UNIT ONE

INTRODUCTION TO PROJECT
1.1. Definition of Project
A project can be defined in different ways. A project is a complex of economic activities in
which we commit scarce resources in expectation of benefits that exceed these resources. A
project is an investment made on a package of interrelated time-bound activities; consequently, a
project becomes a time-bound task. A project is an organizational unit dedicated to the allotment
of a goal the successful completion of a development product in time, within specified budget, in
conformance with the pre-determined performance specifications. It (a project) is a set of finite
activities that are usually prepared only once and have well designed objectives, using a
combination of human and non-human resources within limits of time. It consists of a series of
non-routine, interrelated activities with a goal that must be completed with a set amount of
resources and within a set time limit. It is a proposal for investment to create and/or develop
certain facilities in order to increase the production of goods and/or services in a community
during a certain period of time (UNIDO). So, a project is a sequence of unique, complex, and
connected activities having one goal or purpose and that must be completed by a specific time,
within limited budget, and according to specification. The following constitutes each part of the
definition.

Project is a scheme or part of a scheme for investing scarce resources, which can be reasonably
evaluated and analyzed as an independent unit. Project refers to an investment activity in which
resources are committed within a given time framework, to create assets over an extended time
in expectations of benefits which exceeds the committed resources. A project is a complex set of
economic activities in which we commit scarce resources in expectation of benefits that exceed
the value of these resources. Although the definitions above seem different, all definitions imply
the same concept: a project is a set of proposal for investment of resource in to a clearly
identified set of actions that are expected to produce future benefits of a specific kind, the whole
series of actions being the subject of individual planning and examination before being adapted
and implemented within a single over all financial and managerial frameworks. From these
definitions, it is clear that a project:
has specific objective (private or public);

1|Page
involves set of activities (planning, financing, and implementing);
involves resource use;
deals with future expectations (risk and uncertainty);
involves comparing benefits and costs to occur in the future; and
has defined period of life;
In most cases, it is easier to describe than to define a project. In practice, a project idea gradually
crystallizes and thus defines itself out as analysts think about it and delineates its various aspects.
As more understanding is gained among the stakeholders and deeply conceptualizes its aspects, a
good deal of confusion can be avoided by describing the project than trying to define it precisely.
Absence of effective and well defined project preparation is one major problem in Least
Developed countries (LDCs) like Ethiopia. Economic development planners often give little time
to the preparation of suitable development projects. However, project preparation is not the only
aspect of development planning; rather it includes identifying national development objective;
selecting priority areas for investment; designing effective regulatory framework for free market
operations; designing effective ways of government intervention where there is a market failure
so as to mobilize and allocate the resources effectively and efficiently.

Additional descriptions of projects

Project Boundary: It is extremely important to properly establish the boundaries of a project.
One should avoid attributing too few or too many positive (negative) effects to a project.
Distribution of costs (investment and recurrent costs, intangible costs) and benefits differs based
on the nature of projects. How the boundary is drawn will depend upon the point of view
(financial, economic, and social) from which the project is being appraised. Boundary of a
project is conceptually simple but in practice it is extremely difficult as it is not simple where to
delineate its boundary. As we move down to the different levels of Cost Benefit Analysis
(financial to economic to social) the project boundary gets wider.
Project Types: As to their type, projects may be agricultural, industrial, transportation,
commerce etc.
Projects Input use: in relation to input use, projects may be capital intensive, labor intensive,
and/ or energy intensive.

2|Page
Project Scope: It should be neither too small nor too large. A plan of action that deals with the
agricultural sector can’t be called a project. On the other hand, to employ or not an extension
agent in a given government office can’t be called a project.
Project Size: Size of a project is a function of capital invested, human labor requirement (skilled
/unskilled), coverage of beneficiaries, total value of inputs used and total value of goods and
services produced by the project.
Project Duration: A project has a limited duration. We can find projects of long and short
duration (number of years required to complete the project) Economic life of the project (the
number of years the project remains economically productive) is different from the duration of
the project. Duration of project is 10 years does not mean that economic life of the project is 10
years. From all the discussions above, one can derive the following more dynamic and
comprehensive definition of a project, which links development planning, development
programs, and project planning together.

I. A project is an instrument of change.

It is coordinated series of actions resulting from a policy decision to change resource
combinations and levels so as to contribute to the realization of the country’s development
objectives. Projects should, according to this definition, be formulated within the framework of
the country’s development priority objectives, which may include agricultural production
growth, improving income distributions, eradicating poverty and malnutrition, promoting larger
public involvement in producing goods and services.

II. A project is beneficiary-oriented (responds to people’s needs).

Projects can also be developed on the basis of the people’s need/ demand to satisfy unsatisfied
needs. Example: Hydroelectric power supply project is oriented by society’s demand for
electricity. Hence, projects should forecast the response of their ultimate beneficiaries. A project
within the framework of a national development changes plan into action at a micro-level.
Hence, a project is undertaken, among other things, for development reasons, which may include
executing national objectives at the micro level, national increases in agricultural production,
promoting exports, employment creation, and utilizing non-utilized and under-utilized resources
- full employment, and pursuing agricultural diversification policies (minimizing risk). To
understand the role of projects as instrument of change, it is indispensable to conceptualize the

3|Page
meanings of national development (goal) objective, national development plan, national
development strategy.

1.2. Programs Vs Projects

Some time, people confuse a project with a program and often use interchangeably, but the terms
are not the same. Unlike a project, a program is an ongoing development effort or plan.

A program is “a group of related projects managed in a coordinated way to obtain benefits and
control not available from managing them individually.” Imagine, it is often more economical to
group projects together to help streamline management, staffing, purchasing, and other work.
The following are examples of programs

A construction firm has programs for building single-family homes, apartment buildings, and
office buildings. Each home, apartment building, and office building is a separate project for a
specific sponsor, but each type of building is part of a program. There would be several benefits
to managing these projects under one program,. For example, for the single-family homes, the
program manager could try to get planning approvals for all the homes at once, advertise them
together, and purchase common materials in bulk to earn discounts. A government agency has a
program for children’s services, which includes a project to provide pre-natal care for expectant
mothers, a project to immunize newborns and young children, and a project for developmental
testing for pre-school children., to name a few.

A program manager provides leadership and direction for the project managers heading the
projects within the program. Program managers also coordinate the efforts of project teams,
functional groups, suppliers, and operations staff supporting the projects to ensure that project
products and processes are implemented to maximize benefits. Program managers are
responsible for more than the delivery of project results; they are change agents responsible for
the success of products and processes produced by those projects. Program managers often have
review meetings with all their project managers to share important information and coordinate
important aspects of each project. Many program managers worked as project managers earlier
in their careers, and they enjoy sharing their wisdom and expertise with their project managers.
Effective program managers recognize that managing a program is much more complex than
managing a single project. They recognize that technical and project management skills are not

4|Page
enough. In addition to skills required for project managers, program managers must also
possess strong business knowledge, leadership capability, and communication skills. A program
may include various projects at various times as its constituent units. Hence, a project is a
specific activity, with a specific starting point and specific ending point intended to accomplish a
specific objective. A project is narrower than a program in terms of technical performance, time
and resources (scope). A program may consist of more than one project. The following
comparisons may explain the difference between the two:

Bases of comparisons Program Project

Scope/objectivities wide /diverse Narrower /limited
Location diffused /wide Specific
Lifetime Non-time bound Time bound
Resources Larger budget Limited budget

1.3. Classification of projects

Projects can be classified based on several criteria.
1. Ownership
a. Private sector – mostly projects undertaken by business enterprises
b. Public sector projects undertaken by national and local government body,
c. NGO’s development projects undertaken by non- government and not for profit
organizations
2. Based on the sources of finance
a. Government treasury
b. Government treasury and external sources
c. External sources of finance
3. Based on the forces behind
a. Demand driven/need driven- based on identified unsatisfied demand project can be
created or on unsatisfied basic needs like food, water, and shelter ,
b. Donor driven – the force behind the financing organization
c. Political driven

5|Page
1.4. Why projects are undertaken
The purpose (goals) to a project depends on the nature of the project. Development projects
(usually undertaken by government or NGOs) may have the following objective. Projects are
very powerful and efficient means to achieve development (growth), rightly called ‘cutting edge’
of development. They are mechanisms for improving income distribution (as government policy
instrument). Example, implementing a project that enhances the income of the poor people to
benefit the poor; They are mechanisms to solve immediate problems. Ex implementing a project
to solve a specific problem in the society such as project to eradicate malaria, prevent the
spreading of HIV, Project undertaken by business organization have a primary objective of
maximizing the wealth of current shareholders. Other objectives may include maximization of
profit, maximization of earning per share or maximization of return on equity.

1.4.1. Projects as policy instruments

The specific sectoral and national objectives specified in plans can be achieved through various
means: projects, fiscal policy, monetary policy etc. Therefore, projects are policy instruments
through which national and sectoral plans are translated into action. Thus, projects are rightly
called “cutting edge” of development. Projects aim at increasing the production of goods and
services which are fundamental components of people’s welfare. However, projects are not a
panacea, (can’t cure all social and economic ill of a country) – although projects are capable of
serving many purposes, they are better in some and inferior in other cases. There are cases where
projects are inferior as policy instrument in comparison with other policy instruments in
addressing specific issues. For example, Fiscal and monetary policy instruments are more
effective in correcting macro economic instability than project (immediate response to the
problem).

1.4.2. Project as capital Expenditure decision

Almost all projects involve a capital expenditure decision. Capital expenditure decisions often
represent the most important decisions taken by an economic entity. The importance of project as
capital expenditure decision stems from three inter – related facts:
Long-term effects፡ the consequence of capital expenditure decisions extend far into the future.
The scope of current manufacturing activities of a firm is governed largely by capital

6|Page
expenditures in the past. Likewise, current capital expenditure decisions provide the framework
for future activities.
Irreversibility፡ Most of the time, wrong capital investment decision can not be reversed without
incurring a substantial loss.
Substantial outlay፡ Capital expenditures usually involve substantial outlays.

1.5. Why project analysis?

The basic economic problem facing all developing countries is that of allocating inherently
limited resources (such as labor, capital, and other natural resources, as well as foreign
exchange) to a variety of different uses (such as current production of consumer goods and
public services as against investment in infrastructure, industry, agriculture, or other sectors of
the economy in such a way that the net benefit to society is as large as possible.

We have been convinced that, comprehensive macro-economic plans and sectoral programs are
valuable in identifying development projects and in providing the framework within which the
projects should be evaluated. However, these macroeconomic plans and sectoral programs are
drafted based on assumptions and forecasts, which may not necessarily reflect the reality. And
yet project formation, implementation and evaluation require concrete (realistic) information for
the project implementation involve substantial resource commitment; most of the decisions are
irreversible and projects have long term effect. Given the limited resources, choices must be
made among the competing uses, and project analysis is one method of evaluating alternatives in
a convenient and comprehensible fashion. In essence, project analysis assesses the benefit and
costs of a project and reduces them to a common yardstick (benchmark / standard). If benefits
exceed costs, with both measured by the common yardstick, the project is acceptable; if not, the
project should be rejected. The same justification is used for project analysis made by business
organizations. All business organizations face problem of allocating the scarce resource they
have to the alternative projects available. Project analysis helps them to select the alternative that
will bring more benefits than costs.

1.6. Characteristics of projects

The following attributes help to define a project further:

7|Page
A project has a unique purpose: Every project should have a well-defined objective. For
example, many people hire firms to design and build a new house, but each house, like each
person, is unique.
A project is temporary: A project has a definite beginning and a definite end. For a home
construction project, owners usually have a date in mind when they’d like to move into their new
homes.
A project is developed using progressive elaboration or in an iterative fashion: Projects are
often defined broadly when they begin, and as time passes, the specific details of the project
become clearer. For example, and there are many decisions that must be made in planning and
building a new house. It works best to draft preliminary plans for owners to approve before more
detailed plans are developed.
A project requires resources, often from various areas. Resources include people, hardware,
software, or other assets. Many different types of people, skill sets, and resources are needed to
build a home.
A project should have a primary customer or sponsor. Most projects have many interested
parties or stakeholders, but someone must take the primary role of sponsorship. The project
sponsor usually provides the direction and funding for the project.
A project involves uncertainty. Because every project is unique, it is sometimes difficult to
define the project’s objectives clearly, estimate exactly how long it will take to complete, or
determine how much it will cost. External factors also cause uncertainty, such as a supplier going
out of business or a project team member needing unplanned time off. This uncertainty is one of
the main reasons project management is so challenging

1.7. Project success criteria

Every project is constrained in different ways. Some project managers focus on scope, time, and
cost constraints. Other people focus on the quadruple constraint, which adds quality as a fourth
constraint. The scope, time, and cost limitations are sometimes referred to in project management
as the triple constraint.

To create a successful project, a project manager must consider scope, time, and cost and balance
these three often-competing goals:

8|Page
1. Scope: What work will be done as part of the project? What unique product, service, or
result does the customer or sponsor expect from the project?
2. Time: How long should it take to complete the project? What is the project’s schedule?
3. Cost: What should it cost to complete the project? What is the project’s budget? What
resources are needed?
Other people focus on the quadruple constraint, which adds quality as a fourth constraint.
Quality: How good does the quality of the products or services need to be? What do we need to
do to satisfy the customer? Other also suggests these four constraints plus risk.
Risk: How much uncertainty are we willing to accept on the project?
Whatever its size, a project’s success is based on the three main criteria as shown by the
following triangle:

Scope

Time Budget

Therefore, project will deem to be successful if it:

Delivers the outcome with an agreed upon quality.
Does not overrun its end date.
Remains within budget (cost of resources).
Note however, that outcome, time and budget are interrelated, and during a project you may need
to do trade-offs between them. For example, if you want to get something done more quickly,
you may have to pump in more money into your project for additional resources.

