It’s been a crazy couple of weeks for me in Massachusetts: teaching classes for seven straight eight-hour days, about four feet of snow, and a Super Bowl victory for the New England Patriots. All this has left me with limited time for writing a couple of blog posts I’ve been wanting to post.
In my recent post, “Delay Always Breeds Danger,” I mentioned that the cost of time on the refueling shutdown of a nuclear power plant is $400K to $2.5M in the US, depending on the grid and the size of the plant. On development projects such as for new pharmaceuticals or medical devices, smartphones, and other products for the commercial market, the impact on revenues of project duration can be even greater. And in my book Managing Projects as Investments, I show that for what I term “enabler projects,” the value/cost of the time can be greater still, multiplied by the delay caused on the value generation of all the enabled projects.
The biggest difference between the above projects is that, on the nuke outage, every member of the project team knows exactly what the cost is of each day the plant is off-line. Such knowledge is rarely the case with the other types of projects. And that is a big reason why nuke outages are scheduled and performed with a discipline rarely seen on projects in other industries.
By far the biggest impact of time is to the project sponsor or customer – the person or persons who are funding the investment in expectation of reaping its value, yet often must wait months or years for its completion. This is the person who should be stipulating the value of time right up front, in the contract or the business case of the project charter.
Such sponsors and customers rarely have much knowledge of the toolbox of modern project management. They and their lawyers draw up the initiation documentation in the way people have been used to doing for decades. Whatever the contract type – almost any flavor of fixed price, cost plus, or time & materials — they typically set a deadline and budget, often arbitrarily chosen, with no incentive for earlier or less expensive delivery. It is almost as though early completion is deemed impossible, but somehow the Patrick Stewart-like “Make it so!” mandate of deadline and budget has magical qualities!
In fact, the strictures of deadline and budget, while doing nothing to actually ensure on time and on budget delivery, often paralyze innovation and value enhancement. “Just stick to the knitting and do what we’re told. Seeking opportunities for improvement ain’t part of the scope!” Teams plan and work to be just-in-time and just-within-budget, and then often overstep when something unexpected happens.
If projects are investments (and surely they are!), the purpose of every other investment, and the way that it is judged, is to generate the greatest expected value for the least cost. On an investment in work, which is what every project is, the goal should be to generate a product scope that delivers maximum benefit, with the greatest possible difference between the expected value of the benefit and the cost to generate it. That is ROI, that is profit, and that should be the raison d’etre of every project.
The duration of the project almost always has a big impact on the project’s profit. This is true whether we think in terms of a deadline or simply a less straitjacketed metaphor such as a target completion date, where delivering late can be very detrimental, but delivering early can increase value to the investor (which it almost always does). Stipulating within the charter or contract a value target for the project that incorporates the impact of delivery date on expected project profit can do several beneficial things:
- It provides the project team with goals that are intimately related to the value of the intended project benefits, thus addressing a well-known shortcoming of project work, where projects frequently fail to generate benefits. One additional tool of the TPC methodology that supports this is the value breakdown structure (VBS).
- Through contractual clauses incorporating schedule-based incentives and penalties, it can tie together the benefit to the contractor team and the benefit to the sponsor/customer, alleviating the all-too-frequent principal-agent problem in contracts.
- Perhaps most of all, it plays into what should be one of the project manager’s greatest areas of expertise: time management through critical path analysis — a vital tool for schedule and value optimization whether or not the project is scheduled using critical path method (CPM). Such analysis, especially with the new concepts of critical path drag and drag cost, can be used to identify the delaying factors on any scheduled project or process, to quantify the cost in lost value due to such delays, and to assess the possible ways of reducing those costs. This is a key way in which project managers and schedulers can demonstrate the value they are adding to a project, by pointing to their analysis and showing how much additional value an alternative scheduling stratagem is adding to the sponsor/customer’s expected value. This should be their area of expertise, and they should revel in it!
Of course, all this is dependent on the sponsor/customer having an estimate of what the value/cost of decreased/increased project duration is for the project investment. And, of course, they should have that estimate – it is increased/decreased benefit to them, and due diligence requires them to perform such analysis. But what if they don’t? It’s amazing how often in the business world due diligence is ignored!
What to do when the sponsor/customer has no idea of the value/cost of time will be the topic of my next blog. Meanwhile, if you haven’t already read it, I would urge you to read this earlier blog post from a couple of months ago: “Turning Iron into Gold!”. It explains how to use the monetized cost of time in integration with the value of the scope and the cost of resources to generate metrics that support decision-making across the “Triple Constraint” parameters of the project effort.
Fraternally in project management,
Steve the Bajan