7 Estimating costs, revenues and intangible benefits
Planning a project includes preparation of financial and related projections. Frequently, these will be used to:
weigh up the economic feasibility of the project;
obtain approval from a higher authority in the organisation for the project to proceed;
set boundaries of delegation or empowerment in a formal budget;
provide the basis for accounting for project revenues and costs;
provide a means of diagnostic and, possibly, interactive control of the project.
At the project preparation and planning stages, your focus is on understanding and shaping the future. Among important questions you should be addressing are those along the lines of:
What resources will we require and what will they cost the organisation?
What products will be produced, in what quantity and of what quality?
Depending on the type of organisation, either:
for what prices can our for-profit organisation sell these products and how much revenue will they generate?
how much must our non-profit organisation charge users for these products if these charges are to cover resource costs?
In producing these products or offering these services, how much economic, political and/or social value will our governmental organisation confer on their direct beneficiaries, and on other citizens and other taxpayers generally; and by doing so, what private costs will our governmental organisation impose on citizens and other taxpayers?
What cost savings will accrue to our organisation from these products or what fines/penalties will our organisation avoid by producing these products?
Planning a project is an iterative process, involving having ideas, trying them out and formulating them into something coherent enough to call an outline proposal for a project. All these activities result in an opportunity cost, mainly of staff time (spent on thinking, corridor discussions, meetings, etc.) that is not, therefore, being devoted to other valuable activities. As soon as most of these costs are incurred, however, they are sunk, irrecoverable and, therefore, irrelevant to analysis of the future, at least in economic terms.
One trap to watch out for is to be sucked further and further into a project on the political grounds that the organisation has invested (or sunk) so much money and effort in it so far that it can't afford to pull out now.
Projected benefits and costs need to be calculated at an early stage in the life of the project, working as far ahead as possible, preferably until the project would be completed. There must be a case that shows that the benefits exceed the costs by a large enough margin to warrant spending more planning time on the project, instead of working on alternative organisational activities.
Estimates are the best guess that you can make given the information available at the time of estimating. It provides a way of testing the extent to which the desired aims are likely to be achieved by the organisation within the financial resources it can make available internally or raise externally. It is only when you have a detailed breakdown of work and a schedule of timing that you can be more specific about the revenues and costs involved.
Few projects are genuinely unique. Many are look-alikes and a prime source of estimates is similar activities, past or present, elsewhere in the organisation. Data, published and otherwise, should be available from other organisations, especially those that that aren't direct competitors. Often you just have to telephone or email the right person as you can make use of networking to establish useful contacts.
It helps to distinguish between development and operational costs, and to analyse these further into stages or components of the project, based on Gantt and/or critical path charts. These components will each require effort and resources, and these inputs can be analysed and translated into monetary values simply by applying unit prices or rates. Revenue and intangible benefit estimates can be approached in a similar way, based on other experiences and components of your market. Be aware, however, of monetary amounts being assigned to intangible benefits because these may give rise to an impression of objectivity that is not deserved.