Chapters 9 - 12

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232 Terms

1
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positive NPV

means that return from a project exceeds the cost capital and the return available from investing the capital elsewhere.

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Discount rate

the interest rate used to discount cash flows 

  • It takes into account not just the time value of money but also the risk or uncertainty of future cash flows 

  • The greater the uncertainty of future cash flows, the higher the discount rate. 

  • It is also called the capitalization rate or the opportunity cost of capital.

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NPV calculations

Determine estimated costs and benefits for the life of the project and the products it produces.

  • Determine the discount rate

  • Calculate the net present value

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Return on investment

a metric used to measure the profitability of an investment relative to its cost.

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ROI Formula

___= (Total discounted benefits - total discounted costs)/discounted costs

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Payback period

Is the amount of time it will take to recoup, in the form of net cash inflows, the total dollars invested in a project

  • Determines how much time will elapse before accrued benefits overtake accrued and continuing costs

  • Occurs when the net cumulative discounted benefits equals the costs

  • Many organizations have requirements for the length of the payback period of an investment

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Cost overrun

is the additional percentage or dollar amount by which actual costs exceed estimates

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Cost

a resource sacrificed or foregone to achieve a specific objective or something given up in exchange 

  • Usually measured in monetary units like dollars that must be paid to acquire goods and services

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Project cost management

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

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Project cost management includes

  • Planning cost management

  • Estimating costs

  • Determining the budget

  • Controlling costs

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Planning cost management

Determining the policies, procedures, and documentation that will be used for planning, executing and controlling project cost

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Estimating costs

the process of forecasting the financial and other resources needed to complete a project within a defined scope

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Determining the budget

Allocating the overall cost estimate to individual work items to establish a baseline for measuring performance

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Controlling costs

Controlling changes to the project budget

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Basic principle of Cost management

Most members of an executive board better understand and are more interested in financial terms than IT terms.

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The terms executive members use to present and discuss project information

  • Profits

  • Profit margin

  • Life cycle costing

  • Cash flow analysis

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Profits

Revenues minus expenditures

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Profit margin

Ratio of profits to revenues

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Life cycle costing

Considers total cost of ownership, or development plus support costs, for a project

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Cash flow analysis

Determines estimated annual costs and benefits for a project and resulting annual cash flow

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Tangible costs or benefits

are those costs or benefits that an organization can easily measure in dollars

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Intangible costs or benefits

are costs or benefits that are difficult to measure in monetary terms

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Direct costs

are costs that can be directly related to producing the products and services of the project.

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Indirect costs

are costs that are not directly related to the products or services of the project, but are indirectly related to performing the project.

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Sunk cost

cost is money, time, or effort that has already been spent and cannot be recovered.

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Types of costs and benefits

  • Tangible

  • Intangible

  • Direct

  • Indirect

  • Sunk

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Learning curve theory

When many items are produced repetitively, the unit cost of those items decrease in a regular pattern as more units are produced.

  • Help estimate costs on project that involve the production of large quantities of items

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Reserves

are dollars included in a cost estimate to mitigate cost risk by allowing for future situations that are difficult to predict.

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Types of Reserves

  • Contingency

  • Management

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Contingency reserves

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

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Management reserves

allow for future situations that are unpredictable (sometimes called unknown unknowns)

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Cost management plan includes

  • Level of accuracy

  • Units of measurement

  • Organizational procedure links

  • Control thresholds

  • Rules of performance measurement

  • Reporting formats

  • Process descriptions

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Level of accuracy

rounding guidelines, guidelines for the amount of contingency funds to include

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Units of measurement

each unit used in cost measurement, e.g. labor hours days, should be defined

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Organizational procedure links

work breakdown structure (WBS) component used for project cost accounting as the control account (CA)

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Control thresholds

a specific amount of variation allowed before action needs to be taken, e.g. 10 percent of the baseline cost.

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Rules of performance measurement

cost measurement  rules, e.g. how often actual cost will be tracked and to what level of detail

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Reporting formats

format and frequency of the cost report required for the project 

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Process descriptions

describe how to perform all of the cost management processes

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Estimating costs

the number and type of cost estimates vary by application area

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Types of cost estimates for construction projects

  • Order of magnitude

  • Conceptual

  • Preliminary

  • Definitive

  • Control

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Cost estimation tools and techniques

  • Analogous or top-down estimates

  • Bottom-up estimates

  • Three-point estimates

  • Parametric estimating

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Analogous or top-down estimates

Use the actual cost of a previous, similar projects as the basis for estimating the cost of the current projects

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Bottom-up estimates

involve estimating individual work items or activities and summing them to get a project total

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Three-point estimates

involve estimating the most likely, optimistic, and pessimistic costs for items 

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Parametric estimating

Uses project characteristics (parameter) in a mathematical model to estimate project 

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Reason for Cost estimate Inaccuracies

  • Estimates are done too quickly 

    • Estimates are done at various stages of the project, and project managers need to explain the rationale for each estimate

  • People lack estimating experience 

    • Enabling IT people to receive training and monitoring on cost estimating will also improve cost estimates.

  • Human being are biased toward underestimation 

    • E.g. senior IT professional make estimate for younger people, and extra costs needed or integration and testing on large IT projects

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Software development estimate approaches

  • Labor Estimate

  • Function point estimate

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Labor estimate

the supplier who developed the proof of concept project will provide the ___ estimate input

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Function points

are a means of measuring software size based on what software does for end users

  • Composed of inputs, outputs, inquiries, internal and external interface data. It is most commonly used software size metric, followed by lines of code

  • Local Technical experts will make this estimate

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User stories

are common ways to describe requirements in a simple, concise way. 

