Cost Project: IS 350D: Project Management Information Systems Department

LECTURE 6:
PROJECT
COST
MANAGEMENT
Information Systems Department IS 350D: Project Management

OBJECTIVES
 Discuss the Project Cost Management Processes.
 Understand the processes involved in cost budgeting and

preparing a cost estimate and budget for an
information technology project.
 Discuss different types of cost estimates and methods

for preparing them.
 Understand the benefits of earned value management.
Information Systems Department 2

WHAT IS COST MANAGEMENT?

What is Cost ?
Cost is a resource sacrificed or

foregone to achieve a specific
objective.

What is Cost ?
Cost is Something given up in

exchange.
Costs are usually measured in monetary units like

dollars.

WHAT IS PROJECT COST MANAGEMENT?
Project cost management includes the processes

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

PROJECT COST MANAGEMENT PROCESSES
No Process Name Description Output
1 Planning cost Involves determining the policies, Cost management plan

management procedures, and documentation that
will be used for planning, executing,
and controlling project cost.
2 Estimating Developing an approximation or Activity cost estimate, basis of

costs estimate of the costs of the resources estimate and project
needed to complete a project. document updates
3 Determining Allocating the overall cost estimate to Cost performing baseline,

the budget individual work items to establish a project document updates
baseline for measuring performance.
4 Controlling Controlling changes to the project Work performance

costs budget. measurement, project
document updates
1. Planning Cost
A cost management plan includes:

1. Level of accuracy and units of measure
 Activity cost estimates normally have rounding

guidelines, such as rounding to the nearest $100
 Each unit used in cost measurements, such as labor
hours or days, should be defined.

1. Planning Cost

2. Organizational procedure links
 Refer to the work breakdown structure (WBS) component used
for project cost accounting as the control account (CA).
 Each control account (CA) is often assigned a unique code
that is used in the organization’s accounting system.
 Project teams must understand and use these codes properly.

1. Planning Cost

3. Control thresholds
 Similar to schedule variance, costs often have a
specified amount of variation allowed before
action needs to be taken, such as ±10 percent of the
baseline cost.

1. Planning Cost

4. Rules of performance measurement.
 If the project uses earned value management
(EVM), the cost management plan would define
measurement rules, such as how often actual costs
will be tracked and to what level of detail.

1. Planning Cost

5. Reporting formats
 Describe the format and frequency of cost reports
required for the project.
6. Process descriptions
 Describe how to perform all of the cost management
processes.
2. Estimating Cost
Not the Dilbert way

2. Estimating Cost

2. Estimating Cost
16
2. Estimating Cost

2. Estimating Cost
 Project managers must take cost estimates seriously

if they want to complete projects within budget
constraints.
 It’s important to know the types of cost estimates, how

to prepare cost estimates, and typical problems
associated with IT cost estimates.

2. Estimating Cost
Types of cost estimates:
1. A Rough Order of Magnitude (ROM) estimate
2. A Budgetary estimate
3. A Definitive estimate

2. Estimating Cost
If we have a project with an actual cost of: $130,000
 Rough Order of Magnitude (ROM) estimate = $ 250,000
 Budgetary estimate = $ 133,000
 Definitive estimate = $ 129, 000

2. Estimating Cost
Types of Cost Estimates: 1. A Rough Order of Magnitude (ROM) estimate
1. A Rough Order of Magnitude (ROM) estimate:
 Provides an estimate of what a project will cost.
 Done very early in a project or even before a project
is officially started.

2. Estimating Cost
 Actual costs could be 50% below the ROM

estimate or 100% above.
 For example, the actual cost for a project with a

ROM estimate of $120,500 could range from …..

2. Estimating Cost
1 50% = 50/100 = 0.5

100% = 100/100 = 1
2 0.5 X 120,500 = 60250

1 X 120,500 = 120,500
3 120,500 - 60250 = 60250

120,500 + 120,500 = 241,000
2. Estimating Cost

 Actual costs could be 50% below the ROM estimate or
100% above.
 For example, the actual cost for a project with a ROM

estimate of $120,500 could range from …..
$60,250 to $241,000
2. Estimating Cost
Types of Cost Estimates: 2. Budgetary Estimate
2. A Budgetary estimate:
 Used to allocate money into an organization’s

budget.
 Many organizations develop budgets at least two

years into the future.

