The Cost of Running Late
Projects exceed their predicted schedules for many reasons. The cost consequences of some delays are obvious, some are subtle and surprising. Knowing the expected costs of delays is vital to supporting informed decision-making and negotiation.
A project manager informed me that her vendor was over-extended and had requested to delay implementation of a major IT system for several months to assure it could be adequately staffed. The PM was scrambling to understand the impact and we were brainstorming together.
“Have you determined what the delay will cost your organization?” I asked.
“Why?” she asked, puzzled.
This was her first project working with a vendor. I suspect she hadn’t thought of delays in terms of hard dollar costs before.
“So that you can consider a change order with the vendor to offset the consequences of the delay to your organization.”
She was surprised at the notion of using a change order to seek compensation from a vendor.
I suggested that first, we figure out what costs her organization was going to incur because of the delay. Some of the things on our list included:
- The system being replaced was licensed annually. The original go-live date was before the license renewal. The proposed delay would require incurring renewal fees.
- The system being replaced was the last running on legacy hardware. There was a significant cost to operating the legacy hardware and it was consuming real estate in the computer room that was scheduled for other purposes.
- The software being installed had been licensed to support the project during installation, configuration, testing and training. These would soon be complete, and the new system would be idle until installation. During the wait for it to go live, the organization was funding a license that it wasn’t using.
- Training for the new system was nearly complete. Training on a software system develops perishable skills. If people don’t use a system shortly after training, they will either forget the training and have difficulties when they try to use the system (an organizational change issue) or require the investment of additional time to participate in re-training.
- The cost of making resources available to support the proposed new go-live date. The project manager had arranged for local technical support and operations folks to be available to support the original go live date. She now needed to free them up and hope they would be available for the new target date. Depending on what else was going on at the target time, she might have to delay things further to get appropriate support.
The project manager and I discussed possible options for a change order to recover value from the vendor. Some ways to seek compensation in a change order for the vendor imposed delay might include:
- Asking the vendor to discount their bill
- Providing a no-cost extended warranty
- Providing a no-cost or reduced cost-extended maintenance agreement
- Providing additional training or documentation at no or reduced cost
- Providing additional seat licenses at no or reduced cost
It is quite reasonable for a vendor to request a change order to compensate them for costs when a project is delayed because of client issues. This isn’t punishment, it is business. Everyone incurs costs if there are delays. The other side of the coin is also valid. If the cause of a delay is clearly the responsibility of the vendor, it is reasonable to seek appropriate compensation.