Chapter 1
Introduction to the Challenge of Cost and Value Management in Projects

Learning Objectives

After studying this chapter, you should be able to:

• Explain the challenges of cost and value management in projects.
• Describe the importance of cost and value management in projects.
• Identify the key elements of effective project cost management.
• Describe the essential features of effective value management in projects.

The past 40 years have witnessed a dramatic increase in the number and variety of organizations engaged in project-based work. In addition to "traditional" project-oriented industries, like construction, aerospace, and pharmaceuticals, service industries as diverse as finance, utilities, telecommunications, and insurance have embraced project-based ventures.

This paradigm shift is due to growing recognition that projects and their effective management can provide organizations with a significant competitive edge through cost reduction, enhanced responsiveness, and overall value to customers. Consequently, a number of organizations have adopted many of the well-known techniques of project management, and professional project management organizations have witnessed marked increases in membership.

Despite this enormous interest in projects and project management practices, success rates in many industries are at alarmingly low levels. In addition, bad news about high-profile projects continues to dominate the headlines-in both the public and private sectors. Consider these recent examples:

When it comes to cost overruns, Honolulu's new rapid transit system is in a league of its own.

When City and County of Honolulu leaders signed a funding agreement for the project in 2009, the rapid transit rail project was slated to cost some $5.12 billion. As of 2022, it's expected to cost more than $12.4 billion and faces an approximately $3.6 billion shortfall, according to recent Honolulu Authority for Rapid Transportation estimates. Officials who helped launch Honolulu rail more than a decade ago said the dramatic cost overruns that have plagued the project ever since construction started are worse than anything they've ever seen.1

Rome joins the growing list of cities refusing to host the Olympics.

Rome's mayor, Virginia Raggi, addressed the media in late 2016 to announce her decision to cancel the city's efforts to bid for the 2024 Olympic Games. Citing the huge increase in costs for recent Olympic Games, Ms. Raggi noted that in addition to Rome, a number of other cities worldwide (including Boston, Budapest, and Hamburg) had independently decided that the costs of hosting Olympics had become prohibitive and that the billions spent on the games could more profitably be used to fund social programs. Indeed, the final estimated price tag for the 2016 summer Olympics in Rio are estimated to have cost $14 billion, which represents a 352% cost overrun, while many of the sites created for the Games (such as the aquatic center) have since been abandoned.2

Clearly, something is going wrong.

1.1 IMPORTANCE OF COST AND VALUE MANAGEMENT IN PROJECTS

The key features that define project success are twofold: managing costs to achieve efficiencies, and creating and enhancing value. These two elements enable project stakeholders to understand the activities and resources required to meet project goals, as well as the expenditures necessary to complete the project to the satisfaction of the customer.

Unfortunately, in the field of project management today, significant cost and schedule overruns are the norm, rather than the exception. In fact, recent research that examined the success rates of information technology (IT) projects indicates that the majority of these projects neither met their cost objectives nor delivered the promised value. For example:

• IT project failure statistics show that 75% of respondents in the IT industry lack confidence in project success; i.e., they believe from the start that they are doomed to fail. Further, 55% of project managers cite budget overruns as the number-one reason for project failure. On the other hand, in organizations that develop robust project management practices, their projects are 2.5 times more likely to succeed than those of other organizations.3
• In a 2020 report on the current state of IT project implementation, the Standish Group reported on the results of over 50,000 in-depth software projects they had studied over the past five years. They identified 31% as successful, 50% as "challenged," and 19% as failed. These numbers have remained remarkably steady for year. At the same time, a report by the Consortium for Information and Software Quality (CISQ) reports that the total cost of poor software quality in the United States is approximately $2.1 trillion.4 In other words, these projects will meet neither their cost nor their value objectives.

Why do these problems persist, despite the fact that tools for cost efficiency and value enhancement are widely used, and their benefits are well understood? One key answer is the lack of an integrated cost and value management framework.

Before we explore this integration of cost and value, a brief discussion of their concepts in relationship to projects is worthwhile. Both require well-defined and structured management processes, commonly referred to as cost and value management. Project cost management focuses on issues such as cost estimation and budgeting, cash flow management, and cost control. On the other hand, the emphasis of value management is on optimizing project value-given cost, time, and resource constraints-while meeting performance requirements such as functionality and quality.

Cost and value management remains a critical but often underrepresented issue for a couple of reasons. First, in this book, we define value as the relationship between meeting or exceeding the expectations of project stakeholders, as well as the resources expended to meet or exceed those expectations. This definition clearly implies that project cost and value are inextricably linked, to the point where any attempt to enhance project value without a thorough understanding of its impact on cost and associated trade-offs is meaningless.

Second, project value is a multidimensional concept. Different project stakeholders with different vested interests have different perceptions about what constitutes value to them. For example, the expectations of top management often leave IT project teams scrambling to complete projects as quickly as possible. Internal customers, however, may request additional features that will delay completion. Each stakeholder sees value in the finished project; however, the measures they use to determine value can actually conflict. And yet, despite these differences, the one constant in any attempt to enhance project value is its cost ramifications.

The inability to clearly understand this complex relationship between project cost and value is one of the primary reasons why it is an underrepresented issue. The following case example illustrates this point.

Case Study: New York City's Second Avenue Subway-Two Miles Completed for Only $5 Billion Spent

Labeled "a catastrophe of cost control at every level" by the Wall Street Journal, the first 1.6-mile segment of the Second Avenue subway line in Manhattan-the first to open in decades-was celebrated as a feat of engineering and the ability of government to "accomplish big things for the people it serves," according to then-New York governor Cuomo. After ceremonies marking the completion of the opening stretch of the new subway line in late 2016, harsh commentary about the cost of the subway line became louder and harder to ignore. The line, so far consisting of just three stations and two miles of track (from 96th to 72nd Streets), is costing roughly $1.6 billion per kilometer, the most expensive train line ever built. When Phase 2, which extends the line north to Harlem and adds three additional stations, begins construction, it will cost even more: an estimated $2.2 billion per kilometer.

The Second Avenue subway project reinforces an already unenviable record. Researchers, studying rail projects, examined dozens of projects across 44 countries worldwide and found that the four most expensive rail projects, and six of the top 12, were American, with the Second Avenue project among them. Is this just a case of government agencies' willingness to spend public money without taking adequate care of how the funds are being used? Is there some other, more institutionally-rooted reason for the high price tag and poor cost control of the Second Avenue subway?

Trying to make sense of the skyrocketing cost of public works rail projects in the United States is complicated, but there are some reasons why we continue to see runaway budgets. Among the top four reasons for poor cost control are:

1. Regulatory statutes and other hurdles drag out the permitting process and increase costs. Environmental and workplace safety regulations, while important, slow the construction process to a crawl. On the Second Avenue subway, for example, the federal government and New York's Metropolitan Transportation Authority (MTA) fought for more than a year about whether a fire-suppression system met longstanding federal "buy...