The Money Files

Recently there has been a discussion about which areas of the PMBOK® Guide are hardest to learn. Quality came up a few times: in my view that’s because the quality management techniques are not often put into practice.

On a training course I did recently, one of the delegates from a construction background felt that it was all second-nature, but others in the group had very little experience of quality techniques because the industries they worked in didn’t require the same focus on a quality outcome. It’s not that they didn’t care about quality, it’s just that it manifested itself in a different way in their jobs and they took a different approach to getting there.

So today I’m going to talk about one of the aspects of quality management: the cost of quality.

What Makes Up The Cost of Quality?

The cost of quality is made up of two things:

• Cost of conformance
• Cost of non-conformance.

Let’s look at each of those.

The Cost of Conformance

The cost of conformance is all about the work you put in to get a quality result. It’s the time and effort taken to ensure that the outcome is what you would expect and what meets your quality targets.

It is made up of things like:

• Training courses: both the cost of doing the course and paying the trainer etc and the time involved in putting people through the course.
• Documentation: the time taken to write it and the cost of getting it printed (or, more likely, your websites amended to put the documentation online)
• Verification and validation: any verification and validation activities you do to verify the deliverables against your quality plan.
• Testing: the cost of testers or testing tools, plus the time taken to go through a full testing cycle.
• Audits: if you are subject to formal quality audits, they take time and effort too.
• Internal reviews: if you don’t have formal quality audits planned then you probably have informal reviews in your schedule. These also take time.

These activities cost money, and you pay out the money in the hope that the project’s deliverables will be better quality and that they will be used in the best possible way. The time and money spent on the cost of conformance is what you hope drives the best business value from your deliverables.

The Cost of Non-Conformance

Not working with quality in mind also costs money. Money drains through your contingency budget if you aren’t careful because not delivering things right first time takes its toll on your cost management and your project schedule.

For example:

• Scrap: if you have to throw away deliverables and start again, that is wasted money and time.
• Rework: equally, if you have to go back and polish deliverables because they weren’t right first time, that also costs money and time.
• Complaint handling: unhappy stakeholders take time to talk round. You might also find your project funding baskets of fruit or something similar to apologise to people. It happens, but it costs money (and time).
• Product recalls: you’ll see this in the press every so often, like the Toyota recall of cars with faulty airbags or the new tumble dryer we needed as our last one was recalled. The effort in managing a product recall, plus the cost of the negative publicity, is massive. You don’t want your project to be associated with that. Note that this cost may well come a while after your project is formally closed, but it’s still a cost to the company for a job that wasn’t done to the right quality standards.
• Lost future business: let’s not forget that the cost of getting something wrong, even if you then do put it right, could be that the client doesn’t want to work with you again. That’s lost business and while it’s hard to put a financial figure on it you could if it results in them cancelling an existing contract.

On Balance…

So, getting to ‘quality’ can cost you from various aspects. Is it worth it? Absolutely. In fact, it’s more likely that the potential cost of non-conformance will far outweigh the cost of putting quality measures in place and following through on them.

Whether you currently do a formal quality plan or not, it’s a good idea to take a few minutes to work out whether the cost of quality is something that is being taken seriously by your project team at the moment. If not, what are you going to do about it to improve the quality culture and schedule in some cost of conformance tasks to give yourselves a better chance of success?

When you are trying to put estimates together, whether it’s for time or cost, it’s important to be as accurate as possible because the estimates form the basis of your plan. They also set the expectations of your stakeholders, so getting them right – or as close to ‘right’ as possible – makes for an easier project for everyone.

So, what things could affect your project estimates? Here are 5 things to look out for when putting your estimates together – whether it is you doing the estimating or someone on your team.

1. Optimism Bias

We are predisposed, most of us, to look on the bright side of things. How long will it take me to drive there? 20 minutes? Then you do it and realise it took 40.

Being positive is fine, but it’s not realistic most of the time in a project environment. We need to look out for where being overly optimistic, or even just a little bit optimistic, is going to have an implication for the project.

Manage it by: Have several people do the estimate and then take an average. PERT is also a good estimating technique to use if you are worried about estimating bias because it takes best and worst case scenarios into account.

