Project managers and stakeholders must assess project costing and feasibility using a structured approach. Feasibility assessments can classify projects as either “definable” or “high uncertainty.” Definable projects, such as manufacturing cars, televisions, or houses, follow clear processes based on prior successful outcomes, with low levels of execution uncertainty. High-uncertainty projects, on the other hand, involve new designs, problem-solving, and tasks not previously undertaken. These exploratory projects require collaboration between various stakeholders and subject matter experts. As technology advances, many definable projects are becoming automated, leaving teams to focus on increasingly risky, high-uncertainty projects that may require non-traditional approaches to solve.
Costing and Feasibility Study
Immerse yourselves in the financial intricacies of project management. Learn how to create detailed project budgets, estimate resource requirements, and conduct thorough feasibility studies.
Learning Objectives and Outcomes
→
Understand the principles of costing, including budget estimation and resource allocation techniques in project management.
Learn how to conduct feasibility studies, assessing economic, technical, legal, and scheduling factors to evaluate project viability.
Develop skills in risk assessment related to project costs and feasibility, considering various scenarios and uncertainties.
Familiarize with tools and techniques for financial analysis, such as ROI, NPV, and payback period, to assess project profitability.
Practice creating detailed project budgets and financial plans, aligning them with organizational goals and stakeholder expectations.
Feasibility Study
A feasibility study in project management serves as a critical assessment conducted prior to initiating a project, aiming to evaluate the project’s viability and practicability. It involves a comprehensive analysis of multiple aspects, including technical, economic, legal, operational, and scheduling factors. This examination helps determine the likelihood of the project’s success and whether it’s worth pursuing. Stacey Complexity Model provides a visual representation of task uncertainty and associated risk throughout the project life cycle.
The Stacey Complexity Model illustrates how uncertainty in project requirements and fulfillment using current knowledge and technology can lead to increased complexity and a higher rate of change. As uncertainty grows, so does the risk of rework, highlighting the need for adaptive approaches that can accommodate evolving project conditions.
The study entails a detailed examination of costs, benefits, risks, and opportunities associated with the proposed project. Its primary goal is to assist project managers in evaluating the risk-to-reward ratio before committing to a course of action. This assessment encompasses assessing the return on investment, which could be measured financially or as a societal benefit, especially for nonprofit projects. Conducting a cash flow analysis is part of the feasibility study to measure the balance between revenue generation and the project’s operating costs. Additionally, the feasibility study includes a thorough risk assessment to determine whether the anticipated returns adequately outweigh the potential risks associated with the project. This assessment helps project stakeholders make informed decisions about the project’s feasibility and the potential risks involved before proceeding further.
Factors Determining When a Feasibility Study is Necessary
Steps to Conducting a Feasibility Study
Define Objectives
This step involves establishing a clear understanding of what the project aims to achieve. It includes defining specific goals, outlining the project’s scope, detailing the intended outcomes, and setting realistic expectations for what the project will deliver.
Market Analysis
A comprehensive examination of the market conditions, customer needs, and industry trends. It helps in understanding the target market, potential customers, and the competitive landscape. Market analysis includes assessing demand, identifying target customer segments, analyzing competitors’ strengths and weaknesses, and gauging market entry strategies.
Technical Analysis
Involves evaluating the project’s technical aspects. It includes an assessment of the required technology, infrastructure, and resources needed to execute the project successfully. This analysis focuses on determining whether the technical capabilities and resources are available or if additional investments or expertise are necessary.
Financial Evaluation
In this stage, a detailed financial analysis is conducted to estimate project costs, revenue forecasts, and financial viability. It involves creating a budget breakdown, estimating expenses, revenue projections, calculating the return on investment (ROI), and identifying potential financial risks or uncertainties.
Risk Assessment
This step involves identifying and evaluating potential risks, constraints, or challenges that the project might encounter. Risks can include technical issues, market volatility, regulatory hurdles, resource constraints, or unforeseen events. The assessment helps in devising risk mitigation strategies and contingency plans.
