Project Management Lecture Note

UNIT 2: PROJECT CYCLE

2.1. Meaning and Definition of Project Cycle
Project life cycle refers to the various stages through which a project passes from time of its
inceptions up to its implementation and realization of the objectives. The various stages through
which project planning proceeds from inception to implementation are often called "the project
cycle." It is the project's life cycle through which the project advances from infancy to maturity.
Project life cycle differs from organization to organization, from project to project. Different
organizations develop their own project cycle.
Even though there are no hard and fast rules where the demarcation points are as each
organization will define its own phases and life-cycles to suit its method of working; usually
most projects (medium to large) commonly follow the following phases:
1. Conceptual
2. Planning
3. Testing
4. Implementation
5. Closure or completion
1. Conceptual phase
√ This phase includes the preliminary evaluation of an idea.
√ The importance of this phase is the preliminary analysis of risk and the resulting impact on
the time, cost, and performance requirements, together with the potential impact on
company resources.
2. Planning phase
√ It is mainly a refinement of the elements in the conceptual phase and requires a firm
identification of the resources required and the establishment of realistic time, cost, and
performance parameters.
√ This phase also includes the initial preparation of documentation necessary to support the
system.
3. Testing phase
√ It is predominantly a testing and final standardization effort so that operations can begin.
√ Almost all documentation must be completed in this phase.
4. Implementation phase
√ Which integrates the project’s product or services into the existing organization.
√ If the project was developed for establishment of a marketable product, then this phase
could include the product life-cycle phases of market introduction, growth, maturity, and a
portion of deterioration.
5. Closure phase
√ It includes the reallocation of resources.
√ This is the stage where performance test is carried out and the deliverables are transferred
to clients.
√ The closure phase evaluates the efforts of the total system and serves as input to the
conceptual phases for new projects and systems.

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√ This final phase also has an impact on other ongoing projects with regard to identifying
priorities.
Project Life Cycle Models
There are various models developed by different authors, usually, related to sponsor
organizations. There are three basic models of project life cycles they are:
a. World Bank Project Cycle (The Baum project life cycle)
b. UNIDO Project Cycle
c. DEPSA Project Cycle
2.2. World Bank Project Cycle (The Baum project life cycle)
Baum (1978), an employee for the World Bank, has developed the following five project cycles.
o Identification: selection of viable ideas.
o Preparation and analysis: determine whether the project is viable or not.
o Appraisal: audit whether the preparation process is carried out adequately.
o Implementation: actual implementation of the project.
o Evaluation: evaluate whether the project has enabled to achieve the desired objectives
since its implementation.
Baum initially developed the first four stages in 1970. Later on he adds the last stage which is
evaluation of the project implementation.
1. Project Identification
It is the initial stage of a project. It involves identifying environmental problems to be addressed
and the needs and interests of possible beneficiaries and stakeholders. The problems and the
most realistic and effective interventions are analyzed, and ideas for projects and other actions
are identified and screened.
A project idea may originate from multiple sources. Some of the sources of such projects are
listed below:
 Some projects are resource based and stem from the opportunity to make profitable use of
available resources.
 Some may be market based arising from an identified demand in home or overseas markets.
 Others may be need based and initiated to make available certain basic material requirements
and services to all people in an area at minimal amounts.
 Well informed technical specialists and local leaders are also common source of projects.
Technical specialists will identify many areas where they feel new investment might be
profitable, while local leaders may have suggestions about where investment might be
carried out.
 Ideas for new projects also come from proposals to extend existing program. In general
project ideas can be generated both from micro level and macro level sources.
Generally, the identification stage is one of identifying the problems, which needed to be
addressed, and analyzing the ways in which they can be addressed. This would include:
 Analyzing of existing situation
 Problems/needs identification
 Prioritization of ideas
 Selection of project ideas

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 Definition of the project ideas

