"Cost" how say you?

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How many ways are there to say "Cost"?

Certainly, more than one!

When "they" ask: 'How do YOU manage cost?", your answer is: 'It's complicated' because there are so many varieties of 'cost'.

Project managers certainly have at least this list:

• Estimated cost (of course, an estimate has to be made in the context of a plan: scope and schedule and resource plans)
• Baseline cost (estimated cost at the beginning of a planned period)
• Re-baseline (Sunk cost, plus a "new" estimate for the ensuing period)
• Cost variance (the difference or departure of actual cost from the baseline)
  
  
• Planned value (baseline cost input to the project, over time, allocated to planned functional or feature achievement)
• Earned value (as a proportion of Planned Value actually completed)
• Cost performance Index (as a 'cost efficiency' measure of how well cost input earns value)
  
  
• Actual cost (measured at a point in time, regardless of achievement)
• Sunk cost (aka actual cost incurred)
• Direct cost (costs attributed to this project, and this project only)
• Indirect or overhead cost (common costs shared across many projects, proportionally)
  
  
• Labor cost (a component of direct cost; does not include overhead labor)
• Standard cost (used by service organizations and Time & Materials proposals to 'fix' or standardize the "labor cost by category" to a single dollar figure within a range of costs for that labor category. *)
• Material and contracted services cost
  
  
• Throughput cost (only that part of direct cost required to actually construct value outcomes; often used in combination with Standard Cost)
• Construction cost (aka Throughput cost, but sometimes also total of direct costs)
  
  
• Incentive cost (paid as direct payments to individuals and contractors for specific performance achievements)

Finance, accounting, and business management have a few more:

• General and Administrative cost (G&A), mostly for "top-level headquarters" expenses
• Marginal cost (cost of one more item that does not require more of 'something else' to enable)
• Cost margin (difference between cost of sales and revenue associated with those costs)
  
  
• Discounted cost (cost after a reserve for risk, usually calculated over time)
• Depreciated cost (cost accumulated over time, as different from cost in the moment)
• Cost of sales (direct cost to generate sales)
  
  
• Activity Based Costing [ABC] Overhead costs allocated to specific activity, plus direct costs of the activity.

---------------------------------

(*) Standard Cost: As an example, for Labor Category 1, the salaries may range from $1 to $10, but the Standard Cost for this category may be $7 because most in this category have salaries toward the upper end. Standard Cost is not necessarily an arithmetic average within the category; it is a weighted average

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Like this blog? You'll like my books also! Buy them at any online book retailer!

Cost: Let's review

---

How many ways are there to say "Cost"?

Certainly, more than one!

When "they" ask: 'How do YOU manage cost?", your answer is: 'It's complicated' because there are so many varieties of 'cost'.

Project managers certainly have at least this list:

• Estimated cost (of course, an estimate has to be made in the context of a plan: scope and schedule and resource plans)
• Baseline cost (estimated cost at the beginning of a planned period)
• Re-baseline (Sunk cost, plus a "new" estimate for the ensuing period)
• Cost variance (the difference or departure of actual cost from the baseline)
  
  
• Planned value (baseline cost input to the project, over time, allocated to planned functional or feature achievement)
• Earned value (as a proportion of Planned Value actually completed)
• Cost performance Index (as a 'cost efficiency' measure of how well cost input earns value)
• Estimated Cost to Complete (ETC): the marginal cost to complete the remaining baseline
• Estimated Cost at Completion (EAC): the sum of all the actual costs, usually including both direct costs and those indirect costs allocated to the project.
  
  
• Actual cost (measured at a point in time, regardless of achievement)
• Sunk cost (aka actual cost incurred)
• Direct cost (costs attributed to this project, and this project only)
• Indirect or overhead cost (common costs shared across many projects, proportionally)
  
  
• Labor cost (a component of direct cost; does not include overhead labor)
• Standard cost (used by service organizations and Time & Materials proposals to 'fix' or standardize the "labor cost by category" to a single dollar figure within a range of costs for that labor category. *)
• Material and contracted services cost
  
  
• Throughput cost (only that part of direct cost required to actually construct value outcomes; often used in combination with Standard Cost)
• Construction cost (aka Throughput cost, but sometimes also total of direct costs)
  
