PROJECT

MANAGEMENT

UNIT - II

By
Dr. Prateek Gupta
Unit II – Project Formulation

The Project Process

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit II – Project Formulation

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit II – Project Formulation

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit II – Project Formulation

Project Identification

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit II – Project Formulation

Project Identification

• Collection, compilation and analysis of data to locate

potential opportunities for starting business and development
of such opportunities

• Opportunity is a business concept, which if turned into a

tangible product or service, by the enterprise, will result into
profit. It is all about creating values

• The search of a good idea:

– Generate your own idea
– Develop someone else’s idea

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit II – Project Formulation

Importance of Project Identification

• It has long term consequences (make or break)

• Involves commitment which can not be easily reversed
• Ideas are put into action
• Projects are catalytic agents for economic development
• Involves creative use of resources- manpower, capital, raw
materials etc.
• Generates value addition and build-up national capital
• Brings socio-cultural development
• Leads to development of infra-structure and environment

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit II – Project Formulation

Steps in Project Identification

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit II – Project Formulation

Project Identification
Idea Generation or Investment Opportunities
Idea generation is the process of grouping logical thoughts
based on some factors.

Importance:

• Launch of new business / product

• Continuous growth of Organization
• Survival in the competitive Market
• Development of Society

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit II – Project Formulation

Project Identification
Source of Idea Generation
• Performance of existing Industry
• Examining the inputs and Outputs of various Industry
• Review Trade (Local and International)
• Availability of Material and Labour at Low cost
• Price Trend
• Demand and supply Gap
• Government guidelines (legal issues)
• Economic and social Trends
• Study of New Technology and Developments

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit II – Project Formulation

Project Identification
Pre-Feasibility Study / Preliminary Screening

1. A series of steps to know whether or not a

complete detailed feasibility study should be made.
2. Preliminary screening is done with a view to avoid
unnecessary cost and efforts in detailed study.

Collection of data without spending much money

and time:

• Interview with Government Officials

• Interview with Beneficiaries (customers)
• Libraries and other sources of data collection

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit II – Project Formulation

Project Identification
Error in Pre-Feasibility Study

Drop Error:

When a good idea is rejected (Loss of Profit)

Go Error:

When a bad idea is selected (heavy loss)

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit II – Project Formulation

Preliminary Screening Project rating Index Method

PROJECT SCORE SHEET (UNWEIGHTED)
SECTION I - BASIS OF PROJECT DECISION
Definition Level (Rating) Weight Factor Score
CATEGORY 0 1 2 3 4 5 Score (out of 1) Weight X Rating
Element
A. BUSINESS STRATEGY
A1. Building Use
A2. Business Justification
A3. Business Plan
A4. Economic Analysis
A5. Facility Requirements
A6. Future Expansion/Alteration Considerations
A7. Site Selection Considerations
A8. Project Objectives Statement

B. OWNER PHILOSOPHIES
B1. Reliability Philosophy
B2. Maintenance Philosophy
B3. Operating Philosophy
B4. Design Philosophy

C. PROJECT REQUIREMENTS
C1. Value-Analysis Process
C2. Project Design Criteria
C3. Evaluation of Existing Facilities
C4. Scope of Work Overview
C5. Project Schedule
C6. Project Cost Estimate

Definition Levels
0 = Not Applicable, 1 = Complete Definition, 2 = Minor Deficiencies, 3 = Some Deficiencies , 4 = Major Deficiencies, 5 = Incomplete or Poor Definition

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit II – Project Formulation

Steps in Project rating Index Method

• Identify relevant factors (Useful to the project).

• Assign weight to each factor on the basis of importance.
• Rate each factors on the rating scale
• Multiply the factor rating with factor weight (get factor score)
• Make a sum of weighted factor score (get rating index)
• Reject if value is less than desired value
• Accept if value is more than desired value

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit II – Project Formulation

Feasibility Study / Detailed Feasibility study

To identify the selection or rejection of the project by spending money and
time on the basis of primary data in formal way.

Objectives:

• It guarantees the success of the project

• It works as basic ‘Terms of reference’
• Describes nature and complexity
• Gives an idea about investment in project
• Idea of risk involved
• Idea about economic and social benefits

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit II – Project Formulation

Components of Detailed Feasibility study

• Market and Demand Analysis

• Technical Analysis
• Financial Analysis
• Social cost-benefit Analysis
• Environmental and other Risk analysis

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit II – Project Formulation

Support Study / Functional Study

An in depth investigation into any one or a couple of critical aspects of a
project, to help the feasibility study

It may be done:
• Before Pre-feasibility Study
• Before feasibility Study
• After Pre-feasibility Study
• After feasibility Study

Example: Launching of new cola in a market

with a critical factor pricing.

