UNIT - 6

PREPARATION OF
PROJECT
Introduction :
An Entrepreneur , before he sets up an enterprise ,
wants to satisfy himself that it is a Profitable Proposition. He
wants to gather critical information & take decisions pertaining
to various facets (Aspects) – Technical Arrangement , Plant &
Machinery, Market, Financial Arrangement, Location,
Statutory Clearances, in order that the tasks of establishing the
project, & to some extent managing it later, becomes easy.

A project report is an outcome of an exercise meant to

check the viability of an enterprise & analyze & firm up its
essential parameters. There are various phrases in vogue to
refer to project report document.
They are :

a) Business Plan.
b) Feasibility Report.
c) Techno Economic Feasibility Report.
d) Viability Report.
Meaning of Project :
The very foundation of an enterprise is the Project. Hence,
the Success or Failure of an enterprise largely depends upon
the Project. In Simple Words, a Project is an Idea or a Plan that
is intended to be carried out. The dictionary meaning of Project
is that it is a Scheme of something intended to be done ; a
Proposal for an Undertaking, design, speculative imagination
etc.

Two Important aspects have to be borne in mind , Viz., A

scheme & speculative imagination. That is, innovative & vision
form an integral aspect of a Project Planning & these are also
the basic characteristics of an entrepreneur. i.e., Entrepreneur is
always innovative & has a Vision.
 Several Economists & Bankers have defined a Project in
different ways. Let us also examine a few other definitions of
“Project.”

Definition 1 : The Smallest Unit of Investment Activity to be

considered in the case of Programming.
Definition 2 : The World Bank has defined Project as an
approval for a capital investment to develop facilities to
provide Goods & Services.
Definition 3 : A Project is an appraisal for Investment with the
definite aim of producing a flow of Output over a specified
period of time.
Definition 4 :
A Project is defined as the whole complex of activities
involved in using resources to gain benefits.

Definition 5 :
A Project can be defined as a Scientifically evolved
work plan devised to achieve a specific objective within a
specified period of time etc.
 After examining all the above definitions of a Project, it is
important to note that while projects can differ in their size,
nature, objectives, time duration & complexity , yet they have
the following Three Attributes :

1) A Course of Action.
2) Specific Objective.
3) Defined Time perspective (period).

So, we can say that every Project has a starting point , an

end point with specific objectives.
Characteristics of a Project :
Every Project has Four Basic Characteristics :

1) Investment Pattern.
2) Benefits or Gains.
3) Time Limit &
4) Location.

In Short, “ The Project is an Economic Activity with well

defined objectives & having a specific beginning & end.” It should
be amenable to Planning, Financing & Implementation as a Unit
where both Costs & Returns are measurable. A well planned
Project includes a Correct Consideration of Alternatives ,
identification of Key Issues, Compactness, enforceability etc. It
should be Neat, Clear Cut & Specific.
 From the Point of View of Resource Allocation, a Project can
be considered as a proposal involving Capital Investment for
the purpose of developing facilities to provide Goods &
Services.

The Goods or Services which the Project seeks to provide

differ widely. Examples are given below :

a) A Project may provide the establishment of a Modern Cast

Iron Foundry to manufacture castings for automobile
industries.
b) A Project may involve establishing an Information
Technology Company to develop Software Packages for
Exports & so on & so forth.
 Whatever the nature of the Project, a Project will involve
allocation & consumption of resources, on the one hand &
generation of resources, goods & services on the other.

Project Classification :
They are classified on the following basis : (Major
Classifications) :
1) Quantifiable & Non Quantifiable Projects.
2) Sectoral Projects.
3) Techno – Economic Projects.
1) Quantifiable & Non Quantifiable Projects :
Projects for which a plausible Quantitative
Assessment of benefits can be made are called as
“Quantifiable Projects”. Egs of this category are
projects concerned with Industrial Development,
Power Generation, Mineral Development etc.

