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Achieving Cost-Effective Projects

written by: R.P.Orticio • edited by: Ronda Bowen • updated: 5/24/2011

A project will not prosper if at the outset it could not guarantee tangible cost-effective results. Many undertakings assure of cost-effective projects, but they failed because they simply overlooked the ramifications of three important factors: costs, benefits, and resources.

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    C-B-R Framework

    Costs-Benefits-Resources Tripod 

    The key elements of cost-effective projects are costs, benefits and resources. Connecting these elements to form a triangle clearly defines the following relationships: costs-benefits, resources-benefits, and costs-resources. Being the simplest yet strongest polygon, the triangular framework offers a solid structure for project management. Assessing these relationships will guide managers on their tasks as administrators.

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    Costs-Benefits

    The best way to get management approval is through controlling project cost. Being a function of cost, advantages that could be derived from any venture should override the incurred expenses. Advantages fall into four broad categories: a) increasing revenue, b) reducing cost, c) improving product quality and customer service, and d) satisfying external requirements, which usually come from government regulatory bodies.

    The equation involving expenses and advantages calls for cost-benefit analysis. A good example of this is the article, “Writing a Cost-Benefit Analysis", by N.Smith.

    The bottom line is to determine the desirability of the different aspects of a project, negative and positive, and come up with common unit of measure which is money. The net benefit, which must be positive for management approval, is just the sum of the present value of the benefits less the present value of the costs.

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    Resources-Costs

    Do not bite more than you can chew, the saying goes. This succinctly surmises the need for evaluating available resources against estimated budget. In general, if funds, facilities, and manpower are not enough, carrying out any plan is put on hold.

    Nevertheless, estimated costs against available resources in terms of manpower, material, machine, methods and money, or 5M's of management need also to be analyzed. Check-listing and financial assessment can be made in coming up with a comparison between costs and resources, in order to know gaps that need to be addressed. For example in procuring new trucks for a transport company, the availability of drivers, mechanics to handle repair and maintenance, including their training if there are new technologies introduced, adjustment of work assignments, garage or additional parking spaces, tools and equipment, and funds to finance the purchase are among the details to be evaluated. Possible movement and deployment of people are also clarified in connection with additional work loads and use of new equipment.

    After assessing and comparing, the amount of needed investments, which consist of the existing assets and additional funds (if ever necessary ), is computed. Usually, there are more opportunities to spend money than money to spend. But weighing the pros and cons, project proponents may drumbeat the need to push the proposal. This need have to be probed through the next level – benefits versus resources.

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    Resources-Benefits

    Meilier Page Jones in his book, “Practical Project Management", stated that everyone has finite capital and limited opportunities to make capital improvement to business. He also added that, Since a company's resources are not infinite, they must be carefully apportioned among projects to realize the greatest over all benefits over cost. Initiate a project only if it represents a good capital investment of the company's resources."

    Checking out resources versus benefits requires short, middle, and long range projections. These projections might be overlooked in the cost-benefit analysis which often is limited to measurement of present values. For instance, a number of companies had embarked on quality improvement program, which in a way is an image-build up strategy, by acquiring quality awards from certifying institutions. Awards could indeed enhance company's image particularly if the certifying institutions are popular and there is a favorable market promotion accompanying such citation.

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    The application fees for being quality certified may not be that much, but the process of compliance to certification such as mobilizing people against daily routines, readjusting work to accommodate new jobs with corresponding paper works and over time pay, and putting up additional facilities if required, eat up much time and funds from company's coffers.

     

    These are the experiences of Florida Power & Light (electric company) and Wallace Co. (a firm dealing with oil equipment) which were winners of Japan's Deming Prize for quality management and Commerce Department's Malcolm Baldrige National Quality Award respectively. Florida Power abandoned the program because of complaints from workers over voluminous documentary requirements while Wallace Co. filed for Chapter 11 Bankruptcy as it cannot cope with the falling price of oil against the increasing cost of quality improvement program.

     

    Infusing resources to projects that will provide improvement to the competitiveness of a company is a wise move. But a wiser step is first to determine the feasibility of the project, which is the harder part. For an established enterprise, the problem lies not much on the availability of resources but on whether the project is viable. Checking out the four basic aspects of business: market, finance, technical and management, a well-prepared business plan facilitates feasible projects with due regard to economy, environment and society.

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    Costs-Benefits-Resources Trilogy

    In general, three interacting factors influence cost-effective projects: costs, benefits and resources. An example on how this three factors canFigure A - costs benefits resources  work together is illustrated in figure A. Among the projects presented, which ones are viable to initiate? Considering the negative result in the cost-benefit, project X can immediately be eliminated. Project Y has a net value of $20M compared to Project Q's $18M. But the latter has a ROI of 1.9 : 1 against the former's 1.8 : 1. Decision on which project to choose, either Project Y or Project Q, requires the recommendations of financial managers, accountants and the upper management.

    What about Project R which has the highest net benefit of $100M and ROI of 2.7 : 1? Surely this is the sweetest project to carry out, but without much resources. However, funds can still be sourced in two ways. First, through upfront financing, having additional capital coming from stock holders own pockets or loans. Second, by breaking the project into affordable segments whose benefits can even provide funds for the remaining portions, having benefits independent from the other remaining parts. The second option is referred to as itemization which will be the topic in subsequent articles.

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    References:

    Jones, Melir Page. Practical Project Management. Dorset House Publishing Co., Inc., New York, 1985

    http://www.sjsu.edu/faculty/watkins/cba.htm

    http://www.newsweek.com/1992/09/06/the-cost-of-quality.html

    http://www.hci.com.au/hcisite2/articles/isquality.htm

    Image provided by author.