Chapter Two: Project Cycle

2.1. Meaning and Definition of Project Cycle

A project cycle is a sequence of events, which a project can follow. These events, stages or
phasescan bedivided into several equally valid ways, depending on the executing agency or parties
involved.
There are various expressions of the stages of the project cycle.
2.2. UNIDO Project Cycle
Phases of the project cycle – UNIDO manual

Phase 1-Pre-investment

Opportunity study Prefeasibility study Feasibility study Appraisal & Deci

Phase 2 Investement

Negotiation & Engineering Construction & Man Commissioning

Contracting Design power training start up

Phase 3- Operation
According to aforementioned diagram UNIDO, 1991 stated the following cycle.
1. Pre-investment phase;
a. Identification/opportunity study/
b. Pre-feasibility study/ pre-selection/
c. Feasibility study
d. Support study
e. Appraisal study.
2. Investment phase;
i. Negotiating and contracting; v. Erection and installation
ii. Engineering design; vi. Pre production marketing;
iii. Construction; vii. Manning and training
iv. Procurement

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3. Operation phase.
A. Commissioning & starting of operation B. Replacement/rehabilitation
4. Project evaluation/appraisal/ [Link]/innovation

1. Pre investment phase

a. Identification (Opportunity studies)
The first stage in the project cycle is to find potential projects. It is the identification of
investmentopportunities.
The objectives of the opportunity study/identification are toconduct:
• Refinement of business idea
• Preliminary evaluation of alternative approaches
• Preliminary assessment of strengths and weaknesses of the concept.
Characteristics of the study:-
 Vague type based more on rough aggregate estimates than on detail analysis.
Project ideas can emanate from a variety of sources. Much depends on the experience, and even
theimagination, of those entrusted with the task of initiating project ideas.
b. Project preparation: Analysis and Appraisal phase
Once project ideas have been identified and selected for further examination, the process of
projectpreparation and analysis starts.
Criticalelement of project preparation is identifying and comparing technical and institutional
alternatives forachieving the project’s objectives. Different alternatives may be available and
therefore, resourceendowment (labor or capital) would have to be considered in the preparation of
projects.
Preparationthus require feasibility studies that identify and prepare preliminary designs of
technical andinstitutional alternatives, compare their costs and benefits, and investigate in more
details the morepromising alternatives until the most satisfactory solution is finally worked out. It
involves generallyfollowing steps:
A. Pre-feasibility studies D. Appraisal of studies
B. Feasibility studies E. Selection of projects/investment
C. Support studies; alternatives/
A. Pre-feasibility Study (Pre-selection/ Preliminary Screening)
The identification process will give the background information for defining the basic
concept project,which leads to the feasibility study stage. Once some project ideas have been
put forward, the first step is to select one or more ofthem as potentially promising. To begin
with, a preliminary project analysis is done.

At this stage, the study/screening criteria are characterized with intermediate level of
detail based primarily on secondary data, becoming specific and refined as projectplanning
advances.

During preliminary selection, the analyst should;-

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 o Eliminate project proposals that are technically unsound and risky,
o Nomarket for their output, supply of inputs, are very costly in relation to benefits,
assume over ambitious sales and profitability, etc.
Some kind of preliminary screening is required to eliminate ideas, which prima facie, are
notpromising. For this purpose the following aspects may be looked into:
• Compatibility with the promoter • Adequacy of market
• Consistency with government priorities • Reasonableness of cost, and
• Availability of inputs • Acceptability of risk level
When a firm evaluates a large number of project ideas, it may be helpful to stream line the
process ofpreliminary screening. For this purpose, a preliminary evaluation may be translated into
project ratingindex. The steps involved in determining the project-rating index are as follows:
1. Identify factors relevant for project rating
2. Assign weights to these factors (the weights are supposed to reflect their relativeimportance)
3. Rate the project proposal on various factors, selecting a suitable rating scale
4. For each factor multiply the factor rating with the factors weight to get the factor score
5. Add all the factor scores to get the overall project-rating index.
Once the project-rating index is determined, it is compared with a pre-determined hurdle value
tojudge whether the project is prima facie worthwhile or not.
As a result of the preliminary screening exercise, a project profile, an opportunity study report,
or anidentification study report, as appropriate, is prepared showing which project alternatives should
berejected and which ones may be advanced to the next stage.

