, i.e., project ‘Blue’.
25. The internal rate of return of a project is defined as the interest rate at which the
net present value of that project equals zero. Here, we spare you the
mathematical details of calculating IRRs, and give you the results for the two
examples, projects ‘Blue’ and ‘Red’, obtained by trial and error with a simple MS
Excel sheet.
Again, we choose project ‘Blue’, the one with the higher IRR.
27. In project selection, we usually account for an overall view of the
benefits and costs of proposed projects, trying to express all benefits
and all costs in monetary terms of present values at given interest
rates.
This is the concept of the benefit -cost ratio (BCR). Here is the
formula:
28. In our examples, at an interest rate of 10%, we
obtain for
1. Project ‘Blue’: BCR = 104,959 / 100,000 =
1.050
2. Project ‘Red’: BCR = 152,066 / 150,000 =
1.014 (rounded to 3 decimal digits.)
If we only consider cash inflow as benefits and
cash outflow as costs, we end up with our
familiar decision to choose project ‘Blue’.
30. With the concept of opportunity cost (OC) we consider that
choosing one option means giving up other options we might
have.
In our example, we choose project ‘Blue’ (because of the
higher NPV or IRR or BCR) and give up project ‘Red’, at an
opportunity cost of NPV = R2,066.00.
32. Using the method of payback period (PP) gives us the simplest
approach. We have the following formula.
In our examples, we obtain as payback period for
1. Project ‘Blue’: PP = 100,000 / 40,000 = 2.50 (years)
2. Project ‘Red’: BCR = 150,000 / 58,333 = 2.57 (years) (rounded to 2 decimal digits.)
We decide in favour of the project with the shorter payback period, and our choice
would be project ‘Blue’. Notice that we do not apply present values explicitly.
33. In general, we emphasise that the methods using
Net Present Value (NPV),
Internal Rate of Return (IRR),
Benefit / Cost Ratio (BCR), or
Opportunity Cost (OC),
are all based upon the calculation of present values of estimated future
cash inflows and outflows.
In a mathematical sense, they usually lead us to the same project
selection results.
Typically, the application of one of these methods is enough.
35. If available, we can take initial risk assessments into consideration in
the evaluation of project proposals. The following chart shows an
example of this comparative analysis.
36. We represent each project by a bubble with the size of the bubble
indicating the project volume.
Those with high NPV and low-risk value we should choose, those with
low NPV and high-risk value avoid.
For the others, we need to consider other criteria like estimated
profit, payback period, etc.
37. We find our two projects, ‘Blue’ and ‘Red’, but now, the picture
does not immediately lead to the selection of ‘Blue’ since it
seems to have a much higher risk value than ‘Red’.
Remarks:
The examples used above are rather simple and therefore, the
corresponding results suggest equivalent selection decisions.
39. Selection and initiation of projects
Project selection and initiation is the step that naturally follows evaluation
and prioritisation
.
A particularly delicate step of project initiation turns out to be the staffing
of project teams.
As mentioned earlier, resources are scarce, and in most organisations
appear to be the most limiting factor in project selection.
If we take in too many projects, we overload our resources, if we do not
take in enough, we do not utilize them economically enough.
40. Having too many staff members working in multi-tasking mode, i.e.,
on two or more projects at the same time, decreases overall
productivity of the organisation.
On a medium/long-term scale, it seems to be the better option to
initiate projects in a way so that the teams can focus and work on
one project at a time, thus, avoiding disturbances of one project by
the others.
Of course, that needs clear prioritisation of the selected projects,
based on evaluation done in the previous step.
42. Review of projects
After project selection we need to regularly review projects that are
under way in order to find out if they are still in line with our strategy.
Thus, the first way of checking them is repeating the initial evaluation
with more accurate estimates as they become available;
the second way is holding regular project management review meetings
in order to identify major problems on a per-project basis, via project
status reports.
The minimum requirements of project management reviews along each
project's life cycle are as follows.
43. From the perspective of a project owner (for an internal project the organisation
is the project owner as well, and partially even the supplier):
• Acceptance of feasibility studies
• Request for proposal (RFP) or request for quotation (RFQ)
• Vendor selection/signature of contract
• Design freeze/approval of detailed planning documents
• Preliminary acceptance
• Final acceptance.
Figure 9 Minimum Requirements for a Project
44. From the perspective of a supplier:
• Bid/no bid decision
• Bid approval
• Signature of contract
• Order approval for sub-contractors
• Declaration ‘ready for preliminary acceptance’
• Project closure.
Figure 10 Minimum Requirements for a Supplier
45. This way, an organisation can monitor all their projects by
‘standardised’ project management reviews.
Figure 11 Standardised Project Review
46. Final remark:
The whole organisation should have a clear understanding
about when to terminate a project.
