What Are the Costs of the Project?

Once you've identified what your major purchase or project should accomplish for you and fleshed out your requirements for the project, the next step is to evaluate the costs. In doing so, you'll also be making more decisions about what features you absolutely need, and which you can live without, in view of their respective price tags.

For example, if you're thinking of buying an office building, you'd need to talk to real estate brokers or agents about the types of properties available, their features, and their price range. If it turns out that the type of building you want is far beyond your borrowing ability, you may have to set your sights lower by choosing one with less square footage, or in a less desirable location.

If you are thinking of buying a piece of industrial equipment, you'll need to talk to suppliers or agents to see what's available to fill the needs of your production system, and to do some comparison shopping. You may find that you'll need customized equipment that costs more. Or, you may find that you can live with standard, used equipment that costs significantly less.

Salespeople can be invaluable sources of information. Just remember that, at this point, you're not buying just collecting data. Salespeople are particularly adept at selling you on the features of whatever product they happen to be pushing that month. You can't rely on them to say that you might be able to meet your goals with an older model, or with some modifications to your existing equipment.

Identify all procurement alternatives. As you scope out the costs of the project, don't forget that there are many ways to skin a cat. Depending on the type of project, you may have the choice of buying, leasing, or constructing some or all of the item yourself. You may decide to pay cash or to finance the project. If you will be financing the item, a variety of lending alternatives may be available. At this point, it would be wise to consider the costs under all reasonable alternatives. You might wind up with several sets of figures, showing the total costs under a number of different scenarios.

If the project involves construction, either by your employees or through outside contractors, the ultimate cost will be more difficult to determine. Many contractors and suppliers will give bids that are estimates on your project, but not guarantees of the final price. The contractors will want to pass any unexpected material or labor costs on to you. Unfortunately, it's much more likely that the ultimate cost will be higher than the bid, rather than lower. To be on the safe side, many business owners mentally tack on an extra 10 percent or more to every bid they receive. Be sure that you've thoroughly explained your needs to the contractor(s) you don't want that extra 10 percent to turn into 20 percent because you didn't fully describe all the work you wanted done.

Identify hidden costs. Along with the cost of the project itself, don't forget to include costs like installation, training sessions, maintenance and repairs, insurance, utilities, supplies, taxes, payroll and benefits costs for new employees needed to operate the equipment, or any other incidental costs that relate to acquiring or maintaining your particular project. Consider also the time your employees will devote to the project instead of their regular work (and make sure the regular workload is covered).

Also consider the nonfinancial aspects of the project like the time you'll need to devote to gathering bids, supervising installation, and managing the project once it goes on-line. Depending on what you're doing, this time may be negligible, or it may be so great that your attention will be fully occupied and the rest of your business may languish for a while.

Consider, too, your own strengths and weaknesses. For instance, if the project you're considering is an expansion from one store to two, you'll probably have to delegate more decisions to managers instead of handling all the details yourself. For some business owners, this is a plus; for others, a great frustration. Branching out into different lines of business is often problematic if you lack familiarity with the market or day-to-day operations in the new area, but such experience can be "acquired" by hiring or consulting with the right people beforehand.