Chapter Two - Project Life cycle

All living things have a life cycle. They are born, grow, wane, and die. This is true for
human being, for the products we buy and sell, for our organizations, and for our
projects as well.

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 Cont’d…..

Project life cycle

Defining project World Bank (Baum) UNIDO Project

cycle, why the need project cycle, Cycle.

*United Nations Industrial Development Organization

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 What is a Project Cycle?
 What is a project cycle and why?
• A project life cycle is the series (collection) of sequential phases that a project
passes through from its initiation to its closure. The phases are generally sequential
when projects are planned and carried out.
(Project Management Institute, 2013)
 These phases constitutes what is often called “the project cycle”
• The number of project phases is determined by the control needs of the project
organization.
 A project goes through various planning phases before it is actually realized.
 The project cycle considers various stages.

• Each stage comes out of the preceding activities, and also leads into subsequent
ones.

• A self-renewing cycle: new projects may grow out of the old ones in a continuous
process and self- sustaining cycle of activity.
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 A Project cycle cont’d…

• The project life represents the linear progression of a project, from defining the
project, through developing a plan, implementing the plan and closing the project.
A project life cycle usually specifies:
1) The technical work that must be carried out in various phases of the project.
2) The list of individuals and their roles in each phase of the project.
 The life cycle recognizes that projects have a limited life span and that there are
predictable changes in level of effort and focus over the life of the project.

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 A Project cycle Con’t…

• Projects vary in size and complexity. All projects can be mapped to the following
generic life cycle structure (PMI,2013)
 Starting the project, Organizing and preparing, Carrying out the project work, and
Closing the project.
• The project life cycle typically passes sequentially through four stages: defining
(initiation), planning, executing, and delivering (closure) ( Gray and Larson, 2011)
• The starting point begins the moment the project is given the go-ahead. Project
effort starts slowly, builds to a peak, and then declines to delivery of the project to
the customer.

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6
 Why project cycle?

• In practice, the project life cycle is used by some project groups to depict the
timing of major tasks over the life of the project so that emphasis is scaled up at
each phase by the concerned project teams.
• Dividing project life cycle into phases helps to have better management and control
of a project.
• Project life cycle is important to decide the type of resource to be allocated and
degree of control exercised at the each phase of the cycle.
• B/c it is a methodology for the preparation, implementation and evaluation of
projects based on the principles of the logical framework approach
• B/c it describes management activities and decision-making procedures used
during the life cycle of a project (key tasks, roles and responsibilities, key
documents and decision options)

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 Framework: Project Cycle

Thesis ideas Thesis Proposal Data collection Thesis Completed

Concept

Thesis proposal)

• Experience Literature review

(observation)
• Gap Instrument dev’t Data analysis,
•Project planning discussion..
• Goal
•RO, RQ Documentation
• Research design
• Library consultation
• Theoretical foundation
• Empirical evidences
• Thesis
submission

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 Basic models of Project Cycle (PC)

• There are a number of different life-cycle models in project management

literature of which the lower three are considered.

• Project life cycle models:

1. The Baum Project Cycle (also called the World Bank PC)
2. UNIDO project cycle
3. DEPSA’s project cycle (Development Projects Studies Authority’s Model) –
developed in Ethiopia in 1990.

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 The Baum project cycle (World Bank PC)

This model amended in 1978

Is the first basic model of – to include “Negotiation”
a project cycle, Developed and “Evaluation”
by Warren C. Baum • Identification;
in 1970, initially • Preparation;
recognized four main • Appraisal and Selection;
stages, • Negotiation and board
presentation;
• Identification
• Implementation and supervision;
• Preparation and
• Appraisal and selection • Evaluation
• Implementation

