ADVANCED

PROJECT MANAGEMENT
CH-3. PROJECT FORMULATION
Prof. Kishor Chandra Meher
Professor(Management)
Bule Hora University

Prof. Kishor Chandra Meher 1

1. Concept of project Formulation
2. Steps in Project Formulation
3. Pre-Investment Phase
4. Feasibility Study
5. Investment Phase
6. Operational Phase
7. Project Monitoring
8. Project Evaluation & Control
9. Project Impact Analysis
10. Project Report Format(see the word file)
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3.1 Concept of Project Formulation
• Introduction:A major constraints faced especially in
developing countries is the resources constraints. Hence, it
becomes imperative that certain project ideas are only taken
up or pursued in performance to others. How to make this
decision or choose only a few projects for implementation?
Project formulation technique helps us in making a choice.
When we say project formulation, we mean that project
ideas are presented in such a form that it can be subjected to
comparative appraisal. This process will aid in definitely
determining the priority of projects from the point of view
of resource allocation.
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• The project ideas can be analyzed from the point of
view of inputs as well as outputs. Such an analysis
when presented to a decision maker or to consulting
agencies will help them in decision making. This
strategy analyses project ideas not only from the view
point of technical feasibility and financial viability but
also evaluated the sum total effect which the project
will have on the society and immediate environment.
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Meaning of Project Formulation
• Project formulation is process whereby the entrepreneur makes an objective
and independent assessment of the various aspects of an investment
proposition of project ideas for determining its total impact and also its liability.
Definition Project Formulation
• Project formulation is defined as taking a first a look carefully at a project idea
by a entrepreneur to built up an all-round beneficial to project after carefully
weighting its various components.
• The aim of project formulation is to achieve the project objectives with the
minimum expenditure and adequate resources. In other words, it is to derive
maximum benefits from minimum expenses in a short span of time.

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Phases of Project Formulation
• It is the assessment of the feasibility of a proposal based on the
examination of the factors like the capacity of the unit or farm to
produce, the repaying capacity generated by the funds asked for,
the assets and liabilities and so on. These factors are technical,
economic, managerial, financial, commercial, organization and legal.
• The project size is determined by taking into consideration factors
like the areas of operation, the type and level of activities
undertaken, the type and size of organization, amount of
investment is necessary and the time required for the completion of
the activities contemplated under the project.

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3.2 Steps in Project Formulation

As mentioned earlier, project comprised a series of activities of achieving predetermined

objective or set of objectives. The process of project formulation consists the following 7
steps.
Steps in Project Formulation(As per sequence of our chapter)
1. Feasibility analysis
2. Techno-economic Analysis
3. Project Design and Network Analysis
4. Input Analysis
5. Financial Analysis
6. Social Cost Benefit Analysis
7. Pre-investment Analysis
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1.Feasibility Analysis
• This is the very first stage in project formulation. At this stage, the project
ideas are examined from the point of view of whether to go in for a detailed
investment proposal or not. As project idea is examined in the context of
internal and external constraints three alternatives could be considered,
• First the project ideas seems to be feasible.
• Second, the project idea is not a feasible one.
• Third, unable to arrive at a conclusion for what of adequate data. If it is not
feasible, we abandon the idea and if sufficient data are not available, we
make more efforts to collect the required data and design development.

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2. Techno-economic Analysis
• In this stage estimation of project demand potential and
choice of optimal technology is made. As the project may
produce goods or services, it is imperative to know the
market for such goods or services produced. Market analysis
is also in-built in this step. The choice of technology itself will
be based on the demand potential and aid in project design.
Techno-economic analysis gives the project a unique
individuality and sets the stage for detailed design
development.

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3. Project Design and Network Analysis
• This important step defines individual activities which constitute
the project and their inter-relationship with each other. The
sequence of events of the project is presented.
• A detailed work plan of the project is prepared with time
allocation for each activity and presented in a network drawing.
• Project design is the heart of the project entity. This paves the
way for detailed identification and qualification of the project
inputs, an essential step in the development of the financial and
cost benefit profile of the project.

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4. Input Analysis
• This step assesses the input requirement during the construction of
the project and also during operation of the project. In the earlier
step, a project was divided into several activities.
• Now it is better to see to the inputs required for a each activity and
quantitative terms. Inputs include materials, human resources. Input
analyses and considers the recurring as well as the no-recurring
resource requirement of the project and evaluate the feasibility of
these resources.
• This will aid in assessing the project cost itself which in turn is
necessary for financial analysis or cost benefit analysis.

