Chapter two

The project Life cycle

The different stages/phases through which a project passes is called

the project life cycle.
The main features and elements of this process are information
gathering, analysis and decision making.
There is no single way of devising the different phases of a project
there are many equally valid ways in which the project cycle may be
divided.

There are three basic models of project life cycles they are:
A. The Baum project life cycle
B. UNIDO project life cycle
C. DEPSA project life cycle
A. The Baum project life cycle (World Bank
procedures)

The first basic model of a project cycle was that of Baum

developed in 1970, which has been adopted by the World
Bank and initially recognized four main stages, namely
1. Identification
2. Preparation
3. Appraisal and selection
4. Implementation
At a later stage in 1978 the author has added another stage
1. Identification Phase:

The first stage in the project life cycle is to find

potentially promising projects which are
worthwhile for investment.
Some of the sources of such projects are listed
below:
• Some projects are resource based and stem
from the opportunity to make profitable use of
available resources.
• Some may be market based arising from an
identified demand in home or overseas
markets.
•

• Others may be need based and initiated to make

available certain basic material requirements and
services to all people in an area at minimal amounts.

• Well informed technical specialists and local leaders

are also common source of projects.
2. Preparation Phase:
 Once projects are identified, there begins a process of
progressively more detailed analysis of the projects and
preparation of the project plans.
 This phase of the project life cycle which normally
includes both the prefeasibility and feasibility study .
 This is the stage at which the project is being seriously
considered as a definite investment action.
Con…

 Project preparation covers the establishment of all the

technical, economic, social, financial, institutional and
environmental feasibility analyses.
 From the inferences of such analysis, decisions have to be
made on the scope of the project, location and site, soil and
hydrological requirements, project size etc.
 At this stage the project exists as asset of tangible
proposals.
3. Appraisal Phase
(an assessment of the quality or value of something)

 At this stage critical review of the project is to be

conducted.
 This provides an opportunity to re-examine every
aspect of the project proposal (project plan) to
assess whether the proposal is appropriate and
sound before large sums are invested.
 Generally only internal institution/government staffs
are used for this work.
 Projects are appraised both in the field and at the
desk level.
Con…

Appraisals should cover at least seven

aspects of the project, each of which must
have been given special consideration during the
project preparation stage. Those seven aspects
are:
1) Technical- here the appraisals concentrate on
verifying whether the proposed project will
work in the way suggested or not.
Con…

2) Financial- In this, the appraisals try to see whether

requirements for money needed by the project have
been calculated properly, their sources are all
identified and reasonable plans for their repayment
are made where necessary.
3) Commercial- the way the necessary inputs for the
project are conceived to be supplied is examined here
and also the arrangements for the disposal of the
products are verified.
Con…
4. Incentive- the appraisals here will
see into it whether things are
arranged in such a way that all those
whose participation is required will
find it in their interest to take part in
the project.
Con…

5) Economic- the appraisal here tries to see that what is

proposed is good from the view point of the national
economic development interest when all project effects
(positive and negative are taken into account and check
whether all are correctly valued.
6) Managerial- this aspect of the appraisal examines whether
the capacity exists for operating the project and the people
who were assigned responsibilities can operate it
satisfactorily or not. Moreover, it tries to see whether the
responsible persons are given sufficient power and scope
Con…

7. Organizational- this appraisal

examines the project if it is
organized internally and externally
into units, contract policy
institution, etc., to allow the
proposals to be carried out properly
and to allow for change as the
Con…

 The above issues are the subjects of specialized appraisal report.

On the basis of this report, financial decisions are made- whether
to go ahead with the project or not.
 In practice, there can be quite a sequence of project selection
decisions. Following appraisal, some projects may be discarded.
 If the project involves loan finance, the lender will almost
certainly wish to carry out his/her own appraisal before
completing negotiations with the borrower.
 Comments made at the appraisal stage frequently give rise to
alterations in the project plan.
4. Implementation Phase:

