Impact of Sustainability Solutions on Project Costs and Budget

A project budget is a list of costs related to the use of resources that are necessary to carry out a project. The budget is approved by the person/organization that finances the project and by the project manager. Preparation of the final detailed project budget. which is submitted for approval, is usually preceded by a preliminary cost estimate. A detailed draft budget is based on a detailed division of labor and estimated costs for all tasks and work packages.

When drawing up a project budget, the bottom-up or top-down method is used. The bottom-up method consists in determining the cost of each work package and task and then adding them together. The top-down method first sets a target budget for the entire project and then allocates it to tasks and work packages. The budget includes costs of labor, materials, and energy, as well as financial, subcontracting, overhead, and other costs. The cost structure depends on the type and size of the project.

The planned staggered financing of the project reflects the so-called base line. The executors should be motivated to carry out the project in such a way that the actual expenses conform to the base line. It is important not to exceed the expenditures planned in the budget. The budget provides for a financial reserve for unforeseen circumstances.

Including Social and Environmental Costs in Proiect Budgets

The purpose of this chapter is to discuss the impact of sustainability on project costs. Let us start with a concrete example. In Chapter 3, we divided a project aimed at preparing the 50th anniversary of the XYZ Company into tasks and work packages, including pro-environmental and pro-social activities. The impact of these activities on the costs will be illustrated using the example of task 3, which consists in making a commemorative folder. The folder, made in the A4 format, is to be printed in 300 copies. It consists of 40 pages, which are planned to be filled with texts and photographs. The cover will bind the entire content of the folder. The work on the folder consists of the following three stages:

  • 1. preparation of the folder design;
  • 2. editorial work; and
  • 3. printing the folder.

The folder is to be printed on environmentally friendly paper. In this way, task 3 is to contribute to sustainable development. Regardless of the type of paper used, the costs of the folder design and editorial work (steps 1 and 2) will be the same. Consequently, all we have to do is make a calculation for step 3 (folder printing) and compare the printing costs for two cases: printing on environmentally friendly paper (Table 4.6) and printing on standard paper (Table 4.7).

In our case, the folder printing cost for environmentally friendly paper is USD 105 higher for standard paper. This is not a big difference and it can certainly be accepted in the project budget. However, one should keep in mind that the folder is

TABLE 4.6

Folder Printing Costs for Environmentally Friendly Paper (Wood-Free Paper COLOR COPY 100 g/m2)

Designation

Costs

Medium

A3 100 g/m2 paper 0.12 cents x 3,000 sheets

USD 360.00

Print

USD 1.320.00

Cover

A3 160 g/m2 paper 0.20 cents x 300 sheets

USD 60.00

Print

USD 240.00

Sewing

USD 60.00

Total

USD 2040.00

A sheet is one A3 sheet (four folder pages). Source: Own work.

printed in a small print run of 300 copies. If the circulation increases to 3,000 copies, the costs will increase by USD 1,050. This case gives rise to the following proposition: projects that involve environmentally friendly physical goods require higher budgets compared to their traditional equivalents. This proposition is also confirmed by examples from other industries. Let us take a look at construction, e.g. Siddharth Jain, Prateek Gupta, and Deepa make a cost comparison of conventional building and green building, as reflected in Table 4.8.

The authors make the following comment to the results of the calculations contained in the table: total development costs for the green buildings ranged from 9 to 18% above the costs for comparable conventional affordable housing (Jain, Gupta and Deepa 2019: 200). They supplement this statement with this opinion: green

TABLE 4.7

Folder Printing Costs for Standard Paper (Standard Paper MONDI 100 g/m2)

Designation

Costs

Medium

A3 100 g/m2 paper 0.09 cents x 3.000 sheets

USD 270.00

Print

USD 1.320.00

Cover

A3 160 g/m2 paper PLN 0.15x300 sheets

USD 45.00

Print

USD 240.00

Sewing

USD 60.00

Total

USD 1,935.00

A sheet is one A3 sheet (four folder pages). Source: Own work.

TABLE 4.8

Cost Comparison of Conventional Building and Green Building

Sr. No.

