2. PROJECT MANAGEMENT
Unit – 1
Concepts of Project Management: Project – Meaning – Nature – Types of
project and project life cycle – Project management – Nature and scope of project
management – Project management as a profession – Role of project manager.
Unit – 2
Project Identification and Formation: Project environment – Identification
of investment opportunities – Project screening – preferability study – Project
selection – Project formulation – Stages in project formulation – Project report
preparation – Planning Commission’s guidelines for project formulation.
Unit – 3
Project Appraisal: Objectives, essentials of a project methodology – Market
appraisal – Technical appraisal – Financial appraisal – Socio-economic appraisal
– Managerial appraisal
Unit – 4
Project Planning and Scheduling: Objectives – Process or planning
components or good planning – Project designing and project scheduling and time
estimation – Scheduling to match availability of man power and release of funds –
Cost and time trade cost.
Unit – 5
Project Execution and Administration – Project contracting: Contract pricing,
Types – Project organization: Forms of organization – Project direction – Project
communication – Project coordination – Factors influencing effective project
management – Project time monitoring and cost monitoring – Project over runs.
Unit – 6
Project Control: Control techniques – PERT, CPM – Proper review –
Prasanna Chandra, Projects
Implementation and Review.
Gopalakrishnan P & Ramamoorthy V.E, Textbook of Project
Kerner Harold, Project Management.
Dennis Hock, Project Management Handbook.
Choudhry S, Project Management
Goel B.B, Project Management: A Development Perspective
4. LESSON 1
CONCEPTS OF PROJECT MANAGEMENT
To explain the nature and scope of Project management.
To give an over view about system approach and Project management.
To give an outline about the factors influencing effective Project
Projects are the building blocks to meet the enterprise objectives. Project
management is essentially involved in executing the projects. It is recognized as a
management philosophy in the recent past in addition to that of discipline. Project
management has always been central to the existence of industries like
construction, aerospace and defense, where schedule and cost goals are contract
The new design of maruti zen, concord supersonic jet aircraft, ship
vasundhara, Godrej puff refrigerator, compaque computer, L&T crane steel
rolling mill of the Tatas, New oil base for the ESSAR refinery, new production
line of J.K cement, highway roads of the country’s capital city, new fly over in
metropolitan cites etc have one thing common; indeed they are all purposefully
unique and they are project. The basis logic behind on the these projects are; a.
Investment of resources for a specific objective and b. a cause of irreversible
What is a project?
Project is a scientifically evolved work plan devised to achieve a specific
objective within a specific period of time. It can be considered as proposal
involving capital investment for the purpose of developing facilities to provide
goods a and services.
A project is a blue for print action oriented activities of an organization. A project
reflected the plan for action in its totality. Like a movie film it is projection
oriented process. The project has beginning middle and an end.
For example, cement project, manufacturing
Power project, refinery projects
Health project, Educational projects
Social project, construction projects etc.
5. DEEINITION OF PROJECT
A Project is a one-shot, time limited, goal directed, major undertaking,
requiring the commitment of varied skills and resources. It has also been
described a s a combination of human and non human resources pooled together
in a temporary organization to achieve a specific purpose. The purpose and the set
of activities which can achieve that purpose distinguish one project form another.
-Project Management Institute, U.S,A
‘’We mean by a project any scheme, or part of sachem, for investing
resources which can reasonably be analyzed and evaluated as an independent unit.
The definition is thus arbitrary. Almost any project could be broken down into
parts for separate consideration; each of these parts would then by definition a
- I.M.D. Little and J.A. Mirrless.
“A specific activity with a specific starting point and a specific ending
point intended to accomplish a specific objective. It is something you draw a
boundary around at least a conceptual boundary and say this is the Project”.
-J. Price Gettinger.
“Compilation of data which will enable an appraisal to be made of the
economic advantages and disadvantages attendant upon the allocation of
country’s resources to the production of specific goods and services.”
FEATURES OF A PROJECT
A project can be identified by its features. The special features of a project
that would differentiate from any other on going activity are given below:
A project fixed set of objectives. Once the objectives have been achieved,
the project ceases to exist.
It has a specific life span.
Project has for a teamwork,
Project has a life cycle reflected by growth, maturity and decline similar.
Change is an inherent feature in any project out its life.
Project is based on successive principle and hence it is difficult to learn
fully the end results at any stage.
6. A project works for a specific set of goals with the complex set of
High level of sub-contraction of work can be done in a project.
Every project has risk and uncertainty associated with it.
Project needs feasibility any appraisal studies. So that the sponsors sweet
dream becomes realizable.
Types of projects
Much of what the project will comprise and consequently its management
will depend on the category it belongs to. The location, type, technology, size,
scope and speed are normally the factors which determine the effort needed in
executing a project. Though the characteristics of all projects are the same, they
cannot be treated alike. Recognition of this distinction is important for
management. Classification of project helps in graphically expressing and
highlighting the essential features of the project.
Projects are often categorized in terms of their speed of implementation as
♦ Adequate time is allowed for implementation.
♦ All the phases in a project are allowed to take their normal time.
♦ Minimum requirement of capital.
♦ No sacrifice in terms of quality.
Requires additional costs to gain time.
Maximum overlapping of phases is encouraged.
Anything needed to gain time is allowed in these projects. Around the
clock work is done at the construction site. Capital cost will go will go up very
high. Project time will get drastically reduced.
Besides that, projects in general are classified on several basis as give in the
following illustrative list.
United Nations Asian and Pacific Development Institute.
Categories of Projects
CLASSIFICATION OF PROJECT
The project can be classified on several basis. Major classification of the
projects are given below:
On the basis of Expansion:
1. Project expanding the capacity
2. Project expanding the supply of knowledge.
On the basis of Magnitude of the resources to be invested:
Giant projects affecting total economy
Big projects affecting at one sector of the economy
Medium size projects
Small size projects (depending on size, investment & impact)
On the basis of Sector:
On the basis of objective:
1. Social objective project
2. Economic objective project
On the basis of productivity:
1. Directivity productive project
2. Interactively productive project
On the basis of nature of benefits:
1. Quantifiable project
2. Non-quantifiable project
On the basis of government priorities:
1. Project without specific priorities
2. Project with specific priorities
On the basis of dependency
1. Independent project
2. Dependent project
On the basis of ownership
1. Public sector project
2. Private sector project
3. Joint sector project
On the basis of location
1. Project with determined location
2. Project with future impact
On the basis of social time value of the project
1. Project with present impact
2. Project with future impact
On the basis of National policy
1. Project determined by inward looking policy
2. Project determined by outward looking policy
On the basis of risk involved in the project
High risks project
Normal risks project
Low risks project
14. On the basis of economic life of the project
Long term project
Medium term project
Short tern project
15. On the basis of technology involved in the project
High sophisticated technology project
Advance technology project
Foreign technology project
Indigenous technology project
16. On the basis of resources required by the projects
Project with domestic resources
Project with foreign resources
17. On the basis of employment opportunities available in the project
Capital intensive project
Labour intensive project
18. On the basis of management of project
High degree of decision making attitude
Normal degree of decision making attitude
Low degree of decision making attitude
10. 19. On the basis of sources of finance
Project with domestic financing
Project with foreign financing
Project with mixed financing
Project with financial institutions
20. On the basis of legal entity
1. Project with their own legal entity
2. Project without their own legal entity
21. On the basis of role played by the project
1. Pilot project
2. Demonstration project
22. On the basis of speed required for execution of the project
1. Normal project
2. Crash project
3. Disaster project
PROJECT LIFE CYCLE
Every programme, project or product has certain phases of development.
The different phases of development in an investment proposal or project is called
life cycle. A clear understanding of these phases permits entrepreneurs, managers
and executives to have better control over existing and potential resources in the
achievement of the desire goals.
PHASES OF PROJECT LIFE CYCLE
Project life cycle is complex process consisting of different steps
arranged in a sequential order. Different authors have described these steps I
different sequential manner but the concept of the cycle is almost similar in each
According to United Nations Guidelines for Rural Centre Planning, there
are 7 steps in the project life cycle such as project identification and appraisal,
pre-feasibility study, feasibility study detailed design project implementation,
operation maintenance, monitoring and evaluation.
Rondinelli, Dennis & Apsy Palia in their book “Project Planning and
implementation in Developing countries” identified the following 12 steps in the
project life cycle. Project identification and definition, project formation,
11. preparation and feasibility analysis, project design, project analysis, project
selection, project activation and organization, project implementation and
operation, project supervision (monitoring and control) project completion or
termination, output diffusion and transition to normal administration, project
evaluation follow-up and action.
