PROJECT FORMULATION

AND APPRAISAL
MINITCLD-001
Dr. K.K.Tripathi
SYLLABUS
 SYLLABUS
UNIT-1 (Project Formulation) 07 Hours
▪ Project: identification, alternatives, and selection
▪ preliminary analysis: market, technical, financial, and economic.
UNIT-2 (Project ownership model) 10 Hours
▪ models: introduction and Characteristics, detailed examination
▪ Advantages and challenges: build operate transfer, build own lease
transfer, build own operate transfer models, hybrid annuity
▪ Engineering Procurement in Construction
▪ Future Trends.
 SYLLABUS
UNIT-3 (Feasibility Study) 08 Hours
▪ project estimates
▪ Feasibility study: pre, techno-economic, and detailed
▪ Financial modeling, regulatory and legal aspects
▪ Project clearance requirements.
UNIT-4 (Project Appraisal) 10 Hours
▪ Introduction
▪ Economic analysis: payback period, benefit-cost ratio analysis
▪ Indian and international practice of investment appraisal
▪ Environmental appraisal,
▪ Detailed project report.
 SYLLABUS
UNIT-5 (Project Financing) 10 Hours
▪ Introduction
▪ Sources of Financing
▪ Project and corporate finance
▪ Special schemes
▪ Financial indicators
▪ Capital investments: importance and difficulties
▪ Financial statement
▪ Working capital management
▪ Financial estimate and projections.
UNIT-3 (Feasibility Study)
 PROJECT
• A project is a set of interrelated activities undertaken to meet a
defined objective in terms of a product or service, which has a
defined start date, a defined end date, and a defined cost.
• Project is a temporary endeavor.
• Each project is unique in its nature.
Examples of projects
• Hosting a College Annual Function
• Plan a Space Shuttle to Mars
• Construct a Plant to Manufacture Ball Bearings
• Plan for Wedding
• Designing and Implementing a Computer System
• Designing an Anti-lock Breaking System (ABS)
• Executing Environmental Clean-up of a Contaminated Site
• Construction of civil engineering structures.
 WHAT IS NOT A PROJECT?
• SEE is not a project
• Assignments are not a project
• Teaching-learning is a process
• Manufacturing car is not a project but a process.
• Any new product comes in market is project then it goes to
process mode ( to develop new model of Samsung is a project
then it will be a process)
 PROJECT ESTIMATE
• Estimation is a process of calculating quantities and costs of
various items required in connection with a work.
• It is prepared by calculating the quantities from the dimensions on
the drawing for various items required to complete the project
and multiplied by the unit rate of the item concerned.
• It may differ from the calculation of the exact cost after
completion of the project.
• For a good estimate the actual cost of the proposed work after
completion should not differ by more than 5 to 10 % from its
approximate cost estimate.
• Estimation requires a thorough Knowledge of the construction
procedures, cost of materials & labor in addition to the skill,
experience, foresight, and good judgment.
 PURPOSE OF ESTIMATION
• To assess the volume of work involved in the project.
• To arrange and organize material, manpower, equipment and
tools-and-plant necessary for the project.
• To fix the project completion period.
• To ascertain the funds required for completing the work.
• To justify the investment from a cost-benefit ratio.
• To invite tenders and preparation of bills of quantities.
• To obtain necessary administrative approval, necessary technical
sanction, and arrangement and allocation of funds required for
the project.
• For valuation of an existing property.
 DATA REQUIRED FOR AN ESTIMATE
To make an estimate following data are necessary:
(1) DRAWINGS:
For calculating quantities of various items for the work,
various drawings like plan, profile, section and elevation are
required.
(2) SPECIFICATIONS:
Specifications contain detailed descriptions of all workmanship,
materials, and methods of preparation and execution for
different items of the work.
(3) RATES:
For preparing the estimate the unit rates of each item of work
are required. To arrive at the unit rates of each item, the rates
of various materials to be used in the construction, the
wages of various categories of labors, the cost of
transportation of materials etc. are required.
 TYPES OF ESTIMATES
There are mainly two types of Estimate
➢ Rough (or) approximate estimate
➢ Detailed estimate
However, the following types of estimates are required to be
made when there is a change in the quantity of the items, a
change in the rate of the items, or there is a change or
addition of the work during the course of execution of the
work.
