Cost management and budgeting are important for all aspects of life, but especially in the world of project management! The goal of cost management is to monitor and estimate the amount of money it will take in order to complete a project correctly and on time. Budgeting must be done with the project team, investors, and stakeholders. Investing in your cost management learning is extremely beneficial, especially if you are a little rusty in the realms of psycho costing and value engineering!
If you covered value engineering and life cycle costing in your PMP study plan, good for you! If it’s been a while since you cover these topics, it’s time to revisit the world of life cycle costing. In this article, we will go over value engineering and life cycle costing so that you can be a pro in the world of project management.
Life Cycle Costing
First and foremost, we will cover life cycle costing. This process helps to look at the total potential cost a project will have. This system is used to estimate the total cost of the project, not just individual pieces. For example, if you are buying a tool to use during your project it is important to consider the life cycle cost, instead of just the cost of the project itself. Let’s take a look at a real-world example.
Let’s say that you need an embroidery machine for your project. If the company that you are working for plans on using this embroidery machine in future projects, not just this project, this will contribute to whether or not they lease or purchase the product.
When analyzing which embroidery machine to invest in, your company explores low-quality and high-quality machines. Low-quality machines are $70,000 but are expected to pay $30,000 after words during maintenance. If total life cycle cost is the combination of these two amounts, this is how much you can expect to pay for the total use of the product.
If you simply consider project cost, buying low-quality machinery is more affordable. However, if you plan to use this piece of machinery for future products it is smart to invest in a high-quality machine.
Next, we will cover value engineering, more commonly known as value analysis. In short, value engineering is the way of finding cheaper alternatives for producing the same outcome. Value engineering focuses on completing the exact outcome, for less of the price. If your team is trying to lean up costs, they are performing value engineering as long as it stays within the same project scope. Let’s take a look at another real-world example to get better context.
Value analysis (value engineering):
- Finding less costly way of the same work
- If a team is decrease in cost with the same scope, they are performing value analysis
- E. G. You need 5000 m ^ 3 of wood for your construction project. 2500 m ^ 3 in the beginning, and 2500 m ^ 3 3 months later.
But your wood supplier tells you that he will offer a 25% discount if you buy all of the wood as a bulk. Then you decide to buy all you need in your project.
Value Engineering in the Real World
For example, let’s pretend that you need 3000 M of plywood for your recent project. You need the first 1500m at the beginning of the project and the second 1500 m 3 months later. Your wood supplier tells you that if you buy all of the wood up front, he will make a 15% discount of the list price. You need all of the plywood to complete your project either way, so buying all wood at once is going to be less costly for your total project. In this example, the total amount of material acquired will be the same. However, you are reducing the total cost by buying all of the plywood at the beginning of the project. This is a great example of value engineering!
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