Chapter 4

PROJECT PREPERATION

4.1 Introduction
Once a project has been identified, the next stage of the
project development cycle would be project preparation. This essentially involves the
conduct of a feasibility study, the purpose of which is to
determine whether the project can and should be undertaken and if
so, how and when.
The importance of the project preparation stage in the project cycle
Cannot be over-emphasized. It is the stage wherein the project is
design to achieve maximum benefits at the lowest possible cost. A
well-balanced and well-prepared feasibility study forms the basis for the sound project
design and increase the probability of success of a project. It
is at this stage that various concerns of policy can be
operationalized.

The two general steps in the project preparation are:

a) Preparation of a feasibility study that will provide information to determine
whether or not to proceed with more detailed planning; and
b) Detailed planning and analysis once the feasibility studies have indicated which
Projects would be worthwhile pursuing.

This chapter gives an overview of the main considerations in project

preparation. First, it presents the major areas of project study such
as the market, financial, technical, economic, and operational analysis. Next, the
levels of feasibility analysis are discussed, including the preparation of
terms of reference for the conduct of a feasibility study, with
a sample for a road feasibility study provided as annex. Finally,
some practical considerations in preparing feasibility studies are
provided.

4.2 Areas of Study

A feasibility study involves five functional areas of analysis; namely, market
Technical, financial, economic, and operational.(Chapter 5 to 10 provide more
detailed discussion of these aspects).
These areas of the study are closely interrelated; for example, the financial
Income is estimated from sales projected in the market study, which
In turn are partly determine from the estimates of the levels and
cost of production assessed in the technical study. In most cases,
a comprehensive analysis of one aspect is hardly possible without referring
to findings in other sections of the feasibility study. However, depending
on the nature and size of the project under consideration, the
area of analysis may vary in degree of importance. For instance,
the identification of a critical demand for a basic good or
service may, in itself, constitute sufficient justification for carrying out the
project.
The functional areas of feasibility study are presented below in the
usual order of investigation together with their corresponding sets of
specific feasibility criteria.

4.2.1 Market Aspects

The purpose of the market study is to determine the extent
to which the product/service to be generated is needed or
demanded; and to design appropriate marketing plans and strategies for the
project’s output. Hence, the quantity and quality of the goods services
demanded, as well as the trend over time of this demand
are surveyed. The levels and trend of supply are similarly assessed.

Project Preparation

To arrive at the expected net demand. It is essentially towards

This expected net demand that the project under consideration should be
Directed.
The criteria for determining the extend of marketability of the goods
and/ or services(carrying a market price) to be generated by
the project include.
a) Magnitude of existing and projected demand for product/service
not covered by current or forecast supply;
b) Competitiveness of product/service with respect to quality and price
and
c) Effectiveness of marketing program and organization(Chapter 5)

4.2.2 Technical Aspects

The purpose of the technical study is to identify and analyzed

alternative ways of carrying out the project in terms of its
size, location, basic technical features, resources requirements, phasing of implementation, and
social acceptability. Cost for the alternative schemes are estimated and
compared.

In the case of agricultural development projects this would involve analysis

of outputs and inputs of individual farm units within the project
area through the use of farm models. This, in turn, leads
to the determination of the farm’s operational and financial feasibility through
the use of farm bugets.

The criteria for determining the technical feasibility of each alternative are
The following:
a) Size, location, and technology are commensurate and appropriate to the demand.
b) All technical features are reasonable define and found to be workable,
adequate, and socially acceptable;
c) Input resources are available in the required quantities and qualities; and
 d) There is assurance that the goods/services can be produced in
the quantities and qualities required on a continuing and dependable basis
(Chapter 6).

