Are You Selling Your Liability Low? – Accounting the Cost of Project Management

When business takes on a new #project, the #success or #failure of the work depend on the #efficiency of your project management and #efforts available for project management – and the most crucial element of your project management efforts is handling project management costs.

Project management costs involve all #costs that cover the tasks related to project management, i.e., everything involving - initiating, planning, executing, monitoring & controlling, and finishing - a specific project.

Project management doesn’t come cheap — it takes up to 20% of the overall project budget or #TIC (Total Invested Cost) of the project. Running a project without solid management, or bad project management or inadequate Project Management efforts, however, will do more harm than doing good to the project. That’s why I am putting together the most important project management statistics to help readers paint a clearer picture of the PM performance rate along with understanding – why projects fail, what factors are crucial to success and more.

So, read on to learn all about project management, and most importantly, why you can’t afford to overlook this process.

-?????As per “4PM” 70% of projects fail to deliver what was promised to customers without proper management process. However, the implementation of a management process, has shown to reduce the failure rate to 20% or below. (www.4pm.si)

-?????As per “PMI” in 2018 organizations that neglected the PM process, reported failure of half or more of their projects. This means huge financial losses, along with potential missed business opportunities and lost clients. (www.pmi.org.in)

-?????As per “PMI” the latest project management stats show that 42% of companies undervalue the importance of project management as a crucial component for project success.

-?????As per “CIO” investing in proven project management practices reduces wasted financial resources by 28 times. This reduction comes because of successfully completing a larger proportion of their strategic initiatives. (www.cio.com)

Few more can be obtained from, 31 Pivotal Project Management Statistics for 2021 - TeamStage

Coming back to the question what should be cost of project management. The amount should be proportional to the size of the project. Since we already know the merits of incorporating project management into a project, let's focus on determining the right level for the #liability at hand as a project management consultant.

Projects come in all sizes and variety. Small projects (up to ? 10 Cr TIC) may only include a short scope document, a few cost accounts, and a milestone schedule. Large projects (more than ? 100 Cr TIC) may include a detailed scope document, a work breakdown structure, an elaborate and integrated project schedule, numerous cost accounts, optional support from a separate project monitoring and controls department, detailed progress reports, and so forth. Medium-sized projects would fall somewhere between these levels of support.

In the capital improvement projects in the industrial sector, there are usually four #phases of a project: #conceptual engineering, #detailed design, #construction, and post construction till #handover.

During the conceptual phase, options analysis takes place, feasibility studies are done, project estimates are completed, and appropriation requests are produced.

During the detailed design phase, major equipment is purchased, design drawings are created and issued for construction, construction specifications are produced, bid packages are issued, and contractors are selected.

The construction phase work involves, site development work, installation of equipment and supporting systems, punch-list work, and completion certification work.

Post construction till handover includes training, start-up, punch-list work, guaranteed test run, certification work and closeout activities.

Smaller projects may not include all these components, or some steps may be merged for greater efficiency.

The conceptual phase normally runs about 5 percent of the Total Installed Cost (TIC) of the project. A project manager's role during this phase is usually a sizeable portion of the cost — perhaps as much as one-third of the total cost of phase. It is during this phase that team members are selected, scope is finalized, and project schedules and estimates are produced. (100*5%*1/3=100*1.67%)

Detailed design is primarily an engineering function. Engineering for detailed design is normally about 15 percent of the TIC of the project. During this phase, a project manager directs an engineering/design team from the end of the conceptual phase through detailed design, procurement of equipment, customer reviews, and ultimately, issuance of design packages for construction. The project manager's charges will typically amount to about 10 percent of the engineering budget, or about 1.5 percent of the TIC. (100*1.5%)

During the construction phase, usually a different person should serve in the role of “project manager.” Hence, instead of “project management,” this discipline is often called “construction management.” A construction manager usually has a different skill set from a project manager who manages the conceptual and detailed design phases of a project; however, many of the issues are similar: managing the scope, tracking budgets and schedules, and so on. On the average, project/construction management costs during the construction phase of the project are in the range of 4–8 percent of TIC [according to Means Estimating Handbook] (100*6%)

Post construction phase will have more liability i.e., product is ready and any failure at this stage is loss of investment. During this phase again design team will be involved for assisting the commissioning and guaranteed test run. This comes about 2% of TIC. (100*2%)

When a project is large enough, it requires a project control specialist, they can provide a significant benefit to the project manager by shifting some of the responsibilities associated with producing the initial schedules and budgets and then tracking them during the life of the project. This allows the project manager to focus his or her attention on higher-level “opportunities.” One of these specialists can support three or four project managers if the projects are in the small-to-medium size range. On a large project, it may be possible to assign one or more full-time project controls people. Assigning project controls specialists to a project will raise the project management costs by about one-third.

Based on the above estimates, the combined project management costs for all phases of a project total somewhere between 7–11 percent of the project's TIC. If project controls support is added, project management costs will be in the 9–15 percent range.

So, ideally for small projects i.e., up to 10 Cr TIC, PM cost should be 0.9 Cr or say 90 Lakh and for Large projects i.e., above 100 Cr TIC (about 100 Cr), PM cost should be 15 Cr. However, as project TIC further increases till 1000 Cr the PM Cost would decrease again and remain 9% at constant beyond 1000 Cr.

For further simplicity, a total budget for project management (including construction management and project controls) would be about one-to-four labor-weeks for small projects, one-to-nine labor-months for medium-sized projects, and nine+ labor-months for large projects.

At last, if you are quoting less than explained above, then mind it to list the exclusion of services. Further, always check your liability, if there is any intrinsic liability which makes you accountable directly for project success, you need to cover for same in price.