Throughout the years potential success of failure of a project was evaluated by its financial gain or loss. Recently though the above approach has been questioned by many academics and also by field experts. They realised that project vigour has to be evaluated by both financial and non-financial aspects. By its nature a project will always have risk involved, but an accurate use of all available financial and non-financial methods of evaluating a project will be helpful to identify and minimise as possible the potential risk of failure. It is acceptable that for a private sector company project the financial viability is the goal so the organisation can remain operational, thus it is preferable the use of financial and technical analysis of the project. It has been highly criticized the great emphasis on the financial and quantitative implications of an upcoming project but this approach has been defined as myopic and misdirected. There are many non-financial aspects that can force a very favourable financially and/or technical project to fail. These non-financial factors can be some or all of the following, organizational and managerial aspects, environmental aspects, political aspects, social conflicts and many more. So the non-financial aspects have to be assessed along with the financial aspects during the project appraisal process. An analysis of the most widely known non-financial factors will follow so we will be able to understand the importance and the potential risk that occurs neglecting some or all of them.
Non-financial factors
In this part we will identify and explain the pre-stated non-financial aspects and how each one of them can influence a project and even force it to a cease. (Lopes and Flavell, 1998)
First non-financial aspect that we have to take under consideration is the political. There are two perspectives that it can be viewed and depends on if the project is national of international. For the national project it means that it takes place its home country and the degree of political interfere will most of the time be some permissions that might be needed, legislation that has to be followed, funding and more. As for the overseas project it is crucial to understand if the country that the project will take place is politically unstable. This is due to the fact that if the project is too big for a country or very strategic for this country then it might be used by other political parties as potential threat for the local economy and that might be a great risk for the project. A way that the political risk can be minimised especially in an overseas project is by hiring external experts that can mitigate a non-biased profile and also get the local community see the project as beneficial, by offering employment to them, invest in the local community and even propose a representation of the local in the Board. Even if it is a national or international project if political factors are not carefully considered and research them adequately then the project might have extensive delays or even fail completely.
Another very important non-financial aspect is the social impact of a project. All of the large projects will have a significant impact in the local community, this impact can be beneficial or harmful. For example the project can create new jobs for the local community so the overall area will be benefited. On the other hand they will be some occasions that projects can be harmful such as a nuclear plant, the waste can harm the local community health. Relocation of a factory for example can harm the workforce because they might have to relocate as well or lose their jobs. Especially if the relocation is in an isolated area then the new infrastructure that will have to take place can harm the certain area. A way to reduce social risk is by creating a Social Impact Study by hiring an external specialist so all the potential drawbacks have taken under consideration before the projects starts taking place. Adopting the local culture in your project and train the managers that will involve in the construction phase to present it at the best possible way to the local community can reduce also the risk. Adopting the local culture is very important especially for overseas projects because social conflicts can lead to high delays of the project or even termination of it.
As it follows a very important area that projects have to focus are the environmental aspects. Since 1988 that a European Union Directive took place about environmental standards and regulations about new projects public and private ones and UK followed them. Also in 1999 UK and Scotland applied new regulations about the environmental issues that projects have to follow. All major projects have to produce and submit an environmental report and almost all minor projects have as well, the regulation has a broad base and affects every project that can influence the environment. (Environmental Assessment Handbook) Certain regulations and rules about any type of environmental pollution apply in all developed countries. For the developing countries most of which do not have adequate regulations or even not at all there is a dilemma if a project must take under consideration the environmental issues. Some can argue that the developing countries must have their own time of deregulation so they can create their wealth as the developed did decades ago, but because of international groups that care about the environment such as Greenpeace, W.W.F., Friends of the Earth and others projects have to follow at least the minimum environmental standards that those groups had developed. This is due to their willingness to inform local community about the potential dangers of a non-eco-friendly project that will take place will have on them. This will make the local community not willing to let the project take place so there will be delays in the project and even cancelling of it. There are many ways that this risk can be minimised two of them are, first of all not ignore the environmental risks and secondly by adopting a more open approach towards an environmental study. It is not easy to conduct such a study because there are many issues that might occur throughout the project life but by having local experts can reduce the potential risk.