➢ Revised estimate
➢ Supplementary estimate
 ROUGH (OR) APPROXIMATE ESTIMATE
▪ A preliminary or approximate estimate is required for studies of
various aspects of the work of the project and for its Administrative
Approval.
▪ It can decide, in the case of commercial projects, whether the net
income earned justifies the amount invested or not. The approximate
estimate is prepared from the practical knowledge and cost of similar
works.
▪ The following are the methods used for the preparation of
approximate estimates.
1) Plinth area method
2) Cubical contents methods
3) Unit base method.
 ROUGH (OR) APPROXIMATE ESTIMATE
1. Plinth area method
cost of construction = Plinth area x Plinth area rate.
2. Unit Base Method
For public buildings, cost. Per person (cost per capita) is used. For example,
Students hostel - cost per student
Hospital - Cost per bed
Hotel - Cost per Key or per room
3. Cubical Contents Method
It is more accurate than the other two methods, viz., the plinth area method
and the unit base method.
Cost of construction = Total cubical contents x Local Cubic Rate.
 DETAILED ESTIMATE
• Detailed estimates are prepared by carefully and separately calculating the costs
of various items of the work that constitute the whole project from the detailed
working drawings after the design has been finalized.
• The mistakes, if any, in the rough cost estimate are eliminated in the detailed
estimate.
• Detailed estimates are submitted to the competent authorities for obtaining
Technical Sanction.
• The whole project is subdivided into different items of work or activities. The
quantity for each item is then calculated separately from the drawings as
accurately as possible. The procedure is known as "taking out of quantities".
• The quantities for each item may be estimated and shown in the pattern, which
is called the "Bill of Quantities."
• The unit in which each item of the work is to be calculated should be followed
according to the prevailing practice in various departments of the country.
 BILL OF QUANTITIES
Description No. Measurements Quantity Total Remarks
Sr.
No. of item Quantity
Length Breadth Height
 DETAILED ESTIMATE
• Detailed estimates are prepared by carefully and separately calculating the costs
of various items of the work that constitute the whole project from the detailed
working drawings after the design has been finalized.
• The mistakes, if any, in the rough cost estimate are eliminated in the detailed
estimate.
• Detailed estimates are submitted to the competent authorities for obtaining
Technical Sanction.
• The whole project is subdivided into different items of work or activities. The
quantity for each item is then calculated separately from the drawings as
accurately as possible. The procedure is known as "taking out of quantities".
• The quantities for each item may be estimated and shown in the pattern, which
is called the "Bill of Quantities."
• The unit in which each item of the work is to be calculated should be followed
according to the prevailing practice in various departments of the country.
• Each item of the work is then multiplied by its estimated current rate calculated
by a fixed procedure to find out cost of the item.
 ABSTRACT OF QUANTITIES
Sr. No. Description of Unit Quantity Rate Cost Remarks
Item
 REVISED AND SUPPLENTRY ESTIMATE
Revised Estimate:
▪ It is a detailed estimate for the revised quantities or revised rates of items of work
originally provided in the estimate without any deviation in original design and
specifications approved for the project.
▪ It is required when the material cost or the material quantities deviates significantly (>
5%) from sanctioned value.
Supplementary Estimate:
▪ This estimate is worked out during progress of work due to any changes or addition of
works to originally approved.
▪ Supplementary estimate is different from the revised estimate.
▪ Supplementary estimate is worked out for the works which are not present in the original
design whereas the Revised estimate is worked out when there is a change in either
quantity or rate without any deviation of materials from original proposal.
 ADMIISTRATIVE APPROVAL
▪ For every work, it is necessary to obtain, in the first instances the approval of the
competent authority of the administrative department requiring the work. The
formal acceptance of the proposals by the authority is termed as Administrative
Approval of the work.
▪ It is duty of the engineering department requiring the work by the administrative
department to obtain the necessary approval to it.
▪ An approximate estimate and preliminary plans are necessary to explain the
proposals submitted by an engineering department to the administrative department
to obtain administrative approval to take up the work within the sanctioned amount.