1.8. Why are organizations using project management?

Today’s highly competitive business environment forces organizations to make high-quality
products at a lower cost and in a shorter duration. Organizations therefore are increasingly
using project management because: it allows them to plan and organize resources to achieve a
specified outcome within a given timeframe. The techniques of project management also help

9|Page
managers manage and anticipate risks in a structured manner. Surveys of organizations using
project management have shown that project management allows for better utilization of
resources, shorter development times, reduced costs, interdepartmental cooperation that builds
synergies across the organization, and a better focus on results and quality.
1.9. Project Stakeholders
Stakeholders are the people involved in or affected by project activities. These include the
project sponsor, the project team, the support staff, customers, users, suppliers and opponents to
the project. These stakeholders often have very different needs and expectations. For example,
there are several stakeholders involved in a home construction project.

The project sponsors would be the potential new homeowners. They would be the people
paying for the house and could be on a very tight budget, so they would expect the contractor to
provide accurate estimates of the costs involved in building the house. They would also need a
realistic idea of when they could move in and what type of home they could afford given their
budget constraints. The new homeowners would have to make important decisions to keep the
costs of the house within their budget. Can they afford to finish the basement right away? If they
can afford to finish the basement, will it affect the projected move-in date? In this example, the
project sponsors are also the customers and users for the product, which is the house.
The project manager in this example would normally be the general contractor responsible for
building the house. He or she needs to work with all the project stakeholders to meet their needs
and expectations.

The project team for building the house would include several construction workers,
electricians, carpenters, and so on. These stakeholders would need to know exactly what work
they must do and when they need to do it. They would need to know if the required materials and
equipment will be at the construction site or if they are expected to provide the materials and
equipment. Their work would need to be coordinated since there are many interrelated factors
involved. For example, the carpenter cannot put in kitchen cabinets until the walls are completed.
Support staff might include the employers of the homeowners, the general contractor’s
administrative assistant, and other people who support other stakeholders. The employers of the
homeowners might expect their employees to complete their work but allow some flexibility so
they can visit the building site or take phone calls related to building the house. Building a house

10 | P a g e
requires many suppliers. The suppliers would provide the wood, windows, flooring materials,
appliances, and other items. Suppliers would expect exact details on what items they need to
provide, where and when to deliver those items, and similar information. There are many
different stakeholders on projects, and they all have different interests. Stakeholders’ needs and
expectations are important in the beginning and throughout the life of a project. Successful
project managers develop good relationships with project stakeholders to understand and meet
their needs and expectations. Program managers often have review meetings with all their project
managers to share important information and coordinate important aspects of each project. Many
program managers worked as project managers earlier in their careers, and they enjoy sharing
their wisdom and expertise with their project managers. Effective program managers recognize
that managing a program is much more complex than managing a single project. They recognize
that technical and project management skills are not enough. In addition to skills required for
project managers, program managers must also possess strong business knowledge, leadership
capability, and communication skills.

1.10. Project Cycle

Project cycle is referred to as the various stages through which project planning proceeds from
inception to implementation. It is the project’s life span through which a project advances from
infancy to maturity. Different guidelines, manuals and foreign authors have called project
phases by different names.

1.10.1. United Nations Industrial Development Organization (UNIDO) Project

Life Cycle
UNIDO has divided project cycles into phases and stages as follows.

1. Pre - investment phase: Identification of investment opportunity (opportunity study),

Preliminary selection stage (pre-feasibility study/Analysis of Project Alternatives), Project
formulation stage (feasibility study) and Evaluation and decision stage (evaluation report/project
appraisal and investment decision)
2. Investment phase: Negotiation and contracting stage; Project design stage, Construction
stage; Preproduction marketing stage; Training stage; Start up stage

11 | P a g e
3. Operational phase: Long-term views (expansion, innovation); Short-term views
(Replacement and Rehabilitation).

UNIDO PROJECT LIFECYCLE

Pre-selection
Pre-feasibility study

Identification Preparation
Opportunity study Feasibility Study

Support Studies
Expansion Pre investment
Innovation phase
Operating Appraisal
phase Appraisal
Replacement Investment Report
phase
Rehabilitation Negotiations and
contracting

Engineering Design
Commissioning and
startup
Construction

Pre-production marketing

Training

The delineation of each phase and each activity from the other is not clear cut/discrete line.
There are several activities undertaken in more than one phase and the transfer is very slow and
gradual. Activities are sequential but it is also possible to go back and revise some of the
activities after once passing that stage. All phases of the project cycle lend themselves to
important consultancy from different disciplines and expertise.

a. Pre - Investment Phase

12 | P a g e
Pre-investment phase comprises several stages from identification of projects to evaluation stage.
Support studies are conducted during this stage. It is easy to understand the scope of an
opportunity study. But it is very difficult to phase into various stages facilitates for studying the
possibility of investing in the project step by step.

i) Opportunity Studies
Identifying investment opportunities is the starting point in a series of investment related
activities. Potential investors, private or public, from developing and developed countries are
interested in obtaining information on newly identified variable investment opportunities. An
opportunity study must analyze the following:
1. Availability of natural resources
2. The existing agricultural pattern that serves as a basis for agro-based industries
3. Future demand
4. Imports, to identify import substitutes
5. Environmental impact
6. Possible inter-linkage with other industries
7. Possible expansion and diversification possibilities
8. General investment climate
9. Availability of cost of production factors
10. Export possibility

Opportunity studies can be general or specific.

General opportunity studies may be:
1. Area studies designed to identify opportunities in a region or in an area.
2. Industry studies designed to identify opportunities in an industrial branch ( such as building
materials or food processing)
3. Resource based studies designed to utilize natural and agricultural resources.
A specific opportunity study may be defined as the transformation of a project idea into a broad
investment proposition. It focuses on a specific project. However, specific studies should follow
the initial identification of general investment opportunities.

ii) Pre Feasibility Studies

The idea of the project that is generated from the opportunity studies must be elaborated in a
more detailed study. But, a feasibility study for a definite decision is expensive and time
consuming. So, before conducting a feasibility study, a further assessment of the project idea
might be made in pre-feasibility study. Such a study aims at determining whether:
1. All possible project alternatives have been examined,
2. The project concept justifies a detailed analysis by a feasibility study,

13 | P a g e
3. Any aspects of the project require support studies,
4. The project idea is attractive enough for a particular investor or investor group,
5. The environmental situation is in line with the national standards.

A pre-feasibility study should be viewed as an intermediate stage between a project opportunity

study and a detailed feasibility study. The structure of pre-feasibility study should be the same
as that of a detailed feasibility study. The difference is in the degree of detail: the difference is in
the degree of detail of the information. Sometimes, a comprehensive opportunity study may
justify by passing the pre-feasibility study stage.

Support Studies

Support studies cover specific aspects of an investment project in support of pre feasibility or
feasibility studies. E.g. Market studies, Raw material studies, Laboratory tests, Location studies
etc.
iii) Feasibility Study
Feasibility study aims at providing all data necessary for an investment decision or against it.
Before the final decision is taken to commit resources, the technical, economical and commercial
justification has to be provided in comprehensive and authentic terms. These should be clarity
about the location, the plant size, the material and the major inputs. Proceeding from this base,
capital outlays, production costs, and expected sales revenues and return on investments have to
be ascertained. It assists in arriving at the final decision to invest. Feasibility study is an
essential document which spells out the economic viability and the prospects of the project.
Though the contents of pre feasibility and feasibility studies are the same, more accuracy is
expected in the feasibility study.

iv) Appraisal Report (Evaluation Report)

When the feasibility 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 objectives. An
evaluation of expected risks, costs and gains of the project will be done. The project appraisal
should be considered as an independent stage of the pre- investment phase, marked by the final
investment and financing decision taken by the project promoters. Appraisal reports are

14 | P a g e
necessary for getting funds from the financial institutions. They reveal the health of the
company to be financed and the protection of its creditors.

b. The Investment Phase

The investment or implementation phase comprises of the following stages.
1. Establishing the legal, financial and organizational basis for the implementations
of the project.
2. Detailed engineering design and contracting, including tendering
3. Acquisition of technology, land, construction work and installation
4. Pre-production marketing, including the securing of supplies.
5. Recruitment and training of personnel.
6. Plant commissioning and start-up
Detailed engineering design comprises preparatory work for site preparation, the final selection
of technology and equipment, the whole range of construction planning etc. Tendering and
evaluation of bids are important to get comprehensive tenders from competitive suppliers. This
stage covers signing of contracts between the investor and the contractors, architects, suppliers of
raw materials and financing institutions. The construction stage involves site preparation,
construction of buildings and other civil works. The personnel recruitment and training stage is
very crucial for the expected growth of productivity and efficiency operations. Timely initiation
of marketing arrangements to prepare the market for the new products (pre production
marketing) and securing supplies are also very crucial for the commencement of operations of
the project.

c. The Operation Phase

The problem of the operational phase should be considered from both a short and a long-term
viewpoint. The short-term view relates to the initial period after commencement of production
when a number of problems may arise concerning such matters as the application for 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 associate production and marketing costs as well as
sales revenues. These have a direct relationship with the projections made at the pre- investment
phase. If such projections prove faulty, remedial measures will not only be difficult but may
probe highly expensive.

Expansion Studies
Though the feasibility study aims at new projects, the same techniques can be applied to the
expansion of existing projects. The expansion may be in the form of increasing the quantity of
production, changing the production program or a combination of the two. Expansion should be
treated as a new project. In order to prepare a project proposal, the data of the expansion project
must be consolidated with those of the existing project. Any other changes in location,
administration etc. should be made clear. The financial impact may be expressed in terms of the
marginal costs and benefits.

1.10.2. The Baum Cycle (adapted by the World Bank in 1970)

15 | P a g e
The Baum Cycle has five stages. The breakdown of the phases in the project cycle is artificial. In
reality the process is continuous and interactive. The phases are:
I. Identification
II. Preparation (feasibility study)- ex-ante evaluation
III. Appraisal
IV. Implementation
V. Evaluation – added after a certain period (1978). It involves ex-post evaluation.

Preparation

Identification Appraisal

Implementation
Evaluation

1.10.3. New Project Cycle (World Bank 1994)

 Emphasis on the issue of participation

 Particularly relevant to projects where beneficiary participation is critical.
 It has four phases
- Listening- listen the stakeholders.
- Piloting- trying it in small scale.
- Demonstrating- demonstrating the pilot
- Mainstreaming- duplicating the pilot.
 Listening - Piloting- Demonstrating – Mainstreaming
1.10.4. Traditional Project Management Life Cycle
Phases of Traditional Project Management
There are five phases to the TPM life cycle, each of which contains five steps:
1. Scope the project.
■ State the problem/opportunity.
■ Establish the project goal.
■ Define the project objectives.
■ Identify the success criteria.
■ List assumptions, risks, and obstacles.
2. Develop the project plan.
■ Identify project activities.
■ Estimate activity duration.
■ Determine resource requirements.
■ Construct/analyze the project network.
■ Prepare the project proposal.
3. Launch the plan.
■ Recruit and organize the project team.

16 | P a g e
■ Establish team operating rules.
■ Level project resources.
■ Schedule work packages.
■ Document work packages.
4. Monitor/control project progress.
■ Establish progress reporting system.
■ Install change control tools/process.
■ Define problem-escalation process.
■ Monitor project progress versus plan.
■ Revise project plans.
5. Close out the project.
■ Obtain client acceptance.
■ Install project deliverables.
■ Complete project documentation.
■ Complete post-implementation audit.
■ Issue final project report.

Scope the Project

The first phase in the TPM life cycle is the scoping phase. This phase is the one most often given
the least attention. The scoping phase plans the project. Planning—or rather, effective planning
—is painful. For many people, planning doesn’t seem like real work. Projects are always behind
schedule, so we are tempted to skip planning so that we can get down to the real work of the
project. Experience has shown that good planning can actually decrease the time required to
complete a project, even taking the planning time into account. Planning reduces risk and, in our
experience, can increase productivity by as much as 50 percent. We find it interesting that
project teams do not have time to plan, but they do have time to do the work all over again. What
insanity!

Every project has one goal. The goal is an agreement between the requestor and the project
manager about the deliverable: what is to be accomplished in the project. The goal tells the
project developers where they are going so that, when the project is completed, they know it.
Ideally, the scoping phase begins with an exchange of information between a requestor and a
provider (usually the project manager). The information exchange usually involves a
conversation between the two parties to assure one another that the request is clearly understood
and the response, in the form of deliverables, is also clearly understood.

In the TPM life cycle, the goal is bounded by a number of objective statements. These objective
statements clarify the Charce haziness/vagueness of the goal statement. Taken as a pair, the goal
and objective statements scope the project. They are the framework within which the entire
project planning process can be successfully conducted. Once the scope is complete, it is
documented in the form of the Project Overview Statement (POS). The POS is a brief document
(usually one page) that describes, in the language of the business, the following:
■ What problem or opportunity is addressed by the project?

17 | P a g e
■ What are the project’s goal and objectives?
■ How will success be measured?
■ What assumptions, risks, and obstacles may affect the project that you wish to call to
the attention of senior management?

The POS, or some form of it, is in wide use. We can trace the early history of the POS back to
Texas Instruments (TI) in the early 1960s. TI used the POS to allow anyone in the organization
to submit an idea for a project. It was the company’s version of a project initiation form. The
POS is also referred to as a document of understanding, scope statement, initial project
definition, and statement of work. In our consulting practice, we have encountered organizations
that require risk analysis, cost/benefit analysis, return on investment calculations, internal rate of
return estimates, and break-even analysis as attachments to the POS. This information is used to
decide whether the project should go forward to the detailed planning phase. If the project, as
described in the POS, is approved, it moves on to the detailed plan phase.