  
• Incentive cost (paid as direct payments to individuals and contractors for specific performance achievements)

Finance, accounting, and business management have a few more:

• General and Administrative cost (G&A), mostly for "top-level headquarters" expenses
• Marginal cost (cost of one more item that does not require more of 'something else' to enable)
• Cost margin (difference between cost of sales and revenue associated with those costs)
  
  
• Discounted cost (cost after a reserve for risk, usually calculated over time)
• Depreciated cost (cost accumulated over time, as different from cost in the moment)
• Cost of sales (direct cost to generate sales)
  
  
• Activity Based Costing [ABC] Overhead costs allocated to specific activity, plus direct costs of the activity.

---------------------------------

(*) Standard Cost: As an example, for Labor Category 1, the salaries may range from $1 to $10, but the Standard Cost for this category may be $7 because most in this category have salaries toward the upper end. Standard Cost is not necessarily an arithmetic average within the category; it is a weighted average

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Like this blog? You'll like my books also! Buy them at any online book retailer!

Make the maximum cost minimal

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Full disclosure: I wrote this posting myself, but I did ask ChatGPT for some ideas to include. 

It's always a PMO objective to minimize cost if scope and quality and schedule are constant. But they never are. So, those parameters are usually intertwined and mutually dependent variables along with cost. 

But suppose for discussion that scope and quality are held constant (not to be traded off to save cost or schedule), and the primary objective is minimization of cost. Here are a few ideas.

Labor-dominant projects

I'm talking about projects where labor is 60% or more of the cost. Many software projects fall in this box, but many other intellectual content (IC) projects do as well: HR, finance, marketing, just to name a few.

Productivity

Assuming competence is not in question, the first order of business is productivity, which is always a ratio: output valued by the customer per unit of labor required for achievement. As in all ratios, the PMO can work on the maximizing numerator and minimizing the the denominator. 

Getting the numerator right the first time minimizes the cost of waste and rework and minimizes schedule mishaps. The skill required: good communications with the people who establish the value proposition. 

Minimize the "marching army" cost

But the numerator is also about finding useful outcomes for the "white space" that crops up: you have staff in place, you can't afford to let them scatter when there is downtime, so you have to have a ready backlog of useful second tier stuff. Staff you can't afford to lose, but may have downtime nonetheless, is often labeled the "marching army"

The denominator is sensitive to organizational stability and predictability, personal skills, tools, interferences, teamwork, and remote working. Anything that PMO can do about the first five is more or less mainstream PMO tasking. 

Remote working:

But the issue of large scale remote working is somewhat new since the Covid thing. Loosely coupled to that is greater emphasis on work-life balance rather than "do what ever it takes" and often for no overtime pay. 

Such has then spawned more of the "do the minimum not to get fired" mindset. All that has cast a shadow on remote working.

Cost-free synergism.

Consequently, the pendulum has swung in the direction of minimizing remote working in order to get the synergistic production (at nearly cost free) from casual contacts with other experts and innovators, to say nothing of problem avoidance and thereby waste and rework avoidance.

Risk management and scheduling

When it comes to labor, the first risk is dependable and predictable availability, particularly if the staff are so-called gig workers. Many PMOs limit W9s to less than 25% of the workforce for just this reason.

One anecdote is loose coupling on schedule tasks to allow for the occasional misstep in staffing. After all, even W2s have matters that interfere.

Material-dominant projects

Here is where a lot of construction projects, hardware development, and critical (or scarce) material projects come in.

Material impacts are largely mitigated by the usual strategies of earliest possible order, acceptance of interim and partial shipments, incentives for faster delivery, and strategic stockpiles of frequently used items.

The workforce for many of these type projects is often contracted by specific trades who have licenses to work on specific work. It's typical that these contactors operate in a matrix management environment of multiple and independent customers vying for a scarce and technical workforce. The impact is uncertainty of schedule and availability, and a cascade of dependencies that have to be reworked.

The customary approach to scarcity is cost incentives to direct resources to your need. 

The mitigation for cascading dependencies is schedule as loosely as possible so that slack among tasks forms risk management buffers to a slipping schedule.

  

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Like this blog? You'll like my books also! Buy them at any online book retailer!