2. Estimating Cost
 The actual costs could be 10% less or 25% more
than the budgetary estimate.

budgetary estimate of $120,500 could range
from…

2. Estimating Cost
1 10% = 10/100 = 0.1

25% = 25/100 = 0.25
2 0.1 X 120,500 = 12,050

0.25 X 120,500 = 30,125
3 120,500 - 12,050 = 108,450

120,500 + 30,125 = 150,625
2. Estimating Cost
than the budgetary estimate.

budgetary estimate of $120,500 could range
from…
$108,450 to $150,625
2. Estimating Cost
Types of Cost Estimates: 3. A Definitive Estimate
3. A Definitive estimate:
 Provides an accurate estimate of project costs.
 It used for making many purchasing decisions

for which accurate estimates are required and for
estimating final project costs.

2. Estimating Cost

than the definitive estimate.

definitive estimate of $120,500 could range
from…

2. Estimating Cost
1 5% = 5/100 = 0.05
10% = 10/100 = 0.1
2 0.05 X 120,500 = 6025

0.1 X 120,500 = 12,050
3 120,500 - 6025 = 114,475

120,500 + 12,050 = 132,550
2. Estimating Cost

than the definitive estimate.

definitive estimate of $120,500 could range from…
$ 114,475 to $ 132,550
2. Estimating Cost
Types of Cost Estimates
1. Actual cost for a Rough Order of Magnitude (ROM)

estimate of $120,500
$60,250 to $241,000
2. Actual cost for a Budgetary estimate of $120,500
$108,450 to $150,625
3. Actual cost for a Definitive estimate of $120,500
$114,475 to $132,550
2. Estimating Cost
Types of Cost Estimates

2. Estimating Cost
Basic tools and techniques for cost estimates:
1. Analogous or top-down estimates: use the actual cost of

a previous, similar project as the basis for estimating the
cost of the current project.
2. Bottom-up estimates: involve estimating individual work
items or activities and summing them to get a project total.
3. Parametric modeling: uses project characteristics
(parameters) in a mathematical model to estimate project
costs.
35
2. Estimating Cost
Example of Cost Estimate

2. Estimating Cost
Typical problems with IT Cost Estimates
 Estimates are done too quickly.

 Lack of estimating experience.
 Human beings are biased toward underestimation.
 Management desires accuracy.
37
3. Determining the Budget
Determining the project budget
Involves allocating the project cost

estimate to individual work items
over time.

Inputs required for cost budgeting process:

 The WBS - defines the work items.
 Cost management plan
 Scope baseline
 Activity cost estimates
 Project schedule
 Resource calendars
39
The main goal of the cost budgeting

process is to produce a cost baseline
for measuring project performance and
project funding requirements.

A cost baseline is a time-phased

budget that project managers use
to measure and monitor cost
performance.

Example of Cost Baseline

4. 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.

Project cost control includes:

 Several tools and techniques assist in project cost
control such as Earned Value Management
(EVM).

Earned Value Management
EVM is a project performance

measurement technique that
integrates scope, time, and
cost data.

Given a cost performance baseline, project

manager and their teams can determine how well the
project is meeting scope, time, and cost goals by
entering actual information and then comparing it
to the baseline (original plan plus approved changes).

Earned Value Management (EVM) involves calculating three

values for each activity or summary activity from a project’s WBS:
1. The planned value (PV)
2. The actual cost (AC)
3. The earned value (EV)


Earned Value Management: An Example on Earned Value

The Planned Value (PV) also called the budget, is the portion of
the approved total cost estimate planned to be spent on an
activity during a given period.
Example
Suppose that a project included a summary activity of purchasing
and installing a new Web server. Suppose further that, according
to the plan, it would take one week and cost a total of $10,000 for
the labor hours, hardware, and software. Therefore, the planned
value (PV) for the activity that week is $10,000.

