Value destruction through cost overruns
You can destroy value by delivering the project over budget thereby reducing the net value of the benefits.
Consistently research finds that around 60%-70% of projects are either late or over budget. Being late usually results in being over budget.
Obviously, each dollar, pound, euro extra in cost diminishes the net value of the project. Cost control is important but is not the objective of the project. The objective is to optimize the net value – to spend wisely to get the ‘best bang for each buck’.
The standard ‘cost justification’ approach to projects is not focused on optimizing the value but on justifying the costs. This approach does not support value optimization.
Instead, you firstly need to ascertain if your project’s value proposition is worth the cost of delivery. Then you need to manage the value equation's delivery to ensure optimum cost control while also ensuring you don’t cause long-term problems for the organization through inappropriate project cost compromises.
It is critical to manage how the money is spent and to minimize wastage by, for example, ensuring…
- people are brought on to the project only as and when required and depart immediately they have finished
- equipment is bought to be delivered only as required
- consultants and contractors are managed to ensure they deliver the extra value that their higher fees demand, and so on.
The art of controlling project costs is in how the money is spent, not how much is spent. If you can deliver 90% of the value for 60% of the cost – then this should be your goal, with the remaining 40% of funds returned to be invested in other projects.
You should think of and manage your projects in terms of a ‘profit and loss’ exercise, where the benefits are the ‘profit’ and the costs are the ‘loss’ and your role is to maximize the long-term profit generated for the minimum cost invested.
Cost management is a value management process.