Updated: Aug 12
Why You Need Project Economics
Once upon a time, there was a dedicated project manager named Raj. He worked tirelessly in a renowned consulting firm, managing significant transformation projects. Despite his intelligence and commitment, Raj faced a major challenge - his projects consistently went over budget, and the expected results fell short for both his firm and his clients. However, one fine day, Raj stumbled upon a game-changer - Project Economics! It was as if a light bulb had switched on in his mind, and he realized that this was the missing puzzle piece in his management toolkit. The economic aspect of his projects had been overlooked in his career development so far, and he couldn't believe he hadn't recognized its importance sooner.
A typical day in a Project/ Program Manager's Life
From planning and scheduling to managing resources and communication, he had a lot on his plate. It was like walking a tightrope, keeping all the stakeholders happy while making sure everything was running smoothly. Oh, and don't forget managing the project finances - a balancing act where every penny counts, and profitability is the name of the game. After all, money doesn't grow on trees, right?
But there's more to the story. Every project comes with its fair share of risks, and Raj had to be a master at handling them. It's like being a fearless warrior, anticipating and tackling challenges head-on to keep the project on track.
Raj believed in nurturing and mentoring his team for optimal performance. Hiring and firing were tough but essential for building a strong and capable team. Data analysis played a significant role in Raj's project management. Analyzing project data provided insights for future planning and decision-making.
Understanding Project Economics
Project Economics is a crucial pillar in project management, guiding managers toward success by effectively managing costs, estimations, and profitability.
Let us explore these components and their transformative impact:
At the heart of project economics lies effective cost management. It involves planning, estimating, budgeting, controlling, and analyzing project costs. Understanding cost estimation allows project managers to make informed decisions based on accurate projections, ensuring realistic timelines, resource allocation, and budget planning.
Different components of cost management
Effective cost management is a vital element in ensuring the successful execution of projects within budgetary constraints. To achieve this, several essential components play a pivotal role in financial control and optimization:
● Project Budget: Developing a detailed financial plan outlining estimated costs for all project activities helps project managers compare and track actual expenses, enabling them to stay on target financially.
● Cost Tracking: Continuously monitoring and recording project expenditures ensures expenses are well-documented, allowing prompt identification and resolution of budget deviations.
● Cost Control: Implementing measures to manage and regulate project expenses effectively involves analyzing budget variances, identifying cost overruns, and taking corrective actions to maintain financial discipline.
● Change Management: Efficiently addressing and managing changes during the project lifecycle minimizes potential cost escalations resulting from alterations in requirements, scope, or schedule.
● Cost Reporting: Providing regular and transparent updates on project finances to stakeholders offers valuable insights for informed decision-making and accountability.
● Risk Management: Identifying and assessing potential risks that could impact project costs allows project managers to proactively mitigate risks and allocate contingency funds as necessary.
● Lessons Learned: Conducting post-project evaluations to identify successes and areas for improvement refines cost estimation, budgeting, and financial management practices for future projects
Mastering the skill of accurate estimation is the backbone of project planning.
Project Estimation - Why and What?
Provides the foundation for:
● Effective project planning
● Resource allocation
● Risk management
● Stakeholder communication
Project Economics – Key Considerations
Project Economics – Key Considerations
Techniques for Project Estimation
● Expert Judgment: Seeking input from subject matter experts with experience in similar projects.
● Past Data Analysis: Utilizing historical data from previous projects to inform current estimations.
● Industry Benchmarks: Referring to industry-standard benchmarks for similar projects to derive estimates.
● Vendor Input: Collaborating with vendors to obtain cost and time estimates for specific project components.
Cost-benefit analysis is a significant focus in project management, helping project managers evaluate potential returns and benefits against project costs, leading to maximizing profitability and delivering value to stakeholders.
Cost Control and Monitoring
Cost control and monitoring enable project managers to keep a close eye on project expenditures, ensuring projects stay within approved budgets and resources are utilized efficiently.
Cost Control & Monitoring - Key Steps
● Establish a Baseline: Involves determining the total budget for the project and breaking it down into smaller components.
● Track Actual Costs: Keep a record of all the expenses incurred during the project.
● Compare Actual Costs to Budgeted Costs: Identify areas where you are over or under budget by comparing actual costs to budgeted costs.
● Analyze Variances: Establish the cause for variance.
● Take Corrective Action: E.g. cutting costs in other areas or seeking additional funding from stakeholders or outsourcing.
● Report Progress: keep stakeholders informed of your progress in managing costs.
Discovering factors contributing to project profitability empowers project managers to identify opportunities for increasing revenue and minimizing costs.
● Billing and Invoicing:
Understanding the billing and invoicing in project economics ensures smooth financial transactions and client satisfaction.
Exploring the final stage of project economics involves evaluating project outcomes and measuring actual results against initial expectations. Valuable insights gained from this process can be applied in future projects and continuous improvement initiatives.
Raj emphasized change management, risk management, and lessons learned as vital aspects of a project manager's role to drive improvements and prevent future issues.
To further emphasize the significance of project economics, I present a case study on an Organizational Resilience Project.