4.2.3 Financial Analysis

The purpose of the financial study is to determine the financial

Feasibility and, where relevant , the dept-service capacity of the project .Areas
of investigation include a comparison of the financial cost of project
implementation and operation with the expected incomes over the project’s lifetime.
In the case of agricultural development projects, this would also involve
farm income analysis. The objective is to determine the incremental returns
that the individual farm households may be expected to generate as
a result of the incremental inputs that they would put in.
For revenue-generating projects to be considered financially feasible, expected earnings
Should sufficiently cover total project cost including maintenance, permit full servicing
of dept, and yield a reasonable margin of profit to the
producing/operating entity (Chapter 8).

4.2.4 Economic Analysis

The purpose of economic analysis is to determine the project’s net

contribution to the national economic and social welfare. This is done
through a comparison of economic and social benefits expected to
be generated from the project with the social and economic cost
of its implementation and operation. The project is considered economically feasible
if after proper discounting, the benefits exceed cost (Chapter 9).

4.2.5 Operational Aspects

The purpose of operational study is to determine whether the

Project can in fact be implemented and put into operation, considering
the political, legal, organizational, managerial, institutional, and other administrative constrains
which may impinge upon the process of project implementation/operation.
The criteria for determining operational feasibility of the project include
the following:
a) Political acceptability and legality of the project;
Project Prevention
b) Adequacyof the organizational and institutional arrangements for the projects
implementation/operation; and
c) Availability and adequacy of resources for the projects implementation/operation
(Chapter 10).

4.3 Levels of Feasibility Analysis

There are two stages in assessing project viability; prefeasibility study and feasibility
studies. In substance, the two are similar differing mainly in the
degree of detail and accuracy involved.
4.3.1 Prefeasibility Study
At the outset, it may be necessary to conduct a prefeasibility
Study of the project primarily to:
a) Narrow down the range of possible alternative solutions;
b) Ascertain whether on the basis of the results obtained , the allocation
of scarce resources for the preparation of a more detailed feasibility
study is warranted; and
c) Establish the work program for further development of the project.
Prefeasibility studies are sometimes considered part of the identification stage,
particularly when a selection has to be made among a large number
of alternative project ideas. In the prefeasibility study, alternative ways of
carrying out the project should be examined at a relative speedy
and economical manner to arrive at a reasonable idea of
the extent of project feasibility. Alternatives found to be highly unfeasible
are immediately screened out to reduce the number of solutions to
be subjected to the subsequent detailed feasibility study. In this manner,
the feasibility study will become more manageable in scope and more
likely to yield positive results, thereby insuring better use of
time and resources than if a full-scale feasibility study were undertaken
at once.
a) General study procedures. As the prefeasibility study is essentially a simplified
version on a feasibility study, the method for carrying out its
various phases should follow the basic procedures for feasibility studies outlined
in Chapter 5 to 10.

In general, the following major steps are involved:

1) A rapid analysis is made of the present and future net
Demand to determine the maximum quantity of the goods/services to
Be provided by the project
2) Alternative technical schemes to meet this demand are considered, and an
Assessment of the size, location, and technical soundness of each alternative
Is made;
3) Implementation and operation cost of each alternative are estimated usually on
the basis of certain cost standards;
4) Benefits derived from each alternative are quantified;
5) Cost and benefit comparisons are made to ascertain the economic and
financial feasibility of each alternative; and
6) Based on all of the above, a plan for subsequent stages
Of project development is drawn up.
b) Data base. To a large measure, information is derived from
Secondary data that can be immediately obtained from relevant empirical investigations
and pertinent literature. Information may also be derived from past experiences
in the preparation and implementation of similar projects. In some cases,
there may not be any needed to undertake entirely new surveys
and test if data of appropriate quality can be extracted from
existing processed materials. However, timeliness of the input data, especially those
derived from previous records, is an important consideration. Antiquated data would
be less reliable than more recent ones.
 4.3.2 Plan for Further Project Development

Depending on the results of the prefeasibility study, any of the

Following decisions may be taken:
a) Reject the project;
b) Defer conduct of detailed feasibility study;
c) Proceed directly to detailed design and implementation; or
d) Conduct a detailed feasibility study.
a) Rejection. Should the analysis conclusive reveal that