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5. Financial Analysis
• This stage mainly involves estimating the project cost, operating cost and
fund requirements. Financial analysis also helps comparing various project
proposals on a common scale, their by aiding the decision maker.
• Some of the analytical tools used in financial analysis is discounted cash
flow in preparing financial estimates.
• The objective of this strategy is to develop the investment decisions
whether made for the provision of goods or services which involve
commitment of resources in future.
• Since investment proposition has a very long time horizon, it is absolutely
necessary to exercise due care and foresight in developing project financial
forecasts.
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6. Cost-Benefit Analysis
• The overall worth of a project is the main consideration here. While
financial analysis will go to justify a project from the profitability point
view, cost benefit analysis will consider the project from the national
viability point view, here again the project design forms the basis of
evaluation.
• Apparent direct cost and benefit of the project but also the costs
which all entities connected with the project have to bear and the
benefits which will be enjoyed by all such entities.
• This strategy is now taken to be the internationally recognized system
of project formulation.

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7. Pre-investment Analysis

• The project proposal gets a formal and final shape at this

stage.
• All the result obtained in the above steps are consolidated in
such a way that the project sponsoring body, the project
implementing body and the external consulting agencies are
able to decide whether to accept the proposal and to
present the project ideas in form in which the project
sponsoring body, the project-implementing body can take an
investment decision regarding the project.
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3.3. Pre-Investment Phase

• A project may be defined as a written account of various

activities to be undertaken by a firm and their technical,
financial, commercial and social viabilities. The term project may
be used synonymously with capital investment.
• The project development is complex process. The project
development cycle consists of three board phases.
1. Pre-investment phase
2. Investment phase(To be discussed later)
3. Operational phase(To be discussed later)
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1. Pre-investment Phase

• Pre-investment phase is the first step in the project development

cycle. It consists of several stages such as :
i. Project identification
ii. Pre-selection or preliminary project analysis
iii. Feasibility study
iv. Decision making

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1. Project Identification:
• Identification of investment opportunity calls for
analyzing plan priories, demand and supply
projections, pattern of imports export if any, scope of
extending the existing lines of activities or integration,
consumption pattern etc.

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ii. Pre-selection or Preliminary project
Analysis:
• Preliminary project analysis concerns itself with
marketing, technical, financial and economic aspects
of the project. It tries to determine whether the
project is worthwhile to justify a feasibility study or
what aspects of the project are critical to its viability.

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iii. Feasibility Study: Feasibility study is a more detailed
project analysis. It results in a detailed study of the
project in terms of location, production capacity,
production technology and material inputs.
iv. Decision Making: The last step in pre-investment
phase is decision making. After getting all
information about the project decision must be taken
for investment of the project.
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3.4 Feasibility Study
• The project feasibility study means systematic investigation or study about the
project. This study supports whether to start the project or not.
• A project feasibility analysis includes market analysis, technical analysis,
financial analysis and social profitability analysis. Although every feasibility
analysis is different and is tailored to suit the product. Feasibility analysis goal is
to identify the existing strengths and weakness of the project. The starting point
of a project analysis is to establishment of objectives to be attained. The next
stage is the pre-selection stage i.e. the advisability of having an in-depth study.
The analysis stage consists mainly of four factors:
a) Market Analysis,
b)Technical Analysis,
c) Financial Analysis,
d)Managerial Competence
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a. Market Analysis
• A market analysis is a method of screening project ideas as well as means
of evaluating projects feasibility in terms of the market. A market analysis
should cover the following areas:
• A brief description including the market area, method of transportation,
existing rate of transport, channels of distribution and general trade
practices.
• An analysis of past and present demand, determination of quality value of
consumption identification of the major consumers of the product.
• An analysis of past, present supply and future demand expectation as well
as information to assist in determining the competitive position of the
product such as selling prices, quality and market practices of competitor.

