A project might have been estimated and budgeted at £500k. But I bet this will have assumed good project management, good sponsorship, cohesive team, etc. Perhaps the project could be delivered for £500k, provided all these things were in place. In reality, many projects overrun, under-deliver or exceed their budget. In part, I think this is because hidden costs are not accounted for from the start and only show up in practice or under a comprehensive audit.
Explicitly accounting for hidden costs will force a review of project timelines to include the fact that, for example, a team might not be as productive as expected. If a team is less productive we can't get away from the fact that it will take longer to get through the same amount of work. Alternatively, the scope or quality will be reduced to hit the deadline.
Because hidden costs are often unaccounted for, they often go unnoticed. For another example, the hidden costs can be material wastage due to over-ordering, or under-ordering and then the need for higher-cost fill-in. Without these items the picture of project costs is not complete, and therefore a Profit & Loss assessment of the project is flawed.
Further, hidden costs are often social, emotional and human as demonstrated in my hypothetical case study. It's much easier to price up how many iron girders are needed in a construction project than how many team meetings might be needed to ensure everyone understands the vision. Moreover, collecting the costs of such meetings might be hard to collect! So, these costs are difficult to quantify, but that doesn't mean we shouldn't try.
Even if we really can't quantify hidden costs we can at least ask ourselves whether we have a problem with them, and then we will be more likely to do something about managing those hidden costs. I hope you enjoyed reading this article and that it has given you something to think about.
What Do You Think?
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Managing Director & Principal Consultant – Hooke & Co.