TVP – Metric 39 Cost vs. Budget

Resource Type
Tool
Authors
Alan Fusfeld, Innovation Research Interchange
Topics
Innovation Metrics, Stage-Gate, Tools and Techniques
Associated Event
Publication

Background | User Guide | Program Contents | Stakeholders | List of Metrics

1. Metric Definition

Actual project costs with respect to budgets on an annual, longer-range, or cumulative basis.

The cost effectiveness of R&D is measured by comparing the value of technology output to the cost of producing that output. Technology output is generally measured with respect to objectives, such as short-range, annual targets, long-range, or strategic targets. Costs are generally measured with respect to budgets, such as annual budgets, longer-range, or cumulative project budgets.

a. Metric 1: Annual Budget Performance

Absolute and relative variance of actual total annual project cost compared to the agreed-on annual project budget, where both are accounted on the same basis. This metric may be defined for an individual project or class of projects, for all projects from a specific R&D unit, for all projects supporting a business segment, or for the total R&D in the firm.

b. Metric 2: Cumulative Project Budget

Absolute and relative variance of total cumulative project cost compared to the agreed on budget for an individual project. This is especially important in the early stages of a multi-year project as an indicator of future trends. It is important toward the end of the project as a measure of total cost for comparison with total benefit.

2. Advantages and Limitations

These metrics are important to management and have the advantage that they are numerical and appear to be objective.
The accuracy of the metrics is limited by the quality of the accounting processes in the firm and by the quality of the effort to assign costs accurately, including those costs which come from shared or purchased resources. Since the standard of measurement is the project budget, the quality of this metric also depends on forecasting a budget which is justified by the merits of the project and provides appropriate, affordable resourcing to project R&D. As knowledge increases and the project progresses, it may be necessary to adjust the previous forecast budget in order to make the performance vs. budget a meaningful measure of effectiveness.

This metric does not take into account the returns associated with the project and is therefore limited to understanding performance against budget and may not be an appropriate tool when making portfolio decisions regarding projects.

3. How to use the Metric

The first key to use of these metrics lies in good analysis and understanding of how manpower, support, and other costs are incurred in R&D for the project, collection of projects, or R&D unit of interest. The second key lies in establishment of project budgets which are meaningful and which accurately reflect the expectation of costs to be incurred. The third key lies in accurate assignment of costs on an ongoing basis. Costs can then be compared to budgets at appropriate times and the metrics can be computed. The fourth key to use is the avoidance of misuse: the purpose of R&D is to create value, not to demonstrate that project budgets can be forecast precisely.

4. Options & Variations

These metrics can be defined for an individual project, for a classification of projects (such as all exploratory projects), for the projects supporting a business unit, or for the total R&D effort of the firm.

5. Champions and Contacts

6. References

Ellis, L. W. 1984. The Financial Side of Industrial Research Management. New York: Wiley.
Ellis, L. W., 1984, Viewing R and D Budgets Financially. Research-Technology Management, 27(3), pp. 35-40.