Review - Chapter 7 Flashcards
Importance of Project Cost Management
IT projects have a poor track record for meeting budget goals
Cost Overrun
The additional percentage or dollar amount by which actual costs exceed estimates
Cost
- A resource sacrificed or foregone to achieve a specific objective or something given up in exchange
- Often measured in monetary units like dollars that must be paid to acquire goods and services
Project Cost Management
Includes the processes required to ensure that the project is completed within an approved budget
Project Cost Management Processes
- Planning cost management
- Estimating costs
- Determining the budget
- Controlling costs
Planning cost management
- Involves determining the policies, procedures, and documentation that will be used for planning, executing, and controlling project cost
- Main output is a cost management plan
Estimating costs
- Involves developing an approximation or estimate of the costs of the resources needed to complete a project
- Main outputs are activity cost estimates, basis of estimates, and project documents updates
Determining the budget
- Involves allocating the overall cost estimate to individual work items to establish a baseline for measuring performance
- Main outputs are a cost baseline, project funding requirements, and project documents updates
Controlling costs
- Involves controlling changes to the project budget
- Main outputs are work performance information, cost forecasts, change requests, project management plan updates, and project documents updates
Basic Principles of Cost Management
- Profits
- Profit margin
- Life cycle costing
- Cash flow analysis
- Learning curve theory
- Reserves
Profits
Revenues minus expenditures
Profit margin
The ratio of profits to revenues
Life cycle costing
- Provides a big-picture view of the cost of a project throughout its life cycle
- Considers the total cost of ownership, or development plus support costs for a project
Cash flow analysis
A method for determining the estimated annual costs and benefits for a project and the resulting annual cash flow
Learning curve theory
States that when many items are produced repetitively, the unit cost of those items decreases in a regular pattern as more units are produced
Reserves
- Dollars included in a cost estimate to mitigate cost risk by allowing for future situations that are difficult to predict
- Two types: contingency and management
Contingency reserves
Allow for future situations that may be partially planned for (known unknowns) and are included in the project cost baseline
Management reserves
Allow for future situations that are unpredictable (unknown unknowns)
Tangible costs or benefits
Easy to measure in dollars
Intangible costs or benefits
Difficult to measure in dollars
Direct costs
Can be directly related to creating the products and services of the project
Sunk cost
- Money that has been spent in the past
* When deciding what projects to invest in/continue, you shouldn’t include sunk costs
Planning Cost Management
The project manager and other stakeholders use expert judgement, data analysis, and meetings to produce the cost management plan
A cost management plan includes what?
- Level of accuracy
- Units of measure
- Organizational procedures links
- Control thresholds
- Rules of performance measurement
- Reporting formats
- Process descriptions
Estimating Costs
- The number and type of cost estimates vary by application area
- Estimates are usually done at various stages of a project and should become more accurate as time progresses
Labor costs
A large percentage of total project costs are often labor costs
Full-time equivalent (FTE)
A standard way to refer to the total staffing required for a project regardless of whether people work full time or part-time
Rough order of magnitude (ROM) Estimate
- Provides an estimate of what a project will cost
- aka ballpark estimate, guesstimate, swag, or broad gauge
- Is done very early in a project or even before
- Used to help make project selection decisions
- Time frame is often 3+ years prior to project completion
- Accuracy is typically -50% to +100%
Budgetary Estimate
- Used to allocate money into an organization’s budget
- Many organizations develop budgets at least 2 years into the future
- Made 1-2 years prior to project completion
- Accuracy is typically -10% to +25%
Definitive Estimate
• Provides an accurate estimate of project costs
• Used for making many purchasing decisions for which accurate estimates are required and for estimating final project costs
• Made 1 year or less prior to project completion
• Should be the most accurate of the three types
Accuracy is normally -5% to +10%
Typical Problems with IT Cost Estimates
- Estimates are done too quickly
- People lack estimating experience
- Human beings are biased toward underestimation
- Management desires accuracy
How to Develop a Cost Estimate and Basis of Estimates
- Before creating an estimate, know what it will be used for, gather as much information as possible and clarify the ground rules and assumptions for the estimate
- If possible, estimate costs by major WBS categories
- Create a cost model to make it easy to make changes to and document the estimate
Best Practice for Developing Cost Estimate and Basis of Estimates
- Use Function Point Analysis (FPA) techniques
- Function points are a means of measuring software size in terms that are meaningful to end users
- User stories are a common way to describe requirements in a simple, concise way
- Developers can analyze user stories to estimate function points and person-hours
How to analyze user stories?
- Estimate the number of internal logical files (ILFs)
- ILFs used to approximate the number of function points
- Multiply by a certain number of hours/function point to estimate the person-hours needed
Determining the Budget
- Cost budgeting involves allocating the project cost estimate to individual work items over time
- The WBS is a required input to the cost budgeting process since it defines the work items
- Important goal is to produce a cost baseline
Cost baseline
A time-phased budget that project managers use to measure and monitor cost performance
Controlling Costs
• Project cost control includes
○ Monitoring cost performance
○ Ensuring that only appropriate project changes are included in a revised cost baseline
○ Informing project stakeholders of authorized changes to the project that will affect costs
• Many organizations around the globe have problems with cost control
Earned Value Management (EVM)
- A project performance measurement technique that integrates scope, time, and cost data
- Given a baseline you can determine how well the project is meeting its goals
- You must enter actual information periodically to use EVM
Baseline
Original plan plus approved changes
Planned value (PV)
- Formerly called budgeted cost of work scheduled (BCWS)
- Also called the budget
- The portion of the approved total cost estimate planned to be spent on an activity during a given period
Actual cost (AC)
- Formerly called actual cost of work performed (ACWP)
* The total of direct and indirect costs incurred in accomplishing work on an activity during a given period
Earned value (EV)
- Formerly called the budgeted cost of work performed (BCWP)
- Is an estimate of the value of the physical work actually completed
- Based on the original planned costs for the project or activity and the rate at which the team is completing work on the project or activity to date
Rate of Performance (RP)
- The ratio of actual work completed to the percentage of work planned to have been completed at any given time during the life of the project or activity
- Suggested for estimating earned value
Estimate at Completion (EAC)
An estimate of what it will cost to complete the project based on performance to date
Budget at Completion (BAC)
The original total budget for the project
Project Portfolio Management
- Many organizations collect and control an entire suite of projects or investments as one set of interrelated activities in a portfolio
- There are five levels for project portfolio management
5 levels for project portfolio management
- Put all your projects in one database
- Prioritize the projects in your database
- Divide your projects into two or three budgets based on type of investment
- Automate the repository
- Apply modern portfolio theory, including risk-return tools that map project risk on a curve
Benefits of Portfolio Management
- Save money by organizing projects into a portfolio
- Reduce redundant projects and coordinate those with overlap
- IT projects can be huge investments so it makes sense to view them as portfolios and track progress as a whole
Software Used to Assist in Cost Management
- Spreadsheets: resource planning, cost estimating, cost budgeting, cost control
- Portfolio management software can help reduce costs
