UNIT : 2

PROJECT CLASSIFICATION

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SYLLABUS

1. Concept
2. Criteria for Project Classification
3. Types of Project
4. Project Formulation
5. Project Formulation Techniques
6. Causes of Project Overrun

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 1. CONCEPT
Project is an integrated effort to achieve a certain goal. There are several types
of projects.

Project classifications mean to group your projects according to categories you

define. A project classification includes a class category and a class code. The
category is a broad subject within which you can classify projects. The code is a
specific value of the category.

They are:

1. Labour Intensive project

2. Capital Intensive Project
3. Indigenous Project
4. Joint Venture Project
5. Bilateral Project
6. Multilateral Project
7. Construction Project

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2. CRITERIA FOR PROJECT CLASSIFICATION
There is a common understanding over categories of projects that project can be
classified from bases.

Karzner (2005) identified four categories of project. They are:-

1. Individual Projects
2. Staff Projects
3. Special Projects
4. Matrix or Aggregate Projects

Similarly, Chaudhary (1998) has classified projects on the national and

international basis which is presented in the diagram:

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 PROJECT

National International

Non-Industrial Industrial

Non-Conventional / High Conventional Low

R&D Technology Technology Technology

Mega Major Medium Mini

Grass Root Expansion Modification

Normal Crash Disaster

Source: S Chaudhary (1998): Project Management. New Delhi: Tata McGraw Hill Education P. Ltd.
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The project can be classified on the various bases. The basis for project classification can
be:

1. On the basis of Funding Source 5. On the basis of Sponsorship

a. Indigenous Project a. Customer Project
b. Bilateral Project b. Organization Project
c. Multilateral Project c. Government Project
d. Joint Venture Project d. Donor Project

2. On the basis of Technology 6. On the basis of Orientation of Project

a. Labor Intensive Project a. Product Oriented Project
b. Capital Intensive Project b. Process Oriented Project

3. On the basis of Size 7. On the basis of Speed of Project

a. Micro Project a. Normal Project
b. Medium Project b. Crash Project
c. Major Project c. Disaster Project
d. Mega Project d. Individual Project

4. On the basis of Nationality 8. On the basis of Nature of Project

a. National Project a. Staff Project
b. International Project b. Special Project
c. Matrix or Aggregate Project
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 3. TYPES OF PROJECT
Based on the above classification of the projects, projects are of seven types as
shown in diagram.

Labor
Intensive
Project
Joint
Venture Capital
Project Intensive
Project

PROJECT

Multilateral Indigenous
Project Project

Construction Bilateral
Project Project

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1. LABOR INTENSIVE PROJECT
 If the activities of a project depend on labor, it is called labor intensive project.
 Labor intensive projects are usually operated in developing countries.
 The success of project depend on the efficiency of labor.
 Skilled and efficient workers are given high priority.
 More wage is given to efficient and skilled workers than inefficient and unskilled
workers.
 Labor intensive projects becomes suitable in the countries, where modern technology
has not been developed.
 But it increases costs and economic growth rate remains low.
For example:-
 Road construction practice applied by Chinese contractor in Nepal.
 Garment Factory in Nepal.
 The “Food for Work” project is highly labor intensive in the hills of Nepal.

ADVANTAGES OF LABOR INTENSIVE DISADVANTAGES OF LABOR

PROJECT INTENSIVE PROJECT
a. Employment creation a. Lack of Technological Development
b. Social Justice b. High Cost
c. Low Capital Requirement c. Time Consuming
d. Local Resource Utilization d. Inability to Handle Complexity
e. Poor Capital Formation
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2. CAPITAL INTENSIVE PROJECT
 If the activities of a project depend on modern technology or automatic machine, it is
called capital intensive project.
 Usually developed countries used huge capital, sophisticated technology and skilled
manpower to run projects.
 It produces better quality output with mass production.
 It helps to increase living standard of people and contributes to economic growth of the
country.
 But it requires huge amount of capital to invest in sophisticated technology and it
violates principle of social equality.
For example:-
 Technology related projects in health sectors are highly capital
intensive. CT Scan, MRI and CATHLAB projects for heart
are examples. They need crores of rupees.
 Mahakali Bridge of Kanchanpur District links Chandhani and
Dodhara VDC with rest of Nepal.
ADVANTAGES OF CAPITAL DISADVANTAGES OF CAPITAL
INTENSIVE PROJECT INTENSIVE PROJECT
a. Resource Utilization a. Human Aspect Ignored
b. Better Quality b. Decreases Employment
c. Complexity Management c. Costly Technology
d. Scale of Production d. Unequal Distribution of Income
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3. INDIGENOUS PROJECT
 The project which is operated with a country’s own tradition, vision, thought, and style
is called indigenous project.
 It is totally local or home country project.
 It is free from foreign thoughts, vision, advice and pressure.
 Indigenous project helps to protect tradition and culture of the country.
 It helps to make maximum utilization of local resources and technology.
 But indigenous project is rigid in terms of traditional and cultural system.
 Indigenous project is generally of small size and uses appropriate technology available
indigenously. Local resources and local people are used in such projects.

