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Information Technology and Project Management
Information Technology and Project Management
Information Technology and Project Management
PROJECT COST
MANAGEMENT
1 Lecture Material 6
THE IMPORTANCE OF PROJECT
COST MANAGEMENT
IT projects have a poor track record for meeting
budget goals
The CHAOS studies found the average cost
overrun (the additional percentage or dollar
amount by which actual costs exceed estimates)
ranged from 180 percent in 1994 to 43 percent in
2002; other studies found overruns to be 33-34
percent
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WHAT IS COST?
Cost is a resource sacrificed to achieve a specific
objective
Costs are usually measured in monetary units like
dollars
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BASIC PRINCIPLES OF COST
MANAGEMENT
Most members of an executive board better
understand and are more interested in financial
terms than IT terms, so IT project managers must
speak their language (Business language!)
Profits are revenues minus expenditures
Profit margin is the ratio of revenues to profits
Cash flow analysis determines the estimated annual
costs and benefits for a project and the resulting annual
cash flow
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TABLE 7-1: COST OF SOFTWARE DEFECTS
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WHAT IS PROJECT COST
MANAGEMENT?
Project cost management includes the processes
required to ensure that the project is completed
within an approved budget
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PROJECT COST MANAGEMENT
PROCESSES
Cost estimating: developing an approximation or
estimate of the costs of the resources needed to
complete a project
Cost budgeting: allocating the overall cost
estimate to individual work items to establish a
baseline for measuring performance
Cost control: controlling changes to the project
budget
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PROCESS 1: COST
ESTIMATING
One of the main outputs of project cost
management is a cost estimate.
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
The three basic types of estimates include the
following: Rough Order of Magnitude (ROM)
estimate or guesstimate, Budgetary estimate,
and Definitive estimate 14
COST ESTIMATING
ROM estimate
Many IT professionals and project managers automatically
double estimates for software development because of the
history of cost overruns on IT projects
Budgetary (cost itemized) estimate
Is used to allocate money into an organization’s budget.
Definitive (most reliable) estimate
Provides an accurate estimate of project costs. Definitive
estimates are used for making many purchasing decisions for
which accurate estimates are required and for estimating final
project costs. For example, if a project involves purchasing
1000 PCs from an outside supplier in the next three months, a
definitive estimate would be required to aid in evaluating
supplier proposals and allocating the funds to pay the chosen
supplier.
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TABLE 7-2: TYPES OF COST ESTIMATES
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TABLE 7-3: MAXIMUM DEPARTMENTAL
HEADCOUNTS BY YEAR (NORTHWEST
AIRLINES)
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SAMPLE COST ESTIMATION USING
PARAMETRIC MODELING
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TYPICAL PROBLEMS WITH IT COST
ESTIMATES
Estimates are done too quickly and before clear system
requirements have been produced.
Lack of estimating experience, especially for larger
projects.
Human beings are biased toward underestimation. For
example, senior IT professionals and project managers
might make estimates based on their own abilities and
forget that many junior people will be working on a
project. Therefore, the low budgets given to the project
will cause bias view of the project by team members.
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TYPICAL PROBLEMS WITH IT COST
ESTIMATES
Management might ask for an estimate but really
desire a more accurate (or shorter) number in
reality. It is important for project managers to help
develop good cost and schedule estimates and to
use their leadership and negotiation skills to stand
by those estimates despite facing conflicts.
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SAMPLE COST ESTIMATE
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
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FIGURE 7-2: SURVEYOR PRO PROJECT COST
ESTIMATE
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FIGURE 7-4: SURVEYOR PRO PROJECT
COST BASELINE
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*Numbers are rounded, so some totals appear to be off.
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COST CONTROL
People often perform better when they know they
must report on their progress.
An important tool for cost control is performance
measurement.
Although many general accounting approaches
are available for measuring cost performance,
Earned Value Management (EVM) is a very
powerful cost control technique that is unique to
the field of project management.
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EARNED VALUE MANAGEMENT
TERMS
The planned value (PV), is that portion of the
approved total cost estimate planned to be spent
on an activity during a given period
Actual cost (AC), is the total of direct (and
indirect) costs incurred in accomplishing work on
an activity during a given period
The earned value (EV), is an estimate of the
value of the physical work actually completed to
date
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RATE OF PERFORMANCE
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
For 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% complete and only 50% of
that work has been completed
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TABLE 7-4 EARNED VALUE CALCULATIONS
FOR ONE ACTIVITY AFTER WEEK ONE
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USING SOFTWARE TO ASSIST IN
COST MANAGEMENT
Spreadsheets are a common tool for resource
planning, cost estimating, cost budgeting, and cost
control
Many companies use more sophisticated and
centralized financial applications software for cost
information
Project management software has many cost-
related features, especially enterprise PM software
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