Project Management –MGMT627 VU

LESSON 12

PROJECT SELECTION (CONTD.)

Broad Contents

Q-Sort Model
Pay-back Period
Average Rate of Return
Discounted Cash Flow
Internal Rate of Return (IRR)

12.1 Types of Project Selection Models (Continued):

• Non-Numeric Models:

• Q-Sort Model:
Of the several techniques for ordering projects, the Q-Sort (Helin and Souder,
1974) is one of the most straightforward. First, the projects are divided into
three groups—good, fair, and poor—according to their relative merits. If any
group has more than eight members, it is subdivided into two categories, such
as fair-plus and fair-minus. When all categories have eight or fewer members,
the projects within each category are ordered from best to worst. Again, the
order is determined on the basis of relative merit. The rater may use specific
criteria to rank each project, or may simply use general overall judgment. (See
Figure 12.1 below for an example of a Q-Sort.)

Figure 12.1: Example of a Q-Sort

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The process described may be carried out by one person who is responsible for
evaluation and selection, or it may be performed by a committee charged with
the responsibility. If a committee handles the task, the individual rankings can
be developed anonymously, and the set of anonymous rankings can be
examined by the committee itself for consensus. It is common for such rankings
to differ somewhat from rater to rater, but they do not often vary strikingly
because the individuals chosen for such committees rarely differ widely on
what they feel to be appropriate for the parent organization.

Projects can then be selected in the order of preference, though they are usually
evaluated financially before final selection.

There are other, similar nonnumeric models for accepting or rejecting projects.
Although it is easy to dismiss such models as unscientific, they should not be
discounted casually. These models are clearly goal-oriented and directly reflect
the primary concerns of the organization.

The sacred cow model, in particular, has an added feature; sacred cow projects
are visibly supported by “the powers that be.” Full support by top management
is certainly an important contributor to project success (Meredith, 1981).
Without such support, the probability of project success is sharply lowered.

• Numeric Models: Profit/Profitability

As noted earlier, a large majority of all firms using project evaluation and selection
models use profitability as the sole measure of acceptability. We will consider these
models first, and then discuss models that surpass the profit test for acceptance.

1. Payback Period:
The payback period for a project is the initial fixed investment in the project
divided by the estimated annual net cash inflows from the project. The ratio of
these quantities is the number of years required for the project to repay its
initial fixed investment. For example, assume a project costs $100,000 to
implement and has annual net cash inflows of $25,000. Then

This method assumes that the cash inflows will persist at least long enough to
pay back the investment, and it ignores any cash inflows beyond the payback
period. The method also serves as an (inadequate) proxy for risk. The faster the
investment is recovered, the less the risk to which the firm is exposed.

2. Average Rate of Return:

Often mistaken as the reciprocal of the payback period, the average rate of
return is the ratio of the average annual profit (either before or after taxes) to
the initial or average investment in the project. Because average annual profits
are usually not equivalent to net cash inflows, the average rate of return does
not usually equal the reciprocal of the payback period. Assume, in the example
just given, that the average annual profits are $15,000:

Neither of these evaluation methods is recommended for project selection,

though payback period is widely used and does have a legitimate value for cash
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budgeting decisions. The major advantage of these models is their simplicity,
but neither takes into account the time-value of money. Unless interest rates are
extremely low and the rate of inflation is nil, the failure to reduce future cash
flows or profits to their present value will result in serious evaluation errors.

3. Discounted Cash Flow:

Also referred to as the Net Present Value (NPV) method, the discounted cash
flow method determines the net present value of all cash flows by discounting
them by the required rate of return (also known as the hurdle rate, cutoff rate,
and similar terms) as follows:

To include the impact of inflation (or deflation) where pt is the predicted rate of
inflation during period t, we have

Early in the life of a project, net cash flow is likely to be negative, the major
outflow being the initial investment in the project, A0. If the project is
successful, however, cash flows will become positive. The project is acceptable
if the sum of the net present values of all estimated cash flows over the life of
the project is positive. A simple example will suffice. Using our $100,000
investment with a net cash inflow of $25,000 per year for a period of eight
years, a required rate of return of 15 percent, and an inflation rate of 3 percent
per year, we have

Because the present value of the inflows is greater than the present value of the
outflow— that is, the net present value is positive—the project is deemed
acceptable.

For example:
PsychoCeramic Sciences, Inc. (PSI), a large producer of cracked pots and other
cracked items, is considering the installation of a new marketing software
package that will, it is hoped, allow more accurate sales information concerning
the inventory, sales, and deliveries of its pots as well as its vases designed to
hold artificial flowers.

The information systems (IS) department has submitted a project proposal that
estimates the investment requirements as follows: an initial investment of
$125,000 to be paid up-front to the Pottery Software.

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Corporation; an additional investment of $100,000 to modify and install the
software; and another $90,000 to integrate the new software into the overall
information system. Delivery and installation is estimated to take one year;
integrating the entire system should require an additional year.

Thereafter, the IS department predicts that scheduled software updates will

require further expenditures of about $15,000 every second year, beginning in
the fourth year. They will not, however, update the software in the last year of
its expected useful life.

The project schedule calls for benefits to begin in the third year, and to be up-
to-speed by the end of that year. Projected additional profits resulting from
better and more timely sales information are estimated to be $50,000 in the first
year of operation and are expected to peak at $120,000 in the second year of
operation, and then to follow the gradually declining pattern shown in the table
12.1 below.