For example:-
 Patan Durbar Square
 Mithila Art Painting
 Pagoda Style Temples in Lalitpur

ADVANTAGES OF INDIGENOUS DISADVANTAGES OF INDIGENOUS

PROJECT PROJECT
a. Local Resources Utilization a. Technical Retardation
b. Cultural Protection b. Rigidity
c. Labor Intensive c. Limited Applications
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4. BILATERAL PROJECT
 The project which is operated with special agreement between two countries is called
bilateral project.
 In principle, bilateral projects become more useful in transportation, irrigation,
education, and industrial sectors. GTZ, JICA, DANIDA, USAID, SDC etc. are the key
donor agencies funding bilateral project in Nepal.
 Bilateral project helps to build bilateral relationship in between two different countries
and accelerates economic growth of the country.
 But it increases dependency on developed countries.

For example:-
 BP Koirala Highway Project (JAPAN)
 Civil Service Hospital (CHINA)
 Trishuli Hydropower Project (INDIA)

ADVANTAGES OF BILATERAL DISADVANTAGES OF BILATERAL

PROJECT PROJECT
a. Grants a. Dependency
b. Economic Development b. Corruption
c. Increased Resource Base c. Uncertainty
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5. CONSTRUCTION PROJECT
 The project which is related with the construction of infrastructure within budget, time
and quality is called construction project.
 It is engineering-oriented for construction of buildings, highways, bridges, dams, etc.
 Effective planning, design and execution of a project are essential for construction
projects.
 Residential Housing Construction, Institutional and Commercial Buildings
Construction, Specialized Industrial Constructions, Infrastructure and Heavy
Construction are the major types in construction project.

COMPONENTS OF CONSTRUCTION PROJECTS

Its components are listed below:

1. Physical Space: It is the are of land on which the project will be constructed.
2. Materials: They are various types of construction and other materials.
3. Equipment and Tools: They are needed to execute works.
4. Human Resources: they are the members of the project team.
5. Finance: It is money t pay bills, employees, labor and other expenses.

For example:-
 Sun City Housing Project
 Dry Port Construction Project
 Gopi Krishna Cinema Hall Construction Project
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 ADVANTAGES OF CONSTRUCTION
PROJECT
a. Infrastructure Development
b. Engine for National and World Economy
c. New Technologies
d. Basis for Development
e. Industrialization
DISADVANTAGES OF
CONSTRUCTION PROJECT
a. Heavy Capital Investment
b. Environmental Degradation
c. International Competition
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6. MULTILATERAL PROJECT
 The project which is operated with an agreement between a multilateral agency and
recipient country is called multilateral project.
 They are generally concessional loan financing which need to be paid-back.
 They implement through global bidding.
 They are generally tend to be mega and major projects.
 Helping group of developed countries operate such projects in developing countries for
the development of health, education, communication, irrigation and so on.
 It accelerates economic growth of the country but it increases dependency on
multilateral agencies.

KEY MULTILATERAL AGENCIES FUNDING PROJECTS IN NEPAL

1. World Bank, through IDA (International Development Agency) and IFC (International
Finance Corporation).
2. Asian Development Bank.
3. UNDP, UNICEF, UNFPA, WHO, FAO, ILO etc. (mostly grant based funding).
4. European Union (EU), including DFID of UK.

