Every project manager learns the iron triangle on the first day: scope, time and cost. Fix any two and the third will move. It is a useful warning, but it treats the three corners as equals, and it says nothing about which one to protect when something has to give. Project teams usually answer by defending the corner they are measured on, which is almost always the budget.

Finance sees the triangle differently. A project is an investment, and its value is the net present value of the cash it will generate. Each corner of the triangle moves a different line of that valuation, by a very different amount. Translated into NPV, the triangle stops being a dilemma and becomes a calculation.

Each corner is a line in the valuation

  • Cost is the capital outflow at the start. It is spent early and is therefore barely discounted: a 12 million overrun costs about 11 million of NPV after the tax shield of depreciation.
  • Time moves the whole stream of future cash flows, and adds the time-related costs of keeping the project open. It works through discounting and through lost operating months.
  • Scope (and its twin, quality) sets the size and the life of the cash inflows: capacity, yield, availability, the features customers pay for. It drives every year of the business case, not just the first one.

Consider the same 120 million plant, worth 60 million of NPV on its business case. The chart compares slips of a similar, ordinary size in each corner.

Loss of NPV of a 120 million project with a base NPV of 60 million, for an ordinary slip in each corner of the triangle. Illustrative business case.

The budget overrun, the corner most closely policed, is one of the cheapest slips. A six-month delay destroys twice as much value, and delivering 10% less capacity than designed destroys more than one and a half times as much, because it repeats every year for fifteen years. For a revenue-generating asset the usual priority is therefore scope first, time second, cost third. Projects that protect the budget by cutting capacity or accepting delay often make the worst trade available.

Choosing the recovery plan by its NPV

Suppose the plant is heading for an 8% overrun and a six-month delay. The project team proposes three plans. Measured on the project's own scorecard, holding the budget looks responsible. Measured on value, it is the worst option.

NPV of three recovery plans against the 60 million business case: hold the budget and accept the delay, accelerate with more spending, or start on time with phased scope. Illustrative business case.
  1. Hold the budget, accept the delay: no extra spending, the full six months lost. NPV falls to about 29 million.
  2. Accelerate: spend another 6% on shifts and expediting to recover four months. The overrun rises to 14%, but NPV recovers to about 37 million.
  3. Phase the scope: start the first 85% of capacity one month late and commission the rest nine months later. NPV is about 44 million, because most of the cash flow starts almost on time.

The phased plan is the one most project scorecards would mark red: it misses the scope milestone and the budget at the same time. It is also the one that preserves the most value. The point is not that cost does not matter; it is that the three corners are not equal, and only a financial measure can say how unequal they are for a given project.

The fourth corner: risk

The triangle also omits risk. A plan that saves two months on paper by removing all float has not improved the expected outcome if it doubles the probability of a much longer delay. The value of a recovery plan is its expected NPV across scenarios, not its NPV in the scenario where everything works. Finance teams that run a simple range or Monte Carlo analysis on the options usually find that the robust plan beats the optimistic one.
BS

Bartor S.

Founder

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