Project life is expected to be 10 years from project inception, at which time the
proposed system will be obsolete for this division and will have to be replaced.
It is estimated, however, that the software can be sold to a smaller division of
PsychoCeramic Sciences, Inc. (PSI) and will thus, have a salvage value of
$35,000. The Company has a 12 percent hurdle rate for capital investments and
expects the rate of inflation to be about 3 percent over the life of the project.
Assuming that the initial expenditure occurs at the beginning of the year and
that all other receipts and expenditures occur as lump sums at the end of the
year, we can prepare the Net Present Value analysis for the project as shown in
the table 12.1 below.

The Net Present Value of the project is positive and, thus, the project can be
accepted. (The project would have been rejected if the hurdle rate were 14
percent.) Just for the intellectual exercise, note that the total inflow for the
project is $759,000, or $75,900 per year on average for the 10 year project. The
required investment is $315,000 (ignoring the biennial overhaul charges).
Assuming 10 year, straight line depreciation, or $31,500 per year, the payback
period would be:

A project with this payback period would probably be considered quite

desirable.

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Table 12.1: Net Present Value (NPV) Analysis

4. Internal Rate of Return (IRR):

If we have a set of expected cash inflows and cash outflows, the internal rate of
return is the discount rate that equates the present values of the two sets of
flows. If At is an expected cash outflow in the period t and Rt is the expected
inflow for the period t , the internal rate of return is the value of k that satisfies
the following equation (note that the A 0 will be positive in this formulation of
the problem):

The value of k is found by trial and error.

5. Profitability Index:
Also known as the benefit–cost ratio, the profitability index is the net present
value of all future expected cash flows divided by the initial cash investment.
(Some firms do not discount the cash flows in making this calculation.) If this
ratio is greater than 1.0, the project may be accepted.

6. Other Profitability Models:

There are a great many variations of the models just described. These variations
fall into three general categories. These are:
a) Those that subdivide net cash flow into the elements that comprises the
net flow.
b) Those that include specific terms to introduce risk (or uncertainty,
which is treated as risk) into the evaluation.
c) Those that extend the analysis to consider effects that the project might
have on other projects or activities in the organization.

12.1.1 Advantages of Profit-Profitability Numeric Models:

Several comments are in order about all the profit-profitability numeric models. First,
let us consider their advantages:

• The undiscounted models are simple to use and understand.

• All use readily available accounting data to determine the cash flows.
• Model output is in terms familiar to business decision makers.

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• With a few exceptions, model output is on an “absolute” profit/profitability scale
and allows “absolute” go/no-go decisions.
• Some profit models account for project risk.

12.1.2 Disadvantages of Profit-Profitability Numeric Models:

The disadvantages of these models are the following:

• These models ignore all non-monetary factors except risk.

• Models that do not include discounting ignore the timing of the cash flows and the
time–value of money.
• Models that reduce cash flows to their present value are strongly biased toward the
short run.
• Payback-type models ignore cash flows beyond the payback period.
• The internal rate of return model can result in multiple solutions.
• All are sensitive to errors in the input data for the early years of the project.
• All discounting models are nonlinear, and the effects of changes (or errors) in the
variables or parameters are generally not obvious to most decision makers.
• All these models depend for input on a determination of cash flows, but it is not
clear exactly how the concept of cash flow is properly defined for the purpose of
evaluating projects.

12.1.3 Profit-Profitability Numeric Models – An Overview:

A complete discussion of profit/profitability models can be found in any standard work

on financial management—see Ross, Westerfield, and Jordan (1995), for example.

In general, the net present value models are preferred to the internal rate of return
models. Despite wide use, financial models rarely include non-financial outcomes in
their benefits and costs. In a discussion of the financial value of adopting project
management (that is, selecting as a project the use of project management) in a firm,
Githens (1998) notes that traditional financial models “simply cannot capture the
complexity and value-added of today’s process-oriented firm.”

The commonly seen phrase “Return on Investment,” or ROI, does not denote any
specific method of calculation. It usually involves Net Present Value (NPV) or Internal
Rate of Return (IRR) calculations, but we have seen it used in reference to
undiscounted average rate of return models and (incorrectly) payback period models.

In our experience, the payback period model, occasionally using discounted cash flows,
is one of the most commonly used models for evaluating projects and other investment
opportunities. Managers generally feel that insistence on short payout periods tends to
minimize the risks associated with outstanding monies over the passage of time. While
this is certainly logical, we prefer evaluation methods that discount cash flows and deal
with uncertainty more directly by considering specific risks. Using the payout period as
a cash-budgeting tool aside, its primary virtue is its simplicity.

Real Options: Recently, a project selection model was developed based on a notion
well known in financial markets. When one invests, one foregoes the value of
alternative future investments. Economists refer to the value of an opportunity foregone
as the “opportunity cost” of the investment made.

The argument is that a project may have greater net present value if delayed to the
future. If the investment can be delayed, its cost is discounted compared to a present
investment of the same amount. Further, if the investment in a project is delayed, its
value may increase (or decrease) with the passage of time because some of the
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uncertainties will be reduced. If the value of the project drops, it may fail the selection
process. If the value increases, the investor gets a higher payoff. The real options
approach acts to reduce both technological and commercial risk. For a full explanation
of the method and its use as a strategic selection tool, see Luehrman (1998a and 1998b).
An interesting application of real options as a project selection tool for pharmaceutical
Research and Development (R and D) projects is described by Jacob and Kwak (2003).
Real options combined with Monte Carlo simulation is compared with alternative
selection/assessment methods by Doctor, Newton, and Pearson (2001).

