Project management and impact of time value of money (1)

“Money often costs too much” – Ralph Aldo Emerson

“If you want to know the value of money, go and try to borrow some” – Benjamin Franklin

“Time is money. Wasted time means wasted money, means trouble” – Shirley Temple

When a project is about to be commissioned and executed, there are various issues, parameters and risks that are taken into consideration. They include time, money, scope, contracts and quantitative risks, to mention a few. Projects are undertaken for the simple reason of making more money through expansion, new purchases or planned acquisition. So timely completion of a project will be more useful than if the project is badly executed or had to be abandoned.

The concept of time and money and the effect they have on projects and how projects are executed cannot be overstressed. It is generally accepted that money now at hand is worth more than at a future date provided it has a latent and prospective earning capacity. In effect, money at hand now can buy more than the exact amount of money spent at a future date. With a finite amount of time and limited resources, particularly money on hand for any project, organizations continually seek to improve their bottom line, which translates to project completion at the shortest possible time and at less cost. Issues of equivalence and cash flow also play an important role in determining how the Time Value of Money (TVM) plays out in project management and project controls.

Practical experience gained from planning, executing, monitoring and controlling project costs has shown that there is a strong correlation between cost, procurement, risk and time/schedule management mainly due to capital budgeting decisions. Projects are funded in a variety of ways by the sponsors and as a result, costs and cost of money play a major role. Should the concept of Time Value of Money be a consideration when funding for a project is being discussed? If yes, then how do procurement management, risks, cost and schedules baselines affect project execution and the project as a whole, and are they essential factors to be considered for its successful completion?

Schedule baseline

Once the project charter has been approved and signed, the project manager is appointed, detailed planning is embarked upon by the planning team and this takes a lot of time and money. The project charter is a high level document that contains factors such as the assumptions and constraints made by the principal stakeholders during the initiating process. These factors are reviewed throughout the lifespan of the project. The project charter includes the project statement of work (SOW) and formal contracts that are signed by all the parties involved. Armed with these documents the project manager proceeds to develop the project management plan. The project management plan is the project control and must meet the needs of the project from start to finish. The project management plan consists of other individual plans that include risk, scope, schedule, cost, quality, communication, and procurement. The schedule, scope and the cost baselines are used to measure the project’s performance.

The project manager must be able to come up with a realistic schedule baseline against which the performance of the project with respect to the duration will be measured. The project schedule development includes the Work Breakdown Structure (WBS), historical records, project scope statement, activities list and their attributes, network diagram, activity duration estimates, resource requirements, calendars, milestones, resource breakdown structure and risks. The final schedule is derived from the combination of the aforementioned variables and becomes the schedule baseline.

The more a project drags on, the more costs are piled up. This often leads to project abandonment. Poor time and schedule management goes a long way to add additional and unintended costs to the bottom line of the project because with time the cost of borrowing skyrockets.

Cost baseline

Cost is a fundamental benchmark by which activities and assets are measured and evaluated. Cost serves as one of the basic features related with the acquisition of an asset or in carrying out an activity. Cost is generally and universally related to the monetary value of an asset or activity. Aside from the scope and time, cost is the third most important consideration for a project. A cost management plan is needed to help chart the course with which costs are managed and controlled for each project. It also includes how the project will be funded, accuracy levels of estimates, cost performance measurement methodology, reporting format, change control procedures and control limits. The project human resource, schedule and risks associated, organizational process assets and enterprise environmental factors are major inputs taken into consideration before you come up with the cost baseline.

For most projects, activities derived from the creation of the WBS are used to create cost estimates at the more granular level. Control accounts from which estimates and control costs are derived differ from project to project. Once the cost estimates are made for each activity, they will be added and pooled into a one time-phased spending plan called the cost baseline. Every cost needed to finish the project should be estimated and included in this baseline.

Apart from activity estimates, other costs that should be included in the cost baseline are the cost of project management activities, cost of risks and quality, rent, direct and indirect costs such as labour, materials and training. Contingency reserves arising from the risks associated are already included in the cost baseline. The cost baseline, in addition to the management reserves, forms the total cost of the project or the budget.

Ayodele Akingbade