Today, we will discuss project selection methods.
No organization has unlimited resources to go after every opportunity. In most cases, they have to select the best option.
All organizations apply project selection techniques.
Let’s say your organization has several proposals but they cannot undertake all of them. Therefore, they will select the least risky option that can provide the maximum profit. Often, brand recognition is also a factor.
As a project manager, you may not have any role in the 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
Project selection techniques vary in complexity, but the goal is the same: to let organizations select a project with maximum profit and recognition.
Every organization has a defined process that helps them choose projects aligned with their strategic objectives.
Benefit Measurement Methods
The benefit measurement method is the most popular project selection method 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, you need 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 the benefits measurement methods.
Benefit-Cost Ratio (BCR)
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 BCR.
Economic Value Added (EVA)
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 several projects, you will select the one with the higher EVA. Please note that the economic value added is expressed in dollars, not as a percentage.
This technique is also known as the economic model.
Here, the project selection committee will list a few relevant criteria and weigh them according to importance. Then they will assign marks for these parameters. Finally, the committee will add the marks and get a final score.
The project with the highest score is selected.
This is the time required to recover the cost invested in the project.
If other parameters are equal, you will select the project with a 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.
NPV should always be positive, and the project with the highest value 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 should select the project with the highest IRR.
This is what you lose by choosing another project. You will choose the project with the lower opportunity cost if you have several options.
These are a few of the benefits measurement techniques used in the selection of projects.
Now, we come to the constraint’s optimization methods.
Constraints Optimization Methods
This is also known as the mathematical model of 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; knowing the name of these techniques is enough.
Roles in Project Selection
Upper management, the steering committee, the Project Management Office (PMO), the project selection committee, or any other equivalent group of stakeholders use these methods and select 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 the project will help them achieve their objectives.
Project selection methods are vital for organizations. The right project helps an organization grow its business and earn recognition.
However, a bad choice 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 sufficient for most organizations to reach a decision. You will use constraints optimization methods for large and complex projects.
What project selection methods does your organization use? Please share with us through the comments section.
This is an important topic for the PMP exam; you may see a few questions on it.