CHAPTER TWO

THE PROJECT CYCLE: MEANING AND MODELS

2.1. Project Cycle: Meaning

“What is a project cycle and why?”
In order to answer this basic question, we need to see and understand the general features of
project planning and the identifiable tasks therein. In this regard, there tends to be a natural
sequence in the way projects are planned and carried out. Before any project is actually realized,
it goes through various planning phases. The different phases, through which a project passes,
thus, constitute what is often called “the project cycle”. The main features of the project planning
process (or the project cycle) are information gathering, analysis, and decision-making.
The project cycle considers various stages in which each stage not only is grown out of the
proceeding ones (i.e. activities in progress) but also leads into the subsequent ones. The planning
process does not contain such a stringent sequence of events since all the aspects of the project
have to be considered simultaneously and, if necessary, adjusted to one another. Therefore, a
project cycle is a self-renewing cycle in that new projects may grow out of the old ones in a
continuous process and self-sustaining cycle of activity. These processes can usefully be
considered as a comprehensive sequence in the sense that for the project that is implemented,
each stage naturally follows the proceeding one and leads on to the next. Actually, the division
into stages is artificial; but it helps to understand project planning, though a continuous process,
has distinct phases and stages. And therefore, throughout the project cycle, the primary
preoccupation of the analyst is to consider alternatives, evaluate them, and to make decisions as
to which of them should be advanced to the next stage in the planning process. There are
alternative models that deal with the project cycle. However, in this chapter, more emphasis will
be given to two basic "Models" that are well accredited as models of the project cycle and widely
dealt in academic literatures. These are “The Baum’s Cycle (also called the World Bank
Project Cycle)” and “The UNIDO Project Cycle”. In addition to these two, a third model
developed in Ethiopia in 1990 by Development Projects Studies Authority (called “The
DEPSA’s Model”), which is nearly identical with the UNIDO cycle, will be briefly discussed.

2.2. The Baum Cycle (World Bank Project Cycle)

In this regard, the first basic model was developed by Warren C. Baum in 1970, which was by
then adopted by the World Bank as a project cycle. Initially, this model had recognized only four
main stages in the project cycle, namely:
1. Identification;
2. Preparation;
3. Appraisal and Selection; and
4. Implementation
Later in 1978, the author has added additional two stages called “Negotiation” and
"Evaluation”. In this version of the Baum model, the issue of negotiation comes when projects
pass the appraisal process and become a candidate for realization. It is after appropriate
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negotiations that projects become implementation entity. Then, projects already implemented
will be the concern for evaluation, which usually closes the cycle as evaluation often gives rise to
the identification of new projects. This model, therefore, includes six identifiable stages in the
project cycle. The World Bank accepted the amendment and adopted the new version since then.
Each of these stages briefly discussed in the next paragraphs.
2.2.1. Identification
The first stage in the project cycle and in the planning process too, is to search for and identify
potentially feasible projects. The sources for identifying such projects may be one or more of the
following:
• “Resource-based” project ideas that stem from the opportunity to make profitable use of
available resources
• Some projects may be “market-based”, the idea of which is arising from an identified demand
in home or overseas markets.
• Others may be “need-based”, where the purpose is to try to make available to all people in an
area of minimal amounts of certain basic material requirements and services.
• Well-informed “technical specialists” and “local leaders” are also common sources of project
ideas.
Technical specialists could identify areas with technical deficiencies, where they feel that new
investments might be profitable; while local leaders may provide some insights regarding
existing problems and bottlenecks, where investments need to be carried out for alleviating the
same.
• Ideas for new projects also come from “proposals to extend and/or expand existing programs
and projects” as well as from identifying technological alternatives.
In general, most projects start as an elementary idea. Some simple ideas are elaborated to the
extent that eventually the name “project” can formally be given to it.
2.2.2. Preparation
Once projects are identified, there begins a new stage that calls for progressively more detailed
preparation and analysis of a project's aspects.
 At this stage, the project is being seriously considered as a definite investment action.
 Project preparation, (also called project formulation), involves pre-feasibility and
feasibility studies and covers the establishment of commercial, technical, institutional,
financial, and socio- economic feasibility.
 To this end, decisions have to be made on the scope of the project, location and site, soil
and hydrological requirements, project size (farm or factory size), etc.
 Resource base investigations are undertaken and alternative forms of projects are
explored.
 Complete technical specifications of distinct proposals accompanied by full details of
financial and economic costs and benefits are the outcome of the project preparation
stage.

