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A project appraisal is a generic term applied to the review process of projects completed by a business. Companies will review projects in order to gain information about the financial impact each project has on the company or the economic wealth added to the firm by the project. A common process for project appraisal is conducting an initial assessment, defining problems, consulting and developing options, and correcting problems. The appraisal process often starts in the early phases of the project. This ensures the company does not spend too much capital on an economically unviable project.
Two types of appraisals are common in business: financial and economic. Under a financial project appraisal, owners and managers will review the project cost versus the potential revenues generated by the project. This review typically works off a budget, as the company will not desire to overspend on a project. Some alterations to a project may result in higher revenues once the project is complete, however. Economic appraisals tend to focus less on costs and more on the entire benefit the project brings to a company. For example, assets needed to complete the project add wealth to the company so long as the project does not increase costs over the benefits brought from the asset.
Following a standard review process will help owners and managers of a company complete project appraisals in a universal manner. The initial assessment will define the objectives of the review and what the company’s management team expects to see during the review process. If using an outside team to help complete the appraisal, owners and managers will discuss the review process at this time.
Defining problems is another essential step during a project appraisal. Companies may combine this step with the initial assessment if they expect to find problems with the project. Problems can result from unexpected issues that arise during the project or factors external to the company that reduce the opportunity for succeeding at the project. This project appraisal phase also works in tandem with developing options to correct the problems. Companies with multiple projects going on at one time may experience a number of issues regarding the inability to allocate scarce assets for proper project completion.
Correcting problems related to projects will ensure the company meets any internal or external deadlines. The project appraisal may also generate suggestions to improve the project. Hiring external individuals to review the project will often result in better, unbiased opinions on project improvement. Companies may also base employee bonuses on the project process and how well the employee performs or meets stated guidelines.
Businesses need really good people in charge of financial appraisals. Why? People in charge of projects tend to naturally overspend as they view their projects as the most important ones in the company and justify anything they think they need to build them and put them in place.
You really want people with that attitude in charge of projects as they are likely to get results. At the same time, you can't let them run loose and overspend. Someone needs to keep them within their budgets and financial appraisers can do just that.