What is selection of the project process?
Selecting the project is a process to investigate and evaluate project proposal so that to find out which project is most compatible with the goals of the organization and can lead the organization to its objectives more effectively. For example, a construction organization might choose from a set of potential projects on which to bid or a TV station would evaluate different shows to run at 6:00 PM in the evening weekdays which best matches its goals.
Each project has its own risk, margin, cost, and characteristic. Those characteristics is evaluated and compared against each other and the projects which make the organization closer to its objectives is selected and prioritized.
It is unlikely for a PM to be involved in the process of project selection though it is very important for a successful PM to be fully aware of the objectives of the organization as to why that specific project is selected.
How to choose the right project?
J R Meredith and S J Mantel (2009) proposed two models (Non-Numeric and Numeric) to evaluate the project proposals and select the right project. Each model investigates the project through separate aspect and helps the PM or selection committee to select the right projects.
- The Sacred Cow – When a senior or a powerful official in the organization indicates his/her desire to a new idea or a product by for example saying, “why don’t you look into …, if you have a chance”. This will result in the creation of a project to investigate what the senior has asked for and the project is ‘Sacred’ until it is concluded that the project is not feasible or until the boss personally loses his/her desire for the project and terminates it.
- The operating necessity – When there is a risk of flood at an important site, not too much investigation is needed to evaluate the project to construct a dam. However, PM should keep in mind that whether or not the system which is to be saved is worth spending the cost of the project. In other word, if a project is needed to keep an operating system working, the question is: whether the system worth to be kept safe at the estimated cost of the project? If the answer is yes further investigation will be carried out.
- The Competitive necessity – In some scenario, it is vital for an organization to modernize or to develop a particular facility to keep its competitive position against its competitor in the market. In this case, the desire to maintain the organization competitivity in the market will lead to the selection of the project.
- The product line extension – When the existing facility of an organization, say manufacturing line of a product, is required to be extended or a weak link should be strengthened to meet the market demands, the project will be selected with not too much calculation about the profitability of the project.
- Comparative benefit model – In some cases, the organization has many subsets of projects to choose from, but the projects cannot be compared to each other because of its nature. For instance, some projects concern developing a new manufacturing line, some require conducting a research and development project for the agency, other concerns computerization of data record or a proposal to build a day-care for employees with children. Is this scenario, the organization has no written method of selection of the right project. However, the selection committee believes some project would benefit the organization more than others even though there is no precise explanation as to why this project best matches the objectives of firms.
Numeric model: Profit /Profitability
- Payback period – The payback period in a primary fixed investment of a project divided by the projected net cash flow of the project. This number reveals the number of years required for the project to pay back its initial investment. For example, if an initial investment of a project is £1.2m and the annual net cash flow of the project is £400k the payback period of the project would be 1200/400 = 3 years.
- Net Present Value Method – It stands for the total sum of the discounted cash flow of the project (the Present Value of the cash flow) within its life. The discounted ratio is desired rate of return of organization (also known as hurdle rate, cutoff rate) which is determined by the policies of each firm.
- Internal Rate of Return – It is an interest rate at which the net cash flow of a project over a time equals to zero.
- Profitability ratio – also known as Benefit-Cost Ratio (BCR) is the net present value of future cash flow divided by the initial cash investment. It is less than one the project might be rejected as it fails financially. Project with BCR more than 1 might be accepted.
Mohammad Farah Bakhsh, Nov 2017