Are you sinking? Or sunk?

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Let's keep the basics in front of us:

• Projects are transformative processes packaged together
• Inputs (cash, people, buildings and tools, overhead like training) are transformed into deliverables that don't remotely look and feel like the inputs
• Deliverables are much more valuable than the sum of the inputs

Too often, the focus of the 'business' is on the inputs being consumed, like cash-flow and resources consumed, whereas the more experienced among us keep an eye on input/output efficiency.

And what do we mean by I/O efficiency?

We mean how well input consumption corresponds to its planned value, and how well the corresponding outputs conform to (planned) expectations, when each is sampled--measured--observed in the same time period.

What about sinking and sunk?

Once the project grabs input and consumes it, that input is "sunk", and can't be changed or refunded

Most of us are familiar with the first law of 'sunk' resources: 'Don't use the sunk resource to make a decision about a sinking project". 

Those focused on the sunk resources are focused on inputs rather than outcomes; are focused on the rearview mirror rather than the windshield, and may not understand the opportunity for adjustments.

That is: the future of your project--if it has one--should stand on its own merits re how resources will be used in the future, not so much how they were used in the past.

Why this first law?

Because at the moment you are challenged--even a self-challenge--to justify your future by citing the past, that is the time to root cause analyze the efficiencies. Depending on the analysis, you will have an opportunity to make decisions to alter the likely future efficiencies, and you have the opportunity to 're-baseline'

The future may not "wash-rinse-repeat" what has already been sunk.

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Like this blog? You'll like my books also! Buy them at any online book retailer!

The language of "Cost"

---

How many ways are there to say "Cost"?

Certainly, more than one!

When "they" ask: 'How do YOU manage cost?", your answer is: 'It's complicated' because there are so many varieties of 'cost'.

Project managers certainly have at least this list:

• Estimated cost (of course, an estimate has to be made in the context of a plan: scope and schedule and resource plans)
• Baseline cost (estimated cost at the beginning of a planned period)
• Re-baseline (Sunk cost, plus a "new" estimate for the ensuing period)
• Cost variance (the difference or departure of actual cost from the baseline)
  
  
• Planned value (baseline cost input to the project, over time, allocated to planned functional or feature achievement)
• Earned value (as a proportion of Planned Value actually completed)
• Cost performance Index (as a 'cost efficiency' measure of how well cost input earns value)
  
  
• Actual cost (measured at a point in time, regardless of achievement)
• Sunk cost (aka actual cost incurred)
• Direct cost (costs attributed to this project, and this project only)
• Indirect or overhead cost (common costs shared across many projects, proportionally)
  
  
• Labor cost (a component of direct cost; does not include overhead labor)
• Standard cost (used by service organizations and Time & Materials proposals to 'fix' or standardize the "labor cost by category" to a single dollar figure within a range of costs for that labor category. *)
• Material and contracted services cost
  
  
• Throughput cost (only that part of direct cost required to actually construct value outcomes; often used in combination with Standard Cost)
• Construction cost (aka Throughput cost, but sometimes also total of direct costs)
  
  
• Incentive cost (paid as direct payments to individuals and contractors for specific performance achievements)

Finance, accounting, and business management have a few more:

• General and Administrative cost (G&A), mostly for "top-level headquarters" expenses
• Marginal cost (cost of one more item that does not require more of 'something else' to enable)
• Cost margin (difference between cost of sales and revenue associated with those costs)
  
  
• Discounted cost (cost after a reserve for risk, usually calculated over time)
• Depreciated cost (cost accumulated over time, as different from cost in the moment)
• Cost of sales (direct cost to generate sales)
  
  
• Activity Based Costing [ABC] Overhead costs allocated to specific activity, plus direct costs of the activity.

---------------------------------

(*) Standard Cost: As an example, for Labor Category 1, the salaries may range from $1 to $10, but the Standard Cost for this category may be $7 because most in this category have salaries toward the upper end. Standard Cost is not necessarily an arithmetic average within the category; it is a weighted average

---

Like this blog? You'll like my books also! Buy them at any online book retailer!

Cost estimates when you just don't know

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It's not unusual. 

You're asked to estimate your work, and really: you just don't know.

