The process of turning certain thinking into a work plan is known as project formulation. The lack of something gives birth to thinking. Therefore, thinking is considered to be the initial point of project.
According to Louis J. Goodman says, “Project formulation is a parameter of a project. It aims at gaining preliminary formal commitment to the project ideas. Project identification is the first stage of project planning and the second stage is project formulation and it determines the project objectives and output. It also estimates of various resources required including the project schedule for achieving the project objectives.
The formulation techniques are:
1. Feasibility analysis
2. Network analysis
3. Input analysis
4. Financial analysis
5. Cost benefit analysis
1. Feasibility analysis:
Feasibility analysis is one of the techniques of project implementation. Feasibility study is the study of viability of a project often detailed investigation. It is the basis of project acceptance. It is based on exact information. It helps for evaluating the further implementation. Feasibility study includes following examination.
i. Financial analysis: This studies the total capital requirement, its sources, cash flow projection, etc. to observe whether the project can be conducted or not. It examines the financial sustainability of the project. It covers:
- Capital requirement
- Sources of funds
- Projected cash flow
- Accounting and reporting system
- Project profitability
ii. Economic analysis: Economic analysis studies whether the project is economically viable or not. Cost benefit analysis, NPV, IRR, etc. are examined.
- Cost/ Benefit ratio is calculated and ratio greater than 1 (i.e. benefit/ cost >1 ) should be desired.
- In private projects satisfying rate of return is needed. Project profitability is examined.
- In public projects social cost- benefits are examined. Income redistribution, employment generation, economic growth, social development, poverty reduction, etc. are benefits.
iii. Marketing analysis: This examines whether the project output can satisfy the customers or not. It examines:
- Availability of raw materials as factors of production.
- Market trends and change in demand.
- Potential market share, sales forecast and revenue.
- Marketing mix
- Quality specification
- Competitors and their strength, etc.
iv. Management/ Managerial analysis: This studies whether the institution is capable for managing and controlling the project. It examines the institutional viability. It covers:
- Institutional relationship with donor agencies, regulatory agencies and support agencies.
- Project organization i.e. authority- responsibility relationship and communication channels.
- Project management capacities and limitations.
- Identification of stakeholders.
v. Technical analysis: It examines whether the project is technically viable or not. Alternative technical solutions are examined. It covers following important things:
- Choice of available technologies: Process, machinery, equipment and spare parts and their costs.
- Design requirements: Layout, engineering design and construction material.
- HR requirement: Professional, technical and operative HR.
- Size, location and geology.
- Technical risks.
Finally, feasibility analysis aim to:
- Get necessary technical standard
- Allocate and distribute resources
The feasibility gives the answers of the following questions:
Will the project work?
Can it be improved?
Is there a better way?
Is it worth it?
2. Net work analysis:
Net work is the series of related activities of a project. Network analysis is the study of the sequential order of activities and calculation of the longest time required for the project. Such analysis helps to:
- Define the activities to be done in the project.
- To integrate the activities in a logical time sequence.
- Dynamic control over the progress of the project plan.
PERT is also known as an expected multiple time technique because it consists three types of time, they are the most optimistic time (![]()
, the most pessimistic time ![]()
and the most likely time ![]()
.
Expute time ![]()
= ![]()
PERT and CPM are two most important techniques for network analysis.
PERT is used to plan, schedule and control the activity of complex projects. It provides the information as:
- Finish time of project.
- Start and finish time
- Activities that need to be done first before starting others.
- Reduction on uncertainty in a project.
CPM technique is used for project planning, sequencing and control where the emphasis is on optimizing resource allocation and minimizing overall cost for a given time. CPM estimates one most likely time for completion of each activity.
3. Input- Analysis:
Inputs in projects are those things which are used for implementation of project. Inputs can be human and non-human resources. Major inputs are:
i. Human resources: HR is very important input for project. They are responsible for proper utilization of resources. Right person at the right job is the key to project success. Capability, experience, qualifications and availability of HR should be examined in input analysis. Job responsibilities and job description are analyzed.
ii. Raw materials: Raw materials, semi-finished and finished products are used to produce the product or services. Quality of the raw materials determined the quality of the product/ output. Similarly, easy availability, source, distance of source from project place etc. are crucial factors in material analysis. Analyst must concentrate on these factors because they limit the costs, quality and time of the project.
iii. Machinery: Machinery is another inevitable thing for production work. The raw materials cannot be changed in finished goods in the absence of machinery. The type machinery to be used in the project should be analyzed.
iv. Money or financial resources or capital: Availability of capital, cost of capital, source of capital, capacity to meet financial obligation, profitability, etc. should be clearly studied before planning the project.
v. Information: The present era is the information era. Project quality, cost and time are highly influenced by availability of timely and accurate information. Information must be sufficient, accurate, reliable, updated and probably low costing. Therefore, information is another important factor. Information helps to manage the tasks and reduce the risk and uncertainty regarding risk.
Hence, in this way their analysis becomes most important.
4. Financial analysis:
The financial analysis consists of financial aspect of the projects. It includes:
a. Capital requirement: Analysis should be made by comparing the total cost of the project and the expected return from it. On the other hand, fixed capital and working capital of the project should also be estimated.
b. Sources of fund: There may be both long term and short term funds for the operation of the project. In order to increase the profitability, it is necessary to arrange for the less cost or cost free short- term fund along with the long- term fund.
c. Projected cash flow: To fulfill the economic liabilities statement of projected cash flow receives + expenditure should be prepared.
d. Accounting and reporting system: The report includes long term loan of the organization, their expenditure system, short term loan, current liabilities, outstanding debts, etc.
e. Project profitability: The trading a/c, p/c & B/s etc. should be prepared while explaining the profitability of the project. On the other hand, profitability may be determined by using tools of capital budgeting technique like NPV, IRR, etc.
f. Break-Even analysis:
Assumptions:
- Total fixed cost remains constant
- Variable cost per unit remains constant
- Selling price per unit is given.
It may be clearly presented below:
If the production is over BEP is yields profit and if it is below BEP it occurs loss or at BEP revenue equals cost or R=C. Symbolically,
BEP in Rs. = ![]()
Where, FC = fixed cost
V = variable cost
S = sales
5. Cost benefit analysis:
This cost benefit analysis is the technique of analysis of effects of all the economic aspects of the project. It analyses the cost and benefit by means whether to accept or reject the project. If it is the private sector (project) the profitability analyzed. If it is the public project, the social profitability is analyzed like i) how much the project is useful to the society ii) How much contribution it will do to the national income, employment opportunities, poverty alleviation, etc. It also analyzes the shadow price and opportunity cost.
The bases to select the project from this analysis are:
- By comparing benefits & cost
- By producing benefit- cost ratio
- On the basis of IRR &
- By comparing NPVV cost
Therefore, cost- benefit analysis is used to determine the following.
- Whether a specific project should be undertaken
- Which project should be selected from various alternative projects
- Which time cycle will be beneficial to the project
The answers of these questions are:
Cost > benefit = reject the project
Cost < benefit = accept the project
Cost= benefit= as your wish