CHAPTER TWO

PROJECT LIFE CYCLE

2.1. Project Life Cycle
There are distinct stages that shall be passed in achieving goals of a project and that are repeated
in the right order whenever a project is to be undertaken. Project life cycle refers to the various
stages through which a project passes from its time of inception up to its
implementation/completion. It is the projects life cycle through which a project advances from
infancy to maturity. The stages/phases constitute a specific sequence that is cyclical in nature.
Most, if not all, projects go through a life cycle which varies with the size and complexity of the
project. The main features of this process are information gathering, analysis and decision
making.

These stages of a project life cycle may differ according to the expression of different authors or
institutions. But the basic ones are the pre-investment phase, the investment phase and the
operational phases.

2.2. Project Cycle Models

Project Cycle models differ in their perspective, emphasis and level of detail. Three of these
models are listed below and explained further in detail as follows:
A. The Baum Cycle (World Bank 1970)
B. The New Project Cycle (World Bank 1994)
C. United Nation Industrial Development Organization (UNIDO) Project Life Cycle
D. Development Project Studies Authority in Ethiopia (DEPSAs) Project Cycle (Similar
with UNIDOs PLC)
A. The Baum Cycle (Adopted by the World Bank in 1970)
According to World Bank, project cycle involves four major stages; namely, project
identification, project preparation / project appraisal (feasibility study), project implementation,
and project evaluation.

See the following diagram:

Poject for AcFn,Mgmt and Buad Page 1

 1. Project Identification

2. Project preparation / Project Appraisal

3. Project Implementation

4. Project Evaluation

Lets highlight the major activities in each stage

1. Project Identification
This stage is also called pre-feasibility studies. In this stage, projects that can contribute towards
achieving the specified objectives are identified (listed). Project ideas may come from:
 New experiments from previous project failures
 Replication of successful project tested elsewhere
 New experiments from shortages or excess of resources
 External threats/challenges
 Opportunities
 Internal strengths and/or weaknesses
 Other sources
Project identification is also concerned with elimination of inferior alternatives (projects) from
the identified ones (selection of most impressive project idea). The output of this stage is project
that is prima-facie (at first sight or based on first impression) promising and further work is
justified. Chapter three will present pre-feasibility study in more detail.
2. Project Preparation / Project Appraisal
Project preparation is the most important stage in project planning. Project preparation stage,
also called feasibility study, is concerned with the detailed study of all aspects of the projects.
Project feasibility study is the center of this course and will be explored in detail in chapter four.
Appraisal is the comprehensive and systematic assessment of all aspects of the proposed
project. The project is reviewed (appraised) to confirm that it accords with the broad objectives.
It is to ensure that the project represents a high priority use of the firms resources.

Poject for AcFn,Mgmt and Buad Page 2

 What aspects of the project should be appraised? The project is appraised from different
perspectives: technical, commercial (market), financial, economic and
ecological/environmental.
3. Project Implementation

It is the stage at which the conclusions are reached & decisions made are put into action. What
activities should be done during project implementation? Some of the major activities which
should be done during project implementation phase include:
 Detailed designs and specifications are drawn; (Proper planning to avoid rework and then
reduce cost)
 Tender documents are prepared;
 Bids are invited and evaluated,
 Orders for inputs/required materials are placed;
 Contracts are signed; workers are hired, trained and put to work;
 Materials are moved to sites etc.
4. Project Evaluation
What is the major focus of project evaluation phase? Where it begins? Implementation phase is
followed by supervision and follow up. The execution of the project should be supervised
closely and progress should be reported regularly to ensure that the implementation is
progressing without deviating from the envisaged path and the objectives of the project have
been reached. It is about controlling.
Project evaluation is a monitoring (checking) activity in order to:
 Find out how things are going in the right track or as per plan
 Encourage the project team
 Check that promised resources are in fact working on project tasks
 Rapidly learn about concerns and difficulties
 Show concern for the success of the project
 Take corrective action if things go wrong

B. New Project Cycle (World Bank 1994)

This cycle emphasizes on the issue of participation of different groups in the project. It is
particularly relevant where beneficiary participation is critical to the success of projects. It has
four distinct phases:
 Listening- this is the stage of listening and understanding the needs of the stakeholders
of the completed project.

Poject for AcFn,Mgmt and Buad Page 3

  Piloting- is a stage of trying the success or failure of the project in small scale
operation before scarce resources are spent and wasted.
 Demonstrating-this is the stage of showing the stakeholders the successfulness of pilot
in an effort to convince them accept the whole project idea.
 Mainstreaming- this is the stage of duplicating the pilot as large scale operation and
getting into the main project activity.