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b. Technical Analysis
• The technical analysis of a product feasibility study establishes whether the project is
technically feasible or not and whether its offers basis for the estimation of costs. More
over it provides an opportunity for a consideration of the effort of various technical
alternatives on employment, ecology, infrastructure demand, capital services and
support of other industries, balance of payments and other factors. A technical analysis
should cover the following areas:
i. A description of the product (physical and chemical properties), as well as the uses of
the product.
ii. A description of the selected manufacturing process.
iii. A determination of the plant size and production schedule etc.
iv. Identification of plant location and an assessment of its desirability in term of its
distance from it raw material sources and markets.
v. A determination of the type of quantity of waste to be disposed of, and waste disposal
methods, its costs, and the necessary clearance form proper authorities.
vi. An estimate of the production cost of the product.
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c. Financial Analysis
• In the financial analysis of this feasibility study, emphasis is on the preparation of
financial statement, to know the commercial profitability of the project. It
collects information on which to base on investment decision, as sensitivity
analysis or possibility, a risk analysis may be conducted. This financial analysis
should include:
i. Statement of total cost of project, income statements and cash flow and
balance sheet.
ii. A description about sales, inventory levels, payment period of purchases and
expenses, production cost, selling price administrative and financial expenses.
iii. For all projects a financial analysis showing returns on investments, return on
equity, break-even volume and price analysis.
iv. For all projects, if necessary, a sensitivity analysis to identify items which have
a substantial impact on profitability or possibly a risk analysis.
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d. Managerial Competence
• The technical competence, administrative ability, integrity
and resourcefulness of borrowing top managerial personnel
determine to a great extent the willingness of financial
institutions to accept a term loan proposals.
• The loan application from farms having competent and
honest management finds favorable considerations. It can
therefore be stated that the appraisal of the managerial
competence is of primary importance in the overall appraisal
of a project.

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3.5 Investment Phase
This phase begins with after completion of final decision making. It
consists of several stages:
i. Establishing the legal, financial and organizational basis for the
implementation of the project.
ii. Project and engineering design which is primarily concerned with
probing, prospecting and preparing blue prints and plant designs,
plant engineering, selection of specific machinery and equipment.
iii. Negotiations and contracting. I.e. negotiating and drawing up legal
contracts with respect to project financing, acquisition of
technology, construction of building civil works, provision of
utilities, supply of machinery, marketing arrangements etc.

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i. Pre-production marketing, including the securing of
supplies and setting up the administration of the firm. This
secures critical supplies prepares the market for the new
product.
ii. Construction which includes site preparation construction
of building and civil works, erection and installation of
machinery and equipment.

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3.6 Operational Phase
• This phase is called the implementation of project as follows:
• It is a process whereby “project inputs are converted to project outputs”. It
may be looked at as:
 Putting in action the activities of the project.
 Putting into practice what was proposed in the project document (i.e. transforming the
project proposal into the actual project.)
 Management of the project or executing the project intentions.
• Implementation usually done by implementing agency (organization) that
prepared the project and received funding for it.
• Other organizations that participate in the implementation of the project
• by way of collaboration, say by according good working relationship, extending
technical advice or seconding their staff to the project are referred to as co-
operating agencies.
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Project Implementation phase involves:
• Project activation: This means making arrangements to have
the project started. It involves coordination and allocation of
resources to make project operational.
• Project operation: This is practical management of a project.
Here, project inputs are transformed into outputs to achieve
immediate objectives.

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Approaches to project implementation
• Top-down approach: Implementation mainly done by
agencies from outside the community with limited
involvement by the beneficiaries.
• Bottom-up approach: Beneficiaries implement the project.
Outside agencies may provide the financial resources and
technical assistance.
• Collaborative participatory approach: Both top-down and
bottom-up approaches to project implementation are
applied in the process.

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Project implementation plan (PIP)
If PIP not carried out during the project design process and
embodied in the project documents, it is carried out at the
project activation stage.
Project implementation plan includes the following steps:
a).The project implementation schedule
b).Organizational structure and staffing
c).Financial management
d) Reporting system
e). Sustainability
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a).The project implementation schedule

This is concerned with:

What activities can produce expected project outputs?
What is the sequence of these activities?
What is the time frame for these activities?
Who will be responsible for carrying out each activity?

