Tag: cost management

Cost-benefit analysis in a project

Measuring costs and benefits of a project isn’t something that can be left to the feelings of the Project Manager. We are talking about the essence of the company’s business and therefore we need certain elements on which to make assessments.

When managing a project, in fact, you need to make many key decisions, taking into account all aspects, including potential costs.

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There’s always something that needs to be done and often it is crucial to the success of the project and the organization itself.

Because of the high stakes, good managers do not only make decisions based on instinct, but prefer to minimize risk to the best of their ability and only act when there is more certainty than uncertainty.

But how is this possible with myriad variables and with an ever changing economy?

The solution is to seek concrete data with reporting tools, graphs and spreadsheets, even better with the help of project management software.

Thus, you can use this data to assess your decisions with a process called cost-benefit analysis (CBA).

A smart use of cost-benefit analysis will help minimize risk and maximize gains for both the project specifically and the organization in general. This method of evaluation is crucial for effective project management.

What is cost-benefit analysis?

Jules Dupuit, a French engineer and economist, introduced the concepts behind the cost-benefit analysis in the 1840s.

This method became very popular in the 1950s; a simple way to evaluate the costs and benefits of a project and, therefore, to determine whether to carry on (or not) with a project.

As the name suggests, cost-benefit analysis involves summing the benefits of a course of action and comparing them with the costs associated with it.

The results of the analysis are often expressed as a payback period, the time it takes for the benefits to pay off, also considering the discount rate.

Many people who use it, in fact, search for a payback within less than a specific period.

You can use this technique in a number of situations. For example, when you want to:

  • Decide whether to hire new team members.
  • Consider a new project or change initiative.
  • Determine feasibility of a capital purchase.

The cost-benefit analysis for project management is an additional tool available that the project manager can make use of.

Cost-benefit analysis purpose

The purpose of the analysis is to have a methodical approach to understand the pros and cons of the various possible options for a project, including transactions, activities, business requirements and investments.

In short, the cost-benefit analysis offers options and the best approach to achieve the goal while saving on investment.

There are two main goals to be achieved with the use of this analysis:

  • Determine whether the project is sound, justifiable and feasible, assessing whether its benefits outweigh its costs.
  • Offer a base for comparison of projects by determining which benefits are greater than their costs.
the costs-benefits analysis

How to use cost-benefit analysis

Here are the steps to perform a cost-benefit analysis.

1) Brainstorming on benefits and costs

Although there are some guidelines on how to draw up a project budget, it is always necessary to spend time thinking about all the costs associated with the project and make a list of them, including any unexpected costs (the ones you can think of).

Then, you will do the same for all the benefits of the project, including any potential unforeseen benefits.

2) Give a financial value to the costs

Costs include both the price of the required physical resources and the cost of manpower involved in all stages of a project.

Costs are often relatively easier to estimate than revenues.

It is important to think of as many related costs as possible. For example, how much will it cost to train team members?

Will there be a decrease in productivity while people are learning a new system or technology and how much will it cost?

Also, it is important to consider the costs that will continue to be incurred once the project is completed.

adding estimate and cost

3) Give a financial value to the advantages

This step is less simple than the second one: first, it is often very difficult to accurately predict revenues, especially for new products.

Second, along with the expected financial benefits, there are often intangible benefits that are still important results of the project.

For example, what is the impact on the environment, employee satisfaction or health and safety? What is the financial value of this impact?

For example, is the preservation of an ancient monument worth $500,000 or is it worth $5,000,000 because of its historical significance? Or, what is the value of a stress-free trip to work in the morning?

In these cases, it is also important to discuss with other interested parties and decide how to assess these intangible elements.

4) Compare costs and benefits

The last step is to compare costs with benefits and use this analysis to decide what course of action to take.

For this, calculate the total costs and total benefits and compare the two values to determine whether the benefits exceed the costs.