Project Preparation

None of the possible project alternatives is feasible from the technical

and/ or economic /financial viewpoint(s) even in the remote future, then
the project should be discarded outright.
b) Deferment. Should the analysis reveal that the project can be feasible
only if implemented in a relatively distant future, then the detailed
feasibility study of the project should be postponed. Deferring the execution
of the study is advantageous since the demand and supply characteristics
may drastically change during the interim period.
c) Detailed design and implementation. The economic and technical soundness of the
project may turn out to be highly evident during the prefeasibility
study. Thus there is no point in spending additional resources for.
a detailed feasibility study. In such case, it is only logical
to immediately proceed from the prefeasibility study phase directly to detailed
design and project implementation.
d) Need for a feasibility study. A detailed feasibility study is necessary
only if the results of the prefeasibility analysis indicate any of
the following:
1) More detailed information is required to produce more conclusive results;
2) Alternative schemes of the project are nearly of the same degree
of feasibility and/or show marginal feasibility; and
3) New alternative solutions have emerged whose feasibilities need to be ascertained
through more detailed analyses.

4.3.3 Feasibility Study

Before a feasibility study is actually conducted, a terms of reference

is prepared to indicate the objective of the study, scope of
study, methodology, work program, resource requirements, and participating entities. This is
to ensure that all relevant fields of study are covered and
organized, responsibilities for undertaking each phase delineated, analytical procedures to be
used made clear, and resources required for conducting the studies ascertained
and provided for.
Efforts devoted to the preparation of clear-cut terms of reference
usually pay off well in terms of speedy completion of the
feasibility study with minimum expenditure of resources. In contrast, it has
been widely observed that, where a project study is not based on
a carefully formulated work plan, it tends to get enmeshed in
overextended researches into areas that are really peripheral to its main
objective of ascertaining the technical and economic soundness of the project,
or in detailed investigations that do not substantially influence the degree
of project feasibility. This apply in particular to large projects
for which an in-dept feasibility study may have to be contracted
to a consulting firm. Clear-cut terms of reference are also
recommended for the preparation of smaller projects, whenever a team of
project analysts are to work together, as a basis for efficient
and effective cooperation.
a) Objective of the study. The purpose of the feasibility study should
Be set out in clear and comprehensive terms. It is not
enough to say that the project study should be undertaken to
determine whether or not a project should be carried out. Finding
out the best scheme of doing the project to satisfy the
demand, its technical standards, the optimum timing to its for its implementation, the
impact of the project on related sectors, the complementary projects required,
etc. also constitute study objectives. The explicit statement of study objectives
guide and direct the entire project development exercise.
b) Scope of study. To achieve the study objectives, statistical data and
other information on the five functional areas of feasibility analyses are
to be gathered and evaluated. The data requirements have been specified
in the terms of reference . Likewise, the geographic area and/ or
category of project beneficiaries of study of the study must be define at the
outset, the area or population can be broadly delineated from
a consideration of the likely influence area of the project based on
an assessment of the market. As the study progresses, this area
can be define more precisely.
c) Methodology. A vital component of the terms of reference is the
study methodology, I.e., the analytical procedure to be followed in order
to facilitate the orderly development of the project. Study procedure should
conform with universally accepted practice of project analysis. They should specify, among
other things:

1) Methods for data collection and organization;