2. Pessimism Bias

I don’t know if this is actually a thing, but it’s the opposite of people being too optimistic. Estimates are either deliberately padded with extra contingency or people are unrealistically negative about the amount of time it will take them to get the work done.

Manage it by: PERT again. If you don’t want to use that, then at least get the estimates peer reviewed so that any that are unrealistic can be weeded out.

3. Experience

The experience of the estimator makes a huge difference.

Manage it by: Finding people who are skilled at what they do to work on your estimates. If you can’t get estimates done by the most experienced people in the room, then again a technique like PERT will help average them out. Alternatively, look outside your immediate team or company for people who could help you estimate.

4. Timescales

Have to do an estimate quickly? It’s not going to be very good because you won’t have had time to check out all the assumptions. Rushing makes for poor estimates.

Manage it by: Build enough time into the plan to do a decent job of estimating. If you absolutely have to have a quick turn around on  estimates get your best people on it and make sure that the person asking for the estimate knows that it is of the ‘quick and dirty’ kind.

5. Incorrect Spec

If you estimate from a specification or set of requirements and then find out that these are wrong, you are necessarily going to be wrong in your estimate too. Whether it’s because the users want more put in or some elements taken out, you’ll have to adjust your estimates as well.

Manage it by: It would be lovely to say that you must insist on fully-thought out estimates every single time but I know that isn’t realistic. You can only do your best and have a great change control process in place to deal with the changes when they happen along the way.

What else do you think affects the quality of your estimates? Let us know in the comments.

In this video I talk about some of the commonly asked Q&A around timetracking, especially about people feel about filling them in. For example, what about those experts who only want to take part in your project when they can cross-charge you for their time?

Payback period is an investment analysis technique and it’s personally one of my favourite tools to use for investment appraisal because in my view it’s the easiest to understand of the tools at my disposal.

Today I’m going to work through an example to show you what it looks like. But before we do that, let’s remind ourselves why we might want to use it at all.

Why Do An Investment Appraisal?

Investment appraisals are what goes into your business case to show why your project is financially viable. They are decision-making tools.

The investment appraisal also allows the decision makers to compare your project with others, which they’ll need to do as all the projects are competing for the same corporate funds. The figures from the investment appraisal, and the associated blurb in the business case, confirm why the project is worth the investment based on forecasted cost and time. It justifies the project based on the expected benefits.

So, investment appraisals matter because they help get your business case approved. Obviously, if the numbers don’t stack up then your project doesn’t get approved. Investment appraisal techniques help you show the cost and benefits of your project in a way that makes it easy to compare with others.

What Is Payback Period?

There’s a little video I made about payback period here, but in essence it’s this:

Payback period is the time taken to recoup the project investment.

Let’s take an example.

A project costs £1,000,000. The benefits are:

• Year 1: £500k
• Year 2: £300k
• Year 3: £200k
• Year 4: £200k
• Year 5: £200k

As you can see from the graph below, the project investment equals the benefits for the first three years, so the payback period is three years.

In other words, you’ll earn back the amount spent on the project through the project’s benefits once three years have passed. At that point you ‘break even’. Benefits from Year 4 are cash in the bank.

From a business case and project justification point of view, the shorter the payback period, the better.

Problems With Payback

So far, so straightforward.

The problems come when you try to be a bit more sophisticated.

For example, payback period doesn’t take into account discount rates (how much money will be worth in the future: is the £200k benefit in Year 4 really worth the same as £200k would be today?).

As with all investment appraisal techniques you can’t measure intangible benefits in this way. Payback is only good for working out the financial side of benefits: the monetary cost and the financial benefit gained.

That makes payback period a bit crude but as long as everyone is aware of the limitations, it can still be a useful tool to forecast when the project will break even and start to turn a profit.

There are other ways that you can put financial information into your business case: Net Present Value and Discounted Cash Flow are others.

What investment appraisal techniques do you use?

Always a fan of a snazzy graphic, I put this one together to summarise the things that you should be including in your project business cases.

Do you (or your management team) include all of these in your business case template? What else do you think should be in there that I haven't covered below?