At this point, it is important to consider the payback time of the investment, to find out how long it will take to reach the “break even point”, i.e. the time when the benefits will pay off the costs.

A simple example, considering a situation where the same benefits are collected in each period, is to calculate the payback period by dividing the total expected cost of the project by the total expected revenues. This way:

Total cost / total income (or benefits) = duration (depreciation period).

How to consider the cost-benefit analysis

The data collected is used to help determine whether the project will have a positive or negative consequence.

It is essential to keep the following aspects in mind when evaluating this information:

  • What are the effects on users?
  • What are the effects on non-users?
  • Are there any external effects?
  • Is there a social benefit?

It is also important to take into account the time-value of the money spent. This can be done by converting expected future costs and benefits into current rates.

Of course, there is a risk intrinsic to any business and the risk and uncertainty must always be considered.

This can be calculated with the theory of probability.

Uncertainty is different from risk, but can be assessed using a sensitivity analysis to show how the results meet parameter changes.

How accurate is cost-benefit analysis?

The short answer is that the analysis will be as accurate as the data entered in the process.

Some inaccuracies are caused by:

  • Relying too much on data collected from past projects, especially when these differ in purpose, size, etc. from what you are working on
  • Using subjective insights during evaluation
  • Improper use of heuristics (problem solving that employs a practical method that is not guaranteed) to obtain the cost of the intangibles variables
  • Confirmation bias or use only data that supports what you want to find

Generally speaking, a cost-benefit analysis is more suitable for small and medium-sized projects that do not take too long to be completed.

In these cases, the analysis can lead the people involved to make appropriate decisions.

For large projects that run for a long period of time, there may be a number of problematic external factors that need to be taken into account in a cost-benefit analysis, such as: inflation, interest rates, etc.,

There are other methods that complement the cost-benefit analysis in the evaluation of larger projects.

Overall, however, the use of this methodology is a crucial step in determining whether or not a project is worth pursuing.

Cost-benefit analysis reliability

The cost-benefit analysis also suffers from reliability when a project has cash flows that vary from period to period.

Furthermore, the revenue that will be generated by a project can be very difficult to predict and the value that people attribute to intangible benefits can be very subjective.

Also, the production of a cost-benefit analysis requires a thorough awareness of project risks.

The intangible benefits analyzed can easily be underestimated or overestimated.

The benefits might also not arise or the risk that the benefit will not be achieved is too high.

The risk has two main factors that compose it:

Risk = Probability x Gravity

Here the level of risk of an event is proportional to the probability of its occurrence and the level of risk of an event is proportional to the size of the impact it generates.

For example, the office in which the project team works could be destroyed by an aircraft (a “risk event”).

The probability is clearly very low, but the severity is very high.

However, for most people the low probability outweighs the high severity, which leads to the conclusion that this risk event is not worth creating a risk response plan.

Ultimately, cost-benefit analysis is a data-based process and must be tackled appropriately.

With the help of sufficiently robust project management software, it will be possible to collect, analyze and distribute information effectively, so that the greatest possible benefit can be gained from a cost-benefit analysis.

Measure costs and benefits of a project with Twproject.

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New Twproject Release – Assignments and load for departments

Despite the summer period, the Twproject development team has certainly not stopped and today we are releasing a new version that we are sure you will appreciate. This new release, which is free for all customers, includes an important new feature on the workload and in particular on the use of department on projects, but let’s see all the details.

In Twproject, it was always possible to assign a department to a project, but the assignment had the sole function of giving all those belonging to that department specific permissions on the project.

From today, this assignment will have even greater value.

But this release does not only include this important change, we have also significantly enhanced Twproject’s financial management, making it more suitable for highly structured companies.

Also included are numerous bug-fixes, a complete list of which can be found on the changelog page.

This upgrade is free of charge for all Twproject users and includes updates to the database. A full backup of the application is therefore recommended before upgrading.

Let us now see the new features in detail.