2) Feasibility evaluation techniques, including the factors and parameters to be considered;
And
3) Degree of detail detail desired.
A basic framework of the methods and techniques normally applied for
Each study area is discussed in subsequent chapters, but this should
Be recast if necessary to suit the particular nature of the
Project and circumstances at hand. For instance, the demand estimation procedure
For transport services would naturally vary from the one applicable to
Industrial goods in terms of required information and computation.
d) Program of work. A general time-based program of work indicating
the sequence of the various analytical operations, together with their functional,
interlinkages, should be presented. A simple time-scaled flow chart or network
diagram could be used here. The sequential and functional interrelationships should
be clearly defined since outputs of analysis of the study
area may serve as inputs of another.
e)Resource requirements. Resource needs of the project study are determined from
The work program in terms of the kinds and amount of
Manpower, equipment, and materials to be used for specific time periods.
Translating these needs into costs, a budget is prepared indicating the
Periodic expenditures to be incurred and the schedule of financing.
The budget for a given project study may be preestablished by
Funding limitations. Such limitations restrict the design of the work program.
In these cases, requirements of the study should be carefully scrutinized
So that only those activities that are critical to the successful
Completion of the study are included in the work program.
As a general rule, the coast of a feasibility study should not
Exceed one to two percent of the estimated cost of implementing
The project.
f) Participating entities. From the start, a decision has to be made
As to which entities should pursue the different aspects and phases
Of the study. In general, there are three options to choose
Form. First, the project proponent, either a government agency or private
Entity, may directly undertake the studies; second, other specialized government units
May be entrusted with the conduct of the studies; or third,
Private consultants may be engaged for the purpose.
Initially, an inventory of expertise within the proponent entity should be
Made to find out its capabilities in handling the various phases
Of work. If it is inadequately equipped to conduct the study
Then the second and/ or third options may be resorted to.
In some cases, the latter arrangement is more economical and efficient
Because of the specialization inherent in these agencies/forms. In addition,
A third party study group, especially consultants, is usually able to
Analyze the project with more objectivity and can apply their wide
Experience in handling the job. In general, however, a combination of
The various schemes will provide the most practical set up.
A chart showing the organizational set-up for the conduct of the
Feasibility study should be presented in the terms of reference so
That the sharing of responsibility for various aspects of the study
May be clearly delineated.
The annex to this chapter contains a sample terms of reference
For road feasibility studies. Fir illustrative purposes, a large scale project
Has been selected. To draw up the terms of reference for
A smaller scale project, appropriate simplifications would be required.

4.4 Practical Considerations in Project Preparation

While every project is unique and no two projects are alike
The process through which project preparation is undertaken has many
Common features. Experiences involving a large number and a wide range
Of projects have delivered a number of practical suggestions applicable to
Smaller projects some of which are listed below:

Project preparation
4.4.1 Need to Organize and Plan
Preparing a project is a “project” in itself and should be
Treated as such. Before a project study goes into the
Field to prepare a project, it would be useful to work out
The following in advance:
a) Terms of reference, including the project objectives and scope, methodology for
Data collection and evaluation, etc.;
b) Terms of reference of each member of the team or each
Participating entity;
c) General network or flow chart of the activities and tasks required
(time-scaled, if possible, and showing functional linkages); and
d) Data requirements of the students (including dummy tables, if possible).

Even as the team goes forth to the field, this plan]

Needs to be revised and updated continuously as more information are
Gathered. Failure to plan and organize the team’s activities often results
In unwanted situations such as: conflicting concepts of the project by
The members of the team; unnecessary duplication of work; overgathering of
Information in certain aspects and gaps of information in others; and;
Delay and cost-over run, etc.

4.4.2 Need to Gather Firsthand Information

Information requirements of projects preparations are so specific that there is

A need to be sure about the reliability of data used
forassessing and designing a project. This implies that firsthand information
must be used whenever possible; and, any secondary data used must
be verified and validated.
One pitfall observed to be common among less experienced technicians is
The preference for deskbound analysis using secondary data rather than
Getting a feel of the situation in the field. This pitfall
Can be avoided by setting structures/mechanisms that
Encourage team members to be field-oriented; careful planning of activities to
Allow adequate exposure to field conditions; and, creating a strong resolve
On the part of the team to be field-oriented.