Develop the Detailed Plan

The second phase in the TPM life cycle is to develop the project plan. In this phase, the details
about the project are determined. This may be an exercise for one or two individuals, but it often
takes place in a formal planning session attended by those who will impact or be impacted by the
project. The deliverable from this planning session is the project proposal. This document
includes the following:
■ A detailed description of each work activity
■ The resources required to complete the activity
■ The scheduled start and end date of each activity
■ The estimated cost and completion date of the project
In some organizations there can be any number of attachments, such as feasibility studies,
environmental impact statements, or best-of-breed analysis. The project plan is a description of
the events to come. In that sense, it is a model of the project. As events occur in the project, the
model is affected and can change to describe how future events in the project are likely to occur.
Because the project plan is a model, we can use it to test alternative strategies for redirecting
future events. As project work begins, the nature of the project changes—sometimes radically.
Activities can get behind or ahead of schedule; team members can be reassigned, leave the
company, or get sick. Market situations can change, rendering all or some of the project
objectives obsolete.

These events can occur once at a time or in clumps, and the project manager must be ready to
analyze, decide, and act. You should already have an appreciation for the complexity of the
project plan and work. There are, in fact, several dimensions to consider when trying to
formulate a going-forward strategy. Here are just a few: If a project activity finishes earlier or

18 | P a g e
later than the schedule date, can the resource schedule for later activities be adjusted
accordingly? If one or more project activities finish late, can other resources assigned to the
project be reallocated to restore the project to its original schedule? How can the project manager
simultaneously compress the project schedule while avoiding unresolvable resource scheduling
conflicts? What resources can be reallocated from one project to another without adversely
affecting each project’s schedule? Any one of these decision situations involves a number of
interdependent variables. It is unlikely that any project manager could process these variables
and all of the possible variations without the aid of a computer-based project model and the
supporting software, such as Microsoft Project 2002, ABT Workbench, Open Plan, or any one of
several other software packages. Once the project proposal is approved, the project enters the
next phase of the TPM life cycle, in which the final details of the work schedule are completed
and project work begins.

Launch the Plan

The third phase in the TPM life cycle is to launch the plan. In this phase, the project team is
specified. It is important to eliminate the notion that an individual is solely responsible for the
success (or failure) of the project. It is true that you can point to examples in which the efforts of
an individual brought the project to successful completion, but these events are rare. Although
some of the specific team members could have been identified earlier in the life cycle, additional
members are identified during this stage. In contemporary organizations, the project team is
often cross-functional and can span other organizational boundaries. In addition to identifying
the team at this time, the exact work schedules are determined, detailed descriptions of the tasks
in the project are developed, and team operating rules, reporting requirements, and project status
meetings are established. The completion of this final planning activity signals the beginning of
the monitoring phase.

Monitor/Control Project Progress

As soon as project work commences, the project enters the monitoring phase. A number of
project status reports will have been defined in the previous phase and are used to monitor the
project’s progress. Some of these reports are used only by the project team, while others are
distributed to management and the customer. Change management is a big part of this phase, and

19 | P a g e
procedures will have been installed as part of the launch phase to process change requests.
Change requests will always cause some amount of project replanning. When the requests are
received, the feedback loop is activated, and the project manager revisits the project plan to
identify ways to accommodate the change request. Problems can also occur as work finishes
ahead of or behind schedule. A problem-escalation procedure will have been defined during the
launch phase to handle these situations.

Close Out the Project

The final phase of the TPM life cycle begins when the customer says the project is finished. The
“doneness criteria” will have been specified and agreed to by the customer as part of the project
plan. A number of activities occur to close out the project:
■ Install the deliverables.
■ File final reports and documentation.
■ Perform a post-implementation audit.
■ Celebrate!

1.10.5. DEPSA’s Project Cycle

(Development Project Studies Authority in Ethiopia)

I. Pre Investment: Identification, Preparation and Appraisal/ Decision

II. Investment: Implementation
III. Operation: Operation/ Functional, and Ex-Post Evaluation

20 | P a g e
UNIT TWO
GENERATION AND SCREENING OF PROJECT IDEAS

Identification of a new project is a complex problem. Project selection process starts with the
generation of project ideas. In order to select the most promising project, the entrepreneur needs
to generate a few ideas about the possible project one can undertake. The project ideas as a
process of identification of a project begin with an analytical survey of the economy (also known
as pre-investment surveys). The surveys and studies will give us ideas.

The process of project selection consists of following stages:

1. Idea generation
2. Environment appraisal.
3. Corporate appraisal
4. Preliminary screening.
1.1. Idea Generation
Project selection process starts with the generation of a project idea. Ideas are based on
technological breakthroughs and most of the project ideas are variants of present products or
services. There is no standardized formula to come up with a project idea. The project ideas can
be generated from various internal and external sources. These are:
Knowledge of market, products, and services.
Knowledge of potential customer choice.
Emerging trends in demand for particular product.
Scope for producing substitute product.
Market survey & research.
Going through Professional magazines.
Making visits to trade and exhibitions.
Government guidelines & policy.
Ideas given by the experienced person.
Ideas by own experience.
SWOT analysis.


21 | P a g e
1.2. Environment appraisal
An entrepreneur or a firm systematically appraise the environment and assess its competitive
abilities. The key elements of the environment are as follow:
A. Economic Sector
State of the economy
Overall rate of growth
Cyclical fluctuations
Inflation rate
Growth rate of primary, secondary and territory sector
Growth rate of world economy
Trade surplus and deficits
Balance of Payment
B. Government Sector
Industrial policy
Government programs and projects
Tax structure
Export-import policy
Financing norms
Subsidies incentives and concessions
Monetary policy
C. Technological Sector
Emergence of new technologies
Access to technical know-how, foreign as well as indigenous
D. Socio-demographic Sector
Population trends
Age shifts in population
Income distribution
Educational profile
Employment of women
Attitudes toward consumption and investment

22 | P a g e
E. Competition Sector
Number of firms in the industry and the market share of the top few
Degree of homogeneity and differentiation among the products
Entry barrier
Comparison with substitutes in term of quality and price
Marketing policies and practices
F. Supplier Sector
Availability and cost of raw material
Availability and cost of energy
Availability and cost of capital

1.3. Corporate Appraisal

A realistic appraisal of corporate strengths and weaknesses is essential for identifying investment
opportunities which can be profitably exploited. The broad areas of corporate appraisal and the
important aspects to be considered under them are as follow:
a. Marketing and Distribution
Market Image
Product Line
Product Mix
Distribution Channels
Customer loyalty
Marketing & distribution costs
b. Production and Operations
Condition and capacity of plant and machinery
Availability of raw material and power
Degree of vertical integration
Location advantage
Cost structure
c. Research and Development
Research capabilities of the firm
Track record of new product developments

23 | P a g e
Laboratories and testing facilities
Coordination between research and operations
d. Corporate Resources and Personnel
Corporate image
Dynamism of top management
Relation with government and regulatory agencies
State of industry relations
e. Finance and Accounting
Financial leverage and borrowing capacity
Cost of capital
Tax structure
Relation with share holders and creditors
Accounting & control system
Cash flow and liquidity
1.4. Preliminary Screening project ideas
After gathering the project ides from the various sources as aforesaid, it is essential to eliminate
ideas which prima facie are not promising. This process f eliminating the irrelevant and unviable
ideas is called screening of project ideas. It can be done with the help of testing the following
conditions of the propositions.
Compatibility with the promoter
Consistency with governmental priorities
Availability of inputs
Adequacy of market
Reasonableness of cost
Acceptability of risk level etc.
The project idea must be compatible with interest personality and resources of the entrepreneur.
It should be accessible to him and also it offers him the prospects of rapid growth and high return
on invested capital. The project idea must satisfy or go along with the governmental priorities,
National goals and governmental regulatory framework. Considerations may include:
No Contrary environmental effects to governmental regulations
Easily accommodation foreign exchange requirements

24 | P a g e
No difficulty in obtaining license.
The resources and inputs required for the project must be reasonably assured. This feature of the
project can be assessed with the help of determining the following points relating to a project.
Capital requirement within manageable limit
Obtaining technical know-how
Availability of raw materials at a reasonable cost
Obtaining power supply
Identifying the adequacy of market is the key factor to select, the viable project idea. To judge
the adequacy of market the following factors have to be examined.
Total present domestic market
Competitors and their market shares
Export market
Quality price profile of the product.
Sale and distribution system
Projected increase in consumption
Barriers to the entry of new units
Economic social and demographic trends favorable to increased consumption
Patent protection
Reasonableness of cost is another factor to screen the project ideas. The cost structure of the
proposed project must enable it to realize and acceptable profit with a competitive price. The
following cost factors must be carefully considered to design a viable cost structure: Cost of
material inputs, labor costs, factory overheads. General administration expenses, selling and
distribution costs. Service costs, economics of scale etc. Acceptability of risk level is another
factor which helps to screen the project ideas and hence determine the desirability of a project.
1.5. Project Rating Index
When a firm evaluates a large number of project ideas regularly, it may be helpful to streamline
the process of preliminary screening. For this purpose, a preliminary evaluation may be
translated into a project rating index. The steps involved in determining the project rating index
are as follows: Identify factors relevant for project rating, Assign weights to these factors (the
weights are supposed to reflect their relative importance), Rate the project proposal on various
factors using a suitable rating scale. (Typically a 5-point scale or a 7-point scale is used for this

25 | P a g e
purpose). For each factor, multiply the factor rating with the factor weight to get the factor score.
And add all the factor scores to get the overall project rating index. Table 2.1 Illustrates the
determination of the project rating index: Once the project rating index is determined, it is
compared with a pre-determined hurdle value to judge whether the project is prima facie
worthwhile or not.
Table 2.1. Project Rating Index
Factor Factor V G A P VP Factor
Weight G 4 3 2 1 Score
5
Input availability 0.25 X 0.75
Technical Know-how 0.10 x 0.40
Reasonableness of cost 0.05 x 0.20
Adequacy of market 0.15 x 0.75
Complementary relationship with 0.05 x 0.20
other products
Stability 0.10 x 0.40
Dependence on firm’s strength 0.20 x 1.00
Consistency with government 0.10 X 0.30
priorities
Rating Index = 4.00

After the project rating index is determined it will be compared with the predetermined hurdle
number. Assume the predetermined hurdle number is 3. The project under consideration
worthwhile as the rating index is greater than the predetermined hurdle number; otherwise it will
be not worthwhile.

26 | P a g e
UNIT THREE
PROJECT FEASIBILITY STUDY

Some investment proposals pass through a stage of checking out the feasibility. Large projects
usually need feasibility test to be carried out before a handsome amount is committed. A
feasibility study is part of the process of project identification, preparation and selection. This
process involves the appraising of projects or groups of projects and choosing to implement
some of them. Feasibility literally means whether some idea will work or not. It knows
beforehand whether there exists a sizeable market for the proposed product/service, what would
be the investment requirements and where to get the funding from, whether and wherefrom the
necessary technical know-how to convert the idea into a tangible product may be available, and
so on. In other words, feasibility study involves an examination of the operations, financial, HR
and marketing aspects of a business on ex ante (before the venture comes into existence) basis.

Feasibility is a multivariate concept; that is, a project has to be viable not only in technical terms
but also in economic and commercial terms too. Moreover, there always a possibility that a
project that is technically possible may not be economically viable. After the problems of an
organization or economy have been determined and objectives and strategies agreed, concrete
steps have to be taken. The main form this takes is that of formulating appropriate development
projects to achieve plan objectives and meet the development needs of the economy. Proposals
relating to them are then put to the plan authorities for consideration and inclusion in the plan.
These proposals as pointed out above take the following forms of feasibility studies:
1. Market/Commercial viability
2. Economic feasibility
3. Financial feasibility
4. Technical feasibility
5. Social Cost Benefit analysis
6. Other feasibility considerations like legal, administrative, ecological
When projects are evaluated by government or government agencies, economic and social
feasibility is also considered. Market feasibility is also emphasized, but technical and financial
feasibility is less emphasized. The scope for scrutiny under each of these five heads would

27 | P a g e
necessarily render their careful assessment and the examination of all possible alternative
approaches. The process almost invariably involves making decision relating to technology,
scale, location, costs and benefits, time of completion (gestation period), degree of risk and
uncertainty, financial viability, organization and management, availability of inputs, know-how,
labor etc. The detailed analysis is set down in what is called a feasibility report.

3.1Market feasibility
A market, whether a place or not, is the arena for interaction among buyers and sellers. From
seller’s point of view, market analysis is primarily concerned with the aggregate demand of the
proposed product/service in future and the market share expected to be captured. Success of the
proposed project clearly hinges on the continuing support of the customers. However, it is very
difficult to identify the market for one’s product/service. After all, the whole universe cannot be
your market. You have to carefully segment the market according to some criteria such as
geographic scope, demographic and psychological profile of the potential customers etc. It is a
study of knowing who all comprise your customers, for this you require information on
consumption trends, past and present supply position, production possibilities and constraints,
imports and exports, competition, cost structure, elasticity of demand, consumer behavior,
intentions, motivations, attitudes, preferences and requirements, distribution channels and
marketing policies in use, administrative, technical and legal constraints impinging on the
marketing of the product.


The exercise of project appraisal often begins with an estimation of the size of the market.
Before a detailed study of a project is undertaken, it is necessary to know, at least roughly, the
size of the market because the viability of the project depends critically on whether the
anticipated level of sales exceeds a certain volume. Many projects have been abandoned because
preliminary appraisal revealed a market of inadequate size.