It comes up a lot in the AGILE space, where many hold that "estimate" and "agile" don't belong in the same sentence, let alone the same project. 

We're supposed to accept "emergence" at whatever cost. That doesn't bode well in the enterprise context. Those guys in the C-suite want something more bounded.

There are methodologies for handling the "just don't know" issue.

Allowances: The first way to handle this comes right out of the construction industry wherein a customer is given an allowance of funds for "emergent" need. Allowances provide flexibility to trade feature, function, and fit among disparate components. Pay a little more for component "A" and accept less for component "B", all within the allowance.

Allowances can work in the intangible space also, where we find many software projects with not-so-clear ways forward. What we call "first impression" requirements that don't have history and precedent to fall back on. It comes down to "Do what you can to get me something working for this allowance". 

Time and Materials .. T&M: This is everyone's standby. Just start working and see where it takes you. T&M has been around almost since the industrial revolution took off. It's best applied to research rather than development, where the target is so elusive that I might NOT know it when I see it. 

Cost reimbursable: A bit more constrained than T&M, and perhaps a contractor's version of allowances, the total scope is within an overall budget (cost envelope), but the project proceeds by increments, reimbursing the cost at each increment. If there's not reasonable progress, the project is redirected or even canceled. 

Some put the cost reimbursable method squarely in the "earned value" camp. Earned value: Show me the value you're producing, and I'll pay you accordingly. From your performance-to-date, taking into account improvements you can apply, forecast the outcome. Are you still within the budget envelope?

Incentives and Penalties: Cost is saved, or avoided, with productivity boosts. Almost every manager thinks in terms of incentives because these days almost every manager is personally on some kind of incentive-driven pay plan. Of course, one can also think in terms of penalties. 

But the utility of the marginal compensation comes into play when evaluating how to stimulate productive work. Everyone has a set-point in mind when it comes to their comp. 

• Penalize people below their set-point and morale suffers big time, often out of all proportion to the penalty. It's hard to get productivity pumped on the basis of penalties.
• Bonus people above their set-point enhances morale, but the utility fades quickly, so it doesn't take huge sums to get a boost in productivity.

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Like this blog? You'll like my books also! Buy them at any online book retailer!

Connecting the dollar dots: Cost-Price-Margin

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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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Like this blog? You'll like my books also! Buy them at any online book retailer!

Minimize your maximum cost

---

Full disclosure: I wrote this posting myself, but I did ask ChatGPT for some ideas to include. 

It's always a PMO objective to minimize cost if scope and quality and schedule are constant. But they never are. So, those parameters are usually intertwined and mutually dependent variables along with cost. 

But suppose for discussion that scope and quality are held constant (not to be traded off to save cost or schedule), and the primary objective is minimization of cost. Here are a few ideas.

Labor-dominant projects

I'm talking about projects where labor is 60% or more of the cost. Many software projects fall in this box, but many other intellectual content (IC) projects do as well: HR, finance, marketing, just to name a few.

Productivity

Assuming competence is not in question, the first order of business is productivity, which is always a ratio: output valued by the customer per unit of labor required for achievement. As in all ratios, the PMO can work on the maximizing numerator and minimizing the the denominator. 

Getting the numerator right the first time minimizes the cost of waste and rework and minimizes schedule mishaps. The skill required: good communications with the people who establish the value proposition. 

Minimize the "marching army" cost

But the numerator is also about finding useful outcomes for the "white space" that crops up: you have staff in place, you can't afford to let them scatter when there is downtime, so you have to have a ready backlog of useful second tier stuff. Staff you can't afford to lose, but may have downtime nonetheless, is often labeled the "marching army"

The denominator is sensitive to organizational stability and predictability, personal skills, tools, interferences, teamwork, and remote working. Anything that PMO can do about the first five is more or less mainstream PMO tasking. 

Remote working:

But the issue of large scale remote working is somewhat new since the Covid thing. Loosely coupled to that is greater emphasis on work-life balance rather than "do what ever it takes" and often for no overtime pay. 

Such has then spawned more of the "do the minimum not to get fired" mindset. All that has cast a shadow on remote working.

Cost-free synergism.

