Why do we do projects? In most cases, it is surely to deliver benefits, whether these are financial, say through efficiency savings, or passed on to our customers through improved service delivery.
Looking back on projects carried out in the past, how often have we painted a rosier picture than is the case by understating the costs to the organization and overstating the benefits? How many times have we compared what we intended to deliver against what was delivered and what the true cost was?
An area of good project management practice is in ensuring that your organization is in control of what resource is being utilized and what the true financial impact.
A common practice is to term the cost of a project as the budget that it has been allocated. Of course, we all have financial constraints and many projects have to plan to deliver within a ‘no more money under any circumstances’ environment. Such constraints impact on the quality of the deliverables and therefore the benefits.
Many projects do not even have an earmarked budget, they simply dip into several different cost centers, with various Departments absorbing the costs, as and when an expense arises. Tracking the true cost of these projects becomes almost impossible, especially where subject to audit
What should be included within the project costs? One of the major expenses that many organizations still do not consider is: –
All projects will have identified staff resource applied to them, ranging from perhaps an individual Project Manager (full or part-time), reporting to a Project Executive to full-blown governance structures involving User Groups, Configuration Librarian, Project Support (through a PMO) and several full-time project posts.
The removal of a member of staff from their normal job to work on a project represents a project cost. It is of course not always that simple and different organizations may wish to look at how they apportion these costs in different ways. This assessment is often linked with how the organization manages its finances at a high level. When creating an approach to calculating project cost, involvement of the Finance Department is essential.
For example, some organizations may only consider the secondment of a member of staff onto a project as a project expense where the post from which the project team member has been removed has required to be back-filled. Others may only consider adding resource time to a project cost where the project team member’s allocated time to the project exceeds a certain percentage of their overall employment time.
Another major area of costs that is often overlooked when calculating the total project cost, and, when comparing against the benefits, is: –
If a project has been created to deliver a new system (almost always involving ICT these days!) for carrying out a specific task that your organization has responsibility for and this new system is predicted to result in efficiency savings, then as well as the capital costs involved, it is very important that the organization consider the impact of training costs.
A new IT system can potentially involve the re-training of large numbers of staff. Even at a couple of hours per head, these costs can be significant and should be offset against the financial benefits identified of operating the new system.
There are of course several other headings under which costs require to be captured. When putting together your stakeholder engagement and communication plans, what costs may be involved in publications, printing and hospitality? Are the project team to be located into one office? If so, what are the hardware / software requirements and office furniture needs? What is the likely extent of travel requirements for the project team including, say, benchmarking, where you wish to visit a similar organization that is perhaps located in another part of the country. These are just some of the areas you need to think about.
As an organization, you may wish to create a standardized approach to costing projects in order that direct comparisons can be made at Business Change level. Identifying what is Capital and what is Revenue costs allows forward planning of yearly budget requirements and breaking each project budget down into phases (again, often in line with Finance Department) provides even greater control and transparency of predicted spend.
The cost of any project should be forecast in as much detail as possible during the Initiation Stage of the project and these costs should be included within the Business Case presented within the Project Initiation Documentation.
It may be that a project is estimated to deliver financial savings of, say, $50k, but if the project costs $40k, is it worth the risk and how accurate is the estimated $40k? Perhaps in reality the project is costing the organization $60k and the actual benefit realized may only result in $45k of savings. Familiar??
Alternatively, a project may cost $200k, a big commitment in any circumstances, but is predicted to deliver savings of $5 million. Estimated project costs based around a sound method of calculation allows the senior management (or Business Change Board) to make informed decisions on committing large sums of money to projects and to decide which projects should receive the green light to proceed.
Once a project has been shown the green light to enter Controlled Progress or Delivery, actual spend should be recorded and this can be compared against predicted spend. This will assist the Project Manager in identifying or predicting when the project is looking like it will exceed the financial tolerance set within the PID and therefore kick-start the Exception Process.
About the Guest Author
Alvin Gardiner MBA is a PRINCE2 Approved Trainer, Practitioner and Registered Consultant. Alvin is the UK Prize Winner for the best use of PRINCE2 following his work to introduce structured project and program management at the Registers of Scotland Land Registry. Alvin regularly lectures in PRINCE2 in Canada and is also a Management of Portfolios Approved Trainer.