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Chapter 6:

Project Cost Management

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The Importance of Project Cost

Management

• IT projects have a poor trac recor! for meeting

cost goals

• "verage cost overrun from 1##$ C%"&' stu!y

(as 1)#* of the original estimates+ improve! to

,$* in the 2001 stu!y

• In 1##$- cancelle! IT projects cost the ./'/ over

)1 illion

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3hat is Cost an! Project Cost

Management4

• Cost is a resource sacrifice! or foregone to

achieve a specific ojective or something given

up in e9change

• Costs are usually measure! in monetary unitslie !ollars

• Project cost management inclu!es the processes

re?uire! to ensure that the project is complete!(ithin an approve! u!get

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Project Cost Management Processes

• ;esource planning: !etermining (hat resources

an! ?uantities of them shoul! e use!

• Cost estimating: !eveloping an estimate of the

costs an! resources nee!e! to complete a project

• Cost u!geting: allocating the overall costestimate to in!ivi!ual (or items to estalish a

aseline for measuring performance

• Cost control: controlling changes to the project

u!get

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@uic @uiA on Cost Concepts

• 'uppose you sell 10 (i!gets per !ay onaverage- an! the average cost per (i!get is 10/If you sol! 11 (i!gets on !ay- (hat (oul! the

affect on profits e4• 'uppose you (ere uying 10 PCs for your ne(

usiness/ 3hat (oul! some of the life cyclecosts e4

• Bive e9amples of tangileD vs/ intangileD enefits of a ne( project

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8asic Principles of Cost

Management

• Most CF&s an! oar!s no( a lot more aout finance

than IT- IT project managers must spea their language

G Profits are revenues minus e9penses

G Hife cycle costing is estimating the cost of a project over itsentire life

G Cash flo( analysis is !etermining the estimate! annual costs

an! enefits for a project

G 8enefits an! costs can e tangile or intangile- !irect orin!irect

G 'un cost shoul! not e a criteria in project selection

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Tale 61/ Cost of 'oft(are

efects

When Defect is Detected Typical Cost of Correction

.ser ;e?uirements 10061-000

Co!ingJ.nit Testing 1-000 or more

'ystem Testing E-000 6 )-000

"cceptance Testing 1-000 6 100-000

"fter Implementation .p to millions of !ollars

It is important to spen! money upfront on IT projects

to avoi! spen!ing a lot more later/

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l

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Tale 62/ Types of Cost

Fstimates

Type of Estimate When Done Why Done How Accurate

Rough Order of

Magnitude (ROM

Lery early in the project life cycle-often G$ years

efore project

completion

Provi!es rough allpar of cost for selection !ecisions

G2$*- ME$*

!udgetary Farly- 1G2 years out Puts !ollars in the u!get plans

G10*- M2$*

Definiti"e Hater in the project- N1 year out

Provi!es !etails for purchases- estimateactual costs

G$*- M10*

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Cost Fstimation Tools an! Techni?ues

• asic tools an! techni?ues for cost estimates:

G analogous or top!o(n: use the actual cost of a

previous- similar project as the asis for the ne(

estimate

G ottomup: estimate in!ivi!ual (or items an! sumthem to get a total estimate

G parametric: use project characteristics in a

mathematical mo!el to estimate costs

C i C ! l

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Constructive Cost Mo!el

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Typical Prolems (ith IT Cost

Fstimates

• eveloping an estimate for a large soft(are project is a comple9

tas re?uiring a significant amount of effort/ ;ememer that

estimates are !one at various stages of the project

• Many people !oing estimates have little e9perience !oing them/

Try to provi!e training an! mentoring

• People have a ias to(ar! un!erestimation/ ;evie( estimates

an! as important ?uestions to mae sure estimates are not

iase!

