Project Selection Methods in Project Management

Organizations spend huge amounts of money on new projects. But then they do not have unlimited money to spend. They are obliged to spend their money wisely. They don't have unlimited resources either to take up every opportunity that comes by. Organizations encounter many interesting, exciting, and challenging opportunities to work on and they have to make choices from among them. Before taking up a new project, it becomes important for them to make sure that the money being spent on that is safe, gives a good Return on Investment (ROI), and will benefit the organization in the long run. There may be multiple project opportunities but it is imperative for organizations to analyze all the project opportunities thoroughly so that the decision to invest in a particular project can be justified. Organizations can't invest in all the projects that come their way, so they have to be selective. They have to select the right project based on certain criteria and by following a process. This process of analyzing new project opportunities and choosing the right project for the organization is called project selection, and the methods employed in this process are called project selection methods. These project selection methods are used to choose the project with the least risk and maximum profit potential.

Importance of Project Selection

Project selection is essential because it helps evaluate the projects to ensure that they align with the organization's strategic goals and deliver maximum value. You can select projects on the basis of prioritization. Project selection is done in the starting phases of the project where initial ideas and suggestions are dealt with to assess their benefit to the organization. Choosing the right project can make the difference between profit and loss. If the project scope is unreasonable, deliverables are not defined correctly, or the project goals are not realistic, this can lead to the budget going awry and productivity suffering. The right selection of the project will give many positive results. 

There are mainly two criteria for selecting a project. They are benefits and feasibility. Before taking up any project, the benefits it will accrue to the organization are carefully considered. The benefits may be in the form of financial gains or social or cultural importance. Feasibility here means the possibility of a project being successful. There is always some amount of risk involved in every project and some projects are more complex than others. So, a feasibility study is carried out at the initial stage of the project to determine the likelihood of its success. It takes a lot of time and research to conduct a feasibility study but it is worth it. Going through the project selection process would increase the efficiency of the project. Therefore, if due diligence is done before starting the project, it will remove or reduce much wastefulness or inefficiency which could otherwise impact the progress of the project at the time of its execution or could affect its success.

We have discussed project selection and its importance. We will now understand the different methods of choosing the right project. These methods are different in complexity but have a common objective: to help organizations select a project that will ensure maximum profitability and recognition. 

Every organization has different skills and resource availability. So, selecting the right project matching the available skills and resources in the organization needs some important calculations. The project selection methods can be divided into two categories:

Benefit measurement methods Constrained optimization methods

Both methods use many techniques to select the most suitable project for the organization. Let's examine them.

1. Benefit measurement methods

These methods of selecting the project are less complex than constrained optimization methods. They are more useful and suitable for smaller projects that are not very complex. Benefit measurement, as is obvious from the name, is the method to measure the benefits the project, if chosen, would bring to the organization. It is based on the current value of the expected cash outflow and inflow. It is a comparative method where the likely benefits of all the proposed projects are calculated and projects are rated on that basis. And the results so achieved are compared to assess the potential of each project against the others. The different techniques used in the benefits measurement methods to choose the right project are given below.

• Cost-Benefit analysis:

This is the most simple method of benefit measurement. This technique conveys the project's potential value in terms that can be easily understood. It is clearly evident to everyone that the organization must get more benefits from the project than the cost invested in it if a project is to be considered for selection. Here, the cost of investment in a project is measured against the value of return it will bring on its completion. It is calculated as a ratio between the current value of the cost to be invested in the project and the current value of the outflow or the value of return from the project. All costs including direct, indirect, and tangible are defined against the benefits or returns to be achieved by the project, whether direct or indirect. A project with a higher Benefit-Cost ratio (BCR) is given the nod for proceeding further. 

• Scoring models:

Perhaps this is the most flexible method for comparing different projects. Instead of focusing only on the financial aspects, Scoring Models help you determine which project manager characteristics are most important for the team and the organization. Here, a set of criteria is prepared for the project as per their importance, relevance, and priority. The criteria may include profitability, the overall risk involved in the project, the project's complexity, and the stakeholders' support. After choosing the criteria they are weighed according to the priorities. Each project is assigned a score for all four criteria by using a consistent scale. Then the total score for each project is calculated, reflecting its potential and value. This provides an objective view of every project. The project with the highest score is selected. 

• Payback period:

The payback period is the period in which the investment made in a project is recovered. Profits will come only after the investment is recovered. This technique looks at the time it will take to recoup the cost incurred on a project. It is a basic method of selecting the project. The formula for calculating the payback period is simple. 

