Appraisal of a Project: 4 Types | Project Management (2024)

Different types of appraisal include technical, economic, organiational and managerial, commercial.

Type # 1. Technical Appraisal:

The status of the technical know-how and design as envisaged in the project should be fully assessed.

The cautions in general in this area are:

(i) Project committing with technology and design only in the preliminary stage should be avoided.

(ii) The details of the designs involved should be attended to minimise the technical risk. Innovative design should be distinguished and recognised as tougher than mere uncertainty. It may appear innocuous and less costly but later on may escalate up to an awkward situation when it is too late.

(iii) In technically complex and sensitive designs all design proposals should be fully investigated.

(iv) The appraisal should ensure that the project has minimum of technical uncertainty and resolve uncertainty, if any, on a priority basis.

(v) Design should not have unnecessarily burdensome specifications.

The technology and design should be one already tested and established. The know-how already available within the country and currently in use should be explored and compared with that envisaged in the project. It is desirable to find the ‘state-of-the-art’ technology relevant to the project and weigh and measure the same vis-a-vis the technology proposed in the project appraised.

The aim is to have the best possible know-how (most suitable with the economic environment) already established with higher grade quality and productivity, if possible, from the relevant technical collaborator.

We are to recognise that project without the latest technology ultimately leads to obsolescence, higher cost and, as such, extreme difficulty in withstanding competition. The latest technology may be, on the other hand, a Costly proposition in the initial stage but economic in the long run.

In carrying out the technical appraisal of the project, we should guard recalling the old adage ‘all that glitters is not gold’ technology from a multinational does not necessarily mean the most appropriate.

Experiences suggest that many MNCs get rid of their obsolete technology/designs and machineries by giving the same to others at a very high cost. This situation can best be tested where the technical collaborator is to buy-back a substantial part of the products.

The appraisal should ensure that the ‘project schedule’ does not incorporate ‘concurrency’ to hasten the project. “Concurrency” known as the practice of initiating production activities prior to the completion of full scale development should be avoided.

While carrying out the technical appraisal, it is necessary to appraise the terms for the know-how as agreed with the collaborator as such terms have a direct bearing on the cost and financial impact on the operation of the project. The financial institution providing the term loan for the project also appraises the terms before agreeing to finance the project.

Let us cite an example. A large private sector organisation has considered a project (in 1995) for the manufacture of ‘wheel rims’ and has roped in the largest manufacturer of the wheel rims for heavy and light commercial vehicles in Europe. While such terms are not ideal, they are considered reasonably acceptable.

The major clauses are:

(i) ensure necessary training of personnel by the technical collaborator, the trainees being the key personnel in the plant;

(ii) to have a buy-back arrangement with the technical collaborator ensuring collaborator’s commitment towards the know-how process and the quality of the output;

(iii) such buy-back arrangement also releases the pressure on the need for valuable foreign exchange;

(iv) payment of know-how fee should be by stages, not in one go.

An illustration of such arrangement is repeated here:

5% upon effective date of agreement;

28% upon disbursem*nt of the ‘foreign exchange loan’ for the project;

33% on completion of the basic engineering;

34% upon acceptance of the plant.

Type # 2. Economic Appraisal:

The economic appraisal of the project covers the following areas:

To ensure:

(i) The project’s compatibility with the macroeconomic environment in the relevant industry and fitting in with the government’s concerned policy.

(ii) That the current situation in the industry involved permits such a project, mainly emphasising the appraisal in respect of the following points :

a. Existence of a growing market with increasing gap between the demand and the supply of such product/service as envisaged in the project;

b. When the product is ‘intermediate.’ in nature and the customer is in particular industry/organisation, which is a stable one;

c. There is reasonable amount of market research/study on the product and the project is having a back-up with reliable support study and report;

d. The possible market share that can be arrested with the implementation of the project as revealed by the market report.

(iii) An overall appraisal of the competitors fielding in the area with their strength and weaknesses.

(iv) Availability of the resources required for the project. The alternatives for employment of such resources cannot compete with the estimated project profitability. In this regard, the various techniques for financial appraisal of the project, discussed later, are helpful.

(v) Facilities to the extent available, including monetary assistance for such project, such as :

a. Value based advance licencing (VABAL) for imports required for the project; (Value based advance licenses were scrapped in the 1997-2002 Exim Policy, because of its widespread misuse by exporters. The new policy came into effect from April 1, 1997, known as Duty Entitlement Pass Book (DEPB) scheme.

b. Various duty exemption scheme applicable to the project;

c. Government subsidy; helps for procurement of land/space at suitable location;

d. Benefits for the export oriented units (EOU)/and for being located at export promotion zones;

e. Tax holidays.

Type # 3. Organisational and Managerial Appraisal:

A project report contains an organisation structure drawn along with the suggested number of employees and their levels and grades. These organisations recommended in the reports are, however, impersonal and primarily deal with the functional relationship within the project team, taking care of the work-load involved in the respective areas.

The organisational and managerial appraisal is carried out recognising that:

(i) The complexities in project management require a well-knit project organisation structure, which again depend upon the volume and nature of the project as well as the culture and motive of the project owner. For example, in case of a owner-managed small project, the structure is simple and the appraisal is limited to the assurance that the owner is assisted whole-time/part-time by other functionaries.

In case of a medium sized project the owner still holds the rein for the project management but prefers to carry out the implementation with the help of a project manager. The situation is different for complex and large projects.

(ii) Experience suggests that the project organisation should have an overall in-charge as project manager with the quality of strong leadership and effective communicating ability besides the required theoretical and technical skill.

(iii) The organisation structure should be interlaced so that the project work is carried out in a unified way.

(iv) The managerial personnel heading the different functions should be duly skilled in their respective functions to carry out the project implementation and operation. The appraisal is to ensure that the key managerial personnel have been fixed before the start of the work; it is also desirable to appraise the backgrounds of such personnel.

As a matter of practice, the financial institutions in the process of project appraisal also look out for the background of the key managerial personnel in the relevant project management.

(v) Organisation takes care of the technical training required for the production process.

(vi) The strength of the organisation takes care of the project volume with the number of employees.

(vii) Considering the projected organisation, estimated as sufficient to match the project, the payroll is evaluated in terms of money considering the grades, rates and numbers. These are incorporated in the project’s operation cost. The organisational and managerial appraisal should extend to this area as well to ensure the acceptability of the financial aspect of the organisation. The additional personnel cost which can be about 30% of the salary (representing P.F., medical benefit, leave with pay, uniform, canteen subsidy, bonus etc.) should also be considered while taking into account the personnel cost in the project.

(viii) The organisation should institute a well-balanced standard personnel policy before large scale recruitments. This necessitates the requirement of a skilled Personnel Manager in the organisation who should be well-conversant with the factory environments as well as the statutory rules and regulations.

(ix) Other key personnel requiring early recruitments for manning the organisation include Plant Manager, Maintenance Engineer, Security Manager, etc.

Type # 4. Commercial Appraisal:

Appraisal is made about the marketability of the product including the volume considered in the project. The project should be supported by market research/statistics from competent and reliable organisation or professional consultants like India Market Research Bureau.

The points for consideration are:

(i) The size of the market and its growth; the gap between the demand and supply;

(ii) Information about major competitors, their capacities installed, their market share, their strength and weaknesses, if any;

(iii) The international market and the possibility of export;

a. International standard quality;

b. International prices.

(iv) Whether the product is an import substitute having the prospect of saving valuable foreign exchange.