Item Name

Cost in Conventional Home

Cost in Green Home

I

Windows and openings

140.800

217.350

2

Lighting fixtures

15.800

46.150

3

Plumbing fixtures

45.885

108.300

4

Flooring

230.540

295.295

5

Doors

79.830

165.510

6

Paints

166.380

168.880

7

Bricks

60.175

40.105

8

Cement

976.000

995.250

9

Rainwater harvesting system

0

90.700

Total

1,715,410

2,127,540

Source: Own work based on Jain. Gupta and Deepa 2019: 200.

houses are costlier than conventional houses but only in short run. As per the need of society and livelihood, green houses are very much required and will surely be much cheaper than conventional houses in long run (Jain. Gupta and Deepa 2019: 206).

Environmentally friendly goods require higher financial outlays mainly because they consist of environmentally friendly raw materials, consumables, and components, which are more expensive than their traditional counterparts. However, this perception of the impact of sustainability on project costs is superficial and inappropriate. It is an excellent excuse for the anti-environmental and anti-social attitudes of business people who do not want to carry out projects that contribute to sustainable development. If a business person claims that projects contributing to sustainable development are much more expensive and it does not pay to carry them out. he or she only takes into account his own short-term benefits. In fact, the problem of the impact of sustainability on project costs is much broader and more complex. The higher cost of pro-environmental and pro-social projects is only apparent because the prices of standard goods are understated. When setting these prices, the costs of the negative impact of the products and services on the environment and people are ignored. Let us look at this in more detail.

Projects involving sustainable physical goods now require higher budgets compared to standard goods. This is because standard goods consist of standard components that are underpriced. The prices are underestimated because the costs of the negative environmental and human impact of these components are not taken into account in their calculation.

Source: Own work.

Sustainable Prices and Their Impact on Proiect Budgets

People would not be able to produce any goods without nature. The Earth is the largest producer of natural goods and provides services to people. It reproduces and makes available natural resources from which people produce energy and thousands of physical products. It provides the growing plants and the multiplying animals, fish, and birds that are the basis for the food industry. It purifies the air and naturally treats waste. These examples are only the beginning of a long list of services provided free of charge by the Earth to humans. A global study on the assessment of the economic value of the services provided by the Earth’s ecosystem has led to the conclusion that the value of the entire biosphere (most of which is assessed in non- market terms) is estimated to be between $16 and 54 trillion per year, or an average of $33 trillion per year. This value should be considered as a minimum estimate, because the nature of the services assessed is uncertain and difficult to determine clearly (Constanza et al. 1997: 243-253). For example, let us consider one of the components of the above value, i.e., the value of the work of bees in pollination of flowers of fruit, vegetables, and oil plants. This value is estimated at 150 billion dollars (Bendyk 2013: 6). Moturu Venkata Rajasekhar, Krishnaveer Abhishek Challa, Dharmavaram Vijaylakshmi, and Nittala Rajyalakshmi state: the biosphere supports life on Earth. It ranges from the atmosphere’s top layer to the soil’s bottom layers, both on the continents and in the ocean. $ociety and all earthlings depend on the biosphere for food, fresh water, a habitable climate, and to maintain nature's integrity and diversity (Rajasekhar, Challa, Vijaylakshmi and Rajyalakshmi 2019: 230).

The Earth is unable to enforce payment for the goods and services it provides to people. Consequently, this aspect of product pricing is neglected in practice. The essence of the problem is appropriately reflected in the following questions, asked by F. Belz and K. Peattie: Have you ever asked w'hy you can buy a radio receiver for less than 10 euros? Is such a price really commensurate with the cost? Does it fully cover the extraction of natural resources at the beginning of the production cycle, e.g. crude oil for the manufacture of plastic components or copper or silicon for the integrated circuits and transistors? What about the packaging and transport costs? Does the price include the impact of the product on the global warming and climate change? What about the manufacturing costs? Where and in what operating conditions are the radios that cost less than 10 euros assembled? Last but not least, what about the cost of disposal of the product at the end of its service life? Who pays for it? (Belz and Peattie 2010: 218). According to these authors, the price of such a radio receiver does not cover all the costs related to the environment and the social aspects. In most cases, the price paid for various goods is only a fraction of the actual total cost borne by others (now and in the future), i.e., future generations who will be affected by global warming and climate change. The pricing system in place does not cover external costs related to environmental and social issues. As a result, the prices of many products available in the market are completely unreasonably low. This leads to a biased competition mechanism that favors unsustainable products. Conventional products will be priced more favorably than sustainable products as long as their prices do not reflect the actual social and environmental costs (Belz and Peattie 2010: 218).

