4374 ITPM an integrated approach Chapter 08 Cost and Risk Student

Project Execution Overview

• Focus on key aspects of project cost management and risk management in IT projects.

Chapter 8: Project Execution

• Organizations mentioned: Intel Corp and BMC Software.

• Emphasis on project cost management and risk management.

Learning Objectives

• Understand the importance of project cost management.

• Explain project cost management principles, concepts, and terms.

• Describe planning cost management processes.

• Discuss various types of cost estimates and preparation methods.

• Understand budget determination and cost estimate preparation for IT projects.

• Discuss earned value management and portfolio management benefits.

Importance of Project Cost Management

• IT projects often exceed budget limits.

• Historical overruns: 180% (1994), 43% (2010), and 27% (2011).

• Focus on "black swans" or unforeseen large overruns.

Cost Definitions and Project Cost Management

• Cost: Resource sacrificed for specific objectives; measured in monetary terms.

• Project Cost Management: Processes to ensure completion within approved budget.

Project Cost Management Processes

1. Planning Cost Management: Develop policies, procedures, and documentation.

2. Estimating Costs: Approximation of necessary resource costs.

3. Determining Budget: Allocating estimates to individual work items.

4. Controlling Costs: Managing changes to project budget.

Basic Principles of Cost Management

• Financial Terms: Important for communications with executives, including profit, profit margin, and life cycle costing.

• Cash Flow Analysis: Evaluation of annual costs and benefits.

Types and Costs of IT Applications

• Costs vary by application type (e.g., securities trading, ERP, order processing).

• Cost per minute examples:

  • Securities Trading: $73,000

  • ERP: $14,800

  • Order Processing: $13,300

Types of Costs and Benefits

• Tangible Costs/Benefits: Easily measurable in dollar terms.

• Intangible Costs/Benefits: Difficult to quantify financially.

• Direct Costs: Directly related to project production.

• Indirect Costs: Not directly related but necessary for project completion.

• Sunk Costs: Past expenditures irrelevant for future project decisions.

Cost Estimation Principles

• Learning Curve Theory: Cost per unit decreases with repetitive production.

• Reserves: Dollars set aside for unknown future costs (contingency and management reserves).

Estimating Costs

• Importance of serious cost estimation to avoid budget overruns.

• Various types of cost estimates include:

  • Rough Order of Magnitude (ROM): Early estimates (-50% to +100%).

  • Budgetary: Mid-project estimates (-10% to +25%).

  • Definitive: Final detailed estimates (-5% to +10%).

Determining the Budget

• Allocating overall cost estimate by individual work items to create a baseline.

Controlling Costs

• Ongoing monitoring of cost performance and managing budget revisions.

Earned Value Management (EVM)

• A technique integrating scope, time, and cost data.

• Key terms:

  • Planned Value (PV): Budgeted costs for scheduled work.

  • Actual Cost (AC): Total costs incurred.

  • Earned Value (EV): Value of completed work.

Common Issues with EVM

• Negative performance indicators reflect overspending and delays.

• EVM widely used but still complicated for many.

Software and Tools in Cost Management

• Spreadsheets and specialized software help with cost estimating and budgeting.

• Benefits of organizing projects into portfolios illustrated by Schlumberger's savings on IT projects.

Conclusion: Project Cost & Risk Management

• Emphasize the integral role of effective cost management in successful IT projects.

• Key processes include planning, estimating costs, determining budgets, and controlling costs.