New features

Department assignments

This important new change has several consequences.

As we have already mentioned, the assignment of a department to the project has always been possible, but the function was only to grant permissions to people who were part of the department/section (permissions are those given by the role with which the department is assigned).

Resources could not record hours worked on the department, but required their own allocation.

From today this will be possible! Being part of a department assigned to a project will give you the possibility to report directly on this assignment, you will be able to see the project and work with the to-do’s.

This major change will allow you to assign a department without worrying about who will be in charge of the activities specifically, knowing that everyone in it is fully operational.

In work environments where there are large teams and where there is a tendency to work in agile mode, it will be very convenient to have one assignment to which everyone reports.

Also, the assignment of a ToDo to a person will no longer create an assignment to the person if that person is part of a department/team already assigned on the project.

In the worklog analysis interfaces, however, the detail of the persons who reported on the departmental allocation is shown, while all analysis, control and approval procedures remain unchanged.

This is a new default behaviour of Twproject and therefore does not need to be activated.

Consequently, in all interfaces where one’s own assignments are shown or where one can record one’s worklogs, in addition to one’s personal assignments, those of the department to which one directly belongs are also shown, with the possibility of reporting on them.

If, on the other hand, a person also has his or her own nominal assignment on the same stage, the departmental one is ignored and only the personal one is shown.

Department workload

Obviously, this change, which gives the department an even greater importance than it has had up to now, could not remain incomplete, which is why the optimised load calculation on the department as a whole was also added.


Until now it was only possible to view the workload of people; with this release it becomes possible for departments as well.

The workload calculation takes into account many parameters such as dates, status and type of projects, estimated assignments, planned hours through the plan and/or ToDo’s, actual workable hours net of leave/vacation/illness, hours already worked on each assignment, for each person belonging to the department. Once this data has been extracted, the algorithm tries to optimise the allocation of resources so as to obtain the most plausible load possible, based on the available data:

  1. Hours worked by the resource (both person and department)
  2. Work capacity for that day. It is the sum of the capacities of all the resources belonging to the department; it takes into account working hours (horizontal or vertical part-time) and can therefore differ from day to day.
  3. Total load calculated as the sum of all contributions.

Colours are assigned on the basis of the phase/project. If several resources are allocated to the same phase/project, the box represents the total of all contributions.

Unavailabilities, shown at the bottom of the bar in pale pink, are holidays, leave, etc., entered in the Twproject diary indicating their type.

For more details on the algorithm implemented by Twproject for this calculation, we recommend reading this post on resource workload.

Improved cost management

Let us now move on to the part concerning cost enhancement.

Project budget

Several configurations have been included that can be switched on and off by default, giving you greater control over budgets and estimates.

The activation of the parameter BUDGET_OVERFLOW_FORBIDDEN makes the application prevent the input of financial costs, or costs arising from allocated resources, if these exceed the allocated budget. In addition, the sum of the budget distributed over the phases must respect the budget defined on the higher level.

This behaviour is intended to facilitate the financial planning activities of the project manager, who is then guided by Twproject in entering consistent estimates with the available budget for each individual project phase.

If we then analyse in detail the control exercised by the budget, we see that:

  • each sub-phase cannot have a budget greater than that of the phase to which it belongs (overflow) and, similarly, the budget of a parent node cannot be less than the sum of the budgets of its own sub-phases (underflow).
  • the estimated costs of a phase cannot exceed the budget of the relevant phase as well as the costs arising from the work of the assigned resources (hourly cost of the resource multiplied by the estimated hours of work on his or her assignment).
  • the real costs, in turn, are subject to the control of the estimated costs to which they must necessarily refer and which they cannot in fact exceed.
  • lpersonal expenses are tied to one’s personal budget, which in turn contributes to eroding the phase budget.

In order to better manage finances, Twproject shows for each node the budget allocated to all its sub-phases, if any, as well as the residual usable amount (value given by the budget on the phase minus what is allocated to the sub-phases and the costs of the phase itself).

