In today’s fast-paced world, there appears to be a greater emphasis on getting things done quickly. Still, organizations are always looking for ways to get things done while reducing costs.
This is especially true for fixed-bid projects, where profit margin is derived from the difference between the bid and actual cost of the project. Every dollar saved is a dollar in your pocket. Sometimes, in order to secure a contract, bids are tight, which puts added pressure on cost containment.
In other cases, there are financial incentives tied to cost containment. Even in situations where cost is transferred to customers there is pressure to reduce cost. Cost overruns make for unhappy customers and can damage future business opportunities. Budgets can be fixed or cut, and when contingency funds are exhausted, then cost overruns have to be made up with remaining activities.
As discussed earlier, shortening project duration may come at the expense of overtime, adding additional personnel, and using more expensive equipment and/or materials. Conversely, sometimes cost savings can be generated by extending the duration of a project. This may allow for a smaller workforce, less-skilled (expensive) labor, and even cheaper equipment and materials to be used.
Below are some of the more commonly used options for cutting costs.
Reduce Project Scope
Just as scaling back the scope of the project can gain time, delivering less than what was originally planned also produces significant costs savings. Again, calculating the savings of a reduced project scope begins with the work breakdown structure.
However, since time is not the issue, you do not need to focus on critical activities.
For example, on over-budget movie projects it is not uncommon to replace location shots with stock footage to cut costs.
Have Owner Take on More Responsibility
One way of reducing project costs is identifying tasks that customers can do themselves. Homeowners frequently use this method to reduce costs on home improvement projects.
For example, to reduce the cost of a bathroom remodel, a homeowner may agree to paint the room instead of paying the contractor to do it.
On IS projects, a customer may agree to take on some of the responsibility for testing equipment or providing in-house training. Naturally, this arrangement is best negotiated before the project begins. Customers are less receptive to this idea if you suddenly spring it on them.
An advantage of this method is that, while costs are lowered, the original scope is retained. Clearly this option is limited to areas in which the customer has expertise and the capability to pick up the tasks.
Outsourcing Project Activities or Even the Entire Project
When estimates exceed budget, it not only makes sense to re-examine the scope but also search for cheaper ways to complete the project. Perhaps instead of relying on internal resources, it would be more cost effective to outsource segments or even the entire project, opening up work to external price competition.
Specialized subcontractors often enjoy unique advantages, such as material discounts for large quantities, as well as equipment that not only gets the work done more quickly but also less expensively. They may have lower overhead and labor costs.
For example, to reduce costs of software projects, many American firms outsource work to firms operating in India where the salary of a software engineer is one-third that of an American software engineer.
However, outsourcing means you have less control over the project and will need to have clearly definable deliverables.
Brainstorming Costs Saving Options
Just as project team members can be a rich source of ideas for accelerating project activities, they can offer tangible ways for reducing project costs.
For example, one project manager reported that his team was able to come up with over $75,000 worth of costs saving suggestions without jeopardizing the scope of the project.
Project managers should not underestimate the value of simply asking if there is a cheaper, better way.
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