Project Analysis & Evaluation Chapter 2: Project Cycle
CHAPTER TWO
PROJECT CYCLE
INTRODUCTION
Project life cycle refers to the various stages through which a project passes from its time of
inception up to its completion. The stages/phases constitute a specific sequence that is cyclical in
nature. There tends to be a natural sequence in the way projects are planned and carried out. Before
any project is actually realized, it goes through various planning phases. Therefore, the different
stages through which project planning proceeds from inception to implementation are often called
“the project cycle”. It is the project’s life cycle through which it advances from infancy to maturity.
The main features of this process are information gathering, analysis, and decision making.
The stages or phases through which the project passes are necessary for its completion and they
constitute a specific sequence that is cyclical in nature identified as project life cycle. Dividing
project life cycle into phases helps in better management and control of a project.
The project cycle considers various stages in which each stage not only is grown out of the
proceeding ones, but also leads into the subsequent ones. The planning process does not contain
such a stringent sequence of events since all aspects of the project have to be considered
simultaneously and, if necessary, adjusted to one another.
Therefore, projects cycle is a self-renewing cycle in that new projects may grow out of the old
ones in a continuous process and self-sustaining cycle of activity. There are various models that
deal with the project cycle such as United Nations Industrial Development Organization (UNIDO),
Baum's, Choudhury’s etc.
2.1 UNIDO’s (United Nation Industrial Development Organization) Project
Cycle Model
The United Nation’s Industrial Development Organization (UNIDO) gives emphasis to industrial
projects. It is more practical than conceptual. According to UNIDO, project cycle involves three
major phases. These are:
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1. Pre-investment phase (project identification)
2. Investment phase (implementation)
3. Operating phase (operation and ex-post evaluation)
Each of the above stages (phases) will be explained in the section that follows:
2.1.1 Pre-investment phase
The pre investment phase comprises several stages: identification of investment opportunities
(opportunity studies), project preparation (pre-feasibility and feasibility studies) and project
appraisal (preparation project investment decisions report).
A, Opportunity Studies/Project Identification
The identification of investment opportunities is the starting point in a series of investment related
activities. It is the main instrument used to quantify the parameters, information and data required
to develop a project idea into a proposal. In opportunity study, the firm is required to analysis the
following:
1. Availability of natural resources 8. Possible linkage with other industries
2. Existing agricultural pattern 9. Extension by backward as forward
3. Future demand for goods linkage
4. Increasing population, purchasing power 10. Industrial politics power
5. Export and import substitution 11. General input climate of the economy
6. Environmental impact 12. Expanding an existing firm to have large
7. Functioning similar project of other scale of economy
countries 13. Export potential
The general opportunity studies can be categorized as area studies, industry studies and
resources-based studies.
B. Pre-feasibility/pre-selection studies
The project idea must be elaborated in a more detailed study. However, formulation of a feasibility
study that enables a definite decision to be made on the project is a costly and time-consuming
task. Therefore, before assigning larger funds for such a study, a further assessment of the project
idea might be made in a pre-feasibility study.
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This is to see if:
All possible alternatives are examined
The project concept justifies detailed analysis
A critical area necessitates in-depth investigation
Project idea is either attractive for investment or non-viable
The environmental situation at the site in line with national standards
A pre-feasibility study should be viewed as an intermediate stage between a project opportunity
study and a detailed feasibility study, the difference being in the degree of detail of the information
obtained and the intensity with which project alternative are discussed.
Support functional studies to convert specific areas such as;
Marketing Environmental impact assessment
Raw material and factory supplies Economics of scale and
laboratory and Oliphant testing Equipment selection
location
C. Feasibility study/Project preparation
A feasibility study should provide all data necessary for an investment decision. The feasibility
report should contain the following elements:
Market analysis
Technical analysis (materials & Inputs, Technology and engineering works, construction,
infrastructure)
Organizational analysis Social analysis, and
Financial analysis Environmental analysis
Economic analysis
D. Appraisal
When a feasible study is completed, the various parties involved in the project will carry out their
own appraisal of the investment project in accordance with their individual objective and evolution
of expected a risk, costs, and gains. The quality of feasibility studies makes easier the appraisal
work. If the objective of the appraiser is return on investment, the project is appraised on this base.