Thus, when prices are considered, producers of sustainable goods are at a competitive disadvantage in the market. To increase their competitiveness, project funding bodies often put pressure on project teams to find solutions to reduce the costs of production of sustainable goods and services. As a result, decisions are made to replace sustainable components of products with their cheaper, unsustainable equivalents in projects, which is harmful to sustainable development.

The main reason for the higher costs of projects involving sustainable goods and the resulting competitive disadvantage of their producers and vendors are incorrectly calculated prices of standard goods. The prices of standard goods are unsustainable. A sustainable price takes full account of the cost of production and marketing, not only in economic terms, but also in environmental and social terms, thus ensuring a benefit to the consumer a fair profit for the business (Martin and Schouten 2012: 171). In the case of sustainable prices, the cost category is significantly extended, as explained later in this chapter.

A properly determined price should cover the costs of production and sales and ensure a fair profit. In reality, most prices set in the standard manner do not include all costs. For example, the price of a product does not take into account the cost of the consequences of water pollution. Omitting this cost means assuming that water pollution has no negative consequences and is economically neutral. Meanwhile, such pollution as a side effect of production processes depletes drinking water resources, reduces fish populations, and destroys recreational areas. All this has the following negative economic effects:

  • • an increase in the price of the water supplied to houses, because it needs to be purified and treated;
  • • an increase in fish prices as the supply of fish in the market decreases; and
  • • the loss of businesses in the tourism sector, because tourists are not interested in recreation at polluted bodies of water.

These costs are in fact already incurred, but are not taken into account when setting the product prices. They are not taken into account because they are difficult to estimate and to assign to specific organizations or people, and even more difficult to enforce. The lack of sufficient knowledge, procedures, and legal provisions for the enforcement of total production and sales costs, taking into account the environmental and social effects, leads to an accumulation of negative phenomena and to hiding of real costs.

The unpaid environmental and social costs for most goods and services are referred to as externalized costs. The difference between the retail price and the real cost of the product, including the externalized costs, can be very large. D. Martin and J. Schouten refer to the study conducted by the International Center for Technological Research. It showed that the real cost of a gallon of gasoline at that time was about 15 US dollars. The actual price at the pump in the United States was set at about $1.30 per gallon. In calculating the real cost, the researchers took into account the direct government subsidies, the fuel supplier protection costs, as well as the healthcare, the environmental protection, and the social costs. When added up, the externalized costs were more than a trillion dollars a year, or more than $24,000 per family of four (Martin and Schouten 2012: 172-173).

If the social and environmental costs were included in the price calculations, the prices of sustainable products and services w'ould be lower than those of standard goods. This would result in lower budgets for sustainable projects compared to those for unsustainable ones.

Source: Own work.

So far, we have considered the problem of replacing traditional physical goods with their sustainable equivalents in projects. We have come to the conclusion that the costs of a project that uses sustainable goods are higher than those of a project where standard goods are used. This difference is due to incorrect calculation of prices. This is because the prices of standard goods available in the market do not take into account the high social and environmental costs. If these costs were included in the calculations, the prices of sustainable products and services would be lower than those of their unsustainable equivalents. As a result, the costs of implementation of projects that are based on sustainable goods, and thus their budgets, would be lower than those of projects that use unsustainable products and services.

According to Anjala Karol and C. Mashood, green pricing or environmental pricing is a pricing strategy that encompasses environmental responsibility in pricing products and services (Karol and Mashood 2019: 21). Now let us move on to the costs of creating and operating a sustainable project organization.