PROJECT PROPOSAL

12.2 Introduction:

Project Proposal is the initial document that converts an idea or policy into details of a potential
project, including the outcomes, outputs, major risks, costs, stakeholders and an estimate of the
resource and time required.

To begin planning a proposal, remember the basic definition: a proposal is an offer or bid to do
a certain project for someone. Proposals may contain other elements – technical background,
recommendations, results of surveys, information about feasibility, and so on. But what makes a
proposal a proposal is, that it asks the audience to approve, fund, or grant permission to do the
proposed project.

If you plan to be a consultant or run your own business, written proposals may be one of your
most important tools for bringing in business. And, if you work for a government agency, non-
profit organization, or a large corporation, the proposal can be a valuable tool for initiating
projects that benefit the organization or you the employee proposed (and usually both).

A proposal should contain information that would enable the audience of that proposal to decide
whether to approve the project, to approve or hire you to do the work, or both. To write a
successful proposal, put yourself in the place of your audience – the recipient of the proposal,
and think about what sorts of information that person would need to feel confident having you
do the project.

It is easy to get confused about proposals. Imagine that you have a terrific idea for installing
some new technology where you work and you write up a document explaining how it works
and why it is so great, showing the benefits, and then end by urging management to go for it. Is
that a proposal? The answer is “No”, at least not in this context. It is more like a feasibility
report, which studies the merits of a project and then recommends for or against it. Now, all it
would take to make this document a proposal would be to add elements that ask management
for approval for you to go ahead with the project. Certainly, some proposals must sell the
projects they offer to do, but in all cases proposals must sell the writer (or the writer's
organization) as the one to do the project.

12.3 Types of Project Proposals:

Consider the situations in which proposals occur. A company may send out a public
announcement requesting proposals for a specific project. This public announcement, called a
Request for Proposal (RFP), could be issued through newspapers, trade journals, Chamber of
Commerce channels, or individual letters. Firms or individuals interested in the project would
then write proposals in which they summarize their qualifications, project schedules and costs,
and discuss their approach to the project. The recipient of all these proposals would then
evaluate them, select the best candidate, and then work up a contract.

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But proposals come about much less formally. Imagine that you are interested in doing a project
at work (for example, investigating the merits of bringing in some new technology to increase
productivity). Imagine that you visited with your supervisor and tried to convince her of this.
She might respond by saying, "Write me a proposal and I will present it to upper management."
As you can see from these examples, proposals can be divided into several categories:

1. Internal Proposal:

If you write a proposal to someone within your organization (a business, a government

agency, etc.), it is an internal proposal. With internal proposals, you may not have to
include certain sections (such as qualifications), or you may not have to include as
much information in them.

2. External Proposal:

An external proposal is one written by a separate, independent consultant proposing to

do a project for another firm. It can be a proposal from organization or individual to
another such entity.

3. Solicited Proposal:

If a proposal is solicited, the recipient of the proposal in some way requested the
proposal. Typically, a company will send out requests for proposals (RFPs) through the
mail or publish them in some news source. But proposals can be solicited on a very
local level. For example, you could be explaining to your boss what a great thing it
would be to install a new technology in the office; your boss might get interested and
ask you to write up a proposal that offered to do a formal study of the idea.

4. Unsolicited Proposal:

Unsolicited proposals are those in which the recipient has not requested proposals.
With unsolicited proposals, you sometimes must convince the recipient that a problem
or need exists before you can begin the main part of the proposal.

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Table 12.2: Solicited Versus Unsolicited Proposals

12.3.1 Request for Proposal:

A Request for Proposal (referred to as RFP) is an invitation for suppliers, through a

bidding process, to submit a proposal on a specific product or service.

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A Request for Proposal (RFP) typically involves more than the price. Other requested
information may include basic corporate information and history, financial information
(can the company deliver without risk of bankruptcy), technical capability (used on
major procurements of services, where the item has not previously been made or where
the requirement could be met by varying technical means), product information such as
stock availability and estimated completion period, and customer references that can be
checked to determine a company's suitability.

In the military, Request for Proposal (RFP) is often raised to fulfill an Operational
Requirement (OR), after which the military procurement authority will normally issue a
detailed technical specification against which tenders will be made by potential
contractors. In the civilian use, Request for Proposal (RFP) is usually part of a complex
sales process, also known as enterprise sales.

Request for Proposals (RFPs) often include specifications of the item, project or service
for which a proposal is requested. The more detailed the specifications, the better the
chances that the proposal provided will be accurate. Generally Request for Proposals
(RFPs) are sent to an approved supplier or vendor list.

The bidders return a proposal by a set date and time. Late proposals may or may not be
considered, depending on the terms of the initial Request for Proposal. The proposals
are used to evaluate the suitability as a supplier, vendor, or institutional partner.
Discussions may be held on the proposals (often to clarify technical capabilities or to
note errors in a proposal). In some instances, all or only selected bidders may be invited
to participate in subsequent bids, or may be asked to submit their best technical and
financial proposal, commonly referred to as a Best and Final Offer (BAFO).