 The clear objective of any effort in project planning and analysis

is to have a project that can be implemented to the benefit of
the society.
 Thus implementation is perhaps the most important part of the
project cycle. In this stage, funds are actually disbursed to get
the project started and keep running.
 A major priority during this stage is to ensure that the project is
carried out in the way and within the period that was planned.
 Problems frequently occur when the economic and financial
environment at implementation differs from the situation
expected during appraisal.
Con…
 During implementation stage that many of the real
problems of projects are first identified.
 Because of this feedback effect on the discovery and
design of new projects, and the deficiencies in the
capabilities of the project action can be revealed.
 Therefore to allow the management to become aware
of the difficulties that might arise, in recording,
monitoring and progress reporting are important
activities during the implementation stage.
5. Evaluation Phase:

 At later stage that is in 1978, BAUM has added an additional stage called
Evaluation which usually closes the project life cycle.
 Once a project has been carried out, it is often useful, to look back over what
took place, to compare actual progress with the plans, to judge whether the
decisions and actions taken were corrective, to see whether the results
obtained are optimal in a sense that the resources are efficiently utilized and
whether the project’s goals and objectives are effectively achieved.
 The extent to which the objectives of a project are being realized provides
the primary criterion for an evaluation.
 The analysts look systematically at the elements of success and failure in
the project experience to obtain insights about how to plan more productive
projects in future.
Con…
 Evaluation is not limited only to completed projects.
 It is the most important managerial tool in ongoing projects
and rather formalized evaluation may take place at several
times in the life of project.
 Evaluation may be undertaken when a project is in trouble, as
the first step in a re-planning effort.
 Careful evaluation of the project should precede any effort to
plan follow-up projects.
 Finally, evaluation should be undertaken when a project is
terminated or as well in routine operation. Different people
Con…

 Project management will be continuously evaluating its

experience as implementation proceeds.
 The sponsoring agency, the operating ministry, the planning
agency or an external assistance agency may undertake
evaluation.
 In large and innovative projects, the project’s administrative
structure may provide a separate evaluation until responsible for
monitoring the projects implementation and for bringing
problems to the attention of the project’s management.
Evaluation can help not only in the management of the project after
the initial phase but also in the planning of the future projects.
B. The UNIDO model:

The United Nations Industrial Development organization (UNIDO)is



the most devoted institution towards the development and the

standardization of the concept, context and content(CCC)of
industrial project management system.
According to the UNIDO approach, the project development cycle


comprises three distinct phases, they are:

1. Pre- investment phase

2. Investment phase and
3. Operational phase
Each of these three phases is divided into several stages, some of which
constitute important consultancy, engineering and industrial activities as shown
Con…

1. Pre- investment phase

 Opportunity study( identification of project ideas)

 Pre-feasibility study (preliminary project formulation , selection

of alternatives)
 Feasibility study (techno-economical project back ground, final

project formulation stage)

 Evaluation report ( decision making about project availability)

2. Investment phase
 Project design stage

 Construction stage

 Pre-production marketing stage

 Training

 Start-up stage
Con…

3. Operational phase
 Replacement of equipment
 Development, invasion or liquidation

Before dealing with pre –investment phase, the various

stages of the investment and operational phases are
considered since these impacts on the nature and
scope of pre-investment studies.
The project investment or implementation phase for a
large industrial business project will be different as
compared to that of a small non- industrial project.
Con…

Assuming that a projected industrial activity involves

the construction of a factory and the installation of
machinery and equipment, the project investment
phase could be divided in to the following stages:
a. Project engineering designs
b. Negotiations and contracting
c. Construction and training and
d. Plant start up
 An adequate importance should be given to the pre
investment phase, because the success or failure of an
industrial project ultimately depends upon the marketing,
technical, financial and economic feasibility study
findings and their interpretation.
 To reduce wastage of scarce resources, a clear
comprehension of the sequence of events is required
when developing an investment proposal from the
conceptual stage by way of active promotional efforts to
the operational stage.
1. Pre-investment stage
 It is a usual practice, project ideas must be elaborated in a
more detailed study.
 However, formulation of the detail techno-economic
feasibility study, that enables a definite decision to be made
on the project, is a costly and time consuming task.
 Therefore, before assigning large funds for such a study, a
preliminary assessment of the project idea must be made in
a pre-feasibility study. This is just seeing that whether:
 All possible project alternatives are examined
 The project concept justifies the detail study
 All aspects are critical and need in-depth investigation
 The project idea is viable and attractive or not
Con…