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 The project now exists as a set of tangible proposals. Practically, project design and
formulation is an area in which local and international consultants are very active,
especially for big projects that cover large areas and have big budgets.
2.2.3. Appraisal and Selection
After a project has been prepared, it is generally appropriate to make a critical review or conduct
an independent appraisal.
 This provides an opportunity to re-examine every aspect of the project plan and hence,
helps to determine whether the proposal is appropriate, sound, and acceptable or not
before large sums are committed.
 Generally, internal government staffs only used, for public projects, for this work and
not consultants, and projects, in this regard, are appraised both in the field and at the desk
level.
 For private investments too, only internal staffs opt to involve in the appraisal process.
 Appraisals should cover at least seven aspects of a project, each of which must have
been given special considerations during the project preparation phase.
The seven aspects, in this regard, are the following:
a) Technical: here the appraisers concentrate in verifying whether what is proposed will work in
the way suggested or not.
b) Financial: the appraisers try to see if the requirements for money needed by the project have
been calculated properly, their sources are all identified, and reasonable plans for their
repayment are made where necessary.
c) Commercial: the way the necessary inputs for the project are conceived to be supplied is
examined and the arrangements for the disposal (marketing) of the products are verified.
d) Incentive: the appraisers see to it whether things are arranged in such a way that all those
whose participation is required will find it in their interest to take part in the project, at least to
the extent envisaged in the plan.
e) Economic: the appraisers here try to see whether what is proposed is good from the viewpoint
of the national economic development interest, all project effects (positive as well as negative)
are taken into account, and check if all are correctly valued. Socio-economic aspect is the other
name given to the same.
f) Managerial: this aspect of the appraisal process examines if the capacity exists for operating
the project and see if those responsible ones can operate it satisfactorily. Moreover, it tries to see
if the responsible are given sufficient power and scope to do what is required.
g) Organizational: the appraisers examine the project if it is organized internally and externally
into units, contract, policy, institution, etc so as to allow the proposals to be carried out properly
and to allow for change as the project develops.
The appraisal process builds on the project plan, but may involve new information if the
appraisal team feels that some of the data used at preparation or some assumptions are faulty.
 The implications and/or impacts of the project on the society and the environment are
also more thoroughly investigated and documented.

