Project Cost and Business Management
Cost baseline and business decisions
The cost baseline is the approved time-phased budget used to measure and control performance. It typically includes work-package budgets and contingency for known-unknowns within approved scope. Management reserve is held outside the baseline for unknown-unknowns or unapproved scope and is released through change control. Funding requirements may exceed the baseline because of timing, retainage, or cash-flow needs. A frequent trap is including management reserve in the performance measurement baseline or treating contingency as profit.
Business management connects project decisions to financial value. Compare alternatives using net present value (NPV), internal rate of return (IRR), payback, and return on investment (ROI). NPV accounts for the time value of money; simple payback does not. Sunk costs are irrelevant to go-forward decisions. Contract type also shifts cost risk: fixed-price places more cost risk on the seller, while cost-reimbursable places more on the buyer.
Worked example
A $500,000 investment yields $125,000 per year in savings. Simple payback is $500,000 ÷ $125,000 = 4 years. Payback is easy to communicate but ignores cash flows after payback and the time value of money. If the project’s NPV at the hurdle rate is positive, it adds value under the stated assumptions. Rule of thumb: use NPV for value creation, payback for liquidity screening, and IRR with caution when comparing projects of different scale.