Project management affects almost every type of industry and job category. One of the first steps is to determine which projects are worthy of pursuit when compared to other alternatives. This means we need to consider our opportunity costs. It also means we need some method for performing project screening and selection so as to avoid failed projects or making sub-optimal decisions that impact the company.
Since often resources are scarce relative to needs, the use of resources in one way prevents their
use in other ways. We want to try and ensure that we are making choices with the most likely benefits in the
long, medium, or short term. For everything we choose to do, there is some other option or options we chose not
to do. What we chose not to do is the opportunity cost. In economic terms, opportunity cost is the value of the
next-based alternative if the money and time had been put there instead. It can be thought of as the
return on the most profitable investment choice minus the return on investment that was chosen and pursued.In
project management it is very similar. Opportunity cost is the loss of potential future return from the second
best unselected project. Another way to think about it is the opportunity or potential return that will not be
realized when one project is selected over another.
When making decisions we need to not only consider opportunity cost, but ensure we are not under
weighing it. A measure that is often used is net present value. Net present value is the difference between the
present value of cash inflows and the present value of cash outflows over a period of time. Let's say we have to
choose between two projects. One project Is expected to have a net present value of $50,000 and an internal rate
of return of 1.5 (the internal rate of return is a calculation used to estimate the profitability of potential
investments). A second project is expected to have a net present value of $60,000 and an internal rate of return
of 1.25. The opportunity cost of selecting the second project over the first project is $50,000. The internal
rate of return is not relevant when evaluating opportunity cost as it is a projection.
Let's try another example. This time let's look at investing in stocks. Mark has to decide between
buying stock in company A or Company B. Mark chooses to buy company A. One year later, company A has returned 3%
profit while company B has returned 7% profit. In this case, Mark can measure his opportunity cost as 4% (7% -
A simple way to think of opportunity costs is as a trade-off. Limitations of using opportunity cost is the difficulty in accurately estimating future returns. Opportunity cost is not accurate until a choice has been made and one can look back in time to compare how two different options performed. Equally, opportunity cost is problematic to determine when there are factors that cannot be assigned a dollar amount.
Project managers must be willing to say "no" to some projects. In order to do this, a screening method in place for incoming project opportunities should be in place. Below are some sample questions one might want to ask:
The project screening questions and methods will vary by industry, but some screening method should be in place that addresses key questions asked, how projects are reviewed, and how decisions are made.
Project profiling is the process of summarizing known attributes of common projects so that
projects may be placed into categories with similar characteristics. This is useful for developing appropriate
assessment, execution, and measurement plans for projects as well as for comparing project alternatives. Project
profiles can help expedite evaluation of the expected viability, risk, complexity, and time requirements of
For example, attributes that are considered important may differ for small short-term projects
as compared to larger long-term projects. Attributes may also differ based on the expected project cost or
complexity. Projects might also be categorized by required resources, location, or similar. What is used for
project profiling will vary based on the company, industry, and project management selection methods. In each
case, the idea is to find attributes that are common among projects that allow the categorization for profiling
of project options.
As a sample scenario, a project profile that might be used in the construction of bridges might focus on attributes such as the location of the bridge, the intended materials to be used, the size and structure of the bridge, the expected use of the bridge including frequency and stress, the intended time for completion, the intended budget, and any legal or safety requirements
Portfolio management is the selection, prioritization, and control of an organization's programs and projects that are in line with its strategic objectives and ability to deliver. Project portfolio management takes a holistic view of the organization and ensures a balance in the implementation of initiatives and the maintenance of business as usual.
Projects are often performed within institutional, social, and legal constraints that could impinge on that project's successful completion. Many times these constraints interact and require trade offs. One term you might hear is "triple constraint". It consists of time, scope, and cost. Time is your schedule, scope is the tasks needed to reach the project goals and cost the financials or project budget. Other models will add items such as scope, quality tolerance, or risk tolerance. The main point is to think about what may be limiting, or constraining, this potential project whether those limits are internal or external. The number of competitors already in the field, for example, could be a constraint.
Gap analysis is the process used to compare a company's current performance with their desired expected performance. It is used to determine whether a company is meeting expectations and using its resources effectively. As another way to frame it, for gap analysis you identify best practices and then identify gaps between current and best practice. Gaps can occur in many areas including knowledge, skills, or practice. As noted by Harvard School of Public Health Leadership, "Gap analysis consists of (1) listing of attributes, competencies, and/or performance levels of the present situation ("what is"), (2) cross listing factors required to achieve the future objectives ("what should be"), and then (3) highlighting the gaps that exist and need to be filled." In the eyes of customers it can also be thought of as the difference between what they expect to receive and what they actually receive.
Complete the following steps to perform a gap analysis:
Consider these article snippets from the 2017 CIO article IT project success rates finally improving: In 2013, a survey from cloud portfolio management provider Innotas (now Innotas by Planview) revealed that 50 percent of businesses surveyed had experienced an IT project failure within the previous 12 months. Three years later, those numbers had actually increased; the 2016 Innotas annual Project and Portfolio Management Survey, which polled 126 IT professionals between January and March 2015, revealed 55 percent of respondents reported they had a project fail, up from 32 percent in 2014.
As of 2017, though, the numbers started turning around. Project Management Institute (PMI) found: Champions are those organizations that see 80 percent or more of projects being completed on-time, on-budget and meeting original goals and business intent, and that have high benefits realization maturity. In other words, the projects deliver the promised business outcomes, according to the research. Underperformers are those organizations that see 60 percent or fewer projects completed on-time, on-budget and meeting original goals and business intent, and with low benefits realization maturity, according to the report.Within these categories, only 6 percent of Champions experienced projects deemed failures, compared to 24 percent of Underperformers, the research showed. Overall, all organizations reduced the average amount of money wasted on projects and programs by 20 percent compared to the previous year (Florentine, 2017).
One thing to consider in this context is what you might consider to be a failed project. Some projects
"succeed" but actually do not achieve what they set out to achieve.
Florentine, Sharon (2017). IT project success rates finally improving. CIO. Retrieved January 9, 2021 from https://www.cio.com/article/3174516/it-project-success-rates-finally-improving.html
Harvard Center for Public Health Leadership. Gap Analysis. Retrieved March 9, 2022 from https://cdn1.sph.harvard.edu/wp-content/uploads/sites/1678/2014/10/Gap_Analysis.pdf
Weiss, L., & Kivetz, R. (2019). Opportunity Cost Overestimation. Journal of Marketing Research (JMR), 56(3), 518–533.