It can be shown by the following diagram:

Listening Piloting Demonstrating Mainstreaming

C. UNIDO (United Nations Industrial Development Organization) Project Cycle

According to UNIDO, project cycle involves/encompasses three major phases. These are:
1. Pre-investment phase
2. Investment phase (Implementation phase)
3. Operation phase (operation and ex-post evaluation)
Each of the above stages (phases) will be explained in the section that follows:

1. Pre-investment phase
The pre-investment phase includes four major activities; namely, project identification, pre—
selection, project preparation/ appraisal and project evaluation and decision stage.
A. Project Identification / opportunity study/ Identification of Investment Opportunity
Opportunity study is the main instrument used to quantify the parameters, information and data
required to develop a project idea in to a proposal. What aspects of the project should be
analyzed in opportunity study? In opportunity study, the firm is required to analysis the
following:
 Availability of resources
 Future demand for goods, increasing population and increasing purchasing power.
 Import and export substitutions
 Environmental impact
 Success of similar projects elsewhere
 Possible inter-linkage with other industries

Poject for AcFn,Mgmt and Buad Page 4

  Expansion through backward linkages (Backward integration) and forward linkages
(Forward integration)
 Industrial policies of the government
 General investment climate of the country
 Export potentials
 Availability and cost of production
Generally, opportunity studies can be categorized in to Area studies, Industry studies, and
Resource based studies.
B. Preliminary-selection /Pre-feasibility study/ Analysis of Project Alternatives
This phase involves the analysis of the following factors:
 Examination (investigation) of all possible project alternatives
 Ensure that the detailed analysis of the project is justified.
 In-depth investigation of critical areas of the project
 Examine the attractiveness (viability) of the project
 Investigate the stability of the environmental situation at the location site
The above analyses are based on guess-estimated data.
C. Preparation (feasibility study)
The projects justified by pre-feasibility study enter this phase for detailed analysis based on
investigated efforts than on guess-estimated. This stage provides all data, define, and critically
examine the commercial, technical, financial, economic, and environmental aspects for each
project. In feasibility study phase, window dressing approach should be avoided. What should
be the major components of feasibility study?

The components of feasibility study are:

1. Project Background and history
 Name and address of the promoter
 Project Background
 Project objectives
 Outline of the proposed basic project strategies
 Project location
 Economic and industrial policies supporting the project
2. Summary of market analysis and marketing concepts.
3. Raw materials and supplies
4. Location, site, and environment

Poject for AcFn,Mgmt and Buad Page 5

5. Engineering and Technology
6. Organization and Management
7. Implementation planning & budgeting
8. Financial Analysis and investment appraisal
D. Project Appraisal (Evaluation and Decision Stage)
After feasibility studies are completed, the projects should be presented to the appraising parties.
The appraisal of project is based on the objectives set earlier, the expected risk, costs, and
gains. The quality of feasibility studies makes easier the appraisal work. If the objective of the
appraiser is Return on investment, the project is appraised on this base. That is, the use of
quantitative standards simplifies the evaluation/controlling process.
Types of decisions to be taken during each pre-investment phases
Decision Type of study Decision goal
Identification Opportunity  Identify opportunity
studies  Determine critical areas for support studies
 Determine area for pre-feasibility or feasibility
study.
Pre-selection Support study Determine which of the possible choices is the most viable
Pre-feasibility  Determine provisional viability
study of the project
 Appraise whether the feasibility
study should be launched.
Support  Investigate in detail selected criteria requiring in-depth study
studies
Feasibility  Make the final choices of
Final analysis
study project characteristics
 Determine the feasibility of the
project and selected criteria
Project Evaluation  Make final investment decision
evaluation study
Project Appraisal
Appraisal report

Poject for AcFn,Mgmt and Buad Page 6

2. Investment Phase
The investment phase, also called implementation phase, includes the following activities:
 Establish legal, financial and organizational basis
 Technology acquisition and transfer
 Detailed engineering, design, contracting, tendering & negotiations.
 Acquisition of land, construction works, and installations
 Pre- production marketing, securing of supplies, and setting up administration.
 Recruitment, training, and placement of workers.
 Plant commissioning and startup

3. Operating phase
Once activities listed under investment phase are completed, the project will go in to actual
operation. The operation involves producing the envisaged(imagine) goods, and sale to the
target market, or renders the envisaged service to the target market. The project also requires
evaluation, which deals with the review of whether the project is being implemented as per
expectation. The necessary corrective actions should also be taken if deviation is identified.
.

Poject for AcFn,Mgmt and Buad Page 7

Poject for AcFn,Mgmt and Buad Page 8
 UNIDO PROJECT LIFECYCLE

Poject Analysis and Management Page 9

Poject Analysis and Management Page 10
 Pre-selection
Pre-feasibility study

Identification Preparation
Opportunity study Feasibility study

Support Studies
E Pre investment
x Phase
p Operating Appraisal
a Phase Appraisal
n
s Investment Report
i Phase
o
n Negotiations and
I
n
n
o
v
a
t
i
o
n

R
e
p
l
a
c
e
m
e
n
t
R
e
h
a
b
il
it
a
ti
o
n
Contracting

Engineering Design
Commissioning and
Startup
Construction
Pre-production marketing

Training
Poject Analysis and Management Page 11