Project Economics

Economics can be defined as the science that studies the allocation of scarce resources for competing ends. It primarily focus on the behaviour and interactions of economic agents and the way in which economies work. There are two branches of economics,

1. Microeconomics: Macroeconomics analyzes the basic elements in the economy, such as individual agents (households, firms, buyers, and sellers) and markets, their interactions, and their outcomes of interactions.
2. Macroeconomics: Macroeconomics analyzes the entire economy (including aggregated production, consumption, savings, and investment) which includes issues affecting the economy, (unemployment, inflation, economic growth) and the public policies that further addresses these issues (monetary, fiscal, and other policies).

Project economics can be defined as the analysis of the financial outcome of a project using the owner’s own criteria, metrics and financial policies. The economic assessment of projects account for the following parameters – time value of money, risk and uncertainty, corporate attitude to risk and management of project portfolios. Most of the modeling techniques used are the same as quantitative risk analysis (QRA) and decision support.

Project Relevance

Mostly the project owners hold expertise in assessing the projects which is indeed their core competence. Ideally, the outsiders are kept at a distance from the key decisions, as it is considered to be a commercially very sensitive area.

However, the contractors are very less familiar to project economics and are required to understand the project owners’ decision processes, particularly when promoting new technology or new business models. In which case the contractors are required to submit a sound business case presented which is acceptable by the Owner’s upper management. Note, the business case must answer all of the questions that are likely to be asked when the project is put forward to the Owner’s board for sanction.