On the Other Hand, “Non Quantifiable Projects”

are those in which a plausible quantitative assessment
of benefits cannot be made. Egs of Non Quantifiable
Projects are projects involving Health, Education, &
defense.
2) Sectoral Projects :
The Planning Commission of India has accepted
Sectoral Base as the Criterion for Classification of Projects.
According to this Classification, Projects may be classified
as :

a) Agriculture & Allied Sector.

b) Irrigation & Power Sector.
c) Industry & Mining Sector.
d) Transport & Communication Sector.
e) Social Services Sector.
f) Miscellaneous Sector.
This System of Classification has been found useful
in Resource Allocation, especially at Macro Level.
3) Techno – Economic Projects :
Projects are also classified on the basis of their
Techno – Economic Characteristics.
Three Main Groups of Classification in this
Category are given below.

(i) Factor Intensity – Oriented Classification :

On the basis of this Classification, Projects may
be classified as Capital Intensive or Labor Intensive or
Power Intensive depending upon Large Scale
Investment in Plant & Machinery or Human
Resources or High Power Input is involved.
(ii) Causation – Oriented Classification :
In this Category, Projects may be classified as Demand
Based or Raw Material Based Projects. The very existence
of demand for certain goods or services makes the Project
demand based & the availability of certain Raw materials ,
Skills or other Inputs makes the Project Raw Material
Based.
(iii) Magnitude – Oriented Classification :
Here, the Classification of Projects is based on the Size
of the Capital involved in the Projects. Depending on the
Total Project Investment, may be Projects may be classified
as Large Scale, Medium Scale & Small Scale Projects.
It is to be noted that, Techno – Economic
Characteristics based Classification is facilitating the
process of feasibility appraisal.
Project Identification :
Identification of a single or multiple
project ideas is crucial for the purpose of
converting the Entrepreneurial urge into a
recognizable form. Identification of viable
projects or search for Project ideas is a beginning
– an Ice Breaker. It is the first & most important
step in the actual entrepreneurial journey. Well
begun is half done. So, the success or failure of
an enterprise is built , to an extent on a suitable
Project Identification & Selection.
Therefore, establishing yourself as a successful entrepreneur
depends to a great extent upon choosing a Good Project or
Idea. That idea must not only be good for the Market but also
be good for the Project & good for the Entrepreneur. Most
important, the idea should give satisfying results.

As an Entrepreneur, when you are searching for an idea

suitable for your commitment, background & experience, do
not pursue one idea at a time. Develop five or even more
project ideas in parallel until one emerges so appropriate, that it
begins to dominate your thoughts.
Choosing an idea is quite difficult & the Entrepreneur has
to weigh objectively his intrinsic capabilities in finalizing
an idea.
The Project Ideas can be discovered from various
internal & external sources. These may include :
a) Knowledge of Potential Customer Needs.
b) Watching Emerging Trends in Demand for certain
Products / Services & their market size & potential.
c) Scope for producing substitute products which is
economical & having better features.
 d) Going thro various Professional Magazines /
Journals catering to specific interests like Computers,
Electronics & Telecommunication, Mech, Electrical,
Metalurgical, Chemicals, Drugs etc. etc.
e) Success Stories of Known Entrepreneurs or
friends or relatives.
f) Visiting National & International Trade Fairs &
Exhibitions displaying New Products & Services.
g) Meeting Technical / Industrial Consultants.
h) New Product(s) introduced by other enterprises
All of these Sources put together may give a few Ideas about
the possible projects to be examined as the Final Project. This
Process of identifying Project Ideas is referred to as
“Opportunity Scanning & Identification.”
After going thro the above process, assume that you have
been able to get Seven Project Ideas as a result of the above
analysis.
From the Seven Project Ideas you have in mind, finally you
have to decide & choose the One Most Appropriate & Potential
Project idea going thro the following Selection Process :
Project Selection :
After deciding on a few Project ideas, the
Entrepreneur has to finally select, One Project Idea most
suited depending on the following criteria. A tool
generally used for this purpose is called as “SWOT”
Analysis is done. The Intending Entrepreneur analyses
his Strengths & Weaknesses, as well as Opportunities /
Competitive Advantages & Threats / Challenges offered
by each of the Project Ideas.
 A few Important Criteria are given below :