A support study is required to study

specifically price of other competitive
products and cost of self

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit II – Project Formulation

Pre- Feasibility Study Vs Feasibility study

Factors Pre-Feasibility Study Feasibility Study
Objective Whether or not the To determine the true
project idea needs profitability
further investigation

Scope Overview study Detailed Study

Type of Data Secondary Data Mix of Primary and
(informal sources) Secondary data
( both formal and
informal sources)

Time involved Low High

Cost involved Low High
Accuracy Low High

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit II – Project Formulation

Detailed Project Report (DPR)

A formal written document containing the process of project

formulation and briefing the project scope.

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit II – Project Formulation

Project Formulation

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit II – Project Formulation

What is Project Formulation?

Stages of Project Formulation

Project Report

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit II – Project Formulation

What is Project Formulation?

• Taking a first look carefully and critically at the project idea

• Carefully weighing its various components

• Analyzing with the assistance of specialists or consultants

• Assessment of the various aspects of an investment

proposition

• It is an important stage in the pre-investment phase

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit II – Project Formulation

Stages of Project Formulation

1. Feasibility Analysis

2. Techno-Economic Analysis

3. Project Design and Network Analysis

4. Input Analysis

5. Financial Analysis

6. Cost-Benefit Analysis

7. Pre-Investment Analysis

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit II – Project Formulation

1. Feasibility Analysis

• First stage in project formulation

• Examination to see whether to go in for a detailed investment
proposal or not
• Screening for internal and external constraints

Conclusion could be:

• The project idea seems to be feasible

• The project idea is not a feasible one
• Unable to arrive at a conclusion for want of adequate data

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit II – Project Formulation

2. Techno-Economic Analysis:

Screens the idea to-

Estimate of potential of the demand for goods/services

Choice of optimal technology

This analysis gives the project a platform for preparation of

detailed project design

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit II – Project Formulation

3. Project Design and Network Analysis

• It is the heart of the project entity

• It defines the sequence of events of the project

• Time is allocated for each activity

• It is presented in a form of a network drawing

• It helps to identify project inputs, finance needed and cost-

benefit profile of the project

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit II – Project Formulation

4. Input Analysis

• Its assesses the input requirements during the construction

and operation of the project

• It defines the inputs required for each activity

• Inputs include materials, human resources

• It evaluates the feasibility of the project from the point of

view of the availability of necessary resources

• This aids in assessing the project cost

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit II – Project Formulation

5. Financial Analysis:

• It involves estimating the project costs, operating cost and fund

requirements

• It helps in comparing various project proposals on a common

scale

• Analytical tools used are discounted cash flow, cost-volume-

profit relationship and ratio analysis

• Investment decisions involve commitment of resources in

future, with a long time horizon

• It needs caution and foresight in developing financial forecasts

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit II – Project Formulation

6. Cost- Benefit Analysis

• The overall worth of a project is considered

• The project design forms the basis of evaluation

• It considers costs that all entities have to bear and the

benefit connected to it

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit II – Project Formulation

7. Pre-investment Analysis

• The results obtained in previous stages are consolidated to

arrive at clear conclusions

• Helps the project-sponsoring body, the project-implementing

body and the external consulting agencies to accept/reject
the proposal

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit II – Project Formulation

Constraints in project formulation

• Lack of a viable / feasible project idea

• Lack of realistic/ achievable objectives

• Lack of necessary resources / infrastructure to convert idea

into reality

• Policies of government / Legal restrictions

• Lengthy and cumbersome procedures to get finance, start

business

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit II – Project Formulation

Project Formulation

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit II – Project Formulation

Market and Demand Analysis

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit II – Project Formulation

Market and Demand Analysis

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PROJECT MANAGEMENT By: Dr. Prateek Gupta
Unit II – Project Formulation

Market and Demand Analysis

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit II – Project Formulation

Market and Demand Analysis

Provides a detailed analysis of all market condition and

helps in estimating future revenue from the project.

Estimations are made regarding:

• Size of the potential market
• Patterns of consumption
• Market composition
• Level of competition
• Aggregate demand (product /
service) for a period
• Variation in demand
The objective of this analysis is to see the idea generated is feasible from the point
of view of market potential
PROJECT MANAGEMENT By: Dr. Prateek Gupta
Unit II – Project Formulation

Market and Demand Analysis

Objective Specification

Collection of Data Market Survey

Market Description Demand Forecasting

Market Planning

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit II – Project Formulation

Market and Demand Analysis

Objective Specification

First Step:
Specify Objectives

Example:
If the objective is to forecast long term demand to see the
feasibility of project, the questionnaire should be set
focusing on future not on current.

