for obtaining the Optimum Value for a Future Investment
FEATURED PAPER
By Piero G. Anticona Tello
Lima, Peru
ABSTRACT
Investors always look for the optimum return of the capital invested. They still run feasibility studies to determine which is the best alternative among different projects that offer the best IRR, VPN, ROI, ROCE, or other financial scoring models.
Some projects or programs get rejected because of the value of the alternative chosen is high, and sometimes the process for estimating and budgeting does not obtain the optimum result.
What is the best process for estimating and budgeting that could help owners to get the optimum value for acquiring, constructing, updating, expanding upon, maintaining, repairing and eventually disposing of organisational assets?
What are the advantages or strengths that this process can offer compared to others?
The following research answers this question, through the analysis of project management entities that suggest processes for Cost Estimating and Budgeting.
Guild of Project Controls offers the best processes for an estimating and budgeting calculation. It also provides, some strengths as Owner and Contractor’s perspective, Bottom-Up and Top-Down estimates and an additional horizontal and vertical validation before assessment, to determine that all data is reliable and it considered all resources and costs.
This process complies with most of what owners look for the development of a cost estimate to guarantee that the outcome is almost the closest one to reality.
Keywords: Cost Estimate, Budgeting, Project Estimates, Process Map, Continuous Improvement Model, Simulation, Risk Analysis, Sensitivity Analysis.
INTRODUCTION
Investors always look for the optimum use of their money. They run feasibilities studies to determine the best alternative that meets their requirements. Depending on the sector and companies’ policies for portfolio management, they have gates or steps to determine if they continue analysing in detail the best option and finally make a decision of the Go or No Go of the project.
They set the opportunity cost to evaluate if the best alternative chosen meets the internal rate of return (IRR) and the net present value (NPV) set in the requirements, as other indicators. Also, there are additional requirements that the future asset or investment does comply with environmental, legal, social and other aspects required by law.
Sometimes most of the projects in a portfolio’s investment do not pass through the intermediate or final gate, and investors reject them because alternatives do not comply with investor’s expectations.
Why are these studies rejected? Why owners or investors do not approve feasibility studies?
In most cases, investment does not comply with profit expected, feasibility studies do not meet investors’ portfolio strategy for growing into market shares or for increasing revenues, these studies also do not meet shareholders’ expected cash flows or final report plan does not comply with law’s requirements, or the realization of other corporate strategic benefits.
Regarding profit expected, portfolio strategies and cash flows, why these investments do not comply with these indicators?
When elaborating the cost estimate, we find out that the process for Estimating and Budgeting produced a very high value – or a low value-, the alternative is chosen and is too expensive, or estimators did not optimise the resources required for its construction during the calculation of the CAPEX. Also, IRR or NPV is too high or too low, depending on the value of the investment, so the alternative generates a cash flow that does not meet expectations.
Are these causes part of an inefficient or incomplete process for Estimating and Budgeting?
The following research focuses on determining what process map from project management entities, known by the author, might be the best that produces the most optimum outcome to satisfy the owner’s expectations.
A second analysis will be conducted to determine the strengths and weaknesses of each processes map. This analysis will help us to identify what main differentiators are between processes and also to suggest improvements at each of them.
Besides, it is essential to understand that a good process, as it is iterative in most cases, requires that the process allows to get improvements during the iterations, or at least the flow process lead the team to find the optimum solution.
This research is also useful for owners to understand what a good process for estimating and budgeting requires to meet best practices in estimating and budgeting to obtain the best alternative for your future assets.
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How to cite this paper: Anticona, P.G. (2019). Best Process Map for Obtaining the Optimum Value for a Future Investment; PM World Journal, Vol. VIII, Issue V, June. Available online at https://pmworldlibrary.net/wp-content/uploads/2019/06/pmwj82-Jun2019-Anticona-best-process-map-for-optimum-value-of-future-investment.pdf
About the Author
Piero G. Anticona Tello
Lima, Peru
Piero Anticona is a project controller with 15 years of professional experience in the sectors of Mining, Energy and Oil and Gas. He worked as Owner, EPCM and Contractor in different projects in Peru, Spain and France. Piero is a Certified Cost Professional from AACE International and Project Management Professional from Project Management Institute. Piero graduated from SKEMA (France) with a Master in Program and Project Management. In addition, he has a major study in Mechanical Electrical Engineering from Universidad Nacional de Ingeniería (Peru). He is currently president of AACE International Peru Section (2018-2019) and he is attending a distance learning mentoring course, under tutorage of Dr Paul D. Giammalvo, CDT, CCE, MScPM, MRICS, GPM-m Senior Technical Advisor, PT Mitrata Citragraha, to attain Guild of Project Controls certification.
Piero lives in Lima, Peru and can be contacted at piero.anticona@gmail.com
To view other works by Piero Anticona, visit his author showcase in the PM World Library at https://pmworldlibrary.net/authors/piero-g-anticona/