World Bank Guidelines reveals the following six major steps in the project
life cycle. Conception (identification), Formation (preparation), Analysis
(appraisal), Implementation (supervision), operation and evaluation.
All the steps given in different studies can be grouped into three main phases viz.,
Implementation phase and
A brief description of each of these phases in given below:
The first phase of the cycle describes the preliminary evaluation of an
idea. It consists of identification of investment opportunities, preliminary project
analysis, feasibility study and decision-making. Project idea emanates from the
following problems; potential and the needs of the people of an area; plan
priorities when planning is done by the government demand and supply projection
of various goods and services; Pattern of imports and exports over a period of
time; natural resources which can serve as the base for potential manufacturing
activity; scope of extending existing lines of activity; consumption pattern in
other countries at comparable stages of economic stages of economic
On the basis of the investment opportunities, it is possible to conceive a
number of projects out of which a particular project may be consistent with
development objectives of the area. During this phase, the following aspects of a
project must be carefully designed so as to enable implementation.
Project infrastructure and enabling services
System design and basic engineering packages
Organization and manpower
Schedule and budgets
Licensing and government clearances
Systems and procedure
Identification of project manager
Design basis, general condition for purchase and contracts
Constriction resources and materials
This phase is involved with preparation for the project to take out smoothly.
Once a project opportunity is conceived, it needs to be examined.
Preliminary project analysis concerns with marketing, technical, financial and
economic aspects of the project. It seeks to determine whether the project is prima
facie worthwhile to justify a feasibility study and what aspects of the projects are
critical to its viability and hence call for an in depth investigation.
More details, through and complete feasibility study results in a
reasonably adequate formulation of the projects in terms of location, production
capacity production technology and material inputs. The feasibility study contains
fairly specific estimates of projects cost, means of financing sales revenues,
production costs, financial profitability and social profitability.
Based on the thorough feasibility study the project owner or sponsors or
financiers can decide whether to accept or reject particular project. In other
words, the decision whether investment on the project should be made or not has
to made at this stage.
The implementation phase of an industrial project involves setting up of
manufacturing facilities. After judging the worthiness, project needs to be
designed for implementation. Drawing, blue prints and the sequences in which the
various activities concerning the project need to be carried out. The main
activities under this phase are:
Project and engineering design: It consists of site probing and prospecting,
preparation of blue prints, plant design, plant engineering, selection of machinery,
Negotiations and contractions: It covers the activities like project
financing, acquisition of technology, construction of building and civil works,
provision of utilities supply of machine and equipment, marketing arrangement
Construction: This step involves the activities like site preparation,
construction of building, erection and installation of machinery and equipment.
Training engineers, technicians and workers.
13. OPERATION PHASE
It is the longest phase in terms of time span. It begins when the project is
commissioned and ends when the project is wound up. This is a transition phase
in which the hardware built with the active involvement of various agencies is
physically handed over for production. This phase is basically a clean up phase
for project personnel. The main concern of this phase is on smooth and
uninterrupted operation of machinery and plant, development of suitable norms of
productivity, establishment of a good quality fo rhte product and securing the
market acceptance of the product. It aims to realize the projection made in the
project regarding sales, production, cost and profits. Project monitoring and
project evaluation are two vital activities under this phase.
Project monitoring is a step towards achieving properly identified
objectives through a carefully laid down strategy. Each activity in the project
implementation should be carefully watched so that, the progress may be
measured and any deviation from the expected progress be identified in time.
Project evaluation refers to post-investment analysis. It aims at finding out
whether the project has achieved the objectives for which it was taken up and
whether it has created the anticipated or intended impact. This helps in developing
an insight for future investment and better planning.
Thus the life cycle of a project narrates the methodology of developing,
maintaining nd controlling an investment proposal at its various phases in the life
cycle. The various steps in the project life cycle are given in the following
14. Diagram 1
PROJECT LIFE CYCLE
1. Information input 2. Investigation of
4. Preliminary evaluation
3. Final reports
2. Establish goals
Development & Construction
1. Install and field
2. Quality control
3. Advertising begins
4. De-bug and
3. Model building
4. Design review
1. Prototype development
2. First units to test
3. Begin campaign
4. Progress report
PROJECT LIFE CYCLE CURVES
The project life cycle phases from an interesting pattern indicative of
growth, maturity and decline almost similar to product life cycle. The following
figure shows the typical project life cycle curve.
15. Diagram 2
It can be seen from that curve that effort built up in a project is very slow
but effort withdrawals is very sharp. It can also be seen that time taken in the
formative and clean up stages together is more than the implementation stage.
This parabolic patterns of growth, maturity and decline itself in all phases of the
project life. This curve enable a project manager to ascertain the state of health of
any project at any point of time.
Project management is an existing new profession which receives much
attention in these days. It is concerned with the management of resources
successfully to complete the project, the resources being time, money, materials
and equipment and the most expensive resources of all- namely the human
Project management is concerned with achieving a specific goal in a given
time using resources available for that period only.
Project management can mean different thing to different people. Project
management as regard ongoing project within a company refers the art of creating
that illusion that any outcome is the result of a series of predetermined, deliberate
acts when, in fact, it was dumb luck It is designed to make better use of existing
resources by getting work to flow horizontally as will as, vertically within a
An overview definition of project management is the planning, organizing,
directing and controlling company resources for a relatively short term objective
that has been established to complete specific goals and objective. Further more,
project management utilizes the system approach to management by having
function personnel assigned to a specific project
Project Management has been evolved as a distinct discipline ever since
the Second World War. Though it is special discipline it got elevated only in the
recent times, it has been in practice ever since the times of construction activities
in this world. Constructions such as British Aisles, the Taj Mahal, Eiffel Tower,
London Bridge etc., stand testimony to the fact that the doctrine of Project
Management are not new.
Project management resembles functional management in all aspects for
all practical purposes with a little difference. It is concerned with the management
16. of resources successfully to complete the project, the resources being time,
money, materials and equipment and the most expensive resource of all – namely
the human resource. To understand the project management one must first
understand the basic concepts and different approaches to the study of
management. An overview of different management approaches with specific
emphasis on System approach to management approaches with specific emphasis
on System approach to management and its relevance to project management,
brief mention about the steps in project management, benefits and limitation of
project management, and also an outline about effective project management are
discussed in this lesson.
Thus, the project management is designed to manage or control company
resources on a given activity, within time, within cost and within performance.
This has been depicted in the following diagram.
OVERVIEW OF PROJECT MANAGEMENT
GOOD CUSTOMER RELATIONS
Project management involves project planning and project monitoring and
includes such item as
Definition of work requirements
Definition of quantity of work
Definition of resources needed
Tracking progress, comparing actual to predicated
Analysis impact and making adjustments.
Thus, the successful project management can be defined as the process of
achieving the project objectives within the cost (budget), at the desired
performance and within the allocated time.
Development of a Project system
The three major groups of management theorists – the structuralists, the
functionalists and the behavioruists – differ some what on how the project
17. manager deals with problems shifting job environments but they are unanimous
on the utility of the task force as a useful device in group problem solving
The structuralists argue that the project manager, as a unifying agent,
integrates the parochial interests of autonomous organizational elements towards
a common objective through the formation of some standard organization instead
of functional or product departmentalization.
The funtionalists argue that project management is in reality simply the
application of the systems concept to organizational problems. They visualize
integration into a separate organizational system of activities related to particular
projects or programmes, Management science techniques, computer simulation
approaches and information decision systems are just a few of the tools that will
make it possible for management to visualize the firm as a total system.
The behaviouralists see the task force as organized around problems (not
products, programmes, projects or tasks) arranged in an organic rather than a
mechanical model in which the executive becomes the link pin or coordinator but
human speaking the diverse languages or research and who has skills to realay
information and mediate between groups. People will be differentiated not
vertically according to rank and status but flexibly and functionally according to
skill and professional training and replacing bureaucracy as we know it.
Components of a Project Management System
The vital components of a project from the systems perspective are:
Objective: The fundamental rationale of a system that must be
Requirement: A sine qua non or a fundamental and irreducible constident
of a whole system that may even satisfy the objective to some extent.
Alternative: A surrogate, a secondary course of action, if one fails out the
other will substitute and fulfill the needs of a system
Selection criteria: The matter of ‘carrying out’ is focused on assessing the
choice and selecting the best course of action.
Constrain: A demarcation point which describes the frontiers of a system
within which the alternatives must move and devote their resources.
It can be inferred that the basic theories and philosophies, governing the
age-old corps and projects had a stormy attack by the systems approach to
management. Owing to the fact that project management is a subset of total
management cult, it would be comforting oneself to describe the principles of
general systems theory. The general systems approach can be squared with a
18. management approach which attempts to integrate and unify scientific
information across many fields of knowledge. Systems theory attempts to strike at
problems with a holistic view rather than through and analysis of the individual
STEPS IN PROJECT MANAGEMENT
Project Management basically consist of the following steps.