Consequently, the pendulum has swung in the direction of minimizing remote working in order to get the synergistic production (at nearly cost free) from casual contacts with other experts and innovators, to say nothing of problem avoidance and thereby waste and rework avoidance.

Risk management and scheduling

When it comes to labor, the first risk is dependable and predictable availability, particularly if the staff are so-called gig workers. Many PMOs limit W9s to less than 25% of the workforce for just this reason.

One anecdote is loose coupling on schedule tasks to allow for the occasional misstep in staffing. After all, even W2s have matters that interfere.

Material-dominant projects

Here is where a lot of construction projects, hardware development, and critical (or scarce) material projects come in.

Material impacts are largely mitigated by the usual strategies of earliest possible order, acceptance of interim and partial shipments, incentives for faster delivery, and strategic stockpiles of frequently used items.

The workforce for many of these type projects is often contracted by specific trades who have licenses to work on specific work. It's typical that these contactors operate in a matrix management environment of multiple and independent customers vying for a scarce and technical workforce. The impact is uncertainty of schedule and availability, and a cascade of dependencies that have to be reworked.

The customary approach to scarcity is cost incentives to direct resources to your need. 

The mitigation for cascading dependencies is schedule as loosely as possible so that slack among tasks forms risk management buffers to a slipping schedule.

  

---

Like this blog? You'll like my books also! Buy them at any online book retailer!

Cost management, and force majeure

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Are you doing a project under a contract from a sponsor?

When did you do the cost estimating for the price you signed up for?

Is there a clause for "force majeure" (Look in the fine print in the contract's boilerplate)

A lot of contractors (and their lawyers) are spending time on "force majeure"

Three elements required:

(1) unforeseeable event, 

(2) outside of the parties' control, that 

(3) renders performance impossible or impractical.

Did someone say "black swan"? They might have.

So, among the favorites these days are:

• Supply disruptions affecting schedule and price on account of the pandemic
• The war in Ukraine (although there is a war somewhere almost all the time)
• Historically high inflation wrought by the factors above

It's argued -- in the case of contracts that have been ongoing since before mid-2020 -- that these are all 'black swan' events or outcomes not reasonably predicted and their effects not reasonably understandable in foresight. So their impact could not have been accounted for in the original contract price. Ergo: invoke 'force majeure'

A case to be made

• COVID brought, or is bringing, travel restrictions and quarantines. So that's a pretty solid case for some labor related costs. But, that's getting to be old hat. It's been around since early 2020. In 2022, it's perfectly foreseeable; but if you bid your contract in 2019, or even 2020, then you've probably got a case. 
• So also has COVID impacted supply all around the world. Another arrow in the quiver, as it were. But again, supply problems have been around since the pandemic.
• And COVID is behind  massive government stimulus which some believe is the root cause for inflation. Economists are a bit divided on this as the root cause because also there is somewhat independent monetary policy to consider (cost of money), but certainly 2022 is at significant variance with the prior 20 years.

Pricing leverage

So, it comes down to this: do you have pricing leverage with your sponsor? FM clauses may help, but a contract cancellation in the event of a sponsor push-back may not serve your interests either.

Tricky business, this!

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Like this blog? You'll like my books also! Buy them at any online book retailer!

Throughput accounting: pushback

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Whenever I write about or talk about 'throughput accounting' I get pushback.

Fair enough.

You won't find such accounting in your Accounting 101 textbook, except perhaps in a chapter dedicated to cost accounting wherein the concept of 'variable cost' is discussed.

But 'variable cost' doesn't quite capture the concept:

'Throughput' is the stuff that gets through to end-users, beneficiaries, or customers that they can apply to whatever it is they do. 

Accounting for what it takes to produce 'throughput' is the essence of 'throughput accounting'

• First, of course, is 'variable cost': If you have to buy a gallon of paint to put the finishing touch on 'throughput', then the cost of the paint is 'variable' to your day-to-day expenses, and the cost of the paint is directly part of the cost of 'throughput'.
• But second, you might reallocate resources from day-to-day 'running the business' to specifically and directly produce the throughput. If such is reallocated, then add that to the cost of throughput.

What about the day-to-day?

