CHAPTER 2

PROJECT CYCLE

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Project Cycle
 The different phases, through which a project passes constitute
what is often called “the project cycle”.
 A project goes through various planning phases before it is
actually realized. These phases constitute what is often called
“the project cycle”.
 ƒThe main features of the project planning process (or the
project cycle) are information gathering, analysis, and
decision-making.
 There are alternative models that deal with the project cycle.
1. The Baum Cycle (a.k.a. the World Bank Project Cycle)
2. The UNIDO Project Cycle
3. The DEPSA’s Model (Development Projects Studies
Authority’s Model) – developed in Ethiopia in 1990
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 1. The Baum Cycle (World Bank Project Cycle)
 In this regard, the first basic model was developed by Warren C.
Baum in 1970, which was by then adopted by the World Bank as
a project cycle.
 This model had recognized only six main stages in the project
cycle, namely:
1. Identification;
2. Preparation;
3. Appraisal and Selection; and
4. Negotiation and Financing
5. Implementation
6. Evaluation
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A. Identification
First stage in the cycle – it is searching for and identifying
potentially feasible projects.
Most projects start as an elementary idea.
 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).

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B. Preparation
 Project preparation, (also called project formulation), involves
pre-feasibility and feasibility studies and covers the establishment
of commercial, technical, institutional, financial, and socio-
economic feasibility.
 A feasibility study is the analysis of a problem to determine if it
can be solved effectively. This activity takes place during the
project initiation phase and is made before significant expenses
are engaged.
 Decisions will be made on the: scope of the project, location and
site, soil and hydrological requirements, project size (farm or
factory size), etc.
 Local and international consultants highly involve – especially
for big projects (that cover large areas and have big budgets).
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 C . Appraisal & Selection
 Critical review (independent appraisal) comes after preparation.
 Opportunity to re-examine every aspect of the project plan.
 Helps to determine whether the proposal is appropriate, sound, and
acceptable or not before large sums are committed.
 Internal staffs only used for this work (government staffs for public
projects).
 Based on the appraisal report, decisions made whether to go ahead
with the project or not.
 Comments given at this stage frequently give rise to alterations in
the project plan (project proposal).
 Some projects may be discarded
 Viable projects are chosen for implementation after appraisal on
the basis of the priorities of stakeholders and available resources.
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D. Negotiation and Financing
 Once the project to be implemented is agreed on, for donor
funded projects, discussions are held on funding and associated
aspects of funding such as
ƒ Conditions for grants,
ƒ Repayment period,
ƒ Interest rates on loans,
ƒ Flow of funds,
ƒ Contributions from stakeholders, and whether there is co-
financing or not

This culminates into an “Agreement Document” for the project,

which binds all the parties involved during implementation of the
project.
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 E. Implementation
 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, and time standards).
 Many of the real problems of projects faced at this stage.
 Project implementation must be flexible.
• Circumstances will change - project managers must be able to respond intelligently to these changes.
• Examples: technical changes; price changes; economic policy and environmental changes; political
changes, etc.

 A better and more realistic project plan can be carried out or

realized easily (or with little difficulty)

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F. Evaluation
The final phase in the project cycle is evaluation-it is useful (though not
always done)
 Look back what has been done in the past,
 Compare actual progress with the plans,
 Judge whether the decisions and actions taken were responsible and
useful.
 Evaluation is not limited only to completed projects.
 Important managerial tool in on-going projects.
 May take place at several times in the life of a project.
 May be undertaken when the project is in trouble as the first step in a re-
planning effort.
 Different bodies or units may do the evaluation of projects.
 Project’s management unit.
 Sponsoring agency (the operating ministry, planning 9agency, or an
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 2. The UNIDO Project Cycle
 The UNIDO has established a project cycle comprising the following
three distinct phases:
1. The pre - investment phase
2. The investment phase, and
3. The operating phase
2.1. The Pre–Investment Phase
 According to the UNIDO, Manual for Industrial Feasibility Study,
the pre-investment phase comprises several stages. These are:
a) Opportunity study
• A project opportunity study should not involve any substantial cost,
as its intention is primarily to highlight the principal investment
aspects of a possible industrial proposition.
 Opportunity studies could be general or specific.
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b) Pre-Feasibility Studies
 The project idea must be elaborated in a more detailed study.
 However, formulation of a feasibility study that enables a definite
decision to be made on the project is a costly and time-consuming
task.
 Therefore, before assigning larger funds for such a study, prior
assessment of the project's idea might be made in a pre-feasibility
study.
 This helps to see if:
 All possible project alternatives are examined,
 The project concept justifies detailed study,
 All aspects are critical and need in-depth investigation, and
 The project idea is viable and attractive or not.
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C. Functional Studies
 This include:
 Location studies,
 Equipment selection studies
 Raw material and factory supply studies,
 Market studies of products,
 Economies of scale studies, and
 Environmental impact assessment,
In most cases, a support study when undertaken either before or
together with a feasibility study to lessen its burden and cost.

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d. Feasibility Studies
 A feasibility study should provide all data necessary for an
investment decision.
 The commercial, technical, financial, economic, and environment
prerequisites for an investment project should, therefore, be
defined, refined, and critically examined based on alternative
solutions already reviewed in the pre- feasibility study.
e. Appraisal (Decision) Report
When a feasibility study is completed, various parties will carry
out their own appraisal of the investment project in accordance
with their individual objectives and evaluation of expected risks, costs,
and gains.
 Project appraisal as carried out by financial institutions concentrates
on the health of the company to be financed, the returns to be
obtained by equity holders, and the protection of its creditors.
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 2.2 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:
Acquisition of land,
Tendering, and negotiations;
construction work, and installation
Establishing organizational framework; setting up the
administration of the firm;
Recruitment and training of personnel; and
Pre-production marketing, including the securing of supplies
and suppliers and
Plant start-up. 07/25/20
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 2.3 The Operating Phase
 The problems of the operational phase needs to be considered from both
short term and long term view points.
 Short-term problems– relates to the initial, after commencement of
production period problems.
 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.
 Long-term problems– problems that relates to chosen strategies and the
associated production costs and marketing costs as well as sales revenues.
 These have direct relationships with the projections made at the pre-
investment phase.
 If such strategies and projections prove faulty, any corrective measures
will not only be difficult but may prove highly
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 3. The DEPSA’s Project Cycle
 According to the Guidelines to project planning in Ethiopia of
Development Project Studies Authority (DEPSA), the project
cycle comprises three major phases.
 Pre - investment phase,
- Identification,
- Preparation,
- Appraisal/decision,
 Investment phase, and
- Implementation,
 Operating phase
- Operation, and
- Evaluation

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END OF CHAPTER ONE

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