Decision-Making
Based on the findings from the feasibility study, stakeholders make informed decisions regarding the project’s feasibility. This involves a critical review of the study’s results, considering the identified risks and opportunities. The decision might involve proceeding with the project, modifying certain aspects to enhance feasibility, or deciding against pursuing the project due to identified risks or infeasibility
Principles of Costing
To grasp the foundational principles of project costing, encompassing budget estimation and resource allocation techniques, it’s essential to understand the core concept of cost management. Cost management constitutes the systematic process involving planning, budgeting, and meticulous reporting of project expenditure. This process is integral to maintaining teams within budget constraints and ensuring overall project costs remain justifiable and controlled.
The following are the four functions of cost management
Resource Planning
This function helps the project manager determine how much human resource, raw material, equipment, and facilities that would be required to deliver on the project. At this phase, the project manager would be looking at all the physical resources necessary for executing the project. The project manager can also refer to data from past projects, consult the Statement of Work (SOW) document and ensure that all activities and requirements are in-line with the organization’s policies and procedures.
Project Scope and Objectives
Clearly define the project scope, objectives, and deliverables to determine the resources needed.
Create a Work Breakdown Structure
Break down the project into smaller, manageable tasks and create a hierarchical Work Breakdown Structure (WBS). Each task should have a specific deliverable(s).
Determine Resource Requirements
For each task in the WBS, identify the types and quantities of resources required. This includes human resources, equipment, materials, software, and time.
Estimate Resource Quantities
Estimate the quantities of each resource required for each task. Consider factors like duration, skill levels, and dependencies between tasks.
Determine Resource Availability
Assess the availability of resources within your organization. Identify any constraints or limitations that may affect resource allocation.
Resource Allocation
Assign resources to specific tasks based on their availability, skills, and the project timeline. Ensure that resources are allocated efficiently to avoid overallocation or underutilization.
Consider Dependencies
Take into account task dependencies when allocating resources. Ensure that resources are assigned in a logical sequence to avoid bottlenecks or delays.
Resource Management Tools
Use project management software or dedicated resource management tools to assist in allocating, tracking, and managing resources. These tools can help optimize resource utilization.
Balance Workloads
Ensure that workloads are balanced among team members. Avoid overloading individuals with too many tasks or allocating too many resources to a single task.
Monitor Resource Utilization
Regularly monitor resource utilization throughout the project. Adjust resource allocations as needed based on changing project requirements or unexpected issues.
Communicate Resource Plans
Communicate the resource plan to the project team, stakeholders, and relevant departments. Ensure everyone is aware of their responsibilities and resource commitments.
Handle Resource Conflicts
Address and resolve any resource conflicts or constraints promptly. This may involve negotiating with other project managers or departments to secure the necessary resources.
Update Resource Plan
Periodically review and update the resource plan as the project progresses. Adjustments may be necessary due to changes in scope, schedule, or resource availability.
Post-Project Evaluation
Conduct a post-project evaluation to assess how well resources were managed. Identify lessons learned and areas for improvement in future resource planning processes.
Cost Estimation
This involves developing an approximate value of how much the resources identified are going to cost. There are techniques for estimating costs, they include: Analogous estimating, Parametric estimating, Bottom-up estimating, and the use of cost accounting tools or computerized tools.
Identify Resources and Determine Quantities
Identify all the resources needed for each task in the WBS. This includes human resources, equipment, materials, software, and any other relevant resources. Estimate the quantities of each resource required for each task. Consider factors such as duration, skill levels, and any dependencies between tasks.
[Information obtained in resource planning should be utilized here].
Obtain Resource Costs
Gather information on the costs associated with each resource. This may include labor rates, equipment rental fees, material costs, and any other relevant expenses.
Estimate Labor Costs
For human resources, estimate the labor costs based on the hours required for each task and the applicable labor rates. Include all related costs such as benefits and taxes.
Calculate Material Costs
Estimate the costs of materials required for each task. Consider quantities, unit costs, and any potential discounts or bulk purchase savings.
Assess Equipment Costs
If specialized equipment is needed, estimate the costs associated with renting, purchasing, operating, and maintaining the equipment for the project duration.
Factor in Overhead and Contingency
Include overhead costs, such as administrative expenses, utilities, and other indirect costs. Additionally, allocate a contingency reserve to account for unforeseen risks and changes.
Use Historical Data
Review historical data from similar projects, if available. Analyze past project costs and performance to inform your current cost estimates.
Consider Inflation and Market Conditions
Account for inflation and current market conditions when estimating costs for long-term projects. Prices for resources and materials may change over time.