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit II – Project Formulation

Market and Demand Analysis

Collection of Data

Primary Data Secondary Data

• Internal
• External

• Survey Method
• Experimental Method

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit II – Project Formulation

Market and Demand Analysis

Primary Data Obtained from present

and past data of the
firm.

• Internal
• External

Obtained from opinions

of the dealers, feedback
of the sales personnel,
consumers etc.

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit II – Project Formulation

Market and Demand Analysis

Includes interviews,
telephonic interviews
Primary Data and mail survey with
customers and
middlemen.

• Survey Method
• Experimental Method

Includes:
• product testing (product performance done on limited scale),
• psychological techniques (test of subconscious emotions of customers) and
• consumer panel technique (interviewing the same group of consumers on
permanent basis).

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit II – Project Formulation

Market and Demand Analysis

Secondary Data

May be collected from:

• Central Statistical Organization (CSO)

• Census of India
• Centre for Monitoring Indian Economy (CMIE)
• Market Analysis and Research Group (MARG)
• Journal of FICCI
• Others

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit II – Project Formulation

Market and Demand Analysis

Market Survey

Gathering all possible information (primary data) by conducting interviews.

Helpful in:

• Determining the total market demand

• Determining the Demand growth rate in different
segments of the market
• Understanding the inner motives of the customers
• Measuring the unsatisfied need of the customers.

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit II – Project Formulation

Market and Demand Analysis

Steps in Market Survey

• Defining the Target Market (setting the population)

• Selecting the sample
• Developing the Questionnaire (Structured / unstructured)
• Training the surveyors
• Recording the information
• Interpreting the information (testing with the help of statistical tool)

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit II – Project Formulation

Market and Demand Analysis

Market Description

Based on the information obtained from secondary data and market survey, the
project manager try to draw the picture of whole market.

includes study of

• Competition in Market
• Market Segments
• Price Statistics
• Methods of distribution
• Sales Promotion
• Consumers interest

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit II – Project Formulation

Market and Demand Analysis

Demand Forecasting

An art of predicting demand for a product or service at some future date on the
basis of certain present and past behavior patterns of some related events.

Characteristics:

• Accuracy
• Simplicity
• Economy
• Timeliness
• Availability

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit II – Project Formulation

Market and Demand Analysis

Methods of Demand Forecasting

Survey of buyer’s intention To ask customers what they are planning to buy

Collective Opinion Method Salesmen are required to estimate expected sales (territories wise)

Expert Opinion Method Opinion form the experts of the respective fields

Controlled Experiments Use of experiments to control variation with use of variables

Study of General Economic Environment Study of change in economic environment and its impact

Statistical Method Trend Projection, Graphical Method, Regression analysis

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit II – Project Formulation

Market and Demand Analysis

Statistical Methods
of
Demand Forecasting

Data of past is available and ‘no

The input data (like change’ is forecasted in near
sales) and the output • Trend Projection future. A trend will be identified
by plotting the past data on
data (to be affected by • Graphical Method graph and set a trend.
any factor) is to be • Regression Analysis
plotted on graph.

A relationship is
established between
demand and the
independent variables
(like income, prices etc.)

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit II – Project Formulation

Market and Demand Analysis

Market Planning

4 Ps

On the basis of all the points discussed before, the 4 Ps will be designed i.e.
PRODUCT, PRICE, PLACE, PROMOTION

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit II – Project Formulation

Project Technical Analysis

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit II – Project Formulation

Project Technical Analysis

Includes an in-depth study of all technical aspects related to

basis manufacturing operations, detailed design,
assembling etc.

Selection of Right Technology which can produce a Right

Quality product at Right Cost.

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit II – Project Formulation

Project Technical Analysis

Objectives

• Primary
o To see whether the project idea is feasible or not from
technical point-of-view or not.

• Secondary
o To find out the most optimal formulation of the project
technology, size location etc.
o To find out the cost of project, so that profitability can
be calculated.

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit II – Project Formulation

Project Technical Analysis

Activities in Technical Analysis

• Technology Selection
• Material And Utilities Input Requirement
• Flexibility in Product Mix
• Plant Capacity
• Location and Site for the Project
• Selection of Machinery and Equipments

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit II – Project Formulation

Project Technical Analysis

Technology Selection

Is based on:

• Plant Capacity
• Availability of Materials and Input and their
requirement
• Investment Outlay
• Production cost
• Use by Other Units (must be successful earlier)
• Flexibility (in product mix)
• Latest Developments (new version)
• Appropriateness

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit II – Project Formulation

Project Technical Analysis

Material And Utilities Input Requirement

Defining the input requirement and searching availability of those, there

are four categories of Inputs:

• Raw Materials (Agriculture Products, Minerals Products, live-stock etc.)

• Processed Industrial materials and Components (base

metals, semi-processed products, etc.)

