Chapter 15

Identifying Program Costs

Judith F. Cardenas

In This Chapter

This chapter explores the most relevant techniques for identifying program costs. Upon completion of this chapter, you will be able to

• articulate the importance of developing and monitoring costs
• identify types of values associated with programs and initiatives
• identify the challenges of capturing costs
• identify sources of program costs.

 

The Importance of Identifying Program Costs

Managers are being called to provide accurate and timely information related to the cost of programs and projects. No longer is the total program cost sufficient because increasingly more managers are asking for how and why money is spent. A cost profile, which includes both direct and indirect costs, becomes a critical decision-making tool. Cost information is used to monitor and manage resources, develop standards, and study the pros and cons of alternative delivery processes.

Tabulating program costs is an essential step in measuring and evaluating training, particularly if one wants to calculate the return-on-investment (ROI) in training. With the challenges and pressures to use resources wisely, organizations must carefully monitor, report, and forecast cost in a timely and transparent manner. Table 15-1 presents a variety of reasons to develop costs.

Pressure to Disclose All Costs

In the past, training costs were associated with training budgets. Today, more than ever, training is touted as an investment rather than viewed as a cost. Organizations with the investment view of training expenditures look beyond the budget when identifying program costs. Training as an investment considers all costs related to assessing, designing, developing, implementing, and evaluating a training program. For example, the cost associated with the time participants are involved in a program includes the salary plus the benefits earned during the timeframe of the given program. To accurately and appropriately reflect the entire cost of a particular program, indirect as well as direct costs must be accounted for within the total calculation of program cost.

Fully Loaded Costs

Evaluators recommend training costs be fully loaded. This is especially important when calculating the ROI in training, because it ensures the most conservative and credible ROI will be developed. Fully loaded costs include those direct and indirect costs. If the cost is questionable as to whether or not it should be included, include it, even if the cost guidelines for the organization do not require it.

The Danger of Costs Without Benefits

Take care when communicating costs without benefits. Senior executives recognize training costs are quite high. Blatantly communicating that information does not necessarily help the training cause. When most executives receive training costs, a logical question comes to mind: What benefit was received from the program? This is a typical management reaction, particularly when costs are perceived to be high.

Table 15-1. Reasons to Develop Costs

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• Determine overall training expenditures

• Determine relative cost of each program

• Predict future program costs

• Calculate ROI of a program

• Evaluate alternatives to a proposed program

• Plan and budget for next year’s operation

• Develop a cost pricing system

• Integrate data into other systems

 

Cost-Monitoring Issues

The most important task is to define which specific costs are included in a training costs profile. Costs come from a variety of sources. When developing costs, some are prorated, whereas others are expensed.

Sources of Program Costs

Program costs can be captured and categorized into three major sources of program cost:

• Staff expenses. These costs often represent the greatest portion of training costs and often are transferred directly to the client or program sponsor.
• Participant expenses. These costs include direct costs and indirect costs.
• External resources. These costs include payments to external training venues such as hotels and conference centers, equipment, suppliers, and providers of services prescribed in the program.

Unfortunately, the costs in these categories are often understated. Financial and accounting systems should be able to track and report the costs from these sources.

Prorated versus Direct Costs

Once a program has been developed and implemented, the costs related to the program are captured and expensed to the specific program. However, three categories are often prorated over several sessions of the same program. These categories include needs assessment, design and development, and acquisition. The cost for these categories should be prorated over the life of a program. A program’s life should be short if the manager evaluating the program uses a conservative approach. The timeframe of prorating such costs differs among organizations. Some organizations will prorate program costs over one year of operation; others may prorate costs over two or three years (Phillips and Zúñiga, 2008). Figure 15-1 presents an example of how costs may be prorated.

Major Cost Categories

The most important task in a tabulation of program costs is to define which costs should be included. Table 15-2 shows the recommended cost categories for a fully loaded, conservative approach to estimating costs (Phillips, 1983; Phillips and Zúñiga, 2008). Each category is briefly described in this section.

Needs assessment and analysis. It is important to capture the costs associated with conducting a needs assessment. In some programs, this cost is zero because the program is conducted without a needs assessment, but for other organizations, the cost is significant. All costs associated with the needs assessment include the time of staff members who conduct the assessment, direct fees, expenses of external consultants who conduct the assessment, and internal services and supplies.

Figure 15-1. Example of Prorated Costs

In a large pharmaceutical company, a program was developed at a cost of $150,000. It was anticipated that the program would have a three-year life before it would need to be updated. About 900 participants would be involved in the program over the three-year period. The training department wanted to prorate the cost over the life of the program. To be conservative, the total cost should be written off at the end of three years. Therefore, the $150,000 development cost would be spread over the 900 participants as a prorated development cost of $167 per participant.

• $150,000 development cost

• Three-year program life

• 900 participants expected to attend over the program life

• Per person cost to develop the program = $150,000 / 900 = $167 per person.

An evaluation that included an ROI calculation was conducted for 50 participants. The development cost used in the ROI calculation was $167 x 50 = $8,350.