For example:-
 Secondary Higher Education Project (World Bank)
 Road Connectivity Sector Project (ADB)
 Poverty Alleviation Fund (World Bank)
 Food for Education (FAO)
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 ADVANTAGES OF MULTILATERAL DISADVANTAGES OF MULTILATERAL
PROJECT PROJECT
a. Low Cost Funding a. Debt Servicing Burden
b. Economic Development b. Cumbersome
c. Enhanced Friendly Relations c. Dependency

d. Uncertainty of Assistance
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7. JOINT VENTURE PROJECT
 The project established with the joint effort and investment of two or more persons,
firms or countries is called joint venture project.
 So joint venture project may be indigenous or foreign.
 In Nepal, joint venture project is founded in banking and production sectors.
 Joint venture project facilitates transfer of technology from developed countries to
developing countries.
 It takes advantages of lower labor costs in host country.
 But it increases depending of developed countries for local development.
 Due to globalization, economic liberalization and advancement of information
technology, joint venture project is becoming very popular throughout the world.
 Multi ownership status, economic development objective, profit oriented, equal chance
of risk and return and help to industrial growth are some attributes of the joint venture
project.
For example:-
 Everest Bank Limited  The Oriental Insurance Company Limited
 Wai-Wai Noodles  Khimit I Hydropower Project

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 ADVANTAGES OF JOINT VENTURE DISADVANTAGES OF JOINT
PROJECT VENTURE PROJECT
a. Low Labor Costs a. Competition
b. Capital and Technology Transfer b. Dependency
c. Employment Opportunities c. Disagreements between Host and foreign
Company
d. Risk Spreading
e. Market Spreading

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 4. PROJECT FORMULATION/DESIGN
 The project formulation phase is the preliminary planning
phase of the project.
 The project idea is born.
 The parameters of the identified project idea are defined in
outline form.
 The decision is made about weather “to proceed” or “not to
proceed” with the identified project idea.
The project formulation phase involves the following tasks:
1. Project Identification
2. Project Formulation
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 4. PROJECT FORMULATION/DESIGN
At first the necessity of a project and its concept is developed. The project is formulated
on the basis of generated idea. After the necessity of the project is felt different activities
are done to materialize it. All such activities are done stage by stage. In the lifecycle of
project, at first related concept is developed, then pre- feasibility and feasibility studies
are done for the support of the concept. If the project is found possible, it is analyzed with
scientific technique. In this, cost of the project, necessary infrastructures for the project
benefit from the project, etc. are evaluated. If the project is found feasible, necessary and
beneficial from the study and analysis, full framework of the project is prepared. This is
the second stage; project is formulated at this stage. This stage includes the activities such
as making of plan for project implementation, development of project concept,
preparation of estimated budget necessary for the project implementation, schedule for
the implementation of the project etc. Then project implementation becomes able to be
implemented. This stage is called project formulation stage. Then steps are taken towards
implementation.
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 5. PROJECT FORMULATION TECHNIQUES
The systematic way or technique of converting the concept of project in probable
planning is called o its project formulation technique. At first the necessity of project and
its concept is developed. The project is formulated on the basis of generated idea. After
necessity of the project is felt different activities are done to materialize.
Stages of Project Formulation are:
1. Feasibility Analysis:
It is the first stage in project formulation. Examination is done to see whether to go in for
a detailed investment proposal or not. Screening of internal and external constraints are
also made. Various aspects of feasibility analysis are:
a. Technical Analysis:
It analyses the feasibility of meeting technical specifications of the project and
technical resources required for project implementation.
b. Financial Analysis:
It analyses the capital requirement of project, project's capacity to meet
financial obligation and cost aspect of the project. 20
 c. Economic Analysis:
Benefit/cost analysis is done to analyze the net contribution of the project to the
economy and the society.
d. Marketing Analysis:
It analyses project capacity, market demand, sales forecasts, revenue generation
and competition.
e. Management Analysis:
It analyses the adequacy of management system to direct and control the
project.
f. Environment Analysis:
It analyses the impact of project on the environment.