But, many ask, what about all the day-to-day stuff to make possible the environment and capabilities and capacity to affect throughput. Shouldn't there be some "ABC" of those costs? (*)

• My answer is: no. But ....
  
• Yes, you can try that. But, be prepared for endless arguments about allocations which in-and-of-themselves add no value. 
• And be prepared to 'de-conflict' allocation overlaps such that the sum of the ABC costs does not exceed the sum of the actual business expenses, to wit, by example: a manager's cost is allocated to several projects in an ABC sense. Then it's discovered that the sum of all the manager's allocation exceed the actual cost of the manager. Back to the allocation drawing board!
  

What about revenue?

Does 'throughput' have to generate new revenue in order to be 'throughput'?

No.

Back to the definition: the users or beneficiaries may not be revenue customers. So, there's no direct tie of throughput to revenue.

 

What about 'value'?

Does throughput have to make the business more valuable ... in effect, increase the size of the balance sheet? 

No.

Value is consequence of throughput, but in many instances the value which is consequential to throughput can not be directly monetized. Such is the case for many non-profits and government agencies. Yes, they have balance sheets; but no, those balance sheets don't accumulate the consequences of their activities like a for-profit business' balance sheet does.

It's complicated

Yes, but ....

Throughput' is the stuff that gets through to end-users, beneficiaries, or customers that they can apply to whatever it is they do.

 

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(*) Activity-based costing (ABC) is a method of assigning overhead and indirect costs—such as salaries and utilities—to products and services. The ABC system of cost accounting is based on activities, which are considered any event, unit of work, or task with a specific goal.

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Training budget for project robots?

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Are you busy building your project budget?

Are you going to include a budget for training your project's working staff?

• New developer and testing tools;
  
• New frameworks;
  
• New process and workflow management?

If that's a Yes and Yes, have you thought about this? You may need to train your project robots also.

 

Really?

Really!

Robots, whether mechanical and real, or virtual, all depend on training data to get their AI parameters set. Now, sometimes it's all built-in and there's no API, like the robotic vacuum cleaner, but for most AI-based [robotic] project tools some degree of training on test data sets is necessary.

• Expert systems which execute according to rules trained on knowledge bases
• Data estimators that fill in the blanks ... from history and current trends
  
• Fuzzy logic that studies patterns and offers assistance with scheduling and administration
• Predictive analytics for risk assessments based on risk histories (unlikely to predict a black swan, but don't rule it out)
  

How to start

And so, having decided about how AI is to be integrated into the PMO -- that being no small matter by itself -- the questions are begged:

• At what cost do I go about assembling a training data set,
  
• What should the data set contain,
  
• Who will administer the training, and
  
• Who's done this before?

Look here for the answer

Actually, you won't find those answers here because project AI is too situational dependent. But, the major frameworks all have user group forums; the major tool vendors all have support systems; and there are a myriad of consultants around this industry. 

Your job: don't forget to budget to train the robots!

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Friction -- a consequence of debt

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And, so now we've all come to the point in the art and science of project management that not only do we have a myriad of biases that have been listed and explained and examined over the past 30 years, but now we have debts. The new one (for me) is social debt, as described by Philippe Kruchten


He tells us:

Damian Tamburri, from VU in Amsterdam, has introduced the notion of social debt, as a counter part of technical debt [ICSE2013 workshop].

Social debt is .... the accumulation over time of decisions about the way the development team (or community) communicates, collaborates and coordinates; in other words, decisions about the organizational structure, the process, the governance, the social interactions, or some elements inherited through the people: their knowledge, personality, working style, etc

Now, put social debt together with technical debt -- all the myriad of little things left undone -- and you get the idea of the friction in the project -- that is: impediments to velocity; inefficiencies in productivity. And, like friction in the physical world in which energy is wastefully converted to heat, only to dissipate without adding value, these debts absorb project energy.

So, what price -- actually, for the PM: cost -- is non-value-add of friction? First, friction spreads the tails of the Monte Carlo simulation of cost and schedule, and potentially shifts the mean cost and schedule to the right. Second, and certainly a root cause of the first point, friction holds back productivity and gives rise to lost energy (to overcome friction) and lower velocity (less throughput)

Fair enough. But, what do we do about it?