Grouping work into packages which acquires the properties of a project.
This means that the works so grounded are related on each other, contribute to the
same goals and can be bound by definite time, cost and performance targets.
Entrusting the whole project to a single responsibility centre known as the
project manager, for coordinating directing and controlling the project.
Supporting and servicing the project internally within the organization by
matrixing or through total projectisation, and
Building up commitment through negotiations, coordinating and direceing
towards goals through schedules, budgets and contracts.
Ensuring adherence through negotiations, coordinating and directing
towards goals through schedules, budgets and contracts.
Defining what is to be done, maintaining its integrity and ensuring that it
is done and performed as desired, within time and cost budgets fixed for it
through a modular work approach, using organizational and extra-organizational
resources is what is project management.
PROJECT MANAGEMENT ENVIRONMENT
Project management performance will largely depend on the real-world
environment. The project management environment in India, is very different
from any other country. There are many problems which are peculiar to our
country and these are experienced by all those who are concerned in the execution
of both small and big projects. One has to aware of these problems in order to be
able to cope with the same for successful implementation of a project.
The most important problem is lack of mutual trust and respect amongst
the participating agencies: owner, financial institutions, consultants, vendors and
contractors. The owner believes that the agencies/contractors would take his for a
ride and, therefore, he should, as far as possible, do things himself. When
consultants are not appointed, projects are likely to have congenial weakness
such as wrong selection of technology, wrong site, high risk element, etc.
Sometimes the owner may appoint a consultant for a nominal fee and ask him to
19. prepare a report which he can sell to the bank. These reports often do not reflect
reality as they are made without any in-depths study, and if cleared, would give
birth to defective projects. This, doubt, reflects on a consultant’s lack of
professional ethics and can be avoided if the financial institutions use a proper
accreditation, system for consultants.
However, accreditation of consultants may not set everything right. A site
may often be selected purely on personal rather than on techno-economic
considerations. The same may happen with the selection of technology or even
with the selection of the consultant.
It is often suggested that besides technical and financial appraisal of a
project the financial institutions should appraise the entrepreneur himself. It is
also suggested that the financial institutions should introduce an on-going audit
system to prevent diversion of funds and other forms of financial irregularities. In
other words, the financial institutions may not trust the owner/promoter since an
owner may disown a project and the financial institutions have more stake in the
project than the owner himself.
Sometimes a promoter may intentionally underestimate the project cost
with the intention of reducing his contribution. This would inevitably lead to cost
overrun which normally the financial institutions are expected to finance. Of
course, the financial institutions can insist on proportional overrun finance by the
owner, but since the promoter’s stake is low, the institutions take their own time
to decide to finance the overrun, meanwhile the project cost undergoes further
overrun. A project, thus faces a fund crisis leading to extension of project
completion time. With the extension of the project schedule further fund problems
occur. Financing cost and inflation overtake the revised cost estimate. Since
contingency provisions are too inadequate to meet the inflationary conditions of
the economy, institutions have to provide further funds. But this again is not
Most vendors and contractors, do not trust the owner regarding payment.
At the very first sign of delay in payment, they start slackening. They cannot also
be expected to be too enthusiastic about a project where fund problems are
foreseen. A vendor, in such circumstance, may not start the work at all. This not
only delays the project but sours the relationship between the owner and the
Over the years, a number of projects have been affected by enormous
increase in prices of cement, steel and transport and energy costs. These are noncontrollable costs as far as the owner is concerned and, therefore, the owner looks
towards the financial institutions for relief. But the overruns even in such cases do
not get automatically sanctioned as the financial institutions do not trust the
promoter and would first like to be satisfied about the reasons for overrun.
20. Financial institutions often hesitate to disburse their term loans unless the
promoters bring their entire contribution. Sometimes they withdraw their
commitments due to temporary resource constraint, or when the find a project
facing serious technical problems. Thus, due to financial insecurity some projects
cannot progress as desired and end up with huge time and cost overruns.
The problems discussed above can broadly be grouped into four classes of
environmental problems: social, economic, technical and managerial. As
discussed before, if these problems are not tackled, time and cost overruns cannot
be stopped. Yet management of environment is beyond the scope of project
management. There is no point, therefore, in discussing these problems in any
further detail as they are beyond the scope of this book.
While one cannot change the environment for the duration of a project,
one can definitely project oneself from its adverse influences adverse influences.
This can be done by creating a strong shield which will not only resist the adverse
effect of the environment but also influence the environment marginally, at least,
along the boundary. This is referred to as boundary management.
A project can shield itself effectively against the environment only if it engages
good agencies, used good system and has adequate funds to meet the
requirements of the project. Good system and good agencies will require good
funds. However, the funds must be used properly otherwise a project cannot be
completed at least cost which is the ultimate criteria for measuring the efficiency
of project management. Unfortunately, at the moment, we are unable to provide
such a shield to all our projects that must be the only reason for our poor
performance in the execution of the project.
Projects in India have to be executed in a highly unfavorable environment
but project management must cope with the situation. It has been suggested that
project must be insulated adverse environmental influences by mobilizing good
agencies, good system and all adequate funds.
Benefits of project management
Project management helps to avail the following benefits:
Identification of functional responsibilities to ensure that all activities are
accounted for regardless of personnel turnover.
Minimizing the need for continuous reporting.
Identification of time limits for scheduling.
Identification of a methodology for trade-off analysis.
Measurement of accomplishment against plans.
Early identification of problems so that corrective action may follow.
Improved estimating capability for future planning.
Knowing when objectives cannot be met or will be exceeded.
Obstacles in project management
To enjoy the various benefits of project management given above, the
following obstacles be overcome carefully.
♦ Project complexities
♦ Execution of customer’s special requirements
♦ Organisation restructuring is a typical task
♦ Project risks
♦ Changes in technology
♦ Forward planning and pricing.
Project Management – A Profession
Project management has been evolved as a distinct ever since the Second
World War. It has got elevation the recent times.
Novelty is the hallmark of every project, hence it should exhibit
fascination and dynamism. This requires professional approach in conceiving,
implementing and controlling projects. Though the functional management and
project management are related, the degree of professional approach is highly
essential for the efficient management of project. The project management is
mainly driven by intellectual operation and skilled and mechanical operations.
Project management is covered by the matrix form of organization structure
where a roles are defined according to a combination rather than functional
Only managers with sufficient spirit and dynamism can withstand the over
whelmin dizziness in these incessant operations.
Hence, the project management requires sound expertise and exposure,
which may not be possessed by the project promoter. So they have to resort the
assistance from projects consultants and project managers. A brief description
about the role of project manager and need functions of project consultants are
Project Manager and his role
This is to signify a person who has the overall control of the project and
shoulders responsibilities for its execution and performance. Therefore, he is
thoroughly involved in planning the work and monitoring, directing and leading
the participants and seeks to reach the project goal in time-cost-quality
22. conundrum. The project manager is either a specialist or having predominantly
technical background with sufficient experience, exposure, expertise on
multifaceted, multidimensional and multi disciplinary project. It is well evident
from the monumental constructions and project that have been around us since
heydays, that the role of a project manager is quite distinct and demands an all
A project manager is always found shard in the enternal circle of doing,
learnig and changing. Only managers with sufficient spirit and dynamism can
with stand the overwhelming dizziness in these incessant operations. An ideal
candidate for project managership should have some prominent personal
characteristics as out lined by R Archibald.
Flexible and adaptable
Preference for significant initiative and leadership
Aggressiveness, confidence, persuasiveness, verbal fluency;
Ambition, activity, forcefulness;
Effectiveness as communicator and integrator;
Broad scope of personal interests;
Poised with enthusiasm, in agitation, spontaneity;
Able or willing to devote most of his time to planning and controlling,
Able to identify problems;
Willing to make decisions that are acceptable;
Able to maintain a proper balance in the use of time,
This ideal project manager would probably have doctorates in engineering
business and psychology, sustained with a handful years of experience on similar
natured project officer occupying different positions, and should have physical
fitness to undertake such Machiavellian tasks with feeling of positive stress. Good
project managers in industry today would probably be lucky to have 60% to 80%
these traits. good project managers are willing to identify their shortcoming and
know heavy traffic, they have to balance between the wheels that are mutually
exclusive and yet engineering to run coherently, they ensure that goal is reached
by properly accelerating the vehicle the vehicle to manager the traffic avoiding.