Baum's six stage process through which, practically, every major project passes
through are: Identification, Preparation, Appraisal, Presentation, Implementation
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and Evaluation.
 Baum Model- Identification Phase
Is the first stage in the cycle – it is searching for and identifying potentially feasible projects.
This is just finding the project. A stage where one project-idea is chosen and defined out of
several alternatives.
• Most projects start as an elementary idea. Sources include:
 Resource-based project ideas – opportunity to make profitable use of available
resources.
 Market-based project ideas– arising from identified demand in home or overseas
markets.
 Need-based project ideas– to fulfill certain basic material requirements and services
(unsatisfied needs).
 Technical specialists- may identify areas with technical deficiencies
 Local leaders-may provide information about existing problems and bottlenecks.
 Proposals to extend and/or expand existing programs/projects.
 Identifying technological alternatives
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 Baum Model - Preparation/Formulation Phase

• Once projects are identified, then more detailed analysis of the projects and
preparation of the project plans are formulated.
• At this stage, the defined idea is carefully developed to the preparation stage
that include both the pre-feasibility and feasibility study
• Is the stage at which the project is being seriously considered as a definite
investment action (Does it have merit?)
• The feasibility studies cover all the technical, economic, social, financial,
institutional and environmental feasibility analyses
• Business plan and a project timetable is established during preparation.

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 Baum Model - Appraisal and Selection Phase

• This is an assessment of the project - the appraisal.

• Every aspect of the project idea is subjected to systematic and comprehensive
evaluation
• Critical review (independent appraisal) done after preparation.
– This provides an opportunity to re-examine every aspect of the project proposal
– Helps to determine whether the proposal is appropriate, sound, and acceptable
before large sums are committed.
• Internal and external appraisals conducted
• Internal staffs may be used for this work (government staffs for public projects).
• Projects are appraised both in the field and at the desk level.
• Consultants may/may not involve in this process.

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 Cont’d
• The appraisal process builds on the project plan. The appraisal team may seek additional/new information if
they feel some of the data used or
assumptions made in the stage of preparation are faulty.
 Appraisals should cover at least 7 major aspects of a project (that are given special considerations during the
preparation phase):
• Technical: verifying whether what is proposed will work in the way suggested or not.
 ensures that projects are soundly designed, appropriately engineered, and follow acceptable standards.
 The appraisal mission looks into technical alternatives considered, solutions proposed, and expected results.
 Technical questions: Is the project/dam soundly designed and engineered? Does it meet acceptable
standards? Will it displace local people? Will it affect the env’t?

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 Cont’d..
• Financial: Ensure that there are sufficient funds to implement the project. See if
the requirements for money needed by the project have been calculated properly,
their sources are allied if identified, and reasonable plans for their repayment are
made where necessary.
 Financial questions: Is the borrower's financial plan sound? Is the project
financially viable? Is the proposed accounting system adequate?
• Commercial: examine arrangements for acquisition of inputs and disposal
(marketing) of the products.
• Incentive: examine whether the project is in the best interest of all the
participants( stakeholders).
• Economic: verify project’s soundness from the viewpoint of the national economic
development interest, examine whether the benefits outweigh the costs, whether
it provides job opportunities for local people, examine the estimated rate of return
on the investment?
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 Cont’d

• Managerial: examine if capacity exists for operating the project, see if those
responsible ones can operate it satisfactorily and are given sufficient power and
scope to do what is required.
• Organizational: examine if the project is organized internally and externally into
units, contract, policy, institution, etc.
 To allow the proposals to be carried out properly, and
 Allow for change as the project develops
The implications (or impacts) of the project on the society and the environment are
also more thoroughly investigated and documented.
• These issues are the subjects of specialized appraisal report.
– Based on the appraisal report, decisions made whether to go ahead with the
project or not.
– The appraisal may also change the basic project plan or develop a new plan.

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 Cont’d

– Comments given at this stage frequently give rise to alterations in the project
plan (project proposal).
– Some projects may be discarded.
• Viable projects chosen for implementation after appraisal on the basis of the
priorities of stakeholders and available resources pass to the next stage.

