Project Management: The Time-Cost Relationship

There is usually a direct and very important relationship between time and money. If the planned timescale is exceeded, the original cost estimates are almost certain to be overspent. A project costs money during every day of its existence, working or non-working, weekday or weekend, from day on of the program right through until the last payment has exchanged hands. These costs arise for a variety of reasons, some of which I will explain in this article.
The variable or direct project costs of materials and workforce man-hours are time-related in several ways. Cost inflation is one factor, so that a job started and finished later than planned can be expected to cost more because of intervening materials price rises and increases in wages, salaries, and other costs.
There are other less easily quantifiable causes where late working implies inefficient working, perhaps through lost time or waiting time (often the result of materials shortages, missing information, or poor planning, communications, and organization). If any project task takes longer to perform than its planned duration, it is probable that the budgeted man-hours will also be exceeded. This is true not only for a single task, but also for the project as a whole.
The fixed or overhead costs of management, administration, accommodation, services, and general facilities will be incurred day by day, every day, regardless of work done, until the project is finished. If the project runs late, then these costs will have to be borne for a longer period that planned. They will then exceed their budget.
Another important time-related cost is financing. Where the contractor has an overdraft at the bank or relies on other loan financing, interest has to be paid on the loan. Even if the contractor can finance the project from internal funds, there is still a notional cost of financing, equivalent to the interest or dividends that the same funds could have earned had the contractor invested the money elsewhere (such as in a bank deposit account). If a project runs late, the financing period is extended, and the total amount of interest or notional interest payable must increase correspondingly.
Much of the finance raised for a large project is likely to be invested in work in progress. This work in progress includes not only work carried out in a factory or at a construction site, but also all the costs of engineering and design that have yet to be recovered from the customer. In many cases, the contractor is only able to charge for work actually finished and delivered to the customer, or for amounts of work done and supported by certified invoices. Such invoices are validated by certificates from an independent professional third party, which agree the amount of work done and claimed for. Certified invoices are often linked to planned events. If an event is late, or if a measurable progress stage has not been reached, a certified invoice cannot be issued. The contractor's revenue is then delayed, which means that the contractor must continue to finance the mounting costs of the project. The contractor could suffer severe cash flow problems as a result, perhaps leading to bankruptcy in the worst case.
Late completion can invoke the ignominy of contract cost penalties. Some contracts contain a penalty clause which provides the customer with the sanction of a cost penalty against the contractor for each day or week by which the contractor fails to meet the contracted delivery obligation.
All these time-cost considerations mean that delays on a large project can easily cause additional costs amounting to thousands of dollars per day. It is clear, therefore, that if work can be monitored and managed carefully so that it proceeds without disruption against a sensible, achievable plan, must of the battle to control costs will already have been won.

Article Source: http://www.diyarticlelibrary.com

John Reynolds has been a practicing project manager for nearly 20 years and is the editor of an informational website rating project management software products. For more information on project management and project management software, visit Project Management Software Web.

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