4.4.3 Need to Develop Confidence and Exercise Judgement

Although high priority should be given to obtaining firsthand information, it

Is seldom possible nor practical to get all the information needed
for project, nor is it necessary to do so. At
some point, a team has to stop gathering data and do the
analysis under limited data conditios. This is where the exercise of
judgment comes in.
 Use of judgement by the team is justified, in fact necessary,
as long as the team has develop enough “gut feel” about
the project, and having been exposed to the defferent perspectives of
the project, it has actualy become the discerning “expert” (often more
than the proponent itself). In this situation, the team should have
the confidence to exercise its judgement.

4.4.4 Need to Keep a Critical and Open Minded

Project development is essentially an analytical process that requires a critical

Mind. Likewise, the evolution of a project is organic in nature
so that an open mind is crucial to accommodate the need
for flexibility in project design. Failing to exercise this, a project
development team may end up doing a project description or justification
report rather than one that critically analyzes a project and its
alternatives. This can result if the team has not build enough
confidence about its own ability to critically assess and design the
project or where there is wide divergence in perceptions among the
various actors (beneficiaries, proponents, etc).
Thus, the team takes the convenient route of merly describing and
Trying to justify one version (usually the proponent government agency’s or
The politician’s).
Such pitfalls may be avoided by enhancing the expertise and confidence
Of the team on the specific project, or by negotiating among
The actors in the project to come up with a common,
Workable frame of reference.

4.4.5 Need to Develop a Supportive Environment

While keeping a critical and open mind, the team must also
Help develop a supportive environment in order to generate and sustain
Continuing interest in the project among those concerned or affected. It
Must be remembered that the team is merely helping develop the
Project for the actors, and that the project properly “belongs’’ to
The proponents and actors. Having established
Such motivation, acceptance of future
Roles of the actors in the implementation can easily be facilitated.
Building up supportive environment during project preparation can be facilitated
By proper consultation and/or participation of decision makers, implementers, beneficiaries,
Etc. in project design; better understanding by all concerned of the
Project’s objectives, processes, outputs, etc.; and conscious effort on the
Part of the team to maintain a helping relationship with the
Project proponents, rather than taking control of the project preparation.

4.4.6 Need to Focus on More Critical Aspects of the Project

While project preparation usually requires looking into the five functional areas
(market, technical, financial, economical, and organizational), the degree of attention on
Each should vary according to its importance in the future success
Of the project. The uniqueness of the project, its maintain objectives,
The anticipated problem areas, based on the experiences in similar or
Related projects, help determine the precise focus of the study.
For instance, agricultural projects which success depends largely on the capability
Of the farmers to adopt recommended technologies must have strong focus on
How individual farmers will actually benefit (as shown in their farm
Income analysis). On the other hand, a communal irrigation project designed
To be managed and maintain by the farmer-beneficiaries themselves will
Need strong emphasis on the organizational and management component,
Likewise, it is wise to be wary of biases in the
Team itself which may adversely affect the intention of the project.
For instance, a team may be largely engineering-oriented which is not
Required by the project; heavy orientation towards background information 9i.e., socioeconomic
Profile), rather than specific project information, etc.; concentration on report writing
Rather than on project analysis.

4.4.7 Need to Balance Technical Skills with Behavioral Skills

A Project development team needs a good balance of technical and

Behavioral (and or other managerial) skills as well as a wide composition
Of individuals representing varied orientations and need (politicians, technicians, businessmen, farmers,
etc.).
A common failure occurs when the primary concern centers on
Having good technicians in a team without considering their interactive skills.
Having achieved an adequate balance of skills in a team will
Create better teamwork and facilitate the team’s ability and process-oriented
Can maximize learning opportunities for the team and the people it
Interacts with.
To further strengthen behavioral skills and process-orientation in a team
Some measures may be instituted like including team-building session as
A regular part of team’s activities, placing equal importance o
Coping skills and technical skills in forming a team, and broadening
The perspective of team members to look at project development as
An opportunity for learning (for its members) as well as capability-
building for the people it will deal with.
 Group Members
Wynette Hope Occena
Karen Jinon
BezalelLegada
Jabelle Marie Basiya
PatricVillasis
Ofelia Parcon