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 Baum Model – Negotiation and Financing Phase

• Detailed plan is submitted for approval and financing to the appropriate entities. Then
negotiations are made which is the process of give and take on both sides of the table
Once the project to be implemented is agreed on, discussions are held on funding and
associated aspects of funding.
– Conditions for grants,
– Repayment period (for loans),
– Interest rates on loans,
– Flow of funds,
– Contributions from stakeholders, and
– Whether there is co-financing or not.
This culminates into an “Agreement Document”– binds all the parties involved in the
implementation of the project.

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 Baum Model – Implementation and Supervision Phase
• This is a stage where the project plan is implemented, of course after the necessary
approvals and financing decisions are made. This is just getting it started
• Is the most important part of the project cycle
 Funds actually disbursed to get the project started and keep running.
• Major priority: accomplishing the project in accordance with the basic plan (within cost,
quality, safety and time standards).
• The following are usually observed at this stage:
– Problems frequently occur as the economic and financial environment during
implementation often differ from the expectations at the time of appraisal.
– Many of the real problems of projects are faced at this stage
– Deficiencies in the capabilities of the project actor can be revealed.
– Original proposals frequently modified, though with difficulty, because of the need
to get agreement between the parties involved.

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 Cont’d
• Recording, monitoring, and progress reporting should be integral parts.
– Allows the management to be aware of the difficulties that might arise.
• All the above is possible through supervision which helps to ensure that projects are
executed according to their plan so as to achieve their objectives.
• Relevant aspects of implementation to project planning and analysis:
– A better and more realistic project plan can be carried out or realized easily (or
with little difficulty)
– Emphasizes the need for careful attention to each of the seven aspects of
projects.

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 Cont’d

• Project implementation must be flexible.

– Circumstances will change - project managers must be able to respond
intelligently to these changes. Eg technical changes (soils, water logging,
and nitrogen application); price, economic and environmental, political
changes, etc.
– These alter the way in which projects should be implemented.

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 Baum Model - Evaluation Phase
• This is done at every stage where the progress of the project is assessed against
the plan. This phase is important to determine the overall success or failure of
the project
Final phase in the project cycle - it is useful (though not always done).
– Once a project has been carried out, it is often useful, to look back over
what took place,
– To compare actual progress with the plans,
– To judge whether the decisions and actions taken were corrective,
– To see whether the results obtained are optimal in a sense that the
resources are efficiently utilized and whether the project’s goals and
objectives are effectively achieved

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 Cont’d
• Different bodies or units may do the evaluation of projects.
– Project’s management unit
– Sponsoring agency (the operating ministry, planning agency, or an external assistant
agency).
• A separate evaluation unit (especially for large and innovative projects) might be organized
for:
– Monitoring the projects' implementation,
– Bringing problems to the attention of the project’s management.

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 The UNIDO Project Cycle

• The UNIDO Manual for Industrial Feasibility Study outlines 3

distinct phases:
A. The pre - investment phase
B. The investment phase, and
C. The operating phase

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25
 Cont’d

A. The pre-investment phase

This phase also comprises several stages:
I. Identification of investment opportunities (opportunity studies);
II. Analysis of project alternatives and preliminary project selection,
III. Project preparation (pre-feasibility and feasibility studies);
IV. Project appraisal, selection, and investment decision.
• The division of the pre-investment phase into stages:
– Avoids the attempts proceeding directly from project idea generation
(identification) to the final feasibility study.
– Cuts out many superfluous feasibility studies that would have little
chance of reaching the investment phase.
– Ensures that the subsequent project appraisal task, made by national or
international financing institutions, becomes an easier task when based
on well-prepared studies. 26
 UNIDO -The Pre-investment phase

• Support or functional studies are part of the project preparation stage conducted
separately, where its findings are later incorporated in a pre-feasibility or feasibility study
as appropriate.
• Covers critical 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
• When a project idea is determined to be feasible with regard to its critical aspect, a full-
fledged study may be commissioned. If not, further studies such as pre-feasibility and
feasibility studies will be halted.

