The powerful & beautiful tool called CTC
The two most important measures of success in a project are time and cost management. Most project failures occur in these two parameters, and likewise, a project is successful if it has been completed in time and within cost. Last time, when we talked about the third element of "checking" in PDCA loop, we were primarily dealing with the challenge of tracking a project and taking corrective actions in terms of time management. It is of equal, if not greater, importance to finish the project within budgeted costs. How does one achieve this? The answer for me, is cost to complete. It will always be my recommendation to budding project managers, to understand the concept of CTC and to use it fully, with all honesty. Yes, effectiveness of this tool is zero, if people approach this with lack of honesty, and it will soon be clear why.
Whenever I worry about a project, the recurring theme that comes up in mind, is that there should be no surprises to me, and I must know about the possibility of time or cost over-runs as soon as the occur. In that sense, project management is all about "surprise management". These risks always exist, but when any of these two risks materialise, we must know soonest. Today, as we talk about cost control, we must have a system in place to know about a potential cost increase as soon as possible, so that corrective actions can be taken at the highest level of the project management team. How can this be achieved? Once again, this is no rocket science, cost to complete is simple, disciplined application of knowledge and transparency. The team has to calculate, capture and report, with a given frequency (weekly/ monthly/ quarterly) the actual total cost already incurred plus the estimated total remaining cost to be incurred before completing the project, and this sum is called "cost to complete". Evidently, the first number, actual cost incurred, can be churned out by accountants, but the second number is a joint estimate by engineers and purchasers, and this is where the importance of knowledge and honesty comes in.
Take for example, the case of a fictitous steel plant, which was estimated to cost Rs 10,000 crore, and take five years to complete, and this formed the basis of viability calculations, and therefore, project approvals. One year down the line, let us say that the cost of acquiring land already went up by Rs 100 crore, and the rates of steel and cement went up inordinately, say by 20 per cent for each. On top of this, if there were some changes in scope of the project, and the cost of equipment to be ordered has gone up in the mean time by an estimated Rs 200 crore. If the cost to complete report was to be faithfully worked out at this point in time, it will perhaps show that the project cost has gone up to Rs 10,700 crore, assuming there were no savings in the work executed so far, to counterbalance these additional costs. If, on the other hand, the cost to complete report is not deployed, or even if deployed, it is not honestly compiled with all information available, then the project manager or his higher management will not know at this stage that the project cost is going up, and cost reduction has to be initiated. One can fool the world (and a gullible boss can also unknowingly fool himself) if we look at the usual data on cash outflow (projected vs actual), or value of commitments made so far, all of which will remain below the total approved cost till it is already too late. Sounds unbelievable, but it keeps on happening in our world everyday.
I had the misfortune of dealing with a small Project in its terminal phase, when everyone suddenly woke up to the shocking fact that the project which was approved for Rs 200 crore, has already spent Rs 150 crore, committed a total of Rs 190 crore, and will need to commit Rs 40 crore more for completion, which meant that the total cost to complete was actually Rs 230 crore, and at such a late stage of the project there was no possibility of any corrective action to be taken, and it was a huge embarrassment to seek fresh approval for this cost overrun. More than the embarrassment, the cost increase, which was by now a fait-accompli, adversely affected the financial viability of the project. If the project manager used the concept of CTC, and looked beyond the traditional reports of cash outflows and project commitments, the potential cost overrun would be known much earlier, and perhaps some cost optimisation opportunities could have been explored, and at the same time, top management would be kept informed of the possibilities early on.
Let us say that simplistically a project organisation has three hierarchical levels. The first one is where the action is, and where the news of cost increase first hits. The second is the project management, who are accountable for overall performance of the project, and these guys need to know about the cost push quickly. The third and last tier is, let's say, the top management of the organisation, who has oversight responsibility for the project, and also have the job to guide the project manager when needed. For a"cost to complete" reporting system to work effectively, the first two levels of people must be transparent and honest in disclosing all that they know in a scrupulous manner about potential costs, without which, the top level will have no clue whatsoever. This is why I say again and again, that honesty and transparency is a very important attribute here (and everywhere, of course!). To promote this kind of positive behaviour in the project team members, we have to first create an environment where speaking out is encouraged, and messengers with bad news are not seen to be shot down. The other suggestion is to partially automate the generation of CTC reporting through IT system/ERP, which will perforce bring in some amount of discipline and rigour into the frequency and accuracy of the reports, although, let it be understood clearly, that CTC report will always have the need for human inputs from engineers, purchasers and accountants who have their ears on the ground to pick up the early tremors.
"Cost to complete" has been my favourite when I managed projects, and I can assure you that even in this digital age, and in this fast-changing world, it remains a "bread and butter" concept, which has lost no relevance.
- SUMIT BANERJEE