Requirements for market and demand analysis

A. Information requirement
The principal types of information required for market and demand analysis relate to:
1. Effective demand: to gauge the effective demand in the past and present, the starting point
typically is apparent consumption which is defined as:

28 | P a g e
Production + Imports – exports – changes in stock level

In a competitive market, effective demand and apparent consumption are equal. However, in
most of the developing countries, where competitive markets do not exist for a variety of
products due to exchange restrictions and controls on production and distribution, the figure of
apparent consumption may have to be adjusted for market imperfections. Admittedly, this is
often a difficult task.
2. Breakdown of demand: to get a deeper insight into the nature of demand, the aggregate
(total) market demand may be broken down into demand for different segments of the
market. Market segments may be defined by nature of product, consumer group, and
geographical division.
(i) Nature of product: One generic name often subsumes many different products: steel covers
sections, rolled products, and various semi-finished products; commercial vehicles cover
trucks and buses of various capacities etc.
(ii) Consumer groups: Consumers of a product may be divided into industrial consumers and
domestic consumers. Industrial consumers may be sub-divided industry-wise. Domestic
consumers may be further divided into different income groups.
(iii) Geographical division: A geographical breakdown of consumers, particularly for products
which have a small value-to-weight relationship and products which require regular, efficient
after-sales service is helpful.
B. Price: Price statistics must be gathered along with statistics pertaining to physical quantities.
It may be helpful to distinguish the following types of prices:
(i) manufacturer’s price quoted as FOB (free on board) price or CIF (cost, insurance, and
freight) price,
(ii) landed price for imported goods,
(iii) average wholesale price, and
(iv) average retail price.
C. Methods of distribution and sales promotion: the method of distribution may vary with the
nature of product. Capital goods, industrial raw materials or intermediates, and consumer
products tend to have differing distribution channels. Further, for a given product,
distribution methods may vary. Likewise, methods used for sales promotion (advertising,
discounts, gift schemes, etc.) may vary from product to product. The methods of distribution

29 | P a g e
and sales promotion employed presently and their rationale must be studied carefully. Such a
study may explain certain patterns of consumption and highlight the difficulties that may be
encountered in marketing the proposed products.
D. Consumers: two categories of information about the consumers may be required:
a) Demographic and sociological information-, information on: age, sex, income,
avocation, residence, religion, customs, beliefs, and social background, and
b) Attitudinal information- information on - preferences, intentions, attitudes, habits, and
responses.
E. Governmental policy: the role of government in influencing the demand and market for a
product may be significant. Governmental plans, policies, legislations, and fiats which have a
bearing on the market and demand of the product under examination should be studied.
These are reflected in: production targets in national plans, import and export trade controls,
import duties, export incentives, excise duties, sales tax, industrial licensing, preferential
purchases, credit controls, financial regulations, and subsidies/penalties of various kinds.
F. Supply and competition: it is necessary to know the existing sources of supply and whether
they are foreign or domestic. For domestic sources of supply information along the following
lines may be gathered: location, present production capacity, planned expansion, capacity
utilization level, bottlenecks in production, and cost structure. Competition from substitutes
and near-substitutes should be examined because almost any good may be replaced by some
other good as a result of changes in relative prices, quality, availability, promotional
strategies, consumer taste, and other factors.


Demand estimation
The first and most difficult step in market feasibility analysis is determining the potential
demand for the product or the service we are intending to produce/render. There are different
methods of estimation.
A. Market survey
The information sought in a market survey may relate to one or more of the following;
(i) Total demand and rate of growth of demand;
(ii) Demand in different segments of the market;
(iii) Income and price elasticity of demand;

30 | P a g e
(iv) Motives for buying;
(v) Purchasing plans and intentions;
(vi) Satisfaction with existing products;
(vii) Unsatisfied needs;
(viii) Attitudes toward various products
(ix) Distributive trade practices and preferences;
(x) Socio-economic characteristics of buyers.

Market survey can be undertaken using the following steps:

1. Definition of the target population
2. Selection of sampling scheme and sample size
3. Preparation of the questionnaire
4. Recruiting and training of field investigators
5. Obtaining information as per the questionnaire from the sample of respondents
6. Editing of information gathered
7. Analysis and interpretation of data

B. Demand forecasting
After gathering information about various aspects of the market and demand from primary and
secondary sources, an attempt may be made to estimate future demand. Several methods are
available for demand forecasting. The important ones are qualitative and quantitative methods.
Qualitative Methods

Qualitative or judgmental forecasting does not rely on numbers to conclude forecast, but rather
on intangible factors. This method is especially common when sufficient historical data is not
available, i.e., for a new business or a less-established market environment. Groups whose
judgment is normally surveyed in preparing a qualitative forecast include the experts in the field,
the sales force and the customers. Combining historical data with the judgment of people or
groups presumed to have superior knowledge of sales only adds to the reliability and integrity of
a company's sales forecast. Some of the identified qualitative methods of sales forecasting are
Delphi method and Jury of Executives Opinion methods. These methods rely essentially on the
judgment of experts to translate qualitative information into quantitative estimates.

31 | P a g e
i. Jury of Executives Opinion Method

This method, which is very popular in practice, involves soliciting the opinions of a group of
managers on expected future sales and combining them into a sales estimate. The advantages of
this method are: (1) It is an expeditious method for developing sales forecast; (2) it permits a
variety of factors like economic climate, competitive environment, consumer preferences,
technological developments, and so on, to be included in the subjective estimates provided by the
experts and, (3). it has an immense appeal to managers who tend to prefer their judgment to
mechanistic forecasting procedures. The disadvantages of this method are: (1) the biases
underlying subjective estimates cannot be unearthed easily; (2) the reliability of this technique is
questionable.

ii. Delphi Method

This method is used for eliciting the opinions of a group of experts with the help of a mail
survey. The steps involved in this method are:

1. A group of experts is sent a questionnaire by mail and asked to express their views.
2. The responses received from the experts are summarized without disclosing the identity of
the experts, and sent back to them along with a questionnaire meant to probe further the
reasons for the extreme views expressed in the first round.
3. The process may be continued for one or more rounds till a reasonable agreement emerges
in the view of the experts.

Delphi method appeals too many organizations for the following reasons: (1) it is intelligible to
users; (2) it seems to be more accurate and less expensive than the traditional face-to-face group
meetings. While the Delphi method is appealing, there are certain questions it doesn’t answer.
What is the value of the expert opinion? What is the contribution of additional round and
feedback to accuracy?

Quantitative Methods

Simply stated, the word quantitative signifies an estimate of a particular, indefinite or

considerable amount of anything. Quantitative techniques rely primarily on numbers to conclude

32 | P a g e
forecasts. These numbers are multiplied, added or correlated and then placed in a formula to
predict the company's sales. You can start by building up to aggregate totals of market demand,
or start with these totals and work the numbers down into more focused forecasts for individual
products. Quantitative techniques are calculated from important numbers such as a number of
sales volume, gross national product, disposable income, and total number of buyers in the
market. These numbers have been shown to have significant value in forecasting. Among others
some of the quantitative forecasting methods include the time series methods and causal
methods.

A. Time Series Methods: these methods generate forecasts on the basis of an analysis of the
historical time series. The important time series projection methods are trend projection methods,
exponential smoothing method and moving average method.

i. Trend Projection Method

When the trend projection method is used, the most commonly employed relationship is the
linear relationship. Trend projection: it consists of determining the trend of consumption by
analyzing past consumption statistics, and projecting future consumption by extrapolating the
trend. The trend of consumption may be represented by one of the following relationships:
Linear Relationship: Yt = a + bt
Where; Yt = demand for year t,
t = the time variable,
a = intercept of the relationship
b = slope of the relationship
a, b and aj’s are constants.
This relationship may be estimated by using one of the following methods visual curve fitting
method and least squares method.
1. Consumption level method:
Useful for a product which is directly consumed, this method estimates consumption level on the
basis of elasticity coefficients, the important ones being the income elasticity of demand and the
price elasticity of demand.
a) Income elasticity of demand— The income elasticity of demand reflects the
responsiveness of demand to variations in income. It is measured as follows:

33 | P a g e
Q2−Q1
∗I 1+ I 2
I 2−I 1
Y=
Q 1+ Q2
Where; Y = income elasticity of demand
Q1 = quantity demanded in the base year
Q2 = quantity demanded in the following year
l1 = income level in the base year
l2 = income level in the following year
b) Price elasticity of demand - The price elasticity of demand measures the responsiveness
of demand to variations in price. It is defined as:

Q2−Q1
∗P 1+ P 2
P2−P1
Y=
Q 1+Q 2
Where, Ep = price elasticity of demand
Q1 = quantity demanded in the base year
Q2 quantity demanded in the following year
P1 = price per unit in the base year
P2 = price per unit in the following year
c) End use method
Suitable for estimating the demand for intermediate products, the end use method, also referred
to as the consumption coefficient method involves the following steps:
1. Identify the possible uses of the product.
2. Define the consumption coefficient of the product for various uses.
3. Project the output levels for the consuming industries.
4. Derive the demand for the product

d) Leading Indicator Method

Leading indicators are variables which change ahead of other variables, the lagging variables.
Hence, observed changes in leading indicators may be used to predict the changes in lagging
variables. For example, the change in the level of urbanization- a leading indicator may be used
to predict the change in the demand for air conditioners a lagging variable. Two basic steps are
involved in using the leading indicator method:

34 | P a g e
(i) First, identify the appropriate leading indicator(s).
(ii) (ii) Second, establish the relationship between the leading indicator(s) and the variable
to be forecast.
e) Market penetration for the product: once a reasonably good handle over the aggregate
demand is obtained, the next logical question is: What will be the likely demand for the
product of the project under examination? The answer to this question depends on ggregate
potential supply, nature of competition, consumer preferences and sales promotion efforts.
If the aggregate potential domestic supply is likely to be significantly less than the
aggregate potential domestic demand, the demand for the product of the project under
examination is likely to be very strong, provided liberal imports which may hurt domestic
manufacturers are not allowed.
The nature of competition and market-sharing arrangement (if any) has a bearing on the
demand for the product of the project under examination.
Consumer preferences for competing products and the sales promotional efforts of
various competitors obviously influence the relative market shares enjoyed by them.
The promoter should be capable of creating a profile of the organization’s ideal customer. The
promoter must ask themselves: Who is our target customer? Am I operating as a Business to
Customer or Business to Business enterprise? What are our ideal customers’ sex, age, income
level and interests? Is there a distinction between our buyer and our end user? What are the target
customer segments (geographic, demographic, psychographic and behavioral)? What
products/services are they already using? On what factors are buying decisions made?

3.2. Economic feasibility

Economics is the study of costs- and- benefits. In regard to the feasibility, the study of the
entrepreneur is concerned whether the capital cost as well as the cost of the product is justifiable
vis-à-vis the price at which it will sell at the market place. For example, technically, silver can be
extracted from silver bromide, (a chemical used for processing the X-ray and photo films); but,
the cost of extraction is so high that it would not be economically feasible to do so. Likewise,
until recently cost of harnessing solar power was prohibitively high. This cost-benefit analysis
goes into financial calculations for profitability analysis that we discussed under financial
analysis. At this stage it is also useful to distinguish between the economic and commercial

35 | P a g e
feasibility; whereas economic feasibility leads one to the unit cost of the product, commercial
feasibility informs whether enough units would sell.

Economic viability and financial viability are not different for companies. However, from
national angle and from the viewpoint of the economy, as a whole, economic feasibility and
financial feasibility are not considered to be the same. Economic appraisal of a project deals with
the impact of the project on economic aggregates-on employment and foreign exchange, and on
net social benefits. Cost and benefits to the nation due to proposed project are considered in the
economic feasibility test. Tax revenue, generation of employment, savings of foreign exchange
and such other factors differentiate economic feasibility from financial feasibility. The
government and government agencies calculate the economic indicators of a project before
permitting a project or financing it.

Apart from the cost-benefit analysis as above, which we also refer to as private cost-benefit
analysis, it is also useful to do what is known as social- cost-benefit- analysis (SCBA). For
example, the entrepreneur may be getting subsidized electricity in which case private cost would
be less than social cost. Likewise, exporting units earn precious foreign exchange resulting into
social benefits being more than private earnings. Many a time, a project that is worthy on SCBA
may find greater favor with the support agencies. This tells us that there is a huge overlap
between economic feasibility for a private project and financial feasibility and social cost-benefit
analysis of a developmental project. Hence the specific considerations and technical issue of this
part of the analysis will be covered in the subsequent sub-sections.

3.3. Financial feasibility

The objective of financial analysis is to ascertain whether the proposed project will be financially
viable in the sense of being able to meet the burden of servicing debt and whether the proposed
project will satisfy the return expectations of those who provide the capital. Capital budgeting is
a required managerial tool for project appraisal. One duty of a financial manager is to choose
projects with satisfactory cash flows and rates of return. Therefore, a financial manager must be
able to decide whether a project is worth undertaking and be able to choose intelligently between
two or more alternatives. To do this, a sound procedure to evaluate, compare, and select projects
is needed. This procedure is called capital budgeting.

36 | P a g e
In the form of either debt or equity, capital is a very limited resource. There is a limit to the
volume of credit that the banking system can create in the economy. Commercial banks and
other lending institutions have limited deposits from which they can lend money to individuals,
corporations, and governments. In addition, the Federal Reserve System requires each bank to
maintain part of its deposits as reserves. Having limited resources to lend, lending institutions
are selective in extending loans to their customers. But even if a bank were to extend unlimited
loans to a company, the management of that company would need to consider the impact that
increasing loans would have on the overall cost of financing.

In reality, any firm has limited borrowing resources that should be allocated among the best
project alternatives. One might argue that a company can issue an almost unlimited amount of
common stock to raise capital. Increasing the number of shares of company stock, however, will
serve only to distribute the same amount of equity among a greater number of shareholders. In
other words, as the number of shares of a company increases, the company ownership of the
individual stockholder may proportionally decrease.