As mentioned, by symmetry with the overflow, the underflow is also controlled, so an already entered budget may not be changed below what has already been distributed or estimated, and likewise, an estimated cost may not be lowered below the actual cost already incurred.

Two new budget management permissions have been created.

Management of resource cost per hour
USE_REAL_RESOURCE_COST

Twproject has two cost per hour indications: one on the resource, the other on the assignment.

This is done in order to differentiate the cost of the employees to the company (cost on the resource) from the value with which the resource is ‘sold’ to a customer (cost on the allocation).

However, should it be necessary or more convenient to always use the cost of the resource, this new flag has been introduced, the activation of which disables the hourly cost on the allocation, which is then ignored.

As a consequence, any change of hourly cost on the resource will be propagated immediately to all task assignments with active or pending status. The display of historicised consumptive costs (worklogs) and estimates, discounted to the new cost, is also activated.

The historicised worklog cost (actual cost) is the sum of the individual worklog costs to the hourly cost of the resource at the date of entry, while the estimated cost is the historicised hourly cost, on what was actually recorded, and the current cost for the residual part:

actual worklog cost + (estimated hours – hours worked) * current hourly cost

Please note that if the hourly cost of a resource is changed, the project cost page should be interpreted by taking into account the above calculation, not simply by multiplying the hourly cost by the hours.

Management of final reports (worklog entry)
WORKLOG_OVERFLOW_FORBIDDEN

Linked to the management of the project budget, but independent of it, is the blocking of worklog entries in the event of overruns.

Once this property is activated, it will no longer be possible to enter hours in excess of the estimate; therefore, in the case of non-estimated hours, worklog entry is disabled.

In the case of assignment to a department (see next paragraph), the block is activated on the total number of hours entered by the whole team.

In the event of an overrun, an alert warns of the error and shows the remaining number of hours that can be entered.

Note that this ban does not take into account budget overruns (provided the functionality is active), but only the estimate on the allocation; this is to avoid blocking normal work activities in the event of changes in the hourly cost of resources.

The property WORKLOG_ROUNDING_TO instead, controls the rounding to ‘n’ predetermined minutes. The value 0 (default) does not round and therefore deactivates the property.

Management of cost centres

With the same aim of simplifying the management of large teams and complex projects, several innovations concerning cost centres were introduced.

Cost centre propagation

A new default behaviour means that when the cost centre on a task or resource is changed, all ‘children’ having the old cost centre are updated to the new one. If, however, a child had a different one, it is not changed.

Choice of cost centre type
USE_DISTINCT_COSTCENTER_PRJ_RES

Its activation involves the appearance in the cost centre editor of a new drop-down menu, the ‘type’, having only two values, project and resource, and the task and resource drop-downs will only show the respective cost centres.

Cost centre inheritance
COSTS_INHERIT_COST_CENTER

This new custom feature has been introduced so that additional project costs inherit the cost centre from the phase, with no possibility of modification.

Security

With this release we have introduced 5 new permissions related to phase/project management of the budget, revenue and cost centre.

The application update procedure automatically adds them to all existing roles that have similar cost permissions.

To increase security, ownership of project phases will automatically be inherited from the parent node.

Thus, if even the individual project phase will have a different manager (e.g. a junior project manager) than the main project, this manager will not acquire ownership over all aspects of the phase, such as costs, etc., by default.

Many other new features

  • Kanban: added search in each column.

  • Assignment list: the printout now also includes any customised fields.

  • Operator loading: in the detail popup, we have increased and improved the summary information.

  • Tasks with an undefined status: their progress percentage is always zero and they are not taken into account in the project progress calculation.

But all this is but a brief extract of what you can find in Twproject 7.1.007!

With this release, Twproject has made many other system improvements and bug-fixes, a complete list of which can be found on the changelog page.