12.3.2 Request for Proposal (RFP) Variation:

The Request for Quotation (RFQ) is used where discussions are not required with
bidders (mainly when the specifications of a product or service are already known), and
price is the main or only factor in selecting the successful bidder. Request for Quotation
(RFQ) may also be used as a step prior to going to a full-blown Request for Proposal
(RFP) to determine general price ranges. In this scenario, products, services or suppliers
may be selected from the Request for Quotation (RFQ) results to bring in to further
research in order to write a more fully fleshed out Request for Proposal (RFP).

Request for Proposal (RFP) is sometimes used for a Request for Pricing.

12.3.3 Request for Information (RFI):

Request for Information (RFI) is a proposal requested from a potential seller or a

service provider to determine what products and services are potentially available in the
marketplace to meet a buyer's needs and to know the capability of a seller in terms of
offerings and strengths of the seller. Request for Information (RFIs) are commonly used
on major procurements, where a requirement could potentially be met through several
alternate means. A Request for Information (RFI), however, is not an invitation to bid,
is not binding on either the buyer or sellers, and may or may not lead to a Request for
Proposal (RFP) or Request for Quotation (RFQ).

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LESSON 13

PROJECT PROPOSAL

Broad Contents

Characteristics of a Project Proposal

Preparation for Future Proposal
Proposal Effort for Specific Proposals
Proposal Efforts
Typical Engineering, Procurement and Construction (EPC) Proposal Contents
Modifications to the Standard Proposal

13.1 Characteristics of a Project Proposal:

The more important characteristics of a project proposal are:

1. Proposal projects are high priority, short duration efforts. They must be completed to the
owners schedule requirement regardless of the work load and other demands on the
contracting organizations.

2. The owner’s specifications for the preferred payment method must be adhered to, at least in
the basic proposal. Alternates which offer benefits to both parties may be suggested for the
owner’s consideration.

3. The owner frequently will specify a particular format for the proposal and for presentation
of the requested information.

4. The owner may express a clear preference as to the location where the project work will be
done. The engineering company may suggest alternate arrangements that give the owner a
more cost effective project without sacrificing the required contract. The base proposal
however, must be as responsive as possible.

5. The owner may have a preference, openly expressed or merely implied, for the construction
labor arrangement. If this preference has not been made clear in the Request for Proposal
(RFP) or in the discussions with the owner, it should be determined at the earliest possible
time in the proposal effort so that the proper construction program may be planned.

6. A proposal project requires forming a team of the representatives for sales, project
management, technical and support functions. Many of these have responsibilities over and
above the proposal project. These work loads must be considered and respected insofar as is
possible.

7. Proposal projects are normally costed against corporate overhead and therefore will be
tightly budgeted and be closely monitored by senior management.

13.2 Preparation for Future Proposal:

Because of the price restraints and the repetitive nature of much of the data used in proposals, it
is helpful to collect as much as possible of the proposal information in advance. This is
especially true for the following areas:

• Proposal project manager should be identified in advance. In a company with a significant

continuing proposals load, a group may be formed consisting of former project managers
with verbal skills and the proper personality to allow them to function in the pressure
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cooking environment of proposal preparation. These individuals must have a high tolerance
for working under tight schedules, stringent budgets, with borrowed personnel, and being
the object of continual criticism which is not always constructive.

• A proposal publication staff should be in place to be fully effective. These individuals

should have skills in editing, use of word processing and reproducing equipment, as well as
graphic art capability. They should be able to work effectively with the masses of material
in various stages of progress to assure that all of it comes together according to the
schedule.

• A technical information data base including the full range of the type of projects offered by
the company, including feasibility studies, engineering projects, as well as full scope
projects for various types of facilities.

• Standard scope of services should be developed that can be readily customized for the
particular project on word processing system. Much of the particular information of various
projects is quiet similar and only requires bringing it into conformance with owner’s
requirements or with those of particular facility of location.

• The company should have developed comprehensive definitions for the various levels of
efforts associated with producing cost estimates of various accuracies. This is particularly
important for developing proposals for feasibility studies.

• Work plans should also be developed for the various basic types of projects. These can be
of general information which can then be modified to conform to the plans for the specified
project under consideration.

• A data bank is helpful to standardize commercial terms and conditions together with listing
that define those costs included in overhead and those which are not. This is particularly
important in reimbursable contracts to control charges to the standard check list and the
resultant changes in the reimbursable unit cost.

• Qualification material should be updated frequently in several different standard formats

such as:

o Project performance data, schedule and cost

o Descriptions of past projects
o Resumes of key personnel
o Write ups on support areas such as:
ƒ Project Controls
ƒ Procurement Procedures
ƒ Material Management
ƒ Quality Assurance Practices

• Typical write ups should be prepared in advance for various other parts of the proposal.
These will be modified to suit the Request for Proposal (RFP) or inquiry document. Among
other these writings include:
o Introduction
o Project Organization
o Schedule
o Project Controls
o Compensation

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13.3 Proposal Effort for Specific Proposals:

Preparation of the proposal may start as soon as there has been a positive indication that the
company will be included in the bid list and preliminary information is available on the project.
Early efforts would include:

• Preliminary assignments for the anticipated proposals would be made based upon the
schedule for the Request for Proposal (RFP) release and the due date of the proposal. These
assignments would include the proposal project manager, the project manager proposed to
head the project, and the proposal publication and technical support personnel. In addition,
the lead estimator, the lead scheduler, technical personnel, procurement and construction
representatives as indicated by the nature of the effort would be selected.