B. Feasibility Study
The major difference between the pre-feasibility and feasibility studies is the amount of work
requiredin order to determine whether a project is likely to be viable or not.
If the preliminary screeningsuggests that the project is prima facie worthwhile, a detailed
analysis of the marketing, technical,financial, economic, and ecological aspects is undertaken.
Feasibility study provides a comprehensivereview of all aspects of the project and lays the foundation
for implementing the project and evaluatingit when completed.
The focus of this phase of capital budgeting is on gathering, preparing, and summarizing
relevant information about various project aspects, which are being considered for inclusion in the
capital investment. Based on the information developed in this analysis, the stream of costs and
benefits associated with the project can be defined.
At this stage a team of specialists(Scientists, engineers, finance experts/accountants,
economists, sociologists, etc) will need to work together. At this stage more accurate data need to be
obtained and if the project is viable it should proceed to the project design stage. Appraisal should
cover major aspects like technical, institutional, economic and financial.
The final product of this stage is a feasibility report. The feasibility report should contain the
followingelements:
1. Market analysis

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 2. Technical analysis (materials & 4. Financial analysis
Inputs, Technology & 5. Economic analysis
engineering works, 6. Social analysis, and
construction,infrastructure) 7. Environmental analysis
3. Organizational analysis
C. Support Studies
Support or functional studies cover specific aspects of an investment project, and are required
as pre requisites for, or in support of, pre-feasibility and feasibility studies of particularly large-
scaleinvestment proposals, the viability of which critically depends upon the quantity and quality of
certaininput or aspect of that project.
This type of study is justified when a detailed study required for a specific aspect/input/ is too
involvedto be undertaken as part of the feasibility study. Alternatively, the decision towards
undertaking afeasibility study could be dependent upon the outcome of a support study.
Example: Cement processing is tied to the source of major raw materials, which are lime stone
andsandstone. Since the requirement is bulky, one cannot think of a cement factory located
at a distancefrom the source of these raw materials. So there is little room for outsourcing
from distant locations orimports. Since cement production is critically dependent upon the
availability of adequate quantity and the right quality of these raw materials, a support
study is justified before commissioning afull-fledged feasibility study.

D. Appraisal of an investment Decision

Project appraisal can be defined as a second look at the project report by a team of
professionals, who were not participated in the preparation of the study but qualified and
experienced to evaluate such studies.
It is or should be an independent assessment of the project to identify the weaknesses
andstrengths of the study that have a bearing on the decision to invest, and/or to finance the project.
Appraisal is the comprehensive and systematic assessment of all aspects of a project study,
addressingparticularly issues like:
• Specificity of objectives;
• Clarity of problems;
• Methodology: type and source and appropriateness of data collection techniques and
analysistechniques;
• Project specific factors.
When a feasibility study is completed the various parties involved in the project will carry out
theirown appraisal of the investment project in accordance with their individual objectives and
evaluationof expected risks, costs and gains.
The prime objective of project appraisal should be to:-
 Identify the weaknesses that have bearing on decision-making
 Identify means of strengthening it adequately to ensure final success of the project
 Improve and revamp the project.
The appraisal report concentrates onthe;-

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  Health of the company to be financed
 Returns obtained by equity holders and
 Protection of its creditors.
The techniques applied to appraise the project in linewith these criteria center around technical,
commercial, market, managerial, organizational, financial and possibly also economic aspects. The
findings of this type of appraisal enter into the appraisalreport.
A wide range of appraisal criteria have been developed to judge the worthwhile of a project. They
aredivided into two broad categories, viz.,
 Non-discounting criteria and
 Discountingcriteria.
When the appraisal is completed, the findings and final recommendations are put together in the
formof an appraisal report. The recommendation may be to approve, re-formulate, postpone, or
abandonthe project under review.
E. Selection of projects/investment alternatives/
The feasibility study would enable the project analyst to select the most likely project out of
several alternative projects. Selection follows, and often overlaps, analysis.
It addresses the question - is the project worthwhile? Which of the projects is the best option
from the existing competing once? Giventhat there are alternative projects, theoretically the owner is
supposed to come up with alternative useof his/her money and hence the need to choose the best
investment opportunity.
Project selection involves different factors and forces. It involves political, social and
economic variables. Essentially it is a political process in the sense that despite economic rationality,
political forces could exert significant pressure on the decision making process on the selection of
projects from available alternatives.