For any developing country, project management hols the key for
development. Without efficient project management neither cost control nor time
23. control is possible. The basis ingredient of successful project management is a
happy integration of three factor, appropriate estimate, competent contractor and
effective project management. The other important ingredient of successful
project management is an effective management team.
Consultant provide guidance as well as direction to the projects. From the
formulation stage to the completion and post project evaluation stage, consultants
services are essential ant are also available. Infect, the consultant is the part of the
project management team, though as a paid member on contractual terms and
When a project is taken up for execution, the first task would be to assess
the requirements of the service of an outside consultant or the in-house expertise
available would be sufficient for the project.
Need of consultants
Need of consultant arises:
i) When a project of new technology is undertaken.
ii) When the in-house consultant is incapable of meeting the requirements
of the project.
iii) When there is no in-house facility available in the organization.
iv) When the project is executed on the basis of imported technology and
v) To avail the advantages of expertise available with the outside
Consultants may be of:
As regards ‘in-house consultant’, it may be stated that in many
organizations a separate department is maintained in the total orgainisation
structure. This department looks after the work of detailed engineering , drawings
and preparation of technical specifications, etc. An office order shall be issued
assigning the jobs along with scope of work, time schedule and job
responsibilities to carried out.
24. When the jobs cannot be done my the in-house consultants, the
appointment of outside consultants would become unavoidable. While assigning
jobs to the outside consultants the following steps should carried out effectivel:
Approval from the competent authority.
Decide about Indigenous or foreign consultants.
Preparation of list of consultants.
Scope of services of consultants
Preparation of tender documents
Inviting offers from leading consultants
Evaluation of offers
Award if contract to the consultant
While selecting outside consultants the various factors to be considered
are : job requirements, facilities available in their organizations, experience,
performance, their organization structure, fees, the terms and conditions, pre and
post commissioning services etc.
Job of consultants
The functions of a project management consultant have been identified as
1) Assisting the agency in appropriate site investigation and sourcing of materials.
2) Assisting the agency in selecting the appropriate contractor; 3) Checking the
quality of work, supervision control, testing monitoring and progress reporting,
checking measurements and of bills.
The project management consultant has to give periodic reports to the
client on the progress, trend and completion date, likely slippage in time,
adequacy of resources with the contractor and quality awareness of the contractor,
and recommend measures for better control and management, including additional
input to correct slippages in future. If it is necessary, they can also recommend
termination of a contractor, after examining the legal implications. In India,
engaging project management consultants for selection of contractors and
supervision of work is somewhat new. The project management consultant
concept makes available for project management the latest developments in
technical, engineering, management and information fields.
Main jobs of the consultants are:
Preparation of feasibility report
Preparation of detailed project report
Detailed engineering and consultancy services
Project monitoring and control
Supervision of erection and commissioning of
Provide pre and post commissioning services.
With the passage of time, there has been progress in Indianisation in the spheres f
technology, know how etc. Many firms in public sector as well s in private sector
have come up in have consultancy services. A few well known consultancy firms
TATA Consultancy Services Ltd.
Birla Technical Services
Dastur & Co. Ltd.
Engineer India Ltd.
Metallurgical & Engineering Consultants (India) Ltd.
Kirloskar Consultancy Ltd.
Power Consultancy Services India Pvt. Ltd.
Small Industries Services Institute.
Technical Consultancy Organisation
Science and Technology Entrepreneurship Park etc.
Thus, this chapter has explained the various aspects of projects and project
management. This conceptual knowledge will certainly helps you to know about
the features of project and project managements, which is an emerging unique
discipline. And this chapter has also explained the various stages of project life
cycle, which helps the project manager to ascertain the strength and weakness of
any project at any point of time.
SELF ASSESSMENT QUESTIONS
Explain the significance of project approach for the economic
development of the country.
Give an outline about the project opportunities available in different
sectors of the economy.
Describe the various resource potentials of out country.
Explain the latest trend in the infra-structural project in India.
Give a brief note about the various on-going social-welfare sector
Explain the role of project manager in successfully administering a
Describe the need and functions of project consultants.
27. LESSON – 2
To know the importance of conceiving a good of project idea
To ascertain the different sources from which a project idea can be generated
To identify the steps involved in project identification and selection
SCOUTING AND SCREENING OF PROJECT IDEAS
An entrepreneur has an infinitely wide choice with respect to his project in
different dimensions such as product/service, market, technology, equipment,
scale of production, time phasing and location. Hence, the identification of
investment opportunities (projects) calls for understanding he environment in
which one operates, sensitivity to emerging investments possibilities, imaginative
analysis of a variety of factors and also chance luck. This chapter is concerned
with scouting and screening of project ideas, steps in the project identification
process and also consideration involved in identifying the new projects by an
It is the first and foremost task of an entrepreneur to find out suitable
business which is feasible and promising and which merit further examination and
appraisal. Therefore, he has to first search for a sound of workable business idea
and give a practical shape to his idea. While doing so, the entrepreneur has to
tackle the various problems from time to time to achiever the ultimate success.
Since the good project ideas are elusive, a variety of sources should be trapped to
stimulate the generation of project ideas.
SOURCES OF PROJECT IDEAS
Project ideas could originate fro the various sources viz.,
Success story of a friend/relatives
Experience of others in manufacture/scale of product
Examining the inputs and outputs of industries
Plan outlays and government guidelines
Suggestions of financial institutions and developmental agencies
Investigation of local materials and resources
Economic and social trend of the economy
New technological developments
Project profiles and industrial potential surveys
Visits to trade fairs
Unfulfilled psychological needs
Possibility of reviving sick units
The various sources from which the project idea can be generated are explained
Analysis the performance of existing industries
A study of existing industries in terms of their profitability and capacity
utilization is helpful. The analysis of profitability and break even level of various
industries indicates promising investment opportunities. Opportunities which are
profitable and relatively risk free. An examination of capacity utilization of
various industries provides information about the potential for further investment.
Such a study becomes more useful if it is regionwise, particularly for products
which have high transportation costs.
Examine the inputs and outputs of industries
An analysis of the inputs required for various industries may throw up
project ideas. Opportunities exist when (I) materials purchased parts, or supplies
are presently being procured from different sources with attendant time lag and
transportation costs and (ii) several firms produce internally some
components/parts which can be supplied at a lower cost by a single manufactures
who can enjoy economies of scale.
A study of the output structure of existing industries may reveal
opportunities for further processing of output or even processing of waste
Examine imports and exports
An analysis of import statistics for a period of fie to seven years is helpful
in understanding the trend of imports of various goods and the potential for
import substitution. Indigenous manufacture of goods currently imported is
advantages for several reasons:
29. It improves the balances of payments situations
It provides market for supporting industries and services
It generates employment
Likewise, an examination of export statistics is useful in learning about the
exports possibilities of various products.
Plan outlays and government guidelines
The governments plays a very important role in out economy. Its proposed
outlay in different sector provides useful pointers toward investment
opportunities. They indicate the potential demand for goods and service required
by different sectors.
Suggestions of financial institutions and developmental agencies:
In a bid to promote development of industries in their respective states,
state financial corporations state industrial development corporations and other
developmental bodies conduct studies, prepare feasibility reports and offer
suggestions to potential entrepreneur. The suggestions of these bodies are helpful
in identifying promising projects.
Investigate local materials and resources
A search for project ideas may begin with an investigation into local
resources and skills, various ways of adding value to locally available materials
may be examined. Similarly, the skills of local artisans may suggest products thay
may be profitably produced and marketed.
Analysing economic and social trends
A study of economic and social trends is helpful in projecting demand for
various goods and services. Changing economic conditions provide new business
opportunities. A great awareness of the value of time is dawning on the public.
Hence the demand for time saving products like prepared food items, ovens and
powered vehicles has been increasing. Another change that we are witnessing is
that the desire for leisure and recreational activities has been increasing. This has
caused and growth in the market for recreational products and services
Explore the possibility of reviving sick units
Industrial sickness is rampant in the country. There are over 20,000 units
which have been characterized as sick. These units are either closed or face the
prospect of closure. A significant proportion of sick units, however, can be nursed
back to health by sound management, infusion of further capital and provision of
complementary inputs. Hence there is a fairly food scope for investment in this
30. area. Such investments typically have a shorter gestation period because one does
not have to begin from scratch. Indeed, in many cases marginal efforts would
suffice to revive such units.
Identify unfulfilled psychological needs
For well established, multi brand product groups like bathing soaps,
detergents, cosmetics and tooth pastes, the question to be asked is not whether
there is an opportunity to manufacture something to satisfy an actual physical
need but whether there are certain psychological needs of consumers which are
presently unfulfilled. To find whether such an opportunity exists, the technique of
spectrum analysis may be followed. This analysis is done somewhat as follows.