• Auxiliary Materials and Factory Supplies (chemicals, additives,

Packaging materials, oils, grease, cleaning material etc.)

• Utilities (Services like power, water, telephone etc.)

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit II – Project Formulation

Project Technical Analysis

Flexibility in Product Mix

As a product varies according to color, quality, sizes etc., the

technology must be according to the product mix.
Example

A shirt manufacturer is required to manufacture shirts of

• Different design
• Different color
• Different sizes etc.

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit II – Project Formulation

Project Technical Analysis

Plant Capacity / Production Capacity

The volume that can be manufactured during a stipulated time. The

factors are as:

• Technological Requirement (To set minimum economic size. For ex:

as in a cement plant minimum capacity should be 300 tones per day)

• Input Constraints (raw materials, power supply, foreign exchange etc.)

• Market Condition (Current demand and future prospects)

• Initial Investment (over plant)

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit II – Project Formulation

Project Technical Analysis

Location and Site Selection

include:

• Nearness to Raw Materials and Market (based on costing and

availability)
• Availability of Infrastructure (Power, Water, communication,
Transportation, etc.)
• Availability of Labour (and cost of labour)
• Government Policies
• Other ( impact on society, climate conditions etc.)

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit II – Project Formulation

Project Technical Analysis

Machinery and Equipments

Depend upon:

• Type of Plant
• Plant Capacity
• Technology selected
• Cost of Machinery and Equipments
• Justification on the basis of Capital Budgeting process

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit II – Project Formulation

Project Technical Analysis

Other Factors

• Civil works, Charts and Layouts

• Work Schedule

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit II – Project Formulation

Project Technical Analysis

Civil works, Charts and Layouts

Civil works denote the application of all the point discussed above in
technical manner.
Charts and layouts are the ways of presentation or forecasting (sort of
structured plan in a stipulated manner).

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit II – Project Formulation

Project Technical Analysis

Various Charts and Layouts

General Functional Layouts

(shows the relationship between equipments, buildings, and civil works. This is
to facilitate smooth movements of Raw Materials, W-I-P, Finished Goods
etc.)

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit II – Project Formulation

Project Technical Analysis

Various Charts and Layouts

Material Flow Diagram

(shows the flow of material, utilities, intermediate products, by products, final
products and their quantities.)

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit II – Project Formulation

Project Technical Analysis

Various Charts and Layouts

Production Line Diagram

(Shows the progress of production)

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit II – Project Formulation

Project Technical Analysis

Various Charts and Layouts

Transport Layout
(shows the distances means of transport outside the production line)

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit II – Project Formulation

Project Technical Analysis

Various Charts and Layouts

Utility Consumption Layout

(shows the principle commodities ‘ consumption (water, gas, power etc.)

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit II – Project Formulation

Project Technical Analysis

Various Charts and Layouts

Communication Layout
(shows how the project is connected with telephone, internet, intercom etc.)

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit II – Project Formulation

Project Technical Analysis

Various Charts and Layouts

Organizational Layout
(shows the organizational setup with inter-relationship)

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit II – Project Formulation

Project Technical Analysis

Various Charts and Layouts

Plant Layout
(shows the physical layout of the plant)

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit II – Project Formulation

Project Technical Analysis

Work Schedule

Reflects the plan of work concerning installation as well as initial

operations. The purposes are:

• To anticipate problems like to arise during the installation phase

and suggest possible means for coping with them.

• To establish the phasing of investments taking into account the

availability of finances.

• To develop a plan operations covering the initial period.

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit II – Project Formulation

Project Technical Analysis

Cost of Project

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit II – Project Formulation

Cost of Project
includes:

• Land and site development

• Buildings and civil works
• Plant and Machinery
• Technical know-how and engineering fees
• Expenses on foreign technicians and training of Indian technicians abroad
• Miscellaneous Fixed Assets
• Preliminary and Capital Issue expenses
• Pre-operative expenses
• Margin money for working capital
• Initial cash losses

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit II – Project Formulation

Project Technical Analysis

Financial Projections

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit II – Project Formulation

Financial Projections
Balance Sheet

Cash Flow Statement

Means of Finance and time

phasing
Cost of Project & Time
Phasing Interest and Loan
repayment

Depreciation
Estimates of
working results Interest on WCA
Cost of Production

Working Capital Tax Factor

needs

Working capital
Production Plans Advance (WCA)

Projected Sales

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit II – Project Formulation

Project Financing & means of Finance

Will be discussed later!!!!

PROJECT MANAGEMENT By: Dr. Prateek Gupta

Unit I – Basic Concept

END OF UNIT - II
THANKS

76
PROJECT MANAGEMENT By: Dr. Prateek Gupta