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The Benefits of Project Management

It is customary for project managers to claim that good project management will reduce project slippages, provide better project results, save money, and usher in a whole new era of golden tranquility. Unfortunately, the claim usually founders when some gimlet-eyed corporate executive asks, “What’s the financial impact?” and then walks away when the claimant simply reiterates the argument.

There are two problems in answering that question. First, it is easy to talk in generalities about benefits and hard to have to actually attach numbers to them. Second, just as companies differ, so too do their project results and their costs of slippages. In other words, any answer has to be specific to a company.

To help companies evaluate the cost of project slippages, we have prepared this guide, which consists of these instructions, a worksheet, and a spreadsheet. The complete package is available on request on our contact page.

Here is the procedure, which is excerpted from The Project Management Office Toolkit (AMACOM, 2004) by Jolyon Hallows. Our goal is to enable you to be able to provide a number when you are asked, “How much do slipped schedules cost us? What’s the potential recovery if we could bring our projects in on time?” There are eight steps in this process, at the end of which, you will have an estimate of the monetary cost of project slippages across your entire portfolio.

Step 1: Select Sample Projects

To start, select three or four typical projects. Don’t pick the major disasters—the ones with which nobody is willing to admit involvement—and don’t pick the big successes. You want to select projects that are as close to typical as you can find. Also, make sure to select projects that are finished, not ones that are in progress.

Once you have these projects, you will calculate five numbers from each one:

Let’s look at each in turn.

Step 2: Calculate the Duration Slippage

The duration slippage is the duration, on the calendar, by which the project slipped. For these calculations, we’ll use a sample project of three months planned duration, but that actually took five and a half months, giving a duration slippage of two and a half months.

Step 3: Calculate the Effort Slippage

The effort slippage is the amount of extra work that the project took. Our sample project was estimated at eight work months of effort, but the actual effort expended was thirteen months, producing a slippage of five work months.

To calculate effort slippage, it’s best if you have some means of measuring the actual time that people spent on the project, otherwise you will have to estimate it.

Step 4: Calculate the Cost of Duration Slippage

The cost of duration slippage is what it cost you because the project was late. There are two variants of this: a delay in realizing cost savings or a delay in realizing product revenues.

Delays in Cost Savings

If the product of the project delivered savings of $10,000 per month, then a delay of two and a half months means $25,000 in savings that the company did not realize. It doesn’t even matter if the savings started small and grew; you still lost money by being late.

Delays in Revenues

These are a little more complicated because you probably didn’t lose revenues, you simply deferred them, in which case, the cost of the slippage is the lost value of not having the revenues earlier.

As an illustration, assume that the sample project’s duration slippage meant that a new product launch was delayed by two-and-a-half months. Assume further that when the product was finally released, it produced initial revenues of $500,000 a month. The two-and-a-half month slippage, therefore, meant that $1.25 million of revenue was deferred for two and a half months. If the company’s average annual return on investment is 10 percent, the calculation of project slippage costs is:

10% ÷ 12 months per year X 2.5 months X $1,250,000 = $26,042

There may also be other costs associated with the slippage, such as plant re-tooling, pulling advertisements, or paying staff who were on standby prepared to take telephone orders.

If the customer is external, the cost of duration slippage may reflect penalties for late delivery or lost interest if the customer holds back progress payments.

Step 5: Calculate the Cost of Effort Slippage

The cost of effort slippage is the cost to your department of the extra effort required to complete the project. At its simplest, it is the blended hourly employee cost, including salary and benefits, times the number of hours of effort slippage. To illustrate, assume that your blended employee cost for project team members, including benefits, is $75,000 per year. Therefore, the five months of extra effort in the sample project cost the company:

$75,000 ÷ 12 months per year X 5 months = $31,250

Step 6: Calculate the Slippage Cost Factor

The slippage cost factor is a single number that relates the slippage cost to the project’s original effort estimates. It is the cost of slippages for each day of original estimated effort. To calculate it for a single project:

Therefore, for each originally estimated day, the project incurred about $340 in slippage costs.

Step 7: Average the Slippage Costs Factor

Now follow the same procedure to calculate the slippage cost factor for the remaining projects that you have selected, then take the average of all of them. The result is a dollar amount that, for these projects taken together, you incurred in slippage costs for each day of estimated effort.

Step 8: Apply the Slippage Cost Factor to Your Project Portfolio

You now have the data you need in order to determine how much project slippages cost your company or department.  

  1. On a spreadsheet, list all the projects, large and small, that your department executed in the previous full year. For projects that spanned years, enter the percentage of the project that was executed in the target year. For each project, enter the estimated effort, then sum the effort estimates. This will give you the total annual estimated effort for all the projects that you completed in that year.
  2.  Convert the total annual estimated effort to days using an average of twenty-one workdays per month, then multiply that amount by the slippage cost factor for the control projects. This will give you the annual slippage costs for all projects in your portfolio. This is how much slippages are costing you.

See the spreadsheet, available from our contact page, for an example.

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