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ENTERPRISE MANAGEMENT
Dave Rochford offers tips on reducing project costs and preventing overruns.
How many projects have you heard about that have bust their budgets? Far too many, no doubt, compared with the number that you can recall coming in well within budget. A comprehensive study of projects in 2003 found that nine out of 10 had gone over budget and that overruns of 50 to 100 per cent were typical. Cost overruns are particularly common in construction and technology projects. Research into IT projects in 2004 found that seven out of 10 had overspent and missed their target completion dates. The average cost overrun was 43 per cent. Some of the more spectacular and welldocumented cases of project overspending include the development of supersonic airliner Concorde, which had a 1,100 per cent overrun, and the construction of Sydney Opera House, which exceeded its budget by 1,400 per cent. Some of the more obvious causes of cost overruns are as follows: Poorly defined requirements and a lack of agreement and prioritisation. “Scope creep” – eg, the uncontrolled addition of extra requirements. Inappropriate designs. Inadequate information. Unforeseen problems. A lack of control on spending. Insufficient skills and resources. Inadequate checks on estimates and work. Poor project direction and management. Some less obvious causes include: The absence of a robust business case. A lack of understanding about cost drivers and direct and indirect costs. The insufficient use of planning techniques. Poor estimation or forecasting, especially of demand and revenue. A lack of option appraisal or evaluation of cheaper alternatives. In-built complexity and delays. Poorly integrated plans and an imbalance between people and processes. An inadequate consideration of safety, legal, regulatory and environmental issues. A lack of formal agreements where there is a dependence on third parties. The existence of political pressure, vested interests or a fear of a lack of approval. The Sydney Opera House project went over budget largely because construction was pushed ahead by the government before all the technical design problems were solved, which led to significant reworking and rebuilding. The associated cost increases

Paper P1 Performance Operations

Cost-duration graph
Direct cost 90 80 70 Cost ($000) 60 50 40 30 20 10 0 5 6 7 8 9 10 11 12 13 14 15 Duration of project (weeks) Lowest total project cost Indirect cost Total cost

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financial management

The building was eventually completed a full decade later than scheduled. Focus on the most crucial activities. Consider lower-cost alternatives. since they can often alleviate the effects of cost increases. integrated project plan with discrete. Explore and assess options – eg. A supportive organisational culture should help to prevent problems from being discussed behind closed doors. Optimise the cost/benefit ratios and ensure that accountability is matched with responsibility. Bent Flyvbjerg. stakeholder and risk management issues at an early stage and discuss them openly at meetings of the project board or steering group. Don’t ignore the benefits. Spending time on benefit assessment can help you to improve the viability of the project and identify further potential benefits as well as early achievements that help to increase people’s commitment to the project. ensuring that there is a sound business case with realistic estimates of costs and revenues. assumptions. The business case drives the project. you need to do the following: Identify the lowest-cost activities that could reduce the project’s duration and cost. too. While I have focused here on the financial side of managing project costs. Compute the costs and benefits of reducing the project’s duration. linking them to objectives. The former can be assigned to a specific package of work or activity – eg. It’s important to factor in leadership. therefore. writer and lecturer.(ALSO OF INTEREST TO P2 CANDIDATES) PAPER E2 resulted in the architect’s resignation and further delays. It’s important to make realistic cost estimates. Validate forecasts and estimates. Setting up the project properly will help to avert unforeseen problems and knock-on effects later. The first step in preventing overruns is to acknowledge that they are likely. This will inform scheduling decisions and enable sensitivity analysis to assess critical activities and costs. Reduce the scope of the project where little added value is evident. The risk should be managed by: setting up the project properly. Use cross-functional teams to tackle problems. which tend to be inaccurate. They suggest that there’s a need for institutional checks and balances. penalties for estimation errors. you should tie these to costs to inform decisions on the project’s scope and priorities. Duplicate assembly lines were established by the French and UK governments and the finished product – a particularly costly aircraft to operate – was bought only by the two countries’ state airlines. Continually seek alternative ways to meet deadlines. It is also important to establish agreed baselines of performance from which benefits can be measured. you should not forget that they are run by people. dependencies. Dave Rochford FCMA is an independent consultant. so stakeholder analysis. Assess the impact of possible problems and build in a contingency factor. manageable stages and an agreed schedule for resource allocation. because this could reduce all the value in the project. A project’s budgeted costs should always include a contingency fund. which ideally should be based on experience or benchmarked and validated using a range of sources. Nils Bruzelius and Werner Rothengatter argue that it’s dangerous to rely on revenue forecasts. But calculating benefits and forecasting revenue isn’t as straightforward as it might seem. Identify the direct and indirect costs. opposite page). You should focus on what adds value to the project. not as a oneoff exercise to obtain funding. problems. Cutting expenditure may not be the answer. and the use of risk capital to encourage more accurate forecasting. and the main cost drivers and dependencies. The Concorde project overran mainly because of political reasons. and understanding and analysing the cost drivers and costs. A detailed. but the following key ingredients are required: A project brief with clearly defined objectives and responsibilities. At this point it’s useful to distinguish between direct and indirect costs. The latter cannot be associated with any particular work package or activity – eg. with costs and benefits itemised and the forecast ROI signed off by the finance team. understanding the cost-time relationships. labour or materials. Defined processes for identifying and managing risks. Business cases must be detailed yet easily understandable. admin and interest payments. Match the costs and benefits. performance specifications. While such factors may be beyond the control of a single project manager. rather than external. governance and communication are equally important factors. 2003). Where possible. Shortening the project may cut the indirect costs but it may also increase the direct costs if it means that more resources are needed. When assessing and reviewing costs. Once the direct and indirect costs and drivers have been identified. It should be seen as a living model for delivering continuous benefits. In their book Megaprojects and Risks (Cambridge University Press. ALAMY financial management 37 . Using accepted methods such as PRINCE2 will help you here. using internal. decisions and changes. both direct and indirect. you can prepare a costduration graph (see panel. resources. Ten ways to control the costs of a project Clearly define and prioritise the project’s requirements. you can still use several tools and techniques to help control costs.

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