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Potential Costs of Poor Project Management
When a business is considering undertaking a new, large project, there can be many issues to consider along the way. It is critical to examine all aspects of a significant project carefully before starting. Moving ahead blindly will result in a business incurring unanticipated future costs. Such costs may be minor and merely “troublesome” in nature. Or, they could be critical; perhaps even life-threatening for the business.
As an example, let’s consider a case in which a business is considering expanding their facility. This addition will double their manufacturing capacity and increase product quality. An existing customer indicated that if the expansion occurs, they will increase their annual purchases by 40%. No-brainer to move ahead, right? Not necessarily.
Let’s take a closer look at a few issues for scrutinization:
1. Initial Go/No Go:
Before moving forward with the expansion, the project should be rigorously evaluated for financial viability. Preliminarily, what are the revenues (and bottom line positive cash flow) that would be added to the business? Will these added cash flows be sufficient to pay for the cost of the addition? While the customer has indicated that they will increase their orders by 40%, is a contract signed with them to secure this business? Will other customers increase their orders sufficiently to utilize this additional new capacity? Would a better and more cost-effective choice be to replace existing machinery-in-place to gain a portion of the quality and efficiency increases?
Secondly, does the business have the financial resources to undertake this expansion? What will the working capital needs be after consideration of the new addition (and the requisite additions in headcount, inventory, payables, and receivables)?
If the financial benefits of the addition are insufficient, the project should be reconsidered, rescaled, or abandoned. To proceed without sufficient resources and benefits, the business could find itself in a dire financial situation that may threaten its survival.
The project manager and their team are critical to the project’s success or failure. Choosing a poor project manager can cause a number of costly problems including delays, rework, potential fines and loss of existing business.
The manager chosen should have strong grasp of all of the issues facing the project- both financial and operational. Additionally, the manager must have the “strength of personality” to choose other strong team members who have expertise in critical areas – and be willing to listen to them. Failure of the team-management aspect of the project can threaten the project’s success.
Next time in Part II: The importance of planning, evaluation and testing.
POTENTIAL COSTS OF POOR PROJECT MANAGEMENT – PART II
Last time, we examined the importance of properly scrutinizing a range of considerations – financial and otherwise – prior to embarking on any new major project. In our example, a business was considering a significant expansion of its infrastructure. This time, additional areas for examination:
Each and every step of the project must be planned and scheduled by the team to ensure that goals and deadlines are met and trouble spots are recognized early. Careful planning can prevent costly delays and rework. It can also highlight important issues not previously considered and addressed. Poor planning and lack of goal-setting can prove disastrous.
The project plan should meticulously detail each step needed to complete the project, the start and end date of each facet of the expansion, and contingency plans should things go awry. Careful evaluation of the planning document timeline will highlight important deadlines that must be met before further work can be completed.
Failure to adequately address all facets and timing of the project can cause delays in construction, delays in receiving, testing and calibrating new equipment, and delays in hiring and training the necessary new workers. All of these delays will cost the company time as well as money. Should the addition fail to be completed on time, the business will not only slow the realization of positive cash flows from new business, it may cause a lack of confidence in existing customers (and financial backers) who may seek to take their business elsewhere. Each of these consequences of poor planning and execution will have a negative impact on bottom-line cash flows.
4. Constant evaluation and testing:
It is imperative that the project management team test and evaluate project implementation every step of the way. Once the planning has been completed and each facet of the expansion documented, the planning document will serve as the benchmark from which to measure the success (or failure) of the project implementation.
For example, before construction begins, the contractor in charge of building the facility should be evaluated based on previous work experience. Failure to choose a strong, competent contractor will leave the business at the mercy of the contractor’s poor management.
Additionally, if all aspects of the facility are not considered and documented in detail (before the first shovel of dirt is turned), costly change orders may be incurred that will drive the cost of the project upwards. If the entire project has a cost of $10 million, a 10% overrun will add another $1 million to the project. Will the project still be financially viable should this occur? Does the business have adequate resources on hand to address overruns and change orders? If not, where will they come from?
A simple rule of thumb on facility construction costs is 1:5:200, where 1 is the initial cost of constructing a building, 5 is the overall cost of maintenance of the building over its life, and 200 is the cost of the employees to work there. Granted, these will fluctuate somewhat depending on the type of facility constructed. However, it does indicate some of the factors to be considered when building the facility, and must be documented and evaluated during project planning.
The four issues for consideration mentioned are merely a few of many that must be addressed for any significant project. While this example doesn’t consider every aspect of a project a business should consider, it does show that careful, meticulous planning can help a business properly evaluate a project and ensure the best possible outcome. Failure to consider all financial and operational aspects of the project, can, on the other hand, cause unnecessary and expensive delays leading to increased cost which may threaten a business’ existence.