Rarely an organization has unlimited resources to go after all available opportunities. In most cases, they have limited resources and they have to select the best option.
In project management, organizations have many techniques for project selection. They make a decision as the stakes can be high and wrong ones are costly.
Let’s say your organization has many proposals but they cannot undertake all of them due to resource constraints. Therefore, they will select a project that is the least risky and could provide them with the maximum profit. Often, recognition is also a factor.
As a project manager, you may not have any role in the project selection process but you should know why the project was selected and how it fits into the organization’s strategic objectives.
Project Selection Methods
You can divide these techniques into two categories:
- Benefit Measurement Methods
- Constrained Optimization Methods
These techniques vary in complexity, however, the goal is the same: to provide your organization with maximum profit and recognition. Every organization has a defined process that helps them to choose the project that is aligned with its strategic objectives.
Who Selects the Projects?
Upper management, the steering committee, the project management office (PMO), the project selection committee or any other equivalent group of stakeholders uses these methods and selects the project.
They will use various criteria, such as:
- Whether they have the technical expertise to complete it
- If they have the resources required
- If it will help them achieve their objectives
Now, we will discuss each type of project selection method.
Benefit Measurement Methods
This is the most popular technique for project selection and is based on the present value of estimated cash inflow and outflow. Here, you calculate the cost and benefits of all projects and compare them.
The following are a few benefits measurement methods:
- Benefit/Cost Ratio
- Economic Value Added
- Scoring Model
- Payback Period
- Net Present Value
- Discounted Cash Flow
- Internal Rate of Return
- Opportunity Cost
Before we discuss these techniques, it is important for you to understand the Discounted Cash Flow.
Discounted Cash Flow
The value of money received today is greater than the money received in the future.
For example, the value of 10,000 USD after ten years will be far lower than the current value of 10,000 USD.
This phenomenon is known as Discounted Cash Flow.
Therefore, consider Discounted Cash Flow while calculating the return on investment.
Now, let’s get back to benefits measurement methods.
Many experts call this technique the Cost-Benefit Ratio.
It is the ratio between the present value of inflow (cost invested in the project) and the present value of outflow (value of return from the project). You will select the project with a higher Benefit-Cost Ratio (BCR).
Economic Value Added (EVA)
Economic Value Added (EVA) is a performance metric that calculates the value creation for the organization and defines the return on capital (ROC). It is the net profit after deducting all taxes and capital expenditure.
If you have many projects, you will select the one with the higher EVA. Please note that EVA is expressed in dollar value, not a percentage.
This technique is also knowns as Economic Model.
Here, the project selection committee will list a few relevant criteria and weigh them according to their importance. Then they will assign marks for these parameters for each project. Finally, they will add the marks and get the final score.
They will select the project with the highest score.
This is the time required to recover the cost invested in the project.
If other parameters are the same, you will select the project with the minimal payback period.
Net Present Value (NPV)
This is the difference between the current value of cash inflow and the current value of the cash outflow of the project.
Net Present Value should always be positive, and the project with the highest NPV is the better option.
Internal Rate of Return (IRR)
This is the interest rate at which the Net Present Value becomes zero. In other words, it is the rate at which the present value of the outflow is equal to the present value of inflow.
You will select the project with the highest IRR if you have many to choose from.
This is what you lose by choosing another project. You will choose the project with the lower opportunity cost if you have many options.
These are a few of the benefits measurement techniques used in the selection of projects.
Now we come to the constraints optimization methods.
Constraints Optimization Methods
This is also known as the Mathematical Model of project selection and is used for large projects requiring complex calculations.
The following are a few constraints optimization techniques:
- Linear Programming
- Nonlinear Programming
- Integer Programming
- Dynamic Programming
A detailed discussion of these topics is outside of the scope of the PMP certification exam. For the PMP exam, knowing the name of these techniques is enough.
Project selection is the most important process for any organization. The right project helps an organization grow its business and earn recognition. However, a bad one can put a damper on progress and hurt credibility. Project selection techniques help you choose the right project with a better return on investment. Benefits measurement methods are enough for most organizations to reach a decision. You will use constraints optimization methods for large and complex projects.
Were you ever involved with the project selection process? If yes, please share your experiences in the comments section.
This is an important topic for the PMP exam. You may see a few questions on it.