Chapter 2:-Project life cycle

BY
ATAKELT HAILU ,
MBA,M.COM & Ph.D.
DEPT. OF MANAGEMEN
 Chapter Two: Project Cycle
 There is 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.
• Therefore, the different phases through which a project passes
constitutes what is often called “the project cycle”.

 It refers to the various stages through which a project

passes from its time of inception up to its completion
 Project Cycle
• The main features of this process are information
gathering, analysis and decision making which take
place between a project’s inception and
completion. (project idea- screening, project
analysis and selection, implementation and
review ).
• project cycle covers all the steps necessary to
bring a project to the point where its
Market
technical,
economic and
financial feasibilities etc have been established and it
is ready for appraisal.
 There are different approaches:

 There are various models that deal with the project cycle.
1.The Baum’s cycle (World Bank procedures):-consisting of
identification, preparation, appraisal, implementation and
evaluation phases)
2.DEPSA’s project cycle (Development Project Studies Authority)
3.UNIDO ( United nations industrial development organization) -
consisting of :-pre-investment, investment and operational
phases,
4.Integrated project planning and management cycle(IPPMC):- four
phases:- 1. planning, appraisal and design; 2. selection,
approval and activation; 3. operation, control and
handover; and 4. evaluation and refinement.
2.1 The Baum project Cycle (World Bank Procedures) 
• The first basic model of a project cycle is that of Baum (1970), which

has been adopted by the World Bank and initially recognized four main

stages, namely.

• Identification

• Preparation

• Appraisal and Selection

• Implementation 
• At a later stage (in 1978) the author has added an additional stage

called “Evaluation” which usually closes the cycle as it gives rise to the

identification of new projects.

1. Identification
• Project life cycle begins with the identification of a project.
• The first stage in the cycle is to find potential projects idea
• During the Identification phase, ideas for projects are identified and
screened for further study.
• Some sources of projects are given here.
 Some may be “resource based” and stem from the opportunity to
make profitable use of available resources.
 Some projects may be “market based” 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 projects.
 Technical specialists will have identified many areas where new
investment might be profitable, while local leaders may have
suggestion about where investment might be carried out.
 Ideas for new projects also come from proposals to extend existing programs.
 Project identification ….cont
Stage
1. Generate project idea
2. Preliminary Screening:
– Once some project ideas have been put forward, the first step is to
select one or more of them as potential viable by quick
preliminary screening
– is process of elimination of inferior alternatives.
●
At this stage the analyst should eliminate proposals that are
technically unsound and risky; have no market for the
output; have inadequate supply of inputs are closely in
relation to benefits; assume over ambitious sales and
profitability etc
 Stage of Project identification

Conceptual • Generate Project Idea

stage
• Un-viable, unsound and
risky idea are
eliminated/abandoned
Screening stage

Further work

• Viable
project
Identification stage ideas are
identified.
 ……………..The Baum Project Cycle
2. Project preparation/formulation
 Project preparation also called feasibility study
 Once projects have been identified, there begins a process of
progressively more detailed preparation and analysis of project
plan.
 During preparation, project team has to determine all the technical,
institutional, economic, environmental, and financial conditions of
required for the project to success.
 It involve the study of following area: technical analysis, economic
analysis, financial analysis , social cost-benefit analysis
●
Decisions have to be made on;
 Scope of the project
 Location and site
 Soil and hydrological requirements
 Project size (farm or factory size) etc
 The Baum Project Cycle
3. Project Appraisal
• After a project has been prepared, it is generally appropriate for a
critical review or an independent appraisal to be conducted.
– This provides an opportunity to re-examine every aspect of the
project plan to assess whether the proposal is appropriate and
sound before large sums are committed.
• Appraisals should cover at least seven aspects of a project, each of
which must have been given special consideration during the project
preparation phase:
1. Technical appraisal– here the appraisals concentrate in verifying
whether what is proposed will work in the way suggested or not.
– It evaluate technical aspect of technology and design, production
process, plant layout, material input, capacity, and project
schedule, Know-how of technology and design availability in the
county.
 …Cont’d
2. Financial– to see:
– if money needed for the project have been properly
calculated.
– their sources are identified, and
– reasonable plans for their repayments are made .
3. Commercial – to examine whether the
necessary inputs for the project are supplied.
– to see whether the arrangements for the
disposal of the products are verified.

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 …Cont’d
4. Incentive - to see 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.
5. Economic – to see the economic significance of the
project towards the nation’s development.

6. Managerial – this aspect of the appraisal

examines:
– to see if the capacity exists for operating the
project, and
– to see if the responsible ones are given
sufficient power and scope to do what is
required.
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 Cont’d

 On the basis of this appraisal

report ,financial decisions are made –
whether to go ahead with the project or
not.

