2 Concepts Of Cost Management: Value Engineering & Life Cycle Costing
As defined in PMI Certification training, Cost Management is all about defining the necessary budget for executing the project. Its objective is to monitor and control the project costs to match the approved budget. So that’s why life cycle costing and value engineering are two important concepts in cost management. Do you know what is value engineering and how to execute it? Do you know how to calculate Life Cycle Costing? Did you add Value Engineering and Life Cycle Costing concepts in your PMP study plan? These concepts might also be one of the cost management questions in PMP Exam, so be sure to test your knowledge with sample PMP exam questions.
Now, let’s go over Value Engineering and Life Cycle Costing concepts one-by-one.
What Is Life Cycle Costing?
First, we will go over life cycle costing. Life cycle costing is looking at the cost of the whole life of the product, not just the cost of the product in the project. You might be buying a tool or equipment to use in your project. While buying it, your company must consider the life cycle cost of the product, not just the cost in the project. It is better to describe this concept over an example.
Life Cycle Costing Example
Let’s consider that, you will be needing a pressing machine for your project. However, your company plans to use this machine in future projects after your project is completed. Therefore, your company will buy the pressing machine instead of leasing it.
There are two options for pressing machine. Low quality and high quality. Low quality pressing machine is $80,000 but it is expected to pay around $40,000 afterwards during maintenance in next years. So total lifecycle cost is $120,000 for low quality pressing machine. High quality pressing machine is $100,000. And expected maintenance costs for the next years is $10,000. So in total, life cycle cost of the high-quality pressing machine is $110,000.
Now, if you consider only project costs, buying low quality pressing machine is more feasible. But your company plans to use it in future projects, therefore, life cycle cost must be considered and high quality pressing machine must be purchased.
What Is Value Engineering?
Now, we will go over value engineering. Value engineering is also known as value analysis. Value engineering is, briefly, finding a less costly way of the same work. Please do not confuse this with reducing scope or decreasing quality to deliver project work with a lower cost. Value engineering aims to do the exact work with a less costly way.
If a team is trying to decrease the costs with the same scope, they are performing value engineering. In order to describe value engineering, we will go over a sample scenario.
Value Engineering Example
Let’s consider that you need 5,000 meters’ cube of wood for your construction project. And you need the first 2,500 meters’ cube in the beginning of the project and the next 2,500 meters’ cube 3 months later.
However, your wood supplier tells you that, if you buy all 5,000 meters’ cube at once, he can make 25% discount from the list price. You will need total 5,000 meters’ cube wood anyhow in your project, and buying all wood at once at the beginning of the project is less costly.
Here in this scenario, the total amount of the material that will be purchased is same, but you reduce the cost by buying all required amount at once. And this is an example of value engineering.
Originally published at blog.masterofproject.com on August 15, 2017.