 

Table 15-2. Training Program Cost Categories

 

Cost Item	Prorated	Expensed
Needs Assessment
Design and Development
Acquisition
Delivery • Salaries/Benefits—Facilitators
• Salaries/Benefits—Coordination
• Program Materials and Fees
• Travel/Lodging/Meals
• Facilities
• Participants Salaries/Benefits
• Contact Time
• Travel Time
• Preparation Time
Evaluation
Overhead/Training and Development

 

Design and development. One of the most significant cost categories is the cost associated with designing and developing a program. These costs may include internal staff time for design and development, cost of supplies, videos, software, and other materials directly related to the program. These costs may also include external fees for consultation and support.

Acquisition. Some organizations lack the staff or expertise to internally develop programs. Such organizations purchase programs to use directly or in a modified format. The acquisition cost associated with such programs includes the purchase price for facilitator materials, train-the-trainer sessions, licensing agreements, webinars, assessment tools, and other costs for rights to deliver the program.

Technological support. Some programs require technological support. For example, online assessments may be required of the participants prior to program participation. Additionally, many programs are offered in a hybrid format, in which a portion of the training is offered using a variety of technology platforms.

Delivery and implementation. The delivery and implementation of a training program often represents the largest segment of program cost. Five major subcategories must be considered when capturing all program cost.

• Facilitators’ and coordinators’ salaries and benefits. Proportionally allocated salaries of facilitators or program coordinators should be included in the program’s cost based on the amount of time spent on the particular program. These costs include internal facilitators and coordinators, as well as external facilitators and consultants. When calculating labors costs for internal staff, the benefits factor should be used to figure the cost of employee benefits so that it can be included. The benefits factor is usually in the range of 30 to 50 percent in the United States.
• Participants’ salaries and benefits. The salaries and benefits of participants are an expense that should be included in the program cost. This cost represents the cost of taking employees off the job to attend a training program. The amount allocated should be directly calculated based on the amount of time spent on the given program.
• Travel, lodging, and meals. Direct travel costs for participants, facilitators, and coordinators should be included in the program cost. All expenses related to lodging and meals for participants, facilitators, and coordinators during travel, as well as during the entire time of the program offering should be included. If refreshments are offered throughout a particular training session, the cost should also be captured and recorded as well.
• Facilities. The cost of the facilities used during a training session should also be captured, regardless if the session was offered at an external facility or inside the organization itself. For meetings or sessions held at external facilities, this cost is the direct charge from the conference center or hotel. If the program is conducted in-house, the use of the conference room represents a cost for the organization, and that cost should be estimated and included, even if it is not the practice within the organization to include in-house facilities costs in other reports. The cost of internal facilities can easily be obtained by the facilities manager or estimated by obtaining the rental rate of a room of the same size at a local hotel.
• Program materials and fees. Specific program materials such as notebooks, textbooks, how-to manuals, instruction guides, software, case studies, exercises, CDs, DVDs, jump drives, and participant workbooks should be included in the delivery costs of a program. In addition to these costs, license fees, user fees, and royalty payments along with pens, paper, certificates, calculators, and personal copies of software are also included in this category.

Evaluation. Program evaluations should be included in calculating the program cost. Evaluation costs include the cost associated with developing the evaluation strategy, designing instruments, collecting data, data analysis, and report preparation and distribution. Cost categories include time, materials, hardware or software used to collect or analyze data, and purchased instruments or surveys.

Overhead. A final cost category is overhead. The overhead costs are the additional costs within the training department that are not directly related to a particular program. Typical overhead items include the cost of administrative support, departmental office expenses, salaries of managers, and other fixed costs. Figure 15-2 presents an example of how to prorate the cost of overhead across the number of training days. Remember that the cost of overhead may also be divided by the number of people trained during a year, the number of programs offered during a year, or the number of training hours per year.

The key to allocating overhead is to use a simple approach that logically and systematically allocates the costs in the department that are not allocated to specific programs. Also, it is important not to spend too much time on this issue. Estimates are appropriate in most situations. Some organizations estimate an amount of overhead for a program, using some logical rationale, spending no more than 10 or 15 minutes on the issue.

Figure 15-2. Overhead Allocation

An organization with 50 training and development programs tabulated all the expenditures in the budget not allocated directly to a particular program ($548,061). This part of the budget represented total overhead. Next, this number was divided by the total number of participant days (for example, if a five-day program is offered 10 times a year, 50 days would be put in the total days category). Participant days for the year totaled approximately 7,400. The total unallocated overhead of $548,061 was divided by 7,400 days to arrive at $74. Therefore, $74 is charged for overhead for each day of training.

• Unallocated budget = $548,061

• Training days = 7,400

• Overhead cost per training day = $74

The organization calculated an ROI study on a three-day leadership program. The overhead allocation to that particular study was $222 ($74 x 3 = $222).

