More than cash out the door
Cost – one of the worst four-letter words in business. We all hope for revenues without much cost. But as the saying goes, there’s no such thing as a free lunch. When projects are pitched, leaders need to examine all of the costs associated with a project and not just the external spend that will ultimately hit the treasury. A failure to evaluate the true cost of a project can lead to significant headaches down the line.
So what are the “true costs” of a project:
- External – as discussed, these are the cash costs associated with a project. This could take the form of software licenses, new hardware, equipment, or even contracted labor (clearly not an exhaustive list). Because these costs are easy to see – and track – they are often presented during a project pitch, but as we will see, they are not the only costs associated with a project.
- Internal – Internal costs come in two forms, cost of labor and opportunity cost. The first – cost of labor – is pretty straightforward but is often overlooked since it can be considered a sunk cost. Salaries are already being paid, regardless of a project, so it is easy to omit these internal hours from a budget. However, the “sunk” nature of these costs does not make them any less real. Likewise, any time an internal resource is used for a project, it is not available for a different opportunity. This finite nature of resources comes as a cost. While often not quantified separately from cost of labor, opportunity cost is nonetheless real and should be factored into the budget.
- Capital Cost – When a project sets out to build something big, often new equipment and resources are required to achieve the goal. These one-time expenses and their long-term maintenance must be factored into the cost analysis of the project.
- Cost of Change – This is often the most overlooked and least to be addressed cost during the planning process. Change does not happen on accident and there are costs associated with implementing the change in order to achieve the desired outcomes of the project. This cost comes in the form of training, sunsetting the old process, and decreased productivity in the early stages of implementation. Given the scope and scale of the change, there is a chance that personnel will be unwilling to adopt the new so they leave or require the old process to continue alongside the new.
- Contingency – no project plan will ever be 100% accurate, therefore, some amount of contingency funding should be made available to the project to handle the unknowns.
When true costs are not factored into projects, efforts are often undertaken that never should have been. When only the checks that are written externally are factored, the true cost is understated and leads to distrust, surprised stakeholders, and often time a decision to stop a project late in the game after a tremendous amount has already been spent. Be careful not to step of over Bennies for pennies.