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Large investment and development finance institutions have formalized project appraisal
procedures and usually prepare an appraisal report. The appraisal report will prove whether these
pre-production expenditures were well spent, project appraisal as carried out by financial
institutions concentrates on the health of the company to be financed, the returns obtained by equity
holders and the protection of its creditors.
Appraisal reports as a rule deal not only with the project by also with the industries in which it will
be carried out and its implications for the economy as a whole. Thus, if a care manufacturing plant
is to be appraised the report will also review the relationship of the plant to its feeder industry. The
transport, the availability of highways and the energy supply. For large scale projects, appraisal
reports will require field missions to verify the data collected and to review all those factors of a
project that are conditioned by its business environment, location and markets and availability of
resources.
2.1.2, Investment phase
The investment or implementation phase of a project provides wide scope for consultancy and
engineering work, first and foremost in the field of project management. The investment phase can
be divided in to the following stages.
Establish project management office which involve establishing of the legal, financial and
organizational basis for the implementation of the project.
Technology acquisition and transfer, including basic engineering
Detailed engineering, contracting, tending & negotiations.
Acquisition of land, construction works, and installations
Pre-production marketing, including the securing of supplies and setting up the
administration of the firm.
Recruitment, training, and placement of workers and
Plant commissioning and start- up.
This implementation basically involves capability in project management. 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.
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2.1.3, Operating phase
The operation phase includes project activities such as expansion and innovation, replacement and
rehabilitation, and commissioning and start-up. The problems of the operational phase need to be
considered from both a short and a long-term view point. The short-term view relates to initial
period after commencement (beginning) of production. When a number 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 and labor. Most of these problems
have their origin in the implementation phase. The long-term view relates to chosen strategies and
the associated production and marketing costs as well as sales reviews. These have a direct
relationship with the projections prove faculty any remedial measures will not only be difficult but
may prove highly expensive.
2.2, BAUM'S Project Life Cycle (BAUM’S Model)
Baum (1978), an employee for the World Bank, has developed the following five project cycles
that are related with performance of the World Bank:
A, Identification: selection of viable ideas
B, Preparation: determine whether the project is viable or not.
C, Appraisal: audit whether the preparation process is carried out adequately.
D, Implementation: actual implementing of the project (construction of building, hiring
employees, etc.).
E, Evaluation: evaluate whether the project has enabled to achieve the desired objective since its
implementation.
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Identification:
(Resource, Market and/or Need Based)
Preparation:
Evaluation: ( Technical, Financial, Economic, etc.)
(Past, Future, Feed Back )
Implementation:
(Planning the work, work the Appraisal:
planning and monitoring the work) ( Technical, Financial, Economic, etc.)
Figure 2.1: Baum (1978) Project Life Cycle
a) Project Identification
Project identification consists in finding project ideas that could contribute towards achieving
specified development objectives. But, where do projects come from? There is no simple answer.
Some may be "resource based" stem from the opportunity to make profitable use of available
resources; "market based" arise from an identified demand in home or overseas markets; and
"need based" to make available to all people in an area where minimal amounts of certain basic
material requirements and services exist.
Once some project ideas have been put forward, the first step is to select one or more of them as
potentially promising. This calls for a quick preliminary screening by experienced professionals
who could also modify some of the project proposals.
Preliminary screening is conducted to reduce to a manageable number the project alternatives to
which more work and time will be devoted. As a result of preliminary screening exercise, some
of the project alternatives will be rejected and those that are promising will be advanced to the next
stage.
