How Schedule "Should" Effect the Project Budget

Talking with a lot of project managers I find that many of them understand the challenges of the triple constraint. Schedule, budget, and scope all need to be tracked and managed. But, many of them do not understand the direct link between schedule and budget. Many project managers feel that a schedule slip is okay as long as the customer agrees to the delay or if there is no missed opportunity.

“We met with the customer and they understand the situation and have agreed to
move the expected delivery date out one year.”

Or

“Our competitors will not have these features in their product for
another two years. Even with a one year slip we will still be ahead of them by
six months.”

These points are valid points and the focus on the customer is very important when facing a potential schedule slip, but the financial implications for these delays need to be understood before moving forward with the new plan. Many times, delayed deliveries imply delayed revenue. Let’s say your customer has agreed to pay after the final delivery or sales are expected to start increasing after the new features have been added to the next release of the product. Even if the project has stayed within budget, the schedule slip might affect the success of the project in terms of the project’s net profits.

First, understand that a project is only undertaken when management feels the project will add value to the business (short-term or long-term). The completion of the project is expected to increase sales by 5% or the customer will pay $5 million for the final delivery. Schedule, costs, expected returns, and the required profits are all considered when calculating the success of the project. Changing the schedule will affect the required budget. A delayed schedule may require a smaller budget if for the project to still add value to the business. Take for example the following project.

A project is expected to last four years and is given a budget of $3.5 million over four years. The project will cost $120k in 2007, $1 millions in 2008 and in 2009, and $1.3 million in 2010. Added revenue is expected to be about $5 Million by the end of 2011.

Let’s say the cost of capital for the project is 15%. The expected Net Present Value (NPV) comes to $258,286. Great! A positive value means a positive growth for the business.


Now let’s say the project is expected to slip by one year. In most cases this would also impact the costs, but for this example we’ll assume the cost originally expected to occur in 2010 can be spread out over 2010 and 2011 ($700k in 2010 and $600k in 2011) thus keeping within the original $3.5 million budget.


This schedule slip changes the NPV to a loss of $63k! The project now reduces the value of the business!

What I want project managers to understand is that schedule is tied to the budget. Just because the customer is okay with your slip, you still need to make sure the project makes sense to the value of your business.

Kiva Mobile Fulfillment System

A current xconnomy.com article introduced me to the startup, Kiva Systems of Woburn, MA USA. Kiva Systems has developed the innovative Kiva Mobile Fulfillment System (Kiva MFS). According to Kiva’s website, Kiva MFS “improves productivity, speed, accuracy, and flexibility” of their customer’s warehouse operations. How does Kiva MFS do this? With robots! Stubby orange robots drive along the warehouse floor. The robots carry the inventory pods around the warehouse storing, moving, and sorting inventory. Figure 1 is an image of the MFS system at work. The orange figures under the blue shelves (pods) are the robots as they are moving the pods around the warehouse. The system uses robots, bar code scanners, and an intelligent software system that communicates with each robot wirelessly.

Figure 1: Image of the Kiva MFS at work source: kivasystems.com (requires login)

Operation managers have the responsibility to lower cost, increase quality, increase the speed of operations as a whole and for each order, and at the same time ensure the customization of each customer’s order. In warehouse operations, speed is correlated with the employees’ knowledge of the warehouse. When items need to be stocked or when a new order requests a particular item, an employee must identify the location of the item in the warehouse and then physically travel to that location and back. Quality, on the other hand, is linked to the employees’ knowledge of each product as they must visually check the actual items being packaged for shipment against the ordered items. Error occurs when items are placed into the wrong order or when wrong items are misidentified. In many warehouse operations, each order is customized; tailored to the exact needs of the customer. To help relieve these requirements, orders can be batched. Orders are not fulfilled until a number of orders come in for the same set of items. Although batch ordering increases speed for the operation as a whole, it can reduce the speed of each individual order. An order can be placed at one o’clock but might not be fulfilled until Six o’clock when a larger order for those items comes in.

With the Kiva MFS, warehouse operations can increase quality, increase speed, and ensure customization of each order. The system allows warehouse workers to remain in one location while the required bins for each item automatically come to them while fulfilling the previous order. This reduces the time it takes each warehouse worker to recognize the location of the items in the warehouse and cuts the time that the worker would be required to travel to that location. Thus, it increases the speed of each order. In fact, Kiva Systems claims it can triple order fulfillment output per worker.

At the same time, the system increases quality by utilizing barcode scanning technology. The worker scans each item. The system then tells the operator which order the item must be placed in. This increases the quality of operations by ensuring the correct items are being placed in the correct order. Workers new to the warehouse no longer need extensive training of the location and identification of items in the warehouse.

The Kiva MFS also adapts the location of each product to optimize the warehouse. Slower moving items are moved to the back of the warehouse while faster moving items are placed closer to the workers. The system allows the warehouse to learn how to become more efficient over time, making the operations increase efficiency and adapt to new trends in customer orders.

The Kiva MFS is the beginning of the next generation enterprise solutions. Many current solutions are focusing on connecting departments with the needed information in a timely and useful manner. The current systems have improved the efficiency and decreased the cost of operations by optimizing the flow of information. The next generation of enterprise solutions will need to look toward robotic and intelligent systems that optimize the way we think and operate our businesses

Exploration Efforts Still Need Project Management

A lot of projects start with a clear goal, an available budget, and the deadlines are already somewhat obvious. From my experience, companies are utilizing project management practices in these types of situations more and more. Companies are realizing that the execution of a clearly defined effort needs to balance the triple constraint of schedule, budget, and scope.

However, in my experience project management is not commonly utilized when the effort does not already have an obvious path and objective. An opportunity is understood to exist but the main tasks that need to be accomplished, the budget, and/or the schedule are unclear. In situations like this, companies tend to see the effort as an “exploration” and not a project. The “explorations” do not tend to follow any project management processes. This is a mistake. These efforts cost money, utilize resources, and tend to drag on without a final result. They end up adding no value to the company.

If you find yourself falling into this trap step back and think about why you are pursuing this ‘exploration” effort. In for-profit corporations, the end reason is for profit. You are pursuing this effort because there is some potential opportunity for your company to gain profits. Maybe you don’t have a clear understanding of the potential opportunity or how much it will cost. That is fine, but before starting the effort you need to at least come up with estimates. Determine what you are willing to spend for the estimation, decide what resources are qualified to complete the estimation, and give a deadline for the final estimation.

To complete your estimations, understand why you are investing in the effort. Get a good understanding of the opportunity and determine an estimate of the potential return. Estimate the window of opportunity you have or when the needed resource will be available to complete the effort. Deadlines will become more obvious and the project’s risks will become better understood (i.e. does the project that falls in line with your current business efforts). Next use your corporation’s financial structure to obtain the budget (if ‘x’ dollars are invested in this project over the life of the project and given the estimated return for this opportunity is ‘y’ dollars, our return will be a Net Present Value (NPV) of positive ‘z’ dollars).

The budget, schedule, and scope of all efforts need to be defined and project management is needed to manage the efforts. Understand and manage all efforts if you want them to be successful otherwise you are only wasting time and money.