Value for Money Analysis

Attached articles discuss the basics of value for money analysis in terms of: business cases; benefits to cost; cost-effectiveness; discounted cash flow analysis; risk analysis; and sensitivity analysis.

‘Value’ is a general term for the worth of a system, product or service, as perceived by a buyer or acquirer.  It may be seen as purely financial (investment); as a direct benefit with economic utility; as necessary for risk minimisation or as a ‘wider benefit’ (esoteric/ imaginary/ wishful/ ideological).

Value should be assessed in quantitative terms whenever possible but many value criteria cannot be so quantified and thus require a qualitative assessment by the buyer. This is even more so when multiple value criteria (often conflicting) are involved. 
Evaluation of both value and dollar cost should always be on a defined life-cycle basis, ie. for a stated economic life in years, dated from a ‘base-date’ and all benefits and costs expected over the life-cycle to be established for the year incurred and discounted to the base-date, at an agreed percentage discount rate (using real cost of money). 

Sadly, too many governments, especially those that are well entrenched electorally, will impose ideological objectives rather than subject project proposals to valid scrutiny.  So-called business cases can be of little validity or use to the public.  Projects can be approved in spite of benefit to cost ratios being demonstrably less than unity, even grossly so.

That said, valid value for money analysis is not easy, often needing complex computer modelling and eventually qualitative judgement calls of value, across multiple criteria, for the expected dollar cost.

Borrowing money by any entity for investment is recognised as a good thing, as long as the investor can see value for money.   However, borrowing for projects that clearly have negative returns is not only wasteful, especially of taxpayer funds, but bordering on negligence by those in a position of trust. 

Articles

Value for Money Analysis

Value for money analysis has been a preoccupation of Acquisition and Logistics Study Centre (ALSC) since its inception, hence ‘Value for Money’ as its motto.

It should be the accepted basis of valid decisions, taken by individuals, business and governments.   It exists to provide for wise investment and to obtain value for money. 
Sadly, the process and even the underlying science is often manipulated by decision-makers for political or ideological reasons.

LCC Risk Analysis

Life Cycle Cost (LCC) can be an important differentiator in the source selection decision for a system or equipment.  In many instances, only a single estimate of LCC is determined.  However, the decision maker needs to know more about the risk associated with the LCC estimate, as represented by the probable range of values that the LCC may take, ie between a lowest value and a highest value, and how LCC means may differ from their respective point estimates (modes).  This paper illustrates the need for knowledge of the spread of LCC values about the point estimate, as an expression of estimating risk and the importance of correct statistical summation of cost component distributions to obtain a valid estimate of that LCC spread.  Key Words: Life Cycle Costing; LCC; cost risk.

Schedule Risk Analysis

To correctly account for risk within a work schedule can be a time consuming and difficult task to do in a valid and defensible manner, given the complex, networked nature of most schedules.  To provide also the functionality to cater for interdependence of component times poses a quantum leap in that difficulty.  Yet, as this paper contends, interdependence of component times exists in most schedules and should not be ignored.  The consequences could prove to be expensive.

Tender evaluation-Validity of Quantitative Techniques

Computer-based tools are available as aids to the systematic evaluation, documentation and comparison of competing tenders and often employ quantitative techniques to determine ‘value’ indexes as quantified measures of the worth to the buyer of an offer. Thus, this paper explores the validity of quantitative indexes and their limitations in tender evaluation. It argues that value indexes and particularly value for money indexes are more limited in their power than given credit for by proponents. 

Introducing Automated Cost Risk Analysis Model (ACRAM)©

The Automated Cost Risk Analysis Model (ACRAM)© is a proprietary, analytical, Excel-based tool that determines the risk associated with a total cost or budget estimate, given the component costs of that estimate and their individual risk profiles.  All risk profiles – for the total and for each of its individual components – are expressed in terms of minimum, Mode, Mean and maximum values.

Although developed primarily for cost risk analysis, ACRAM may be used in exactly the same way for the summation of any set of linear component values (dollars, wheat yields or whatever), any or all of which may have a risk profile about the most likely value (point estimate), eg annual crop yields.