Project Selection Criteria

Project Selection Criteria

Criteria for Project Selection Model

The selection of projects requires evaluation of the projects based on different criteria and a variety of numeric and non-numeric models. The project selection models provide a clear understanding about the benefits of the project to the organization, which helps the project manager and the senior management choose the best project.

Projects can best be selected if they are chosen after analyzing the various models. The project selection criteria and model should be based on the following criteria given by Souder (1973): 

Realism: The selection model should reflect the real situation of the organization, including objectives of the management, employees and other associated members. It should also take into account the organization’s limited resources and risks associated with cost, time, performance and implementation.

Capability: The model should be based on crucial factors, such as multiple time periods and internal and external events, like strikes, interest rate changes and so on.

Flexibility: The model should be easy to modify in response to the changes that may occur in the organization.

Various numeric and non-numeric models are available for making the selection of project. The project selectors can use these models to determine and choose the best one.

Let’s look at different types of project selection models.

Numeric Model

Numeric models are used to evaluate and select the projects by assessing the profitability as the only measure of acceptability. The most used numeric models are:

  • Payback Period
  • Net Present Value (NPV) Internal Rate of Return (IRR)
  • Profitability Index
  • Let’s study each of these models in detail.

Payback Period

Payback period is one of the simplest and popular techniques of evaluating the investment proposals. Also known as pay-out period or pay-off period, it refers to the number of years required to recover the initial investment with the help of stream of annual cash flows generated by the project. It can be calculated in two different situations:

In case of Constant or Equal Annual Cash Inflows

When the project generates constant cash flow, payback period is calculated as:

Payback period = Cash outlays (initial investment)/Annual cash inflows

Let’s calculate the payback period for an investment proposal.

Example: Calculate the payback period for the project which requires the initial investment of Rs. 40,000 and generates the annual cash inflow of Rs. 10,000 for 6 years. Solution: Payback period = Cash outlays (initial investment)/Annual cash inflows = 4 years

This means that investment will be recovered fully in 4 years. Thus, payback period is 4 years.

Scoring Model

Apart from the numeric models mentioned earlier, project selection is also done using the scoring model. It is an objective technique. The steps of scoring model are as follows: 1. The project selection committee develops the specific criteria, for example, profitability, marketability of product or service, ease of product/service development, and so on. Each of these criteria is assigned a weight based on its relative importance to the organization. The criterion with greater importance is assigned a higher weight and vice versa. For example, if it is important for the organization that the project should be completed on time, and they are willing to spend more to do this, schedule may be assigned a weight of 5, and cost may be assigned a weight of 3.

Each of the projects is rated on a scale of 1 to 5 on each of the criteria defined. The higher the number, the greater is the desirability of the project on that criterion. For example, if the cost is less, the rating of the project may be 5 on 5. This means that the project is very desirable in terms of cost. If the same project takes a longer time as compared to the other project, then the rating in terms of schedule may be 2 on 5.

The rating is then multiplied by the weight of the criteria factor. This gives the score of the project on that criterion. The scores on all the criteria are then added to obtain the total score of the project.

Hence, the project with the highest score is selected.

Non-numeric Models

Besides the aforementioned models, there are some non-numeric or subjective models used for selecting the projects. Some common non-numeric models are as follows:

The Sacred Cow: In this model, a project is 'suggested' by the senior or most influential official in the organization. Generally, such projects begin with a simple note, like "if you have a chance, why don't you look into.

The statement is then followed by undeveloped idea for making a new product or development of a new market or for some such project. As these projects originate from some top management officials, they normally bypass the portfolio selection process and are considered as sacred. Such projects are funded till they succeed or are recognized as futile by the seniors themselves.

The Murder Board Method: In this model, a committee critically appraises the projects proposed by different people in the organization and tries to find faults or risks associated with them, or in other words, it tries to murder the proposed projects. The idea here is to play the devil's advocate and assess the things that can go wrong if the project is undertaken. The projects that survive the critical appraisal may be undertaken.

The Operating Necessity: In this model, the projects that are assumed to be extremely important to the operation of the organization are undertaken. For example, if a plant is threatened by flood, developing dykes (a wall built to prevent flooding) would not require much assessment, and the company would undertake this project at the earliest. Thus, if the project is necessary for the sustenance of operation of an organization, it must be undertaken. The project cost would be controlled to ensure that it remains consistent with the project value to the organization.

The Comparative Necessity: In this model, a decision related to a project is taken based on competitive necessity. For example, the project aiming to modernize or rebrand already existing products can be of high priority for an organization, as it is necessary for maintaining the competitive edge in the market. For example, many car manufacturers modernized their vehicle models running for ages, due to the entry of foreign organization in the market.

The Product Line Extension: In this model, a project is undertaken after being judged whether it fits the organization’s existing product line, fills a gap, provides strength to a weak link or extends the product line. For example, a laptop manufacturer may decide to start producing mobiles and extend their existing product line by undertaking this project.

The Comparative Benefit Model: In this model, the senior management attempts to choose a subset of projects which would provide the maximum benefits to the organization. However, these projects may not be easy to be compared. This model is used in the absence of any formal method for project selection. The project selection committee selects a project if it considers the project to be more beneficial for the organization than the others. For example, a funding organization’s management would assess all the projects which have positive recommendations and try to create a portfolio that turns out to be the best fit to the organization’s aims and budget. The evaluation and selection of projects for implementation can be made depending on the evaluation through project rating index. The evaluation can be done by either an individual or the committee responsible for the assessment. In case evaluation is conducted by the committee, anonymous individual rankings can be given to the projects, which can be evaluated by the committee in order to reach a consensus. Later, the projects are selected in the order of preference, after conducting the financial evaluation.

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