1) Investment Size :
This is a very important criterion to decide success
or failure of the Project. The Entrepreneur should assess
the Economical Size of the Plant & the Total Investment
reqd & should assess his Financial Capability to pool in
at least about 25 % of the Investment required for the
Project. Entrepreneur therefore, should select only such
Projects which are within his financial resources. You
cannot establish an Enterprise only on borrowed funds
& this may lead to severe financial problems in the
Initial Stages of the Project Implementation itself.
2) Location :
Location chosen should have Good Infrastructural
Facilities like Good Approach Road , Transportation Facilities,
Communication Facilities, Availability of Power, Water & reqd
Labor. Also, Location chosen should have good proximity to
the Raw Materials as well as to the Market. Entrepreneurs
should also examine the Concessions & Incentives offered for a
Particular Location as per the Govt Industrial Policy.
It is also advisable to select a location nearer to bigger
cities or Industrially Forward Areas rather then setting up an
Enterprise in Remote rural or Backward Areas just for the sake
of getting better or higher incentives offered by the Govt.
3) Technology :

The Project chosen should not be for a Product

which requires sophisticated technology, necessitating
Foreign Technical Collaboration. It is better to go in for a
Product with a proven technology that is Indigenously
available & where the Entrepreneur himself is well versed
with the reqd technology.
4) Plant & Machineries :
When deciding on a Project, the Entrepreneur should
assess the availability of High Quality Plant & Machineries
indigenously. As far as possible, a New First Project by the
Entrepreneur should not be planned on Imported Plant &
Machineries because of the problems & delays invariably
associated with Imports.
This may lead to Cost Escalation of the Project, & may
affect the implementation schedule of the Project. One should
remember that one should not compromise on the Quality of
the Equipment even if there are little expensive in the
beginning , as they will pay back in the Long Run due to
uninterrupted working. Cheap Poor Quality equipment leads to
frequent breakdowns.
 5) Marketing :
The Success of any Enterprise finally depends
on Marketing Capability of ones Goods / Products /
Services. It is not advisable to get into a Project
particularly the first, which would mean survival
amidst Cut Throat Competition involving Direct
Selling to a large number of Ultimate Customers. One
should go in for Products with a Limited Number (say
10 or 15) of established Industrial Customers.
This also means that there is a Time Interval
involved in between Projects Identification & Final
Projects Selection.
 Project Report :
An Entrepreneur after finalizing & selecting a particular Project for setting up
of his enterprise wants to satisfy himself that this is a profitable proposal.
He wants to gather Critical Information & take decisions pertaining to
various facets (issues) like Technical Arrangement, Arrangement of
Financial Resources, Plant & Machinery , Market, Location, Statutory
Clearances in order that his task becomes easy.
In fact, the Project Report is a Business Plan, this is an Outcome of an
exercise meant to check the viability of an Enterprise & analyze & firm up
its essential parameters. In other words, Project Report or Business Plan is a
Written Document of what an Entrepreneur proposes to take up & his
course of action to establish his Enterprise. The Project Report serves like a
Road Map to reach the Destination determined by the Entrepreneur. Thus, a
Project Report can best be defined as a well evolved course of action
devised to achieve the Specified Objectives within a specified period of
time.
Need & Significance of a Project
Report :
An Objective without a Plan is a Dream. The
Preparation of a Project Report is of great significance
for the Entrepreneur as well as the other Stake Holders
in his business.
There is a variety of purposes which a Project
Report or a Business Plan will fulfill. Hence, its need
in Modern Business. These purposes are as follows :
 Its helps an Entrepreneur judge the viability & profitability of a given
enterprise proposal. If it reveals a proposal to be unviable, the Entrepreneur
will avoid a grave error of investing in an Unsound Venture.
 It is the basis for a Development Bank to sanction Long Term Financial
Assistance & a Commercial Bank to provide Working Capital Assistance.
 It aids the process of firming up Technical Arrangement , Choosing a
Location, Selecting Plant & Machinery, Determining Man Power , & Utility
needs etc etc.. reqd for Project Implementation.
 It generates a Knowledge Base for the Entrepreneur concerning such
diverse facets as Structure of Enterprise – Industry, Market, Raw Material
supply & Technology etc.
 It educates the Entrepreneur regarding the Degree of Risk underlying
the Enterprise Proposal.
 It brings into sharp focus the Key Performance Determinants in the
chosen line of Business & thus makes the Entrepreneur realize the need to
pay special attention to such determinants.
 An Entrepreneur, thanks to his initial enthusiasm,
often fails to notice the blind spots in his proposal. The
biggest advantage of a BP is that it enables him to look at the
proposal in a dispassionate , objective light & encourages
him to search for solutions with reference to the pitfalls in
his proposal.

