What is Project Formulation?

Project formulation can be defined as the systematic. step-by-step development of a project

idea for the eventual objective of arriving at an investment decision. In fact it is a careful and
scientific mechanism which enables the entrepreneur to achieve the project objective with the
minimum expenditure and adequate resources. This makes it an analytical management aid.
Project formulation helps not only in fighting with the internal problems of project idea but a well-
formulated project is the best way ofgetting financial assistance from various financial
Project formulation will also be of great assistance for obtaining necessary government
clearances and in meeting the hurdles of procedural formalities.

ELEMENTS OF PROJECT FORMULATION

Project formulation or the development of project has different stages. These are defined the
elements of the project formulation. Normally an entrepreneur goes through these sequential
stages:

1. Feasibility Analysis
2. Techno-Economic Analysis
3. Project Design and Network Analysis.
4. Input Analysis
5. Financial Analysis
6. Social Cost-Benefit Analysis
7. Pre-investment Appraisal
Thus, project formulation is the step-by-step analysis of above defined aspects of the project,
as shown in fig. below
Sequential Stages of Project Formulation
 1. Feasibility Analysis : This is very first stage in project formulation. It is done by the
entrepreneur in order to evaluate the feasibility of the project. As it is examined in the
context of internal and external constraints, the entrepreneur may face three
alternatives. First the project idea seems to be feasible, second it is not feasible and third
is a state of confusion with inadequate data. Depending upon these alternatives, the
entrepreneur moves ahead, as if it is feasible-proceed to the second step. If not feasible-
abandon the idea. And If sufficient data is not available-make more efforts to collect
the required data to come to a conclusion.
2. Techno-Economic Analysis : As the name indicates this analysis is concerned with the
technology selected and the economy of the project idea. In this step, estimation of project
demand potential and the choice of optimal technology is made. This analysis produces
necessary information on which the project design can be done appropriately. It also indicates
whether the economy is in a position to absorb the output of the project.
As a project may produce goods or provide services, it requires sufficient market survey for
successful completion of task. Market analysis is built-in step of this process. The size of the
project and technology used depend very much on the demand potential.
Hence, the techno-economic analysis may be described as the combination of two steps. The
first is related with the determination of the maximum feasible project output and the second is
with the selection of the optimal technology to get this output.
3. Project Design and Network-Analysis : Project design is one of the most important and
essential part of the project formulation. This defines individual activities and their inter-
relationship with each other which are being performed to constitute the whole project. This
identifies a detailed work plan including all events with time allocation and presented in a
network drawing. Network analysis is carried out to identify the optimal course of action, so
as to execute the project within the minimum time keeping in view the available resources.
This paves the way for detailed identification and quantification of the project inputs, an
essential step in the development of the financial and cost-benefit profile of the project. We
shall discuss it in detail further.
4. Input Analysis : Project is the combination of several activities required to convert an idea into
a reality. Each activity requires certain input to be complete successfully. Input analysis is
primarily concerned with the identification, quantification and evaluation of the inputs
required during the construction and also during the operation of the project.
Inputs include all materials as well as the human resources. Both recurring and non-recurring
resources must be considered. Input requirements constitute the basis of cost estimates of the
project and are, therefore, necessary for financial analysis or cost-benefit analysis of any
project.
5. Financial Analysis : Finance may be considered as the life-blood of a project. Financial aspects
of an investment proposition have a significant impact on the acceptability or rejection of a
project. Financial analysis mainly involves estimating the project costs, estimation of the
operating cost of project and the fund requirements. This analysis provides the feasibility
report of any project to the entrepreneur to make decision about the project. It seeks to find
out whether the project will generate revenues to realise the ultimate objective for which it is
being designed. It reduces investment propositions to one common scale so as to permit
comparison and eventual investment decision. As investment proposition has a long-time
horizon, this analysis needs due care, professional guidance and foresight of
planner. Some of the analytical tools used in financial analysis are discounted cash now cost volume-
profit relationship, break-even analysis and ratio analysis. This can provide data for calculating the
different profitability criteria with a view to establish the projects

6. Cost-Benefit Analysis : As we have read that entrepreneurs are like the back-bone of economic
power of any country. So their projects must provide some national interests. Under this analysis,
estimation of social costs and social benefits are made for the computation of social profitability
of the projéct. This is mainly to find out the impact of the project on the society. As financial
analysis will provide the profitability point of view for any project. the cost-benefit analysis will
consider the project from the national viability point of view. Here again, the project design
provides the basis of such evaluation. The methods of estimating the shadow prices or imput
prices, social discount rate, etc., are to be explained and the calculations are to be presented in
separate statements or tables. However, most of the data obtained from the financial analysis
could be adjusted to reflect the true social values and use. This information gathered would be
used mostly for providing the profit criteria for public project appraisal and evaluation. Social
cost-benefit analysis is now an internationally recognised system of project formulation.
7. Pre-investment Appraisal : The results of all above defined analysis and steps i.e., the feasibility
analysis, the techno-economic analysis, the design and network analysis, the input analysis,
financial analysis and the social cost-benefit analysis are consolidated in this step to provide a
final and formal shape to the project.
At this stage, the project is presented in such a way that the project-sponsering body,
implementing body and other consulting agencies could be in the position to take decision
 about the project's acceptance or otherwise. It involves selection of the project appraisal
format, its contents and form of presentation.
Conclusion
Now it is clear that project formulation can be considered as a key input of management aid
during the course of establishment of a new project. The whole process of project formulation is
defined through certain, definite steps which are well connected with each other. The conclusion
drawn at the end of each step forms the basis of development of the next step. And the beauty of the
concept lies in the fact that each step is complete in itself to provide sufficient information to the
entrepreneur regarding the decision to move further or to look backward for re-check and
modifications if re uired some where in project formulation.