Case Study: Organizational Resilience Project
DBD Consultancy, a renowned global consulting firm, was approached by Swift LLP from Saudi Arabia (KSA) to implement organizational resilience in a government entity. Maple Consultants was already designated as the leading contract holder for the client.
(please download the full case from this link)
● No Prior Relationships: DBD Consultancy lacked existing connections with Swift LLP, Maple Consultants, or the government entity, leading to concerns about understanding the local business landscape and cultural nuances.
● COVID-19 Pandemic: Travel restrictions and in-person meeting limitations presented obstacles to project execution, necessitating collaboration with local parties or subcontracting.
Estimations and Negotiations
● DBD Consultancy's initial proposal included a 20% profit margin and a nine-month project schedule, while the RFP required completion within six months.
● To secure the project, DBD Consultancy revised their proposal with a 5% reduction in profit margin.
● Swift LLP informed DBD Consultancy about the client's request for further price reductions, which led to reluctance but was eventually accepted to avoid blacklisting.
● Delays in meeting the client's top management.
● Potential financial penalties due to the client's delays.
● Lack of access to the contract in the local language.
Based on the provided case study, here are some lessons learned and observations:
Did DBD Consultancy conduct thorough due diligence before committing to the project?
Answer: No, DBD Consultancy missed to do this. Engaging in prior business relationships with involved parties and gaining a deep understanding of the local business landscape and legal framework can significantly impact project success. The lack of prior business relationships with the involved parties and inadequate understanding of the local business and legal framework led to several challenges.
Did DBD Consultancy assess the risks associated with the project, including potential financial penalties resulting from delays?
Answer: No, DBD Consultancy should have done better on this front. A well-thought-out risk management strategy is crucial to mitigate the impact of unforeseen challenges. Identifying risks early on allows for proactive measures.
Was the contract clear and understandable to all parties, especially in the local language?
Answer: No, it was not. Ensuring clear communication and contractual clarity, especially when dealing with different languages, is vital. Providing contracts in a language understood by all parties helps establish a solid foundation for smooth collaboration.
Were realistic profit margins set from the beginning, considering the project's complexity and potential challenges?
Answer: No, profit margins were not realistic (under the pressure though). Underestimating the project's complexity can lead to adverse impacts on profitability. Setting realistic profit margins based on a comprehensive evaluation is essential.
Were project timelines and expectations realistically assessed and communicated?
Answer: No, the project severely lacked in setting expectations and in communication. Striving to meet overly strict timelines can lead to additional pressure and hinder effective negotiations. However, a realistic assessment of project timelines is vital to ensure successful project outcomes.
Were there attempts to improve communication and transparency between DBD Consultancy, Swift LLP, and the client?
Answer: No, communication continued to be a challenge between the parties. Clear and transparent communication helps manage expectations, avoid misunderstandings, and address challenges effectively. Regular updates and open dialogue foster better collaboration. It seems the escalation points were not defined.
Did DBD Consultancy reevaluate decisions when faced with unfavorable conditions?
Answer: Yes, but it appeared that they were under immense pressure by the three other parties involved in the project. Knowing when to reevaluate and make assertive decisions is crucial for protecting the company's interests. Flexibility and adaptability are key to successful project management.
Did DBD Consultancy display a culture of continual improvement?
Answer: No, this is not evident in the case study. Documenting lessons learned from past projects and incorporating them into organizational processes is vital for growth and avoiding similar pitfalls in the future. A commitment to continual improvement enhances overall performance.
Final comments on documentation standards.
It's good to talk/ ask and show rather than assume. DBD should have asked for any documentation standards to be followed, Client’s templates etc. or should have shown their own samples in the beginning (preferably, attached in the proposal itself) or should have shown a sample and got clearance before developing and submitting a full report.
The project resulted in a lot of expenses and no recovery for DBD Consultancy, hence it is important to control the project costs.
As shown above, knowing the components of the project cost will help to manage a portion or many if/ when required.
Project Economics stands as a powerful and transformative concept in the realm of project management. It has the potential to elevate ordinary project managers to exceptional ones, just as it did for Raj. He learned to manage costs, estimate accurately, and analyze benefits, making smart decisions to keep projects on budget.
This case study about DBD Consultancy showed how careful evaluation of contracts and effective risk management are crucial.
By conducting thorough due diligence, addressing potential risks, ensuring clear communication, and managing project economics project managers can mitigate challenges and maximize project outcomes.
Project managers can learn & improve like Raj by learning Delivering Excellence for their customers. There is value in investing in professional development and continual learning, leading to enhanced employability and promotability.
Are you ready to take your project management skills to the next level, just like Raj did? Join my comprehensive course on “project economics” with “Delivering Excellence in Management Consultancy and Project/ Program Management” and witness a turning point in your career. Gain valuable knowledge and earn certifications to become RIPER!
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The following picture helps to understand the 10 challenges and my proposed way to tackle them.
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Almost all of us deal with customers (whether internal or external) and all of us have some activities, which can be converted into Projects for efficiency, hence this course is important for all.
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