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Defining the True Cost of a Project

Posted: Tue 28 Sep 2010 4:59 pm
by satisfactionuk
The fact that only around 37 percent of project are successful and come in on or under budget is a damning indictment that there are systematic faults in the way projects are handled in the initial stages.

From what I have read, the company directors come up with a 'wouldn’t it be nice' idea for a project and then decide how much they would be willing to pay to implement it. Then the business case and project brief is given to the project manager who is charged in designing the project plan so that it is achieved within the financial constraints. This seems to me to be a crazy way to go about conducting projects and can only be considered a recipe for disaster that is born out by the dismal 37 percent success rate.

Surely a far better process would be for the directors to present the project manager with the outline business case and project brief and say to him or her to produce and cost a project plan that will achieve these goals. Having designed and fully costed the plan the directors would then be in a position to make informed decisions regarding the project scope and cost. They may decide that in achieving the expected benefits, project is far to costly and may seek ways to scale back their expectations in order to achieve the cost restraints.

Considering costing is another major issue for project managers, from what I have seen in literature and the application of project design packages like MS Project. Resource time is allocated on an hourly rate basis with provision for fixed fees, scalable fees and overtime, which is only half of the cost equation.

Using an example to make the point of total cost of resources. If you have a meeting lasting an hour with ten people attending and the accumulation of their hourly rate of pay is say £3000, this sum is not the true cost of the meeting. Generally speaking you need to double this figure to take account of other associated cost, such as the hourly rate of floor space representing the value of the lease and rates for the building, the hourly rate of depreciation of furniture and machinery, the cost of electricity, computer time and telephone usage, any refreshments that were used, the cost of producing the documents used in the meetings. The people attending the meeting had to go to it and this took time, even if they just went to it from another part of the building say 5 or 10 minutes each way. After the meeting there were further secretarial and office services to be taken into account before the true cost of the meeting could be calculated.

The above scenario represents every resource situation used in a project environment, if the project is technology development, the coder uses a computer, a table, a room that has heating and lighting, the telephone system and he uses consumables such as paper ink pens, pencils and notepads all of which should have its cost directly allocated to the cost of the project. Costing every aspect of a project by just allocating the hourly wage rate of pay for the resource would in fact automatically bring the project over 50 percent over budget.

Another problem I am having is when allocating resource time to a task; in MS Project it allocates standard time as 100 percent of an hour, day, week or month. Nobody works at 100 percent all the time, the hour may be interrupted several times by non project related telephone calls, going to the toilet, getting coffee, answering non project related question or just talking to people in general. Surely a wiser project manager would build allowances for these non-project activities into his plan from the beginning by using say the Pareto Ratio Law of 80:20. Therefore assuming that for every hour of planned project work s/he is only going to get 48 minutes of actual productive work.

Surely the argument above fully supports the principle of having departmental hourly rate scales that take into account the full cost of using their resources.

I think project managers must have the intestinal fortitude and leadership skill to speak up and bring over-zealous directors down to earth when accepting a project. It is only by considering the above that the true time and cost of a project can be made and from that information, realistic go and no go decisions made.

Stephan Toth

Re: Defining the True Cost of a Project

Posted: Thu 18 Nov 2010 5:25 am
by satisfactionuk
Further reading on the subject and I have read all the Prince2 books now about six times suggests that Prince2 is highly bureaucratic which is not a bad thing in itself. However, this does have a direct and very considerable implication on project costs.

Now, I understand that the company board or portfolio managers will dictate what cost are included in or excluded from the projects cost structure. However, from a strategic business perspective wouldn’t it be wise to include all relevant cost regardless of where they may arise?

By not using a total costing method the cost that are left out have to be accounted for in other ‘business as usual’ areas which is definitely not the right place for them. Also, if the project is for an external customer then the projects billing will be deficient and that money may not be accountable or recoverable.

If the project is a success and more so if it is failure to some degree or has to be prematurely closed for whatever reason then the cost of the project should be able to be written off against taxes and any cost (tax benefits) not directly recorded as attributable to the project would be lost.

Prince2 recommends that the administrative management processes should be included in the project plan, which is a fair comment and logical if it is to be costed properly. I applied this to a rather complicated factory move which I completed in two formats one without the Prince2 administrative management processes included and one with. While the one without the processes in it was clean and crisp and easy to follow the one with the Prince2 administrative processes became between half and two thirds longer in the gannt chart and rather cluttered especially when linking activities. I used the programme @Risk to do the risk analysis and found that attributing risk to delays in decision-making or through other personal agendas by say line managers (previous lesson reports) could become problematic if project managers are not forthcoming when criticising the performance of their superiors or other managers.

I am sure that this subject raises a lot of issues and could trigger a substantial debate for and against total costing and would gratefully welcome all opinions.
Regards
Stephan Toth