The argument that capital is a limited resource is true of any form of capital, whether debt or
equity (short-term or long-term, common stock) or retained earnings, accounts payable or notes
payable, and so on. Even the best-known firm in an industry or a community can increase its
borrowing up to a certain limit. Once this point has been reached, the firm will either be denied
more credit or be charged a higher interest rate, making borrowing a less desirable way to raise
capital. Faced with limited sources of capital, management should carefully decide whether a
particular project is economically acceptable. In the case of more than one project, management
must identify the projects that will contribute most to profits and, consequently, to the value (or
wealth) of the firm. This, in essence, is the basis of capital budgeting.

Capital budgeting is project decision-making as to whether a project is worth undertaking.

Capital budgeting is basically concerned with the justification of capital expenditures. Current
expenditures are short-term and are completely written off in the same year that expenses occur.
Capital expenditures are long-term and are amortized over a period of years are required by the
tax authorities

37 | P a g e
Basic Steps of Capital Budgeting
1 Estimate the cash flows (initial outflow and subsequent net inflows)
2 Assess the riskiness of the cash flows.
3 Determine the appropriate discount rate.
4 Find the PV of the expected cash flows.
5 Accept the project if PV of inflows > costs. IRR > Hurdle Rate and/or payback < policy
Basic Data
Expected Net Cash Flow
Year Project L Project S
0 ($100) ($100)
1 10 90
2 60 30
3 80 50

Evaluation Techniques:
A. Payback period and discounted pay-back period
B. Net present value (NPV)
C. Internal rate of return (IRR)
D. Profitability index
Payback Period (PBP): Payback period refers to the length of time it takes to recover initial
investment of the project. Depending on the nature of net cash flows, payback period may be
computed in two ways.
a) When cash flow is in annuity form:Annuity refers to equal amount of cash flows that occur
every period over the life of the project
Initial Investment
PBP = Annual Net Cash Flows
b) When cash flows are not in annuity form
When net cash flows are not annuity, payback period is obtained by adding net cash flows for
successful years until the total is equal to initial investment.
Payback period = Expected number of years required to recover a project’s cost.
Expected Net Cash Flow
Year Project L Project S

38 | P a g e
0 ($100) ($100)
1 10 90
2 60 30
3 80 50

Payback-L = 2 + $30/$80 years

= 2.4 years.
Payback-S = 1.33 years.
Weaknesses of Payback: it ignores the time value of money. This weakness is eliminated with
the discounted payback method. It ignores cash flows occurring after the payback period.

DISCOUNTED PAY-BACK PERIOD

Since the payback period rule ignores the time value of money, some firms have modified it to
reflect the time value of money. This is the discounted payback period. This technique specifies
that the cash flow from each period has to be discounted appropriately by the firm’s cost of
capital (i.e. a risk-adjusted WACC).

Given a 10% weighted average cost of capital, the payback period will be:

Year Project L Project S

Cash flow Discounted cash flow Cash flow Discounted cash
0 ($100) ($100) ($100) ($100)
flow
1 10 9.09 90 81.82
2 60 49.59 30 24.79
3 80 60.12 50 66.55

Discounted pay-back – project L = 2 + (41.32/60.12) = 2.7 years

Discounted pay-back – project S = 1 + (18.18/24.79) = 1.7 years

Net Present Value Method: The net present value of project is the difference between the
present value of net cash inflows and present value of initial investment.

39 | P a g e
n
CFt
NPV = ∑ (1 + k) t
t =0

0 1 2 3

100.00 10 60 80
Project L:
9.09

49.59

60.12
NPVL = $ 18.79
NPV-S = $73.16

Decision: If the projects are independent, accept both. If the projects are mutually exclusive,
accept Project S since NPVS > NPVL.

Note: NPV declines as k increases, and NPV rises as k decreases.

Internal Rate of Return (IRR)
Internal Rate of Return is the discount rate which equates the project NPV equal to zero. It is the
discount rate at which the present value of Net cash flows is equal to the present value of initial
investment. In other words, IRR is the rate of return on investments in the project. The
determination of IRR is purely based on project cash flows. Mathematically, at IRR,
n Ct
∑ ( 1+ r )t = Initial investment
i=1

40 | P a g e
IRR is determined using trial and error: the complexity of determining IRR is greater if net cash
flows are not in annuity form. This section illustrates the determination of net cash flows when
cash flows are annuity as well as non-annuity.

n
CFt
IRR: ∑ ( 1 + IRR ) t = $0 = NPV
t=0

0 1 2 3

-100.00 10 60 80
18.1%
Project L:

8.47 18.1%
43.02
18.1%
48.57
$ 0.06  $0

IRRL = 18.1%
IRRS = 38%
Decision: If the projects are independent, accept both because IRR > k. If the projects are
mutually exclusive, accept Project S since IRRS > IRRL. Also Note also that IRR is independent
of the cost of capital.
Advantages and Disadvantages of IRR AND NPV
Advantages
A number of surveys have shown that, in practice, the IRR method is more popular than the NPV
approach. The reason may be that the IRR is straightforward, and it uses cash flows and

41 | P a g e
recognizes the time value of money, like the NPV. In other words, while the IRR method is easy
and understandable, it does not have the drawbacks of the ARR and the payback period, both of
which ignore the time value of money.
Disadvantages
The main problem with the IRR method is that it often gives unrealistic rates of return. Suppose
the cutoff rate is 11% and the IRR is calculated as 40%. Does this means that the management
should immediately accept the project because its IRR is 40%.? The answer is no! An IRR of
40% assumes that a firm has the opportunity to reinvest future cash flows at 40%.If past
experience and the economy indicate that 40% is an unrealistic rate for future projects, an IRR of
40% is suspect. Simply speaking, an IRR of 40% is too good to be true! So unless the
calculated IRR is a reasonable rate for project of future cash flows, it should not be used as a
yardstick to accept or reject a project.
Another problem with the IRR method is that it may give different rates of return. Suppose there
are two discount rates (two IRRs) that make the present value equal to the initial project. In this
case, which rate should be used for comparison with the cutoff rate? The purpose of this
question is not to resolve the cases where there are different IRRs. The purpose is to let you
know that the IRR method, despite its popularity in the business world, entails more problems
than a practitioner may think.
IRR Vs NPV k NPVL NPVS

NPV 0% $50 $40

($) 5 33 29
50
10 19 20
15 7 12
40
20 (4) 5

30 Crossover Point = 8.7%

20 IRRS = 23.6%

10

0
5 10 15 20 25 k(%)
42 | P a g e

-10
A. PROFITABILITY INDEX (PI)

The profitability index, or PI, method compares the present value of future cash inflows with the
initial project on a relative basis. Therefore, the PI is the ratio of the present value of cash flows
(PVCF) to the initial project of the project.

[ PI =
PV of Cash Flows
Initial Investment ]
In this method, a project with a PI greater than 1 is accepted, but a project is rejected when its PI
is less than 1. Note that the PI method is closely related to the NPV approach. In fact, if the net
present value of a project is positive, the PI will be greater than 1. On the other hand, if the net
present value is negative, the project will have a PI of less than 1. The same conclusion is
reached, therefore, whether the net present value or the PI is used. In other words, if the present
value of cash flows exceeds the initial project, there is a positive net present value and a PI
greater than 1, indicating that the project is acceptable. PI is also known as a benefit/cash ratio.

Project L
0 10% 1 2 3

-100.00 10 60 80

PV1 9.09
PV249.59
PV360.11
118.79
[ PI =
PV of cash flows
initial coast ]

43 | P a g e
118. 79
= = 1.10
100

Decision: Accept project if PI > 1. Reject if PI < 1.0

PROJECT DECISION ANALYSIS

Making Go/No-Go Project Decision

Virtually all general managers face capital-budgeting decisions in the course of their careers.
The most common of these is the simple “yes” versus “no” choice about a capital project. The
following are some general guidelines to orient the decision maker in these situations.
Focus on cash flows, not profits. One wants to get as close as possible to the economic reality
of the project. Accounting profits contain many kinds of economic fiction. Flows of cash, on
the other hand, are economic facts.

Focus on incremental cash flows. The point of the whole analytical exercise is to judge
whether the firm will be better off or worse off if it undertakes the project. Thus one wants to
focus on the changes in cash flows affected by the project.

The analysis may require some careful thought: a project decision identified as a simple go/no-go
question may hide a subtle substitution or choice among alternatives. For instance, a proposal to
invest in an automated machine should trigger many questions: Will the machine expand
capacity (and thus permit us to exploit demand beyond our current limits)? Will the machine
reduce costs (at the current level of demand) and thus permit us to operate more efficiently than
before we had the machine? Will the machine create other benefits (e.g., higher quality, more
operational flexibility)? The key economic question asked of project proposals should be, “How
will things change (i.e., be better or worse) if we undertake the project?”

Account for time. Time is money. We prefer to receive cash sooner rather than later. Use NPV
as the technique to summarize the quantitative attractiveness of the project. Quite simply, NPV
can be interpreted as the amount by which the market value of the firm’s equity will change as a
result of undertaking the project.

44 | P a g e
Account for risk. Not all projects present the same level or risk. One wants to be compensated
with a higher return for taking more risk. The way to control for variations in risk from project
to project is to use a discount rate to value a flow of cash that is consistent with the risk of that
flow. These 4 precepts summarize a great amount of economic theory that has stood the test of
time. Organizations using these precepts make better project decisions than organizations that do
not use these precepts.

CAPITAL RATIONING

Exists whenever enterprises cannot, or choose not to, accept all value-creating project projects.
Possible causes may be: banks and investors say “NO” and managerial conservatism. Analysis is
required. One must consider sets of projects, or “bundles”, rather than individual projects. The
goal should be to identify the value-maximizing bundle of projects. The danger is that the
capital-rationing constraint heightens the influence of nonfinancial considerations, such as the
following:
Competition among alternative strategies
Corporate politics
Bargaining games and psychology
The outcome could be a sub-optimal capital budget, or, worse, one that destroys value!
Some remedies are the following: Relax and eliminate the budget constraint; Manage the process
rather than the outcomes; Develop a corporate culture committed to value creation.

3.4. Technical feasibility

The technical aspects of a typical project idea can be scrutinized in detail to evaluate its technical
feasibility, as distinct from commercial, financial, economic and managerial feasibility. For the
sake of comprehensiveness we will cover Environmental Impact Analysis (EIA) also, as a part of
this analysis. While the various aspects to be examined will obviously vary from project to
project, the following summary covers the more common ones briefly.
3.4.1. Objectives:
First, the project proposal must fall within the ambit of the stated mission of the sponsor(s).
Next, the proposal must be able to further the objectives and priorities of the sponsor(s). These

45 | P a g e
must therefore be ascertained and clearly recorded, along with detailed specifications for the
output which constitute the basic frame of reference for all future decisions. The private sector
would usually expect a project to earn a high enough profit, i.e. a stated level of return on
investment. Only for core projects (which are intended to basically support other highly
profitable projects) may this requirement be relaxed. The public sector generally has multiple
objectives and profitability normally takes a back seat. In either case, it is essential for the project
analyst to keep the organization’s objectives - a along with their interest priorities - in sharp
focus, to ensure that his/her efforts follow the correct direction.
3.4.2. Location and site
Initially, as many locations as possible should be identified which meet the most fundamental
operational requirements of the proposed project. These should then be evaluated and an
optimum location selected using the criteria of material versus market orientation, quality
standards, infrastructural status, local laws, and socio-economic and living conditions.
Within the geographical location so selected, alternative sites are similarly identified and the
most optimal one selected after considering factors like terrain, local climate land its impact on
plant & equipment and their operation, availability and cost of land (plus its development), local
infrastructural facilities and their costs (power; water: road/ air/water transport;
telecommunications; etc.), socio-economic conditions, availability and quality of labour and
construction equipment, valid waste disposal alternatives and their costs, local living conditions,
public policies, local law, and taxes, etc.

Note: Resource-oriented projects like mining of minerals involve items like geological analysis
covering geological structure, hydrological conditions, characteristics of the resource, resource
reserves, prospecting status, and expected geological problems.

The location decision should be made after giving due consideration to various benefits and
incentives offered by governments or local bodies for setting up production or service facilities
in certain specified areas. These may include assistance in the form of or in respect of capital
loans and grants, tax, concessions, clearances, subsidies, infrastructure, etc. One way to do
this is to evolve (or use available). Location Cost Indices (LCI) for different sites. If the cost (in a
specified currency) of setting up a plant is CA at location A and CB at location B, the LCI for
location A is defined as 100 x CA/CB. If reliable values of LCI for different locations, whether

46 | P a g e
within one or more countries, are available, the selection of an appropriate location becomes a bit
easier. Such valuable information is however kept a closely guarded secret by a consulting
company and is therefore difficult to come by.

Plant Size
Determination of an optimum plant size is critical to the success of a project. A plant represents
sunk costs and any under utilization of its capacity means either reduced profits or, for levels
below the Break-Even Point, losses. The adverse impact of an extra-large capacity is felt all the
more keenly during the early years when profits are all the more important for survival. It is
therefore normally better to err on the lower side and to build a plant having a capacity that is
likely to be fully utilized quickly, rather than to go in for a large capacity in the fond hope of a
growing share of the market. In a feasibility study, one-begins by looking 'at projections of the
demand-supply gap in the market and anticipated arrives' at the possible range of project sizes
after considering various constants like availability of materials, technology, equipment, public
policy (for example, a large company may be precluded from setting up capacities beyond a size)
and finances, etc.. The best possible size of plant & equipment is then recommended after
analyzing the availability, economics, and practicability of different size options.

