Every investment decision – stock purchase, real estate development, commodity options, new product development, poker hand – must be based on analysis that estimates the value that the investment will generate at some specified point in the future. That is one reason why the redefinition of projects as “investments in work” is so important. As most project and program professionals are keenly aware, a key area of disappointment with the way that projects are currently executed is their frequent failure to produce benefits. Defining them as investments will enforce renewed emphasis on the expected benefits—not just by listing them but also by:
- Estimating the expected value of such benefits if delivered on a specific date;
- Estimating how a change in that delivery date, later or earlier, might change that expected value;
- Tying those benefits to specific items of product and project scope (via the value breakdown structure, or VBS);
- Tying the items of project scope to the project duration and budget through critical path drag, drag cost and true cost (TC of a critical path activity = resource costs + drag cost); and
- Making every project and program decision with the impact on expected value (and the DIPP) in view.
One of the crucial types of projects to deal with as an investment is the sort that in my book Managing Projects as Investments: Earned Value to Business Value is referred to as an enabler project.
- An enabler project is usually part of a larger overall program.
- Its value comes from its role in increasing the value of the overall program by enabling the other projects (and perhaps non-project work) in the program.
- In that role, its value is enlarged by the value of the projects it enables.
- Its acceleration or delay value/cost is therefore also often increased because of its impact in delaying or accelerating the schedules and value generation of the other projects.
There are many, many examples of this type of enabler project. But a concrete example is that of the development of a luxury vacation resort:
Paradise Island Luxury Resort will provide luxury vacation time for the whole family!
- Five-star hotels and restaurants, as well as boutiques for the rich-and-famous. These are expected to generate an average of $2 million per week above operating costs, or $520M over 5 years after the Grand Opening.
- A championship-quality golf course, where the greens fees are expected to generate $1 million per week above operating costs, or $260M over 5 years after the Grand Opening.
- A marina for luxury yachts, expected to generate $0.5 million per week above operating costs, or $130M over 5 years after the Grand Opening.
One of the great attractions of the resort is its guaranteed privacy. This is due to the fact that it is located on Paradise Island. Although only a short distance from land, the cliffs that comprise the island’s perimeter make it completely inaccessible. We therefore have to build the Garden of Eden Bridge to the island in order to:
- Transport the heavy construction equipment and materials needed for the development, and
- To allow the guests to reach the island once the resort is opened.
It is planned to take 52 weeks to make the bridge ready for the transportation of equipment and materials. Only after that point can work start on the hotels, restaurants, boutiques, golf course and marina. The Grand Opening of the entire resort with all its features is intended for 104 weeks after transportation across the bridge becomes possible.
When the resort opens, a tollbooth will be placed on the bridge. It is expected that tolls will amount to $1,000 per week above operating costs, or $260,000 over five years.
- What is the expected value of the entire resort over five years?
- What is the expected value of Garden of Eden Bridge over five years?
- What is the value/cost of time on the Garden of Eden Bridge project?
- Based on the information above, how much would it be worth if we could shorten the bridge project by six weeks?
- If the Garden of Eden Bridge is being built by a contractor on a fixed price contract, what should the customer insert into the contract?
Scroll down for the answers.
- What is the expected value of the entire resort over five years? Combined, the Paradise Island Resort is expected to generate $3.5M per week above operating expenses, or $910M over five years, plus $260,000 in tolls from the Garden of Eden Bridge.
- What is the expected value of Garden of Eden Bridge over five years? $910.2M over five years! There is no value unless we build the bridge – it enables the entire project! So the value-added of the bridge project is equal to the value of the entire luxury development program.
- What is the value/cost of time on the Garden of Eden Bridge project? Any delays on the bridge delay all the other projects, and the resort opening, on a one-to-one basis. Therefore the value/cost of time on the bridge project is $3.5M per week (+ $1,000 per week for the bridge tolls). In other words, that is the drag cost per week for every activity on the bridge project’s critical path.
- Based on the information above, how much would it be worth if we could shorten the bridge project by six weeks? Each week that we can shorten the bridge project is worth $3.5M per week + $1,000. That means that the expense for additional resources that cost up to $21M (+$6,000 for the bridge tolls!) would be justified.
- If the Garden of Eden Bridge is being built by a contractor on a fixed price contract, what should the customer insert into the contract? Substantial monetary incentives for each week earlier that the contractor completes the bridge. Unless the contractor is incentivized, he likely will not even seek opportunities to accelerate the schedule, costing the customer $3.5M per week for every opportunity overlooked. And if the customer doesn’t do this but the contractor recognizes the project as an enabler project, the contractor should:
- Approach the customer;
- Explain the situation;
- Point out that he might be able to accelerate the schedule by spending more money; and
- Suggest amending the contract to include time-based incentives that would maximize the customer’s value.
This is a very simple — but easy to understand — example of an enabler project and the importance of identifying it as such and of computing its multiplied value/cost of time. What are some other examples of enabler projects in the real world? Have you worked on any? Were their unique value aspects, as shown in this example, understood and exploited? If you have other examples from your experience, please describe them in this website’s Discussion FORUM here.
Fraternally in project management,
Steve the Bajan