• New project? Take a look at the history of overcoming debt and make adjustments to the knobs and switches of your project model
• Got flexibility? Reorganize, retrain, change environment or tools, or add SMEs (or dismiss the high-friction nemesis)
• On-going project? Rebaseline. That may cancel a lot of the social debt built up in the existing project. In effect: reboot
• Risk management? Sure, think of both technical and social debt as a risk to be managed

---

Read in the library at Square Peg Consulting about these books I've written
Buy them at any online book retailer!

Read my contribution to the Flashblog

The evolution of cost management

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• In the beginning, cost often matters most*: the greatest amount at stake and the most politically sensitive parameter understandable by all, specialists and lay persons alike
• In the middle, cost often takes a comparable priority to function; function has been promised and people have begun to count on it; there's less cost remaining at stake
• In the end, cost is set aside as the schedule and function dominate. Success in a functional sense takes on a political priority ... functional failure is easiest to measure and has the longest effect on reputation

* Especially if the project is publically funded with taxpayer dollars.

---

Read in the library at Square Peg Consulting about these books I've written
Buy them at any online book retailer!

Read my contribution to the Flashblog

Priceless, but not costless!

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There are a lot of advertisements that run on public media here that tout things to buy that are "priceless" -- a value so meaningful that you can't really monetize it.

Perhaps so -- what value would you put on a meaningful and fulfilling relationship?!

• Priceless, I'll bet.

So, what would you spend to keep it going? Any amount?

• Maybe... However, however, priceless, it's not costless I'll wager.

And so after this set-up we arrive at business value vs project cost... you probably knew we'd get here if you read this blog often.

What would you pay to keep a good business from going into decline:?

The real test of decline is whether or not there is new investment going into the business. In the decline stage, the emphasis is on cost control, efficiency, and getting the most out of existing product with existing customers; there's little or no investment beyond required maintenance. Over time, product will obsolesce and customers will move on. If there's investment going into finding new customers with existing product, that's probably an organization surviving and perhaps growing and redefining.

Show me the money!
Of course, one way to start is on the balance sheet: what's the book value of the business? Another place to start is with the cash flow: what's the present value of the DCF?

Certainly, but project to keep the business from decline should not cost more than the business is worth! Or should it? Enter:

• Utility, bias, fear, emotion, irrational exuberance, etc.

These move you from cost to priceless! (See: Bezos buys the Washington Post)

Project balance sheet
I suggest the real start is with the project balance sheet: the accounting between the business and project to find the risk in the gap between their individual conceptions of value. If you (the PM) can handle the risk... then press on!

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Agile and DCF

In my musings about agile, one advantage is that benefits come quicker, and therefore are less susceptible to the risks of future uncertainties, since the future is more uncertain than is the near term.

If benefits are monetized by cash flow, then finance guys have a term for cash benefits subject to the risk of time: discounted cash flow, DCF.

So what is DCF and how does it work? (You can find more about this in my posting at PMHut) In a few words, the idea of a 'discount' is to value less a benefit in the future when compared to a like benefit in the present -- the financial equivalent to a bird in hand vs a bird in the bush.

The future is where uncertainties lurk. The so-called 'cone of uncertainty'.  It's just not a deflated dollar; it's also market uncertainties, the varagies of customer delight, and competitive effects.

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What's the Agile connection to DCF? Answer: incremental deliveries, each with some value to the customer or the business, and each delivered a little bit earlier than waiting til the end. Thus, more timely means less risky; thus, less discount.

I covered this in detail here:

 

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Sunk cost and the rear view mirror

Sunk cost: "everyone knows" that decisions are not to be made on the basis of trying to salvage sunk costs. The saying goes: what's done is done; decisions are to be made about options in the future. The past is past.

Well, if humans were robots, following that rule would be no big thing. But of course it's not that way, and what's more, we know it.

Now into the "sunk cost" arena comes another bias to add to the list: "continuation bias". The first I heard about it was in a post last month from our friends at Dark Matter: "flying in the rear view mirror". I quote:

Plan continuation bias is a recognised and subtle cognitive bias that tends to force the continuation of an existing plan or course of action even in the face of changing conditions

Of course there are other variants to this: "Continuing to do the same thing and expect a different result is nonsense", and other formulations.