According to the UNIDO manual, the main stages of the pre-

investment phase are as follows:
A. Identification of investment opportunities (opportunity
studies)
B. Analysis of project alternatives and preliminary project
selection
C. Project preparation( pre-feasibility and feasibility studies ) and
D. Project appraisal and investment decision (appraisal report)
These stages assist a potential investor in the decision making
process and provide the base for project decision and
implementation.
Con…

a. opportunities studies
 Identification of investment opportunities is the starting
point in a series of investment related activities when
potential investors (private or public) are interested in
obtaining information on newly identified viable
investment opportunities.
 The main instrument used to quantify the parameters,
information and data required to develop a project idea
into a proposal is the opportunity study.
Con…

 An opportunity study should identify investment opportunities

or project ideas by analyzing the following factors in detail:
 Natural resources with high potential for processing and manufacture:
 Existing agricultural pattern that serves as a basis for agro-based
industries:
 The future demand for certain consumer goods or for newly developed
goods:
 Imports in order to identify areas for import substitution:
 Cost and availability of production factors:
 Possible expansion of existing industrial capacity to attain
economies of scale and
 Export possibilities.
b. Pre-feasibility studies
 A Pre-feasibility study should be viewed as an intermediate stage

between a project opportunity study and a detailed feasibility study.

c and the intensity with which project alternatives are examined.
 The structure of a prefeasibility study should be the same as that of

the detailed feasibility study. These two studies basically compile

the information on the justification of the project. In a practical
sense, the main components of the project feasibility report
are:
 Executive summary
 Project back ground and history
 Market and plant capacity
 Location and site
 Project engineering works
 Factory, administrative and sale overheads
 Man power
 Project implementation
 Financial analysis and
 Project risk analysis
Con…

C. feasibility studies
A feasibility study should provide all data necessary for making the
investment decision.
The commercial, technical, financial, economic and environment
prerequisites for an investment project should therefore be defined and
critically examined on the basis of alternative solutions already reviewed in
the pre-feasibility study.
The results of these efforts strengthen a project whose back ground
conditions and aims have been clearly defined, in terms of its control
objective and possible marketing strategies, the possible market share that
can be achieved, the corresponding production capacities, the plant location
existing raw materials, appropriate technology and mechanical equipment
and, location, existing raw materials, appropriate technology and mechanical
The financial part of the study covers the scope of the


investment, including the net working capital, the production and

marketing costs, sales revenue and the return on capital invested.

The final estimates on investment and production costs and its



subsequent calculations of financial and economic profitability are

only meaningful if the scope of the project is defined in order not
to omit any essential part and its related cost.

However, there is no uniform approach or pattern to cover all



industrial projects of whatever type, size or category. The

emphasis on the components varies from project to project.

For most industrial projects, however, there is a broad format of



general application-bearing in mind the larger the project the

more complex will be the information required.
d. Appraisal Report
When a feasibility study is completed, the various parties
will carry out their own appraisal of the investment project
in accordance with their individual objectives and
evaluation of expected risks, costs and gain.
Large investment and development finance institutions
usually have formalized project appraisal procedures and
usually prepare an appraisal report.
This is the reason why project appraisal should be
considered an independent stage of the pre-investment
phase, marked by the final investment and financing
decisions taken by the project promoters.
 The appraisal report will prove whether the pre
production expenditures spent since the initiation of the
project idea were well spent or not.
 Project appraisal, as carried out by financial institutions
concentrates on the health of the company to be
financed, the returns to be obtained by equity holders
and the protection of its creditors.
 The techniques applied to appraise projects in line with
these criteria center around technical, commercial,
market, managerial, organizational, financial and if
possible economic aspects of project.
2. Investment (implementation) phase
The investment or implementation phase of a project provides
a wide scope for consultancy and engineering work, first and
foremost, in the field of project management.
The investment phase can be divided into the following
stages:
a. Technological acquisition and transfer
b. Detailed engineering design and contract, including
tendering, evaluation of bids and negotiations
c. Acquisition of land, construction work and installation
d. Pre-production marketing, including the securing of suppliers
and setting up the administration of the firm
e. Recruitment and training of personnel and
Detailed engineering design comprises preparatory work for
site preparation, the final selection of construction planning and
time scheduling of factory construction, as well as the
preparation of flow charts, scale drawing and a wide variety of
layouts.
During the stage of tendering and evaluation of bids, it is
chiefly important to receive comprehensive tenders for goods
and services for the project from a sufficiently large number of
national and international supplies of proven efficiency and with
good delivery capacity.
This stage covers the signing of contracts between the
investor on the one hand, and the financing institutions,
consultants, architects and supplies of raw materials and
The construction stage involves site preparation,
construction of buildings and other civil works, together
with the erection and installation of equipment in
accordance with proper programming and scheduling.