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 Similarly, the technical design, financial measures, commercial aspects, incentives, and
economic parameters are thoroughly scrutinized. These issues are the subjects of
specialized appraisal report.
 Based on an appraisal report, decisions are made whether to go ahead with the project or
not.
 The appraisal may also change the basic project plan or develop a new plan.
 To this end, comments often made at the appraisal stage frequently give rise to
alterations in the project plan (project proposal).
After appraisal, the viable project proposals are chosen for implementation on the basis of the
priorities of the stakeholders and the available resources.
 If the project involves loan finance, the lender will almost certainly wish to carry out its
own appraisal before completing negotiations with the borrower.
 Following appraisal, some projects may be discarded as well.
2.2.4. Negotiation and Financing
Once the project to be implemented is agreed on, for donor funded projects, discussions are held
on funding and associated aspects of funding such as
 Conditions for grants,
 Repayment period,
 Interest rates on loans,
 Flow of funds,
 Contributions from stakeholders, and
 Whether there is co-financing or not.
This culminates into an “Agreement Document” for the project, which binds all the parties
involved during implementation of the project.
2.2.5. Implementation
The objective of any effort in the process of project planning and analysis, clearly, is to come up
with projects that can be implemented and/or realized to the benefit of the society.
 Thus, implementation is, perhaps, the most important part of the project cycle.
 In this stage, funds are actually disbursed to get the project started and keep running.
 A major priority during this stage is to ensure that the project is carried out in accordance
with the basic plan (i.e. within the cost, quality, and time standards).
 Problems frequently occur as the economic and financial environment during
implementation often differ from the expectations at the time of appraisal.
 Frequently, original proposals are modified, though usually only with difficulty, because
of the need to get agreement between the parties involved.
 It is during implementation that many of the real problems of projects are first identified.
 Because of this, the feedback effects on the discovery and design of new projects as well
as the deficiencies in the capabilities of the project actor can be revealed.
 To this end, to allow the management to become aware of the difficulties that might
arise, recording, monitoring, and progress reporting should be integral parts of the
implementation stage.
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Some of the aspects of implementation that are of particular relevance to project planning and
analysis, therefore, are the following:
i. The first is that, the better and more realistic a project plan is, the more likely that the plan can
be carried out and the expected benefits realized.
 This emphasizes once again the need for careful attention to each of the seven aspects of
projects.
ii. The second is that, project implementation must be flexible.
 Circumstances will change and, therefore, project managers must be able to respond
intelligently to these changes.
 The common ones are technical changes; price Changes; economic policy and
environmental changes; political changes, etc.
 Moreover, all these alter the way in which projects should be implemented.
2.2.6. Evaluation
The final phase in the project cycle is evaluation.
Once a project has been carried out, it is often useful, (though not always done),
 To look back what took place in the past,
 To compare actual progress with the plans, and
 To judge whether the decisions and actions taken were responsible and useful.
Evaluation is not limited only to completed projects.
 It is a most important managerial tool in on-going projects as formalized evaluations
may take place at several times in the life of a project.
 Evaluation may be undertaken when the project is in trouble as the first step in a re-
planning effort.
 Careful evaluation should precede any effort to plan for new projects and it is also
needed to follow-up the progress of projects.
 Moreover, a final evaluation should be undertaken when a project is terminated or is well
into routine operation.
Different groups or units may do the evaluation of projects. Among others,
 Project’s management unit often continuously evaluates its experience as
implementation proceeds.
 The sponsoring agency, perhaps, the operating ministry, the planning agency, or an
external assistant agency may undertake evaluation.
2.3. The UNIDO Project Cycle
The UNIDO has established a project cycle comprising the following three distinct phases:
1. The pre - investment phase
2. The investment phase, and
3. The operating phase
Each of these three phases is divided into stages, some of which constitute important
consultancy, engineering, and industrial (manufacturing) activities. Above all, increasing
importance should be attached to the pre-investment phase as a central point of attention,
because the success or failure of an industrial project ultimately depends on the marketing,
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technical, financial, and economic findings and their interpretations, especially in the feasibility
study.
2.3.1. The Pre–Investment Phase
According to the UNIDO, Manual for Industrial Feasibility Study, the pre-investment phase
comprises several stages. These are:
 Identification of investment opportunities (opportunity studies);
 Analysis of project alternatives, preliminary project selection, and project preparation
(pre-feasibility and feasibility studies);and
 Project appraisal, selection, and investment decision (specialized appraisal reports)
A. Opportunity Studies
The identification of investment opportunities is the starting point in a series of investment
related activities, when potential investors (private or public) are interested in obtaining
information on newly identified viable investment opportunities.
In this regard, the main instrument used to quantify the parameters, information, and data
required to develop a project idea into a proposal is the opportunity study, which should analyze:
 Natural resources,
 Future demand for consumer goods,
 Imports substitution and export possibilities,
 Environmental impacts (mandatory or non-revenue producing projects),
 Expansions of existing capacity,
 Diversification
Opportunity studies are rather sketch in nature and rely more on aggregate estimates than on
detailed analysis.
B. Pre-Feasibility Studies
The project idea must be elaborated in a more detailed study. However, formulation of a
feasibility study that enables a definite decision to be made on the project is a costly and time-
consuming task. Therefore, before assigning larger funds for such a study, prior assessment of
the project's idea might be made in a pre-feasibility study.
A pre-feasibility study should be viewed as an intermediate stage between a project opportunity
study and a detailed feasibility study, the difference being in the degree of detail of the
information obtained and the intensity with which project alternatives are discussed. The
structure of a pre-feasibility study should be the same as that of a detailed feasibility study,
however.