Apply Cost Estimation Techniques
Use various cost estimation techniques such as Analogous Estimating, Parametric Estimating, and Three-Point Estimating to enhance accuracy.
Review and Validate Estimates
Review the cost estimates with project team members, subject matter experts, and stakeholders. Validate the estimates for accuracy and completeness.
Document Assumptions and Constraints
Clearly document any assumptions made during the estimation process and note any constraints that may impact costs.
Compile the Cost Estimate
Summarize the individual estimates for labor, materials, equipment, overhead, and contingency to create a comprehensive project cost estimate.
Communicate and Gain Approval
Communicate the cost estimate to project stakeholders. Gain approval and ensure that everyone understands the basis of the estimates.
Monitor and Control Costs
Throughout the project, continually monitor and control costs. Compare actual costs against the estimates, identify variances, and take corrective actions as needed.
Update Estimates as Necessary
Periodically update cost estimates as the project progresses, and new information becomes available. This helps in maintaining accurate forecasting.
Cost Budgeting
This function is the process of allocating costs to a certain chunk of the project, such as individual tasks or modules, for a specific time period. Budgets include contingency reserves allocated to manage unexpected costs.
To provide some guidance for this process, we will use the following case example to explore the steps in budget writing:
” Constructing a 25-Capacity Computer/Digital Media Room on Municipality-Owned Land”
We explored the following tasks in Resource Planning and Cost Estimation:
Project Scope and Objectives
The construction of a 25-capacity computer/digital media room on municipally-owned land with a 100-year lease. We could also specify the integration with an existing school at the location. Identify any specific requirements for the digital media room.
Project Deliverables
List the tangible outcomes and deliverables, such as a fully constructed computer/digital media room, equipped with necessary technology and amenities. Specify any additional requirements, such as safety measures or compliance with municipal regulations.
Work Breakdown Structure (WBS)
Detailed WBS with explicit timelines may include:
- Site preparation
- Construction of the digital media room
- Installation of technology infrastructure
- Interior furnishings
- Assimilation/Testing
- Integration with school facilities
Resource Identification
This includes labor, materials, technology equipment, and any specialized services. For example, labor for construction, materials for building, and technology equipment for the digital media room.
Cost Estimation
Estimate the costs associated with each resource. This involves detailed cost analysis, including labor costs, material costs, equipment costs, and any additional expenses related to permits or inspections. Use historical data or quotes from suppliers for accuracy.
Risk Assessment and Contingency Planning
Identify potential risks, such as delays due to weather, regulatory approvals, or unexpected expenses. Allocate a contingency budget to address unforeseen circumstances. For instance, allocate a contingency fund for possible delays in construction.
Contingency funding may be 10- 15% of the total project cost. This value will vary based on the nature of the project and the needs of the client.
Budget Allocation
Allocate the estimated costs to the respective tasks in the WBS. Create a comprehensive budget spreadsheet detailing the costs associated with each phase of the project. Include a line item for the 100-year land lease and any associated legal fees. A variety of application software exists that can assist with detailed budget creation using customizable templates. Some of these are listed below:
Microsoft Excel
A spreadsheet software that allows users to create detailed budgets using customizable templates. It provides robust calculation and visualization capabilities. Users can generate formulas, charts, graphs, pivot tables, and customizable templates.
Google Sheets
An online spreadsheet tool by Google, similar to Excel. It allows collaborative budgeting in real-time and easy sharing. This offers cloud-based, real-time collaboration, templates, and integration with other Google Workspace apps.
Quicken
A personal finance management tool that offers budgeting features, expense tracking, and financial planning. Quicken helps with budget creation, expense tracking, investment tracking, and financial planning tools.
YNAB (You Need A Budget)
Is a budgeting app that focuses on zero-based budgeting, helping users assign every dollar a specific job. It allows for real-time budget tracking, goal setting, and educational resources on budgeting.
Mint
Is a freeware personal finance app by Intuit that helps users track spending, create budgets, and set financial goals. Mint helps with expense tracking, budget creation, goal setting, and credit score monitoring.
Other Applications include:
- PocketGuard
- EveryDollar
- Mvelopes
- PocketSmith
- Zoho Books
Approvals and Authorization
Seek approvals from relevant stakeholders, including municipal authorities and school administrators. Ensure that the budget is authorized and aligned with the project’s goals and the municipality’s financial policies.
