Last time I looked at 7 types of expense that are worth mentioning in your business case, to show that you’ve got a rounded handle on all the costs.
The Better Business CasesTM model that I mentioned last time goes on to describe even more different cost types that you should be aware of. I did know about some of these, but this list has some in that I wouldn’t routinely think of.
We might not need to mention or use them all in business case preparation, but it is worth having a general awareness of them, not least so you can ask your Finance colleagues smart questions!
1. Sunk costs
If your business case represents a Phase 2 or subsequent investment, then it’s worth mentioning the sunk costs: the money already spent on other parts of the work that you cannot get back. These might be in contracts already issued, purchase orders already raised that must be fulfilled or previous steps of the project.
They get a mention in the business case but they aren’t part of the appraisal. In other words, talk about them so that decision-makers have the whole picture, but don’t include them in the cost assessment or budget figures for this part of the project.
2. Full economic costs
This is another term I wasn’t aware of but it only means including direct, indirect and attributable costs for each option mentioned in the business case. In other words, flesh out your finances so they show the whole, true picture. Use a bottom up approach to get the real figures.
3. Attributable costs
Wondering what attributable costs are from the section above? These are generally the costs related to staff time. If your team members are caught up delivering the project in this business case, they aren’t doing work on other business cases, that might be equally or even more important. So attributable costs are things that don’t fall into the direct or indirect category but are relevant as they round out the business case.
I think too many managers forget that if you are working on Project A you can’t be working on Project B at the same time (because they expect that everything gets done, most likely!). It’s worth calling out that if you tie up a team full-time on this initiative, their costs go towards the project and their staff time is allocated.
4. Organisational development
Organisational development costs are the figures related to change management. These are definitely worth including. I can’t even remember the number of times I’ve had a project budget handed to me and there has been no allocation for training, printing, change management, travel and room hire for workshops or town halls, or anything else. Make sure your business case includes the costs of what it will take to go from the current way of working to the new way of working, including any process updates, change activity and staff development required to make proper use of the thing you are delivering.
5. Contingent liabilities
Now, I confess to including these in business cases in the past but not knowing the correct term for them. You are probably aware of them too: they are the expenses related to future events. For example, the costs you may incur to buy yourself out of a contract early. Make a mention of those in your financials as well.
So, we have all those, as well as capital, revenue, fixed, variable, step, opportunity costs and inflation that I covered last time.
It feels like this business case is going to be weighty! Remember to draw on your sponsor, finance analyst and the finance team more broadly for support with the numbers and to make sure your maths stacks up. Ideally, they should be providing the underlying assumptions and algorithms that make up the financial parts of the business case template. As the business case is a major input to how much money you get to do the work, it’s important.
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.
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!
James Lea, founder of Project Science, spoke at EVA 26 earlier this year. He talked about the psychology of estimating. “People,” he said, “are just as important as the techniques and data.”
He went on: “Plans and estimates are built by and used by people. Psychology matters.”
The talk was very interesting, and here’s what I took from it.
He started by asking us our experiences of estimating and the emotional responses we had at the time. Think about your own experience of estimating. Did you feel:
That’s all (unfortunately) normal, and we all nodded along as he talked.
Challenge how will estimates be used
James talked about how we should challenge how estimates should be used. “Uncertainty drives variable reactions in our teams,” he said. “It drives emotions and responses.” If you are open about how estimates are going to be used and how they should be used, that can help people feel more comfortable with the process.
Make estimating positive
How can we enable our teams to experience planning and estimating as a positive, creative experience? Instead of the stressful, “I suppose I can give you a number,” experience that it is mostly?
It’s hard for an organisation to accept that it doesn’t know the answer, and that can sometimes lead to a poor experience of the estimating process for the people involved.
Here are some ways he suggested we could turn the experience into a positive one:
Creating a route to predict the future
James talked about asking the question about whether we have a route to predict whether the estimate is a robust one or not. We need to understand what is in and out of our control. Where things are out of our control, accept that and track it.
Estimates are only a guess without a map of how you got there and a set of viable routes.
We often hear that people can’t estimate where there is no historical data. Well, data science should make it easier now to estimate from past performance and the vast tracts of data we store about projects. If leaders can give teams the data, in a way that helps with estimating, that should make our estimates better.
Building defensible plans
James talked about showing your workings and documenting the bases of estimates. Steve Wake, the conference chair, shared his thoughts too, namely that the audit office regularly says people don’t know the basis of estimate and therefore the best ‘proof’ that your estimates are good is that you can justify them.
He talked about bounding your plans carefully, describing the world around the estimate as well as the estimate itself to provide rigour.
He suggested we quantify and compare with data science, applying risk appetite to the delivery methodology to round out what we know.
That, and the other points discussed, are ways to shape the emotional response and create a safe space for people to estimate their work.
What do you think? Let me know in the comments below.
Last month I looked at what you need to consider when setting up programme financial management, drawing on The Standard for Program Management, Fourth Edition (2017).
Today I wanted to write some more about financial planning at programme level (as we would spell it here in the UK), again, using The Standard as the foundations but sharing my experience as well.
The financial management plan for a programme
The Standard talks about having a financial management plan which is made up of:
This all fits into the overall programme management plan, but could be a separate document.
The document is supposed to outline a lot of information about how money will be managed during the work. It should go into detail about:
In addition, as with all plans, you should include how the budget is going to be approved and what that authorisation process looks like.
In my experience, we did not have all this written out, although we did have a Finance team who were very much on the ball and probably had considered it without making it my job (thank you, wonderful Finance Manager!). In addition, the detailed technical budgets, which represented most of the cost (aside from staff) were put together by the technical architect, and were comprehensive. By the time it was my turn to look after the numbers, the paperwork seemed solid and it was very much a tracking exercise. I can’t take too much credit for the planning effort.
We were using international resources so the currency issue was very much relevant, and so was the risk reserve because we were doing something new to us with a high degree of uncertainty.
To be honest, I’m not sure we had a formal process for risk reserves either. Contingency had been added to the budget, but we did not allocate budget to risk management activities on a per risk basis. Given the scale of the investment, that was probably a mistake! I don’t recall any terrible dramas happening as a result of not having funding assigned in that way, even when the programme timeline was extended.
Contract payment schedules were documented in the contract instead. Our legal team bound up the contract and relevant schedules into little A5 booklets and I had one that sat on my desk and became my go to reference for all things to do with service level agreements, contract expectations and when I had to approve certain milestones to issue payments.
One time, I issued the payment notification and requested the funds be paid, but I had not warned Finance such a large request for cash would be coming so the actual payment was delayed a few days. That taught me I needed to start my process earlier so that Finance had notice that a large payment was due as part of our contract schedules.
Planning at a programme level feels harder because there is generally a bit more uncertainty, the timescales might be longer than your average project, more people are involved, and the numbers are higher. However, it’s never one person’s job. As you come together as a team, experts can provide their input to make sure the final result is something the governance team, finance team and programme management team can be confident with.
Project costs feels like a topic I’ve revisited many times over the course of writing this blog (can you believe I started it in May 2010?) and today I want to use my monthly video to go into the differences between direct and indirect costs and fixed and variable costs. They are terms new project managers might get confused about and we hear them thrown around in discussions. What do they mean for projects?
In this video I share a few examples of each so you can get a feel for how these might play out for your work. If you want a text-based post to refer back to, then this article on 5 types of project cost also includes some information on the topic.
Do you have different definitions or examples to share? Leave a comment under the video as this community is better for all the different voices in it!