Finally, once the Project is implemented & is

commissioned , BP serves as a tool to educate the
Entrepreneur by pointing out the assumptions which proved
to be true & those which were too Optimistic or too
Pessimistic. Where, the Entrepreneur embark on another
Project which could be Diversification or Expansion, the
lessons he learnt from the previous one help him to be more
realistic & hence successful in his new BP.
Contents of a Project Report :
A Project Report needs to be done / prepared with great
care & consideration. The Important Contents of a Good
Project Report are given below :
a) General Information :
Information on Product Profile & Product Details.
b) Promoter(s) :
His / Her / Their Educational Qualification , Work
Experience , Project related experience, special
achievements.
c) Location :
Exact proposed location of the Project, lease or
freehold, locational advantages.
d) Land & Building :
Land areas, built up area, type of construction, cost of construction,
detailed plan & cost estimate along with Plant layout.
e) Plant & Machinery :
Details of Machinery reqd , Capacity, Suppliers, Cost, Various
Alternatives Available, Cost of other Miscellaneous Assets.
f) Production Process :
Description of Production Process , Process Chart, Technical
Knowledge, Technology Alternatives Available, Production Programme etc.
g) Utilities :
Water , Power, Steam, Compressed Air Requirements, Fuel, Coal / Oil
etc., Cost Estimates, Sources of Utilities.
h) Transport & Communication :
Mode, its associated Costs.
i) Raw Material :
List of Raw Materials reqd by Quality & Quantity , Sources of
Procurement, Cost of Raw Materials, Tie Up Arrangements, if any , for
Procurement of Raw Materials, Alternative Raw Materials , if any.
 j) Man Power :
The Requirement such as Skilled, Semi Skilled, &
Un Skilled (Helpers), Places of Manpower
Availability, requirement of Training & its Cost.
k) Products :
Product Mix, Product Standard, Estimated
Production & Sales Figures, Alternative Product
Substitutes , if any.
l) Market :
End – Users of Products, Distribution of Market
as Local, National, International, Trade Practices,
Sales Promotion devices etc..
m) Requirement of Working Capital :
Working Capital Reqd , Sources of Working Capital, need
for Collateral Security, Nature & extent of Credit facilities
offered & available.

n) Requirement of Funds :
Break up of Total Project Cost in terms of Costs of Land,
Building, Plant & Machinery, Misc. Fixed Assets, Preliminary
& Pre -Operative Expenses, Contingencies & Margin Money
for Working Capital, Financial Arrangements for meeting the
Cost of Setting up of the Project.

o) Cost of Production & Profitability of first five years,

Break Even Analysis, Schedule of Implementation etc..
 Formulation of a Detailed Project Report
Once a Potential Entrepreneur has made a
tentative decision of exploiting a specific
opportunity , he will be advised to prepare a
Detailed Project Report (DPR). A thoughtfully
prepared Project Report is an important tool as it
helps him in anticipating & solving problems.
It has been experienced that in preparing DPR ,
the Entrepreneur is forced to consider several
Financial & Implementation Problems well in
advance, giving him enough time to solve or prepare
for them.
1) For whom is the Project Report :
This is meant for the Entrepreneur himself. This is an
essential document to procure assistance from Financial
Institutions & to fulfill other formalities for the successful
implementation of the Project.
2) Who prepares the Project Report :
Many a time, the Entrepreneurs feel that he could
relieve himself of the botheration of preparing a Project
Report by engaging a Consultant.