Project Formulation

Project Definition
A project is a set of tasks that must be completed within a defined timeline to accomplish a
specific set of goals. It is a temporary and unique endeavour with a specific set of goals,
tasks, and constraints, undertaken to create a product, service, or result. Projects are distinct
from ongoing, routine operations and have defined start and end points.
They typically require a dedicated team, resources, and a well-structured plan to achieve their
objectives within a specified timeframe and budget. Projects can vary in size, complexity, and
purpose, and they are often used to address strategic goals, solve problems, or deliver
innovations in various fields, including business, construction, technology, research, and
more.
Project Formulation
Project formulation is a critical phase in the project management process that involves
defining and planning a project in detail before it is executed. It is an essential step that sets
the foundation for a project's success by clarifying its purpose, objectives, scope, budget,
timeline, and resources. Here are detailed notes on the meaning and concept of project
formulation:

1. Definition of Project Formulation:

Project formulation is the process of turning a general project idea or concept into a well-
defined and structured project plan. It involves converting the initial project concept into a
detailed project proposal.

2. Purpose of Project Formulation:

• To establish clear project goals and objectives.
• To define the project's scope, deliverables, and constraints.
• To create a comprehensive project plan that outlines tasks, resources, and timelines.
• To assess the feasibility and viability of the project.
• To secure stakeholder buy-in and funding for the project.

3. Key Components of Project Formulation:

• Project Objectives: Clearly state what the project aims to achieve. Objectives should be
specific, measurable, achievable, relevant, and time-bound (SMART).
• Project Scope: Define the boundaries of the project, including what is included and
excluded from the project's work.
 • Project Budget: Estimate the financial resources required for the project, including
costs for labor, materials, equipment, and overhead.
• Project Timeline: Develop a project schedule that outlines the start and end dates of the
project, as well as key milestones and deadlines.
• Resource Allocation: Identify the human and material resources needed for the project
and allocate them appropriately.
• Risk Assessment: Analyze potential risks and uncertainties that could impact the
project and develop risk mitigation strategies.
• Stakeholder Analysis: Identify and engage key stakeholders and determine their roles
and responsibilities in the project.
• Feasibility Study: Assess the project's technical, economic, operational, and legal
feasibility.

4. Importance of Project Formulation:

• Minimizes project scope creep and changes during execution.
• Helps in resource allocation and budget management.
• Enhances communication and collaboration among project stakeholders.
• Increases the likelihood of project success by addressing potential issues upfront.
• Provides a basis for monitoring and controlling the project during execution.
• Ensures that the project aligns with the organization's strategic objectives.

Stages of Project Formulation

1. Feasibility Analysis:
❖ This is very first stage in project formulation.
❖ It is done by the entrepreneur in order to evaluate the feasibility of the project.
❖ As it is examined in the context of internal and external constraints, the entrepreneur
may face three alternatives.
❖ First the project idea seems to be feasible, second it is not feasible and third is a state of
confusion with inadequate data.
❖ Depending upon these alternatives, the entrepreneur moves ahead, as if it is feasible-
proceed to the second step.
❖ If not feasible abandon the idea.
❖ If sufficient data is not available-making more efforts to collect the required data to
come to a conclusion.

2. Techno-Economic Analysis:
❖ As the name indicates this analysis is concerned with the technology selected and the
economy of the project idea.
❖ In this step, estimation of project demand potential and the choice of optimal technology
is made.
❖ This analysis produces necessary information on which the project design can be done
appropriately.
❖ It also indicates whether the economy is in a position to absorb the output of the project.
❖ As a project may produce goods or provide services, it requires sufficient market survey
for successful completion of task.
❖ Market analysis is built-in step of this process.
❖ The size of the project and technology used depend very much on the demand potential.
❖ The techno-economic analysis may be described as the combination of two steps: -
• The first is related with the determination of the maximum feasible project output
• Second is with the selection of the optimal technology to get this output.
3. Project Design and Network-Analysis:
❖ Project design is one of the most important and essential part of the project formulation.
❖ This defines individual activities and their interrelationship with each other which are
being performed to constitute the whole project.
❖ This identifies a detailed work plan including all events with time allocation and
presented in a network drawing.
❖ Network analysis is carried out to identify the optimal course of action, so as to execute
the project within the minimum time keeping in view the available resources.
 ❖ This paves the way(opens the door) for detailed identification and quantification of the
project inputs, an essential step in the development of the financial and cost-benefit
profile of the project.

4. Input Analysis:
❖ Project is the combination of several activities required to convert an idea into a reality.
❖ Each activity requires certain input to be complete successfully.
❖ Input analysis is primarily concerned with the identification, quantification and
evaluation of the inputs required during the construction and also during the operation
of the project.
❖ Inputs include all materials as well as the human resources.
❖ Both recurring and non-recurring resources must be considered.
❖ Input requirements constitute the basis of cost estimates of the project and are, therefore,
necessary for financial analysis or cost-benefit analysis of any project.

