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When you have a number of interesting and challenging projects to choose from, finding a project that is the right fit for your team’s skill set, level of competence, and has the best chance of success is the first step in effective project management. Project Selection Methods offer a set of time-tested techniques based on sound logical reasoning to choose a project and filter out undesirable projects with a very low likelihood of success. Project selection methods are an important concept for practicing project managers and aspirants preparing for the PMP® exam alike. And in this article, we will discuss the following project selection methods in detail:
- Benefit measurement methods
- Benefit/cost ratio
- Economic model
- Scoring model
- Payback period
- Net present value
- Discounted cash flow
- Internal rate of return
- Opportunity cost
- Constrained optimization methods
- Non-financial considerations
Read more: 6 Interesting Tips on Project Management
What is Project Selection and Planning?
Project selection and planning are critical components of project management. Project selection involves choosing which projects to pursue based on their potential value and strategic fit. It is essential to have a project selection process to ensure that resources are invested in projects that are aligned with the organization's goals and have the potential to deliver value.
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Once a project has been selected, the next step is to plan it in detail. Project planning involves developing a detailed roadmap, outlining the resources required, and establishing a timeline for completion. A well-planned project can help ensure that the project is completed on time, within budget, and meets the intended objectives. It also helps to identify and manage risks that may arise during the project's lifecycle.
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Benefits of Project Selection and Prioritization
Project selection and prioritization are essential processes that help organizations choose and focus on the most important projects that align with their strategic objectives. Here are some benefits of project selection and prioritization:
- Maximizing resources: Organizations can allocate their limited resources more effectively by selecting and prioritizing the right projects. This ensures that resources are well-spent on projects that are less important or less likely to succeed.
- Strategic alignment: It helps organizations ensure that their projects align with their overall strategy. This ensures that the organization is moving in the right direction and progressing towards its long-term goals.
- Improved decision-making: It involves analyzing and comparing different project options. This helps organizations make more informed decisions about projects to pursue and avoid.
- Risk management: It involves assessing the risks associated with different projects. This helps organizations identify and mitigate potential risks, ensuring that projects are completed on time, within budget, and with minimal risk.
- Increased success rates: Organizations increase their chances of success by selecting and prioritizing the most critical projects. This is because they can focus their resources and efforts on the projects that are most likely to deliver value and achieve their goals.
- Enhanced communication and collaboration: It involves input from various stakeholders, including executives, project managers, and team members. This helps promote communication and collaboration among different parts of the organization, leading to better outcomes and greater buy-in from stakeholders.
Who Does the Project Selection Process?
The project selection process can be done by different stakeholders, depending on the organization's size, structure, and culture. In some organizations, the project selection process may be the responsibility of senior management or an executive team. In others, the project selection process may be delegated to project managers or team leaders.
Role of Project Manager in Project Selection
A project manager plays a critical role in the project selection process. Here are some of the roles they are assigned:
- They are responsible for identifying potential projects and evaluating their feasibility. However, the final decision on project selection may not be entirely up to the project manager.
- They are responsible for providing input and recommendations based on their expertise and knowledge of the organization's project management practices.
- They may also have to work with other stakeholders to prioritize projects.
What are the Common Management Focus Areas in Project Selection?
To effectively evaluate and prioritize potential projects, there are several common management focus areas that stakeholders typically consider. Here are some of the most common management focus areas in project selection:
- Strategic Alignment: The project should match the organization's overall strategy. It should contribute to the organization's long-term objectives and provide a significant return on investment.
- Feasibility: The project should be feasible regarding time, budget, and resources. The project team should be able to complete the project within the given timeframe, budget, and available resources.
- Risk Assessment: The project should be evaluated for risks that could impact its success. Risks may include budget overruns, delays, scope creep, or other factors hindering the project's success.
- Benefit Analysis: The project should provide benefits that justify the investment. The benefits may be financial or non-financial, and stakeholders should consider the short-term and long-term impact of the project.
- Resource Allocation: The project should be evaluated for resource availability and allocation. The project team should have the necessary skills, experience, and resources to complete the project successfully.
- Sustainability: The project should be evaluated for its sustainability, including the long-term impact on the environment and social and economic factors.
- Market Potential: The project should be evaluated for its potential impact on the market. It should be relevant to the target audience and provide a competitive advantage.
- Organizational Capability: The project should be evaluated based on the organization's capability to manage it successfully. The organization should have the systems, processes, and people to deliver the project successfully.
- Stakeholder Engagement: The project should be evaluated for its potential to engage stakeholders, including customers, employees, partners, and other relevant stakeholders.
