Thursday, August 5, 2021

How do YOU manage cost?

'How do YOU manage cost' is a bit different from 'how is cost managed'?

I was  recently asked the YOU question in a way that begged for an 'elevator speech' reply (only 30 seconds for the answer):  
  • My goodness! 30 seconds to reply? 
  • Isn't that question even older than project management itself? 
Let's have a conversation
The best way to answer is to have a conversation, because the response is all tied up in values: 
  • Is cost the dominant leg in the cost-schedule-scope-quality trade space? 
  • Or, is the proposition to always manage to a 'best-value' formulation? 
If value is what we are willing to pay for, then best-value may not be the lowest cost but it may be the best bang for the buck!

Is cost an input or a result?
The mistake most made is to manage cost like it is an input, rather than a result. 

Managing at the input means watching the cash flow in comparison to the budget plan for cash consumption. This will provide comfort to the CFO, but it does little for the other stakeholders. The cash flow could be right on plan, cash consumed exactly as planned, and yet the project could be churning pointlessly and producing nothing. 

Where does the value come from?
There is no value proposition at the input, so continuing to focus on the input side of the project process is strictly a CFO task.

Value is produced at the output. By now, everyone should know this. To manage cost is to manage three variables: 
  1. budgeted cash flow at the input (aka, gasp! an estimate)
  2. actual cost in the process, and 
  3. value of the actual outcomes. (*)
(*) aka, value earned in  the project view, but also business value if you can relate to the 'balanced scorecard' concept.

Forecasts and estimates (dare I say these words?)
By the way, forecasts are the weakest link! Does history ever repeat? Milton Friedman, distinguished economist, opined: "if you are going to predict, then predict often!" Meaning: hey, things change!

Who's in charge?
It's a lucky project manager that actually gets to control the labor cost to only that which is needed to produce the intended value. 

This is another of those conversations we need to have. 
  • How many times have people been placed on projects because they would otherwise be on overhead and vulnerable to release? 
  •  How many times have people been retained on projects, the so-called marching army, because PM's have been told they can't get them back if they release them? 
  •  Smart management anticipates labor redundancies, but also labor losses that might impact the EV: vacation, sick leave, other duties as assigned!

It's a lucky project manager that actually controls the overhead expenses of their project. In point of fact, many projects are encumbered with liquidating enterprise expenses disproportionately to use. It's part of the game, so smart cost managers anticipate the impact of changing overhead positions.

Now the challenge remains to get this all into 30 seconds so that it will sound good on the elevator!

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