Some Additional Remarks Concerning the Subject Costs
Types of Costs
- Direct Costs are costs of one specific project.
- Indirect Costs are costs of a project but the results can be used by other projects too.
- Fixed Costs are costs which can't be influenced by adding resources and which don't grow if you use more resources.
- Variable Costs are costs which are influenced by the number of units and/or resources.
- Sunk Costs "[...] are costs that have already spent on a project" and which should be taken as lost if the project must be replanned or reset.
CROSSWIND7, pp. 258ff)
Types of Cost Estimating Techniques
- One-cost-estimating: one value will be estimated
- analogous: the value refers to the value of a similar work packages of a former project
- parametric: the value will be computed on the base of other values
- three-point estimate: three values are estimated, the optimistic, the pessimistic, and the most like
- bottom-up estimating: the value of the higher work packages is computed on the base of the more exactly estimated values of the lover work packages
(comp. RITA5, p. 202)
Project Evaluation Concepts
- Return On Investment (ROI) is the point of amortization: When the costs of the project are balanced by the sum of the earned benefits (A project with an earlier ROI is better than that with a later ROI)
- Internal Rate of Return (IRR) "[...] is a capital budgeting metric used by firms to decide whether they should make investments. It is an indicator of the efficiency of an investment, as opposed to net present value (NPV), which indicates value or magnitude. The IRR is the annualized effective compounded return rate which can be earned on the invested capital, i.e., the yield on the investment. " (comp. Wikipedia, IRR). (A project with greater IRR is better than that with a lower IRR)
- Benefit Cost Ratio (BCR) "[...] is an indicator, used in the formal discipline of cost-benefit analysis, that attempts to summarize the overall value for money of a project or proposal. A BCR is the ratio of the benefits of a project or proposal, expressed in monetary terms, relative to its costs, also expressed in monetary terms. All benefits and costs should be expressed in discounted present values. " (comp. Wikipedia, BCR) (A project with greater BCR is better than that with a lower BCR)and BCR should a pair X:Y with X>Y)
- Opportunity Cost "[...] is what you give up, or leave on the table to take the other opportunity"
- Payback Period "[...] is the amount of time needed to earn back the original investment on the project. (A project with shorter payback period is better than that with a longer pay back period)
- Future Value: FV = PV (present Value) * (1 + r (interest rate))^n (time period)
- Present Value: PV = FV / ( (1 + r (interest rate))^n )
- Net Present Value (NPV) = PV(benefits) - PV(costs) (Note: Compare value having the time factored in. And a project with greater NPV is better than that with a lower NPV )
- Standard Depreciation assumes that the present value of product will linearly decrease during the future
- Accelerated Depreciation assumes that the present value of product will exponentially decrease during the future
(comp. CROSSWIND7, pp. 259ff)
Project Communication Concepts
- Life-cycle costings are more than the costs which are reviewed and managed by th project cost management: After having finished the project the results (deliverables) normally are used. This usages generates production or maintenance costs. And sometimes a decreasing of the project costs may evoke an increasing of the life-cycle costings and vice versa.
- The Cost Range Table is a set of names for indicating the accuracy of an estimate: You get a pair of one negative and one positive percent values. The greater these values the lower is the accuracy. One uses the following definitions:
- Rough Order of Magnitude :- -50%::+100%
- Order of Magnitude :- -25%::+75%
- Budget :- -10%::+25%
- Definitive :- -5%::+10%
(comp. CROSSWIND7, p. 265)