Costs of Creating and Operating a Sustainable Project Organization

As can be seen from the 4 x SUSTAINABILITY IN PROJECT ACTIVITIES rule, a sustainable project organization is based on sustainable human and material resources. Its w'ork on the project is also carried out in a sustainable manner. The types of costs related to the establishment and functioning of a sustainable organization are shown in Table 4.9. We discuss them below.

TABLE 4.9

Costs of Creating and Operating a Sustainable Project Organization

Costs of recruitment and employment of sustainable project team members

Costs of sustainable construction infrastructure

Costs of sustainable equipment for production and office spaces

Costs of sustainable modes of transport

Costs of other sustainable goods

Costs of work on a project carried out in a sustainable manner

The first cost source listed in Table 4.9 is recruitment and employment of sustainable project team members. Replacement of standard recruitment with recruitment that aims at attracting and employing sustainable project team members practically does not change the associated costs. Recruitment for a sustainable organization, as described in Chapter 2, follows general principles. The change consists in introduction of sustainability requirements in the recruitment notices and in examination of whether candidates meet these requirements. Sustainability does not change the recruitment procedure, but only the scope of the recruitment process. A company may want to hire a specialist to evaluate candidates in terms of sustainability. Even in this case, it will not require high financial outlays.

Project work in a sustainable organization is done in a sustainable way. The members of the project team use the materials needed to execute the project economically. save light, use equipment and means of transport in a rational way, and observe the rules of occupational health and safety. All this leads to savings in different phases of the project.

Another item listed in Table 4.9 is the cost of sustainable building infrastructure in which members of the project team carry out their work. In a model sustainable project organization, the project team works in a sustainable building. In practice, this condition is met only if the company or institution whose employees carry out the project is located in a sustainable building. In any other case, the location of the project team is either partly sustainable or unsustainable. This does not apply to the unusual situation where a separate building has to be erected for the team. As one can easily guess, renting any premises for a project involves costs (lighting, heating, etc.) that are charged to the project budget. Such costs are certainly lower if the building in which the project team works has been built with sustainability in mind and the energy comes from own renewable sources.

The other sources of costs listed in Table 4.9 are related to the purchase of sustainable room furnishings, means of transport, and materials for the project team. In practice, such purchases are not always possible. In many cases, project team members have, as employees of companies and institutions, already assigned means of transport, as w'ell as fully furnished rooms, which they use for the project. They may be sustainable, partly sustainable, or unsustainable. The situation in this regard is similar to that of a project team using building infrastructure. On the other hand, if any resources are to be purchased for the project team, they should be sustainable, which reduces costs during their utilization.

As has been established so far, the establishment and operation of a sustainable project organization are simple in some areas and do not require large financial outlays, while in other areas the situation is more complicated. Recruitment and employment of sustainable project team members, as well as their work, are not a problem. Sustainability, taken into account in recruitment and work on a project, does not increase costs, but contributes to their reduction. The situation is different with regard to building infrastructure and resources. They may be sustainable, partly sustainable, or unsustainable. A project team in most cases has no influence on the degree of sustainability as it uses an already existing infrastructure with fully equipped rooms, as well as the means of transport and equipment allocated to it. This is the case when the members of the project team are full-time employees of business entities and use their infrastructure and equipment to carry out the project. The costs charged for this should decrease as the degree of sustainability of the premises and of the equipment put into service for the project team increases.

The above-mentioned conditions do not undermine the principle that, wherever possible, traditional elements of project organizations should be replaced by their sustainable counterparts.

Functioning of a project organization based on sustainable goods leads to cost reductions and contributes to sustainable development.

Source: Own work.