Technology
The same product or service can generally be obtained using quite different technologies.
Electricity, for example, can be generated using solar panels, coal (thermal plants), hydraulic
power plants, and nuclear power plants and so on. Basic telephone Sol-vices can similarly be
provided using manual, semiautomatic, or automatic exchanges. And, even the last-named
category is available if] various technological versions like Stronger, Crossbar, Analogue
electronic and Digital electronic. Needless to say, the latest technologies usually represent many
improvements over the existing or older ones. They may also offer certain unique features.
However, newly emerging technologies may have some inherent dangers as well.
What is important for formulating a successful project is to weigh available alternative
technologies and select the one that is most appropriate in the prevailing situation, rather than
blindly adopt the latest, state-of-the-art technology assuming that it will work since it works
elsewhere. A technology is considered appropriate only if it is assessed to be satisfactory, and
relevant, vis-à-vis the following aspects in lie specific situation of the project.

47 | P a g e
 Specifications of the task/product
 Task uncertainties and interdependence
 [Especially for public sector] Developmental imperatives (e.g. growth of employment;
maximizing use of local resources; reduction of disparities in income levels)
 Required gestation period versus the time actually available of the project.
 Source(s) and ease of availability.
 Indigenous availability of comparable technology
 Field validation status in comparable situations. If necessary, field trials may have to be set
up.
 Adaptability to the qualitative characteristics of the locally (or indigenously) available
resources including energy and efficiency in their usage
 Dependence on nonrenewable sources of energy
 Capacity of the organization to absorb/adopt the technology
 Timely availability of manpower with requisite skills for installation, operation and
maintenance
 Cost of' acquisition, installation, repairs and maintenance versus availability of funds
(local/foreign)
 Safety characteristics
 Requirement or availability of R & D facilities • Environmental and sociocultural
sensitivities
 Likelihood, and time frame, of obsolescence

Design, Layout & Plant & Machinery

The feasibility study should broadly specify the recommended design of the processes and plant
(giving essential assumptions and design calculations). It should also present a rough layout of
various facilities and list out all the major equipments needed, with key specifications and
available source(s) of supply. Moreover, it should consider, and evaluate alternative equipments
as well and give reasoned recommendations about them. The importance of thoroughness of
planning at this stage of the feasibility study can hardly be overemphasized. Many delays, cost
overruns, and even failures of projects can be avoided provided the design and physical
formulation of the project are based on a sufficiently deep analysis and have the support of the
owner at the highest level. Otherwise, the project is likely to encounter mid-steam changes, with

48 | P a g e
untoward consequences. There is a general impression that "minor" midstream changes would
not pose much of a problem. This is not so. A project is a multi-task entity with complex
linkages and interrelationships between its various constituents, and even "small" changes, which
may result in certain made-to-order procured equipments being rendered unsuitable and thus
throw the project schedule and costs haywire. The aim of all the efforts at this stage is to design a
viable operating entity which not only works, but works harmoniously (and with minimum costs)
in relation to the stipulated inputs and local environment. Apparent as well as latent and
relatively infrequent factors having a bearing on the effectiveness of the project must therefore
be identified and considered. Neglect of climatic and geographical aspects (e.g. monsoons,
floods, snowstorms, dust-storms, heat/cold-waves, earthquakes, typhoons, etc.) at this stage can
prove quite costly later on. It is equally important to ascertain and give due consideration to local
industrial and safety standards.

Construction Process
This needs to be tackled in the feasibility study in terms of its five aspects,
First, the methodology to be followed - viz., capital intensive or otherwise and its feasibility
under prevailing conditions. Second, whether the construction or installation is to be done in-
house, or on a turnkey basis, or by farming out a number of contracts for different work
packages, and their feasibility. A recommendation may also be made whether any special agency
(ies) should be engaged as a part of backup or contingency arrangements for critical activity
(ies). Third, the determination of such construction equipments, materials and other essential
inputs (like cement, sand, steel, stores etc.) as are to be arranged by the owner, along with their
alternatives, availability, source of supply (local/foreign), lead-times, and infra-structural
requirements (like uninterrupted supply of power, clean water, gas, steam, etc). Fourthly, the
recommended sequence and time schedule of different activities in the form of a bar-chart/PERT
network. Lastly, assessment of the financial implications of this phase based on the latest
available unit costs and with provision for inflation and contingencies.
Inputs
These relate to the operation phase of the project, but need to be identified at this stage of the
feasibility study to examine the technical feasibility of the proposed system(s). For this,
classification of the inputs into following categories will be found useful.
raw materials,

49 | P a g e
processed materials,
components & sub-assemblies,
spares and wear & tear parts,
water & steam,
gas, fuels and electricity.
Next, their qualitative and quantitative requirements (including buffer stocks, where applicable),
availability, feasibility alternatives and reliable sources of supply should be carefully ascertained
and record. The problems involved in their storage and handling should be also assessed.

Infrastructural Facilities
Availability and characteristics of roads, bridges, railway facilities (like station, yards), air
transportation, waterways, ports, etc. depending upon their relevance to the assessed
requirements of the project at both implementation and operation stages need to be studied. After
studying the appropriateness of the infrastructure existing around the project location, the
infrastructural requirements at the project site itself. A large part of the land area is normally
required to be reserved for service roads, storm water mains, railways, over-ground or overhead
gas, steam, and air pipelines, water reservoirs, and even harbors for certain large-scale industrial
projects. A detailed study of all such requirements and of their implications in terms of time,
resources, and approximate costs is necessary to avoid surprises later on.
Manpower
The availability in needed numbers, of manpower of requisite skills where and when required,
has to be studied. This covers both the project implementation and the operation (&
maintenance) phases. In case imparting of training is also involved, timely availability, and costs,
of the training facilities have also to be assessed.

Environment Impact Assessment (EIA);

This study identifies the environment in which a project is to be implemented, assesses the short
-- and long-term impacts the former is likely to be subjected to as result of the project activities
during construction as well as operation phases, and generates preferred alternative courses of
action, if possible. The EIA process can prove to be of immense benefit to the project promoter,
if sincerely carried out, by ensuring that the natural resources are conserved or used efficiently
and serious problems likely to arise out of any adverse effects on community or natural systems

50 | P a g e
are duly anticipated and provided for at the planning stage itself. For identification of impacts, a
list of parameters relevant to the project is drawn up, covering natural physical resources, natural
biological/resources, and quality-of-life values including aesthetic and cultural values. For
instance, for rail/road/highway project the following parameters have been identified surface
water quality, air quality, seismology/geology, erosion, land quality, fisheries, forests, terrestrial
wild life, noise, aesthetics, archaeological/historical significance, public health, and
socioeconomic factors.

For each of these, the resulting impacts, whether beneficial or otherwise, are then identified and a
detailed Environmental Management Plan (EMP) prepared for such mitigation, protection and/or
enhancement measures, as are considered necessary,

3.5. Social cost benefit analysis

Social cost benefit analysis (SCBA) is a perfect necropsy where the identification and
determination of the best among project alternatives is made with reference to a country’s
economic and social prerogatives. It is a systematic procedure for comprehensive review of all
the costs, benefits, and effects of a project. Such appraisal is preformed for development and
infrastructure projects usually by emphasizing the economic, technical, operational, institutional,
and financial factors to ensure that the selected project meets all necessary requirements and is
implementable.
SCBA focuses on the following objectives:
 To contribute effectively to GDP of an economy;
 To aid in economic development;
 To justify the utilization of economy’s scare of growth;
 To maintain and protect environment from pollution;
 To educate new lines of functioning that are simple and cost effective;
 To benefit the rural poor and reduce regional imbalances;
 To justify the risks undertaken to implement and the sacrifices made in the process.

Therefore, it is important to identify the major economic, environmental, social and other factors
a project may influence directly or indirectly. For instance, introducing a coal-fired power plant
in a location previously supplied with power over long transmission lines at great cost would

51 | P a g e
introduce economic benefits in terms of lower power costs, higher supply reliability and local
employment at the power plant and support activities. Similarly, economic costs might include
the use of local land for use of the power plant and coal handling or storage activities, air
pollution from both the plant and coal handling, ground water and soil pollution from both the
plant and coal handling, ground or storage activities, air pollution from coal washing and run-off,
temperature (heat) pollution from heat rejection of cooling water, congestion of roads and or rail
corridors, reduction of investment capital for other projects, commitment of local consumption,
and various other indirect costs. Some of the local costs are usually hidden under various
concessions given to public development projects, such as capital generation by use of tax-free
bonds, use of public land subsidizing local development constructions, etc.
The net benefits equation can be written as:

NB = α ( βγδ X −βM−γδ d )
Where α = weighing factor for exchange rate stability;
β = weighing factor for impact of protective practices;
γ = weighting factor for labor availability
δ = weighting factor for adequacy of support services
UNIDO - Guidelines for Project Evaluations released during early 70s
Fundamental focus of these guidelines is net increase in the aggregate consumption of an
economy due to the project output. Other subsidiary objectives are noted as:
Changes in the distribution of domestic income;
Changes in the savings and investment levels of a community;
Change in the labor market due to project implementation, etc.
Therefore, to survey the above objectives, the guidelines advocate the following steps for the
appraiser.
Identification of direct and indirect costs and benefits that affect the aggregate
consumption of an economy;
The consumption of the shadow prices of labor, foreign exchange, and investment;
The estimation of the social rate of discount, and also of relative weights to be attached to
the net benefits accruing to various groups in the economy if redistribution of income is
considered as separate objectives.

52 | P a g e
In a nutshell, the UNIDO guidelines base its arguments on:
The financial profitability of a project;
The net effect of costs and benefits on the economic situation of a country;
The opportunity cost of the investment;
The financial profitability which is similar to that used in normal commercial ventures based on
Discounted Cash Flow techniques and other standard financial management tools;
The concept of shadow prices that are associated with various types of goods and services dealt
in the project.
Diamond – Mirrleess Approach
Little and Mirrlees, through their pioneering efforts, interpret the problem of Least Developed
Countries (LDCs) as follows:
In an LDC, the foreign trade sector is considered as the public sector program. The public sector
projects are to be efficient by setting their prices equal to marginal costs. (P = MC – leaving to
room for loss). Under such a threshold pricing level only world prices should be used as ‘shadow
prices’. Distribution and efficiency be the twin important objectives of a government policy that
affects project performance. Therefore, shadow prices give risk to effect on social welfare of a
small change in quantity of an input or output. Its value depends on the welfare function being
used and the constraints imposed.

Rationale for Using World Prices as ‘Shadow Prices’

While considering shadow pricing philosophy, commodities are classified into four:
1. Traded goods for which the elasticities of demand and supply in the market are infinite;
2. Traded goods which are having definite elasticities of demand and supply in the global
markets;
3. Non-traded goods that are not being traded and will never be traded provided optimal trade
policies are employed by the economy;
4. Potentially traded goods that are not presently traded but can be traded if the trade policies
are optimal.
In all the above cases, world prices are recommended to be used as shadow prices since domestic
pricing policies keep changing.
The crux of the Diamond and Mirrlees approach is that, application of world prices as shadow
prices helps offset the fluctuations in domestic prices and justifies the project from the

53 | P a g e
economy’s point of view. They emphasis productive efficiency, trade efficiency, and optimal
operations are the key issues. This depends on the existence of optimal commodity taxes without
which the exceptions to the rule of using world prices would disappear.

3.6. Other feasibility issues

Ecological Feasibility
We have discussed Environmental Impact Analysis under the Technical analysis. When there are
serious ecological implications, it is worthwhile to have a separate and full-fledged ecological
feasibility. Ecological consideration is another issue to be covered in feasibility study. In recent
years, environmental concerns have assumed a great deal of significance especially for projects,
which have significant ecological implications like power plants and irrigation schemes, and for
environment polluting industries (like bulk drugs, chemicals and leather processing). The
concerns that are usually addressed include the following: What is the likely damage caused by
the project to the environment? What is the cost of restoration measures required to ensure that
the damage to the environment is contained within acceptable limits?
Legal and Administrative Feasibility
Legal and administrative feasibility is another element of the study. Clearances and Approvals:
Setting up of an industrial unit requires the entrepreneur to obtain a number of clearances and
approvals regarding land use, pollution control and safety. In this regard, you would be required
to interact with the local government authorities. Certain products may require specific
clearances from the relevant departments/authorities. Those are the issues we address under legal
and administrative clearance.

54 | P a g e
UNIT FOUR
PROJECT PLANNING

Introduction

Project Planning is foreseeing with blue print towards some predicated goals or ends. Project
plan is a skeleton which consists of bundle of activities with its future prospects; it is a guided
activity. It is a plan for which resources are allocated and efforts are being made to commence
the project with great amount of preplanning, project is a way of defining what we are hoping to
do about certain issue. The project alone is not responsible for what happens during the course of
a planning. Project is a final form of written documents that guides us as to what steps need to be
taken next.

4.1 Nature of project planning

One cannot conceive a project in a linear manner. It involves for activities, resources, constraints
and interrelationships which can be visualized easily by the human mind and planned informally.
However, when a project crosses a certain threshold level of size and complexities, informal
planning has to be substituted by formal planning. Besides that it is an open system oriented
planned change attempt which has certain parameters and dimension. So, the need for formal
planning is indeed much greater for project work than for normal operations. The pre-defined
and outlined in detail plan of action helps those manners to perform their task more effectively
and efficiently. There are always competing demands on the resources available in a region or a
country because of the limited availability and ever expanding human needs. Planning for the
optimum utilization of available resources becomes a pre requisite for rapid economic
development of a country or a region. Project planning makes a possible to list out the priorities
and promising projects with a view to exercising national choice among various alternatives

55 | P a g e
available. It is a tool by which a planner can identify a good project and to make sound
investments decisions.

4.2. Need for project planning

One of the objectives of project planning is to completely define all work requested so that it will
be readily identifiable to each project participant. Besides that there are four basic reasons for
project planning: To eliminate or reduce uncertainty, to improve efficiency of the operation, to
obtain a better understanding of the objectives, to provide a basis for monitoring and controlling
work.
4.3. Functions of project planning

The following functions are to be performed carefully in the Project Planning process. It should
provide a basis for organizing the work on the project and allocating responsibilities to
individuals. It is a means of communication and co-ordination between all those involved in the
project. It induces the people to look ahead. It instills a sense of urgency and time consciousness
It establishes the basis for monitoring and control. In planning a project, the project manager
must structure the work into small elements that are: Manageable, Independent, Integrated and
Measurable in terms of progress. Project planning must be systematic and flexible enough to
handle unique activities, disciplined through reviews and control and capable of accepting
multifunctional inputs.

