Last Updated 10 Jan 2022

The Economic Feasibility Study

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The economic feasibility study of a project is an estimate of the potential profitability of that project, or a study that measures the expected benefits from a certain project relative to its cost (Johnson and McCarthy, 2001; Wong et al., 1999). Examples of construction projects include highways, tunnels, bridges, water mains, dams, sewage systems, water treatment plants, power generation plants and pipeline networks.

Infrastructure projects can be classified as large construction projects that utilize vast amount of resources in terms of money, materials, labor, equipment and time (Salman et al., 2007; Kulkarni et al., 2004; Morley, 2002). Economic feasibility studies need to be conducted prior to the construction of infrastructure facilities due to the ponderous disbursement on infrastructure projects which needs to be weighed against the expected benefits resulting from these projects to the public and the national economy.

However, Owner decision makers and financial institutions build their decisions to proceed with and/or finance any project based on the results of the feasibility study of that project (Abou-Zeid et al., 2007; Vancas, 2003)in other to ensurethat the validity of economic feasibility studies of infrastructure projects is a vital step in ascertaining decisions related to the construction of infrastructure facilities are based on consistent and standard procedures that avoid the use of misleading or inadequate information. Economic benefits include the profits the project owners earned, taxes that are paid to the governments, benefits to the clients etc.

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Theoretical Framework

Theoretical framework for the study is based on cost-benefit analysis of a construction project. Inability of the quantity surveyor to properly ascertain if a project is viable can lead to loses or project failure. The analysis is to determine the success factor, risk assessment and management, repition of project scoping and scaling, estimate the financial return, and select possible project options through the use of cost benefit analysis. Therefore a major theoretical approach that will be used for the study is to examine the cost-benefit of a construction project.

Cost-Benefit of Construction Projects

The major cause of project failure is described as the variation or deviation from the original project plan. Project monitoring and control could only effect corrective actions to bring deviated project plans on course, but failed to be mindfulness of identifying and analyzing the root causes of such variations.

Also project monitoring and control are not final cost and time effective to implement. Therefore, this study intends to fill those gaps created by project monitoring and control. Oberlender (2000) in his reports states that there is proneness for some designers to make changes during design in order to please clients without regard to the effect on these changes on the project final cost and schedule.

He furthermore by saying that changes can be catalogued as either project development or scope growth. Project development relates to changes that are needed to give consideration to the scope as currently defined scope growth relates to changes that alter the projects original scope; the scope that was approved before starting the design process.

These changes, though inevitable usually add final cost and time to the original design. The usual practice is that the lead designers must develop a system of monitoring the design effort to ensure that work is progressing without excessive billable hours, but is still producing adequately defined plans and specifications for the contractors to execute the work during construction.

Though this will reduce the contractor's complaints of pretty drawings in construction that are full of error and lack constructability, they will still add to final cost and time of the project. This study favors' identifying the prominent factors responsible for scope growth and other variations in plans, address them accordingly before the final project design with a view of mitigation or eliminating the negative effects.

Therefore It is compulsory that every propose change must be subjected to a formal review and approval process that considers final cost and schedule implications as well as the quality specification and standards; plus consequential effects on other activities. The authority to approve changes during design must be limited. It is a fact of life that changes the variations in plans occur during the implementation stages of project and they might result to project failure if not properly rectified. nevertheless project managers need to be always ready to address the problems.

The earned-values system presented by Oberlender (2000) can be determined by multiplying the percent complete times the budgeted designed hours for each task. The earned-value can be compared to actual design-hours billed to the job and the planned design-hours to measure the performance of the design process.

  • Earned-value = Percent complete x Budget for that account Percentage completion = Actual final cost or work-hours to date Forecast at completion
  • For the determination of the overall project percent complete, therefore;
  • Percent complete = Earned work-hours/Naira all accounts
  • Budget work-hours/Naira all accounts
  • Final cost performance index (CPI) = Sum of earned work-hours of task included
  • Sum of actual work-hours of task include Schedule performance index SPI = Sum of earned work-hours to date Sum of scheduled work-hours to day
  • Scheduled variance (SV) Earned work hours or naira-Budgeted work Hours or Naira
  • SV = BCWP – BCWS
    Final cost Variance (CV) = Earned work-hours or Naira-Actual work-hours or Naira
  • Where BCWP = Budgeted final cost of work performed
  • BCWS = Budgeted final cost for work scheduled
  • ACWP = Actual final cost of work performed
  • CPI = final cost performance index problems.

The original final cost estimate is the budget actual final cost (BAC) in the earned-value analysis. Therefore, if the original final cost estimate for the project is incorrect, then all progress measurements during execution of the project would be measured against an incorrect budget. The system of recording final costs charged against the job must be consistent to provide realistic comparisons from one reporting period to another.

Also the method of measuring work completed must be consistently applied from one reporting period to another, otherwise the predicted status of the job will vary widely. Each project must be assessed based on the unique circumstance and conditions that apply to the project in order to use the earned-value system to manage the project.

The partial list of items that can cause the final cost or schedule to vary from the original project plan are presented by Oberlender (2000) as follows: estimating errors, technical problems, design errors, test data problems, constructability and equipment problems, scope control (change orders), management problems, personnel skill level, resource availability organization structure, economic/inflation, delay material deliveries, delay equipment deliveries, poor production rates, subcontractors interference and delay, act of God (weather, fire, flood etc).

Telsang (2004) also observes that the following affects plan; non availability of materials due to shortages or late delivery, plant, equipment and machine breakdown, change in demand, design and rush orders, absenteeism of workers, and lack of communication among various functional areas of business.

In a similar vein, variation factors of quality plans are usually described as assignable variation. According to Stevenson (2002), unlike natural variation, the main sources of assignable variation can usually be identified (assigned to a specific cause) and eliminated. He further states that; tool wear, equipments that needs adjustment, defective materials, human factors (carelessness, fatigue, noise and other distractions, failure to follow correct procedures and so on) and problems with measuring devices are typical sources of assignable variation.

Some challenges faced by the analysis includes:

  • The poor awareness of the importance of feasibility/viability analysis
  • Benefits are not easily quantifiable in terms of social, economic and environmental benefit.
  • The scope of feasibility/viability was poorly judged.
The Economic Feasibility Study essay

Related Questions

on The Economic Feasibility Study

Why does feasibility study is important for any business?

Key Takeaways A feasibility study assesses the practicality of a proposed plan or project. A company may conduct a feasibility study if it's considering launching a new business or adopting a new product line. It's a good idea to have a contingency plan in case of unforeseeable circumstances, or if the original project is not feasible.

How do you conduct a feasibility study?

Deciding if you Need to Do a Feasibility Study Conduct a preliminary analysis. Consider your options. Begin to assess the demand for your idea. Begin to assess the competition. Assess the challenges. Decide if you should hire expert consultants. Set a time-table.

What does 'economic feasibility' mean?

Economic feasibility is the cost and logistical outlook for a business project or endeavor. Prior to embarking on a new venture, most businesses conduct an economic feasibility study, which is a study that analyzes data to determine whether the cost of the prospective new venture will ultimately be profitable to the company.

What are the main types of feasibility study?

Common types or form of the feasibility studyTechnical Feasibility -. The technical feasibility assessment is about the outline design and the ability to handle the technical expertise of the project.Legal FeasibilityOperational Feasibility.Time Feasibility.Resource Feasibility.Financial FeasibilityManagerial Feasibility.

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