just searching for your opinion on the following (I had a robust discussion with a peer on that and we're not fully aligned):
- Let's suppose to have a 5M Budget project.
- This budget includes feasibility (1M) + Development (4M)
- Based on the company product development process, Project charter is one of the deliverables of the feasibility stage.
- We're currently in the feasibility stage and managers are discussing whether to approve the project (despite interesting Revenues, the cost is considerably high).
What I would do is to keep financing feasibility (1M) then deciding what to do at Project Charter stage. Do you think it makes sense or would be better another approach? Saving Changes...
*In the initial stage, a rough cost estimation between -25% to 75% accuracy range is accepted.
*Later, when a project proceeds to its planning, you can establish a budget estimate between -10% to +25% accuracy range.
*Finally, when enough information about the project has been collected, and a detailed scope of work is determined, you can calculate a definitive estimate, between -5% to +10% accuracy range.
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1 reply by Matteo Girotto Moretto
Feb 03, 2023 9:11 AM
Matteo Girotto Moretto
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Thanks a lot Veronica for your clear feedback. I absolutely agree that as I move ahead towards the planning stage, the accuracy is gonna increase. My only residual doubt if when to give the green light of the project. At time 0 (i.e. before spending any money), after the feasibility (i.e. 1 M Spent) or even later?
It seems that it is the right approach. You can work on the draft of Charter in your free time, however, I would not spend a lot of time on that unless I feel the project will be approved. Saving Changes...
*In the initial stage, a rough cost estimation between -25% to 75% accuracy range is accepted.
*Later, when a project proceeds to its planning, you can establish a budget estimate between -10% to +25% accuracy range.
*Finally, when enough information about the project has been collected, and a detailed scope of work is determined, you can calculate a definitive estimate, between -5% to +10% accuracy range.
Thanks a lot Veronica for your clear feedback. I absolutely agree that as I move ahead towards the planning stage, the accuracy is gonna increase. My only residual doubt if when to give the green light of the project. At time 0 (i.e. before spending any money), after the feasibility (i.e. 1 M Spent) or even later? Saving Changes...
Vijay SuryavanshiProject Manager - Engineering| RECARO Aircraft SeatingPlantation, Fl, United States
Hi Matteto,
What Veronica is saying is when you start executing the project.
Right now if you are proposing a project to your Steering committee, they are making a decision to select your project.
The committee looks for the following 1. Time value of money (Present, past and future) 2.Net present value - NP V of the project must be positive for project selection. 3. Internal rate of return - usually 6-8 percent IRR is exoected. 4. CBA or Cost benefits abnalysis - Your inital devlopment costs must outweigh the benefits customer gets along with profits for organisation. 5. ROI - This is another measurement used like IRR. For this you must support your project with a business case. How much sales is expected in the future (next 4-5 years) and how many volume you sell along with expected profits. 6. Payback period (PB) - this is another parameter the committee looks at. Some companies reject projects if pay back period is longer 5-7 years. usually, companies want pay back period to be 3 years. That means faster return for investment. Very few companies think long term. Examples are the ones investing in climate or green energy. So if the cost of your project is high and return less and comes over a longer pay back period, the committee may no select the project. The opportunity lost is called opportunity costs. If you already did feasibility studies and spent ( $1M) this is sunk cost. The committee will put their money where they can make money and must make business sense. Don't take it personal if your project is rejected. And in the end the company has to make profits and is accountable for shareholders, customers, employees and all other stakeholders.
Thanks a lot to all of you!!! Now I have ideas more clear. I got the answer I was needing!! I appreciate your help. Now I know that if the decision is made after the feasibility there will be a sunk cost and the new business case will be updated at that time considering the expenses from then onwards.
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1 reply by Vijay Suryavanshi
Feb 03, 2023 12:14 PM
Vijay Suryavanshi
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Agreed.
And your new business case must justify the ROI/IRR etc. that committee is looking for.
Regards
VJ
Saving Changes...
Vijay SuryavanshiProject Manager - Engineering| RECARO Aircraft SeatingPlantation, Fl, United States
Feb 03, 2023 11:50 AM
Replying to Matteo Girotto Moretto
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Thanks a lot to all of you!!! Now I have ideas more clear. I got the answer I was needing!! I appreciate your help. Now I know that if the decision is made after the feasibility there will be a sunk cost and the new business case will be updated at that time considering the expenses from then onwards.
Agreed.
And your new business case must justify the ROI/IRR etc. that committee is looking for.
Regards
VJ Saving Changes...