• Management (ants a numer for a i!- not a real estimate/Project managers must negotiate (ith project sponsors to create

realistic cost estimates

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T l 6 , 8 i ' t ; l t

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Tale 6,/ 8usiness 'ystems ;eplacement

Project Cash 5lo( "nalysis)*+,

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Cost 8u!geting

• Cost u!get involves allocating the project costestimate to in!ivi!ual (or items an! provi!inga cost aseline

• 5or e9ample- in the 8usiness 'ystems

;eplacement project- there (as a total purchase!costs estimate for 5#E of 600-000 an! another1/2 million for Information 'ervices an!Technology

• These amounts (ere allocate! to appropriate u!gets as sho(n in Tale 6$

Tale 6 $ 8usiness 'ystems ;eplacement Project

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Tale 6$/ 8usiness 'ystems ;eplacement Project

8u!get Fstimates for 5#E an! F9planations!udget Category Estimated Costs E3planation

%ea!count

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Cost Control

• Project cost control inclu!es

G monitoring cost performance

G ensuring that only appropriate project changes are

inclu!e! in a revise! cost aseline

G informing project staehol!ers of authoriAe!

changes to the project that (ill affect costs

• Farne! value management is an important tool

for cost control

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Farne! Lalue Management

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5igure 61/ Cost Control Input 5orm for

8usiness 'ystems ;eplacement ProjectWBS#: 6.8.1.2 Description: Design Interface Process -

Customer Information

Revision: Revision Date:

Assignments Forecast

Hours per da !""ort in $ours% &a'cu'ated

Responsi('e: S)& Ro'e: PA Avai'a(i'it: 6 *ptimistic: 20)ost +i,e': 30 -'an

!""ort:/ Hrs

0nvo'ved: Ro'e: Avai'a(i'it: -essimistic: 40

0nvo'ved: Ro'e: Avai'a(i'it: -'anDuration

:

Das

0nvo'ved: Ro'e: Avai'a(i'it: De'a Das%:

Description Assumptions

Resu'ts 2 De'ivera('es Dependencies

-redecessors WBS#%: Successors WBS#%:

4.7

evelop an operational process !esign for the Customer Informationinterface from the Invoicing 'ystem to &racle ;eceiva1les/ This tas (ill

accept as input the 1usinessJfunctional re?uirements !evelope! !uring thetactical analysis phase an! pro!uce as output a physical operational !esign-

(hich provi!es the specifications- re?uire! for co!e !evelopment/

Process esign ocument 6 Technical 6 &perationJPhysical 5

6 Process 'pecifications

6 Interface ata Map

6 "ll 1usiness rules an! issues (ill 1e resolve! prior to this tas/6 The F; S !ata mo!el for &racle ;eceiva1les S any &racle

e9tension re?uire! (ill 1e complete! an! availa1le prior to this tas /6 The F; for the Invoicing 'ystem (ill 1e complete! an! availa1le

prior to this tas/

6 5e( iterations of the revie(Jmo!ify cycle (ill 1e re?uire!/

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Farne! Lalue Management Terms• The planned "alue (086 formerly calle! the u!gete!

cost of (or sche!ule!

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Tale 66/ Farne! Lalue Calculations for

&ne "ctivity "fter 3ee &ne

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Tale 6E/ Farne! Lalue 5ormulas

To estimate (hat it (ill cost to complete a project or ho(

long it (ill tae ase! on performance to !ate- !ivi!e the

u!gete! cost or time y the appropriate in!e9/

; l f Th f FL"

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;ules of Thum for FL"

Rumers

• Regative numers for cost an! sche!ule

variance in!icate prolems in those areas/ The

project is costing more than planne! or taing

longer than planne!• CPI an! 'PI less than 100* in!icate prolems

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5igure 62/ Farne! Lalue Calculations for a&neear Project "fter 5ive Months

F9cel file

5i 6 F ! L l Ch t

http://a/Fig6-2&3.xlshttp://a/Fig6-2&3.xls

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5igure 6/ Farne! Lalue Chart

for Project "fter 5ive Months

F9cel file

.sing 'oft(are to "ssist in Cost

http://a/Fig6-2&3.xlshttp://a/Fig6-2&3.xls

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.sing 'oft(are to "ssist in Cost

Management

• 'prea!sheets are a common tool for resource

planning- cost estimating- cost u!geting- an!

cost control

• Many companies use more sophisticate! an!

centraliAe! financial applications soft(are for

cost information

• Project management soft(are has many costrelate! features

Documents

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