The identification phase is one of identifying the problems, which need to be addressed, and
analyzing the ways in which they can be addressed. This would include, for example: analysis of
existing situation, problems/needs identification, prioritization of ideas, selection of a project
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idea, definition of the project idea, consultation with stake holders, establishment of overall
objectives.
b) Project Preparation (Feasibility Study)
Project preparation sometimes called project formulation covers the establishment of technical,
financial, economic, social and institutional aspects of the project. Following preliminary
screening, promising project options should be investigated in a systematic manner. The analysis
of the projects technical, commercial, social, environmental, financial, economic and institutional
aspects should be detailed and comprehensive enough to decide on the future of the project with
confidence.
The preparation/formulation stage involves the detailed planning of the project idea. The result of
which is a set of tangible proposals with an associated set of costs and benefits. These will usually
be contained in pre-feasibility or feasibility study. Furthermore, this phase is one of defining more
clearly the actual project, who will do it, what resources are viable, and how it will be divided into
different tasks. This would include:
Specification of objectives and results
Identifying resources available or needed for the project
Design of the project
Packaging and planning of the project
c) Appraisal
It is the comprehensive and systematic assessment of all aspects of a proposed project. During
appraisal, it should be verified that the proposed project, in combination with other policies,
contributes the maximum possible towards achieving certain development objectives. In project
appraisal, a project is viewed from different perspectives: technical (including ecological),
commercial, sociological, financial, economic, managerial and organizational.
When appraisal is completed, an appraisal report is prepared which contains the findings and final
recommendations. The recommendation may be to approve, reformulate, postpone or abandon the
project under review.
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The appraisal/audit phase involves a systematic review of all aspects of the project in order that
a decision can be made as to whether to proceed. The following questions are often the subject of
an appraisal report on the basis of which a series of decisions may be made. These could involve
discarding the project or alteration of some of the plans.
Technical: is the project design appropriate and will the project work as expected?
Financial: has proper provision been made to cover the financial requirements and obligations
of the project? Is the financing planned adequate? Are the financial aspects of the project
beneficial to the different actors and beneficiaries involved with the project? If the project is
commercial how will the necessary inputs be obtained and (where relevant) how will the output
be sold?
Economic: is the project advantageous from the point of view of the economy as a whole?
Social: is the project both advantageous and acceptable to the people affected by it?
Institutional: are there suitable organizations in place to implement and manage the project?
Is the legal framework appropriate?
Environmental: have the environmental impacts of the project been properly considered?
Sustainable: will the project be sustainable in the long term both financially and
institutionally?
D, Project Implementation
Once financing is secured and a final go-ahead (green light) given to proceed with the
implementation of a given project, inter-organizational linkages for its smooth implementation are
streamlined, and a project office is set up. All the construction and supervision of the project is
made.
Immediately after the completion of project implementation, management and assets are integrated
into the operation to the new economic entity or unit. Project operation involves the running and
maintenance of the new entity in accordance with planned objectives and tasks.
The major priority during this stage is to ensure that the project is carried out in the way and with
in the period that was planned. The feedback effect on the discovery and design of new projects
and deficiencies in the capabilities of the project actors can be revealed in this stage. Thus,
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recording, monitoring, and progress reporting are important activities so as to allow management
to become aware of difficulties as they arise.
The Implementation phase is one of actually performing the project and ensuring that the
objectives are met and the out puts made. This includes:
Mobilization of resources for each task and objectives
Project marketing
Ongoing monitoring and reporting arrangement
Identifying problems
Addressing failures
Modification of the planned results and project objectives as appropriate
E, Project Evaluation
Once a project has been carried out, it is often useful to look back over what took- place, to compare
actual progress with the plans, and to judge whether the decisions and actions taken were
responsible and useful.
Evaluation can help not only in the management of the project but also help in the planning of
future projects. As a result of undertaking evaluation, major achievements and problems are
identified, recommendations for remedial action made and lessons of experience drawn
(experience with one project can give rise to new ideas for extension of the existing project as well
as formulation of new project).