• The preliminary proposal plan schedule and budget should be blocked out. The proposal
plan would define the outline of the proposal and the preliminary assignment of the work.
The schedule would indicate dates for completion of the preliminary draft, job hours and
cost estimates, the final draft dates, the necessary dates for approval, and the publication
and delivery dates.

• A rigorous assessment should be made of the technical aspects of the project to identify the
company’s strengths and weaknesses. Immediate and specific actions should be planned to
boost capability where this is required and to develop the personnel and background
information to cover these critical areas.

When Request for Proposal (RFP) is received, it is reviewed and a bid/no bid decision is made.

13.4 Proposal Effort:

1. Assignment of Proposal to Team Members:

As soon as decision to bid has been confirmed, the assignment of team members is
finalized.

2. Kick-Off Meeting:

The project manager calls a kick-off meeting, at which the time task assignments and
the corresponding schedules are made. At this meeting, technical, legal and
compensation considerations are reviewed and assignments of responsibilities are made.
3. Preliminary Review of the Proposal Text:
All material is typed on word processor, with margins for easier editing. Typed drafts
should be checked carefully against the original draft to assure that nothing has been
inadvertently omitted.
4. Final Review:
When text is essentially in final form and all changes have been incorporated, it is
submitted for review of operations management and for final legal review. All major
changes from this last text review should be flagged so that the signoff should be
obtained quickly.

5. Publication and Signoff

6. Delivery of the Proposal

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13.5 Typical Engineering Procurement and Construction (epc) Proposal Contents:
Following is the summary of the typical contents of cost reimbursable proposal for Engineering,
Procurement and Construction services.
1. Introduction and Summary:

The Request for Proposal (RFP) conditions are summarized and general approach to the
work by the contractor is indicated.
2. Project Description:
This material is largely taken from the Request for Proposal (RFP). It may also include
information that has been obtained by site visits, during pre-bid conference, and in other
contacts with the owner of other knowledgeable sources.
3. Scope of Services:
This section details the services the owner will provide. It includes the services that will
be performed and the documents that will be produced. All services should be well
defined, not opened, even in reimbursable proposals. All of the documents that are to
be furnished as part of the services of the contractor should be listed in detail. A brief
description of what each will include should also be provided.
4. Work Plan and Schedule:
The project work plan is developed in response to the stated objectives of the owner or
as defined by the sales representatives and the objectives of the contracting firm for the
specific proposal. It may be presented in graphic form for showing the interrelationship
between various activities.
5. Project Organization:
This describes the proposed project organization, and details the responsibilities of each
of the key member of the project team. An organization chart depicting the proposed
project team will be drawn. The interface with the supplier of technology should be
carefully defined, and the technical review responsibilities should be carefully defined.
6. Estimates, Hours, Costs:
All of the information presented in the previous sections of the proposal must be taken
into account in preparing the estimates of work. The cost estimates will include salaries
of all technical and non – technical personnel, as well as indirect costs such as travel,
communication, computer use and reproduction.
7. Compensation:
After the estimates have been reviewed, the commercial terms are finalized by adding
those discretionary figures such as burdens, contingencies, overlays and fees required
by the format of the bid. This information is presented in the compensation section of
the bid.
8. Qualifications:

The qualification section of the proposal contains all relevant material arranged in
proper manner to strengthen confidence as to the contractor’s capability in the mind of
the owner’s management. It must always be reviewed to ensure that the information
presented is accurate, pertinent and forceful.
13.6 Modifications to the Standard Proposal:

Many owners have a very specific format which requires that the contractor depart from a
standard proposal format. It is best to follow the specified format as it will help to simplify the
proposal evaluation process in the owner’s office.

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LESSON 14

PROJECT PROPOSAL (CONTD.)

Broad Contents

Common Sections in a Proposal

Organization of winning proposals
Formats of Proposals
Some tips for writing and presenting proposals

14.1 Common Sections in Proposals:

The following is a review of the sections you will commonly find in proposals. Do not assume
that each one of them has to be in the actual proposal you write, nor that they have to be in the
order they are presented here, plus you may discover that other kinds of information not
mentioned here must be included in your particular proposal.

1. Introduction:

Plan the introduction to your proposal carefully. Make sure it caters to all of the
following things (but not necessarily in this order) that apply to your particular
proposal:

• Indicate that the document to follow is a proposal.

• Refer to some previous contact with the recipient of the proposal or to your source
of information about the project.
• Find one brief motivating statement that will encourage the recipient to read on and
to consider doing the project.
• Give an overview of the contents of the proposal.

Remember that you may not need all of these elements, and some of them can combine
neatly into single sentences. The introduction ought to be brisk and to the point and not
feel as though it is trudging laboriously through each of these elements.

2. Background on the Opportunity:

Often occurring just after the introduction, the background section discusses what has
brought about the need for the project; what problem, what opportunity there is for
improving things, what the basic situation is. An owner of pine timberland may want to
get the land productive of saleable timber without destroying the ecology.

It is true that the audience of the proposal may know the problem very well, in which
case this section might not be needed. Writing the background section still might be
useful, however, in demonstrating your particular view of the problem. And, if the
proposal is unsolicited, a background section is almost a requirement; you will probably
need to convince the audience that the problem or opportunity exists and that it should
be addressed.