▪ After receiving the administrative approval, detailed drawings, design and the
estimated cost etc. are prepared by the engineering department and submitted to
the administrative department for Technical Sanction.
 TECHNICAL SANCTION
▪ After receipt of administrative approval, a detailed estimate is further sanctioned by a
competent technical authority of the engineering department empowered by the
Government, which ensures that the proposals are structurally sound and the estimate is
accurately calculated based on adequate data.
▪ Such sanction is known as Technical Sanction and should be taken before inviting tenders to
execute the work.
▪ Besides drawings and Bill of Quantities, the following documents are also usually submitted
with the detailed estimate for obtaining Technical Sanction:
▪ 1. A report explaining History, necessity, scope and main features of the project, its
design, and estimate, etc.
▪ 2. Specifications lying down the nature and class of work and material to be used in
various parts of the work.
▪ 3. The abstract of cost (priced Bill of Quantities) showing the total quantities under each
sub-head, rate per unit of measurement, and cost.
▪ 4. Calculation sheets showing calculations for important parts of the structure. In fact, in
estimating the art and skill lies only in the computation of details without any omissions, of
all parts of the building or work.
 COST ESTIMATE
The following components shall be considered while preparing an approximate cost
estimate:
▪ Capital cost for land procurement and its development.
▪ Costs for site surveys, geotechnical investigations, and other project site-specific studies.
▪ Cost of project and enabling buildings, roads, development of site, and other
infrastructure services.
▪ Cost of engaging design professional and project management consultant.
▪ Supervision costs, including testing and inspections.
▪ Fees for approval by municipal/development authorities.
▪ Taxes as per the law of the land.
▪ Other costs chargeable to the project, such as insurance, essential items of furniture and
fittings, and equipment/appliances required to make the project usable.
▪ Cost of resettlement and rehabilitation of project-affected people.
▪ Financial costs and capital equipment costs.
 PRE-FEASIBILITY STUDY
• This is the first attempt to examine the overall potential or viability of the project.
• The data and information gathered at the scope preparation stage are used also taking into
account the local survey and preliminary investigations.
• The existing reports on the data and studies of similar projects in similar location in past, if any,
shall be incorporated in the report.
• This is the stage for completing all the preliminary steps for going into a detailed feasibility
exercise.
• The pre-feasibility stage should normally comprise the following aspects:
➢ Demand and supply,
➢ Availability of suitable land,
➢ Technical or engineering requirements,
➢ Environmental impact,
➢ Manpower and administrative support,
➢ Socio-economic viability, and
➢ Financial aspects.
• A conscious decision needs to be taken after the prefeasibility study whether the next stage of
the feasibility study should be ventured into.
• Only if the outcome of modules mentioned above indicates positive results, the next stages
should be considered for taking up.
 FEASIBILITY STUDY OF A CONSTRUCTION PROJECT
Importance of Feasibility Study in Construction Project:
• A feasibility study is a thorough analysis of all important components of a proposed project in
order to assess its technical viability, economic feasibility, and chances of success.
• Construction industry projects are capital-intensive and often require millions of dollars. Before
spending such an enormous amount, lenders and project owners need to be confident of
the project’s success and financial returns.
What is feasibility study?
• A feasibility study is a detailed assessment study that gives enough information to analyze and
decide whether or not to proceed with the proposed project.
• It is a set of exploratory investigations conducted in the early stages of a project to address
and clear up issues and difficulties that might impact the scope and outcomes of the
proposed project.
• However, companies often conduct a pre-feasibility study (PFS) before a feasibility
assessment. A pre-feasibility study is a preliminary study that analyzes, determines, and selects
the best business scenario, assuming multiple business scenarios exist. PFS identifies the best
scenario from both technical and financial standpoints.
 OBJECTIVE OF FEASIBILITY STUDY
▪ A feasibility study of a construction project is intended to assist project owners/prospective
investors in determining whether a proposed project or investment is likely to succeed. It specifies
the project potential, costs associated with the construction process, and the anticipated benefits
the project might bring. Conducting a construction feasibility study ensures that the project will not
waste essential resources like money, time, and energy before the project execution plan.
▪ For a large infrastructure project, there might be multiple feasibility studies. This is because large-
scale projects have various aspects to consider before going ahead with the final investment
decision.
