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Projects Strategy Community

Hidden Costs in Projects

Being a Programme Manager or Delivery Manager can be frustrating at times because you have to follow procedures to do a simple procurement and it takes much longer than a simple phone call for a small delivery and a cash payment.

A project story…: You are in a meeting, and a decision is made how to proceed with a simple design change for the urgent installation of a Metal bracket on a concrete pedestal. An additional stainless steel bracket is required, with stainless steel bolts and nuts and of course a drawing including the calculation of forces applied. A written change request and the drawing is necessary. The same is required to get the bracket done in a metal shop and to purchase the necessary nuts and bolts. Altogether the costs are estimated about USD7,000 from the design, the drawing, the change request and the material at the shop for 10 brackets.

As the Programme Manager (PgM), I would expect that the specific Project Manager (PM) is instructing his team to get the drawing done, to issue the change request and immediately go to the metal workshop and get the job done within 10 days to enable the main work completion on time.

Three days later, I ask him about the change request paper for signing off and if he purchased the material already for final production. I get a reply that the engineering team was busy with other works and the drawing is not finished yet. The procurement team hadn’t started to check for a metal workshop yet, since the drawing is required for quotation. He promised to expedite the drawing immediately.

The next day, finally I get the change request and the drawing for signing off. Now I can assume that the small job is on track and will be done in few days. During the next weekly meeting, I ask for the progress of this job. The project manager is telling me that the procurement team has started working for getting the material. Now I want to know the date of the material delivery as we have only 5 days left as per official timeline. A standard answer is: Sorry, I need to check but it will be this week. Then some text messages are going forward and backward and after 5 minutes the feedback from the Project Manager is: “We just got feedback from one potential supplier that the lead time is about 3 weeks from the PO (Project Order) and we get the quote within this week. Once we have the quote, we have to negotiate before we can send the PO…. “.

The story can continue for another few weeks, but it is easy to see the delay in this simple job. Negotiating a few dollars less on these brackets will never recoup the cost of time lost and efforts in meetings and follow up by management. One of the worst delays in a project are the idle times or waiting times for people to review and sign a document or a PO. Or material cannot be delivered because the Letter of Credit is still pending with the bank and you have to wait for two weeks just for the bank to proceed. The issue is, that these delays are not factored into the project timeline and it can have a direct impact to the project end date.

The above scenario is a typical story in many projects and it creates delays after delays for simple tasks. The cost for talking about the same small job again and again and finally to rescue the matter is costing far more than the effective quotation of the material and design drawing. These “hidden costs” of meetings include talking about the same topics again and again, management follow-up and unnecessary procedures for “small matters.”  Unfortunately these are not listed clearly in the monthly project expenses. It is usually called: Operational Costs.

The operational costs for an on-going large scale EPC (Engineering, Procurement, and Construction) project are quite fixed every month. If the team performs or not, the costs are fix. Work progress with quality is the key to finish the milestones and eventually the project will pay. However, non-performance, inefficiency and late decisions are the key factors for costs which are not directly visible in the accounts but it will have impact to the project costing.  This includes:

  • Missed payment milestones due to late delivery of work;
  • The project cash flow becomes negative and temporary financing is required;
  • To complete the job on time, more people or higher qualified people are necessary;
  • Additional costs to cover for overtime for absenteeism or needing to hire new staff due to high staff turnover;
  • Working overtime due to bad coordination;
  • Lots of issues require more management attention.

From my experience, reasons for non-performance, inefficiencies, and lack of decision-making are as follows:

  • Company and project culture is not supporting the people in the project
  • No or weak leadership, usually from the management and the project manager
  • Missing procedures or wrong procedures
  • Immaturity
  • Sticking to old procedures without critical thinking
  • Missing roles and responsibilities for project stakeholders
  • Missing authority to make decisions on operational level

How do you overcome these issues?

From my own experience, I have and would define a procurement plan to standardise the procurement process and to have a strategy on how to go approach the required contractors, the selection process and to have a short cut if required. This means it requires a threshold for quick cash purchases under the authority of the project or programme manager. The authority levels need to be clear and defined including a back-up plan in case a signatory level is not available. The process must be clear and should include the time for roll-out from the technical solution and decision to proceed until the material or equipment is purchased.

Make fast decisions on small matters and claim the authority to make these decisions. Otherwise you just spend dollars for saving pennies!


Peter Wyss