In this regard, project appraisal study could be categorized in the selection criterion. After
appraisalstudies the decision maker will have to select one or a number of projects on the bases of
preestablished evaluation/selection criteria.
2. Implementation/Investment phase/
After the project design is prepared negotiations with the funding organization starts and once
source of finance is secured implementation follows. Implementation is the most important part of the
projectcycle. The better and more realistic the project plan is the more likely it is that the plan can be
carriedout and the expected benefits realized.
Project implementation must be flexible since circumstances change frequently. Technical
changesare almost inevitable as the project progresses; price changes may necessitate adjustments to
input and output prices; political environment may change.
Translating an investment proposal into a concrete operational unit is a complex, time
consuming andrisk fraught task. Delays in implementation, which are common, can lead to
substantial cost overrun.
For quick implementation at a reasonable cost, the following are helpful.

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 1. Adequate formulation of projects. A major reason for the delay is inadequate formulationof
projects. Put differently if necessary homework in terms of preliminary studies
andcomprehensive and detailed formulation of projects is not done, many surprises and
shocksare likely to spring on the way. Hence the need for adequate formulation of the
projectcannot be ignored.
2. Use of the principle of responsibility accounting. Assigning specific responsibilities toproject
managers for completing the project within the defined time frame and cost limits
ishelpful in quick execution and cost control.
3. Develop project management competence: Use of network techniques. For projectplanning
and control two basic techniques are available - PERT (Program EvaluationReview
Technique) and CPM (Critical Path Method). These techniques have lately mergedand are
being referred to by common terminology that is network techniques. With the helpof
these techniques, monitoring becomes easier.
The investment phase can be divided into the following stages:
1. Establish project management office which involves establishing of the legal, financial
andorganizational basis for the implementation of the project.
2. Technology acquisition and transfer, including basic and detailed engineering, which include;-
• Tender preparation (hence developing the terms of reference), tendering, tender
analysis,selection of a supplier,
• Negotiation and contracting;
• Procurement of major technology for installation and other inputs necessary forconstruction
and installation of the system;
3. Engineering design;
4. Construction work
5. Installation and erection;
6. Pre-production marketing, including the securing of supplies and setting up the administration
ofthe firm.
7. Recruitment and training of personnel, and
8. Plant commissioning and start-up (Alternatively, this function may be categorized in the
operationphase).
This implementation basically involves capability in project management. The function of
projectmanagement is to foresee or predict as many of the dangers and problems as possible and to
plan,organize and control activities so that the project is completed successfully in spite of the risks.
Project management is the planning, organizing, directing, and controlling of resources for a
specific time period to meet a specific set of one-time-objectives. This process starts before any
resources arecommitted and must continue until all work is finished.
The aim is for the final result to satisfy theproject sponsor or purchaser, within the promised
timescale and without using more money and otherresources than those, which were originally set
aside or budgeted for.
Since there are different types of projects, the management of these different types of projects is
alsodifferent reflecting the peculiarity of the projects.

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Project management is a multifaceted process in which many different things get
managedsimultaneously. In managing projects we are normally involved in the following types
ofmanagement:
 Scope management • Cost management
• Time management • Quality management, and
• Human resource management •Communication management
For each of these activities it is necessary to plan, organize, direct, and control. Successful
projectmanagement can then be defined as having achieved the project objectives:
• Within time
• Within cost
• At the desired performance/technology level, quality, etc./
• While utilizing the assigned resources effectively and efficiently
3. The operational phase
Project operation involves the running and maintenance of new entity in accordance with set
objectives and planned tasks.
The problems of the operational phase need to be considered from both a short-and long-term
viewpoint. The short-term view relates to the initial period after commencement of production when
anumber of problems may arise concerning such matters as the application of production techniques,
operation of equipment or inadequate labor productivity owing to a lack of qualified staff. The long-
term view relates to chosenstrategies and the associated production and marketing costs as well as
sales revenues. These have adirect relationship with the projections made at the pre-investment phase.
If such strategies andprojections are proved faulty and remedial measures will not only be difficult
but may prove to behighly expensive.
The operational phase involves the following main functions.
1. Commissioning and starting of commercial production;
2. Post-project evaluation
3. Replacement/rehabilitation
4. Expansion /innovation.

