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.
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