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Better bottom-line benefit/cost analysis

 

for multi-year projects

 

ADVISORY ARTICLE

By Dr. Kenneth Smith, PMP

Honolulu, Hawaii

& Manila, The Philippines


Benefit/Cost’ is a generic, easily-understood concept, bandied about by many program and project management risk analysis planners.  But I’ve found very few project personnel who actually knew how to do it before they took my Project Management Fundamentals seminar.  Furthermore, the few that already knew how, did it the ‘hard’ way; and even then, often incorrectly!

Although it sounds simple, B/C Analysis is really quite complicated; replete with assumptions, and entailing formulaic computations of several abstruse variables – some with meanings that differ from either common usage, or project management baseline-budgeting terminology — for indicators to compare versus pre-established criteria!  [For instance, in Benefit/Cost terminology, ‘Discount Rate’ is the assumed cost (as a percentage) for borrowing money in the future, not a current mark-down or price reduction on a product. Furthermore, PV = Present Value, not to be confused with the PV (Planned Value) of Earned Value Methodology (EVM).  Muddying the issue even more, FV (Future Value) is EVM’s Planned Value for multi-year projects; while ‘Financial Internal Rate of Return (FIRR)’ is neither monetary income nor a guaranteed savings rate, but rather an analytical break-even point in Discount Rate percentage terms.]  Confused already?!  FYI, the foregoing are all common misconceptions I have encountered on-the-job and in the classroom.

Consequently, in the normal course of events, Benefit/Cost analysis is the province of specialists; primarily financial managers and esoteric economists.  This presents a dilemma for project planners and managers who – while not expected to be experts in the subject matterare responsible for overseeing the analytical process — but all too often lack the capability to participate in it, or verify the analyst’s findings and be reassured the results were based on realistic estimates and analyzed objectively; not simply manipulated to satisfy the bias of one or other contentious stakeholders.  And from my extensive experience, this is not a trivial concern concocted by paranoid project planners and managers. 

Undertaking new ventures requires costly up-front and periodically-recurring capital investments to fund a myriad of risky activities and resources over a long period of time; with the expectation of a worthwhile return on that irretrievable sunken-cost investment in the far-distant future.  However, for a variety of reasons, the history of successful projects is dismal – not only behind schedule and over budget during the implementation stage, but also lacking follow-on operational sustainability for the earlier anticipated life of project, after delivery.  What is the Cause for this Effect?[1]

More…

To read entire article, click here

How to cite this article: Smith, K.F. (2021).  Better bottom-line benefit/cost analysis for multi-year projects, PM World Journal, Vol. X, Issue VIII, August. Available online at https://pmworldlibrary.net/wp-content/uploads/2021/08/pmwj108-Aug2021-Smith-better-bottom-line-benefit-cost-analysis.pdf


About the Author


Dr. Kenneth Smith

Honolulu, Hawaii
& Manila, The Philippines

 

Initially a US Civil Service Management Intern, then a management analyst & systems specialist with the US Defense Department, Ken subsequently had a career as a senior foreign service officer — management & evaluation specialist, project manager, and in-house facilitator/trainer — with the US Agency for International Development (USAID).  Ken assisted host country governments in many countries to plan, monitor and evaluate projects in various technical sectors; working ‘hands-on’ with their officers as well as other USAID personnel, contractors and NGOs.  Intermittently, he was also a team leader &/or team member to conduct project, program & and country-level portfolio analyses and evaluations.

Concurrently, Ken had an active dual career as Air Force ready-reservist in Asia (Japan, Korea, Vietnam, Thailand, Indonesia, Philippines) as well as the Washington D.C. area; was Chairman of a Congressional Services Academy Advisory Board (SAAB); and had additional duties as an Air Force Academy Liaison Officer.  He retired as a ‘bird’ colonel.

After retirement from USAID, Ken was a project management consultant for ADB, the World Bank, UNDP and USAID.

He earned his DPA (Doctor of Public Administration) from the George Mason University (GMU) in Virginia, his MS from Massachusetts Institute of Technology (MIT Systems Analysis Fellow, Center for Advanced Engineering Study), and BA & MA degrees in Government & International Relations from the University of Connecticut (UCONN).  A long-time member of the Project Management Institute (PMI) and IPMA-USA, Ken is a Certified Project Management Professional (PMP®) and a member of the PMI®-Honolulu and Philippines Chapters.

Ken’s book — Project Management PRAXIS (available from Amazon) — includes many innovative project management tools & techniques; and describes a “Toolkit” of related templates available directly from him at kenfsmith@aol.com on proof of purchase of PRAXIS.

To view other works by Ken Smith, visit his author showcase in the PM World Library at https://pmworldlibrary.net/authors/dr-kenneth-smith/

 

[1]Find out the cause of this effect, Or rather say, the cause of this defect. For this effect, defective comes, By cause! Lord Polonius in Hamlet (by William Shakespeare)