ITPM - Chapter 7 Project Cost Management

CATEGORIES OF PROJECT COST

Cost is 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

Labor - Cost of resources working on the project - Depends on the quantity and the unit rate

Software – Subscription or one-time cost - Depends on the units consumed such as # of users, transactions

Hardware – Subscription or one-time cost - Depends on the capacity or # of transactions

Expenses – Actual cost for travel, team events etc

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

RELATIONSHIP WITH SCOPE AND SCHEDULE

• Scope drives cost

• Schedule compressions increase cost

• Delays also increase cosT

TYPICAL PROBLEMS WITH IT COST ESTIMATES

• Estimates are done too quickly

• People lack estimating experience

• Human beings are biased toward

• underestimation

• Management desires accuracy

• Optimism bias + pressure from leadership = bad estimates

KEY FINANCIAL TERMS FOR IT PROJECTS

• Life cycle costing

• Cash flow analysis

Life cycle costing

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

Cash flow analysis

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

TYPES OF COST AND BENEFITS

• Tangible Costs or Benefits

• Intangible Costs or Benefits

• Direct Costs

• Indirect Costs

Tangible Costs or Benefits

Costs or benefits that an organization can easily measure in dollars ie. Cost Savings due to the project

Intangible Costs or Benefits

Costs or benefits that are difficult to measure in monetary terms ie. Better employee engagement

Direct Costs

Costs that can be directly related to producing the products and services of the project ie. Labor cost

Indirect Costs

Costs that are not directly related to the products or services of the project, but are indirectly related to performing the project ie. Rent of the office space used by the project teaM

SUNK COST

• Scenario

Imagine your IT company has been working on developing a new software

application. So far, you’ve invested $500,000 into the project, which includes costs

for software development, testing, and licensing fees. During the testing phase, you

discover that the software has significant flaws that will require another $300,000

to fix.

• Dilemma

You realize that competitors have launched better software products at a lower

price. Continuing the project as planned will require even more investment and may not succeed in the market.

• Decision

At this point, the $500,000 already spent is a sunk cost. It’s money that has already

been invested, and regardless of what you do next, you cannot recover it

RESERVES

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

• Contingency reserves

• Management reserves

Contingency reserves

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

Management reserves

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

WHAT IS PROJECT COST MANAGEMENT?

Project cost management includes the processes required to ensure that the project is completed within an approved budget.

• Planning cost management

• Estimating costs

• Determining the budget

• Controlling costs

Planning cost management

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

Estimating costs

developing an approximation or estimate of the costs of the resources needed to complete a project

Determining the budget

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

Controlling costs

controlling changes to the project budget

ESTIMATES: TYPES OF ESTIMATES

COST ESTIMATION TOOLS & TECHNIQUES

• Analogous or top-down estimates

• Bottom-up estimates

• Three-point estimates

• Parametric estimating

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

Bottom-up estimates

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

Three-point estimates

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

Parametric estimating

Uses project characteristics (parameters) in a mathematical model to estimate project costs

EXAMPLE OF A COST ESTIMATE

ESTIMATING LABOR COSTS - TOP DOWN ESTIMATE

Calculate the total cost of a project cost based on a project for four months on full-time basis.

• Role

• Efforts

• Cost Rate

Role

Resource role working on the project

Efforts

Measured in terms of Hrs. or FTEs (Full-time Equivalent)

• Top-Down Estimate: Derived based on a full- time or part-time resource for duration of time

• 1 PM for four months with an assumption of 160 Hrs per month = 640 Hrs

Cost Rate

What it costs for 1 hr of a role

• Cost includes salary + burden (other costs such as retirement benefit, health insurance, etc.)

• Cost per role is standardized across the organization

• You can have different cost rates for junior vs. senior PM

ESTIMATING LABOR COST - BOTTOMS UP ESTIMATE

Calculate the total cost for a developer working on a project.

• Hourly Rate: The developer's hourly rate is $50

• Activities: Coding and Defect Resolution

• Work Schedule: 40 hours per week

• Duration

  • Coding - 100% for 3 weeks

  • Defect Resolution - 50% for 1 week

• Calculation:

  • The formula to calculate the total cost C = {hourly rate} {hours per week {number of weeks}

• By plugging in the values: C = (50 40 3) + (50*20*1) = $7,000

You got this tennn <3!

GROUP ACTIVITY: ESTIMATING PROJECT LABOR COST

Scenario - You are estimating labor cost for a 4-month software implementation project. The following team members will work on the project. Assume 160 hours per month for a full-time resource.

• The project team includes:

  • Project Manager — $100/hour, working 50% allocation,

  • Developer 1 — $50/hour, working 100% allocation

  • Developer 2 — $50/hour, working 75% allocation

  • QA Tester — $40/hour, working 50% allocation

• Task - Estimate the total labor cost for the project. Calculate the total hours each role will work over 4 months Multiply hours by the hourly rate

  (Add the costs to determine the total project labor cost)

ESTIMATING SOFTWARE COSTS

License cost (Subscription)

Based on number of users or transactions (pay for usage)

• 0 to 50 users - $300 per month per user.

• 0 to 100,000 transactions per months - $10,000 per month

Implementation Cost

Either ‘time and material’ or ‘firmed fixed’ cost

• $500,000 for firmed fixed cost for a defined scope

• $400,00 for time and material contract based on defined scope

  • Cost rate of $100/Hr for PM

  • Cost rate of $50/Hr for Develop

ESTIMATING HARDWARE COSTS

Hardware Cost

• Based on the services that you use (cloud based)

• Based on the hardware procured (Installation based)

ESTIMATING EXPENSES

• Travel Expenses

• Food and Meal Expenses

• Rentals

Travel Expenses

Costs associated with transportation, accommodation, and incidental expenses for project-related travel

Food and Meal Expenses

Expenditures for meals and catering for team members during travel or extended work sessions

Rentals

Fees for leasing equipment, facilities, or vehicles necessary for project execution

DETERMINING THE BUDGET

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

• Material resources or work items are based on the activities in the WBS

for the project

Important goal is to produce a cost baseline

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

EXAMPLE OF A COST ESTIMATE

BUDGET ESTIMATE

CONTROLLING COSTS

What are the ways to control cost?

Activities involved in controlling project costs

• Periodic monitoring cost performance

• Ensuring that only appropriate project changes are included

• Informing project stakeholders of authorized changes to the project that will affect cost

EARNED VALUE MANAGEMENT (EVM)

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

• Given a baseline (original plan plus approved changes), you can determine how well the project is meeting scope, time, and cost goals

Earned value management involves calculating three values for each activity or summary activity from a project’s WBS

• Planned value

• Actual cost

• Earned value

EARNED VALUE EXAMPLE

EVM DEFINITIONS

VARIANCE ANAL YSIS

COST AND SCHEDULE INDEX

EARNED VALUE: GRAPHICAL ANALYSIS