Cost Estimation

Cost estimations are developed by many organizations in an effort to track training costs. Table 15-3 displays an example of a cost estimation worksheet. The worksheet summarizes analysis, development, delivery, operations and maintenance, and evaluation costs. The worksheet contains a few formulas that make it easier to estimate the costs.

In addition to cost estimating worksheets, organizations often provide the current rates for services, supplies, and salaries. These data become outdated quickly and are usually updated periodically. The most appropriate way to predict costs is by tracking the actual costs incurred in all phases—from analysis to evaluation—of all programs. This way, it is possible to see how much is spent on programs and how much is being spent in the different categories. Until adequate cost data are available, however, detailed analysis on the worksheets for cost estimation will be necessary.

Summary

Capture and reporting costs is a critical part of measuring and evaluating training. This is particularly true when an ROI calculation is planned. Historically, capturing costs provided a synopsis of expenses related to a particular program or event. Today, managers use cost data to compare programs, internally and externally; track resources; and monitor efficiencies. Tracking costs helps program staff manage resources carefully, consistently, and efficiently. A strong understanding of the different cost categories and different methods of extrapolating cost data provides a stronger evaluation framework.

Table 15-3. Cost Estimating Worksheet

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Analysis Costs
Salaries and employee benefits—function staff (no. of people × average salary × employee benefits factor × no. of hours on project)
Meals, travel, and incidental expenses
Office supplies and expenses
Printing and reproduction
Outside services
Equipment expenses
Registration fees
Other miscellaneous expenses
Total Analysis Cost

Development Costs
Salaries and employee benefits (no. of people × avg. salary × employee benefits factor × no. of hours on project)
Meals, travel, and incidental expenses
Office supplies and expenses
Program materials and supplies
Printing and reproduction
Outside services
Equipment expenses
Other miscellaneous expenses
Total Development Costs

Delivery Costs
Participant costs, salaries, and employee benefits (number of participants × average salary × employee benefits factor × hours or days of meeting or training time)
Meals, travel, and accommodations (number of participants 2 average daily expenses 2 days of training)
Program materials and supplies
Participant replacement costs (if applicable)
Lost production (explain basis)
Facilitator costs
Salaries and benefits
Meals, travel, and incidental expenses
Outside services
Facility costs
Facilities rental
Facilities expense allocation
Equipment expenses
Other miscellaneous expenses
Total Delivery Costs

Operations/Maintenance
Salaries and employee benefits—function staff (no. of people × avg. salary × employee benefits factor × no. of hours on project)
Meals, travel, and incidental expenses
Participant costs
Office supplies and expenses
Printing and reproduction
Outside services
Equipment expenses
Other miscellaneous expenses
Total Operations/Maintenance Costs

Evaluation Costs
Salaries and employee benefits—function staff (no. of people × avg. salary × employee benefits factor × no. of hours on project)
Meals, travel, and incidental expenses
Participant costs
Office supplies and expenses
Printing and reproduction
Outside services
Equipment expenses
Other miscellaneous expenses
Total Evaluation Costs
General Overhead Allocation
TOTAL PROGRAM COSTS

Source: Phillips and Phillips (2005).

Knowledge Check: Prorating Development Costs

Now that you have read this chapter, try your hand at prorating development costs. Check your answers in the appendix.

A large financial institution plans to evaluate a major leadership development program. They are interested in prorating the development program costs over the life of the program. The leadership program will last approximately 18 months. The intent is to run 200 supervisors and team leaders through the program. The development costs were $250,000. This is a high profile project and the senior leaders are interested in seeing an ROI for at least one group of 25 participants. The data are summarized as follows:

• Development costs = $250,000

• Program life = 18 months

• Number of participants = 200

• Number of participants included in ROI study = 25

What is the per person cost of developing the leadership development program?

How much in development cost will be included in the ROI study?

About the Author

Judith F. Cardenas, PhD, CPLP, CRP is the founder and CEO for the Center for Performance and Accountability. She has worked in many diverse work settings and has held positions of president and vice president in higher educational institutions. Cardenas received her doctorate in education administration from Baylor University in 1995, as well as a doctorate in training and performance improvement from Capella University in 2007. She also possesses significant expertise in measuring results and accountability. She is certified as an ROI Professional (CRP) and has completed a variety of postdoctoral training, including leadership development, Harvard University John F. Kennedy School of Government; human performance improvement, ASTD; and advanced ROI methodology, Villanova University. In addition, she holds the designation of RCC (Registered Corporate Coach). She can be reached at [email protected].

References

Phillips, J. J. (1983). Handbook of Evaluation and Measurement Methods, 3rd ed. Boston: Butterworth-Heinemann.

Phillips, J. J. and L. Zúñiga. (2008). “Costs and ROI: Evaluating at the Ultimate Level.” In Phillips, P. P. and J. J. Phillips, Measurement and Evaluation Series. San Francisco: Pfeiffer.

Phillips, P. P. and J. J. Phillips. (2005). Return on Investment Basics. Alexandria, VA: ASTD, p. 124.

ROI Institute. 2005. ROI Certification Handbook. Birmingham, AL.: ROI Institute.