4.4. Steps in project planning

Planning decisions involves a conscious choice or selection of one alternative from among a
group of two or more alternatives. The three main steps involving project planning decisions are:
Identifying alternative ways of action which are relevant to the decision to be made, Defining
each of the alternatives. Hence, the definition involving a determination of consequences or
impact of each of the proposed alternatives, and Making a choice among the alternatives i.e., one
has to make a decision with maximum input, feedback and participation of superiors as well as
subordinates. Planning is a systematic attempt to achieve a set of goals within the specified time
limit under the constraints of available resource restrictions involving the least sacrifice. Broadly
speaking planning involves two differences methodologies:

4.5. Planning by incentive and Planning by direction

56 | P a g e
Planning by incentive mainly depends on the controlling of economic tools to push economic
resources towards the attainment of set goals within the specified period. Planning by direction
gives more emphasis on the direct participation of the central planning authority in the economic
activities to attain the set goal within the estimated time limit. Planning is decision making based
upon futurity. It is a continuous process of making entrepreneurial decisions with an eye to the
future, and methodically organizing the effort needed to carry out these decisions. This type of
well structured project plan helps to establish an effective monitoring and control system.
Project Planning Structure
The various activities involved in Project planning is given in the following chart as Project
Planning Structure.

Work Description and Instruction Net work Scheduling

Project Objectives Master Schedules
Management Decision making Budgets
Reports Time/Cost Performance

4.6. Planning and decentralizing

The different way of allocating the activities of a project are important means of delineating
various degrees of decentralization. These are three main ways in which project planning can be
decentralized into manageable divisions viz, Project planning by subject, Project planning by
type of plan and Planning in phases
1. Planning by subject is a simplest way of dividing the powers of planning. The planner takes
decision on related operation and planning by subject. He plans, decides and directs the part
of plan. He is the sole in charge of the plan from beginning to final completion.

2. Planning by type of plan broadly defines premises and assumptions leaving the detailing to
be done by persons at the grass root level of planning. Generally such cases involve decisions
which are routine and involve a lower degree of professional and financial risk.
3. Planning in phases - are designed by several individuals who participate at the formulation
stage. The level of people involvement is directly related to the phase and the degree of risk
involved.

4.7. Areas of project planning

57 | P a g e
Comprehensive project planning covers the following area; planning the project work: the
activities relating to the project must be spelt out in detail. They should be properly scheduled
and sequenced.
 Planning the manpower and organizations: The manpower required for the project must
be estimated and the responsibility for carrying out the project work must be allocated.
 Planning the money: the expenditure of money in a time-phased manner must be budgeted
 Planning the information system: The information required for monitoring the project must
be defined

4.8. Types of project plan

The planning process can be done in different ways depending on the type of plan. They can be:
a) One shot or single use plans and
b) Standing or Standard use plans
Single use plans: It includes programs schedule and special ways of operating under particular
circumstances. Single plans are meant as objectives which centre on focused and desired results.
It can also be known as short term plans, to deal with the specific problem for specific place with
prescribed time limit.

Standing plans: Standing plans are those plans which include policies, standard methods and
standard operation, procedures. They are designed to deal with recurring problems. It may be
treated as standard document to be used in different plans to deal with a set of problems. The
design procedure and steps are already described. It may require adjustment considering the unit
of operation.

4.9. Project objectives and policies

Project planning begins with the end result, the goal and works backward. Often the focus of
project planning is on questions like who does what and when before such operational planning
is done, the objectives and policies guiding the project planning exercising must be articulated. If
the project team lacks a clear goal, even excellent skills and the best equipment will not enable
the team to do a good job. Well defined objectives and policies serve as the framework for the
decisions to be made by the project manager. Throughout the life of the project, he has to seek a
compromise between the conflicting goals of technical performance, cost standard and time
target. A clear articulation of the priorities of management will enable the project manager to
take expeditious actions.

58 | P a g e
An effective project goal has the following characteristics. These characteristics are captured in
the term SMART, an acronym for the aspects of a goal commitment. These characteristics of a
project goal are specific, measurable, agreed upon, realistic and time framed. The objectives of a
project may be: Technical objectives, Performance objectives, Time and cost goals. Policies are
the general guide for decision making on individual actions. Some of the policies of a project
are: Extent of work given to outside contractors, Number of contracts to be employed and Terms
of the contract etc. Project policies must be formulated on the basis of following principles:
 It must be used upon the known principles in the operating areas;
 It should be complementary for co-ordination
 It should be definite, understandable and preferably in writing,
 It should be flexible and stable,
 It should be reasonably comprehensive in scope.

4.10. Tools of project planning

There are different tools available for drawing the project plan in a formal way. They may be
grouped into two categories:
1. Traditional tools and
2. Network analysis.
The common traditional tool is Gantt chart.
4.10.1. Gantt chart
It is the oldest formal planning tool designed by Henry Gantt in 1903. Under this, the activities
of project are broken down into a series of well-defined jobs of short duration whose cost and
time can be estimated. It is a pictorial device in which the activities jobs are represented by
horizontal bars on the time axis. The length of the bar indicates the estimated time for the job.
The left hand end of the bar shows the beginning time, the right hand and the ending time. The
manpower required for the activity is shown by a number on the bar. An illustrative bar chart is
shown as follows.

59 | P a g e
The project review dates are indicated by a vertical dotted line and at this time a horizontal line is
drawn beneath each bar to indicate the progress actually made up to that date. The length of the
progress line is then drawn to represent the percentage of the job that has been completed at the
review date. The merits and demerits of Gantt are below:
MERITS: 1. It is simple to understand
2. Is can be used to show progress
3. It can be used for manpower planning
DEMERITS: 1. It cannot show inter-relationship among activities on large complete projects
2. There may be physical limit to the size of the bar chart
3. It cannot easily cope with frequent changes or updating

4.10.2. Network techniques

The foundation of the approach came from the Special Projects Office of the US Navy in 1958. It
developed a technique for evaluating the performance of large development projects, which
became known as PERT - Project Evaluation and Review Technique. Other variations of the
same approach are known as the critical path method (CPM) or critical path analysis (CPA). The
heart of any chart is a network of tasks needed to complete a project, showing the order in which
the tasks need to be completed and the dependencies between them. This is represented
graphically:

60 | P a g e
Example of an Activity Network
The diagram consists of a number of circles, representing events within the development
lifecycle, such as the start or completion of a task, and lines, which represent the tasks
themselves. Each task is additionally labeled by its time duration. Thus the task between events 4
& 5 is planned to take 3 time units. The primary benefit is the identification of the critical path.
The critical path = total time for activities on this path is greater than any other path through the
network (delay in any task on the critical path leads to a delay in the project). Tasks on the
critical path therefore need to be monitored carefully. The technique can be broken down into 3
stages:
1. Planning: (identify tasks and estimate duration of times; arrange in feasible sequence; Draw
diagram).
2. Scheduling: (Establish timetable of start and finish times).
3. Analysis: (establish float; Evaluate and revise as necessary).

The slack time or Total float for an activity is the time between its earliest and latest start time,
or between its earliest and latest finish time. Slack is the amount of time that an activity can be
delayed past its earliest start or earliest finish without delaying the project. The critical path is the
path through the project network in which none of the activities have slack, that is, the path for
which ES=LS and EF=LF for all activities in the path. A delay in the critical path delays the
project. Similarly, to accelerate the project it is necessary to reduce the total time required for the
activities in the critical path. Activity is an individual task needed for the completion of a
project. Duration is the length of time (hours, days, weeks, months) needed to complete an
activity. Float is the amount of time that an activity can slip past its duration without delaying
the rest of the project. Free float is the excess time available before the start of the following
activity.

61 | P a g e
Diagram Symbols

To Produce the Diagram

There is a single start and end event;
Time flows from left to right (so does the numbering sequence);
Events are given a unique number (activities then have a unique label i.e. head & tail event
numbers);
The network can then be drawn taking into account the dependencies identified;
Working from the start event forward, calculate the earliest times, setting the earliest time
of the first event to zero. Add the job duration time to the earliest event time to arrive at the
earliest time for the successor event. Where the successor has more than one activity
dependent on to the latest time is entered;
Workings from the finish event backwards, calculate the latest times. Set the latest time to
the earliest time for the finish event. Subtract job duration from the latest time to obtain
predecessor latest event times. Where the predecessor event has more than one arrow
emanating from it enter the earliest time;
Event slack is calculated by subtracting the earliest event time from the latest event time;
Critical path(s) are obtained by joining the events with zero event slack.

62 | P a g e
Dummy Activity: An imaginary activity that requires no time and is used to correctly maintain
the appropriate precedence relationships.
Critical path is the longest-duration path through the network. The significance of the critical
path is that the activities that lie on it cannot be delayed without delaying the project. Because of
its impact on the entire project, critical path analysis is an important aspect of project planning.
The critical path can be identified by determining the following four parameters for each activity:
Earliest Start time (ES): the earliest time at which the activity can start given that its precedent
activities must be completed first.
Earliest Finish time (EF), equal to the earliest start time for the activity plus the time required
completing the activity.
Latest Finish time (LF): the latest time at which the activity can be completed without delaying
the project.
Latest Start time (LS), equal to the latest finish time minus the time required to complete the
activity.Worked Example

List of activities for the network:

Task Location Dependent on Duration

A - 3
B - 6
C - 3
D A 5
E C 2
F B, D, E 6
G A 9

Calculation of Earliest Time:

Use the instructions presented in section 3.2 and the following diagram.

Calculation of Earliest Start Time

63 | P a g e
What is the earliest time for event 4?
Solution to Calculation of Earliest Start Time for Event 4

Preceding
Activity Duration Calculated ET
ET
2 5 3 5 8

1 4 0 6 8

3 4 3 2 5

So the earliest start time for event 4 is day 8 (by this time all the preceding activities will have
been completed). What is the earliest time for event 5? If you are unsure, the answer is explained

Solution to Calculation of Earliest Start Time for Event 5

This solution builds on the previous one - the earliest start time for event 4 was day 8 therefore...
Preceding
Activity Duration Calculated ET
ET
2 5 3 9 12

4 5 8 6 14

So the earliest start time for event 5 is day 14 (by this time all the preceding activities will have
been completed).

Calculation of Latest Time:

Use the instructions presented above and the following diagram.

64 | P a g e
Calculation of Latest Start Time
What is the latest time for event 2?
Solution to Calculation of Earliest Start Time for Event 5
This solution builds on the previous one - the earliest start time for event 4 was day 8 therefore...
Activity Preceding ET Duration Calculated ET
2 5 3 9 12

4 5 8 6 14

So the earliest start time for event 5 is day 14 (by this time all the preceding activities will have
been completed).
What is the latest time of event 1? If you are unsure, the answer is explained
Solution to Calculation of Earliest Start Time for Event 5
This solution builds on the previous one - the earliest start time for event 4 was day 8 therefore.

Activity Preceding ET Duration Calculated ET

2 5 3 9 12
4 5 8 6 14
So the earliest start time for event 5 is day 14 (by this time all the preceding activities will have
been completed).
Drawing the Critical Path:

65 | P a g e
Drawing the Critical Path

Analysis of the network allows the 'float' to be calculated, this is essentially the amount of time
an action can be delayed without delaying the overall project. Activities on the critical path must
be monitored very carefully.

4.4. The Logical Framework Approach in Project planning

4.4.1 Overview of the logical framework approach

Logic is a science that deals with the rules and tests of sound thinking and proof by reasoning
The Logical Framework is a simple tool for organizing thinking, elating Activities to expected
results, separating means from ends, setting performance indicators, allocating responsibilities,
communicating concisely & unambiguously. The Logical Framework or Log Frame Matrix is
one tool, amongst others, used for project planning & management (M&E). The Log Frame
Matrix (LFM) displays the casual relationship between the project inputs & outputs and
demonstrates how the outputs will lead to attainment of objectives and then contribute toward the
ultimate goal. A useful tool for planning more complicated projects is the logical framework
approach. The idea of this tool is that you identify all the main elements of a new proposal, and
examine how they fit together. The logical framework requires that you write down the planned
activities in a certain order that helps you to check whether one step will lead to the next, note
any assumptions that you are making, and examine whether or not they are true, identify
indicators of progress.

66 | P a g e
By Using LFM project designers/planners, managers and evaluators can define a project
hierarchy of objectives and the necessary and sufficient conditions required to achieve the next
higher-level objective/s/. The standard model log frame is a 4×4 matrix which vertically and
horizontally summarizes what the project intended to achieve, from the level of goal down to
specific activities, the performance questions and indicators that will be used to monitor progress
and evaluate overall achievements, how these indicators will be monitored or where the data can
be found, the assumptions behind the logic of how activities will eventually contribute to the
goal, plus associated risks for the project if assumptions turn out to be incorrect.

The Vertical Logic (Project Logic) is a set of means and ends interrelated in a logical fashion and
intended to define the way the project inputs are transformed into development goals. It is based
on the assumption that the achievement of ultimate project objectives (goal) proceeds through a
hierarchy of sub-objectives linked by a set of hypotheses: If we provide the following inputs and
carry out the following activities, then we produce the required outputs, If we produce those
outputs (product &/or service), then the purpose will be achieved. If the purpose is achieved,
then the goal will be realized. The statement of goal, purpose, outputs & activities (inputs)
frequently are subject to different interpretations by those involved with the project. Hence, the
HL enables to state the evidence that will signal success or failure, and the means it can be
verified. It lists the Objectively Verifiable Indicators of progress (OVIs), the Means of
Verification (MOV) and the Important Assumptions.