C. Support /Functional/ Studies

Support or functional studies cover aspects of an investment project, and are required as
prerequisites for, or in support of, pre-feasibility and feasibility studies, particularly for large-
scale investment proposals.
This may include:
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 Market studies of products,
 Raw material and factory supply studies,
 Laboratory and pilot plant tests,
 Location studies,
 Environmental impact assessment,
 Economies of scale studies, and
 Equipment selection studies
The contents of a support study vary, depending on the type and nature of projects.
D. Feasibility Studies
A feasibility study should provide all data necessary for an investment decision.
The commercial, technical, financial, economic, and environment prerequisites for an
investment project should, therefore, be defined, refined, and critically examined based on
alternative solutions already reviewed in the pre- feasibility study.
The financial part of the study covers the scope of the investment, including the net working
capital, the production and marketing costs, sales revenue, and the return on capital invested.
 Final estimates on investment and production costs and its subsequent calculations of
financial and economic profitability are only meaningful if the scope of the project is
defined unequivocally in order not to omit any essential part and its related cost.
There is no uniform approach or pattern to cover all industrial projects of whatever type, size, or
category in such studies.
 The emphasis on the components varies from project to project.
 For most industrial projects, however, there is a broad format of general application –
bearing in mind that the larger the project the more complex will be the information
required.
 Although feasibility studies are similar in content to pre-feasibility studies, the industrial
investment project must be worked out with the greatest accuracy in an iterative
optimization process, with feedback and inter linkages, including the identification of
commercial, technical, and entrepreneurial risks.
The sensitive parameters such as the size of the market, the production program, or the
mechanical equipments selected should be examined more closely.
Moreover, a feasibility study should be carried out only if the necessary financing facilities, as
determined by the studies, can be identified with a faire degree of accuracy.
 There would be little sense in a feasibility study without the reliable assurance that, in the
event of positive study findings, funds could be made available.
 For that reason, possible project financing must be considered as early as the feasibility
study stage, because financing conditions have direct effects on total costs and, thus, on
the financial feasibility of the project.
E. Appraisal Report
When a feasibility study is completed, various parties will carry out their own appraisal of the
investment project in accordance with their individual objectives and evaluation of expected
risks, costs, and gains.
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 Large investment and development finance institutions have a formalized project
appraisal procedure and usually prepare appraisal reports.
 This is the reason why project appraisal should be considered an independent stage of
the pre-investment phase, marked by the final investment and financing decisions taken
by the project promoters.
 The appraisal report will prove whether the pre-production expenditures spent since the
initiation of the project idea were well spent or not.
 Project appraisal as carried out by financial institutions concentrates on the health of the
company to be financed, the returns to be obtained by equity holders, and the protection
of its creditors.
 The techniques applied to appraise projects in line with these criteria center around
technical, commercial, market, managerial, organizational, financial, and, possibly, socio-
economic aspects.
2.3.2. The Investment/Implementation Phase
The investment or implementation phase of a project provides wide scope for consultancy and
engineering work, primarily in the field of project management.
The investment phase can be divided into the following stages:
o Establishing the legal, financial, and organizational framework;
o Tendering, evaluation of bids, and negotiations;
o Technology acquisition and transfer;
o Detailed engineering design and contract, including tendering, evaluation of bids,
and negotiations;
o Acquisition of land, construction work, and installation;
o Pre-production marketing, including the securing of supplies and suppliers and
setting up the administration of the firm;
o Recruitment and training of personnel; and
o Plant commissioning and start-up
Detailed engineering design comprises preparatory work for site preparation, the final selection
of construction planning and time scheduling of factory construction, as well as the preparation
of flow charts, scale drawing, and a wide variety of layouts.
During the stage of tendering and evaluation of bids, it is especially important to receive
comprehensive tenders for goods and services for the project from a sufficiently large number of
national and international suppliers of proven efficiency and with good delivery capacity.
Negotiations and contracting are concerned with the legal obligations arising from the
acquisition of technology, the construction of buildings, the purchase and installation of
machinery and equipment, and financing. This stage covers the signing of contracts between the
investor or entrepreneur, on the one hand, and the financing institutions, consultants, architects,
and suppliers of raw materials and required inputs, on the other.