(i) Important factors influencing brand choice are identified (ii) respect of the
factors identified in step (iii) gaps which exist in relation to consumer
psychological needs are identified.
Visit to trade fairs
Attending the National and International trade fairs provides an excellent
opportunity to know about new products and new development.
The above said sources of project ideas may be generated by the
Government agencies, credit institutions, non-governmental organizations and
also by public.
The Governments has largest resources and have the necessary
information to generate project ideas and it plays a predominant role in this
sphere. The government has the required facilities and manpower to conduct
detailed studies which may lead to making investment decisions. Banks and other
financial institutions are actively involved in sharing the social responsibility of
achieving the national objectives of economic development. The co-operatives
and non-governmental organizations as well s individual entrepreneurs are now
actively participated in identification of projects. The awareness of involving the
people or the beneficiaries in project identification is now increasing fast. Since
the local people have the first hand knowledge of the potentials and problems of
the area to which they belong, more realistic project identification has become
possible with their involvement. It needs no emphasis the project ideas would be
generated in better manner both in the qualitative as well as quantitative terms
when the knowledge and ideas of the Gove. Functionaries, people, the financial
institutions and other experts are pooled together.
PURPOSE AND NEED FOR PROJECT IDENTIFICATION
The entire economic management planning is based on two fundamental
assumptions. i.e. a) limited means and b) unlimited ends. A planner has to select
few important needs to cut it into size of his/her means. This may be treated as
31. fixing the priority is called identification of project. It helps in elimination
process. Identification and selection of a project is a scientific process. This
process is based on certain essential conditions. It may differ from project to
project. The essential conditions which should be taken into consideration for
identification and selection of production projects are as follows:
Project should be in conformity with the economic needs of the area.
It should take into account the depriving factors which might have adverse
The input-output ratio should be optimum.
The purpose of the project is to increase the production and employment
of the area.
Thus, the above said conditions will differ due to resources availability,
use pattern and other relevant conditions of the area. Besides that, project should
also consider certain national priorities.
STEPS IN PROJECT IDENTIFICATION
Project ideas are like other ideas which don’t take concrete shape
immediately. There are several stages of making propositions their considerations
and scrutiny for their soundness.
An idea is first born, it is under incubation for sometime and subsequently
is begins to take some definite shape. The project ideas to develop take almost the
same course. This project identification may be broadly divided into four stages,
Conceptual stage – where project ideas are generated
Screening stages – at which unviable ideas are eliminated.
Identification stage – at which viable projects are selected
Pre-feasibility state – at which pre-feasibility studies are taking up.
A number of project ideas may be generated either by those officials or nonofficials and entrepreneurs individually or collectively who are conversant with
the area. In this context, one has to examine the potentialities of development and
the problems, needs and aspirations of the people of the concerned area.
32. Screening stage
In the second stage project ideas generated above are screened n a
preliminary exercise to weed out the bad or unviable ides. All project ideas would
not pass the screening test. Some project ideas may be imaginary to warrant any
The third & fourth stages may be called as investment opportunity study.
This study is necessarily preliminary and the broad one and has a limited
objective of providing planners with a choice of projects from which they can
make a selection. Pre feasibility study and these can be differentiated opportunity
study and a detailed feasibility study and these can be differentiated mainly on the
basis of information required for respective stages.
SCREENING PROJECT IDEAS
After gathering the project ides from the various sources as aforesaid, it is
essential to eliminate ideas which prima facie are not promising. This process f
eliminating the irrelevant and unviable ideas is called screening of project ideas. It
can be done with the help of testing the following conditions of the propositions.
Compatibility with the promoter
Consistency with governmental priorities
Availability of inputs
Adequacy of market
Reasonableness of cost
Acceptability of risk level etc.
The project idea must be compatible wit interest personality and resources
of the entrepreneur. It should be accessible to him and also it offers him the
prospects of rapid growth and high return on invested capital.
The project idea must satisfy or go along with the governmental priorities,
National goals and governmental regulatory framework.
No Contrary environmental effects to governmental regulations
Easily accommodation foreign exchange requirements
No difficulty in obtaining license.
33. The resources and inputs required for the project must be reasonably
assured. This feature of the project can be assessed with the help of determining
the following points relating to a project.
Capital requirement within manageable limit
Obtaining technical know-how
Availability of raw materials at a reasonable cost
Obtaining power supply
Identifying the adequacy of market is the key factor to select, the viable
project idea. To judge the adequacy of market the following factors have to be
Total present domestic market
Competitors and their market shares
Quality price profile of the product.
Sale and distribution system
Projected increase in consumption
Barriers to the entry of new units
Economic social and demographic trends favourable to increased
Reasonableness of cost is another factor to screen the project ideas. The
cost structure of the proposed project must enable it to realize and acceptable
profit with a competitive price. The following cost factors must be carefully
considered to design a viable cost structure.
Cost of material inputs, labour costs, factory overheads.
General administration expenses, selling and distribution costs.
Service costs, economics of scale etc.
Acceptability of risk level is another factor which helps to screen the
project ideas and hence determine the desirability of a project.
34. METHODOLOGY FOR PROJECT IDENTIFICATION
To make a viable project it should be linked with the actual circumstances
prevailing in the area. Without knowing the basic information relating to socioeconomic conditions of the area, it is difficult to draw a suitable project for the
area. Development needs and potentials vary from area to area. For specific area,
before drawing a project, local condition and other relevant factors must be taken
into consideration. Most of the project fails because they were not based on local
problems. Assumptions based on macro level information may fail to watch at
micro level. Survey is a technique to unearth the hidden information which are
vital to identify the basic requisites of project i.e , need, resource and priorities. It
also helps in making right choice between different alternatives. Secondly it
presents lot of information to be used as bench mark information which will help
at the later stage for evaluation of the project.
PROJECT IDENTIFICATION FOR AN EXISTING COMPANY
Existing companies essentially large scale company form of organizations
are continuously developing various projects for their developmental purposes.
While doing so, the existing company has to make a more intensive analysis of its
resources and environment and conceive of projects on the basis of its existing
activities. An existing company which seeks to identify new project opportunities
should undertake a “SWOT” analysis, It is an acronym law of strengths and
weakness and opportunities and threats. This analysis evaluate all these four
characteristics of existing company.
A brief summary of the points required for SWOT analysis is given below:
Availability of internal financial reasons for new projects after taking into
account the need for replacement expenditure, increase in working capital,
repayments of borrowings and dividend payments.
Capability of raising external financial resources
Availability of production facilities
Technological capabilities of the company
Availability of different sources of raw materials and its utilization
Availibility of infrastructural facilities
Cost structure and profit margins of the company
Distribution network of the company
35. Market share of the company
Capability of top management of the company
State of industrial relations in the company
Impact of corporate laws on the growth of the company especially (MRTP ACT)
Likely changes in the governmental policies
Possibility of evolving new technology and its impact on the cost structure of the
Existence and severity of competition
Changes in the customers preferences, tests etc.,
By considering the above said information keenly the SWOT analysis
helps to provide the basis for the corporate strategy to be followed and indicate
the major areas of thrust. These may include expansion of the capacity of existing
product range, vertical integration, diversification in related areas and mergers.
Thus this lesson has explained to you the significance and mode of conceiving
good project idea. It also explains to you the various sources from which the
project ideas can be generated and how one should select the project ides.
SELF ASSESSMENT QUESTIONS
What factors would you take into account for identifying promising
What is SWOT analysis and how it can be done?
Explain the process of project identification
36. LESSON – 3
To impart the need for project formulation
To describe the project formulation process
To know the criteria to be followed in project formulation
Project formulation is an investigating process which precedes investment
decision. The purpose is to present relevant facts before the decision-makers to
enable them to decide as to whether to go ahead signal should be given for the
project or not.
Formulation of projects involves scientific procedure. The task of any
formidable project is too many. It has to present several information subjective
and objective in nature. It explains the objectives, goals and justification for the
acceptance of the project. The major task of the project is to assess the financial,
technical and managerial involvement and its justification considering the
resource constraint. The project formulation stage involves the identification of
investment options by the enterprise.
Project formulation is designed to bring the project sponsoring authority
and the agencies from whom it has to gent concurrence, support etc., on one
wavelength. Project formulation by providing a scientifically developed
procedure for developing the contend as well as the format of the investment
proportions, seek to streamline the process of appraisal of project at government
and the aiding agencies level. So, the project formulation is a process involving
the joint effort of a team of experts including the economists, the financial
analysis and specialists in various fields. A well formulated project provides a
medium which out across scientific, social and positional prejudices and provides
a common meeting ground for all those who have a contribution to make
successful implementation of a project.