Even Glen Alleman recently got into the act with a quote of Fitzgerald's First Law of Program Success:

There are only two phases to a big program: Too early to tell and too late to stop.

Program advocates like to keep bad news covered up until they have spent so much money that they can advance the sunk-cost argument;

that it’s too late to cancel the program because we’ve spent too much already.

Buy why?

It's relatively simple: we hate to lose, and most important we had to lose what we had. People who study these things say it's more than just anecdotal that we are very averse to risking what we have: thus, a utility response that is quite non-linear. We weight a loss, particular a loss of from a reference point of achievement, much more so than we favor a gain from the same reference.

Such reference point adjustment is the basis of a utility concept called "prospect theory". Originally formulated in the financial community, it easily extends to project management. It's a cousin of adjustment or anchor bias. Once we reach a pinnacle, the new height becomes the reference for subsequent measurements of loss.

And sunk cost is the cost to reach the pinnacle. If we can go no farther, or if continuing the same plan only gets us regression, we keep hoping things will change and we'll get back to where we were.

Might happen; might not. Continuation bias: beware!

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Risk v. Issue

I recently had a conversation in which I was asked if a budget "constraint" should be identified on a risk register. I answered this way:

"I make the distinction between an issue and a risk, because the methodology for each is different. Different methods are motivated by different time frames.

Issues: current time, present problem. Methods include problem investigation, problem solving, and conflict resolution, among others [These methods are not not normally in Risk Mgmt; see Six Sigma for excellent problem investigation protocols]

Risks: future time, probable problem, but not certain. Amenable to mitigation. Methods include response planning and mitigation actions to implement plan to mitigate occurrence of problem, not solve the problem itself.

So, depending on the timing of the budget constraint, it is either an issue or a risk. Ordinarily, PMs keep a register for issues separate from the register for risk because of different temporal attributes and different methods in the tool box.

And, the constraint may only be a surrogate for the real risk. The "real risk" may be a misalignment between sponsor and PM of--or about--deliverable value, or expected result. This is a point of the Project balance sheet, and Utility.

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A note about cost risk analysis

Dave Hulett has a whitepaper on his web site that covers an introduction to cost risk analysis.  If this is a new subject for you, this whitepaper goes through a number of quantitative considerations, including correlation risks among cost elements, that will give you a good feel for this territory.

You might also take a look at a more thorough treatment by reading through the cost estimating guide from the General Accounting Office (GAO), an arm of Congress.  One thing about this guide is that is well illustrated with a lot of diagrams that point the way.

Of course, NASA has a readable manual on parametric cost estimating.  Take a look at it if you really want to dig deeper into the subject.

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That Financial Alphabet-DCF,EVA,NPV,IRR-for Program Managers

Good grief: talk about acronyms!  It's enough to keep up with the earned value system--PV, AC, EV, SPI, CPI, ETC, EAC--and now add in the accounting world.

In a whitepaper I wrote some time ago, I shed a little light on accounting for project managers.

It's entitled That Financial Alphabet�DCF, EVA, NPV: are they affecting your project?

For many in the crowd, this is pretty sleepy stuff, but wake up long enough to take notice that many projects never see the light of day because of unfavorable discounted cash flow--what's that?--and other projects get cancelled mid-stream, and still others disappoint their sponsors in ways that can rub on program managers.

So, it may be worth your while to take a few notes and be able to discuss your project with your accountant.

After all:

Cash is fact; profit is an opinion.

Is your project likely to make a profit for your enterprise, and are you being a good steward of cash?  You might be surprised--Check it out!

Agile Benefits and DCF

In my musing on agile, I assert one advantage is that benefits come quicker and therefore are less susceptible to the risks of future uncertainties since the future is more near term.

The finance guys have a term for this: discounted cash flow, DCF.

So what is DCF and how does it work? In a word, the idea of a 'discount' is to value less a benefit in the future compared to a benefit in the present -- the financial equivalent to a bird in hand vs a bird in the bush.

The future is where uncertainties lurk.  It's just not a deflated dollar; it's also market uncertainties, the varagies of customer delight, and competitive effects.

Below is a Slideshare presentation that gives you some pictures of how this works:

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Quantitative Risk in Cost and Budget

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