3. Benefits and Feasibility of the Proposed Project:

Most proposals discuss the advantages or benefits of doing the proposed project. This
acts as an argument in favor of approving the project. Also, some proposals discuss the
likelihood of the project's success. In the forestry proposal, the proposer is
recommending that the landowner make an investment; at the end of the proposal, he
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explores the question of what return there will be on that investment, how likely those
returns are. In the unsolicited proposal, this section is particularly important as you are
trying to "sell" the audience on the project.

4. Description of the Proposed Work (Results of the Project):

Most proposals must describe the finished product of the proposed project. In this
course, that means describing the written document you propose to write, its audience
and purpose; providing an outline; and discussing such things as its length, graphics,
binding, and so forth.) In the scenario you define, there may be other work such as
conducting training seminars or providing an ongoing service. Add that too.

5. Method, Procedure, Theory:

In most proposals, you will want to explain how you will go about doing the proposed
work, if approved to do it. This acts as an additional persuasive element; it shows the
audience you have a sound, well-thought-out approach to the project. Also, it serves as
the other form of background some proposals need. Remember that the background
section (the one discussed above) focused on the problem or need that brings about the
proposal. However, in this section, we will discuss the technical background relating to
the procedures or technology you plan to use in the proposed work. For example, in the
forestry proposal, the writer gives a bit of background on how timber management is
done. Once again, this gives the proposal writer a chance to show that you know what
you are talking about, and build confidence in the audience that you are a good choice
to do the project.

6. Schedule:

Most proposals contain a section that shows not only the projected completion date but
also key milestones for the project. If you are doing a large project spreading over many
months, the timeline would also show dates on which you would deliver progress
reports. And if you cannot cite specific dates, cite amounts of time or time spans for
each phase of the project.

7. Qualifications:

Most proposals contain a summary of the proposing individual's or organization's

qualifications to do the proposed work. It is like a mini-resume contained in the
proposal. The proposal audience uses it to decide whether you are suited for the project.
Therefore, this section lists work experience, similar projects, references, training, and
education that show familiarity with the project.

8. Costs, Resources Required:

Most proposals also contain a section detailing the costs of the project, whether internal
or external. With external projects, you may need to list your hourly rates, projected
hours, costs of equipment and supplies, and so forth, and then calculate the total cost of
the complete project. With internal projects, there probably would not be a fee, but you
should still list the project costs: for example, hours you will need to complete the
project, equipment and supplies you will be using, assistance from other people in the
organization, and so on.

9. Conclusions:

The final paragraph or section of the proposal should bring readers back to a focus on
the positive aspects of the project (you have just showed them the costs). In the final

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section, you can end by urging them to get in touch to work out the details of the
project, to remind them of the benefits of doing the project, and maybe to put in one last
plug for you or your organization as the right choice for the project.

10. Special Project-Specific Sections:

Remember that the preceding sections are typical or common in written proposals, not
absolute requirements. Similarly, some proposals may require other sections not
discussed above. Do not let your proposal planning be dictated by the preceding
discussion. Always ask yourself what else might my audience need to understand the
project, the need for it, the benefits arising from it, my role in it, my qualifications to it,
What else might my readers need to be convinced to allow me to do the project? What
else do they need to see in order to approve the project and to approve me to do the
project?

14.2 Organization of Winning Proposals:

As for the organization of the content of a proposal, remember that it is essentially a sales, or
promotional document. Here are the basic steps it goes through:

1. You introduce the proposal, telling the readers its purpose and contents.
2. You present the background – the problem, opportunity, or situation that brings about the
proposed project. Get the reader concerned about the problem, excited about the
opportunity, or interested in the situation in some way.
3. State what you propose to do about the problem, how you plan to help the readers take
advantage of the opportunity, how you intend to help them with the situation.
4. Discuss the benefits of doing the proposed project, the advantages that come from
approving it.
5. Describe exactly what the completed project would consist of, what it would look like, how
it would work – describe the results of the project.
6. Discuss the method and theory or approach behind that method; enable readers to
understand how you will go about the proposed work.
7. Provide a schedule, including major milestones or checkpoints in the project.
8. Briefly list your qualifications for the project; provide a mini-resume of the background you
have that makes you right for the project.
9. Now (and only now), list the costs of the project, the resources you will need to do the
project.
10. Conclude with a review of the benefits of doing the project (in case the shock from the costs
section was too much), and urge the audience to get in touch or to accept the proposal.

Notice the overall logic of the movement through these section: you get them concerned about a
problem or interested in an opportunity, then you get them excited about how you will fix the
problem or do the project, then you show them what good qualifications you have – then hit
them with the costs, but then come right back to the good points about the project.

14.3 Format Of Proposals:

Following are the options for the format and packaging of your proposal. It does not matter
which you use as long as you use the memorandum format for internal proposals and the
business letter format for external proposals.

• Cover Letter With Separate Proposal:

In this format, you write a brief "cover" letter and attach the proposal proper after it. The
cover letter briefly announces that a proposal follows and outlines the contents of it. In fact,
the contents of the cover letter are pretty much the same as the introduction (discussed in

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the previous section). Notice, however, that the proposal proper that follows the cover letter
repeats much of what you see in the cover letter. This is because the letter may get detached
from the proposal or the recipient may not even bother to look at the letter and just dive
right into the proposal itself.

• Cover Memo with Separate Proposal:

In this format, you write a brief "cover" memo and attach the proposal proper after it. The
cover memo briefly announces that a proposal follows and outlines the contents of it. In
fact, the contents of the cover memo are pretty much the same as the introduction
(discussed in the previous section). This is because the memo may get detached from the
proposal or the reader may not even bother to look at the memo and just dive right into the
proposal itself.