STAGES IN PROJECT FORMULATION
The different stages in the project formulation process are briefly describes as
37. A. Feasibility analysis
B. Techno-economic analysis
C. Project design and network analysis
D. Input analysis
E. Financial analysis
F. Social cost-benefit analysis
G. Project appraisal
Feasibility analysis is the first stages in the process of project
development. The purpose of the analysis is to examine the desirability of
investing in pre-investment studies. For this purpose it is essential to examine
project idea in the light of the available internal (inputs, resources & outputs) and
external constraints (environment). When a project idea is taken up for
developmental three situations can arise. The project may appear to be feasible,
project may turn out to be not feasible or the available data may not e adequate for
arriving at reasonable decision regarding further investment. In the last mentioned
case, investment in pre-investment studies will obviously have to be adequate for
arriving at reasonable decision regarding further investment. In the last mentioned
case, investment in pre-investment studies will obviously have to e deferred till
such time s adequate date regarding the project feasibility is available. The project
sponsoring body will therefore have to invest in collection additional data and
refer the investment decision for the time being. In the second situation when the
project is found to e not feasible, further investment in the project idea is
completely ruled out. In the third situation, when the project idea is found to be
feasible, the decision-makers can proceed to invest further resources in preinvestment studies and design development.
Techno-economic analysis is primarily concerned with the identification
of project demand potential and the selection of the optimal technology which can
be used to achieve the project objectives. The analysis provides necessary
material on which the project design can be based. It also indicates whether the
economy is in position to absorb the output of the project or not.
PROJECT DESIGN AND NETWORK ANALYSIS
Project design is the heart of the project entity. It defines the individual
activities which go into the corpus of the project and their inter-relationship with
each other. It identifies the flow of events, which must take place before a project
can start yielding the results for which it has been set up. The inter-relationship
38. between various constituent activities of a project in most conveniently expressed
in the form of a network diagram. Project design and network analysis are
concerned primarily with the development of the detailed work plans of the
project and its time profile, and the presentation of this plan is form of a detailed
network drawing. Project design and network analysis make available to the
project formulation team a clear picture of the work elements of the project and
also their sequential relationship. This presentation the way for detailed
identification and quantification of the project inputs, an essential step in the
development of the financial and cost-benefit profile of the project.
The objective is to identify and quantify the project inputs and to assess
the feasibility of a sustained supply of these inputs all through the effective life
span of the project. Resources are consumed in project constituent activities. The
best method of identifying the project constituent activities. The best method of
identifying the project inputs is therefore to identify these activities determine the
resources which each activity will consume individual requirements. Input
analysis uses the network plans for developing the input characteristics of the
project. If thereafter proceeds to evaluated the availability of the inputs both in
quantitative as well as qualitative terms. Resources require for a successful
implementation of a project include not only the material inputs but also human
resources which are necessary both for the setting up of the project as also its
successful normalization run. Resources requirements estimates form the basis of
costs estimates of the project and are, therefore, essential for developing the
financial profile and cost-benefit profile of the project.
The objectives of financial analysis is to develop the project from the
financial angle and to identify these characteristics. Financial analysis concerns
itself with the estimation of the project costs, estimation of project funds
requirements, It also involves appraisal of the financial characteristics of the
project so as to establish the relative merits and demerits of the project as
compared to other investment opportunities. Financial analysis reduces
investment proposition in diverse fields of human activity to one common scale,
thereby simplifying the project is developing project financial forecasts.
COST BENEFIT ANALYSIS
In judging the overall worthiness of the project, the effect of the project on
society as a whole is very essential. While financial analysis evaluates a project
from the profitability point of view, social cost benefit analysis views it from the
point of view of national viability. The cost-benefit analysis however takes into
account not only the direct costs and benefits which will accrue to the project
implementing body but also total costs which all entities connected with the
39. project will have to bear and the benefits which well be enjoyed by all such
entities. The idea here is to evaluate the project in terms of absolute costs and
benefits rather than in terms apparent costs and benefits.
Pre investment appraisal is the process of consolidating the results of
feasibility analysis, the techno-economic analysis, the design and network
analysis, the input analysis, the financial analysis and the cost benefit analysis, so
as to give the investment proposition a final and formal shape, It naturally
involves selection of appraisal format, the material which should go into preinvestment report and the form of presentation of various conclusions. The sun
total of the pre-investment appraisal is to present the project idea in a form in
which the project sponsoring body, the project implementing body and the outside
agencies can take investment decision regarding the proposals.
CRITERIA TO BE FOLLOWED
The main criteria in the project formulation process are:
Forecasting – understanding and precisely identifying the objectives/needs/goals
(regional/state/national/international) of the unit/society/economy/on a sustained
Setting up priorities and choosing the goals that are more urgent
Searching for alternations and carrying out feasibility studies to pick up projects
that appear most beneficial and desirable.
Carrying out detailed studies of the project so selected
Estimation the needed resources (human and physical) and finding the yearly cost
and benefit of project
Arranging funds – both approval and allocation. The successful implementation
of any project depends upon the timely availability of the required resource as per
Preparing of time schedule for all hobs so that the physical and financial targets of
the projects are passed appropriately
Distributing the works to various departments or agencies having the appropriate
40. Execution and controlling the project. This requires frequent reviewing, updating
and constant action to restore the operation to its planned characteristics.
Evaluating the performance of each project to ensure the worth of good or service
for each rupee to be spent.
Thus the process of project formulation involves a stage by stage
development of the project idea into an investment proposition. The conclusion
down at the end of each stage forms the basis of development of the ensuing
stage. These conclusions also provide necessary materials for re-checking of the
initial premises from which a beginning was made. There must be forward and
backward look at the completion of every stage. So the project formulation team
has to be ready to revise its opinions and conclusions in the light of further
SELF ASSESSMENT QUESTIONS
1. What do you mean by project formulation? Explain the several aspects of
2. What are the different phases of project formulation?
3. Explain the criterion to be adopted while formulating a project.
4. “Formulation of projects involves scientific procedure” elucidate.
41. LESSON – 4
FEASIBILITY STUDY AND PREPARATION OF FEASIBILITY REPORT
1. To explain the nature and significance of feasibility study.
2. To know the components of feasibility study in a detailed manner.
3. To import knowledge of preparing feasibility report and how it can be
A feasibility report is an investment proposal base on certain information
and factual data appraising the project. This type of feasibility study may be
required by the financing institutions, project sponsor, project owner. The
feasibility report enables the project holder to know the inputs required and if
rightly prepared confirms to the convictions that he is proceeding in the right
direction. In other words, a project needs to be fully defined in order to provide
terms of reference for the management of the project.
A project can be considered to have been fully established when the
following conditions are fulfilled.
The technical configuration of the project has been fully defined.
The performance requirement for the various technical system and the key
equipment have been specified.
Cost estimate for the project is frozen.
Techno-economic viability of the project has been examined, appraised
An overall schedule for implementation of the project has been drawn-up.
The feasibility report is prepared during the definition phase of a project.
It lies in between project formulation stage and appraisal and sanction stage. It is
prepared to present an in-depths techno-commercial analysis carried out on the
project idea for consideration of the financial institutions and other authorities
empowered to take the investment decision.
42. NATURE OR PROJECT FEASIBILITY ANALYSIS
In the broadest sense, every rational decision t make new investment is
proceeded by an investigation of the feasibility of the project, whether or not this
carried out in a formal manner. The larger the project and greater the investment,
the more formalized the investigation. Assurance is needed that the market exists
or can be developed, that raw materials can be obtained, that sufficient labour
supply is available, that local services vital to the project are at hand, and that the
overall costs for plant equipment, labour and raw material input will be of a
certain order. Most importantly it must be determined that income will exceed
costs by a margin sufficient to make the project financially attractive. When the
project is small, the study format may be quite informal, perhaps there will be no
formal study at all and little accumulation of actual data. Nevertheless, the
feasibility calculations will have to be computed and evaluated, even if an
informal manner before the ultimate step of actual investment is taken.
NEED FOR FEASIBILITY STUDIES
A company is incorporated for the purpose of setting up a project. The
promoters obviously have, to start with, some broad idea about the proposed
industrial activity. They make mental picture as to how the idea, when translated
into reality would result in a profitable project, given the demand supply pattern,
probable cost of production etc. It is quite likely that the originators get attracted
by the favorable aspects of the project known to them, while they may have
overlooked the dark side of the picture, which can only be revealed by a detailed
objective study. Too many projects have floundered, at considerable loss to the
investors and indeed to the national economy through waste of scarce resources,
because the investment decisions were taken without objective and in depth
techno-economic feasibility studies. The need for such careful studies is further
underscored on two counts:
In modern times, business operations are complex, requiring carefully
The shareholders, creditors, term leaders etc., insist on as complete an
analysis of the scheme as possible without their co-operation, it would not be
possible to translate the ide into action.