 Consultations with stakeholders
 Establishing of overall objectives.
2. Project Preparation (feasibility study): also called project formulation. It covers the
establishment of technical, demand analysis, supply of raw materials, choice of technology,
financial, economic, social and institutional aspects of the project.
Generally, project preparation stage involves the detailed planning of the project idea. The
result indicates a set of tangible proposals with an associated set of costs and benefits.
Furthermore, this stage is one that defines more clearly the actual project, who will do it, what
resources are available, and how it will be divided in to different tasks. This would include:
 Specification of objectives and results,
 Identifying resources available for the project,
 Identifying resources needed for the project,
 Design of the project,
 Packaging and planning of the project.
3. Project Appraisal:
Appraisal is the comprehensive and systematic assessment of all aspects of the proposed project.
During appraisal, it should be verified that the proposed project, in combination with other
policies, contributes the maximum possible towards achieving certain development goals.
Generally, the appraisal/audit phase involves a systematic review of all aspects of the project in
order that a decision can be made as to whether to proceed. The following questions are often the
subject of an appraisal report on the basis of which a series of decisions may be made. These
could involve discarding the project or alteration of some of the plans.
 Technical: is the project design appropriate and will the project will work as expected?
 Financial: has proper provision been made to cover the financial requirements and
obligations of the project?
 Is the financing planning adequate?
 Are the financial aspects of the project beneficial to the different actors and beneficiaries
involved with the project?
 If the project is commercial, how will the necessary inputs be obtained and how will the
output be sold?
 Economic: is the project advantageous from the point view of the economy as a whole?
 Social: is the project both advantageous and acceptable to the people affected by it?
 Institutional: are there suitable organizations in place to implement and manage the
project? Is the legal framework appropriate?
 Environmental: have the environment impacts on the project been properly considered?
 Sustainable: will the project be sustainable in the long term both financially and
institutionally?
4. Project Implementation: At this stage the conclusions reached and decisions made to
implement the project and put it into action. The execution of the project should be
supervised closely and progress should be reported regularly to ensure that the
implementation is progressing without deviating from the envisaged path.

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Generally, the Implementation phase is one of actually performing the project and ensuring that
the objectives are met and the out puts made. This includes:
 Mobilizing of resources for each task and objectives,
 Project marketing,
 Ongoing monitoring and reporting arrangement,
 Identifying problems,
 Addressing failures,
 Modification of the planned results and project objectives as appropriate.
5. Project Evaluation:
Once a project has been carried out, it is often useful to look back over what took-place, to
compare actual progress with the plans, and to judge whether the decisions and actions taken
were responsible and useful.
Generally, the evaluation phase is the process of reviewing the completed project to see whether
the intended benefits are likely to be achieved. It should be a natural part of the process and not
seen as a punishment for a project, which has failed to perform. This includes:
 Assessing whether the contractor has truly completed the task,
 Identifying best practice for further projects,
 Identifying what resources are required for future,
 Identifying the need for future projects.
2.3. UNIDO Project Cycle
The United Nations Industrial Development organization (UNIDO) is the most devoted
institution towards the development and the standardization of the concept, context and content
(CCC) of industrial project management system. Beherens and Hawranck (1991) in collaboration
with UNIDO, identifies three phases project which are commonly known as UNIDO Project Life
Cycle. These are:
1. Pre- investment phase
2. Investment phase and
3. Operational phase

Pre-investment Phase:
(opportunity study, Pre-feasibility
study, feasibility study, appraisal)

Operation Phase: (Expansion

and Innovation, Replacement Investment phase: (Negotiation
and Rehabilitation, and Contracting, Engineering
Commissioning and start-up) design, Construction, Pre-
2.4. DEPSA Project Cycle production marketing, recruitment
and training)
Figure: 2.1. UNIDO’s Project Life Cycle
1. Pre-investment Phase
The pre- investment phase comprises several stages:

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i. Identification of investment opportunities normally called opportunity studies,

ii. Pre-feasibility study (preliminary project selection and definition)
iii. Feasibility studies (project preparation )
iv. Project appraisal and investment decisions.
i. Project Identification
Project identification amounts to finding projects which could contribute towards achieving
specified development objectives. In principle, especially in developing countries like Ethiopia,
project identification should be an integral part of the macro-planning exercise with sectoral
information and strategies as the main source of project ideas. In practice, however, projects are
not always derived from national and sectoral plans; they originate from multiple sources such
as investment promotion agencies, private consultants and private investors.
Where does Projects Originate?
The variety of projects makes it impossible to prepare an exhaustive list of sources from where
project ideas emanate; much depends on the experience, and even imagination, of those entrusted
with project creation. In general, there are two levels where project ideas are born: the macro-
level and the micro-level.
Macro-Level source
At the macro-level, project ideas emerge from:
i. national, sectoral, or regional plans and strategies supplemented by special studies, often
called opportunity studies, conducted with the explicit aim of translating national and
sectoral programmes into specific projects;
ii. constraints in the development process due to shortages of essential infrastructure
facilities, problems in the balance of payments, etc.;
iii. a government’s decision to correct social and regional inequalities or to satisfy basic
needs of the people through development projects;
iv. a possible external threat that necessitates projects aiming at achieving, for example, self-
sufficiency in basic materials, energy, transportation, etc.;
v. unusual events such as droughts, floods, earth-quakes, hostilities, etc.; and
vi. a government’s decision to create locally project implementing capacity in such areas as
construction etc.
Micro-Level Source
At the micro-level, Project ideas emanate from:
i. the identification of unsatisfied demand or needs;
ii. the existence of unused or underutilized natural or human resources and the perception of
opportunities for their efficient use;
iii. the need to remove shortages in essential materials, services or facilities that constrain the
development effort;
iv. the initiative of private or public enterprises in response to incentives provided by the
government;
v. the necessity to complement or expand investments previously undertaken; and
vi. the desire of local groups or organizations to enhance their economic independence and
improve their welfare.

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A. Opportunities Studies

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. Depending on the prevailing situation, either a
general opportunity study (sector approach) or a specific opportunity study (enterprise
approach) or both will have to be undertaken.

 General opportunity studies

General opportunity study may be divided into three categories:
a) Area studies to identify opportunities in a given area
b) Industry studies to identify opportunities in a delimited industrial branch
c) Resource-based studies to reveal opportunities based on the utilization of natural
resources.
 Specific project opportunity studies
A specific project opportunity study may be defined as the transformation of a project idea into a
broad investment proposition. The purpose of Specific project opportunity studies is to arrive at a
quick and inexpensive determination of the salient facts of an investment possibility. It therefore
should not involve any substantial cost in it preparation.
B. Preliminary Screening
Once some project ideas have been put forward, the first step is to select one or more of them as
potentially viable. This calls for a quick preliminary screening by experienced professionals who
could also modify some of the proposals. At this stage the screening criteria are vague and rough
becoming specific and refined as project planning advances.
During preliminary selection the analyst should eliminate project proposals that:
 Are technically unsound and risky;
 have no market for the output;
 have inadequate supply of inputs;
 are very costly in relation to benefits;
 assume overambitious sales and profitability; etc. .
ii. Pre-feasibility Studies
Following the preliminary screening, promising project options should be investigated in a
systematic manner. This requires the preparation of brief reports that indicate in sufficient, but
not painstaking detail of the project versions that are still promising and suggest which ones
should be eliminated. Sophisticated analysis, of the technical, financial, economic social and
institutional aspects of the project is postponed to a later stage before assigning larger funds for
such a study, since feasibility studies are costly and time-consuming. However, the reports
should indicate which of these aspects deserve particular attention during the subsequent step.
Reports of this type are often called pre-feasibility.
Content of the Pre-feasibility Study
To enable the relevant authorities to decide on the merits of various project options, the pre-
feasibility study should, although briefly, discuss:
i. the structure and objectives of the project;