The personnel recruitment and training stage, which

should proceed simultaneously with the construction
stage, may prove very crucial for the expected growth of
productivity and efficiency in plant operations.

Plant commissioning and start up is usually a brief, but

technically critical span in project implementation.
3. Operational Phase
 The problem of the operational phase needs to be considered from
both short and long term view points.

 The short term view relates to the initial or commencement of

production when a number of problems may arise concerning such
matters as the application of production techniques, operation of
equipment or inadequate labor productivity owing to lack of qualified
staff and labor.

 Most of the problems have their origin in the implementation phase.

The long term view relates to chosen strategies and the associated
production and marketing costs as well as sales revenues.

 These have a direct relationship with the productions made at the pre-
investment phase. If such strategies and projections prove faulty and
remedial measures will not only be difficult, but may prove highly
expensive.
C. The DEPSA Model
In Ethiopia, Development
 Project Studies Authority
(DEPSA) made certain efforts and developed a model for
Project life cycle, which is known as DEPSA’s Project life cycle.
This life cycle comprises three major phases. They are:


1. Pre-investment phase
2. Investment and
3. Operation
Each of these three phases may be divided into different
stages.
1. Pre- investment Phase
a. Identification Stage
b. Formulation Stage
 Pre-feasibility study
 Feasibility study
c. Appraisal
 Appraisal
 Decision
2. Investment Phase
 Implementation

 Tendering negotiation and contractual

 Detailed engineering design
 Construction, erection and commissioning

3. Operation Phase
 Operation
 Ex-post evaluation
1. Pre-investment phase
A. Project Identification
 Projects identification amounts to finding projects, which
could contribute toward achieving, specified
development objectives.
 Or the first stage in project cycle is to identify an idea,
which enables to presentation a project.
Where do project ideas come from?
Sources of project ideas
We can distinguish two level where projects ideas
are born: the macro level and the micro level.
At the macro level project idea comes from:
 National, sectorial or regional plans and strategies
supplemented by special studies often called opportunity
studies, conducted with the explicit aim of translating
national and sectorial programmers into specific projects.
 Constraints in the development process due to shortage

of essential infrastructure facilities, problems in the

balance of payments, etc
 A government's decision to correct social and regional

inequalities or to satisfy basic needs of the people

through development projects.
 Unusual events such as drought, floods, earthquake, etc