This feasibility study helps the promoter to make the investment decisions
correctly and to obtain funds without much difficulties.
It allows the promoters to anticipate the problems likely to be encountered
in the execution of the project and phases them in a better position to answer the
queries that may be raised by the financial institutions and others who would have
to be involved in the project.
43. COMPLEMENTS OF FEASIBILITY STUDY
Project feasibility study comprises of market analysis, technical analysis,
financial analysis, and social profitability analysis. The analysis is mainly
interested only in the commercial profitability and thus examining only the
market, technical and financial aspects of the project. But, generally the gamut of
feasibility of a project covers the following areas:
Commercial and economic feasibility
Social feasibility or acceptability
These areas are briefly described below:
COMMERCIAL AND ECONOMIC FEASIBILITY
The economic feasibility aspect of a project relates to the earning capacity
of the project. Earnings of the project depends on the volume of sales. If taken
into consideration the following important indicators.
Present demand of the goods produced through the project. i.e. market
facility (or) getting a feel of the market.
Future demand: a projection may be made about the future demand. The
period normally depend upon the scale of investment.
Determining the extent of supply to meet the expected demand and
arriving at the gap.
Deciding in what way the project under consideration will have a
reasonable chance to share the market.
Anticipated rate of return on investment. If it is positive the project
justifies the economic norm in the relationship between cost and demand.
Future demand can be estimated after failing into consideration the
potentialities of the export market the charges in the income and prices, the
multiples use of the product, the probable expansion of industries and the growth
of new industries. The share of the proposed project n the market could be
identified by considering the factors affecting the supply position such as
competitive position of the unit, existing and potential competitors, the extent of
44. capacity utilization, unit cost advantages and disadvantages, structural changes
and technological innovations bringing substitute into the market.
The commercial feasibility of a project involves a study of the proposed
arrangements for the purchase of raw materials and sale of finished products etc.
This study comprises the following two aspects.
Arriving at the physical requirement of production input such as raw
materials, power, labour etc., at various level of output and converting them into
cost. In other words, deciding costing pattern.
Matching costs with revenues with a view to estimating the profitability of
the project and the break-even point. The possibility ultimately decides whether
the project will be a feasible proposition.
The technical analysis of a project feasibility study serves to establish
whether or to the project is technically feasible ant it also provides a basis for cost
The examination of this aspect requires a thorough assessment of the
various requirements of the actual production process and includes a detailed
estimate of the goods and services needed for the project. So, the feasibility report
should give a description of the project in terms of technology to be used,
requirement of equipment, labour and other inputs. Location of the project should
be given special attention n relevance to technical feasibility. Another important
feature of technical feasibility relates the types of technology to be adopted for the
project. The exercise of technical feasibility is not done in isolation. The scheme
has also to be viewed from economic considerations; otherwise, it may not be a
practical proportion however sound technically it may be.
The promoter of the project can approach the problem of preparation of
technical feasibility studies in the following order:
Undertaking a preliminary study of technical requirements to have a quick
If preliminary investigation indicate favourable prospects working out
further details of the project. The exercise begins with engineering and technical
specifications and covers the requirements of the proposed project as to quality,
quantity and specification type of components of plant & machinery, accessories,
raw materials, labour fuel, power, water, effluent disposal transportation etc.
Thus, the technical feasibility analysis is an attempt to study the project
basically from a technician’s angle. The main aspects to be considered under this
45. study are: technology of the project, size of the plant, location of the project,
pollution caused by the project production capacity of the project, strength of the
project. Emergency or stand-by facilities required by the project sophistication
such as automation, mechanical handling etc. required collaboration agreements,
production inputs and implementation of the project.
The main objectives of this feasibility study is to assess the financial
viability of the project. Here, the main emphasis is in the preparation of financial
statement, so that the project can be evaluated in terms of various measures of
commercial profitability and the magnitude of financing required can be
determined. The decision about the financial feasibility of project should be
arrived at based on the following consideration:
For existing companies, audited financial statements such as balance
sheets, income statements and cash flow statements.
For projects that involve new companies, statement of total projects cost,
initial capital requirements, and flow relative to the projective time table.
Financial projections for future time periods, including income
statements, cash flows and balance sheets.
Supporting schedule for financial projections stating assumptions used as
to collection period of sales, inventory levels, payment period of purchases and
expenses and elements of production cost, selling administrative and financial
Financial analysis showing return on investment return on equity, breakeven volume and price analysis.
If necessary sensibility analysis to identify items that have a large impact
on profitability or possibly a risk analysis.
The success or failure of a project largely depends upon the ability of the
project holder to manager the project. Project is a bundle of activities and each
activity has its own role. For the success of a project, a project holder has to coordinate all the activities in such a way that the additive impact of different inputs
can produce the desired result. The ability to manage and organize all such inter
related activities come within the concept of management. If the person in-charge
of the project, has the ability, has the ability to manage all such activities, the
desired result can be anticipated.
46. There are three ways to measure the managerial efficiency:
Skill acquired through training
Skill acquired course of work
A project may cross all the above barriers mentioned above an found very
suitable but is will lose its entire creditability, if it has no social acceptance.
Though the social customs, conventions such as caste community, regional
influence etc. are creating hindrance for development of a project should avoid all
such social conflicts which will stand on the successful implementation of the
(e.g.) Considering the interests of the general public; projects which offer
large employment potential, which channelise the income from less developed
areas will stimulate small industries.
In a nut shell, the feasibility report should highlight on these five testing
stones before it can be declared as complete and only after judging through these
indicators a project can be declared as viable and can be submitted for finance or
any other assistance from any institutions.
FORMAT OF FEASIBILITY REPORT
The sketch of feasibility report of the project covers the following
2. Summary and Recommendations
3. Project Capacity, Chemistry of the product, specifications, properties,
application and uses.
4. Market potential
5. Process and know-how
6. Plant and machinery
7. Location of the unit
8. Plot plan and building
9. Raw materials availability
10. Utilities, requirements
47. 11. Effluents treatment
12. Personel requirement
13. Capital cost
14. Working capital
15. Mode of finance
16. Manufacturing cost
17. Financial analysis
18. Implementation schedule
CHECK FOR FEASIBILITY REPORT
The following key elements must be presented in the feasibility report,
Examination of public policy with respect to the industry project
Broad specification of outputs and alternative techniques of production
Listing and description of alternative locations
Preliminary estimates of sales revenue, capital costs and operating costs of
Preliminary analysis of profitability for different alternatives
Specification of product pattern and product prices
Listing of major equipment by type, size and cost
Listing of auxiliary equipment and process know-how
Specification of site and completion of necessary investigation
Listing of buildings, structures and yard facilities by type size and cost
Specification of supply sources connection costs and other costs and other costs
for transportation services, water supply and power
Preparation of layout
Specification of skill-wise labour requirements and labour costs.
Estimation of working capital requirement
Phasing of activities, and expenditure during construction
Analysis of profitability
Determination of measures of combating environmental problems
State the preparedness to implement the project rapidly
Thus, this chapter narrates the very purpose of a feasibility report in a lucid
manner, covering components of feasibility reports, principal feature of project
feasibility study and also checklist for feasibility study. It helps in defining and
analyzing the alternative approaches to production processes and outcomes. It
focuses attention on the material inputs and various other techno-economic
variables. It describes the optimization process, justifies the assumptions and
hypothesis set thereby selection the better alternative solutions and defines tre
clear boundaries of a project viability.
SELF ASSESSMENT QUESTIONS
1. What do you mean by feasibility study? Explain its significance in project
2. Explain the different components of feasibility study
3. Suggest a suitable outline of feasibility report for setting up a small scale
4. How a technical feasibility of a project can be ascertained?
5. Analyse the significance of managerial competence and commercial
viability of project in the feasibility study.
6. What the elements to be covered in the feasibility report?
49. LESSON – 6
To know the need for preparing a project report
To explain the content of an ideal project report
A project at the outset must bear a logical appearance, which it can get
only after the feasibility test. Project report is a document, which clearly narrates
the various aspects f project in a prescribed form. Project report preparation is a
post investment decision exercise. It involves the preparation of detailed
specifications and designs for the project premises, detailed design of the process
or other equipment and time schedules for the implementation of the project.
Hence, the detailed project report is the work plan for the implementation of the a
project once an investment decision is arrived at.
