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Effective key performance indicators for project cost estimation and analysis

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  • 1. Effective Key Performance Indicators for Project Cost Estimation and AnalysisIn todays competitive environment, every dollar counts and organizations cannot afford toremain ignorant about true project costs. Fortunately, there are a few formulas that help youtrack and analyze project cost and to estimate projects with increasing accuracy in thefuture. Creating An Effective KPI Key performance indicators (KPIs) measure progress toward a strategic goal. Let‟s useMartin Luther King Jr. as an example to illustrate this concept. He had a morally compellingvision: equality and peace between different races. Your business needs a vision as well,and the strategic goals you set as well as the projects you take on should aim towardsfulfilling this vision. Kings strategy for achieving his vision was nonviolent protest. A sampleKPI for measuring the success of this strategy could be „number of violent incidents perprotester.‟ King could have pushed his organization to minimize this number over time.Regardless of your vision, the closer you get to identifying it and developing a clear strategyand calculable KPIs, the more successful your projects will be. It is important to narrow your focus, so unless your company has 100 strategic goals,you should not have 100 KPIs. Ten KPIs can be effective, five KPIs are even better, andone KPI is optimal. The KPI you choose must also be measurable. "Make clients moresuccessful" is useless as a KPI without some way to measure their success. KPIs are oftentied to strategy through techniques such as the „Balanced Scorecard,‟ but they don‟t have tobe as complicated as that to be useful and effective. As with most things, simplicityincreases efficacy. A KPI is a „SMART‟ goal, which means it must be Specific, Measurable, Achievable,Relevant and Time-Based. Lets say that you set the following goal for your team: "Increaseaverage revenue per sale to $10,000 by December." Average revenue per sale‟ is the KPIthat you would measure in order to determine success or failure. The goal would not beSMART if it wasn‟t an achievable goal. It would not be SMART if the word „December‟ wasleft out either, or if it was not relevant because the team you are holding accountable is aportion of the organization that has nothing to do with sales or marketing, like HR. Leveraging KPIs for Cost Analysis Next I would like to discuss some useful KPIs that are easy to calculate, yet will make ahuge impact on your projects and revenue.
  • 2. 1- Billability Billability or utilization rate refers to the percentage of time in a given period duringwhich an employee or set of employees is working on a revenue-producing capacity.Utilization rate can be found by the formula B/T, where B = billable hours for the employeeor group in the period and T = all hours worked by the employee or group in the period.Most organizations try to keep utilization rates above 70 percent or so. The higher the rate,the better the results until you‟ve reached a point where necessary administrative tasks arenot being accomplished. If this occurs, youll know that you have pushed it too far and needto regroup. Knowing not only how many hours are being spent on a particular project but also whatpercentage of that time is billable to the client is one key way to understand the completeproject cost. The more work that employees spend time on that is not billable, the more theproject will cost. If you use this KPI consistently, you will be able to identify unproductivework and find ways to minimize it successfully. 2 - Adherence to Estimate Accurate project estimation is another component that is crucial in keeping costs downand stakeholders happy. The KPI you want to minimize here is defined by the formula [(E-A)/E], where E = estimated hours to complete project and A = actual hours used tocomplete project. If you can keep this number as close to zero as possible, you know thatyou are doing a good job in estimating projects. If not, it is important that you realize it nowand take steps to address it. Improving this number can be difficult for some companiesuntil they understand a simple truth about most projects, which is that similar projects oftenhave a strikingly accurate ratio of early phase cost to overall project cost. In other words,the early phases of a project, commonly referred to as „requirements,‟ „design,‟ or„specification,‟ can often give you a clue as to the length of the entire project. Let‟s say thatafter carefully tracking time on a batch of similar projects you find that the first two phasestake approximately 10% of the project time. You can then use that data to predict the lengthof future projects. We‟ve found this project estimation technique to be extremely accurate,regardless of whether your company‟s magic number is 3% or 30%. 3 - Percentage of projects profitable Why do we track project costs in the first place? The answer is simple—to guaranteethat every project undertaken and executed is bringing in a profitable ROI for theorganization. This KPI, “percentage of projects profitable,” can really jumpstart yourbusiness and ensure that you are taking on the right projects. Unfortunately, mostcompanies have projects going on at any given time that actually lose money for thecompany. Due to an inadequate understanding of costs, many of these go unnoticed. Yet allyou need is direct and indirect per-project cost data along with revenue data to gauge per-
  • 3. project profitability, allowing you to make every effort to maximize this particular KPI. Theformula is:# of profitable projects / # of projects Understanding true project cost should be an integral part of every organizationsproject management methodology, but many companies do not even know where to begin.With the right data and a few powerful KPI formulas in hand, cost engineers can enlightenthe organization and empower them to be selective in the projects they choose. Not onlythat, but project estimation becomes substantially easier when you keep track of the lengthand scope of past projects, which will save you time and money as you go.Reference Link: http://www.hr.com/en/app/blog/2013/01/effective-key-performance-indicators-for-project-c_hc3qsyxh.html