More and more organizations are interested in sustainable development and are investing in projects in this area. This is due not only to the increasingly pro- environmental and pro-social attitudes of companies themselves and their customers. but also to the behavior of shareholders. Shareholders are entering more and more boldly into the area of sustainable investment. As of Ю August 2018, 476 shareholder resolutions on environmental and social issues had been registered in the United States. The percentage of all resolutions related to these issues had increased from about 33% in 2006-2010 to about 45% in 2011-2016. In 2017, this ratio slightly exceeded 50%. Research shows that investing in sustainable development pays off. Companies that measured, controlled, and communicated environmental, social, and governance (ESG) performance in the early 1990s were in better financial shape for the next 18 years than a carefully selected control group. Another study showed a positive correlation between good ESG performance and above-average financial performance. Evidence gathered by investors confirms this relationship: a survey conducted in 2017 by the Nordea Equity Research group (the largest financial services group in Scandinavia) showed that between 2012 and 2015, the companies with the highest sustainability rating achieved 40% better financial results than the lowest rated organizations. In 2018, the Bank of America Merrill Lynch found that companies with better ESG results than comparable organizations generated higher three-year profits, were more valued by investors (their shares were considered high quality securities), had less frequent significant drops in share prices, and were less likely to become bankrupt (Eccles and Klimenko 2020: 129, 132).

As practice shows, it is possible to achieve high financial results from business activities and at the same time do good and care for the environment.

Source: Own work.

Revenues from Sale of Sustainable Goods Depend on the Customer

If a project concerns sustainable goods to be marketed and offered to consumers, then in addition to their cost of production, the project budget must also estimate the revenue from their sale. The difference between sales revenue and costs is the seller’s profit. The level of sales revenue depends on the demand for sustainable goods. In order to estimate the demand and the potential revenue, it is best to use marketing research. Information on marketing research can be found in marketing books. Marketing research is a starting point for any well-conducted marketing activity, alongside marketing intelligence. Marketing research is also the subject matter of various books. Their authors include Anne E. Beall (Beall 2019), Harrison M., Cupman J., Truman O., Hague P. (Harrison, Cupman, Truman and Hague 2016), Chapman C„ and McDonnel Feit E. (Chapman. McDonnel and Feit 2019). Marketing research starts with identification of the research purpose. Its next steps are: to establish the research objectives, t estimate the value of information, to design the research, to collect the data, to prepare and analyze the data, and to report the research results (Aaker, Kumar, Day and Leone 2011: 48).

If the project team is not able to carry out marketing research, it should commission one of the many marketing research agencies offering their services in the market. We are of the opinion that properly conducted marketing research is the most reliable source of information on the demand and the sales revenue for goods involved in a project. Use of secondary sources, i.e., all kinds of published and unpublished market and sales data, is risky. Such data sources can only be considered if the product is the same as or very similar to products already sold in the market. As we have already mentioned in this book, projects are aimed at creating new and innovative products and services. Such products or services have not been offered in the market so far, so there is no experience related to their sales. In such cases, information from secondary sources may not be useful. Therefore, it is necessary to obtain information from the original source of marketing research.

Consumers are a very complex and unpredictable part of the market. Their purchasing behavior is influenced by many different factors. These include social and group forces, psychological forces, situational forces, and information from commercial and social sources. Also, their purchasing decision-making process, especially in the case of durable goods with long service lives, is complicated and consists of the following phases: problem recognition, information search, information evaluation, purchasing process, and post purchasing behavior. In the following part of this chapter, we will present a few remarks about consumers’ attitudes toward sustainable goods and ways to increase their sales. This will enable more realistic project budgeting.

Buying decisions are made by customers based on an analysis of expected benefits and costs. Customers try to maximize benefits and minimize costs, so they ultimately choose those products that are better than competing goods in the categories considered. Sustainable products are subject to the same principle: in order to be sellable, they should be seen by consumers as superior to conventional products. This perception is negatively affected by prices. Sustainable products are usually more expensive than their unsustainable equivalents. Including externalized costs would result in a significant increase in the prices of the latter. It is unlikely that the market will accept such prices. Nevertheless, producers and retailers of sustainable goods can count on increased demand and decent profits. This is enabled by the life-cycle costing and the promotion of the results of this valuation among consumers. Such valuation is more advantageous compared to the valuation of conventional goods. Let us explain its essence.

When considering the purchase of a product, the customer takes into account not only its price, but also other aspects related to the purchase, use, and disposal of the product. A good example is the purchase of a new car. For the customer, in addition to the price, the following issues may be important: Can car X be bought in the customer’s own town or must he or she go to a showroom located in another town? How much gasoline does the car use per 100 km? Is it reliable? How much does it cost to service it? How much does the vehicle lose in value each year? How much will the customer be able to sell it for in a few years? Consequently, the concept of total customer cost has been introduced, which includes, in addition to the retail price:

  • • the product purchase costs;
  • • the product use costs; and
  • • the postuse costs.

