Chapter two

The project Life cycle:

After studying this chapter, you should be able to:

 Describe the stages of project planning process:
project cycle
 Understand the project clearance reports
 Understand the management approach to project
cycle
 The different stages/phases through which a project passes
is called the project life cycle.
 There are various models that deal with the project cycle,
such as Baum's, United Nations Industrial Development
Organization (UNIDO), Choudhury’s, Development
Project Studies Authority (DEPSA) etc.
This section presents and provides detail explanations on the;
1. The Baum project life cycle
2. UNIDO project life cycle
3. DEPSA project life cycle
 BAUM'S PROJECT LIFE CYCLE (1978).
Baum has developed the following five project cycles that are
related with performance of the World Bank:
a) Identification - Selection of viable ideas
b) Preparation - Determine whether the project is viable or not.
c)Appraisal - Audit whether the preparation process is
carried out adequately.
d) Implementation: - Actual implementing of the project
E) Evaluation - Evaluate whether the project has enabled to
achieve the desired objective since its implementation.
a) PROJECT IDENTIFICATION
The Identification phase is one of identifying the problems,
which need to be addressed, and analyzing the ways in which
they can be addressed. This would include,
 Analysis of existing situation
 Problems/needs identification
 Prioritization of ideas
 Selection of a project idea
 Definition of the project idea
 Consultation with stake holders
 Establishment of overall objectives
b) PROJECT PREPARATION (FEASIBILITY STUDY)
Project preparation covers the establishment of technical,
financial, economic, social and institutional aspects of the
project.
This would include:
_ Specification of objectives and results
_ Identifying resources available for the project
_ Identifying resources needed for the project
_ Design of the project
_ Packaging and planning of the project
c) APPRAISAL
The Appraisal/Audit phase involves a systematic review of
all aspects of the project in order that a decision can be made
as to whether to proceed. The following questions are often
the subject of an appraisal report.
 Technical- Is the project design appropriate and will the
project work as expected?
 Financial- Has proper provision been made to cover the
financial requirements and obligations of the project?
 Economic- Is the project advantageous from the point of
view of the economy as a whole?

 Social- Is the project both advantageous and acceptable to

the people affected by it?
 Institutional- Are there suitable organizations in place to
implement and manage the project?
 Environmental- Have the environmental impacts of the
project been properly considered?
 Sustainable- Will the project be sustainable in the long
term both financially and institutionally?
D. Implementation
The Implementation phase is one of actually performing the
project and ensuring that the objectives are met.
This includes:
 Mobilization of resources for each task and objectives
 Project marketing
 Ongoing monitoring and reporting arrangement
 Identifying problems
 Addressing failures
 Modification of the planned results and project objectives.
E. Evaluation phase
The Evaluation phase is the process of reviewing the
completed project to see whether the intended benefits are
achieved. This includes:
 Assessing whether the contractor has truly completed the
task
 Identifying best practice for further projects
 Identifying what resources are required for the future
 Identifying the need for future projects
UNIDO’S PROJECT LIFE CYCLE (UNIDO MODEL)
The United Nation’s Industrial Development Organization
(UNIDO) gives emphasis to industrial projects. It is more
practical than conceptual. Beherens and Hawranck (1991) in
collaboration with the UNIDO have identified three project
phases: Pre-Investment, Investment and Operation Phases.
1. Pre-investment stage
According to the UNIDO manual, the main stages of the pre-
investment phase are as follows:
 Identification of investment opportunities (opportunity
studies)
 Analysis of project alternatives and preliminary project
selection (pre- feasibility study)
 Project preparation (feasibility studies ) and
 Project appraisal and investment decision (appraisal report)
a. opportunities studies
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.
 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
The structure of a prefeasibility study should be the same as
that of the detailed feasibility study. 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
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.
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.
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.
2. Investment (implementation) phase
The investment or implementation phase of a project provides
a wide scope for consultancy and engineering work, The
investment phase can be divided into the following stages:
 Detailed engineering design and contract.
 Acquisition of land and construction work.
 Pre-production marketing, including the securing of
suppliers and setting up the administration of the firm
 Recruitment and training of personnel and
 Plant commissioning and start-up
3. Operational Phase

The operation phase includes project activities such as

expansion and innovation, replacement and rehabilitation, and
commissioning and start-up.
The problem of the operational phase needs to be considered
from both short and long term viewpoints.
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 2. Investment Phase
A.Identification Stage  Implementation
B. Formulation Stage  Tendering negotiation and
 Pre-feasibility study contractual
 Feasibility study  Detailed engineering
A. Appraisal design
 Appraisal  Construction, erection and
 Decision commissioning
3. Operation Phase
 Operation
1. Pre-investment phase
A. Project Identification

The first stage in project cycle is to identify an idea, which

enables to launch a project. Once to some project ideas have
been put forward, the first step is to select one or more of them
as potentially viable.
This requires the preparation of brief reports that clearly
indicates in sufficient and details those project versions that
are promising and suggests those projects options that should
be eliminated.
B. Project Formulation

I. pre-feasibility study
The pre-feasibility study should briefly discuss
 The objectives of the project
 The nature and size of the demands for the output.
 The availability of materials and human inputs
 Basic alternative technologies available
 Approximate investments and operation costs and revenue
 Rough estimate of financial and economic return
 Any major factors that have an effect on the project
II. Feasibility study
If the pre-feasibility study indicates that the project is
promising the project enter the stage of preparation. project
preparation covers the establishment of technical, economical
and financial feasibility.
III. Project Appraisal
Appraisal is the comprehensive and systematic assessment of
all aspects of the proposed projects.
The main objective of the appraisal is to improve the project
with the cooperation of the promoter (financing agencies).
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?
3. Commercial: how will the necessary inputs for the
project be supplied?
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?
7. Organizational: is the project organized internally and
externally?
2. Investment phase
Project Implementation
In this stage, funds are actually disbursed to get the project set
up and running. Project analysts generally divide the
implementation phase into three different time periods.
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 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.
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.
2.4: PROJECT CLEARANCE REPORT (PCR)
Whenever project is identified it is often done with reference
to the countries development strategies and economic
policies. This has to pass through at least the under
mentioned three stages of scrutiny and clearances.
Government may have a three-stage project scrutiny.
 First stage: Pre-Feasibility Report (PFR)
 Second stage: Techno-Economic Feasibility Report
(TEFR)
 Third stage: Detailed Project Report (DPR)
A.Pre-Feasibility Report (PFR)

The objective of this scrutiny is to ensure that the project is

viable from various angles:
 Market demand for the project or a product exist
 Plant capacity
 Materials and inputs used
 Location and site
 Project engineering and investment cost
 Plant organization and over head cost
 Manpower requirement
 Implementation schedule
 Financial and economic evaluation Statutory clearances

Once getting clearance from the first stage (PFR), it moves to

the second stage (TEFR).
B. Techno-Economic Feasibility Report (TEFR)

In this stage, project scope is defined, capacity or size is

identified, and also the method to be used is determined.
C. Detailed Project Report (DPR)

The outline and the items for DPR remains the same as
TEFR; however, the level of accuracy increases because
this is a period only when basic engineering, process
design, and equipment listing is complete.
End of chapter
Two
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