Last but not least are the organisational and managerial aspects. Many can argue that project management has no role in the evaluation procedure of a project. Studies have sawn that a large number of projects failed because they were not able to identify managerial and organisational issues from the early begging of the projects. (Morris and Hough, 1986) (Baker, Murphy and Fisher, 1983) Many factors such as organisational structure, communication among the organisation, report system of the project progress, working atmosphere even partnership relations because all of them interact with each other a potential conflict between them can led to project failure. So a good project manager has to make sure that there is a good team spirit and has to motivate all the project members so the project can run smoothly and reach a good outcome. A crucial aspect that it is vital for the project's failure or success is the communication between the project team and all others that are involved in the project. Also important is the spreading around the organisation and the project team all available information, this will help to keep everyone motivated so they perform their best. There are not certain solutions to such problems and each one needs different trade-offs but bringing together a good working project team and making sure that they are highly motivated and most of all communication among them and with the organisation will reduce any potential conflict that can lead to project failure.
Financial factors
Private sector companies emphasise in the financial evaluation of a project and not so much in the non-financial evaluation because of their ultimate goal is the viability of the organisation and its economic survival. This is due to the fact that financial evaluation is considered as unmistakable because of the use of numbers and formulas that are supposed to provide an unbiased decision. There are many technics that can be used for the financial evaluation of a project, a description of the most commonly used will follow. One of the financial methods is the Payback period. This method is used to determine the period, time length, that the initial investment will be recovered by the undertaken project. As longer the period the less interesting and more risky the project is, because if an investment needs more time to recover its initial capital the more exposed it is to market changes and higher risk of failure. Most of the time if there are many projects that can be undertaken then the one with the shortest payback period will be selected due to the fact that the invested capital will be earliest recovered so it can be reinvested. Another financial factor that can be used to evaluate a project is the Time Value of Money. The rational of this concept is that an amount of money today does not worth the same in the future. For example £100 today do not worth the same as in one year time, this is because if you invest that amount of money in one year time you will get pay back the original amount of £100 plus the interest rate. So having £100 today it worth more than having £100 in the future. As for the project the taking under consideration the time value of money an organisation will go with the project that pays back the capital invested faster and it has to provide a better return than investing the same capital in Government bonds that are considered riskless. One more financial factor to evaluate a project is the Net Present Value (NPV) hereafter. NPV is the sum of the discounted future cash flow, so they are converted in today's money, minus the initial invested capital. The discount rate is the interest rate that applies today. With this technic it can be figured out if the project will have a potential gain or loss during its life. Last but not least there is the Internal Rate of Return (IRR) hereafter. IRR is the growth rate that the project is expected to produce at the initially invested capital. Also IRR is the rate that when the future cash flows are discounted with it produces a zero NPV. The larger the IRR the most attractive a project is.
There are also other financial factors that a project can be evaluated with but due to limitations of length we will continue with the evaluation of NPV that is the most commonly used evaluation factor and briefly name some evaluation factors of the non-financial aspects.
Evaluation of Financial and Non-financial factors
NPV is the most commonly used and widely accepted as most accurate financial "tool" to evaluate the potential gain or loss of a project. There are though some limitations that make this tool not accurate. For example if interest rates change after the decision is made we might end up with the wrong evaluation. Also the discount factor it is not always so accurate and might mislead the decision that has to be made. Another fact that has to be considered is that a project with negative NPV today might worth undertaking it in the future so time that NPV is calculated is a limitation. To demonstrate the potential dangers of NPV and how it might mislead a decision (Ross, 1995) describes the three potential outcomes of NPV as the Good, the Bad and the Ugly. The good NPV is when it was rejected as it should be. The bad NPV is rejecting an investment when it has to be accepted. The ugly NPV is when it is accepted when the investment had to be rejected. Also some project might have negative NPV but because of other factors will be accepted. As an example is The Royal London Hospital that it was refurbished and the NPV was negative but because of the fact that public benefits where grater the project was undertaken. Those techniques are, the Delphi method, the Nominal Group Technique, the Jury of Executive Opinion and the Scenario projection. All of them are methods that help to evaluate the collected data from the opinions of the experts so we adequate evaluate each non-financial aspect and its potential threats or benefits.
Conclusion
The evaluation of a project it is one of the most important phase of a project because through which can be determined the success or the failure of a project and as it follows the potential gain or loss of an organisation. Because of the complexity of nowadays risks that cannot be identified by only one type of factors, financial or non-financial, on their own it must be made a joint and in depth research of both types of aspects. Also non-financial factors are getting more important and have to be well considered because of the easier access to information around the globe so all stakeholders can know at any time if any of their interests get violated. There will always be potential risks in a project that where not sufficiently evaluated but by using both financial and non-financial evaluation aspects such risk can be minimised so the success of a project can be more certain.
