CH7 - Project Cost Management

True

IT projects have a poor track record for meeting budgets goals

Cost Overrun

the additional percentage or dollar amount by which actual costs exceed estimantes

overages

black swans

What Went Wrong

• The United Kingdom’s National Health Service IT modernization program was called the greatest IT disaster in history with an estimated 26 billion dollars overrun

• The program had problems due to incompatible systems, resistance from physicians, and arguments among contractors about who’s responsible for what

• It was finally scrapped in 2011

Cost

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

• usually measured in monetary units like dollars

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

Project Cost Management Processes

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

Profits

revenues minus expenditures

Profit Margin

the ratio of revenues to profits

Life Cycle Costing

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

Cash Flow Analysis

determines the estimated annual costs and benefits for a project and the resulting annual cash flow

True

You cannot measure ROI unless you have a benefits measurement process in place

What Went Right

• Investing in green IT and other initiatives has helped both the environment and companies’ bottom lines

• Michael Dell, CEO of Dell, reached his goal to make his company carbon neutral in 2008

• As of March 2012, Dell had helped its customers save almost 7 billion dollars in energy costs

• In 2014, Dell reported being on track toward reaching their goal of recovering 2 billion pounds of used electronics by 2020

Tangible costs or benefits

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

Intangible costs or benefits

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

Direct costs

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

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

Sunk Cost

is money that has been spent in the past; when deciding what projects to invest in or continue, you should not include sunk costs

Learning Curve Theory

states that when many items are produced repetitively, the unit cost of those items decreases in a regular pattern as more units are produced

Reserves

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

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)

• Level of accuracy and units of measure

• Organizational procedure links

• Control thresholds

• Rules of performance measurement

• Reporting formats

• Process descriptions

Cost management plan includes

• Rough Order of Magnitude (ROM)

• Budgetary

• Definitive

Type of Estimate

Rough Order of Magnitude (ROM)

When done: Very early in the project life cycle, often 3-5 years before project completion

Why done: Provides estimate of cost for selection decisions

How accurate: -50% to +100%

Budgetary

When done: Early; 1-2 years out

Why done: Puts dollars in the budget plans

How accurate: -10% to +25%

Definitive

When done: Later in the project, less than 1 year out

Why done: Provides details for purchases, estimates actual costs

How accurate: -5% to +10%

• Order of Magnitude

• Conceptual

• Preliminary

• Definitive

• Control

Five Types of Cost Estimates for Construction Projects

Estimates

are usually done at various stages of a project and should become more accurate as time progresses

Labor Costs

A large percentage of total project costs are often

• Analogous or Top-Down Estimates

• Bottom-Up Estimates

• Parametric Modeling

Basic Tools and Techniques for Cost Estimates

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

Parametric Modeling

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

• Estimates are done too quickly

• People lack estimating experience

• Human beings are biased toward underestimation

• Management desires accuracy

Typical Problems with IT Cost Estimates

• 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

• Create a cost model to make it easy to make changes to and document the estimate

Sample Cost Estimate

Best Practice

• Alvin Alexander wrote a book called Cost Estimating in an Agile Development Environment in 2015

• Function points are a means of measuring software size in terms that are meaningful to end users

• User stories are a common way to describe requirements in a simple, concise way

• Developers can analyze user stories to estimate

• function points and person-hours

Function points

are a means of measuring software size in terms that are meaningful to end users

User stories

a common way to describe requirements in a simple, concise way

True

Developers can analyze user stories to estimate function points and person-hours

Cost Budgeting

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

WBS

required input to the cost budgeting process since it defines the work items

Cost Baseline

• important goal is to produce

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

• 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

Earned Value Management (EVM)

a project performance measurement technique that integrates scope, time, and cost data

baseline

original plan plus approved changes

True

Given a baseline, you can determine how well the project is meeting its goals

True

You must enter actual information periodically to use EVM

Planned Value (PV)

formerly called the budgeted cost of work scheduled (BCWS), also called the budget, is that portion of the approved total cost estimate planned to be spent on an activity during a given period

Actual Cost (AC)

formerly called actual cost of work performed (ACWP), is the total of direct and indirect costs incurred in accomplishing work on an activity during a given period

Earned Value (EV)

• formerly called the budgeted cost of work performed (BCWP), is an estimate of the project value of the physical work actually completed

• 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)

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

Rules of Thumb for Earned Value Numbers

• Negative numbers for cost and schedule variance indicate problems in those areas

• CPI and SPI less than 100% indicate problems

• Problems mean the project is costing more than planned (over budget) or taking longer than planned (behind schedule)

• The CPI can be used to calculate estimate at completion (EAC) of what it will cost to complete the project based on performance to date. The budget at completion (BAC) is the original total budget for the project

Problems

mean the project is costing more than planned (over budget) or taking longer than planned (behind schedule)

CPI

can be used to calculate the estimate at completion (EAC)

Estimate at Completion (EAC)

an estimate of what it will cost to complete the project based on performance to date

Budget at Completion (BAC)

the original total budget for the project

Global Issues

• EVM is used worldwide, and it is particularly popular in the Middle East, South Asia, Canada, and Europe

• Most countries require EVM for large defense or government projects

• EVM is also used in such private-industry sectors as IT, construction, energy, and manufacturing.

• However, most private companies have not yet applied EVM to their projects because management does not require it, feeling it is too complex and not cost effective

True

Many organizations collect and control an entire suite of projects or investments as one set of interrelated activities in a portfolio

1. Put all your projects in one database

2. Prioritize the projects in your database

3. Divide your projects into two or three budgets based on type of investment

4. Automate the repository

5. Apply modern portfolio theory, including risk-return tools that map project risk on a curve

Five Levels for Project Portfolio Management

Benefits of Portfolio Management

• Schlumberger saved $3 million in one year by organizing 120 information technology projects into a portfolio

• Reduced redundant projects and coordinated those with overlap

• IT projects can be huge investments, so it makes sense to view them as portfolios and track their progress as a whole

Spreadsheets

are a common tool for resource planning, cost estimating, cost budgeting, and cost control

True

Many companies use more sophisticated and centralized financial applications software for cost information

True

Project management software has many cost-related features, especially enterprise PM software

True

Portfolio management software can help reduce costs

Recent Studies on PPM Software

• 2014 Gartner report says the market continues to grow, with annual sales over $1.65 billion in 2014 report. The pace of change is driving the demand for enterprise software to help manage projects

• Forrester estimates ROIs of 250 percent from PPM tools

• Pfizer and Ford use PPM software to improve transparency of the many projects they manage