Are you putting together a business case? This is the time of year when many project teams are kicking off new work with the lovely new budgets that are available at the start of a financial year.
The UK government (HM Treasury and the Welsh government)’s guidance called the Better Business CasesTM model, has a section on different costs that are helpful to include in your outline business case.
Project managers don’t always get involved with business case creation but I think it helps when we are. If you are working on a new proposal, here are 7 types of cost that you can consider including as part of the economic appraisal for why the work should take place, and to show that you have fully considered all the elements.
1. Capital costs
For my projects, I’d say that capital costs make up most of the budget. These relate to buying equipment, whether that is IT kit, or in my case, machinery. They relate to costs that can be capitalised and (depending on your local regulations it might be different for you) the costs of bringing an asset into service.
2. Revenue costs
Also known as opex, these are pretty much the opposite of capital costs: things you can’t capitalise but are required for running the project. Maintenance, operational costs like some software licences, things that hit the P&L like the electricity bill and disposable coffee cups, if your project is required to pay for those.
Even if they are not necessarily part of your project budget, it is worth knowing abou tthesee and including them in the business case to show you have considered the whole life, complete costs of the work required.
3. Fixed costs
These are costs that are constant over time, regardless of how long the project goes on for. Typically for me, these are resource costs that are spread over the life of the project. They could also relate to other overheads like having to hire a portacabin as a project office on site.
4. Variable costs
The monthly impact on your project budget from these costs are variable. They tend to relate to how much of something you use per month, so it could be printing, it could be downloads of something, it could be training costs or meeting room hire.
5. Step costs
These are prices that increase as you reach a certain threshold. For example, if you use project management software you’ll be familiar with the licence model for SaaS tools where if you go into the next ‘bucket’ of users you’ll be charged an uplift. Let’s say the cost for 1-10 users is a certain price per user. When you hit user 11, you’ll be charged a different price.
This could also relate to items like post: as you ramp up receiving in items of post, your parcel handler changes the pricing structure and you end up paying more for hitting the threshold.
6. Opportunity costs
In a business case, you want to say what you’ve looked at in terms of other solutions. The model says that these should be explored in full and be representative of salary with all the on-cost (pension, employer’s tax contributions etc). These represent what you won’t be doing if you go with the recommendation: the loss of other alternatives.
7. Inflation
Yes, given the rising prices we’re experiencing at the moment, it’s worth building some inflation into your financial modelling. Your Finance team can tell you what the right amount to include is for general ‘normal’ inflation and also whether there are other rates applicable to certain elements of the business case, or the cash flow projections.
Next time I’ll look at another 5 types of cost you should also be including in your business case presentations, so watch this space!