5. Financial Analysis:
❖ Finance may be considered as the life-blood of a project.
❖ Financial aspects of an investment proposition have a significant impact on the
acceptability or rejection of a project.
❖ Financial analysis mainly involves estimating the project costs, estimation of the
operating cost of project and the fund requirements.
❖ This analysis provides the feasibility report of any project to the entrepreneur to make
decision about the project.
❖ It seeks to find out whether the project will generate revenues to realise the ultimate
objective for which it is being designed.
❖ It reduces investment propositions to one common scale so as to permit comparison and
eventual investment decision.
❖ As investment proposition has a long-time horizon, this analysis needs due care,
professional guidance and foresight of planner.
❖ Some of the analytical tools used in financial analysis are discounted cash now cost
volume profit relationship, break-even analysis and ratio analysis.
❖ This can provide data for calculating the different profitability criteria with a view to
establish the projects

6. Cost-Benefit Analysis:
❖ As we have read that entrepreneurs are like the back-bone of economic power of any
country.
❖ So, their projects must provide some national interests.
 ❖ Under this analysis, estimation of social costs and social benefits are made for the
computation of social profitability of the project.
❖ This is mainly to find out the impact of the project on the society.
❖ As financial analysis will provide the profitability point of view for any project. the
cost-benefit analysis will consider the project from the national viability point of view.
❖ Here again, the project design provides the basis of such evaluation.
❖ The methods of estimating the shadow prices or impute prices, social discount rate, etc.,
are to be explained and the calculations are to be presented in separate statements or
tables.
❖ However, most of the data obtained from the financial analysis could be adjusted to
reflect the true social values and use.
❖ This information gathered would be used mostly for providing the profit criteria for
public project appraisal and evaluation.
❖ Social cost-benefit analysis is now an internationally recognised system of project
formulation.

7. Pre-investment Appraisal:
❖ The results of all above defined analysis and steps i.e., the feasibility analysis, the
techno-economic analysis, the design and network analysis, the input analysis, financial
analysis and the social cost-benefit analysis are consolidated in this step to provide a
final and formal shape to the project.
❖ At this stage, the project is presented in such a way that the project-sponsoring body,
implementing body and other consulting agencies could be in the position to take
decision

Project Appraisal

Project appraisal is a systematic process used to evaluate the potential benefits, risks, and
overall feasibility of a proposed project before it is approved and implemented. This process
is essential for making informed decisions about whether to proceed with a project, modify
its scope, or abandon it. Project appraisal considers various factors, including financial,
economic, technical, social, and environmental aspects. Following are the key concepts and
features of project appraisal:
Concepts of Project Appraisal:

1. Assessment of Viability: Project appraisal aims to determine whether the proposed

project is viable and aligns with the organization's goals and objectives. It helps
stakeholders assess the potential for success and profitability.

2. Risk Evaluation: Project appraisal involves a thorough analysis of potential risks and
uncertainties associated with the project. This includes identifying and quantifying risks
and developing strategies to mitigate them.

3. Resource Allocation: It helps in evaluating the allocation of resources, including

financial, human, and physical resources, to ensure they are used efficiently and
effectively to achieve project goals.

4. Decision-Making: The results of the appraisal process inform decision-makers about

whether to approve, modify, or reject the project proposal. It provides a basis for making
informed investment decisions.

Features of Project Appraisal:

1. Multidimensional Analysis: Project appraisal considers various dimensions, including

financial, economic, technical, social, and environmental aspects, to provide a
comprehensive evaluation of the project's feasibility.

2. Objective Assessment: The appraisal process is conducted objectively and without bias
to ensure that the project's true potential and risks are accurately assessed.

3. Stakeholder Involvement: It involves the participation of relevant stakeholders,

including project sponsors, management, experts, and affected communities, to gather
input and insights for a holistic assessment.

4. Detailed Documentation: Project appraisal generates detailed documentation, such as

feasibility studies, reports, and financial models, which serve as references for decision-
making and project planning.

5. Risk Management: It identifies and evaluates potential risks associated with the project
and develops risk mitigation strategies to minimize adverse impacts.

6. Financial Analysis: Project appraisal includes financial assessments to determine the

project's cost estimates, revenue projections, return on investment (ROI), payback
periods, and cash flow analysis.
7. Economic Analysis: Economic evaluation assesses the broader economic impact of the
project, including its contribution to the local economy, employment generation, and
long-term economic sustainability.

8. Social and Environmental Impact Assessment: It considers the social and

environmental consequences of the project, including its effects on communities, culture,
and the natural environment. Mitigation plans may be developed to address negative
impacts.

9. Sensitivity Analysis: Sensitivity analysis is often conducted to assess how variations in

key project variables (e.g., cost, revenue) would affect project outcomes. This helps in
understanding the project's robustness in different scenarios.

10. Comparative Analysis: In some cases, project appraisal involves comparing the
proposed project with alternative options or scenarios to determine which one offers the
best value or benefits.

11. Continuous Monitoring and Review: Project appraisal is not a one-time process. It
should be followed by continuous monitoring and periodic reviews throughout the
project's lifecycle to ensure it remains on track and continues to deliver expected benefits.