• Business-Letter Proposal:
In this format, you put the entire proposal within a standard business letter. You include
headings and other special formatting elements as if it were a report.

• Memo Proposal:
In this format, you put the entire proposal within a standard office memorandum. You
include headings and other special formatting elements as if it were a report.

If we are in a competitive bid situation, usually price, schedule, financial stability, quality of
experience and resources and financing offer (if any) are relevant. However, many contract
awards are made on a negotiated basis. While success may depend on some or all of the above
features, two others many come into strategic play:
1. Interpersonal relationships with people of the prospective client
2. The written word in the proposal. Conveying the real proposal message with effective
writing is essential.

Below is a list of seven key ingredients of a winning proposal.

i) Message:
That we understand the project, the owner’s real wants, and are prepared to satisfy them
with our resources and company commitment.
ii) Response:
Complete and direct response to the Request for Proposal (RFP) or the bidding
documents. The client wrote them, or at least approved them, and expects to see them
addressed in their entirety.
iii) Disclosure:
Comprehensive documentation of all relevant company experience. Careful attention to
personnel resumes, rewriting them to emphasize pertinent experience.
iv) Creativity:
Something unique or innovative to set us apart from the competition.
v) Price:
Usually but not always a significant factor in competitive proposals on bids.
vi) Financing:
More than ever, an important consideration, even a requirement. Bids are usually
adjusted by financing terms offered, so the product of price and financing determines
the “bottom line”.
vii) Style:

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Well composed, concisely written, logically organized, properly referenced, and
attractively presented.
In preparing the proposal strategy, all of the homework already accomplished needs to be
woven into the plan. Some Request for Proposals (RFPs) (most for engineering work) include
an evaluation system to award proposals a number of points in selected categories. Typical
evaluation criteria may include a point distribution as shown below:
• Qualification of proposed personnel, particularly the project manager: Up to 50%
• Experience on similar projects: Range of 25-35%
• Proposed work plan and approach: Range of 25-35%

Cost or level of estimated effort in terms of man-hour or man-months may well be the deciding
factor. If so, in times of a strong U.S. dollar it very definitely places a U.S. firm at a
disadvantage overseas.
Obviously, if evaluation criteria are specified, every effort needs to be made to achieve the
maximum possible score.
Various techniques are employed in proposal writing, i.e., getting the message across. Aside
from outlines, schedules and tables of contents, one technique, which has come into wide use, is
called the “story board”.
It employs modules organized for each strategic message intended for the proposal. Each
module is composed of:
1. A topical sentence describing the module theme
2. A theme expressing the strategic message in, say 400 –800 words
3. Graphic or artwork to illustrate the theme

Modules from their earlier skeleton form and further developed during the proposal preparation
process are posted on the wall of a control room. When finished they tell the complete story.
This technique permits early organization of the proposal contents, allows continuous
management overview, directs the tone of the proposal toward its strategic objectives, clearly
establishes writing assignments, and produces a balance of content.
A carefully conceived financing package is often a proposal requirement. This subject is
covered in separate former oral presentations, in addition to written proposals, sometimes are
important steps in the process. However, overseas clients generally are less interested in
receiving them than in the United States.
What about post proposal strategies? Continuous contact with the perspective client, in an effort
to answer his questions and to further demonstrate our commitment to his project, can be
worthwhile. If our proposal was not selected, a postmortem will be of value to determine how
we went wrong or how the competition outdid us.

14.4 Some Tips for Writing and Presenting Proposals:

The following tried and tested tips are to encourage the 100%ers to write more proposals and
the low raters to take heart and give it another try.

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1. Ask Questions:
Before starting your proposal, take some time to make sure you know exactly what you
are proposing. If you are unclear about any part of the project, ask your potential client
a few meaningful questions. If anything seems vague in their description of “what they
want”, ask for clarification and then give them a list of possible options as to what you
think they might have meant. For your sake, when preparing to give a price, it is
important that you and the client both have the same amount of work in mind. Note that
if you decide to include a list of questions along with your proposal, include an
educated guess as to what their answers would be. Make it clear that your price is based
on you having made the correct guesses to the proposed questions and that if anything
needs clarifying or if anything is missed, you can adjust your quote accordingly.

2. Summarize the Project:

Take all the information on the project that you have received from the client thus far
and summarize it briefly, using your own words, in an opening paragraph. This not only
helps you get a clearer concept of the project in your own mind but also gives the client
confidence that you have given it thought and you understand what they want. It also
provides a solid opportunity for them to clarify encase you did not understand.

3. Break Down the Project into a Nice “To Do” List:

After your summary, follow-up with a solid “To Do” list, that is very useful for both
you and your client. List everything that they have requested so far as well as your
standard work on the project. For designers, this would include listing the initial drafts,
etc. For programmers, this would include planning the database, building it, etc. Be
thorough in your list. It will help give the client a strong sense that you know what you
are doing and that you will do the job well. It will also help you make sure nothing slips
through the cracks. Use the list in your project updates and cross things off as you move
along.

