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. The project cycle consist of various stages in which each stage, not only is
grown out of the preceding ones, but also leads into the subsequent ones.
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:
1. The Baum project life cycle
2. UNIDO project life cycle
3. 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 called “Evaluation “thus making
the stages 5 in number.
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.

1|Page
  Well informed technical specialists and local leaders are also common source of
projects. Technical specialists will identify many areas where they feel new
investment might be profitable, while local leaders may have suggestions about where
investment might be carried out.
 Ideas for new projects also come from proposals to extend existing program.
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. 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. 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:
 Technical- here the appraisals concentrate on verifying whether the proposed project
will work in the way suggested or not.
 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.
 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.

2|Page
  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, at least to the extent envisaged in the plan.
 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.
 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 to do what is required.
 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 project develops.
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 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.
It is 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

3|Page
 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.

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 may do
evaluation like:
 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.

4|Page
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
documented in the UNIDO manual, 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 below:
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
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.

5|Page
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:
 Project engineering designs
 Negotiations and contracting
 Construction and training and
 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
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
 Project preparation( pre-feasibility and feasibility studies ) and
 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.

6|Page
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. 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

7|Page
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 equipment and if required an environmental
impact assessment.
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

8|Page
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:
 Technological acquisition and transfer
 Detailed engineering design and contract, including tendering, evaluation of bids and
negotiations
 Acquisition of land, construction work and installation
 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
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 required inputs
on the other.
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.

9|Page
 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.
The following is the summary of this classification of the project life cycle.
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

10 | P a g e
  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 launch a project. The question at this stage is 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, sectoral or regional plans and strategies supplemented by special
studies often called opportunity studies, conducted with the explicit aim of
translating national and sectoral programmes 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

11 | P a g e
  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 and 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 investment studies.

B. Project Formulation

I. Content of the 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 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,
economical and financial feasibility. Decisions have to be made on the scope of the project,
location, and site etc. Complete technical specifications of distinct proposals accompanied by

12 | P a g e
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, each of which must have been
given special consideration during the project preparation phase:
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 for change as the project
develops?

13 | P a g e
Frequently these questions are the subjects of a specialized appraised report. On the basis of
this report, final decisions are made about whether to go ahead with the project or not.
Following appraisal, some projects may be discarded.
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 implemented.

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.

14 | P a g e
 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 programme/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 the circumstances in which they had to be fulfilled, to assess the impact of the
project activities.

15 | P a g e