Monday, April 10, 2023

Connecting the dollar dots: Cost-Price-Margin

Though not intending this posting to be rigorous for accountants or tax preparers, there is nonetheless a need for the PMO to be in touch with the three "dollar dots" that monetize project value: Cost, Price, and Margin.

And, as my book title (*) says, the PMO should be one of those seeking maximum project value. So, here's a quick look at the three 'dollar dots':

1. Cost: All the money required to get from project charter to the final report. For anything other than a Kool-aide stand, cost can be a bit tricky: Direct costs, capital costs (**), and indirect costs. The first two, at least, are project inputs which are pretty much the responsibility of the PMO to estimate and then manage, after the accountants set the rules. Indirect costs may also be a cost input, but the PMO has much less to say about them. (***) 

2. Price: What the customer pays (and when they pay, to wit: purchase, lease, or rent). Price is largely a marketing responsibility to determine. There are many considerations: Cost input is one of them, so the PMO's cost decisions do connect to price. Indeed, the price-point for the customer deliverable may strongly influence the project budget, not only in terms of development cost, but also the deliverable design that feeds into post-project production and post-delivery service costs. 

And beyond an intended price-point, there are other market considerations for price as well, and these considerations are usually multi-factored (discounts for some customers; meeting the competition; loss leaders, inventory clearance sales, etc)

3. And then there's margin. For simplicity, margin is price-less-cost. So again, the PMO connects to this dot through the 'cost input'. In real life, margin is a pretty complex computation involving both accounting rules and tax rules. In fact, the accounting margin and the margin reported for taxes (profit) may be quite different. So, leave these computations to the accountants!


(*) "Managing Project Value" (cover picture below) 

(**) For accounting purposes, those project items that are "capitalized" will have a value on the business' balance sheet until they are depreciated over time as non-cash expenses on a P&L statement. However, the actual cash expense incurred when the items are purchased may go against the project's budget, depending on the accounting rules of your particular enterprise.

(***) Indirect costs are usually an allocation based on resource utilization. The allocation rules are generally set by the accountants. These costs are largely out of the control of the PMO even though they may appear on the project budget. 

Some direct costs may be subject to rules: For labor, "standard cost" may be set by accountants such that a project is charged for internal labor at a 'standard cost' by labor category, and not the actual salary of the employee.

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