Why Good Cost Management is so Valuable to Projects

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Very often there is only one valid reason to spend money on a project: it will generate or save more money than it costs. There is the classic view of project cost management in that the project needs to spend money either to make or save money. What this means is that there is a constant pressure on finances within organisations and projects. Pressure to spend and in turn pressure to make returns. Companies now forecast on quarterly operations, stock-markets report gains and losses on a quarterly, monthly, weekly, daily and even hourly basis, individuals are inherently driven by cost margins and profits.  

Examining current-day project strategy, it is about ensuring that it will pay back on the investment and contribute to the financial performance of the organisation. The bottom-line justification for any project is the contribution that it can (and will make) to the organisation: –

  • Project Purpose: – The purpose of a project is a general statement about why the project is being carried out. A purpose statement may be: to create a state-of-the-art, on-line, real-time system that will allow more secure inventory management
  • Project Justification: – A justification is an analysis of the costs versus the benefits showing that the benefits are greater. If the costs are greater, then it is a justification for scrapping the project, not for proceeding. A justification describes exactly where the improved savings or revenues will arise.

Many justifications are filled with such vague notions as flexibility, customer service, integration, state-of-the-art, and other values that remain undefined. But a true justification has the following characteristics: –

  • It is money quantified. Tools such as cost / benefit analysis, return on investment and payback periods are applicable
  • It is treated as a target or goal. Costs are a main theme of many project goals in the form of resourcing, marketability or the realisation of the benefits and investment.
  • Value is returned. The project returns a measurable value, whether measured by costs or funct
  • ionality.

A justification describes the returns that will accrue from doing a project: the benefit side of a cost / benefit analysis. It must be quantified to ensure that all involved understand if the project is worthwhile at the beginning or in the end if it was successful.

Consider the justification, ‘to increase customer service’. This could mean reducing response time to customer inquiries, improving the accuracy or quantity of information available, adding to the services that are offered, or simply smiling at customers. Without more detail, nobody will understand what is expected. Furthermore, if the justification is not quantified, then any improvement, however slight, in any area will not allow the company to claim that project has been successful from a monetary perspective. Justifications may be quantified when they are expressed in terms of money. This can vary from savings to increased sales, or reduced costs in areas.

Assume that a project is justified by an expected sales increase of 15%. When the project is being evaluated, nobody can state with certainty what the increase will be; it can simply be said that one is expected. A 15% increase is an estimate, subject to the vagaries of all estimates. Whether or not this figure is realised, depends on whether it is treated as a goal or as a prediction.

  • Prediction: – A guess about what will happen based on estimates where the outcome of the project is left to the fates
  • Goals: – Is a target to be achieved and the justification becomes a matter of objectivity, planned within the overall project.

Monetary justifications are sought and they in turn become goals that the project accepts the responsibility for achieving. To understand and balance these goals, we need a good project cost management practice.

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