2 Concepts of Cost Management: Value Engineering and Life Cycle Costing

Cost Management, as defined in PMI Certification training is about setting the budget for the project. Its purpose is to control and monitor project costs in order to match the budget. Value engineering and life cycle costing are important concepts in cost management.
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Are you able to calculate Life Cycle Costing? Did you include Life Cycle Costing and Value Engineering concepts in your PMP study plans? These concepts could also be part of the PMP Exam cost management questions, so make sure to test your knowledge by answering sample PMP exam questions.
Let’s now look at Value Engineering and Life Cycle Costing concepts.
What is the Life Cycle Cost?
We will first discuss life cycle costing. Life cycle costing considers the entire product’s life span, not just the product itself. You might purchase a tool or equipment for your project. Your company should consider the product’s life cycle cost, not just the project cost, when purchasing it. This concept is better described than illustrated.

Example of Life Cycle Costs
Let’s say that you will need a pressing machine to complete your project. Your company plans to continue using the machine in future projects. Your company will purchase the pressing machine, rather than leasing it.
There are two types of pressing machine. High quality and low quality. The cost of a low quality pressing machine is $80,000, but it will be able to pay $40,000 for maintenance over the next few years. The total lifecycle cost for a low quality pressing machine is $120,000. High quality pressing machines cost $100,000. The expected maintenance costs for the next year are $10,000. The total life expectancy of the high-quality pressing machine costs $110,000.
If you only consider project costs, purchasing a low-quality pressing machine is more affordable. However, if your company plans on using it in future projects, then buying a low quality pressing machine is more feasible.
What is Value Engineering?
We will now discuss value engineering. Value analysis is also known by value engineering. Value engineering simply means finding a cheaper way to do the same work. This is not the same as reducing scope or lowering quality to deliver project work at a lower price. Value engineering is a way to accomplish the exact same work in a more economical manner.
Value engineering is when a team tries to reduce costs while maintaining the same scope. We will show you a scenario to illustrate value engineering.

Value Engineering Example
Let’s say that you need 5,000 m2 of wood for your construction project. You will need the first 2,500 meter’s cube at the beginning of your project, and the next 2,500 meter’s cube three months later.
Your wood supplier will tell you that if you buy all 5,000m of cube wood at once, you can get a 25% discount on the list price. It is possible to purchase all the wood you need at once, which will save you money.
In this example, the total amount to be purchased is the same. However, you can reduce the cost by purchasing all the material at once. This is an example value engineering.
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Value EngineeringReview by: Ruby Mitchell5 / 5 stars