4. Evaluation Phase
The final phase of the project is the evaluation phase. Many individuals usually neglect this stage.
The projectanalyst looks carefully at the successes and failures in the project experience to learn how
better toplan for the future. In this stage it is important to examine the project plan and what really
happened.
Performance review should be done periodically to compare actual performance with
projectedperformance. A feedback device, it is useful in several ways it:
(i) Throws light on how realistic were the assumptions underlying the project;
(ii) Provides a documented log of experience that is highly valuable in future decision making;

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 (iii) Suggests corrective action to be taken in the light of actual performance;
(iv) Helps in finding judgment biases;
(v) Induces a desired caution among project sponsors.
Weakness and strengths should carefully be noted so as to serve as important lessons for future
project analysis undertaking. Evaluation is not limited only to completed projects; ongoing projects
could also be evaluated to correct problems when the project is in trouble. The evaluation may be
done by the project management, the sponsoring agency, or other bodies.
2.3. World Bank Project Cycle(BAUM’s Project Cycle (BAUM’s Model, 1978))
The development cycle for World Bank projects has been described in an article by Warren Baum.
The Bank defined six sequential steps as follows:
• Identification

• Preparation

• Appraisal

• Promotion, Negotiations, Board presentations

• Implementation and supervision

• Evaluation

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Figure 2.2 World Bank project cycleModel
2.4. S Choudhury’s Project Life Cycle (1988)
The generic project cycle has six phases. In practice, the duration and importance of each
phase may vary for different projects.

Figure 2.3. S Choudhury’s Project Life Cycle (1988)

Identification– generation of the initial project idea and preliminary design
Preparation– detailed design of the project addressing technical and operational aspects
Appraisal– analysis of the project from technical, financial, economic, gender, social,
institutional and environmental perspectives
Proposal preparation, approval and financing– writing the project proposal, securing
approval for implementation and arranging sources of finance

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Implementation and monitoring– implementation of project activities, with on-going checks
on progress and feedback
Evaluation – periodic review of the project with feedback for next project cycle.

2.5. Project Completion Report (PCR)

The Project Completion Report (PCR) is a structured reporting format provided and
completed by the Project Promoter and the Focal [Link] the type of project assistance
(i.e. individual project, programme, or block grant), the same PCR format is to be used.
In some legal framework, the PCR forms an integral part of the project planning and
reporting structure. It has the following diagram shows.

Grant Agreement &

Application Form
Project Implementation
(APF)
Plan (PIP)

Project Completion Project Interim Report

Report (PCR) (PIR) =Payment claim

Figure 2.3. Project Completion Report (PCR)

2.6. Management Approach to Project Cycle

Project Cycle Management is an approach to manage multiple projects or programmes and to
improve the quality of projects by learning from one project and applying the lessons in the
following ones.
The approach was introduced by the World Bank in the 1980, and spread throughout the
world in the 90s, when it was picked up by the European Commission.

PCM incorporated the logical framework approach (LFA) and added two main elements:

 The link between the long term policies or the strategic framework of the organization and
their execution in the form of projects (or programmes).
 Learning from experiences: PCM puts a heavy emphasis on monitoring and evaluation. The
main idea behind the cycle is that the quality of projects gradually improves as lessons are
passed on from one project to the next.
 Also, within a single project there is flexibility and learning, as continuous
monitoring allows the people who manage the project to adapt the activities and
planning to the (changing) situation in the field. At least, that is the theory.

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The principle of PCM involves the following points:
1. Adherence to the phases of the project cycle to ensure a structured and well-
informed decision-making process.
2. Client orientation through the use of participatory planning workshops at key
phases of the project cycle, and the formulation of the Project Purpose in terms of
sustainable benefits to be delivered to beneficiaries.
[Link] of aspects of sustainability into project design to ensure sustainable
benefits.
4. Use of the Logical Framework Approach to ensure a consistent analytical approach
to project design and management.
5. An integrated approach which links the objectives of each project into the objectives of
the Commission and the national

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