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The following methods may be used to answer the above questions:
Gantt chart
Critical Path Method (CPM) or Net work analysis
Project Evaluation and Review Techniques (PERT)
• The role of the implementing agency: The specific responsibilities of
the key staff during project implementation and monitoring are
outlined.
• Beneficiary participation: The involvement of the beneficiaries in
planning and implementation and what is expected of them is spelt
out.
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b). Organizational structure and staffing

Here the following are sought:

Project structure for purposes of management
Qualifications and skills for the staff
Job descriptions and specifications for the staff
Technical assistance if needed

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c).Financial management: This looks at funds management, accounting
period, financial reports and statements and how often they will be
made?
d). Reporting system: This looks at who will be reporting to whom and
how often. There is need to design standard reporting formats.
c).Sustainability: The concept of sustainability is based on belief that
project should result in benefits that have lasting effect. Project should
be sustained beyond the life of funding - especially if it is a grant.
Project should not exhaust the available resources like raw materials
and labor.

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• Time control and remedial action: Time taken to implement
project activities is one measure of successfulness of supervision
or monitoring of project implementation. Supervisor pays
particular attention to time control measures, time scheduling and
its supervision, time extension and postponement, damages for
non-completion and defect or warranty period.
• Supervision of implementation of project schedule: This involves
a set of checks and balances to ensure that the schedule is being
adhered to. To ensure that the time schedule is being adhered to,
the project activity time listing can be of great importance.
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Other typical implementation problems
• Poor scheduling of projects leading to delays in implementation.
• Misallocation of funds
• Delay and sometimes lack of counterpart funding
• Lack of accountability and transparency
• Bureaucracy in decision-making.
• Selfishness/nepotism/favoritism by some project managers.
• Weak monitoring systems
• Natural calamities like drought, earthquakes, landslides, and hailstorms.
• Policy changes
• Migration of beneficiaries
• Lack of team work
• Lack of incentives for implementers.
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3.7. Project Monitoring
• What is Monitoring?
• Monitoring represents an on-going activity to track project
progress against planned tasks.
• Monitoring implies observing and controlling the project’s
activities.
• As soon as the project is launched, control or monitoring
becomes the dominant concern of the project management.
• Once the kick off phase is over, planning and control
becomes closely intertwined in an integrated managerial
process
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• The concept of project Monitoring and Evaluation are used in
many ways
• We can think of M&E as a part of continuous
• observation
• information gathering
• supervision (control)
• Assessment.

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Need for Monitoring and Evaluation
• There are many reasons for carrying out project M&E
• Project managers and other stakeholders need to know to
what extent their project is meeting its objectives,
• M&E build greater transparency and accountability in terms
of use of project resources
• Information generated through M&E provide project staff
with a clearer basis for decision-making,
• Future project planning and development is improved when
guided by lessons learned from project experience.

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The Goal of Monitoring
To ensure that the implementation is proceeding as per the plan
To provide records of input use, activities and results
To warn of deviation from the initial objective
Any significant departures from the budget and the schedule must be
reported immediately,
• This will help the project manager to adapt
the project schedule,
the budget,
the work plan to keep the project on track.
• The project progress and changes must be documented and communicated
to the team members in a consistent, reliable and appropriate manner.
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What should be monitored?

A regular comparison of performance against target

Volume of work being completed
Quality of work being completed
Costs and expenditures compared to the plan
Attitudes of people working on the project and others who
are involved with the project,
A search for the cause of deviation
Cohesiveness and co-operation of team members

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What monitoring should accomplish?

Communicate project status and changes to other project

team members
Inform management (and clients) about the status of the
project
Provide the justification for making project adjustments
Document current plans compared to the original project
plan

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Criteria for Successful Project Control
• Use the project plan as the primary guide for co-ordinating
your project.
• Consistently monitor and update the plan.
• Remember that quality communication is a key to control.
• Monitor progress on the project against the plan on a regular
basis.
• Adapt the project schedule, budget and/or work plan as
necessary to keep the project on track.
• Document project progress and changes and communicate
them to team members.
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In many cases project control may appear to be in-effective.

Some of the reasons are:

• Poor information system: Some of the weaknesses
observed in information system are,
Delay in reporting: This will delay initiation of
timely action to curb the adverse development
Unreliable Information: When incorrect
information is provided to the project manager the
control and follow up will become meaningless

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• Human factor: When the operational mangers lack experience,
training, competence and inclination to words controlling activity of
the project
• The characteristics of the project: When project is very large and
complex involving many people the task of control become difficult.
Keeping track of personal performance and expenditure on a large
number of activities is demanding
Coordination and communication problems multiply when several
organization are involved in the project
Proper communication is a key for successful monitoring of the project
activities.
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There are Formal and Informal ways to tell what’s going on .

a. Formal Communication
i. Reports – Status reports must be completed by all team members so
that progress and problems can be identified easily and early.
• Use a standardised form at regular, predetermined intervals.
ii. Audits – Usually performed by objective outsiders who review
progress, costs and current plans.
iii. Project review meetings – Periodic meeting of key team members,
and supervisors to get together to resolve issues
Frequency will depend on size and nature of project and problems
experienced.

