how much is enough?
Read the Companion Workbook
There is a cost to project management; it is not free, and it does not happen by magic. While the actual cost of project management varies--and there have been no studies that have provided any conclusive answers to the question. This workbook explores more into the true cost of project management.
HOW MUCH PROJECT MANAGEMENT should there be on a project? 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 task at hand.
Projects come in all sizes and variety. Below a certain threshold, assigning a dedicated project manager is neither necessary nor justified. Small projects may only include a short scope document, a few cost accounts, and a milestone schedule. Large projects 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 controls department, detailed progress reports, and so forth. Medium-sized projects would fall somewhere between these levels of support.
My background is in the area of capital improvement projects in the industrial sector. There are usually three main phases of a project: conceptual engineering, detailed design, and construction. 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 involves site development work, installation of equipment and supporting systems, training, startup, punchlist work, and closeout activities. Smaller projects may not include all of these components, or some steps may be merged for greater efficiency.
“As much as is necessary and no more” may sound like a Zen puzzle, but it's actually the only practical answer.
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 significant portion of the cost—perhaps as much as one-third of the total. It is during this phase that team members are selected, scope is finalized, and project schedules and estimates are produced.
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.
John P. Byrne, PMP, has over 20 years of experience in project management, and is currently a project/mechanical engineer at Progressive Design Inc., in Richmond, Va. He is also a member of the Central Virginia PMI Chapter.
During the construction phase, it is possible that a different person will serve in the role of “project manager.” Instead of “project management,” this discipline is often called “construction management.” It has been my experience that 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 [R.S. Means Company, Inc., 1990].
What about project controls? In some companies, there is a separate project controls group with specialists in estimating, scheduling, and cost control. When a project is large enough to justify project control specialists, 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.
Reader Service Number 5160
With respect to defining small, medium and large projects, I propose for this discussion that a small project have a TIC of $100,000 or less, that a medium-size project be in the $100,000–$1,000,000 range, and that a large project be in the $1 million–$10 million range. There are certainly projects larger than $10 million, but they are more the exception than the rule. (Many of us would be in a different profession if we had to subsist on only $10 million and up projects.)
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. In his book Project Management—A Systems Approach [Von Nostrand Reinhold, 1998, 9–15], Harold Kerzner states that project management can vary from 2 percent to 15 percent of the TIC. In “Benchmarking Project Management Organizations” [PM Network, February 1998], project management costs as a percentage of total project costs averaged 6 percent and ranged from less than 1 percent to almost 17 percent. The 7–15 percent range I've quoted is therefore in line with these other references. The range will also vary by industry.
Generally speaking, the larger the project, the smaller the project management costs as a percentage of the total. There are certain project management activities that need to take place regardless of the size of the project, and those activities consume a larger part of a project's budget on small projects than they do on large projects. Let's assume an average project management cost of 10 percent of the TIC, including construction management and perhaps limited support from a project controls group. As defined above, project management costs on a small project would be less than $10,000; on a medium-size project, they would range from $10,000 to $100,000; and on a large project they would be $100,000 or more. Assuming an all-inclusive billing rate of $70/hour (whether internally budgeted or billed to a client), 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.
What does this data mean?
It means that on small projects it is difficult to function strictly as a project manager, even when managing multiple projects. To justify working strictly in a project management role, the number of small projects becomes unreasonable. There comes a point where the number of details becomes overwhelming, resulting in detrimental effects to one or more of the projects. The solution is to have the project manager pick up other responsibilities on a project, such as the technical lead. This approach is widely used in industry, whereby the project manager on small projects has primary responsibility in both the project management area and as the technical lead. A prime example would be a project engineer working in an industrial plant.
The level of project management on small projects needs to be kept to a minimum—utilize a concise scope of work, a milestone schedule, and a limited number of accounts for budgeting and tracking purposes. It is unlikely that a small project can justify support from the project controls group.
On medium-sized projects a higher degree of project management can be justified. After all, the company is funding a project that will require a larger monetary outlay with increased risks. The project manager may only have limited, if any, responsibilities outside of his or her normal roles and responsibilities. A limited amount of support from the project controls staff may also be effective for medium-sized projects.
On large projects the project manager may have a dedicated staff to support the project, including one or more people from project controls, possibly a project coordinator, and administrative or clerical support. The stakes continue to rise as the size of the project increases in cost and complexity. Scopes, schedules, and budgets will likely increase in complexity as the dollars increase; however, they do not necessarily have to increase proportionally. They can be efficient and effective at the same time.
These guidelines are by no means absolute, but can provide a project manager with some targets to keep project management costs reasonable. Nevertheless, projects may have specific challenges that can skew the norm.
THE BOTTOM LINE IS that project management and its associated costs should add value to the project. Too much and you're making the project more complicated than it needs to be; too little and you may end up wasting dollars due to a lack of proper planning. As Albert Einstein once wrote, “Things should be made as simple as possible, but not any simpler.” As project managers, it is our responsibility to find the right level of project management—a level that adds value in our minds and the minds of our customers.
Reader Service Number 5095
FEBRUARY 1999 PM NETWORK