The Actual Cost (AC), is the total of direct and indirect costs
incurred in accomplishing work on an activity during a given
period.
Example
Suppose that it actually took two weeks and cost $20,000 to
purchase and install the new Web server. Assume that $15,000 of
these actual costs were incurred during Week 1 and $5,000 was
incurred during Week 2.

The Earned Value (EV), is an estimate of the value

of the physical work actually completed.
 EV is 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) is 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.
Example
Suppose the server installation was halfway completed by the
end of week 1: the rate of performance would be 50% because
by the end of week 1, the planned schedule reflects that the task
should be 100 percent complete but only 50% of that work has
been completed.

Earned Value Management: Earned Value Formulas


Term Formula
Earned Value (EV) EV = PV X RP
Cost Variance (CV)
Schedule variance (SV)
CV = EV - AC
SV = EV - PV
EV
Cost Performance Index (CPI) CPI = EV ÷ AC Earned Value
Schedule Performance Index (SPI) SPI = EV ÷ PV is the KING

Cost Variance (CV): EV - AC

 If cost variance is a negative number, it
means that performing the work cost more
than planned.
 If cost variance is a positive number,
performing the work cost less than planned.

Schedule Variance (SV): EV - PV

 A negative schedule variance means that it
took longer than planned to perform the
work.
 A positive schedule variance means that the
work took less time than planned to perform.

Cost Performance Index (CPI): EV/AC is the ratio of earned

value to actual cost.
 If CPI equals to 1 or 100%, then the planned

and actual costs are equal.
 If CPI less than 1 or less than 100%, the project
is over budget.
 If CPI greater than 1 or more than 100% , the
project is under budget.
Schedule Performance Index (SPI): EV/PV is the ratio of earned

value to planned value.
 If SPI equals to 1 or 100%, then the project is

on schedule.
 If SPI less than 1 or less than 100%, the
project is behind schedule.
 If SPI greater than 1 or more than 100% , the
project is ahead of schedule.
Earned Value Management: Rules of Thumb for Earned Value Numbers
 The Cost Performance Index (CPI) can be used to

calculate the estimate at completion (EAC), an estimated
cost of completing a project based on performance to date.
 Similarly, the Schedule Performance Index (SPI) can be
used to calculate an estimated time to complete the
project.


Earned Value Management: Example of Earned Value Calculations for One Activity after 5 months
Assume:
 Planned Value (PV) = $ 42,461, Actual Costs (AC) = $48,923
 Rate of performance = 94.204%
 Budget at Completion (BAC) = $100,000
Earned Value Calculation:
EV =
CV =
SV =
CPI =
SPI =
EAC=
Assume:
EV = 0.94204 * 42,461 = 40,000
CV = 40,000 – 48,923 = - 8,923 Cost more than planned
SV = 40,000 – 42,461 = - 2,461 Took longer than planned
CPI = 40,000/48,923 = 81.761% Over budget
SPI = 40,000/42,461 = 94.204% Behind schedule
EAC=100,000/0.81761 = 122,308 Cost $22,308 more
64
Assume:
EV = 0.94204 * 42,461 = 40,000
CV = 40,000 – 48,923 = - 8,923 Cost more than planned
SV = 40,000 – 42,461 = - 2,461 Took longer than planned
CPI = 40,000/48,923 = 81.761% Over budget
SPI = 40,000/42,461 = 94.204% Behind schedule
EAC=100,000/0.81761 = 122,308
Cost $22,308 more 65
Assume:
 Rate of performance = 95%
EV =
CV =
SV =
CPI =
SPI =
EAC=
Assume:
EV = 14,000 * 0.95 = 13,300
CV = 13,300 – 13,000 = 300 Cost Less than planned
SV = 13,300 – 14,000 = -700 Took longer than planned
CPI = 13,300/13,000 = 1.02 Under budget
SPI = 13,300/14,000 = 0.95 Behind schedule
EAC= 100,000/1.02 = 98,039.22 Cost $1,960 less
67
Assume:
EV = 14,000 * 0.95 = 13,300
CV = 13,300 – 13,000 = 300 Cost Less than planned
SV = 13,300 – 14,000 = -700 Took longer than planned
CPI = 13,300/13,000 = 1.02 Under budget
SPI = 13,300/14,000 = 0.95 Behind schedule
EAC= 100,000/1.02 = 98,039.22 Cost $1,960 less
68
Earned Value Management: Earned Value Chart






Planned value (PV), the cumulative planned amounts for all

activities by month. Note that the planned value line extends for
the estimated length of the project and ends at the BAC point.
Actual cost (AC), the cumulative actual amounts for all

activities by month.
Earned value (EV), the cumulative earned value amounts for all
activities by month.