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ii. the nature and size of the demand for the output or the needs that it would satisfy,
together with the foreseen beneficiary groups;
iii. the availability of the most important materials and human inputs;
iv. basic alternative technologies available and their merits and weaknesses;
v. approximate investment and operation costs as well as expected revenues and other
benefits;
vi. rough estimates of financial and economic returns;
vii. any major factor that is likely to have and important effect on the project; and
viii. What further information on the technical, financial, economic or institutional aspects of
the project should be acquired through special studies and surveys.
By the end of the identification stage we should know:
a. Whether further detailed work is justified;
b. what major issues have been identified, what project alternatives have been considered
and which of them have been rejected; and
c. A rough estimate of costs.
iii. Feasibility Studies (Project Preparation)
If the pre-feasibility study indicates that the project is promising and further work is justified,
the project enters the stage of preparation. The project, already defined in a sketchy form, is now
being advanced to a level at which it can be appraised thoroughly before a decision is taken on
whether to implement it. The analysis of the project’s marketing, technical, financial, economic
and institutional aspects should be comprehensive enough to allow the policy makers to decide
on the future of the project with confidence. Project preparation takes the form of a feasibility
study conducted by the agency sponsoring the project or by consultants.
There is a trade-off between project preparation and implementation. The better a project is
prepared the easier and faster its implementation and the lower the probability of cost overruns.
At this level, it is essential to check that the project is prepared to a level that its characteristics
are clearly presented, its objectives and beneficiaries accurately defined and its merits and
shortcomings thoroughly discussed.
iv. Appraisal and Investment Decision
The project proposal in the form of a feasibility study is submitted to the investment decision
makers for a broad and impartial appraisal.
Appraisal is the comprehensive and systematic assessment of all aspects of the proposed project.
After appraising the project carefully, appraisers will decide whether it will be implemented or
not, with or without minor modifications. How smoothly the appraisal will proceed depends on
how well the project has been prepared.
The project, during appraisal, is viewed from different perspectives, such as
1. Technical: On the technical side, we must be sure that alternatives have been diligently
considered and that the selected one provides sound solutions.
2. Commercial: Appraisal of the commercial aspect amounts to verifying that the markets for
the output and the inputs of the project have been thoroughly investigated, including the
channels of distribution and supply.

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3. Financial: From the financial viewpoint, appraisal aims at ensuring that the necessary funds
to implement and operate the project will be Available timely. And whether the project is
financially viable.
4. Economic: The economic appraisal of the project relates closely to its technical aspect. Of
course, during project preparation cost-benefit analysis should ensure that the technological
solutions adopted are those that best fit the conditions prevailing in the country and are not
simply the most advanced ones. However, the appraisal stage is where the final review and
evaluation of these matters are made.
5. Managerial: From the managerial angle we should check whether the proposed top
management and key staff are adequate for the prompt implementation and smooth operation
of the project. Finally, the organizational structure of the project is reviewed to ensure that it
provides for: sufficient degree of autonomy; functional allocation of responsibilities and
decision making; and a general administrative mechanism conducive to the efficient
operation of the project.
2. The Investment Phase: The Project in Motion
The next stage in the project is the actual implementation of the project, followed by operation.
Implementation begins immediately after the final decision on the project ends when it starts
rendering the benefits envisaged. It is the time when the conclusions reached and the decisions
made are put into action. At this phase,
 Detailed designs and specifications should be drawn,
 tender documents have to be prepared,
 bids should be invited and evaluated,
 orders for inputs have to be placed and contracts to be signed,
 Workers should be hired and put to works materials have to be moved to the site, etc.
The phase is divided into the following stages:
a) Establishing the legal, financial and organizational basis for the implementation of the
project.
b) Technology acquisition and transfer, including basic engineering.
c) Detailed engineering design and contracting, including tendering, evaluation of bids and
negotiations. Detailed engineering design will include site preparation final selection of
technology construction planning and time scheduling as well as flow charts and scale
drawings preparation. Negotiations are concerned with legal obligations arising from the
acquisition of technology, construction of buildings, purchase and installation of machinery,
and financing.
d) Acquisition of land construction work and installation. This involves site preparation
construction of buildings and other civil works, together with erection and installation of
equipment
e) Pre-production marketing, including the securing of supplies and setting up of the
administration of the firm. This and secures critical supplies prepares the market for the new
product