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Informal Communication
• General conversations with the team members
• Ongoing interaction with stakeholders
• Observations (management by walking around)

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3.8. Project Evaluation & Control
• Meaning of Evaluation:
• Project evaluation represents a systematic and objective
assessment of ongoing or completed projects in terms of
their design, implementation and results.
In addition, evaluations usually deal with strategic issues
such as
project relevance,
effectiveness,
efficiency in the light of specified objectives,
Project impact and sustainability.
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Periodic evaluations of ongoing projects are conducted at
regular interval.
to review implementation progress,
to predict project's likely effects and
to highlight necessary adjustments in project design

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Terminal evaluations (or final evaluations) are
evaluations carried out at the end of a project. It is
carried out
to provide an overall assessment of project
performance and effects/impact,
to assess the extent to which the project has
succeeded in meeting their objectives and their
potential sustainability.
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Types of Evaluations

The type of evaluation you undertake to improve your

programs depends on what you want to learn about the
program.
• In general, there are two main categories of evaluations of
development projects:
Formative evaluations
Summative evaluations

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Formative evaluations:
This is also called process evaluations.
• It examines the development of the project and may lead to
changes in the way the project is structured and carried out.
• These types of evaluations are often called interim
evaluations.
• One of the most commonly used formative evaluations is the
midterm evaluation.
In general, formative evaluations are process oriented and
involve a systematic collection of information to assist decision-
making during implementation of a project.
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Summative evaluations:
• This is also called outcome or impact evaluations (terminal
evaluation)
• Summative evaluations are usually carried out as a program
is ending or after completion of a project in order to “sum
up” the achievements, impact and lessons learned.
• Such evaluation look at what a project has actually
accomplished in terms of its stated goals

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• There are two types of summative evaluations
• End evaluations: aim to establish the situation and to
identify the possible need for follow up activities
either by donors or project staff
• Ex-post evaluations: are carried out two to five years
after external support is terminated.
The main purpose is to assess what lasting impact the
project has had or is likely to have and to extract
lessons of experience.
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• As in monitoring, evaluation activities must be planned at the project level.
Baseline data and appropriate indicators of performance and results must be
established.
• Many organizations do not have the resources to carry out the ideal
evaluation.
• Therefore, it is recommended that they recruit an external evaluation consultant
to lead the evaluation process.
• This would increase the objectivity of the evaluation.
• Project strengths and weaknesses might not be interpreted fairly when data and
results are analyzed by project staff members.
• When the organization cannot afford outside help, and/or prefers to carry out
the evaluation using its own resources,
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• it is recommended to select an experienced
evaluation expert to advise on
• developing the evaluation plan,
• selecting evaluation methods,
• and analyzing and reporting results

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• Project Control: To control is to compare actual with planned
achievements and take action to correct any adverse deviations. It
involves:
• Plans of Operation: These are the result of the planning process of
Project management.
• Review and Updating: Review is necessary to determine whether the
project is proceeding according to plan or not. Updating is recording the
state of the project as shown by the reviews, or of making amendments.
• Project Action: When review has shown a project to be deviating from
plan, action is required to restore the operation to its planned
characteristics.
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3.9 Project Impact Analysis
• Project impact statement: The response to a change request
is a docu­ment called a project impact statement. It is a
response that identifies the alternative courses of action that
the project manager is willing to con­sider.
• The requestor is then charged with choosing the best
alternative. The project impact statement describes the
feasible alternatives that the project manager was able to
identify, the positive and negative as­pects of each, and
perhaps a recommendation as to which alternative might be
best. The final decision rests with the requestor.

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• The impact study involves looking at the project plan,
assessing how the change request impacts the plan, and
issuing the impact study, which is forwarded to the
management group for final disposition.
• They may re­turn it to the project manager for further
analysis and recommendations or reject it and notify the
customer of their action. The project manager reworks the
impact study and returns it to the management group for
final disposition.
• If they approve the change, the project manager will
implement it into the project plan.
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3.10 Detailed Project Report Format
• SEE THE WORD FILE.

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