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The construction stage involves site preparation, construction of buildings and other civil works,
together with the erection and installation of equipment, in accordance with proper programming
and scheduling.
The personnel recruitment and training stage, which should proceed simultaneously with the
construction stage, may prove very crucial for the expected growth of productivity and efficiency
in plant operations.
Plant commissioning and start-up is usually a brief, but technically critical, span in project
implementation. It links the proceeding construction phase and the following operational
(production) phase.
2.3.3. The Operating Phase
The problem of the operating phase needs to be considered from both a short- and a long-term
viewpoint.
The short-term view relates to the initial, after commencement of production period, when a
number of problems may arise concerning such matters as the applications of production
techniques, operation of equipment, or inadequate labor productivity owing to lack of qualified
staff and labor. Most of these problems have their origin in the implementation phase and hence,
relatively easy to overcome as there is learning over time.

The long-term view relates to chosen strategies and the associated production and marketing
costs as well as sales revenues. These have direct relationships with the projections made at the
pre-investment phase. If such strategies and projections prove faulty, any remedial measures
will not only be difficult but may prove highly expensive.

2.4. The DEPSA’s Project Cycle

There are various ways in which the project cycle may be viewed and portrayed depending on
the purpose, emphasis, and detail required to illustrate. According to the Guidelines to project
planning in Ethiopia (1990) of
Development Project Studies Authority (DEPSA), the project cycle comprises three major
phases.
1. Pre - investment phase,
2. Investment phase, and
3. Operating phase

Each of these three phases may be divided into stages. The Guideline has divided the above
phases into six stages as follows:
1. Identification,
2. Preparation,
3. Appraisal/decision,
4. Implementation,
5. Operation, and
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6. Ex-post evaluation
The pre-investment phase consists of the first three stages, while the investment phase includes
the fourth stage, and the operation phase covers the last two stages.
1.4. Project Cycle Management [PCM]
Project management Covers the whole set of concepts, techniques, and tools involved in the
effective realization of project goals through dynamically coordinating and/or administrating the
human, material, and financial resources and by creating conducive environment for properly
doing things along with efficient utilization of resources. In this process, every one having stake
in the project implementation and/or realization need be regularly consulted in matters affecting
the project in order to ensure proper co-ordination of resources and project activities. More to
this, in the process of project management, the project manager (or the coordinator) should be
given commensurate authority and responsibility in order to enable him/her make decisions
consistent with the project goals and objectives, being responsible for it, without delay and as
required. This smoothen the process of implementation as well as enhances the achievement of
basic objectives and the satisfaction of stakeholders.
 Project cycle management, therefore, implies a process-oriented project management
system covering the whole project cycle from project conception to project completion.
 It involves a combination of the various project cycle phases with corresponding
management task.
 It is an effective decision-making process to ensure certain actions occur at the right
time within the life of a project in order to attain the desired and specified quality output
within the budget.
The basic tasks involved in project cycle management are
 Creating (or building) capabilities for implementation,
 Planning the tasks for implementation,
 Follow-up of the progress in implementation (referred to as monitoring), and
 Conduct performance evaluations periodically (i.e. on-going) as well as final evaluation
after full implementation of the project.
To this effect, the concerned (for instance, the project promoters) need to comprehend, as
early as the initiation of the project, the importance of designing and/or building sound
project organization. In general, a sound project organization enables the project
implementation team to overcome diverse obstacles that potentially encounter in the process
of implementation.

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