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 Cont’d Support /Functional Studies

• Examples of support studies are:

– Market studies of products to be manufactured: DD projection & mkt penetration
– Raw material and factory supplies studies: availability and price
– Laboratory and pilot plant tests: to determine the suitability of raw materials or products
– 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.
• The conclusions should be clear enough to give directions to the subsequent stage of
project preparation.
• When properly done, the results of the study forms an integral part of the feasibility
study which would lessen its burden and cost.

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 Cont’d
I. OPPORTUNITY STUDIES
• This is a study made to identify and come up with possible profitable project
proposition
• Opportunity study is the main instrument used to quantify the parameters,
information and data required to develop a project idea into a proposal.
• Identification of investment opportunities is the starting point in
a series of investment related activities.
– Provides information on available investment opportunities
– Is rather sketchy in nature and depend more on aggregate/crude
estimates than on detailed cost- benefits analysis.
• The purpose of such a study are:
– primarily to highlight the principal investment aspects of a possible
industrial proposition with out involving any substantial cost
– to arrive at a quick and inexpensive determination of salient
facts of an investment possibility.

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 Cont’d
The opportunity study should analyze:

• Natural resources,

• The existing agricultural base (for agro-industries),

• Future demand for consumer goods that have growth potential,

• Imports substitution and export possibilities,

• Environmental impacts ,

• Expansions of existing capacity,

• Manufacturing sectors successful in other similar countries etc…,

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 Cont’d
Opportunity studies could be general or specific.
• General opportunity studies(“sector approach”). Divided in to three:
– Area studies– designed to identify opportunities on a given area
(Administrative province, backward region, etc);
– Industry studies– designed to identify opportunities in delimited
industrial branch; and
– Resource-based studies– designed to reveal opportunities based on the
utilization of natural, agricultural, or industrial resources.
• Specific project opportunity studies (“enterprise approach”)- These studies
should follow the initial identification of general investment opportunities in
the form of products with potential for domestic manufacturing.
• Should be defined as the transformation of a project idea into a broad
investment proposition with the objective to stimulate investor response

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 Cont’d
 Opportunity studies are usually conducted by federal, local government units
such as investment offices, an investment promotion agency, a financing
agency, municipality or non governmental organization such as chamber of
commerce or other private organization
 Check with Ethiopian Investment Commission (EIC) website for the list of
investment opportunity studies :www.investethiopia.gov.et
 You can also check websites of the regional investment bureaus and chamber
of commerce

 IMPORTANT
Where a project opportunity study is undertaken by a national or
international investment promotion or financing agency to develop
entrepreneurial interest, the prefeasibility study has to be carried out as and
when entrepreneurial response is forthcoming.
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 II. Pre-Feasibility Studies
• The project idea elaborated in a more detailed study.

– This is an intermediate stage between a project opportunity study and a detailed

feasibility study, the difference being in the degree of detail and the intensity

– B/c a feasibility study is a costly and time- consuming task.

– Prior assessment of the project's idea might be made in a pre-feasibility study.

– The structure of a pre-feasibility study should be the same as that of a detailed

feasibility study.

• Pre-feasibility study is done to see if:

– All possible project alternatives are examined,

– The project concept justifies detailed feasibility study,

– All aspects are critical and need in-depth investigation, and

– The project ideas are viable and attractive

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 Cont’d
• Pre-feasibility study should cover review of the various alternatives identified in the
following main fields (components) of the study/project:
* Project background and scope of project (basic ideas or strategies)
* Market analysis and marketing concept
* Raw materials and supplies
* Location, site and environment
* Engineering and technology
* Organization and overhead costs
* Human resources and training requirements and costs
* Project implementation, schedule and budgeting
* Financial analysis and investment appraisal
This study should assess the financial and economic impact of each of the above-
mentioned factors.
• This processes can be bypassed if a well-prepared and comprehensive opportunity
study is conducted.
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 III. Feasibility Studies
• A detailed study of projects that provides all data necessary for an investment
decision. It consists of detailed studies on
– Commercial, technical, financial, economic, and environmental analyis
– This would critically examine the alternative solutions already reviewed in the
pre-feasibility study.