The Evaluation phase is the process of reviewing the completed project to see whether the intended
benefits are likely to be achieved. It should be a natural part of the process and not seen as a
‘punishment’ for a project, which has failed to perform. This includes:
Assessing whether the contractor has truly completed the task
Identifying best practice for further projects
Identifying what resources are required for the future (if something goes wrong this may
mean that more resources are required rather than that the project has failed)?
Identifying the need for future projects
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2.3, Choudhury’s Project Life Cycle (1998)
According to Choudhury (1988), the project life cycle has five phases: Conception, Definition,
Planning and Organizing, Implementation and Clean-Up.
Conception
Definition
Clean-Up
Planning &
Implementation Organizing
Figure 2.2: Choudhury (1988) Project Life Cycle
A, Conception
It is the phase where the project ideas germinate or conceived. This could be because of two
reasons:
1, Growth- expansion, modernization, diversification, etc.
2, Solve a problem- to remove constraints.
Project idea can be conceived by anybody in the organization and therefore has to be put in black
and white before it can be compared with other project ideas or weigh to be seen its relevance.
Project ideas examined in the light of projective constraints, opportunities, and what finding shows
a green light may become the future project. All projects are identified or conceived in this way.
b) Definition
It defines the conception phase and therefore works to define the idea generated during the
conception phase. This phase prepares a document using sufficient details and on the basis of this
documents all customers, or financial institutions, or government may say yes or no to the project
idea. This project report is called a Detailed Project Report (DPR). For instance, for a cement
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industry, the DPR encompasses raw material availability, plant size and capacity, technology
selection, plant lay out, machinery and equipment needed, electrification and infrastructure work,
civil and engineering work, utility (telephone, water, fuel, power, etc), financial analysis (total
investment cost, source of finance, total production cost), the implementation schedule (when to
start and end), etc.
What are the best decisions with the product leads to that signal it gets from the government. Banks
have laid down various projects’ appraisal procedures.
c) Planning and Organizing
It involves in the planning of the projects and organizing the human and non-human resources
required to implement the project. It looks in to organizing or arranging for items needed, like
purchase of technology, machines and equipment, inviting tenders, say, from construction
company for construction of plan, call for issue of shares, call for appointment of specialized
personnel, etc.
d) Implementation
It is the phase where the conceived project idea takes shape gradually, in this fieldwork starts. For
capital equipment projects, it includes actual ordering and receipts, equipment and machine
erections, civil construction of the plant, electrical piping, fitting, etc, trial and run, and final
commissioning.
Since this phase takes maximum time, everybody wants to start (implement) the work at the early
possible time and try to complete at the minimum cost. Efforts are made to "fast track" the project
by overlapping (merging) some stages, i.e., engineering (design), ordering, receipt, construction,
and commissioning. The amount (degree) of fast tracking depends. If, for example, designing and
construction are undertaken by different contracts, then the scope of fast tracking will be limited.
However, if design, supply, and construction, all as a package, are with one subcontractor,
maximum amount of fast track is possible.
e) Clean-Up
It is where the plant commission is handed over to different agency for production.
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This is where the BOT (Built, Operate, Transfer) or BOLT (Built, Operate, Lease, Transfer) works
and hence known as Transaction Phase. This includes closing of all accounts, etc. As the project
is in termination phase, project team also disintegrates and each person leaves the organization in
the very sequence in which they hand entered. For example, designing and architecture could
leave before construction engineers. Every organization also prepares lessons learned from this
project for future project works including qualitative and quantitative database. This is known as
"feedback phase". The information includes assessment of customers' e-mail, listing of problems
encountered and remedies taken, technological advancements, and therefore recommendation for
future R & D (Research and Development) and future projects.
2.4, Project Clearance Report (PCR)
Comprehensive study guidelines have been prepared by different organizations such as the United
Nations Industrial Development Organization (UNIDO), World Bank (WB), Institution of
Monetary Fund (IMF), national organizations concerned with national economic development and
planning, etc
Whenever project is identified it is often done with reference to the countries development
strategies and economic policies. Therefore, even if a private entrepreneur is identifying a project,
the project must serve to fulfill the social and economic need of the country. This has to pass
through at least the under mentioned three stages of scrutiny and clearances.