Budget Presentation
Present the finalized budget to project stakeholders and sponsors. Clearly articulate the costs associated with each phase of the project, emphasizing the importance of financial transparency.
Monitoring and Control
Implement a robust monitoring system to track expenses against the budget. Regularly review the budget status and update stakeholders on any deviations. Establish protocols for obtaining additional approvals if significant changes to the budget are required. This will be discussed in more details under ‘Cost Control.’
Documentation and Reporting
Maintain detailed documentation of all budget-related activities. Regularly generate reports summarizing budget vs. actual expenditures. Provide transparent and accurate financial reporting to stakeholders.
Continuous Improvement
Periodically review the budgeting process to identify areas for improvement. Collect feedback from project team members and stakeholders to enhance future budgeting processes.
Cost Control
Cost control is a critical aspect of project management that involves the systematic monitoring and management of project expenditures to ensure that they align with the established budget. This function is essential for maintaining financial discipline, meeting financial objectives, and preventing budget overruns. Several cost control techniques are commonly employed to achieve these goals. Cost control techniques include Earned Value Management (EVM), Variance Analysis, and Performance Reviews.
Earned Value Management (EVM)
Graph Showing Project Performance Analysis: Earned Value (EV), Actual Cost/Value (AC), and Planned Value (PV) Over Time for a 16-Week Project with 1.45M Dollar Planned Budget. 
EVM is a comprehensive performance measurement technique that integrates scope, schedule, and cost data. Earned Value (EV) serves as a pivotal project management tool, enabling the measurement of actual work progress against the planned trajectory. This technique seamlessly integrates critical data to provide a comprehensive analysis. The critical components of Earned Value include:
Planned Value (PV)- Also known as Budgeted Cost of Work Scheduled (BCWS), PV reflects the anticipated value of scheduled work completion at a specific project milestone. It represents the budgeted cost aligned with the planned work.
Actual Cost (AC)- Recognized as Actual Cost of Work Performed (ACWP), AC encapsulates the overall costs incurred for the work executed up to a specified point in time.
Earned Value (EV)- EV signifies the value of work accomplished up to a designated point, often termed as Budgeted Cost of Work Performed (BCWP). The EV formula involves multiplying the percentage of completion by the Budget at Completion (BAC).
This percentage is a measure of the project’s progress, indicating the completed portion of the total work. Notably, Earned Value Management (EVM) leverages EV as a fundamental metric, offering project managers insights into performance through indices like the Cost Performance Index (CPI) and Schedule Performance Index (SPI).
Cost Performance Index (CPI)
The Cost Performance Index (CPI) is a crucial performance metric in Earned Value Management (EVM). It provides a quantitative measure of how efficiently project resources are being utilized in terms of costs.
A CPI greater than 1 indicates favorable cost performance, implying that the project is utilizing its resources efficiently. Conversely, a CPI less than 1 suggests that the project is over budget.
Scheduled Performance Index (SPI)
The Schedule Performance Index (SPI) is another essential EVM metric that assesses the efficiency of time utilization on the project.
An SPI greater than 1 indicates favorable schedule performance, signifying that the project is ahead of schedule. An SPI less than 1 implies a lag in schedule adherence.
In essence, these indices offer quantitative insights into the project’s cost and schedule efficiency. The higher the CPI and SPI values, the more efficiently the project is progressing. Project managers can use these metrics to make informed decisions, identify potential issues, and implement corrective actions to keep the project on track.
Variance Analysis
Variance Analysis is a critical aspect of Earned Value Management (EVM) that involves scrutinizing the disparities between actual costs and budgeted costs. Variances can be categorized as favorable (indicating costs lower than expected) or unfavorable (indicating costs higher than expected). The analysis aids project managers in understanding the reasons behind budget variations and guides corrective actions.
Cost Variance (CV)
Cost Variance (CV) is a measure of the cost performance of the project, indicating the difference between earned value (EV) and actual cost (AC).
Performance Reviews
Regular performance reviews involve assessing the progress of the project, including cost performance. This may include reviewing financial reports, analyzing spending trends, and comparing them to the project plan. Performance reviews help in identifying areas where adjustments may be necessary to control costs effectively.
Updating…