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Internal logical files (ILFs)

a group of logically related data that resides entirely within the application boundary and is maintained through external inputs.

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Budgeting

involves allocating the project cost estimate to individual work items over time

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Cost baseline

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

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Activities involved in controlling project costs

  • 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

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Earned value management 

Project performance measurement technique that integrates scope, time and cost data

  • Given a baseline (original plan plus approved changes)

  • Determine how well the project is meeting scope, time and cost goals

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Three Earned value management Values

  • Planned Value (PV)

  • Actual cost (AC)

  • Earned Value (EV)

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Planned Value (PV)

Authorized budget assigned to scheduled work

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Actual cost (AC)

Realized cost incurred for the work performed on an activity during a specific time period

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Earned value (EV)

Measure of work performed expressed in terms of the budget authorized for that work

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Cost Variance Equation

is the earned value minus the actual cost:

  • ___ = EV - AC

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Schedule Variance Equation

is the earned value minus the planned value

  • ___ = EV - PV

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Cost Performance Index Equation

is the ratio of earned value to actual cost

  • CPI = EV/AC

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Project quality management

ensures the project will satisfy the needs for which it was undertaken

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Project quality management processes

  • Planning quality management

  • Managing quality

  • Controlling quality

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Planning quality management

identifying which quality standards are relevant to the project and how to satisfy them; a metric is a standard of measurement

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Managing quality

translating the quality management plan into executable quality activities

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Controlling quality

monitoring specific project results to ensure they comply with the relevant quality standards

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Defect prevention methods

  • Selecting proper materials

  • Training and indoctrinating people in quality

  • Planning a process that ensures the appropriate outcome

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Scope aspects of IT projects

  • Functionality

  • Features

  • System outputs

  • Performance Addresses

  • Reliability

  • Maintainability

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Functionality

degree to which a system performs its intended function

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Features

system’s special characteristics that appeal to users

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System outputs

screens and reports the system generates

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Performance

addresses how well a product or service performs the customer’s intended use

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Reliability

ability of a product or service to perform as expected under normal conditions

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Maintainability

ease of performing maintenance on a product

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Kaizen

is the Japanese word for improvement or change for the better

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Lean

involves evaluating processes to maximize customer value while minimizing waste

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Benchmarking

generates ideas for quality improvements by comparing specific project practices or product characteristics to those of other projects or products within or outside the performing organization

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Quality audit

is a structured review of specific quality management activities that help identify lessons learned and that could improve performance on current or future projects

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Five Kanban Properties

  1. Visual workflow

  2. Limit work-in-process

  3. Measure and manage flow

  4. Make process policies explicit

  5. Use models to recognize improvement opportunities

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Acceptance decisions

Determine if the products or services produced as part of the project will be accepted or rejected

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Rework

Action taken to bring rejected items into compliance with product requirements, specifications, or other stakeholder expectations.

  • Result from recommended defect repair or corrective or preventive actions

  • Result in requested changes and validated defect repair

  • Very expensive: project manager must strive to do a good job of quality planning and quality assurance to avoid this need.

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Process adjustments

  • Correct or prevent further quality problems based on quality control measurements

  • Result in updates to organization process assets and the project management plan

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Cause-and-effect diagrams

  • Trace complaints about quality problems back to the responsible production operations

  • Help find the root cause of a problem

  • Also known as fishbone or Ishikawa diagrams, named after their creator, Kaoru Ishikawa.

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Control chart

Graphic display of data that illustrates the results of a process over time.

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When a process is in control

any variations in the results of the process are created by random events.

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When a process is out of control

variations in the results of the process are caused by nonrandom events

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Seven run rule

If seven data points in a row are all below the mean or above the mean, or are all increasing or decreasing, then the process needs to be examined for nonrandom problems.

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Checksheet

  • Used to collect and analyze data

  • It is sometimes called a tally sheet or checklist, depending on its format.

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Scatter diagram

  • Help to show if there is a relationship between two variables

  • The closer data points are to a diagonal line, the more closely the two variables are related.

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Histogram

  • Bar graph of a distribution of variables.

  • Each bar represents an attribute or characteristic of a problem or situation

  • The height of the bar represents its frequency.

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Pareto chart

  • Histogram that helps identify and prioritize problem areas.

  • The variables described by the histogram are ordered by frequency of occurrence.

  • Help identify the vital few contributors that account for most quality problems in a system.

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Pareto analysis

  • Referred to as the 80-20 rule

  • 80 percent of problems are often due to 20 percent of the causes.

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Flowcharts

  • Graphic displays of the logic and flow of processes

  • Help analyze how problems occur and how processes can be improved.

  • Show activities, decision points, and the order of how information is processed.

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Run chart

  • Display the history and pattern of variation of a process over time.

  • A line chart that shows data points plotted in the order of occurrence.

  • Perform trend analysis and forecast future outcomes based on historical results.

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Statistical Sampling

  • Choosing part of a population of interest for inspection

    • Size of a sample depends on how representative you want the sample to be

    • Sample size formula • Sample size = 0.25 x (certainty factor/acceptable error)2

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Standard deviation

  • Measure how much variation exists in a distribution of data

  • A key factor in determining the acceptable number of defective units found in a population

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Stages of software testing

  • Unit testing

  • Integration testing

  • System testing

  • User acceptance testing

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Unit testing

Each individual component (often a program) to ensure it is as defect-free as possible