Like in project selection, the criteria are similar:
If a project cannot fulfil expectations in terms of strategy
support or originally estimated figures like net project value
(NPV), payback period (PP), etc. it should be terminated.
49. Project Charter
A project charter is a formal, typically short document that describes your
project in its entirety — including what the objectives are, how it will be carried
out, and who the stakeholders are. It is a crucial ingredient in planning out the
project because it is used throughout the project life cycle.
The project charter typically documents:
• Reasons for the project
• Objectives and constraints of the project
• Who the main stakeholders are
• Risks identified
• Benefits of the project
• General overview of the budget.
50. • Understand project goals and objectives.
• Identify the project vision and determine the scope of the project.
• Define project organisation.
• List all of the essential roles for the project, including customers,
stakeholders, and day-to-day project team.
• Create an implementation plan.
• Outline major milestones, dependencies and timeline for the entire team
and stakeholders.
• List potential problem areas.
How to create a Project Charter?
51. Adding potential risks and issues to the project charter helps everyone
think ahead should the worst happen.
The final section of the project charter is the approvals section.
The project manager and project sponsor (or the person who kicked
off the work, if a longer-term sponsor has yet to be appointed) should
sign and date the document.
Today, that is likely to be via email, so keep a copy of the email
authorisation in your project files in case you need to refer back to it.
54. 2023/07/31 59
Preparing a Request for Proposal
State, comprehensively and in detail, what is required, from
the customer’s point of view
Enable contractors or a project team to understand what
the customer expects so that they can prepare a thorough
proposal
The need may be communicated informally—and
sometimes only orally
55. 2023/07/31 60
Preparing a Request for Proposal (Cont.)
Guidelines for drafting a formal RFP to external contractors:
• statement of work (SOW)
• customer requirements
• deliverables
• customer-supplied items
• approvals required by the customer
• type of contract
56. 2023/07/31 61
Preparing a Request for Proposal (Cont.)
• the payment terms
• the required schedule for completion
• instructions for the format and content of the contractor
proposals
• due date for proposals
• evaluation criteria
• occasionally will indicate the funds the customer has available
57. Project Information - This section is meant to provide an overall picture of
the project that can be seen at a glance as well as convey important project
details.
Name of the Organisation:
Project Title:
Project Summary: Write a 2-4 sentence summary of the project scope
Project Time-frame:
Prepared by:
Attached Documentation:
58. Project contacts:
List those individuals who are involved with the project and
can be contacted.
Be sure to include their name, title, role in the project, as well
as phone numbers and email addresses.
59. Project summary:
The goal of this section is to present the reasons for doing this project as well as stating all
of the project's objectives. In this section in particular it is very important to write concisely
and clearly. Some project professionals even suggest writing the project summary last.
Before you begin writing you should be able to answer the following questions:
• Why are you doing this project?
• What will you be doing?
• How will you be doing it?
• Who will be doing it?
• Where will it be done?
• How long will it take?
• How much will it cost?
60. Project background
Explain what needs/problems you are trying to solve, and why these
needs/problems are worth solving.
You should also provide a brief setting and history behind the project.
This section should be no more than a page. Include references to
supporting documentation, such as research papers and articles.
This information can be placed in the index at the end.
62. Project methodology
This section details the plan for how the project objectives will be achieved. It
usually starts with a description of the overall approach. Then it provides details
on methodology, the population being addressed, and how anticipated
problems will be managed.
The project approach summary
Write a few short paragraphs or bullet points on your overall approach to
the project. Include how the project team will be organised, what
development and collaboration tools will be used, and how the plan will be
updated along the way.
Work breakdown and task time estimates
In this section you should create a detailed project schedule. Make a list of tasks
that will be performed for this project, make sure the list is detailed enough and
the tasks broken down enough to expose risks and make reasonable estimates in
man hours required. You may want to include a milestone chart in this section.
63. Project deliverables
Make a list of the project ‘deliverables’. (These are the products,
information, reports, etc. that will be delivered to the client at the
end and throughout the duration of the project).
Make sure to include a description of the deliverable and an
estimated delivery date.
64. Project risk management
This section details the major project risks and delineates the plans to
alleviate or control them. Make sure to address each risk's likelihood of
occurring as well as its impact on the project and the organisation.
Risk management plan:
This is the detailed plan of action to minimise and contain any risk factors
that may come up as the project progresses.
Risk register:
Be sure to include this line-item list of risks and counter efforts
65. Project costs - In this section you will need to estimate the overall
cost of the project.
Project budget: A detailed, line-item budget should be divided into
categories such as salaries, fringe benefits, travel, supplies, and
equipment.