Government may have a three-stage project scrutiny. These three stages are often known as:
1. First stage: Pre-Feasibility Report (PFR)
2. Second stage: Techno-Economic Feasibility Report (TEFR)
3. Third stage: Detailed Project Report (DPR)
1, Pre-Feasibility Report (Also Called Project Formulation Report or Project
Opportunity Study Report)
PFR is a document that elicits the preliminary sanctions of the first stage clearance by the
government and this has a specified outline to supply information. Industry practices is that the
same pro forma is being used for all the aforementioned three stages of scrutiny but information
gets refined by and by at its stage.
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The objective of this scrutiny is to ensure that the project is viable from various angles:
❖ Market demand for the project or a ❖ Plant organization and overhead cost
product exist ❖ Manpower requirement
❖ Plant capacity ❖ Implementation schedule
❖ Materials and inputs used ❖ Financial and economic evaluation
❖ Location and site ❖ Statutory clearances
❖ Project engineering and investment cost
Along with this, project cost estimates are also submitted. Industry collects historical estimates
and adjusts for escalation, inflation, local factors, etc which may be based on statistics and
experiences. If no previous experience of having such experience, consultants are hired for this
purpose.
PFR is evaluated by various agencies from various angles. Each of them gives their individual
clearances, record their objection, or get rectifications made (ask for further explanation). And
this grants the first stage clearance is over.
Once getting clearance from the first stage (PFR), it moves to the second stage (TEFR).
2, Techno-Economic Feasibility Report (TEFR)
In this stage, project scope is defined, capacity or size is identified, and also the method to be used
is determined.
3, Detailed Project Report (DPR)
This is the last and most important stage for project pre investment phase. The DPR and Detailed
Cost Estimates (DCE) are together for scrutiny and clearance. The outline and the items for DPR
remains the same as TEFR; however, the level of accuracy increases because this is a period only
when basic engineering, process design, and equipment listing is complete.
To prepare DPR from the TEFR:
❖ Breakdown all the project components, time phase them, schedule them, with accurate cost
estimates along with explanations by giving reasons for your assumptions and calculations.
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❖ Develop base line for controlling time and cost during the implementation of the project
components.
❖ Prove preparedness with all the technical and resource requirements to implement the project.
2.5, Management Approach to Project Cycle
From identification through evaluation of the project cycle is a process that can and should be
managed. Management has been traditionally associated with the implementation phase and often
equated with the efficiency with which this activity has been carried out. The management aspect,
however, is not restricted to implementation but includes all stages of project cycle.
The five managerial functions (planning, organizing, staffing, directing, and controlling) shall be
applied for accomplishing each successive project cycle. Each successive cycle calls for a
distinctive planning of its activities to be done; organizing of its structure, planned activities and
the various resources required; staffing of its structure with the right people who are fit for the
purpose; directing of its people involved in towards attaining the set goals; and controlling
(monitoring and evaluating) of its performance so that to take corrective as well as preventive
measures when needed.
Therefore, each project cycle has to be managed; it is a process for decision-making, not an end in
itself. As more information is gathered during the various phases, the project is modified and
reshaped, with consequent changes in its cost estimates, implementation schedule, and so on. The
process may also identify additional projects that overlap and interlock with the initial proposal.
As noted above, the cycle is an iterative process consisting of a series of decisions. Each phase is
logically separated from the rest by a decision point. At each decision point, the project can be
dropped, forwarded to the next phase, or recycled back to the previous one for restructuring and
refining.
A report is usually prepared at the end of each phase. The report might include an analysis for
decision-making, prospective budget and work plan for the next phase and elementary plan for the
whole cycle. As the project progresses throughout various phases, those summary master plans
can be refined with evermore detail and revised to take account of new and more comprehensive
information.
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