Payback period = cost of project / average annual cash inflow

So here, the selection of the project is made on the basis of the payback period. Th project with the shortest payback period is selected. But, this method has certain limitations. The first of which is that it does not take into consideration the time value of the money. Also, this method focuses more on liquidity, hence the profitability gets neglected. Benefits that come after the payback period are not taken into consideration. And very importantly, the risks involved in each project are neglected.

• Economic model:

It is also called Economic Value Added (EVA) and is somewhat similar to the Cost-Benefit analysis technique. The similarity is in describing the difference between the cost invested and the revenue generated in terms of profit. EVA is the measurement of performance that calculates the value generated for the organization. This method defines the Return on Capital (ROC) and is calculated as the net profit. By employing this method, you can clearly view the quantifiable benefits of a project after its completion, and can give you a fair idea of the kind of benefits you can expect from each project. The project with the highest EVA is selected out of all the assigned projects. Economic Value Added is always expressed in numbers and not as a percentage.

• Net present value:

Net present value is the difference between the present total value of the investment or cash outflow and the present total value of the returns or cash inflow. The important thing here is that the Net Present Value (NPV) should always be positive, indicating that the project is profitable. This is the most practical parameter that discounts all the future values of revenue and investments to their equivalent present values for calculating the profit. Unlike the payback period method, the NPV method takes the future value of the money into consideration but it doesn't present the profit and loss picture. The project with the highest NPV is chosen.

• Internal Rate of Return (IRR):

Internal rate of return is the maximum return on money that is expected from a project. It sets NPV at zero and incorporates it in its calculation. In other words, it is the interest rate at which the net present value becomes zero which means all the cash flow from the project, both positive and negative, levels off against each other. It can also be interpreted as the rate at which the present value of the outflow becomes equal to the present value of the inflow. The IRR becomes a criterion to select the project with the maximum profitability and the project with the highest IRR is chosen. However, while using IRR as a criterion for project selection, you should remember that it should not be used solely for evaluating the worth of a project because the project with a lower IRR might have a higher NPV. 

• Opportunity cost:

Opportunity cost is the loss you incur by not choosing one project over other and this concept is particularly important for Project Managers to understand. This method is used when the organizations want to see what they will lose in terms of benefits while choosing other benefits. Opportunity cost is a supplemental technique and not a standalone method. So, while selecting a project, the one with the lower opportunity cost is selected.

So, this was about the Benefit measurement methods in project selection. There are other techniques too in Benefit measurement methods that can be used for selecting the right project. We have dwelled on some more important and useful methods. Let us now look at the Constrained optimization methods.

2. Constrained optimization methods

Constrained optimization methods are also called the Mathematical Model of Project Selection. These methods are mainly used for projects that are large or more complex. Although Benefit Measurement methods are more widely used, Constrained optimization methods are also used particularly when more intricate mathematical calculations are required for selection from large and complex projects. These methods are also used for simulations for the project feasibility study by clearly understanding the risks involved in the project. There are five main techniques used in Constrained optimization methods. They are:

•  Linear programming:

This method works to reduce the cost of the project by minimizing the time required to complete it. 

• Non-linear programming:

The objective of non-linear programming is to solve optimization issues in the project where some limitations or functions may be non-linear.

• Integer programming:

In this method, the focus is on decisions involving integers rather than fractional values. Certain projects, like cars, tables, or chairs, can never be fractional. They have to be delivered as a whole. 

• Dynamic programming:

This method simplifies complex problems by breaking them into multiple simpler problems. But you must decide if a particular problem is suited for dynamic programming. Dynamic programming allows you to see the best mixture of decisions.

• Multiple objective programming: 

In the multiple-objective programming method, mathematical optimization is used to make a decision for a number of problems.

The importance of project selection methods can not be emphasized enough. The selection of the right project is vital for an organization's growth and recognition. It is one of the most critical steps that need to be taken before making any investment decision. As we have seen, project selection can be done in a number of ways. However, it is crucial for any organization to use different methods of project selection and consider multiple factors before deciding on a project. It is important to ensure the most beneficial project for the company is selected. The project selection techniques described above will help you in choosing the project with the best ROI. 

Also, Check:Project Success Criteria Examples

Conclusion

The project selection process is paramount for organizations aiming for strategic growth and success. By meticulously analyzing project opportunities and employing the right selection methods, companies can ensure that their investments yield maximum returns while aligning with their long-term objectives. Simpliaxis offers comprehensive project management courses that equip professionals with the skills and knowledge needed to navigate these critical decisions effectively. Enroll in Simpliaxis today to elevate your project management expertise and steer your organization toward prosperity. Don't just manage projects – master them with Simpliaxis!