 A possible external threat that necessitate projects

aiming at achieving, for example, self-sufficiency in basic
materials, energy, transportation etc.
 Multi or bilateral agreement
At the micro level, project idea emanate from:
 The identification of unsatisfied demand or need.
 The existence of unused or underutilized natural or
human resources and the perception of opportunities
for their efficient use.
 The initiative of private or public enterprise in response
to incentives provided by the government
 The necessity to complement or expand investment
previously undertaken: and
 The desire of local groups or organization to enhance
their economic independence and improve their
welfare.
 Once to some project ideas have been put forward, the
first step is to select one or more of them as potentially
viable.
 This calls for a quick preliminary screening by experienced
professional who could also modify some of the proposal.
 Following the preliminary screening, promising project
options should be investigated in a systematic manner.
 This requires the preparation of brief reports that clearly
indicates in sufficient, details those project versions that
are promising, and suggests those projects options that
should be eliminated.
 Reports of this type are often called pre-feasibility or pre
B. Project Formulation
I. Content of the pre-feasibility study
 The objectives of the project
 The nature and size of the demands for the output or the needs that
it would satisfy, together with the foreseen beneficiary groups.
 The availability of the most important materials and human inputs.
 Basic alternative technologies available and their merits and
weakness
 Approximate investments and operation costs as hell as expected
revenue
 Rough estimate of financial and economic return
 Any major factors that is likely to have an important effect on the
project
II. Feasibility study
If the pre-feasibility study indicates that the project is, prima
facie, promising and further work is justified, the project enter the
stage of preparation.
The project is now being seriously considered as a definite
investment action and detailed planning of the idea can begin
project preparation (sometimes called project formulation) covers
the establishment of technical, economic and financial feasibility.
Decisions have to be made on the scope of the project, location,
etc.
Complete technical specifications of distinct proposals
accompanied by full details of financial and economic costs and
benefits are the outcomes of the project preparation stage.
The project now exists as set tangible proposals.
III. Project Appraisal
Project appraisal can be defined as second look at a project report
by a person or an institution that is in no way involved in its
preparation.
It helps in taking an entirely independent view of the project.
Appraisal is the comprehensive and systematic assessment of all
aspects of the proposed projects.
Appraisal highlights wide area in the project with the ultimate
objective of strengthening them adequately so as to ensure final
success of the project.
The main objective of the appraisal is to improve and renovate the
project with the cooperation of the promoter (financing agencies).
It's in this stage that the bank will judge whether the project is
acceptable or unacceptable.
Appraisals should cover at least seven aspects of a project,
1. Technical: does the proposed project work in the way suggested?
2. Financial: have the financial requirement of the project been properly
calculated, their sources identified and reasonable plans made for their
repayment? Where this is necessary?

3. Commercial: how will the necessary inputs for the project be supplied and
are the arrangements for the disposal of the product satisfactory?

4. Incentives: does things go as they are planned?

5. Economic: does the proposed project consistent from the view point of
national development?

6. Managerial: does their exist capable manager to run the planned project
successfully and are they given sufficient power and scope to do what is
required?

7. Organizational: is the project organized internally and externally into

units, etc so as to allow the proposals to be carried out properly, and to allow
2. Investment phase
Project Implementation
In this stage, funds are actually disbursed to get the project set up and
running.
Translating project plan into actual investment and operation is one of the
most critical and difficult task.
No matter how sophisticated or detail the project preparation work, it has
no value unless it is transformed into action or implemented.
Implementation can be defined as a project stage which covers the
actual development or construction of the project up to the point
at which it becomes fully operational.
It includes monitoring of all aspects of the work or activity as it
proceeds. It's where the earlier preparations and designs, plans and
analysis are tested in the highlight of reality.
The project's objectives are realized only when it is successfully
Implementation stages begins immediately after the final

decision on the project and ends when it starts rendering the

benefit envisaged. While in earlier stages of project planning
there was more thinking and less action, in this stage more
actions and less thinking is needed.
Project implementation, even though it may involve
complex decisions, is essentially a logical and
systematic approach. Now a days planning the
implementation stage of a project explicitly is one of the
activity in project preparation.
The better and more realistic a project implementation plan
is, the more likely it is that the plan can be carried out
effectively and the expected output or benefit realized.
Project analysts generally divide the implementation phase into
three different time periods.
These are:
1.The investment period: when the major project investments
are undertaken.
2.The development period: when the project's production
builds up.
3.The life of a project: when full development is reached.
3. Project Evaluation and operational phase
Once a project has been carried out, it is often useful (but not
always done) to look back over what took place, to compare
actual progress with the plans, and to judge whether the decisions
and actions taken were reasonable and useful. This we call
evaluation.
Evaluation can be defined as a systematic and
periodical gathering, analyzing and interpreting of inputs,
information to see the effects and impacts of a
development program/project in order it may be adjusted
where necessary.
This kind of analysis can help not only in the
management of the project after the initial construction
phase, but will also help in the planning of future project.
Experience with one project can give rise to new ideas
for extension of the project.
Generally evaluation of a project helps to determine whether the
objectives sets were realistic, given the capacities with which and
End !