The product purchase cost includes all costs associated with searching for a product, collecting and comparing information to facilitate selection, and transport of a product to the customer's home or business. The cost of use is mainly related to the purchase of the materials needed for its use, maintenance, and servicing. The postuse costs include, but are not limited to, charges for the removal and disposal of the product.

The concept of total customer cost provides producers and sellers of sustainable goods with an important tool to influence the market, which is particularly useful in situations where the prices of such goods are higher than those of their conventional equivalents. It can encourage customers to buy by demonstrating lower costs of use and environmentally friendly disposal of sustainable products. The electricity that powers an electric car costs a fraction of the cost of gasoline; solar thermal collectors help save money on hot water and house heating; and environmentally friendly washing machines use less water and electricity, thus reducing bills. Consequently, despite the higher retail prices of these products, the total customer cost is lower compared to their cheaper conventional equivalents. The source of savings is lower costs of use. This aspect should therefore be used to promote sustainable goods. This does not require any additional costs, but only modifications to the content and appearance of marketing messages. In marketing communication with customers, it is a good idea to use the so-called savings calculators. They contain comparisons of sustainable products with their conventional equivalents. Use of savings calculators is justified in cases where a sustainable product is cheaper to use and its disposal is environmentally friendly. Transparent, concrete arguments supported with numbers concerning the costs of use and disposal of sustainable products in marketing communications are an effective incentive for consumers to buy them despite their higher prices.

The amount of revenue from sales of sustainable goods depends on their attractiveness, their ability to meet needs, their prices, and the attitudes of consumers towards sustainability. B. Emery divides these attitudes into favorable and unfavorable. He gives the following names to consumers with a favorable attitude to sustainability:

a. guilty - a consumer who is aware of sustainability issues and occasionally becomes involved in sustainable consumption, although he or she does not do so consistently; the consumer feels guilty but not enough to become more sustainable;

b. practitioner - this consumer has more knowledge and understanding of sustainability than a consumer from the previous group and, whenever possible, his or her consumption becomes sustainable; he or she seeks to deepen his or her knowledge of sustainability and maintain a sustainable lifestyle; and

c. sustainable - this consumer is completely and enthusiastically committed to sustainability; he or she tries to do as much as possible to make his activities fully sustainable.

On the other hand, B. Emery classifies consumers with an unfavorable attitude to sustainability as follows:

a. ignorant - this consumer has no knowledge of sustainable development and often belongs to a lower socio-economic group;

b. fatalist - this consumer does nothing because he or she feels it is too late to influence anything, also with regard to his or her life and imminent death:

c. in denial - this consumer is not convinced by evidence, especially when opposing views on sustainability are presented;

d. cynical - this consumer fights to act despite sustainability concerns, but is skeptical and recognizes the fact that his or her contribution is irrelevant;

e. disinterested - this consumer is not interested in sustainability issues; and

f. fed-up - this consumer treats sustainability issues as a whim, considering it appropriate for the media and companies to no longer focus on this issue (Emery 2012: 80-81).

Consumers with a favorable attitude toward sustainability are the most attractive market segment for sustainable products. They are most often bought by people classified as sustainable, followed by people classified as practitioners and guilty. Consumers with unfavorable attitudes do not show interest in sustainable goods. Moreover, many consumers associate high prices of such goods with unfair practices. Empirical research conducted in the UK has shown that a majority of customers believe that higher prices of sustainable products are just a trick to get as much money from them as possible, not to raise money to save the environment or to achieve social goals (Belz and Peattie 2010: 209). As we have mentioned in Chapter 2, many consumers are willing to pay more for a product that supports environmental and social goals.

When working on the project budget, the problems of market research and consumer behavior cannot be overlooked. This is because customers are the most important source of revenue and decide on the success or failure of a product or service to be put on the market.

 
Source
< Prev   CONTENTS   Source   Next >