Make sure to also include any overhead costs (called ‘indirect costs’) that
will be associated with the project.
Budget narrative: The budget narrative is basically a list of commentary
needed to clarify and justify the figures on your budget.
Additional financial statements: Some project proposals may require
additional financial statements, such as a profit and loss statement, a
recent tax return, an annual report, or a list of funding sources.
66. Conclusion
In this section you should try to tie up all the above information in a short
summary that explains the potential value of the project and emphasises
its feasibility.
Appendix
This is where you should put additional charts, graphs, reports, etc. that
were cited in the proposal, but were not appropriate to place in the main
body of the document.
69. 2023/07/31 74
Soliciting Proposals
Don’t provide information that is not provided to all contractors
May hold a bidders’ meeting to explain the RFP and answer
questions
Not all use RFP
70. TERMS OF REFERENCE
TECHNICAL ADVISOR / CONSULTANT TO DEVELOP AN INVESTMENT
MEMORANDUM AND INVESTOR PITCH DECK TO IDENTIFY A
TECHNICAL PARTNER.
71.
72.
73.
74.
75.
76.
77.
78. CRITICAL SUCCESS FACTORS
The need must be clearly defined before preparing a request for proposal (RFP).
When selecting a project from among several needs or opportunities, the decision should be based on which project will provide the
greatest overall benefits compared to its costs and possible consequences.
Having a well-understood evaluation and selection process and a well-rounded committee will increase the chances of making the best
project selection decision.
Establish quantitative project success criteria or expected benefits.
A good RFP allows contractors to understand what the customer expects so that they can prepare a thorough proposal that addresses the
customer s needs and requirements.
A request for proposal should include a statement of work, customer requirements, expected deliverables, and the criteria by which the
customer will evaluate proposals.
An RFP should provide instructions for the format and content of contractor proposals so that the customer will be able to make a
consistent and fair comparison and evaluation of all the proposals.
Customers must be careful not to provide information to only some of the contractors because it would give these contractors an unfair
competitive advantage in preparing their proposals.
79. AND …… How will we know that we’ve achieved our goal !!!
2023/07/31 84
80. QUESTIONS
2023/07/31 85
1. The initiating phase of the project life cycle starts with the
recognition of a………..,………., or …………..
2. Project selection involves evaluating potential projects, and
then deciding which of these should move forward to be
implemented
3. What are the four steps in the project selection process?
4. A project charter is used to formally …………….. a project and
………. the key ………… and ……….. for the project
5. List at least eight elements that could be included in a project
charter.
81. Answers
2023/07/31 86
• 1. The initiating phase of the project life cycle starts
with the recognition of a need, problem, or
opportunity
82. Answers
2023/07/31 87
• 2. Project selection involves evaluating potential
projects, and then deciding which of these should
move forward to be implemented
83. Answers
2023/07/31 88
3. What are the four steps in the project selection
process?
Develop a set of evaluation criteria
List assumptions for each project
Gather data and information for each
project
Evaluate each project against the criteria
84. Answers
2023/07/31 89
4. A project charter is used to formally authorize
a project and summarize the key conditions
and parameters for the project
85. Answers
2023/07/31 90
• 5. List at least eight elements that could be included in a project charter.
• Project title
Purpose
Description
Objective
Success criteria or expected benefits
Funding
•
Major deliverables
Acceptance criteria
Milestone schedule
Key assumptions
Constraints
Major risks
Approval requirements
•
Project manager
Reporting requirements
Sponsor designee
Approval signature and date
86. QUESTIONS
2023/07/31 91
6. What is the purpose of a request for proposal?
7. What are some elements that may be included in a request
for proposal?
8. Care should be taken not to provide …………..to only some of
the ………….. that is not provided to …….l interested contractors
because it would give some of
them an …… ……. ….
87. QUESTIONS
2023/07/31 92
6. What is the purpose of a request for proposal?
To solicit proposals from potential contractors to do
the project
88. Answers
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•7. What are some elements that may be included in a request
for proposal?
•
Project objective
Statement of work
Customer requirements
Deliverables
Acceptance criteria
Customer-supplied items
Approvals required
Type of contract
Payment terms
Required schedule
Instructions for the content and format
of contractor proposals
Due date for proposals
Proposal evaluation criteria
Funds available
89. Answers
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8. Care should be taken not to provide information to only some of
the contractors that is not provided to all interested contractors
because it would give some of them an unfair competitive advantage.
90. NEXT WEEK
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CHAPTER 3
Developing Project Proposals
• Develop relationships with customers
and partners
• Prepare a proposal/quotation in
response to a customer’s RFP and
discuss how customers evaluate the
proposal.
• Explain types of contracts and various
terms and conditions.
• Measure the success of proposal efforts.