• Outcomes of the study is then:

– A project whose background conditions and aims have been clearly defined in
terms of its central objective and possible marketing strategies,

– The possible market shares that can be achieved,

– The corresponding production capacities,
– The plant location,
– Existing raw materials,
– Appropriate technology and mechanical equipment,
– An environmental impact assessment.
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• The financial part of the study covers the scope of the investment including:
• net working capital,
• the production and marketing costs,
• sales revenue,
• 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 clearly
– There is no uniform approach or pattern to cover all industrial projects of
whatever type, size, or category.
– Emphasis on the components varies from project to project.
– There is a broad format of general application for most
industrial projects.

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 Cont’d
– Larger projects require more complex information.
• An 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.
– More closely examine sensitive parameters– size of the market, the production
program, or the mechanical equipment's selected.
• Carry out feasibility studies only if the necessary financing
facilities can be obtained with a fair degree of accuracy.
– Reliable assurance of funding – pre-requisite for the study.
– Possible project financing must be considered as early as the feasibility study
stage.
– Financing conditions have direct effects on total costs and the financial feasibility
of the project

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 IV. APPRIASAL REPORT
• When a feasibility study is completed, the various parties will carry out their own
appraisal of the investment project in accordance with their individual:
– Objectives,
– Evaluation of expected risks, costs, and gains.
• Large investment and development finance institutions have
a formalized project appraisal procedure and usually prepare appraisal reports.
• This is 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 ( feasibility study)
expenditures spent since the initiation of the project idea were well spent or not.

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 Cont’d

• Project appraisal carried out by financial institutions concentrates on:

– the health of the company to be financed,
– the returns obtained by equity holders and
– the protection of its creditors.
• The techniques applied to appraise projects in line with these criteria centre
around:
– technical,
– commercial,
– market,
– managerial,
– organizational,
– financial and possibly also economic aspects.

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B. The Investment/Implementation Phase
• This phase provides wide scope for consultancy and engineering work,
primarily in the field of project management.
• Comprises the following stages:
– Establishing the legal, financial, and organizational framework for the
implementation of the project;
– Technology acquisition and transfer;
– Detailed engineering design and contracting including tendering,
evaluation of bids, and negotiations;
– Acquisition of land, construction work, and installation;
– Pre-production marketing, including the securing of supplies and suppliers
and setting up the administration of the firm;
– Recruitment and training of personnel; and
– Plant commissioning and start-up.

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 UNIDO operational Phase

C. The Operational Phase: Stage where investment is operational

• Problems may arise in the operational phase and this needs to be considered
from both a short- and a long-term viewpoint.
• Short-term view relates to the initial period after commencement of production.
– Problems associated with the application of production
techniques, operation of equipment, or inadequate labor
productivity owing to lack of qualified staff and labor.
– Their origin is in the implementation phase– relatively easy
to overcome due to learning over time.

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 UNIDO Operational Phase…

• The long-term view relates to chosen strategies and the associated 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 strategies and projections prove faulty, any remedial measures will not
only be difficult but may prove highly expensive.

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 The DEPSA Model
In Ethiopia, Development Project Studies Authority (DEPSA) made certain efforts and
developed a model for Project cycle.
1. Pre-investment phase
2. Investment and
3. Operation
1. Pre- investment Phase
a. Identification Stage
b. Formulation Stage
Pre-feasibility study
Feasibility study
c. Appraisal
Appraisal
Decision
2. Investment Phase
Implementation
3. Operation Phase
Operation & Ex-post evaluation 43