How Do Delays in Projects Cost Money?
Time is money, and in the life of a project, delays can equate to lots and lots of money. Little wonder, then, that as soon as a project becomes more than a glimmer in a CEO's eye, employees begin to litter a company's hallways with “black swan” tales. A black swan is a rare but somewhat probable project-related event that can quickly plunder a company's financial resources. For example, the cost of a system implementation project can balloon from a budget in the tens of thousands of dollars to a cost of hundreds of thousands of dollars due to unforeseen consequences, unanticipated requirements and lost revenue.
Big, successful companies become big, successful companies because parsimonious leaders keep a firm grasp on their cash flow, maintain the necessary resources to “get the job done” and demand predictable schedules and deliverables. Somewhat surprising, therefore, is the fact that some project managers who work for these companies seem to struggle to bring projects in on time and on budget. As a project manager blows past project deadlines, a company incurs costs due to deferred income and lost sales, and additional project costs. While a big company may be able to absorb such costs with relative ease, the same delay in a small company could be devastating.
In some cases, revenue and interest can't be earned until a project is completed. In this case, a project delay can result in deferred income. You can determine the actual value of a deferred income stream by first estimating the future earnings to be generated by a project and determining the present value of this income stream. You then multiply the present value of the income stream by the cost of capital-per-day to determine the daily cost of a project delay.
A project may have a limited period during which it will generate sales revenue. For example, Christmas decor is typically sold in the months of November and December. In this case, the cost of lost sales is equal to the profit you don't earn because you can't fulfill the orders. For example, assume you are unable to fulfill 10 orders in November and December that would have generated $5,000 in sales revenue with a 50 percent margin. In this case, the cost of lost sales is equal to $5,000 multiplied by 50 percent, or $2,500.
A project that runs beyond its planned completion date costs more than the amount that is budgeted for the project. To determine the additional cost per day, you must consider the hourly labor rates for resources assigned to the project, as well as material, supplies and equipment costs and indirect costs. Indirect costs will include employee benefits, office space and administrative costs. For example, for each employee, multiply the hourly rate by the number of labor hours worked per day. To calculate material, supplies and equipment costs, use flat-rate industry pricing rates multiplied by the number of material units required for each project task performed during the extended project period. In turn, to calculate the indirect costs, you can use one rate for all indirect costs and multiply this rate by the total dollar value of the direct salaries.