LG3: Cost — What Are We Really Trying to Optimise?

Let's start with something most of us can relate to: planning a wedding.

You have a budget. You have a list of things you want. You have a date. You have a vision of what the day is going to look like. And then, somewhere along the way, someone says the words that every couple planning a wedding eventually hears:

“It’s only another $500.”

The flowers are a little more expensive than expected. The photographer has an additional package. The venue wants more for a Saturday. The band is worth the extra money because, apparently, they are really good. And then there is the dress.

Before you know it, the original budget has become more of a suggestion than a number.

Sound familiar?

Perhaps surprisingly, this is not a bad analogy for project management.

Cost is important. But it isn't the whole story.

One of the simplest ways to judge a project is to compare the final cost with the original budget.

If we budgeted $10 million and spent $9.5 million, surely that is a success?

Not necessarily.

What if we saved the $500,000 by reducing the quality of the materials? Or by removing something that was important to the people who were going to use the finished project? What if we achieved the saving by cutting corners on something that will create additional costs later?

Conversely, what if we spent $10.5 million because we identified an opportunity during the project that would significantly improve the outcome?

Is that automatically a failure?

I don't think it is quite that simple.

Cost is a measure of what we spent. Value is a measure of what we got.

And the two are not necessarily the same thing.

The wedding budget tells us something important

Let's go back to our wedding.

Imagine Jessica has $30,000 to spend on her dream wedding.

She has a choice.

She could spend $8,000 on the venue, $3,000 on food, $2,000 on flowers, $2,000 on photography, $1,500 on the dress and distribute the rest across entertainment, transportation, accommodation and all the other things that somehow appear on a wedding spreadsheet.

Or perhaps photography is hugely important to her. She wants photographs that she will treasure for the rest of her life.

So she spends $4,000 on the photographer and takes $2,000 out of the flower budget.

Has the wedding become less successful?

Probably not.

In fact, if photography is one of the things that matters most to Jessica, she may have made exactly the right decision.

This is the important point.

A budget is not simply a number. It is a set of choices about where we believe money creates the most value.

The cheapest option is rarely the objective

This is something that is easily lost in project environments.

We can become so focused on reducing cost that we forget why we are spending the money in the first place.

Imagine a project team being asked to reduce the cost of a new building by $1 million.

The immediate response might be to look for cheaper materials, reduce specifications, remove features or negotiate harder with suppliers.

All sensible things to consider.

But perhaps the better question is:

“What can we remove or change without reducing the value of the finished building?”

That is a very different question.

It moves us away from cost-cutting for its own sake and towards value optimization.

And sometimes the answer might actually be to spend more.

If an additional $200,000 today prevents $1 million of future maintenance costs, the extra $200,000 may be an excellent investment.

If spending another $100,000 allows the project to open three months earlier and generate additional revenue, perhaps the cheapest option wasn't the cheapest option after all.

But budgets still matter

None of this means that budgets are unimportant.

They matter enormously.

A project still has to be affordable. There are financial limits, and ignoring them doesn't demonstrate good project management. Someone ultimately has to find the money.

The discipline comes from understanding why the budget exists and what it is intended to achieve.

There is a big difference between saying:

“We must not spend more than $30 million.”

and saying:

“We have $30 million available, and we need to deliver the maximum value possible within that investment.”

The first creates a hard financial constraint.

The second creates a value challenge.

Both may be appropriate, but they lead to very different conversations.

And then someone changes their mind...

There is another lesson from our wedding.

Halfway through the planning, Jessica decides that the venue really needs those beautiful hanging flowers after all.

Unfortunately, they cost another $3,000.

Now we have a choice.

We can increase the budget.

We can remove something else.

We can find a cheaper way of achieving the same effect.

Or we can decide that the flowers aren't actually worth $3,000 and leave things as they are.

That is exactly the sort of decision that happens on projects.

The danger is when we simply add the $3,000.

Then another $2,000.

Then another $5,000.

Each individual change seems reasonable, but collectively we have moved away from the original project without consciously deciding to do so.

This is where cost connects directly back to scope.

Changing what we want will normally change what it costs.

And changing what we can afford will normally change what we can deliver.

The six dimensions of project success are already starting to bump into each other.

So what does success actually look like?

Perhaps the better measure of cost success is not:

“Did we come in under budget?”

It is:

“Did we make good decisions about the money available to us?”

That means understanding what matters, protecting the things that create the greatest value, challenging expenditure that doesn't, and being honest when a change in scope requires additional investment.

Just as with our wedding, the objective isn't necessarily to spend the least amount of money.

It is to spend the right amount of money on the right things.

And sometimes, spending a little more is exactly the right decision.

The trick is knowing when.

In the next blog, we'll look at a criterion where the conversation becomes much more uncomfortable.

Because while cost can often be negotiated, adjusted or traded against something else, there is one area where we should be very careful about treating it as a trade-off.

Next time: LG3 — Safety: The Criterion We Shouldn't Trade.