Project types - how to distinguish projects
Many attempts have been made to categorise projects. Generally, each classification focuses on one or two aspects of projects: Is your project commissioned internally or externally? What is the project deliverable of your project? In this article you will be presented with differentiation criteria so that you can find out what type of project your (future) projects are.
Content
External and internal projects
The differentiation between external and internal projects is determined by the project sponsor.
External projects
External project sponsors are persons or institutions outside the organisation implementing the project. Projects of this type are also called sponsored projects and they exist primarily in sectors in which the provision of services with a project character dominates. These include, for example, building construction and civil engineering, plant construction and large-scale mechanical engineering, but also the software and consulting industries.
When a company is considering bidding for a project, it is essential that it assesses whether it is worth its while (the ‘bid review’ process). On the other hand, the project sponsor (or customer) faces the task of finding a suitable contractor.
There are various methods of assessing which bidder is most suitable for the envisaged project. The traditional method is to request references that provide information about the bidder’s competence in both the relevant field and in project management generally. Another approach is to explicitly require the application of project management standards and methods as well as formal proof of qualification for the staff employed in the project.
If the customer accepts the bid – with or without changes – both parties conclude a contract with each other. This contract then constitutes the basis for implementation of the project.
Internal projects
With internal projects, the project sponsor is a person or an entity within the organisation implementing the project. Examples of sponsors include senior management, the project portfolio board or the superiors of specialised departments. However, the impetus for internal projects as well as funding contributions can also come from external parties. If only members of the own organisation are involved in the project, there is often no formal contract between client and contractor. If a project order was only given verbally, the contractor should formulate the order in writing and submit it to the client. This can prevent misunderstandings and lay a solid foundation for qualified project work, even for internal projects.
Internal projects are mainly found in the research and development departments of industrial companies and in reorganisations, such as the restructuring of a production department. Especially in the development sector, there is often a large number of proposals for projects. However, they often cannot be realised at the same time due to limited capacities and budgets. Therefore, qualified decisions on project selection have to be made.
External projects
External project sponsors are persons or institutions outside the organisation implementing the project. Projects of this type are also called sponsored projects and they exist primarily in sectors in which the provision of services with a project character dominates. These include, for example, building construction and civil engineering, plant construction and large-scale mechanical engineering, but also the software and consulting industries.
When a company is considering bidding for a project, it is essential that it assesses whether it is worth its while (the ‘bid review’ process). On the other hand, the project sponsor (or customer) faces the task of finding a suitable contractor.
There are various methods of assessing which bidder is most suitable for the envisaged project. The traditional method is to request references that provide information about the bidder’s competence in both the relevant field and in project management generally. Another approach is to explicitly require the application of project management standards and methods as well as formal proof of qualification for the staff employed in the project.
If the customer accepts the bid – with or without changes – both parties conclude a contract with each other. This contract then constitutes the basis for implementation of the project.
Internal projects
With internal projects, the project sponsor is a person or an entity within the organisation implementing the project. Examples of sponsors include senior management, the project portfolio board or the superiors of specialised departments. However, the impetus for internal projects as well as funding contributions can also come from external parties. If only members of the own organisation are involved in the project, there is often no formal contract between client and contractor. If a project order was only given verbally, the contractor should formulate the order in writing and submit it to the client. This can prevent misunderstandings and lay a solid foundation for qualified project work, even for internal projects.
Internal projects are mainly found in the research and development departments of industrial companies and in reorganisations, such as the restructuring of a production department. Especially in the development sector, there is often a large number of proposals for projects. However, they often cannot be realised at the same time due to limited capacities and budgets. Therefore, qualified decisions on project selection have to be made.
Investment, organisational and innovation projects
In addition to distinguishing projects according to their external or internal client, projects can also be differentiated according to the project deliverables or the project objective. The three project types relevant here are investment, organisational and innovation projects (often also called research and development (R&D) projects).
Investment project
In an investment project, fixed assets are built that can be subject to tax-regulated depreciation after completion. Based on the concept of investment, the aim is to initially invest capital in order to later generate a cash inflow or save money. This includes, among other things, buildings, infrastructure, technical equipment or machinery that initially incur costs for construction but are necessary in the future for production or ongoing (business) operations. Since an investment project can involve a very high financial outlay, it may be necessary to check whether the project should be carried out at all. If it is not profitable (at the present time), the project should not be carried out or should be postponed to a later date.
Organisational project
In an organisational project, organisational and process structures are created or changed. The goal is to safeguard or improve the performance of an organisational unit, e.g. through corporate mergers, the introduction of new personnel development concepts or the reorganisation of a sales department. A recurring feature of the organisational project is that the project outcome affects both the employees working on the project and other people in the organisation. The latter can feel threatened or even harmed by the project result (e.g. through changed work processes), even though objectively no negative effects can be seen. For this reason, those actually and supposedly affected stakeholders may oppose the organisational project.