A project report is meant to provide the necessary information, which may
be required for the purpose of processing and assessing the proposal for getting
the financial assistance from the financial institutions. This is essentially prepared
in order to provide a complete information with proximate values of the project
and presented to the financial institution for appraisal. A project report prepared
with utmost care care would not only give a clear idea to the banker but also it
relives the entrepreneur from the normal objections and formal queries of the
In a developing economy like India, where the development banking is
vigorous, an entrepreneur gets a lot of published materials with data relating to
various feasibilities and promotional institutions engaged in entrepreneurship
development produce good literature covering various aspects of producing a
project or products in the country. The Director General of Technical
Development (DGTD), National Small Industries Corporations (NSIC) are some
of the pioneer institutions providing variety of information for small scale
enterprises to manufacture. They are guidelines for industries indication those
items, in which good scope exists for manufacturing.
With these available information, an entrepreneur has to do the following
for starting an industrial unit:
To decide the types and level of industrial production.
To compare the requirements of funds with his personal availability of finance.
50. To prepare a nice project report containing all relevant information.
Many of the institutions like SISI, State Financial Institutions also help in
preparation of project report and later on recommend they to the banks. Besides
these institutions, several commercial banks help the entrepreneurs to get a good
Components of Project Report
The following are the important headings under which the complete
information on relevant aspects should be included for a small scale industry’s
Capital expenditure and sources of finance
Assessment of working capital requirements
Other financial factors
Government and other statutory approvals
Economic and social variables
The following aspects should be given in the stage, which are of general
Name and address of the entrepreneur
The qualifications, experience and other capabilities of the entrepreneur. If
it is a partnership firs, these information of other members should also be given.
A small reference of analysis of industry to which the project belongs e.g.
past performance, present status, the way of organization, the problems etc.
The organizational structure of the enterprise
The utility of the product and the range of products to be manufactured
As mentioned earlier a project may have several objectives subsidiary to
the prime objective of making profit. As a first step in project evaluation, it is
essential that one looks at the broad rationale of the project proposal to ensure that
the project is appropriate and justified. As an example, one could say that
modernization or pollution control may be fully justified on grounds of survival
and environmental protection even if, in the short-term the project expenditure
may adversely affect the financial criteria of project evaluation. On the other
hand, a project which would improve the earnings per share or the debt service
cover or the production efficiency may not necessarily be justified if all this is to
be achieved at the expense of national interest or public interest.
A brief description of the project covering the following aspects should be
given in the project report.
SITE: Location (Town, Complete address) whether owned or leasehold
land whether the site is approved industrial area? Is it suitable for the product
Raw materials: What are the sources of raw materials? Are they locally
available? Whether imported raw material is also required? If so, whether license
has been obtained? Is it suitable to get quality raw materials continuously at
The availability, quality critically and quality compatibility of the raw
material with the technology as well as the plant and machinery are important
factors to be clearly understood while evaluating a project especially those in hitech area. This element is also intimately linked to many other elements in a
project and can force necessary changes in them to ensure the viability of the
As a simple example, one can easily surmise that a raw material with a
high volume to weight ratio will indicate the plant is located near the source of
raw material. e.g. Cement, power (coal based). On the other hand, if the values
added in such a case is very high, then it may be possible or even necessary to
locate the plant away from the source or raw materials. Textiles, power (gas based
of oil based), processed foods like snack foods, ice creams are some the pertinent
The characteristics of the raw materials are multivariate and not just on the
volume weight ratio. It is imperative therefore that this elements gets a careful
52. consideration while assessing a project. The market, the management, and the
utility needs of the projects also influence the locational decisions.
Labour: What is the type of labour required? Whether skilled or unskilled? Are
they available in that area? If not, what arrangement have been made to recruit
and train the labour in various skills?
Power: Inadequate supply and high cost of electricity is a major problem now-adays. So, the project report should contain the information regarding the power
requirements, the load sanctioned, stability of supply of power and the price at
different consumption level.
Fuel & water: Whether the fuel systems like coal, coke, oil or gas are
required and if yes, then state their availability position. Similarly water is an
important factor. The source and the quality of water should be clearly stated.
Waste discharge: Most of the plants product waste material or emissions that
may result in many health problems to the public. The emissions and discharges
may be various types like (a) gaseous )smoke, fumes, dust etc.) by physical
(noise, hear, vibration etc.) or (c) liquid or solid discharged through pumps and
sewers. Hence, it should be clearly stated that the arrangements made from these
COMMUNICATION AND TRANSPORT FACILITIES
A vialability of communication facilities like telephone, telex and post and
telegraph department, should be stated in the report. Similarly, transport is a basic
necessity for industries. Raw materials as well as finished products has to reach
destination only through a good transport systems available. So, the various
transport facilities available in that should be clearly stated. Similarly availability
of facilities like machine shops, welding shops and electrical repair shops etc.,
should also be stated.
List of machinery & Equipments: A complete list of items of machinery and
other equipments indication their type, size and cost should be stated. Source of
supply of capital equipment and the construction services should also be given.
The source of plant and machinery as also the specification for the same
can often make or break a project. It is, therefore, equally important to evaluate
the plant and machinery which is to be installed at the project. The reputation of
the supplier and references to place where such/similar plant and machinery are
installed is a good starting point while assessing this element.
Capacity & Technology: The installed and licensed should be stated and
the number of shifts likely to follow should be stated. Similarly, is the technology
53. upto date and appropriate? Which other units are using the same technology and
with what results? How the required know-how is proposed to be arranged.?
The level of technology in terms of its “state of art” or obsolescence,
adaptability to the local conditions, maintenance and repairability, sophistication
in management and control are elements which have a significant impact on the
quality and quantity of production that is envisaged in the project. It is thus
necessary to have a clear understanding about the technology which is to be
utilized in the project.
It is pertinent to note that there are no hard and fast rules but
“appropriateness” and “relevance” are the two key operative words while
assessing a technology proposed for the project. It is ridiculous to propose a
highly sophisticated, push button control technology in a place where electricity
supply follows its own rules or where a simpler technology is better understood
and more manageable. Equally, it would be disastrous to recommend an obsolete
technology on account of its durability or time tested proof of performance when
everyone else is fast discarding it.
This technology elements is linked to ever other element in the project
proposal and these linkages also need to be looked into as an essential step in
assessing the technology. One of the technologies available may necessitate
creation of large capacity not necessarily advisable given the current raw material
supply or the market size for the product.
For example, a capacity of 100 tps. But if raw material proposed is “agricltral
waste” a whole lot of new considerations starting from collection and storage or
raw materials come into play necessitation appropriate changes in the plant size
and even perhaps the technology. Similar situations can arise in linkages of
technology to management, availability of utilities, and cost of the project.
What is the system arranged for to check the quality of products on
continuous basis? The quality marks like ISI, Agmark will enhance the values of
the product as well as confidence among the consumers. If it is desired to get
quality markings, the fact should be included in the project report.
Estimation of demand & supply
Facts regarding the anticipated demand for product and the level of supply, should
be clearly stated. An estimate of manufacturing and administrative expenses
together with the price expected along with the margin of profit should be stated.
54. Marketing strategy:
What is the strategy adopted for marketing the product should be stated.
Whether the products are to be supplied to the reputed sellers directly or
distributors? Is there any possibility of getting a contract from the reputed
concerns should also be stated in this project report. Similarly whether after sales
service has been arranged and how to fill the gap of demand if there is
fluctuations in the sales seasonal demand arrangements made for warehousing the
Capital expenditure and sources of finance
Cost of the project : Since each project is profit motivate it is important that cost
of the project is carefully assessed and evaluated. One of the most important
factors in this assessment is the level of accuracy in the cost estimates, which in
addition to proper data collections also depends upon the approach and the
attitude of the evaluator himself. Some evaluators tend to see all cost estimates as
“too high” leading to unnecessary under estimation of the project cost and
consequent problems in project implementation and even project viability. On the
other hand some evaluators tend to provide “cushions” at all levels of cost
estimates which may erode the viability of the project on paper leading to wrong
decision on the issue of project selection and implementation.
As estimate regarding this various capital inputs required by the industry should
be given. Those capital items include the following:
Land & Building
Plant and machinery
Working capital limit
Means of financing: Having established the cost of a project as justified and
reasonable, it is necessary to evolve the means of financing the project. It should
be acceptable within the framework of the financial system and sufficiently
attractive/or safe enough for the investor lender to come forward and extend the
necessary assistance. During the last decade, financial scenario in India has
undergone substantive, qualitative as well as quantitative change almost
amounting to a metamorphosis. As a result the project prosperity has a fairly wide
range of means of finance available to him to choose from. Instead of a standard
debt-equity ratio of 2:1, the promoter taking up 50% to 75% of the equity, the
balance being offered to the public and the financial institutions and banks