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f) Recruitment and training of personnel. This stage proceeds simultaneously with the
construction stage to ensure timely commissioning and the expected growth in productivity
and efficiency in plant operations.
g) Plant commissioning and start-up. It is usually a brief but technically critical span in project
implementation. It links the preceding construction phase with the operational (production)
phase. The success achieved in this stage demonstrates the effectiveness of implementation
planning and execution of the project and has a bearing on the future performance of the
project.
The need to pay particular attention to project implementation cannot be overemphasized. No
matter how carefully a project has been prepared and evaluated, the expected benefits are
realized only when it is properly implemented; it is not project reports but studiously executed
projects that deliver the envisaged benefits. Of course, it is easier to execute a well prepared
project but sound preparation is not a substitute for careful programming and close control
during implementation. This is all the more so because most projects face problems during
implementation and some of them cannot be identified in advance; they emerge as we proceed in
the execution of the project. Some implementation problems are the result of general factors such
as changes in the economic and political situation of the country or the world market while
others are project specific.
3. The Operational Phase
This is the production phase that commences commissioning and start-up which includes;
expansion and innovation, replacement and rehabilitation. Commissioning and start-up: requires
handover of the building to project sponsor or promoter. Start-up (delivery stage) is brief but
technically critical span in project development. It success indicates the effectiveness of the
planning and execution of the project.
The resultant challenges of this phase are viewed from the short-term perspective and long-term
perspective.
The short term view point relates to:
 Application of products
 Operation of equipment
 Labor productivity and skill etc.
The long-term view point relates to:
 Production costs,
 Income from sales.
 Chosen strategies
 production and marketing costs
C. The DEPSA Model …. Reading Assignment
In Ethiopia, Development Project Studies Authority (DEPSA) made certain efforts and
developed a model for Project life cycle which is known as DEPSA’s Project life cycle.

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UNIT 3: PROJECT IDENTIFICATION

3.1. Project Idea – meaning
Project Idea- is the idea that uses as an input so as to initiate a new project. The first phase of
the project life cycle involves the identification of a need, problem or opportunity and can result
in customer’s requesting proposals from individuals, project team or organizations (contractors)
to address the identified needs or solve the problem. Need may be identified formally or
informally during a meeting or discussion among a group of individuals
The process in project identification includes collection, compilation and analysis of economic
data for the purpose of locating the possible opportunities for investment. Identification of such
opportunities requires imagination, sensitivity to environmental changes, and realistic assessment
of what the firm can do. The task is partly structured, partly unstructured, partly dependent on
convergent thinking, partly dependent on divergent thinking, partly requiring objective analysis
of quantifiable factors, and partly requiring subjective evaluation of qualitative factors, partly
amenable to control, partly dependent on fortuitous circumstances. Identification is often the
outcomes of a triggering process rather than an analytical exercise.
Stimulating the flow of ideas:
Often firms adopt a somewhat casual and haphazard approach to the generating of project idea.
To stimulate the flow of ideas the following are helpful.
 SWOT analysis
 Clear articulation of objectives
SWOT Analysis:
SWOT Analysis is an acronym for strength, weakness, opportunities and threats. SWOT analysis
represents a conscious deliberate and systematic effort by an organization to identify
opportunities that can be profitable exploited by it. Periodic SWOT analysis facilitates the
generation of ideas.
Clear Articulation of objectives of a firm may be use one or more of the following.
►Cost reduction; Productivity improvement; Increase in capacity utilization; Improvement in
contribution margin and Expansion in to promising fields.
A clear articulation and prioritization of objectives helps in channelizing the efforts of employee
and prods them to think more imaginatively.
3.2. Sources of Project Ideas
Good project idea – the key to success are elusive. So a wide variety of sources should be
trapped to identify them. For our practical purpose, the sources of project ideas are mainly
classified into two type .These classification are as follows:
1. Macro Source of Project Idea 2. Micro Sources of Project Idea
3.2.1. Macro sources
Macro Sources of Project Idea: Macro sources otherwise called Sector Sources. In this level, it
will require an analysis of the overall investment potential in developing countries the general
interest of developed countries.
General opportunity study or Macro study it may be divided into the following three categories:
A. Area Study B. Industry Study C. Resource Based Study