 Budget at completion (BAC), the original total budget for the

project, or $100,000 in this example. The BAC point is plotted
on the chart at the original time estimate of 12 months.
 Estimate at completion (EAC), estimated to be $122,308 in

this example. This number is calculated by taking the BAC, or
$100,000 in this case, and dividing by the CPI, which was
81.761%.

 The EAC point is plotted on the chart at the estimated time to

complete of 12.74 months.
 This number is calculated by taking the original time

estimate, or 12 months in this case, and dividing by the SPI:
which in this example was 94.204%.
𝑶𝒓𝒊𝒈𝒊𝒏𝒂𝒍 𝒕𝒊𝒎𝒆 𝒆𝒔𝒕𝒊𝒎𝒂𝒕𝒆
𝑬𝒔𝒕𝒊𝒎𝒂𝒕𝒆𝒅 𝒕𝒊𝒎𝒆 𝒕𝒐 𝒄𝒐𝒎𝒑𝒍𝒆𝒕𝒆 =
𝑺𝑷𝑰

In Class Activity

REFERENCE
 Schwalbe, K. Information Technology

Project Management (8th Edition).
Chapter 7.

Cost Project: IS 350D: Project Management Information Systems Department

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LECTURE 6:

Information Systems Department IS 350D: Project Management

 Discuss the Project Cost Management Processes.

 Understand the processes involved in cost budgeting and

 Discuss different types of cost estimates and methods

 Understand the benefits of earned value management.

Information Systems Department 2

Information Systems Department 4

Cost is a resource sacrificed or

Information Systems Department 5

Cost is Something given up in

Costs are usually measured in monetary units like

Information Systems Department 6

Project cost management includes the processes

Information Systems Department 7

1 Planning cost Involves determining the policies, Cost management plan

2 Estimating Developing an approximation or Activity cost estimate, basis of

3 Determining Allocating the overall cost estimate to Cost performing baseline,

4 Controlling Controlling changes to the project Work performance

A cost management plan includes:

 Activity cost estimates normally have rounding

Information Systems Department 9

A cost management plan includes:

Information Systems Department 10

A cost management plan includes:

Information Systems Department 11

A cost management plan includes:

Information Systems Department 12

A cost management plan includes:

Not the Dilbert way

Information Systems Department 14

Information Systems Department 15

Information Systems Department 17

 Project managers must take cost estimates seriously

 It’s important to know the types of cost estimates, how

Information Systems Department 18

Types of cost estimates:

1. A Rough Order of Magnitude (ROM) estimate

Information Systems Department 19

If we have a project with an actual cost of: $130,000

 Rough Order of Magnitude (ROM) estimate = $ 250,000

 Budgetary estimate = $ 133,000

 Definitive estimate = $ 129, 000

Information Systems Department 20

Types of Cost Estimates: 1. A Rough Order of Magnitude (ROM) estimate

1. A Rough Order of Magnitude (ROM) estimate:

 Provides an estimate of what a project will cost.

 Done very early in a project or even before a project

Information Systems Department 21

Types of Cost Estimates: 1. A Rough Order of Magnitude (ROM) estimate

1. A Rough Order of Magnitude (ROM) estimate:

 Actual costs could be 50% below the ROM

 For example, the actual cost for a project with a

Information Systems Department 22

Types of Cost Estimates: 1. A Rough Order of Magnitude (ROM) estimate

1 50% = 50/100 = 0.5

2 0.5 X 120,500 = 60250

3 120,500 - 60250 = 60250

Types of Cost Estimates: 1. A Rough Order of Magnitude (ROM) estimate

1. A Rough Order of Magnitude (ROM) estimate:

 For example, the actual cost for a project with a ROM

Types of Cost Estimates: 2. Budgetary Estimate