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Calculating the Benefits of Project Management

April 13, 2011 | Author: PM Hut | Filed under: Project Management Advantages

Calculating the Benefits of Project Management
By Jolyon Hallows

Project managers love to pronounce how much good project management will save a company. Projects will be delivered sooner, costs will be lower, benefits will be realized earlier, birds will sing, and flowers will bloom.

Unfortunately, whenever some gimlet-eyed pencil-pushing executive has the temerity to ask “How much could we save?” the project manager is stuck because he or she doesn’t have an actual number; the “benefits” of project management consist of vague generalities.

Certainly, project budget and schedule slippages cost money. But how much money? If we could calculate these costs across all of our projects, we’d know how much good project management could save us. That’s the point of this article.

The budget costs are easy to calculate. If the original budget was $x and the final expenditures totaled $y, then if $y is greater than $x, the project exceeded its budget, and the overrun was $y - $x. We can put these numbers for all of our completed projects onto a spreadsheet and calculate just how much we lost because of budget overruns.

But what if the project slipped its schedule? How can we calculate what that cost us in monetary terms? Let’s take a look.

How does a schedule slippage cost money? In two ways. First, because the schedule slipped, there is a delay in realizing the benefits of the project. For example, if a new system saved you $10,000 a month, but its project slipped by three months, that slippage cost you $30,000 in savings that you’ll never get back.

Alternatively, if the project developed a new product or service that produced monthly revenues of $250,000, then the three-month slippage means that $750,000 was deferred for three months. If your annual internal return on investment is ten percent, that deferral cost you (10% / 12 * $750,000 * 3) $18,750.

The second way that a schedule slippage costs money is the cost of the extra time for your people. For example, if your project slipped by three months and you had just two full-time people working on it, then you have to pay for an additional six months of effort. If your project budget is charged for the labor costs of your team, then this extra cost is included in your project budget overrun. If not, then the cost of this extra effort has to be calculated.

To do so, determine the average annual salary of the members of your team. For example, assume that, on average, the people on your team are paid $75,000 per year. Now gross up that amount by 25% for benefits, giving an average annual cost per person of $93,750, which means that the slippage cost you, in salary and benefits, a total of ($93,750 / 12 * 6) $46,875.

If we look at these figures, and assume that the slippage resulted in deferred revenue, then the three-month slippage cost you ($18,750 + $46,875) $65,625.

But this is for just one project. How can we extend this type of calculation across all of your projects? There are three steps.

The first step is to convert the project slippage costs of $65,625 into a number that can be compared to similar numbers from other projects. We’ll calculate the slippage costs per day of the original project estimate. For example, if the original project was estimated to take five months on the calendar, that translates to 105 days (at 21 workdays per month). Therefore, this project’s slippage cost you about ($65,625 / 105) $625 for each day of the original estimate. We’ll call this number the “slippage cost factor.”

The second step is to select two or three other typical projects that you have completed and repeat these calculations for them, giving a slippage cost factor for each of them. Now average these numbers to give you an average slippage cost factor. For example, let’s say that three other projects produced slippage cost factors of $391, $615, and $404 respectively. Including the $625 from the project we calculated earlier, that gives an average across all four projects of about $509.

Finally, list all of the projects in your portfolio and the estimated duration for each one. Some projects will span years, so estimate the percent that will be done in the current year. Total the durations for the current year for all projects, then apply the average slippage cost factor to the total. For example, if all the projects that were executed this year were estimated to take 185 months to complete, that is a total of (185 * 21) 3,885 days. Applying the average slippage cost factor of $509 per day of original estimate, slipped projects cost you (3,885 * $509) $1,977,465.

That is the potential savings from implementing good project management practices. Will you recover the entire amount? Probably not: even well-managed projects can slip. But will you recover more than it would cost you to put good project management in place? Almost certainly.

Jolyon Hallows is an accomplished project manager. He has written two professional books on project management, he is on the faculty of a university diploma program in project management, and he has personally trained over a thousand project managers worldwide. Learn how he can train your project managers at http://www.westwindconsulting.com.

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This entry was posted on Wednesday, April 13th, 2011 and is filed under Project Management Advantages. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.

2 people have left comments

Thank-you for the practical tips on this subject. ‘Show me the money’ is a popular request from my executive management and providing credible responses to this is very important. I would like to point out however that we need to be careful that we can make the link clear for them also from cause to effect. The project ‘overrun’ that you reference may be because we are really bad at doing good estimates in the first place, or based on my experience, someone didn’t like the first pass and forced a lower budget on the project that wasn’t achievable. Good project management may simply improve our original budget setting process but it will not actually reduce what we are spending on projects. We should do our best to understand the root cause before extrapolating across the whole portfolio as you propose.

Secondly, and a minor point, but for those that took the ‘finance for non-financial managers course’ and are a little confused - I believe the above should read ‘return on sales’. Return on investment usually refers to income generated on capital invested not revenues. (Sorry, the accountant in me could not leave it alone).

Pat MacFarland wrote on May 2, 2011 - 5:55 am | Visit Link

Thank you for a very informative article.

I just have one question. How do you calculate how much percentage is a task on schedule or behind schedule with no cost involved but just the following information?

1. Current Date
2. Start Date
3. End Date
4. PercentCompleted

Thanks for any input you can give.

Jojo Rodriguez wrote on September 14, 2012 - 3:46 pm | Visit Link

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