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CHAPTER TWO
PROJECT CYCLE
Project cycle is referred to as the various stages through which project planning
proceeds from inception to implementation. It is the project’s life cycle through
which a project advances from infancy to maturity.

Different guidelines, manuals and foreign authors have called project phases by
different names.

1. United Nations Industrial Development Organization

(UNIDO) Project Life Cycle.
UNIDO has divided project cycles into phases and stages as follows.

1. Pre investment phase

1. Identification of investment opportunity (opportunity study)
2. Preliminary selection stage (pre-feasibility study/Analysis of Project
Alternatives)
3. Project formulation stage (feasibility study)
4. Evaluation and decision stage (evaluation report/Project Appraisal
and Investment Decision)
2. Investment phase
1. Negotiation and contracting stage
2. Project design stage
3. Construction stage
4. Preproduction marketing stage
5. Training stage
6. Start up stage
3. Operational phase
1. Long-term views (expansion, innovation)
2. Short-term views (Replacement and Rehabilitation)

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UNIDO PROJECT LIFECYCLE

Pre-selection
Pre-feasibility study

Identification Preparation
Opportunity study Feasibility study

Support Studies
Expansion Pre investment
Innovation phase
Operating Appraisal
phase Appraisal
Replacement Investment Report
phase
Rehabilitation Negotiations and
contracting

Engineering Design
Commissioning and
startup
Construction
Pre-production marketing

Training

 The delineation of each phase and each activity from other is not clear
cut/discrete line. There are several activities undertaken in more than one
phase and the transfer is very slow and gradual.
 Activities are sequential but it is also possible to go back ad revise some of
the activities after once passing that stage.
 All phases of the project cycle lend themselves to important consultancy
from different disciplines and expertise.

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A) Pre investment phase

Pre-investment phase comprises several stages from identification of projects to
evaluation stage. Support studies are conducted during this stage. It is easy to
understand the scope of an opportunity study. But, it is very difficult to phase
into various stages facilitates for studying the possibility of investing in the project
step by step.
i) Opportunity studies
Identifying investment opportunities is the starting point in a series of investment
related activities. Potential investors, private or public from developing and
developed countries are interested in obtaining information on newly identified
variable investment opportunities.

An opportunity study must analyze the following

1. Availability of natural resources
2. The existing agricultural pattern that serves as a basis for agro-based
industries
3. Future demand
4. Imports, to identify import substitutes
5. Environmental impact
6. Possible expansion and diversification possibilities
7. General investment Climate
8. export possibility

ii) Pre Feasibility Studies

The idea of the project that is generated from the opportunity studies must be
elaborated in a more detailed study. But, a feasibility study for a definite decision
is expensive and time consuming. So, before conducting a feasibility study, a
further assessment of the project idea might be made in pre-feasibility study. Such
a study aims at determining whether:

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1. All possible project alternatives have been examined,

2. The project concept justifies a detailed analysis by a feasibility study,
3. Any aspects of the project require support studies,
4. The project idea is attractive enough for a particular investor or investor
group,
5. The environmental situation is in line with the national standards.
A pre-feasibility study should be viewed as an intermediate stage between a
project opportunity study and a detailed feasibility study. The structure of pre-
feasibility study should be the same as that of a detailed feasibility study. The
difference is in the degree of detail feasibility study. The difference is in the
degree of detail of the information. Sometimes, a comprehensive opportunity
study may justify by passing the pre-feasibility study stage.

 Support Studies
Support studies cover specific aspects of an investment project in support of pre
feasibility or feasibility studies. E.g. Market studies, Raw material studies,
Laboratory tests, Location studies etc.
iii) Feasibility Study
Feasibility study aims at providing all data necessary for an investment decision.
Before the final decision is taken to commit resources, the technical, economical
and commercial justification has to be provided in comprehensive and authentic
terms. These should be clarity about the location, the plant size, the material and
the major inputs. Proceeding from this base, capital outlays, production costs, and
expected sales revenues and return on investments have to be ascertained. It
assists in arriving at the final decision to invest. Feasibility study is an essential
document spelling out the economic viability and prospects of the project.
Though the contents of pre feasibility and feasibility studies are the same, more
accuracy is expected in the feasibility study.

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IV) Appraisal Report (Evaluation Report)

When the feasibility study is completed, the various parties involved in the project
will carry out their own appraisal of the investment projects in accordance with
their individual objectives. An evaluation of expected risks, costs and gains of the
project will be done. The project appraisal should be considered as an
independent stage of the pr investment phase, marked by the final investment and
financing decision taken by the project promoters.

Appraisal reports are necessary for getting funds from the financial institutions.
They reveal the health of the company to be financed and the protection of its
creditors.

B) The Investment Phase

The investment or implementation phase comprises of the following stages.
1. Establishing the legal, financial and organizational basis for the
implementations of the project.
2. Detailed engineering design and contracting including tendering
3. Acquisition of Technology, Land, construction work and installation
4. Pre-production marketing, including the securing of supplies.
5. Recruitment and training of Personnel.
6. Plant commissioning and start-up
Detailed engineering design comprises preparatory work for site preparation, the
final selection of technology and equipment, the whole range of construction
planning etc. Tendering and evaluation of bids are important to get
comprehensive tenders from competitive suppliers. This stage covers signing of
contracts between the investor and the contractors, architects, suppliers of raw
materials and financing institutions. The construction stage involves site
preparation, construction of buildings and other civil works.

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The personnel recruitment and training stage is very crucial for the expected
growth of productivity and efficiency operations. Timely initiation of marketing
arrangements to prepare the market for the new products (pre production
marketing) and securing supplies are also very crucial for the commencement of
operations of the project.
C. The Operation Phase
The problem of the operational phase should be considered from both a short and
a long-term viewpoint. The short-term view relates to the initial period after
commencement of production when a number of problems may arise concerning
such matters as the application for production techniques, operation of equipment
or inadequate labor productivity owing to a lack of qualified staff and labor.
Most of these problems have their origin in the implementation phase. The long-
term view relates to chosen strategies and the associate production and marketing
costs as well as sales revenues. These have a direct relationship with the
projections made at the pre investment phase. If such projections prove faulty,
remedial measures will not only be difficult but may probe highly expensive.

 EXPANSION STUDIES
Though the feasibility study aims at new projects, the same techniques can be
applied to the expansion of existing projects. The expansion may be in the form of
1. Increasing the quantity of production or
2. Changing the production program
3. A combination of the two
Expansion should be treated as a new project. In order to prepare a project
proposal, the data of the expansion project must be consolidated with those of the
existing project. Any other changes in location, administration etc. should be
made clear. The financial impact may be expressed in terms of the marginal costs
and benefits.

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2. The Baum Cycle (adapted by the world bank in 1970)

Baum Cycle has five stages. The break down of the phases in the project cycle is
artificial. In reality the process is continues and iterative. The phases are:
I. Identification
II. Preparation (feasibility study)- ex-ante evaluation
III. Appraisal systematic assessment of all aspects of a
project eg technology- appropriateness, social –project
advantage
IV. Implementation
V. Evaluation – added after a certain period (1978). –help to
plan for future

Preparation

Appraisal
Identification

Implementation

Evaluation

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