Innovation project
In an innovation project, new knowledge and skills are to be acquired. For this purpose, new services or products with improved nature, function, design quality and / or economic efficiency are developed.
The decisive characteristic of an innovation project is the relationship between input and output, which cannot be determined in advance: It is not possible to predict exactly what result the use of certain quantities of production factors will bring. Innovation projects include, for example, vehicle and machine developments, but also the development of software.
When developing material products, it is comparatively easy to formulate the characteristics they should have in a measurable and verifiable way. Software development projects have two special features here. On the one hand, the properties of software in terms of product goals can often not be formulated in a measurable and verifiable way (e.g. user-friendliness). In addition, software has a high degree of plasticity compared to material products. This means that it can still be heavily modified during the development process.
Differences between the different project types
Innovation projects and organisational projects differ from investment projects in one essential point that is relevant for project management. While in the case of the investment project, measuring the progress of the project by counting, measuring and weighing (e.g. by determining the amount of formwork attached or measuring the amount of excavated earth) is comparatively easy, it usually causes considerable problems in the case of the other two project types. Moreover, in the case of the investment project, the main objective is to make profits by steering the relevant fixed assets in the right direction. Innovation projects, on the other hand, aim to use scientific methods to further develop existing knowledge, to start and implement completely new research. Organisational projects change the structure of companies. The main goal is to reduce costs and improve performance so that changes in the market can be responded to quickly.
Mixed projects
Projects can have shares of investment, organisational and innovation projects. For such mixed projects, it is advisable to identify the parts of the project that can be assigned to the respective project type. These project parts can then be handled with the most appropriate project management methods and procedures.
Investment project
In an investment project, fixed assets are built that can be subject to tax-regulated depreciation after completion. Based on the concept of investment, the aim is to initially invest capital in order to later generate a cash inflow or save money. This includes, among other things, buildings, infrastructure, technical equipment or machinery that initially incur costs for construction but are necessary in the future for production or ongoing (business) operations. Since an investment project can involve a very high financial outlay, it may be necessary to check whether the project should be carried out at all. If it is not profitable (at the present time), the project should not be carried out or should be postponed to a later date.
Organisational project
In an organisational project, organisational and process structures are created or changed. The goal is to safeguard or improve the performance of an organisational unit, e.g. through corporate mergers, the introduction of new personnel development concepts or the reorganisation of a sales department. A recurring feature of the organisational project is that the project outcome affects both the employees working on the project and other people in the organisation. The latter can feel threatened or even harmed by the project result (e.g. through changed work processes), even though objectively no negative effects can be seen. For this reason, those actually and supposedly affected stakeholders may oppose the organisational project.
Innovation project
In an innovation project, new knowledge and skills are to be acquired. For this purpose, new services or products with improved nature, function, design quality and / or economic efficiency are developed.
The decisive characteristic of an innovation project is the relationship between input and output, which cannot be determined in advance: It is not possible to predict exactly what result the use of certain quantities of production factors will bring. Innovation projects include, for example, vehicle and machine developments, but also the development of software.
When developing material products, it is comparatively easy to formulate the characteristics they should have in a measurable and verifiable way. Software development projects have two special features here. On the one hand, the properties of software in terms of product goals can often not be formulated in a measurable and verifiable way (e.g. user-friendliness). In addition, software has a high degree of plasticity compared to material products. This means that it can still be heavily modified during the development process.
Differences between the different project types
Innovation projects and organisational projects differ from investment projects in one essential point that is relevant for project management. While in the case of the investment project, measuring the progress of the project by counting, measuring and weighing (e.g. by determining the amount of formwork attached or measuring the amount of excavated earth) is comparatively easy, it usually causes considerable problems in the case of the other two project types. Moreover, in the case of the investment project, the main objective is to make profits by steering the relevant fixed assets in the right direction. Innovation projects, on the other hand, aim to use scientific methods to further develop existing knowledge, to start and implement completely new research. Organisational projects change the structure of companies. The main goal is to reduce costs and improve performance so that changes in the market can be responded to quickly.
Mixed projects
Projects can have shares of investment, organisational and innovation projects. For such mixed projects, it is advisable to identify the parts of the project that can be assigned to the respective project type. These project parts can then be handled with the most appropriate project management methods and procedures.
Use findings for the future
The most common categorisations of projects are by client and project deliverables. The categorisation into investment, organisational and innovation project is particularly useful in traditional project management, as the future phase model of the project can be developed on this basis. However, there are other project categories that can be applied. For example, projects can be classified by size, by region, i.e., geographical location, or by degree of innovation. In the latter case, a distinction is made between projects with a repeat character, innovation projects, acceptance projects or change projects. Regardless of how you categorise your projects, it makes sense to always use the same categorisation in order to be able to use the insights gained for future projects.
Author: Dr. Roland Ottmann
Keywords: Project management, Tips, Project types, Definition