4. Split the Project into Phases:

After your “to do” list split the project up into a number of clearly defined phases. It is
recommended starting out with a minimum of three. Your first phase might be the
“Initial First Draft”. During this phase, you begin work on the project and end the phase
by sending the client a first draft for testing and revision. Your next phase, in a simple 3
phase project, could be “Bug Squashing and Customizing”. During this phase the
project is tested and revisions are made until the client is happy with the work and it is
ready for action. Your last phase is “Finalization”. Once the work is finished, you send
them an invoice, ask for referrals, collect payment, and end with a virtual handshake, all
parties satisfied with a job well done. Bonus: A useful strategy to keep in mind when it
comes to pricing is splitting up a long to-do list into meaningful project phases and then
pricing each of the “phases” individually. This can be especially useful for isolating
features that require additional time and energy and being sure the client recognizes the
work involved when it comes time to give them the price.

5. Give Your Clients a Timeline:

Once you have gone over the project phases, let your clients know approximately how
long you expect the project to take. Be generous (overestimate if need be, but gently)
and then strive to finish up ahead of time. While a project may only take you a few
hours to finish up, keep in mind that there will be waiting time between the initial drafts
and the finished project as the client reviews the work and provides feedback. If the
client is in a rush, let them know exactly when it can be finished and be sure to go over
in detail exactly what, if anything needs to be done on their part to make that deadline
possible.

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6. Estimate Your Time Involved:
While not useful for all project types, giving an estimate of time involved is useful for
most and not only gives the client a sense of what to expect and that you know what
you are doing, but also helps you know exactly what to plan ahead for. A large
design/programming project, for example, with a high dollar amount, can be an
excellent opportunity to detail the hours involved in each step of the to-do list. Be
generous, but honest. The last thing you want is word getting around that it takes you
several hours to do what takes the average freelancer 15 minutes.

7. Use the Multiple Choice Price Strategy:

Now that all the details have been clearly laid out and your client is confident in your
understanding of the project and your ability to see it through, it’s time to give them the
price. Calculate your predicted time involved and be sure that nothing is overlooked.
Then, give them the total number of hours along with your standard hourly rate
followed by a discounted “flat rate”. Let us say you estimate about 5-8 hours involved
in the project and your hourly rate is $40 an hour. Your proposal would then read
something like this: “At around 5-8 hours of work, you are welcome to my basic hourly
rate of $40 an hour or a discounted flat rate of $250.” 9 times out of 10 the client will
choose the flat rate over the hourly and will be happy with having had the freedom to
choose. Note that as an honest freelance artist whose abilities are constantly improving,
you will often reach a point where what once took you 5 hours now takes you an hour.
Once that happens, the multiple price strategy is no longer needed. Give them your flat
rate and do an excellent job. Be sure that, along with your price, you give them your
options for accepting payment.

8. Offer a Satisfaction Guarantee:

Once you have given them the price, be sure to include your satisfaction guarantee. Let
them know that you are committed to working on the project until they are fully
satisfied and then, once they have accepted your proposal, stick to it. There is always
the possibility that it can backfire with a client who just does not ever seem to be
satisfied (we can talk about dealing with them another day), but the vast majority of the
time a solid guarantee will give your clients an extra vote of confidence and help to
close the deal. There is always the possibility of a project costing you more time than it
is worth, but no matter. Give the project your absolute best and learn everything that
you can. Satisfied customers often end up being repeat customers and they are more
than worth the time spent on those who may not appreciate your work.

9. End With a Call to Action:

Finally, after all the details have been made clear, and the price and guarantee given,
end with “what happens next.” Let them know exactly what they need to do to get
started. If you require payment upfront, let them know where to send the money. If
everything prior has gone well, you now have a client who is excited and eager to see
their project come to life and you want to make sure that they know what needs to
happen next.

10. Write and Format Professionally:

Nothing says “unprofessional” like a bunch of “misspellings”, grammatical errors, and
“IM Style” typing. Take the extra time to proof read your proposal and fix any little
errors that may have slipped in. Use spacing between your paragraphs and divide your
various sections (Project Summary, Timeline, Price Quote, etc.) with subheadings. For
extra points, put your proposal up on a password protected page (make sure the
password works) within your website. Remember if you are struggling with style or
would just like some extra ideas/opinions, put together an example proposal and share it
with family and friends along with a request for feedback.

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Once the proposal has been accepted and the project complete, be sure to always ask the client
if they have any suggestions for how you can improve and do even better work in the future.
Ask them if your proposal was clear and ask if you were able, what the deciding factor was in
choosing you to do the work. Take note of all you learn and apply it to the next proposal you
write. Although not directly related to “proposal writing”, here are two other tips that are worth
mentioning:

1. Pre-Screen your Clients:

To save both you and your client’s time and energy, it is important to be sure that they
are as informed and as prepared as possible before they contact you. This is where your
website can step in and do its job. After they have browsed through your portfolio and
decided to go for a price on your services, it is important that you provide a clear path
to follow. Create a page specifically for those interested in working with you. Outline
the types of projects that you do and the processes that you use. Do not hide your
prices. As well as offering an hourly rate and flat rate estimates for various project
types, it is better to mention that you are always open to creative negotiations. You can
often end up with “free projects” that more than pay what you would have charged
them.

2. Respond Quickly:
While not always possible, when you are able to, respond to your prospective and active
clients immediately. If you have an expected delay, let them know that you plan to be
unavailable. Be punctual with all your appointments and make sure that you meet your
deadlines. If you miss a deadline and you are at fault, take a hit on your earnings. This
will let the client know that you mean what you say and it will also help you to make
sure it does not happen again.

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