The new release is awaiting you

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Revenue management with Twproject: an excellent solution

By reading this article, you will discover how advantageous revenue management with Twproject is, and some tricks to put it into practice in the best possible way.

The detailed and constant analysis of a company’s financial flows is the main tool for not making losses, and in general for not running into unpleasant events that could easily degenerate over time.

But why is it so important to schedule periodic checks of these flows?

Because in order to manage a company properly, it is often necessary to play in advance, predict the moves and have clear forecasts of future trends.

To do this, it is useful to know in detail the economic potential of the ongoing projects, so as to make the right investments and not grope in the dark.

To this end, it is essential to have a tool that aggregates costs and revenues, and this is where the management of these factors with Twproject comes into play.

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We have recently seen how easy it is to keep the costs of your projects under control.

Now it is time to focus on revenue posting. Doing it with Twproject is really fast and easy.

Estimated and actual values

What distinguishes the cash flow analysis in Twproject is the possibility of always differentiating between estimated and real flows.

This applies to both costs and revenues.

In fact, as in the cost sheet, also for revenue management with Twproject you can add all the expected revenue streams, thus obtaining a probable trend of this crucial aspect.

The method

First, enter all the revenues you think you will get, with an expected date.

Later you will enter the actual revenues and if you want you can also attach the billing document.

Twproject also offers you the possibility of quickly converting a forecast into an actual revenue with a simple click if the value and date have been respected. This will save you a lot of time!

Furthermore, revenues can be registered at each node of the project tree and the total will be reported in the main node under the “total on children” item.

Adding real incomes

The progress diagram (cash flow)

As you enter your data, you will see the financial (or cash) flow of your project compose with a linear diagram that aggregates income and expenses.

In addition, here you will also find the graph relating specifically to the revenue trend and which shows the gap between real and estimated values.

RRemember to always include dates so your diagrams are as accurate as possible!

And remember that the cash flow is visible in each node of the project’s tree so you will not only have a general trend of the project but also a specific detail phase by phase, depending on how you want to track the data.

As you can see, also in this case Twproject offers you the solution to leave all spreadsheets behind and to manage all aspects related to financial performance in a single platform.

An advantage in many respects

Thanks to project graphs X-BRAIN now keeps track of actual costs and revenues against what was budgeted.

Read the interview with X-Brain and find out how they manage project revenues with Twproject

1. The importance of forecasting in the revenue management with Twproject

Currently, if you use any electronic invoicing software it is normal to have invoices already managed and saved online, but there are no tools that allow you to differentiate between expected and actual revenues and above all that give you this information relating to a specific project.

This will allow you to truly identify those projects that do not meet the billing plan or whose income does not exceed the expenses.

This is crucial for analyzing deviations from the project baseline and refining techniques to make more accurate forecasts.

2. Data transferability

Consequently, it is clear that this is also an excellent tool for refining business strategies and using the real data of a project even on similar projects to be programmed for the future.

Having the situation of your revenues in real time will not only help you stay within budget during construction but will also be useful when you want to estimate the budget for new projects.

3. Sharing of responsibility

You will be able to choose who and to what level of depth will be able to access data on financial flows, making the monitoring of this aspect a team effort.

By sharing the data with your team, you will be able to give responsibilities to those directly involved, whether they are project leaders or in charge of single phases, or also decide to leave this aspect to well-defined figures.

Twproject security is extremely refined and you can define who will have the opportunity to interact with project costs and revenues.

Do not waste any more precious time and take a free trial to experience how convenient it is to monitor your revenue with Twproject.

If you like, share your experience with us and let us know what you think.

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Practical Project Cost Management with Twproject

I had the idea of this post reading an interesting article by Katelyn Anton http://newhiteboard.com/2012/01/18/the-practical-project-cost-management, I warmly suggest you to have a look at it as it is a brief but well structured overview. Continue reading “Practical Project Cost Management with Twproject”