2. Project Design and Network Analysis:

It is the heart of the project entity. It defines the sequence of events of the project. Time is
allocated for each activity. It is presented in a form of a network drawings. It helps to
identify project inputs, finance needed and cost-benefit profile of the project. 21
3. Input Analysis:
Its assesses the input requirements during the construction and operation of the project.
It defines the inputs required for each activity. Inputs include materials, human resources
etc. It evaluates the feasibility of the project from the point of view of the availability of
necessary resources. This aids in assessing the project cost.

4.Financial Analysis:
It involves estimating the project costs, operating cost and fund requirements. It helps in
comparing various project proposals on a common scale. Analytical tools used are
discounted cash flow, cost-volume-profit relationship and ratio analysis. Investment
decisions involve commitment of resources in future, with a long time horizon. It needs
caution and foresight in developing financial forecasts.

5. Cost-Benefit Analysis:
The overall worth of a project is considered. The project design forms the basis of
evaluation. It considers costs that all entities have to bear and the benefit connected to it.
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6. Pre-investment Analysis:
The results obtained in previous stages are consolidated to arrive at clear conclusions.
Helps the project-sponsoring body, the project-implementing body and the external
consulting agencies to accept or reject the proposal.

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 6. CAUSES OF PROJECT OVERRUN
A cost overrun, also known as a cost increase or budget overrun, involves unexpected
incurred costs. When these costs are in excess of budgeted amounts due to an underestimation
of the actual cost during budgeting, they are known by these terms.

The results showed that, slow decision making, poor schedule management, increase in
material/machine prices, poor contract management, poor design/ delay in providing design,
rework due to wrong work, problems in land acquisition, wrong estimation/ estimation method,
and long period between design and time of bidding.
1. Estimates:
A common reason for cost overruns is the inaccuracy of cost estimates. When the bids for
subcontracts or the actual costs come in, they are often higher than anticipated. Such cost overruns
are due either to incorrect estimates or to changed conditions in the marketplace. You can review
cost estimates before placing orders to identify mistakes or changed conditions. An overall review
may find that increases in some areas are compensated by decreases in others. You may be able to
adjust requirements o reduce costs or seek out lower-cost suppliers. Advising the business owners or
managers of possible higher costs at this stage gives them the option of making changes and
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maintaining their budgets.
2. Design:
Sometimes, the designs or drawings that form the basis of the project are not realistic.
You may find that a combination of specified features is difficult to achieve or that
drawings show an incorrect arrangement. Executing the project as specified will either
cost extra or cause problems that must be resolved later at additional cost. As project
manager, you have to continuously compare plans with executed work to find such
discrepancies (differences, disagreements, inconsistencies) early and correct them.

3. Planning:
The project progresses according to a plan that assigns durations to project tasks. If the
projected durations can be too short, the project takes longer than anticipated (Expected,
Predicted, Projected, Estimated) and cause cost overruns. Monitoring project tasks on the
longest to complete, helps reduce the risk of delays. Project tasks off the critical path
have slack times, or free times between tasks, that you can use to compensate for delays.

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4. Scope:
Changes in the scope of supply within a project frequently cause cost overruns. These
changes result from new requirements that the owners introduce and fixes for functions
that don’t work as specified. As project manager, you must make sure the owners
understand that additional requirements result in higher costs, which you can classify as
improvements rather than cost overruns. When you discover that parts of the project
don’t work as specified, you must explore different solutions and present them to the
owners. Sometimes, you can find acceptable levels of functionality that don’t cause cost
overruns.

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 6. CAUSES OF PROJECT OVERRUN
One of the main functions of project management is to forecast and track costs to avoid
cost overruns. While poor execution of project management tasks can lead to increased
costs. You can link less obvious reasons to the processes of project management and the
underlying nature of complex projects. Effective project management identifies such
possible sources of cost overruns early and mitigates (diminishes, moderates) their effect.

1. Estimates:
A common reason for cost overruns is the inaccuracy of cost estimates. When the bids for
subcontracts or the actual costs come in, they are often higher than anticipated. Such cost
overruns are due either to incorrect estimates or to changed conditions in the
marketplace. You can review cost estimates before placing orders to identify mistakes or
changed conditions. An overall review may find that increases in some areas are
compensated by decreases in others. You may be able to adjust requirements o reduce
costs or seek out lower-cost suppliers. Advising the business owners or managers of
possible higher costs at this stage gives them the option of making changes and
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maintaining their budgets.
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