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A. Area Study: Area study is made to identify opportunities in a green area such as
administrative province; a back ward region etc. and the following factors should be
considered while making area studies.
1. Size of the area and physical features of the area.
2. Population occupational pattern, per capita income and social background
3. Infrastructure facilities like transport, power, telecommunication etc.
4. Exploited and unexploited factors of production and elements of production, mainly
labor and capital and other natural resources.
5. Labor laws, minimum wages, and holiday, facilities required in factory, bonus rules,
and pension rules, working hours.
6. Level of completion
7. Government concessions include, tax holidays, subsided power and water.
8. Location of marker, it covers nearness to domestic and international market.
9. Export potential, if focuses on possibilities of export.
10. Climate requirements for workers, companies, product etc.
11. Estimated cost of a project
12. Availability of raw materials depends upon nature of the product.
13. Availability of cheap labor.
B. Industry Studies: There are made to identify opportunities in industrial branches like
building material or food processing. The following factors are considered while making sub
sector studies.
a. The rate of sub sector in the industry of the country.
b. Size and growth rate of industry.
c. Present size and growth rate of demands for items that are not imported and for those
which are fully or partial for each item.
d. Rough projections of demand for each item.
e. Identification of the items in short supply that have growth or export potential supply that
have growth or export potential.
f. A broad survey of raw materials; locally available.
g. Transport cost and available infrastructure facilities. Transport cost to bring raw material
to factory, and to distribute finished goods to the wholesalers and retailers etc.
C. Resource Based Studies: These studies are made to reveal opportunities based on the
utilization of natural, agricultural or industrial products such as forest based, petrol chemical
industries. The following are considered while making resource-based studies.
 Features of the resources (Size, shape etc.) past rate of growth (mainly agricultural) and
potential for future growth.
 The role of the resources in the national economy in the country and export potential.
 Industry currently based on the resources (finished goods of the industry can be used as raw
material to other industry). This growth capital employed, labor engaged, productivity future
plans and growth product.
 Major constraints and conditions in the growth of industries based on the resource.
 Estimate growth in demand and prospects of export items that could utilize the resources

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3.2.2. Micro sources/Specific Opportunities studies / Enterprise Approach:

The Micro Approach is mainly concerned with a review of investment ideas of industries,
investment offices and financial institutions in both developing and developed countries. Specific
project opportunity studies are concerned with initial identification of general investment
opportunities in the form of products with the potential form of domestic manufacture. A specific
project opportunity study which is more common than the general opportunity study, may be
defined as a transformation of project into a broad investment position. The specific opportunity
study should consider the following factors.
a. Natural resource available
b. Existing agriculture pattern
c. Future demand
d. Imports I order to identify area for import substitution
e. Environment impact
f. Possibilities for diversification.
g. The general investment climate
h. Industry policy Availability of cost of production factors
i. Export possibilities
j. Possible inter linkage with other industries

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Figure 5.2 Stakeholder Analysis

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