➢ Environmental Impact Assessment
➢Regulatory approval
➢Project cost
▪ Not all feasibility studies are the same. Every project and every industry has its own way of
conducting feasibility studies. Even within the same industry, the study varies when the project
scope and operational demands change. In some instances, there might be numerous feasibility
studies before the project starts. This is particularly true for complex and large projects, especially in
the Oil & Gas industry.
 COMPONENTS OF FEASIBILITY STUDY
Feasibility study shall comprise the • Time frame,
following: • Risk analysis,
• Scope of the project, • Consultancy services required, if any,
• Proposed approach and
methodology, • Cost estimates of the project
• Demand and supply gap study, (a) Soft costs: Costs of consultancy,
surveys, investigations, fees for
• Review of past studies, reports and
data, obtaining approvals, overheads
etc.
• Inventory of existing assets,
(b) Hard costs: Actual costs of
• Infrastructure availability, construction including site
• Material and engineering development and external services
investigations, • sources of fundings of the project
• Approvals required, and its timeline with reference to
• Sustainability, cash flow requirement
 TYPE OF FEASIBILITY STUDIES
There are five main types of feasibility studies associated with a construction project.
Comprehensive Feasibility study: It is a complete feasibility report that takes into account some
of the most sensible business practices that should be implemented before beginning any
project. The comprehensive feasibility report includes information on land acquisitions, real
estate difficulties, and the economic and cultural influence on the surrounding areas.
Economic Feasibility study: When a corporation needs to determine if the projected amount of
money and funding is sufficient to finish a project successfully, it conducts an economic
feasibility study. While a business plan may include a "CBA" or cost-benefit analysis section, an
economic feasibility study will be more extensive and include more figures and numbers in the
financials.
Technical Feasibility study: It determines if it can be completed without technical concerns. The
size of the project site, access to the area, land topography, geotechnical information,
flooding concerns, existing facilities or structures on the site, and other environmental factors
are considered in this element of feasibility. Following the assessment of these factors, the
consultants must examine the availability of materials, personnel, resources, and other practical
requirements for the project.
 TYPE OF FEASIBILITY STUDIES
Legal Feasibility: This study discusses the legality of the proposed
construction project. Legal feasibility ensures that a project will be built in
accordance with current legal state requirements and conditions. It
ensures that the project is free of issues with planning authorization, land
ownership, and taxation.
Operational Feasibility: This study determines if the suggested strategy for
the project can solve any potential challenges and achieve the set goals.
This element of the feasibility study examines the overall project to ensure
that the finished property can fulfill its intended function. Once completed,
a school, for example, should be able to function optimally. The same
should be true for homes, hospitals, and other facilities.
 SCHEDULING FEASIBILITY ANALYSIS
▪ This is the last part of a feasibility assessment in the construction projects.
▪ It primarily calculates the time required to accomplish the job.
▪ Consultants would normally look at the overall design, materials, risk areas, and laws
to see whether any of these elements could affect the project's overall timing.
▪ This component of feasibility evaluates the overall number of months or years
required to execute a project while maintaining its quality.

WHO CONDUCTS A FEASIBILITY STUDY?

▪ Generally, the EPC contractor tasked with the construction of the project conducts
the feasibility study before starting the project.

▪ However, in some cases, the company may outsource a feasibility service

consultant.
 FEASIBILITY STUDY REPORT
A feasibility study report is a strategic brief of the findings of a feasibility study
analysis. The feasibility report usually includes the following elements:
▪ An executive summary
▪ A detailed description of the feasibility study services
▪ Technical considerations
▪ The marketplace
▪ Marketing strategy
▪ Organization
▪ Schedule
▪ Financial projections/ Cost Estimates
▪ Geotechnical studies
▪ Recommendations
 HOW DO FEASIBILITY STUDIES PREVENT COST
OVERRUNS IN CONSTRUCTION PROJECTS?
▪ Feasibility studies aid in the prevention of construction cost overruns by identifying to
project stakeholders where and how the project might be improved.
▪ The findings of feasibility assessments, which include technical, economic, legal,
operational, and scheduling considerations, highlight and emphasize what needs to be
done before digging begins.
