Estimating the Cost of Time When Ain’t Nobody Told Ya!

“Time is a long rope.”

                                                        – Another old Bajan proverb (We got a ton of ’em!)

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Okay, so from the discussion in my recent blog posts Time Is a Cost Even When Nobody Says How Much and “Project Managers Should Revel in Time Analysis!”, estimates of the expected monetary value of the project and of the value/cost of time should be the responsibility of the sponsors/customers, those who are investing in the project in hopes of a greater return in value. That return is almost always impacted by completion date – acceleration usually adds value and delay subtracts value. And it is those in the trenches, the project managers and SMEs on the team, who can see how to use that information to eliminate drag and maximize the expected value of the project.

But what if the sponsor/customer doesn’t understand how important this information is, or how to build incentives around schedule into the charter or contract? What if the sponsor/customer relies on the customary but often deeply damaging artifact known as the deadline?

As we saw in the last post, a project manager knowledgeable in critical path analysis (and especially in the new metrics critical path drag and drag cost), can demonstrate his or her value by making trade-off decisions that maximize value to the sponsor/customer. But if that information is not provided, what can the project manager do? One of the sharpest arrows in her quiver is largely negated.

The cost of time is different on every project, and the factors that go into generating an estimate vary considerably by application:

• Market window and order-to-market in commercial new products.
• Inability to generate revenue due to a maintenance shutdown of a major piece of equipment (e.g., power plant or refinery).
• The value of lives saved in healthcare, and lives and property saved in emergency response.
• Delay in using the product of a project due to later deployment.
• Delay in the schedules of other projects in the program due to later completion of an enabler project.
• Retirement of the risk of being late when a project is completed early.

In the LinkedIn discussion group The Project Manager Network, Norman Patnode made a very interesting comment, suggesting that the cost of a unit of time on new product development projects could be approximated as the projected average revenues for a similar unit of time for the peak sales year. This is very interesting to me and I’m hoping to discuss this at length with Norman. But that still leaves us needing to estimate the value/cost of time on all the other types of projects.

Let us take as an example one of the more difficult projects for which to estimate the value/cost of time: implementation of an organization-wide software system such as SAP, Oracle or Peoplesoft. What would it be worth for every unit of time that such a project is accelerated or delayed?

We don’t know. Someone may have a general idea – perhaps the senior managers who approved the project. But even if they do, they have seen fit to leave us in the dark.

It is in a case like this that I recommend doing some back-of-the-envelope calculations designed to generate a very conservative estimate. This estimate can then be used to raise the topic with the sponsors/customers in order to generate a more precise estimate.

So we don’t know the value/cost of time on our ERP system project, or even how much value the whole project is expected to generate. But even while being kept in the dark, the project manager typically knows two items of information:

• She knows the budget – let us assume $5M.
• She knows the target duration or “deadline” – let us assume 12 months.

There is one more thing she may know – the “payback” period that is customarily used in her organization to justify new systems such as this one. Capital equipment such as blast furnaces may have a required payback period of as much as 40 years – but that certainly isn’t the case with software systems! Any software system that isn’t obsolete in three years will be in five – and those are the two most common payback periods for such systems.

If the project manager knows that the system was likely justified on the basis of a three-year period, she should use that – but otherwise, I advise going with five years. Remember, we’re looking for conservative numbers, just to get the discussion started.

If the budget for the project is $5M, the one thing everyone knows is that the value it is expected to produce will be more than $5M, because every project is an investment and no one knowingly makes an investment that is expected to generate less value than it costs.

Five-year rates on US Treasury securities are currently about 1.5%. But projects are much riskier investments and also may require paying state taxes on any increased profits. Indeed, it is hard to believe that any organization would invest in this new system if it didn’t expect a real (i.e., inflation adjusted) return of at least 4% per year. If you think your project is expecting a lower annual return than that, use your own number – but I think 4% is pretty conservative.

4% per year over five years is 20%. 20% of $5M is $1M. That means that a very conservative estimate of the project’s value generation is $6M over 60 months, or $100,000 per month or about $22,000 per week. Without other information (such as knowledge of a likely spike or cliff in the value generation at some point), it seems reasonable to assume that a week’s delay on the project will result in one week less operating time to the same point of obsolescence, resulting in a reduced expected monetary value of $22,000. And a week of acceleration would add a week before the same point of obsolescence and thus increase value by $22,000.

That is the information that may allow the project team to justify additional resources on the critical path, such as by adding $10,000 of resources to eliminate an activity’s three weeks of critical path drag, increasing the project’s expected value by $66,000 at a cost of $10,000.

Of course, the project manager should not simply spend that extra money on her own initiative. Instead, she should incorporate these calculations in a memo to the sponsor/customer.

“Here is what the minimum cost of value/time on this project seems to me to be. If I know this, I think I can find opportunities to generate added value. Do these numbers seem about right, or is there another estimate of the value/cost of time you’d like me to use?”

And, as likely as not, the reply will come: “Oh, no! The value of time on this project is much more than that! I’d put it at around $50,000 per week. If you can save any week by spending a lot less than $50,000, please let me know immediately. Oh, and good work!”

And that is how a project manager gets a reputation for adding value.

Fraternally in project management,

Steve the Bajan