NB.:
1. If the project involves loan finance, the lender
will almost certainly wish to carryout his own
appraisal before completing negotiations with
the borrower.
2. Comments made at the appraisal stage
possibly results in alterations in the project
plan (Project proposal).
11/20/2022 Gizachew Yirtaw (PhD Cand.) 13
 …Cont’d
4. Implementation
– funds are actually disbursed to get the project set up and
running.
– It is during implementation that many of the real problems of
projects are first identified (Monitoring).
– allow management to become aware of difficulties as they
arise.
5. Evaluation
– finally, evaluation should be undertaken when a project is
terminated.
• This is the process of reviewing the completed project to see
whether the intended benefits are likely to be achieved.
– compare actual progress with the plans
– judge whether the decisions and actions taken were reasonable
and useful 14
2.2 DEPSA’s Project Cycle
• According to the Guidelines to project planning in Ethiopia (1990) of Development

Project Studies Authority (DEPSA), the project cycle comprises three major phases.

 Pre – investment

 Investment and

 Operation
 UNITED NATIONS INDUSTRIAL DEVELOPMENT ORGANIZATION
Industrial Upgrading and Restructuring: the UNIDO’s Approach
UNIDO - UNITED NATIONS INDUSTRIAL DEVELOPMENT ORGANIZATION ONUDI ~ ORGANISATION DES NATIONS UNIES POUR LE DEVELOPPEMENT INDUSTRIEL

Project cycle according to UNIDO

• UNIDO has established a project cycle
comprising three distinct phases :
1. Pre-investment phase
 Project identification- Identification of investment
opportunities (Opportunity study)
 Pre-selection (Pre-feasibility study)
 Preparation (feasibility study)
 Appraisal (Appraisal report)
2. Investment phase (implementation)
3. Operating Phase:
2.3.1. The Pre – investment Phase
• According to the UNIDO Manual, the pre – investment
phase comprises several stages:
 Identification of investment opportunities (opportunity studies).
 Analysis of project alternatives and preliminary project selection as
well as project preparation (pre – feasibility, and feasibility studies)
and
 Project appraisal and investment decision (appraisal repot)
The Pre-Investment phase can be categorized as

under;

A. Opportunity study

B. Pre-feasibility Study

C. Support/functional study

D. Feasibility study

E. Appraisal Report
 A) Opportunity study
• The identification of investment opportunities is the starting –
point in a series of investment related activities.
• It should consider analyzing the following:
1) Availability of natural resources
2)Future demand for goods, increasing population, purchasing power.
3) Imports and import substitutions
4) Environmental impact
5) Functioning of similar project in other countries.
6) Industrial policies of the local government
7) General investment climate in the economy
8) Possible for diversification
9) Expansion of an existing line to have large-scale economies
10) Export potentials and
11) Availability and cost of production factors.
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, a
further assessment of the project idea might be made in a pre-
feasibility study.
This is to see if:
 All possible project alternatives are examined
 The project concept justifies detail study
 All aspects are critical and need in – depth investigation
 The project idea is viable and attractive or not
 Cont’d: Pre-Inv’t
c) Support or Functional Studies:
– Support (or functional) studies covers aspects of an investment
project, and are required as support of, pre-feasibility and
feasibility studies, particularly for large scale investment
proposals.
– This may include:
 Market studies of products to be manufactured
 Raw materials and factory supply studies
– Laboratory and pilot plant tests.
» Made to determine the suitability of a particular raw
materials (products).
– Location studies: Particularly for potential projects where
transport costs would constitute a major determinant.
 Environmental impact assessment:
- Carried-out particularly for project involving for
examples, chemical plants, paper and
petroleum refineries, the Iron & Steel Industry,
and nuclear, thermal and hydropower plants.21
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 and critically examined on the

basis of alternative solutions already reviewed in the pre – feasibility study. 

• The results of these efforts is then a project whose background conditions and aims have been

clearly defined in terms of:

• Its control 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 and, if required,

• An environmental impact assessment.

E) Appraisal 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 and
evaluation of expected risks, costs and gain . 

Large investment and development finance

institutions have formalized project appraisal
procedures and usually prepare an appraisal report.
• Project appraisal is 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.
 2.3.2 The investment/implementation Phase
• The investment or implementation phase of a project
provides wide scope for consultancy and engineering work,
first and foremost in the field of project management.
• The investment phase can be divided into the following stages:
• Establishing the legal, financial and organizational basis
implementation of project, including tendering, evaluation of bids
and negotiations.
• Technology acquisition and transfer.
• Detailed engineering design and contract, including tendering,
evaluation of bids and negotiations.
• Acquisition of land, construction work and installation.
• Pre – production marketing, including the securing of suppliers and
setting up the administration of the firm.
• Recruitment and training of personnel.
• Plant commissioning and start – up.
 2.3.3 The Operational Phase
• realization of final outputs or
services
• Success and failure in the project
experience must be evaluated