- Alignment with Regulatory Requirements: The project should be evaluated for its alignment with regulatory requirements and compliance with legal, ethical, and social standards.
What are Project Selection Criteria?
Project selection criteria refer to the factors stakeholders consider when evaluating potential projects to determine which ones to undertake. These criteria serve as guidelines for decision-making and help ensure that the organization selects projects that agree with its target idea. Without a selection process, an organization may invest in projects with little value to no value or those that do not meet their long-term goals.
What are Project Selection Methods?
Consider this scenario: the organization you are working for has been handed a number of project contracts. Due to resource constraints, the organization can’t handle all the projects at once, so they need to decide which project(s) will maximize profitability.
This is where project selection methods come into play. There are two categories of project selection methods:
- Benefit Measurement Methods
- Constrained Optimization Methods
Although time-consuming, employing these methods is essential for an effective business plan. There are a variety of documented methods for selecting a project, but the basic thumb rule is: for small projects that aren’t very complex, the Benefit Measurement Model is useful, whereas if it’s a large, complex project, the Constrained Optimization Method is a better fit. Let’s take a look at both these methods in further detail.
Various Project Selection Methods
1. Benefit Measurement Methods
Benefit Measurement is a project selection technique based on the present value of estimated cash outflow and inflow. Cost benefits are calculated and then compared to other projects to make a decision. The techniques that are used in Benefit Measurement are as follows:
2. Benefit/Cost Ratio
Cost/Benefit Ratio, as the name suggests, is the ratio between the Present Value of Inflow or the cost invested in a project to the Present Value of Outflow, which is the value of return from the project. Projects that have a higher Benefit-Cost Ratio or lower Cost-Benefit Ratio are generally chosen over others.
3. Economic Model
EVA, or Economic Value Added, is the performance metric that calculates the worth-creation of the organization while defining the return on capital. It is also defined as the net profit after the deduction of taxes and capital expenditure.
If there are several projects assigned to a project manager, the project that has the highest Economic Value Added is picked. The EVA is always expressed in numerical terms and not as a percentage.
4. Scoring Model in Project Management
The scoring model in project management is an objective technique: the project selection committee lists relevant criteria, weighs them according to their importance and their priorities, then adds the weighted values. Once the scoring of these projects is completed, the project with the highest score is chosen.
5. Payback Period
Payback Period is the ratio of the total cash to the average per period cash. It is the time necessary to recover the cost invested in the project. The Payback Period is a basic project selection method. As the name suggests, the payback period takes into consideration the payback period of an investment. It is the time frame that is required for the return on an investment to repay the original cost that was invested. The calculation for payback is fairly simple:
When the Payback period is used as the Project Selection Method, the project that has the shortest Payback period is preferred since the organization can regain the original investment faster. There are, however, a few limitations to this method:
- It does not consider the time value of money.
- Benefits accrued after the payback period are not considered; it focuses more on the liquidity while profitability is neglected.
- Risks involved in individual projects are neglected.
6. Net Present Value
Net Present Value is the difference between the project’s current value of cash inflow and the current value of cash outflow. The NPV must always be positive. When picking a project, one with a higher NPV is preferred. The advantage of considering the NPV over the Payback Period is that it takes into consideration the future value of money. However, there are limitations of the NPV, too:
- There isn’t any generally accepted method of deriving the discount value used for the present value calculation.
- The NPV does not provide any picture of profit or loss that the organization can make by embarking on a certain project.
- For more details on the NPV and how to use the NPV as a tool to filter projects out, here’s an insightful article on calculating the opportunity costs for projects.
7. Discounted Cash Flow
It’s well-known that the future value of money will not be the same as it is today. For example, $20,000 won’t have the same worth ten years from now. Therefore, during calculations of cost investment and ROI, be sure to consider the concept of discounted cash flow.
8. Internal Rate Of Return
The Internal Rate of Return is the interest rate at which the Net Present Value is zero—attained when the present value of outflow is equal to the present value of inflow. Internal Rate of Return is defined as the “annualized effective compounded return rate” or the “discount rate that makes the net present value of all cash flows (both positive and negative) from a particular investment equal to zero.” The IRR is used to select the project with the best profitability; when picking a project, the one with the higher IRR is chosen.
When using the IRR as the project selection criteria, organizations should remember not to use this exclusively to judge the worth of a project; a project with a lower IRR might have a higher NPV and, assuming there is no capital constraint, the project with the higher NPV should be chosen as this increases the shareholders’ profits.
9. Opportunity Cost
Opportunity Cost is the cost that is given up when selecting another project. During project selection, the project that has the lower opportunity cost is chosen.