▪ The key benefit of the feasibility study is that it identifies various potential risks that could
delay the project and cause cost overruns. Project stakeholders should use the feasibility
study findings to determine how to proceed with the construction project.

WHAT HAPPENS AFTER FEASIBILITY STUDIES?

▪ Once the feasibility study report is ready, the project owners/investors decide whether to
proceed further.
▪ If so, they generally go for the Detailed Project Report (DPR) for civil infrastructure projects.
▪ However, for projects related to the oil & gas industry or the energy sector, the project
owners go for the FEED (Front End Engineering Design) Study.
 FINANCIAL MODELING
▪ Financial modeling is the process of creating a numerical representation (usually in
spreadsheets) of how a project will perform financially over time.
▪ It’s a roadmap of the project's economic life, helping stakeholders understand the
feasibility and value of the project.
▪ Think of financial modeling as planning a road trip. Imagine you’re trying to drive from one
city to another, and you need to know:
- Fuel costs ((like your project’s operating expenses).
- Toll taxes (unexpected expenses or contingencies)
- Route options (different scenarios in the project).
- Destination (your project goals, like profit or market entry).
▪ In financial modeling, you input all these factors (costs, revenues, taxes, loans, etc.) into a
spreadsheet that shows how the trip will go financially — whether you’ll run out of fuel (cash
flow problems) or arrive successfully with some money left over (profits).
 COMPONENTS OF FINANCIAL MODELING
Revenue Projections: Estimating how much money the project will generate
over time.
Cost Estimates: Predicting both fixed and variable costs.
Cash Flow Analysis: This shows how money moves in and out of the project.
Sensitivity Analysis: Testing different scenarios. This is essential to test how
changes affect the project’s financial health.
Risk analysis: Identifying risks involved in the project.
 REGULATORY & LEGAL ASPECTS
▪ Every project operates in a specific legal and regulatory framework that
ensures compliance with the laws.
▪ Understanding these rules is essential to avoid fines, penalties, or project
failure.
▪ Analogy: Imagine you want to build a new house. You can’t just start
construction without approval from the local government. There are
building codes (rules) and zoning laws (where you can build). If you don’t
follow them, you could face significant fines and legal action, or the house
may even be demolished, leading to a substantial financial loss and project
failure.
▪ Similarly, every project, whether a road, a factory, or a software system,
must operate within regulatory and legal constraints. You need to:
- Get permits (government permissions),
- Comply with safety standards (environmental laws, safety laws),
 IMPORTANT REGULATORY & LEGAL ASPECTS
▪ Environmental Regulations: These ensure that the project doesn’t harm the
environment (like pollution controls or sustainable development
requirements).
▪ Labor Laws: These cover the legal treatment of workers, ensuring fair wages,
safety, and compliance with employment laws.
▪ Tax Regulations: Projects need to adhere to local and national tax rules,
including corporate tax, property tax, and sales tax.
▪ Contract Law: Legal agreements between parties (contractors, investors,
suppliers) need to be valid and enforceable. You can think of this as
ensuring that every agreement has a binding “promise.”
 PROJECT CLEARANCE REQUIREMENTS
▪ Project clearance refers to obtaining the necessary approvals from various
authorities before starting the project.
▪ This ensures that the project is legally viable and follows all regulations.
▪ Analogy: If you want to host a large event in a public place, you need
permission from the police, fire department, and local government. If you
don’t get these clearances, the event might be shut down or face legal
trouble.
▪ Similarly, for a large infrastructure or industrial project, the stakes are much
higher. You need to get approval from multiple agencies before digging
ground, and each agency might have its own set of requirements.
 COMMON PROJECT CLEARANCE REQUIREMENTS
▪ Environmental Clearance: You need approval that your project won’t
negatively affect the environment. This might involve impact studies to show
how your project will manage waste, pollution, etc.
▪ Zoning Clearance: Ensure the project is allowed in the specific location (for
example, you can't build a factory in a residential area).
▪ Safety and Health Clearances: These ensure that safety protocols (e.g., for
worker health, or fire safety) are in place.
▪ Financial Clearance: Authorities may check if you have enough funding or
financial backing to complete the project and avoid abandonment mid-
way.