Review - Chapter 7

Question 1

Importance of Project Cost Management

Answer 1

IT projects have a poor track record for meeting budget goals

Question 2

Cost Overrun

Answer 2

The additional percentage or dollar amount by which actual costs exceed estimates

Question 3

Cost

Answer 3

• 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

Question 4

Project Cost Management

Answer 4

Includes the processes required to ensure that the project is completed within an approved budget

Question 5

Project Cost Management Processes

Answer 5

• Planning cost management
• Estimating costs
• Determining the budget
• Controlling costs

Question 6

Planning cost management

Answer 6

• 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

Question 7

Estimating costs

Answer 7

• 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

Question 8

Determining the budget

Answer 8

• 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

Question 9

Controlling costs

Answer 9

• 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

Question 10

Basic Principles of Cost Management

Answer 10

• Profits
• Profit margin
• Life cycle costing
• Cash flow analysis
• Learning curve theory
• Reserves

Question 11

Profits

Answer 11

Revenues minus expenditures

Question 12

Profit margin

Answer 12

The ratio of profits to revenues

Question 13

Life cycle costing

Answer 13

• 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

Question 14

Cash flow analysis

Answer 14

A method for determining the estimated annual costs and benefits for a project and the resulting annual cash flow

Question 15

Learning curve theory

Answer 15

States that when many items are produced repetitively, the unit cost of those items decreases in a regular pattern as more units are produced

Question 16

Reserves

Answer 16

• 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

Question 17

Contingency reserves

Answer 17

Allow for future situations that may be partially planned for (known unknowns) and are included in the project cost baseline

Question 18

Management reserves

Answer 18

Allow for future situations that are unpredictable (unknown unknowns)

Question 19

Tangible costs or benefits

Answer 19

Easy to measure in dollars

Question 20

Intangible costs or benefits

Answer 20

Difficult to measure in dollars

Question 21

Direct costs

Answer 21

Can be directly related to creating the products and services of the project

Question 22

Sunk cost

Answer 22

• Money that has been spent in the past

* When deciding what projects to invest in/continue, you shouldn’t include sunk costs

Question 23

Planning Cost Management

Answer 23

The project manager and other stakeholders use expert judgement, data analysis, and meetings to produce the cost management plan

Question 24

A cost management plan includes what?

Answer 24

• Level of accuracy
• Units of measure
• Organizational procedures links
• Control thresholds
• Rules of performance measurement
• Reporting formats
• Process descriptions

Question 25

Estimating Costs

Answer 25

• 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

Question 26

Labor costs

Answer 26

A large percentage of total project costs are often labor costs

Question 27

Full-time equivalent (FTE)

Answer 27

A standard way to refer to the total staffing required for a project regardless of whether people work full time or part-time

Question 28

Rough order of magnitude (ROM) Estimate

Answer 28

• 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%

Question 29

Budgetary Estimate

Answer 29

• 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%

Question 30

Definitive Estimate

Answer 30

• 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%

Question 31

Typical Problems with IT Cost Estimates

Answer 31

• Estimates are done too quickly
• People lack estimating experience
• Human beings are biased toward underestimation
• Management desires accuracy

Question 32

How to Develop a Cost Estimate and Basis of Estimates

Answer 32

• 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

Question 33

Best Practice for Developing Cost Estimate and Basis of Estimates

Answer 33

• 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

Question 34

How to analyze user stories?

Answer 34

• 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

Question 35

Determining the Budget

Answer 35

• 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

Question 36

Cost baseline

Answer 36

A time-phased budget that project managers use to measure and monitor cost performance

Question 37

Controlling Costs

Answer 37

• 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

Question 38

Earned Value Management (EVM)

Answer 38

• 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

Question 39

Baseline

Answer 39

Original plan plus approved changes

Question 40

Planned value (PV)

Answer 40

• 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

Question 41

Actual cost (AC)

Answer 41

• 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

Question 42

Earned value (EV)

Answer 42

• 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

Question 43

Rate of Performance (RP)

Answer 43

• 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

Question 44

Estimate at Completion (EAC)

Answer 44

An estimate of what it will cost to complete the project based on performance to date

Question 45

Budget at Completion (BAC)

Answer 45

The original total budget for the project

Question 46

Project Portfolio Management

Answer 46

• 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

Question 47

5 levels for project portfolio management

Answer 47

1. Put all your projects in one database
2. Prioritize the projects in your database
3. Divide your projects into two or three budgets based on type of investment
4. Automate the repository
5. Apply modern portfolio theory, including risk-return tools that map project risk on a curve

Question 48

Benefits of Portfolio Management

Answer 48

• 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

Question 49

Software Used to Assist in Cost Management

Answer 49

• Spreadsheets: resource planning, cost estimating, cost budgeting, cost control
• Portfolio management software can help reduce costs