10. Constrained Optimization Methods
Constrained Optimization Methods, also known as the Mathematical Model of Project Selection, are used for larger projects that require complex and comprehensive mathematical calculations. The techniques that are used in Constrained Optimization Methods are as follows:
These topics, however, are not discussed in detail in the PMP® certification. For the exam, all that is necessary to know is that this is the list of Mathematical Model techniques that are used in Project Selection.
11. Non-Financial Considerations
There are non-financial gains that an organization must consider; these factors are related to the overall organizational goals. The organizational strategy is a major factor in project selection methods that will affect the organization’s choice in the choice of project. Customer service relationships are chief among these organizational goals. An important necessity in today’s business world is to build effective, cordial customer relationships.
Also Read: Program Manager vs. Project Manager
Other organizational factors may include political issues, change of management, speculative purposes, shareholders’ requests, etc.
How Should Project Selection Criteria Be Determined?
Determining project selection criteria is a critical process that requires careful consideration and stakeholder input. To effectively assess project selection criteria, it is important to keep in mind the following points:
- Define the Organization's Goals and Objectives: What is the organization’s long-term vision and mission?
- Understand The Organization’s Environment: What are the organization’s key business drivers? What are its strengths and weaknesses?
- Review Industry Best Practices: Look at case studies and research papers, or consult with experts in the field.
- Evaluate Internal Factors: Recognize the organization's resources, capacity, and market position.
- Evaluate External Factors: Understand the economic conditions, competitive landscape, and regulatory requirements.
- Develop a selection framework that outlines each criterion and weighs them according to importance. This will provide a clear and transparent process for evaluating potential projects and selecting the best ones.
What is the Project Selection Process?
The project selection process involves evaluating potential projects to determine which ones are in the organization’s best interest. By following a structured project selection process, organizations can ensure that they invest their resources in projects that have the highest potential for success and deliver the most value to stakeholders.
What are the Steps in Project Selection?
1. Identify Potential Projects
The first step in the project selection process is to search for projects to shortlist. Here are some ways to identify potential projects:
- Customer feedback: Analyze customer feedback to identify pain points, needs, and areas where the organization could improve its products or services.
- Market research: It helps identify market trends, competitors, and potential growth opportunities.
- Brainstorming sessions: Internal ideas and innovations should be encouraged to make new products, services, or processes that could improve the organization's operations.
- Industry benchmarks: Comparing industry standards helps identify potential areas for improvement and opportunities for growth.
- Technology advancements: Search for the latest developments in tech and identify opportunities to use them.
2. Compare the Projects
Comparing projects is an important step in the selection process, as it allows organizations to evaluate each project's potential benefits, costs, and risks. By comparing projects using various selection methods, organizations can select the projects with the highest potential for success.
3. Analyze Your Findings
Analyzing the findings from a project selection process involves evaluating the accuracy and completeness of the data, identifying patterns and trends, developing (KPIs) Key Performance Indicators, evaluating risks and benefits, prioritizing projects, and developing an action plan. By thoroughly analyzing the findings, organizations can decide which projects to pursue.
4. Select a Project
Once you have considered these factors, you can select a project that aligns with your organization's strategic goals, is feasible, has potential benefits that outweigh the risks and costs, and addresses a real need or opportunity in the market.
What are Project Selection Models?
Project selection models are analytical tools and techniques used to evaluate and compare potential projects to choose the option that best serves the long-term interests of the business. These models use quantitative and qualitative data to assess and prioritize projects based on various criteria.
Projects that offer a greater comparative benefit to the organization are given priority over others. This criterion is based on the project's potential benefits, such as increased revenue, cost savings, or improved efficiency, compared to other available projects.
In highly competitive markets, organizations may prioritize projects that help them maintain their competitive advantage. This criterion evaluates the potential impact of a project on the organization's market position, including market share, pricing, and customer loyalty.
Some projects are necessary to maintain or improve the day-to-day operations of an organization. This criterion evaluates projects that address system upgrades, process improvements, or risk management.
Product Line Extension:
Organizations may prioritize projects that extend their product lines or enter new markets. This criterion evaluates projects introducing new products or services, expanding existing offerings, or entering new markets.
Projects with strong support from key stakeholders may be prioritized based on their sacred cow status, even if they don't meet other selection criteria. This criterion evaluates the level of support for a project from influential stakeholders, such as top executives or major investors.
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As you now know, Project Selection may be carried out in a number of ways. It is best for an organization to try different project selection methods and consider a wide range of factors before choosing a project to be as certain as possible that the best decision is made for the company.
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