The Cost Analysis Dilemma in Project Management

By Russell Harley

Using cost analysis is an important tool in almost every kind of project. It helps determine if a project will improve a business’s profitability or not, so a great deal of effort goes into it during the beginning stages of a project. If an effort’s Return on Investment looks good, then the project moves forward and work begins.

Calculating ROIThe major issue with cost analysis is that a project’s future benefits are predicted by past and current behavior. Assumptions are being made: guesses about future trends, etc., are fed into the analysis. Contingency data is also added to try and reflect any unknowns that may occur as the project moves along. This is usually reflected by adding a 5 to 20 percent bump in overall cost.

All the above seems pretty reasonable, doesn’t it? This, of course, is why cost analysis is used so much. So why do so many projects get canceled due to cost, or go significantly over budget?

From my experience, there are two main reasons:

First, there’s the “human” factor. If a 10 percent contingency factor is added in and that causes the project to be marginal, then the first thing that happens is it’s adjusted down until the ROI improves. Additional efforts — like reducing the scope, extending the time frame across fiscal years and the like — are all tricks that can get the project approved by improving the ROI. Then there’s the “I want this project done and I don’t care what it costs” decision. All of these are based on human decisions that negatively impact the final estimated cost of the project.

The second reason is “stuff happens.” People leave, new priorities arise, technology that worked well in the lab/test environment fails in the field, assumptions prove faulty, etc. Unfortunately, in a lot of projects it’s too late to cancel the project by this point. This is especially true if the company’s leadership is involved.

I actually worked on a project where the initial analysis estimated a cost of around $1 million and a three-month schedule. The project actually ended up costing $2.3 million and took six months to complete. Why? Because the assumptions made at the beginning – which were based on lab work – didn’t hold up when we started executing. The company made the assumption that if it worked in the lab, it would work everywhere, which of course it did not.

So why wasn’t the project canceled? Since the CIO was involved, it had to be completed, regardless of time or cost. In addition, half the company had the new system involved, while the other half didn’t. So “failure is not an option” also came into play.

So the question is, why bother with all that time and effort creating a detailed cost analysis in the first place? Why not just decide the project must be done no matter what and proceed? Or, if a number is needed for budgeting, why not spend a few hours developing a ballpark cost and call it good? At least that way the time and effort involved in the cost analysis could be put to better use.

Either of the “human’ factor” or “stuff happens” is enough to render a cost analysis a waste of time. Both of these things impact many projects, which in turn makes their initial estimate seem even more pie in the sky than it was at the beginning. Given these factors, it’s a wonder why anyone would put the amount of effort into cost analysis that we now do. But since the Finance department controls the purse strings (and they love numbers), the cost analysis will continue to be an important part of the project management process, regardless of how inaccurate or useless it turns out to be.

3 Responses to “The Cost Analysis Dilemma in Project Management”

  1. The main problem with any analysis in project management, especially project management in IT, is that the whole “profession” is not real, its smoke and mirrors and has been created to be a pawn for senior management to play politics. In the 90’s when re-engineering became a sad reality and most of middle management was wiped out, middle management were the ones who ran these projects, they had the knowledge and senior management were forced to listen to them. Once middle management was gone they were replaced with project management, zombies, that were forced to take orders from senior management. And even if project managers were capable of complex analysis, which most aren’t, and PMP doesn’t even bring them in the ballpark of making them capable, senior management will ultimately run the project and all analysis are basically null and void. Cynical? Have you ever tried to develop a risk plan around all the things you were pretty much sure would happen and senior management told you to take out?

  2. Richard Morgan

    Losing experienced people sounds like the root of the problem. It takes time for people to gain the experience in estimating projects. If a company doesn’t retain and promote people who bring projects in on time and under budget, it deserves overruns.

    Also, being hardnosed about changes after a project has been estimated is essential to being on time and under budget. This may be more important than the initial estimate. My first boss was extremely hard about changes, and was a legend in the company for bringing in projects on time and under budget.

  3. Michael

    So true. I’ve seen so many times when cost analysis was done, but at the end of the day, the it didn’t even play into the decision. Just a check in the box to show everyone “hey our cost analysis says…” but really it says whatever it NEEDED to say.