Cost Management

Financial control in a project 

• The investment is known as Capital Expenditure CAPEX, the running cost to operate the product is the Operational Expenditure OPEX, and the net operational result, revenue less expenditures, is the Profit & Loss (P & L).
• A project may be accepted even if the traditional indicators (eg. IRR, NPV) do not recommend it.
• When the company believes that in the long-run the net operational result, P&L, will become positive and significant.
• The projected P&L is therefore a very important parameter to decide whether the project should be executed or not.

Project cost estimation should be done incrementally: first by analogy, then using a paremetric model and finally a detailed cost breakdown per task. Different Estimation Methods are available.

Decisions about expenses are usually made under a fair amount of uncertainty. In this case, the Project Manager can use a decision-tree to help visualize the options and access the different outcomes.

When no previous experience exists about a specific decision or estimation in the project, the Project Manager may bring external expertsie into project planning. Experts can be invited to participate in the estimation process using the Delphi method.

One final word of caution: beware not to mix accuracy and precision. It is very common to see inaccurate estimations transmitted with so much precision that people sometimes forget to question the estimates and make poor decisions.