What is the project’s payback period?

The project’s payback period is the amount of time it will take for the financial benefits of a project to be realised.

For example, the predicted cost to deliver a project (project budget) is 100,000 euros and the financial benefit of the project when it goes live is 10,000 euros a month. Therefore, it will take 10 months for the benefits to payback the cost of the project. This means that the payback period is 10 months.

The payback period should be included in the business case of the project. So, the person or organisation that is paying for the project and who must provide the approval so that the project can be created knows when they will start to realise the financial benefits of the project.

It is important that in each project phase review (tollgate) that the payback period is reviewed, in case there has been any changes to the predicted cost to deliver the project or the predicted financial benefits of the project.

For example, after a few months it is realised that the cost of the project is forecasted to be 150,000 euros and not 100,000 euros. The financial benefits stay the same at 10,000 euros a month, so the payback period is now 15 months. The project sponsor will need to take a decision as to whether the project should continue based on the increased payback period.

Also, there can be the situation where the financial benefits turn out to not be as great as first predicted at the start of the project. For example, the financial benefit is not 10,000 euros a month but 5,000 euros a month. The project cost is forecasted to be 150,000 euros. So, the payback period is now 30 months. The project sponsor will need to take a decision as to whether the project should continue based on the reduction of the financial benefits and the increased payback period.

Not every project will have a direct financial benefit that can be used to calculate the payback period.

It is important that when there is a stated financial benefit of a project that the payback period is calculated and forms part of the business case and the project tollgate graduation criteria, so the person or organisation funding the project knows when they will start to realise the benefits of their investment or if the project should be stopped as the financial benefits no longer justify the continuation of the project.