4.4.2 List the activities

The first step is to think of a project as a series of activities where one step leads on to the next.
The way this is normally shown is to place inputs at the bottom of the page and then to work up
towards the goal written at the top. This concept is illustrated in the following diagram where
one starts with "Inputs" at the bottom and works upward.

Example: Emergency Project

67 | P a g e
GOAL Communities and individuals who are better able to prepare and
respond to local disasters
OBJECTIVE Widely disseminated and heeded public information campaign on how to
locally prepare and respond to disasters
OUTPUTS work-plan reflecting roles, responsibilities and a time line for action

ACTION Planning the disaster awareness public information campaign

INPUTS Volunteers, funds, materials, research on most vulnerable

4.4.3 Examine assumptions (conditions of achievement)
Whether actions lead to the desired results, depends on whether our planning assumptions are
correct. In the above example, the input "Volunteers" will only contribute to the action
"Planning the disaster awareness campaign," if our assumption about the skills and commitment
of volunteers holds true. Otherwise the action may not occur.

4.4.4 Indicators of progress

The full version of the logical framework as a planning tool also includes the indicators of
progress that you will look for once you start to implement your plan. Some examples of
indicators are given below.

4.4.5 Budgets
The next step in resource allocation is the development of a budget for each important element of
the program. Simple, accurate systems that improve budgeting and cost control are crucial.
Whatever approach is used, a budget must be flexible and anticipate inflation of costs. Many
projects experience difficulty with monetary control and have trouble accounting for funds.
Usually this is because the project has not specified the accounting system to be used from the
outset or the system chosen is not adaptable to the project situation. For example, during disaster
times, good field accounting requires a simple system that is easy to use, easy to carry, and
places the emphasis of trust on the user. It also requires training in how to use the system before
disaster strikes. Field representatives, especially in the emergency, must have an accounting
system that recognises the need for flexibility and simplicity. Several agencies have recently
begun to use simplified field-account books that have built-in impression pads, so that duplicate

68 | P a g e
or triplicate records can be prepared and maintained. This innovation reflects the agencies'
awareness that a disaster creates special accounting needs. There is a close relationship between
budgeting as a planning technique and budgeting as a control technique. In this section we are
concerned only with the preparation of budgets prior to operations. From this perspective,
budgeting is a part of planning. With the passage of time and as the organization engages in its
activities, however, the actual results will be compared with the budgeted (planned) results. This
analysis may lead to corrective action. Thus, budgeting can also be viewed as a method for
evaluating and coordinating the efforts of the organization.

Assumptions: The mere fact that inputs are available, however, and that activities are performed
does not guarantee the production of outputs. The resources must be properly managed to
perform the right activities. Furthermore, management could be prevented from producing the
outputs if uncontrollable circumstances prevailed. Similarly, producing the outputs does not
ensure that the desired effect will follow. This relationship is based on the best judgment of the
planners and it may not be right. Besides, if this judgment was right, extraordinary
circumstances may prevent the production of the desired effect. Good project design requires that
project hypotheses and relevant assumptions must be clearly identified.

UNIT FIVE

69 | P a g e
PROJECT IMPLEMENTATION AND FINANCING

Time for action now! You will now hold a formal kick-off meeting to start the execution phase
of your project during which you will direct your team’s activities in order to produce the agreed
upon deliverables as detailed in the project plan.

5.1 Essential of project administration

For a company executing projects either regularly or for the first time it would be necessary for
the chief executive to issue what may be called project charter. It must define the project scope,
the project goals, name and authority delegated project manager, project reviewing authority and
request co-operation of all concerned in the execution of the project. An elaborate effort in this
direction may produce what is known as a project manual. To demonstrate the project manager’s
authority in a simplest and quickest way it is essential to develop a proper organization chart.

There are two systems for the management of project and they are: Project work system and
Project control system. Project work system can be designed by developing and preparing the
following tools: Work breakdown structure, Project execution plan and Project procedure manual
etc. Similarly for effective project control system it is essential to design the tools such as project
planning, project scheduling and project monitoring.

5.2. Factory Design and layout

In creating a factory, an entrepreneur creates something which is attractive, useful and ingenious
from material resources which lack the dimension of targeted benefits. For this, the entrepreneur
uses his skills, abilities and strategies to combine a variety of material and human resources.
These potential resources manifest themselves in the selection of the factory location, in planning
and constructing the factory building, in procuring and installing machinery and equipment, in
putting up other production facilities and auxiliary services, and in recruiting and selecting men
of competence to use the physical resources for the purpose of producing goods. The term
factory design refers to the plan for a particular type of building, arrangement of machinery and
equipment, and provision of service facilities, lighting, heating, ventilation, etc. in the building.

70 | P a g e
Importance of factory design

Factory design and layout of the factory are significant aspects of the factory organizations. They
have direct relationship with the process of manufacturing, productively and value of the
product. It also influences the operational costs of the enterprise. It also boosts the morale of
workers and ensures maximum supervision.
5.3. Factors affecting factory design
The following factors influence the design of a factory: Location
1. Nature of the manufacturing process
2. Plan Layout
3. Functional Smoothness
4. Material Handling and movement
5. Cost of Building
6. Lighting, Ventilation and Service Facilities
7. Nature of Product
8. Future expansion, modernization etc.
9. Projecting the image of a factory.

The factory design and layout should be flexible so that it may be adapted easily to technological
change, modernization, diversification and expansion with minimum cost and time. Any
planning exercise requires of the planner a good knowledge of what is involved in the activity
concerned, such as the nature of the materials to be handled, their quality and the quantity, the
processes they have to be subjected to, inspection and quality control at various stages, assemble
procedures, packing etc. He could also know the sequence of operations. He should look ahead
beyond the immediate future and anticipate changes, modifications, additions, deletions etc.,
which may be forced upon his organization as a result of expansion, obsolescence,
diversification or any other reasons. Having anticipated these, provision should be made to
accommodate such changes.

While working on factory layout plan, a very important aspect to be kept in mind is the fact that
the movement of materials from one stage of manufacture to the next should be minimal. For
this, this movement has to be streamlined. If this is not initiated, it will result in the wastage of
human effort and time, both of which have a telling effect on the efficiency of an organization
and the cost of production. In industrial life, the economic and efficient usage of all the factors of
production is the key to profitability and the ability to compete in the market.

71 | P a g e
a. Plant layout

A plant layout is “a floor plan for determining and arranging the desired machinery and
equipment of a plant, whether established or contemplated, in the one best place to permit the
quickest flow of material at the lowest cost and with the least amount of handling in processing
the product from the receipt of the raw materials to the shipment of the finished products”.
During the course of appraisal, considerable emphasis is laid on a proper and scientific plant
layout as once the plant and equipment are erected, it becomes difficult and costly to change at a
later stage. The following aspect is kept in view while evaluating the plant layout: Production
technology and product – mix, Efficient, economic and uninterrupted flow if human and
materials resources, Proper space for maintenance, Future expansion/diversification of the
project, Safety precautions particularly when explosive or bulky material is required to be
handled, Proper lighting and ventilation, Proper layout of utilities and services and provisions for
effluent disposal, where necessary, Effective supervision of work, and Proper storage and
stacking space, where required. The success of an enterprise to a greater extent depends upon the
factory design and layout. The location, layout, amenities will influence productivity and
facilitate better management. More importantly, the efficiency of the production flow depends
largely on how well the various machines, production facilities and employee amenities are
located in a plant.

b. Project design
Project design is the first stage in the execution of the project. Project design is concerned with
developing project scheduling techniques and also drawing the schedule for implementation of
the project. This is more or less a time frame for each phase in the project development. It
includes major items of project implementation such as finding of location, construction of
building, procuring plant and machinery and finally executing the production program. Project
design along with network analysis helps to develop work plan of the project and present it in the
form of diagrams representing duration of time for each work and adjustment of the time
schedule framed with reference to the problems that usually arise in the project execution.

Project design is useful to the entrepreneurs in the following ways:

 It gives a comprehensive idea about the entire project – described in every phase along with
the time schedule within which it has to be completed.
 It is a diagrammatic representation of work plan devised to execute the project, after
adjusting the usual delays that may arise4 in the implementation fo the project.

72 | P a g e
 The various constituent continent activities of the project are narrated in sequence to
highlight the various phases of the project.
 It defines the individual activities which go into the corpus of the project and their
interrelationship with each other.
 It enables to identify and know of events which must take place for the successful
completion.
 It helps entrepreneurs in coordinating project activities.
 It serves as an effective tool of planning and implementation of a project
 It helps managers to plan the project economically.

With the advent of the computer and large-scale introduction of computer based planning and
control, network analysis can considerably enhance managerial effectiveness in the context of
any time bound action programs. Computer-based network analysis can handle these problems
economically and efficiently. The binding condition is, however, that management is serious in
effecting economies in different areas of activities; and activities and events are closely watched
for initiating corrective action in proper time. The main task of a project manager is to design
systems and manage through them. A business system refers to the total picture of men, machine,
materials and paperwork involved in the implementation of any phase of a project. System has a
planned sequence of operations for carrying out a recurring work involved in a system with
family and consistently which is called a procedure. The first step in system design for project
management is to conceive the total physical system and its natural modules. In the next step, the
connection between these modules has to be identified. Finally, a control system using
information as the media has to be developed for self control as well as forced control of the total
project. Project management system is mainly constituted by project work system and project
control system.

If the project is organized on the lines of process units or technological systems, coordination
will be extremely simplified and cooperation would be almost assured. Therefore, better result
can be obtained if the design of work is systematized. The process of systematization starts with
the development of a work breakdown structure.

c. Work breakdown structure (wbs)

Work breakdown structure, WBS in short, is a technique which breaks down a work into its
components and at the same time establishes the connections between the components on the
lines of a family tree. The work breakdown structure represents a systematic and logical

73 | P a g e
breakdown of the project into its components parts. It is constructed by dividing the project into
its major parts, with each or these being further divided into sub-parts. This is continued till a
breakdown is done in terms of manageable units of work for which responsibility can be defined.
Thus the work breakdown structure helps in: Effective planning by dividing the work into
manageable elements which can be planned, budgeted, and controlled. Assignment of
responsibility for work elements to project personnel and outside agencies. Development of
control and information system. Work breakdown structure and Project organization. The project
organization represents formally how the project personnel and outside agencies are going to
work. The work breakdown structure defines what work is to be done in a detailed manner. To
assign responsibility for the tasks to be done, the work breakdown structure has to be integrated
with the project organization structure.

d. Project Execution Plan (PEP)

Project execution plan (PEP) refers to that exercise of matching the project hardware and
software with the executing agencies to that a viable work system emerges. Project execution
plan, in fact, includes four sub-plans. There are contracting plan, work packaging plan,
organization plan and systems and procedure plan. Project execution plan is a strategic plan – it
does not deal with the operational details of building a project. The operational details are
covered in a network plan which is developed later after the project execution plan is approved
by the owner’s plan for project execution and, therefore, it must from the basis for development
of all operational plans including network plans.
i. Contracting plan
This is the first step in the preparation of a project execution plan. Owners invariably need some
agencies with which they can share responsibilities. In the interest of developing self-regulation
systems it would be necessary to contract out those areas where the owner’s company does not
have inherent competence. At this phase of the project, the following issues must be examined:
Which type of contract to choose, which type of reimbursement to make, what conditions of
contracts to stipulate, and what payment terms to offer, are all issues that must be examined
during this phase of the project. Contract planning would involve examination of a number of
alternatives since there are so many possible arrangements in terms of sharing of responsibilities,
types of reimbursements and general conditions of contract.

74 | P a g e
ii. Work Packaging Plan

Work packing plan will be the next important step in the preparation of the project execution
plan. A work package in a project is the smallest division of work where it still retains the
characteristics of a project. This when a project is progressively divided into systems and the
system into subsystems, a stage is ultimately reached where further division into components
will strip it of its multi-disciplinary character – the work at that stage can be consideration these
packages, grouping them or keeping them as they are, in order to from viable contracts. Work
packaging enables better organization and management of projects. A work package or several
work packages may be assigned to one individual who could serve as a mini project manager.
This enables prioritization of the entire project execution effort which, in turn, ensures the closest
possible adherence to time, cost and technical performance targets. Work packaging can also
ensure that all agencies in a project think and channel their effort in one direction, i.e. towards
the completion of the packages only. Thus, design engineers, procurement engineers and
construction engineers will then give priority to their work in relation to a work package and not
according to functional convenience. Fulfillment of the requirements of a work package will
alone be considered and achievement and not the mere volume of work completed. This will lead
to a well-coordinated completion of the project. Thus, the contracting plan and work packaging
plan together produce a list of contracts with the scope of work defined in terms of self-contained
work packages.

iii.Organization plan

Having decided the number of contracts and their scope, the owner is now in a position to set his
own house in order. The owner can deliberate on the form of organization to be adopted so that
the interest of the project is best served. Several standard organizational arrangements are
possible, ranging from pure functional organization to pure project zed organization and an
owner has to choose his own arrangement depending on the project size, location, complexity,
work packages, type and number of contacts. It should be however, noted that an organization
can become more self-regulation if it is on taskforce or project zed. The participants in such
cases fully identify themselves with the project objectives and would regulate their behaviors on
their own, as the situation may demand.

75 | P a g e
iv. System and procedure plan
The last section of the project execution plan deals with system and procedure. A heavy
emphasis has to be placed on routine system and procedure so that no intervention is required in
the day –to-day operation of a system. There are at least eight routine sub-system of project
management for which appropriate procedures can be conceived right at the start of the project
implementation. These eight sub-systems are:
1. Contract management
2. Configuration management
3. Time management
4. Cost management
5. Fund management
6. Materials management
7. Communications management

76 | P a g e
76