IPM1 thinking task #6: Cost inflation

Imagine a building project. Say you want to make a nice innovation hotel where people could go to get creative ideas and be in a creative environment (an idea we had during a class 5 years ago) while doing business in a city.  From the idea moment to completion might take 2 years. So if we start the project in April 2020 it’ll be delivered 24 months later.

Cost? 10M €

My question is when will most of this money leave the bank account and go to the subcontractors?

a) Towards the start of the project?

b) Towards the middle?

c) Towards the end?

The answer in most projects is (c)

And the real spending curve looks like this

spending1

So you could think, « we have lots of time before we spend the money so there is no real hurry »

But

now think about when you decide and commit yourself to spend? You can’t leave that till the last minute. You make those decisions much earlier…Contracts have to be signed, subcontractors have to plan in the work for you, etc.

spend2

Suddenly you have less time!

And now we’ll add the cost of modifications to this diagram. How much does it cost if you decide to modify something in the project?

cost of modif

Making modifications is cheap at the start of the project. But is expensive later on.

Makes sense?

Do you agree?

Now, let’s superimpose the Midler curves with these and see what we get.

Midler and spending

We get bad news! We decide how to spend on the basis of not enough information about the project…so not surprisingly modifications will cost. We hired the wrong profile people, we went for the wrong system. We forgot about this or that.

So what to do????….How to manage that?….

Think about it.

Next we’ll look at how to fly risky and safe projects.

A propos markowskikrys

I run an advanced Masters programme on project management and innovation at ESIEE
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