Chapter 6 Project Cost Management Learning Objectives n

Chapter 6: Project Cost Management

Learning Objectives n n n n Understand the importance of good project cost management Explain basic cost management principles, concepts, and terms Describe the resource planning, cost estimating, cost budgeting, and cost control processes Explain the different types of cost estimates Understand what is involved in preparing a cost estimate for an IT project Perform calculations for earned value management Understand the benefits of using earned value management Describe how software can assist in project cost management 2020/9/17 2

Chapter Outline n n n n 6. 1 The Importance of Project Cost Management 6. 2 Basic Principles of Cost Management 6. 3 Resource Planning 6. 4 Cost Estimating 6. 5 Cost Budgeting 6. 6 Cost Control 6. 7 Using Software to Assist in Cost Management 2020/9/17 3

6. 1 The Importance of Project Cost Management

The Importance n n n IT projects have a poor track record for meeting cost goals Average cost overrun from 1995 CHAOS study was 189% of the original estimates; improved to 45% in the 2001 study In 1995, cancelled IT projects cost the U. S. over $81 billion 2020/9/17 5

Cost and Project Cost Management n n n Cost is a resource sacrificed or foregone to achieve a specific objective or something given up in exchange Costs are 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 2020/9/17 6

Project Cost Management Processes n n Resource planning: determining what resources and quantities of them should be used Cost estimating: developing an estimate of the costs and 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 2020/9/17 7

Cost Concepts n n n Variable cost & Fixed cost Direct cost & Indirect cost Tangible & Intangible cost or benefits Opportunity cost Learning Curves 2020/9/17 8

6. 2 Basic Principles of Cost Management

Basic Principles of Cost Management n Most CEOs and boards know a lot more about finance than IT, IT project managers must speak their language n n n 2020/9/17 Profits are revenues minus expenses Life cycle costing is estimating the cost of a project over its entire life Cash flow analysis is determining the estimated annual costs and benefits for a project Benefits and costs can be tangible or intangible, direct or indirect Sunk cost should not be a criteria in project selection 10

Cost of Software Defects It is important to spend money up-front on IT projects to avoid spending a lot more later. 2020/9/17 11

6. 3 Resource Planning

Resource Planning n n The nature of the project and the organization will affect resource planning Some questions to consider: n n How difficult will it be to do specific tasks on the project? Is there anything unique in this project’s scope statement that will affect resources? What is the organization’s history in doing similar tasks? Does the organization have or can they acquire the people, equipment, and materials that are capable and available for performing the work? 2020/9/17 13

6. 4 Cost Estimating

Cost Estimating n An important output of project cost management is a cost estimate n There are several types of cost estimates and tools and techniques to help create them 2020/9/17 15

The inputs of cost estimates n n n n WBS--determine deliverables & activities , require resources Resource requirement Resource rates Activity duration estimates Historical information Risk Network diagram 2020/9/17 17

Types of Cost Estimates Type of estimates 估算类型 Accuracy Other Expressions 精确度 其他说法 When done Rough order of magnitude estimates 量级估计 -25—— 75% Ball-park estimates 发生在概念形成与启动阶段 (棒球场估计) 用于可行性研究决策 Feasibility estimates 是一种自上而下的估算方法 Budgetary estimates -10—— 25% Top-down estimates 通常发生在计划编制阶段 Analogy estimates( 是一种自上而下的估算方法 类比估计) Definitive estimates 确定性估计 -5—— 10% 2020/9/17 Detailed estimates WBS estimates Engineering estimates 在计划编制阶段 用WBS进行的自下而上估算 最精确的估计 18

Cost Estimation Tools and Techniques n 3 basic tools and techniques for cost estimates: n n n analogous or top-down: use the actual cost of a previous, similar project as the basis for the new estimate bottom-up: estimate individual work items and sum them to get a total estimate parametric: use project characteristics in a mathematical model to estimate costs 2020/9/17 19

Constructive Cost Model (COCOMO) n n Barry Boehm helped develop the COCOMO models for estimating software development costs Parameters include source lines of code or function points COCOMO II is a computerized model available on the web Boehm suggest that only parametric models do not suffer from the limits of human decision-making 2020/9/17 20

Typical Problems with IT Cost Estimates n n Developing an estimate for a large software project is a complex task requiring a significant amount of effort. Remember that estimates are done at various stages of the project Many people doing estimates have little experience doing them. Try to provide training and mentoring People have a bias toward underestimation. Review estimates and ask important questions to make sure estimates are not biased Management wants a number for a bid, not a real estimate. Project managers must negotiate with project sponsors to create realistic cost estimates 2020/9/17 21

Business Systems Replacement Project Cost Estimate Overview 2020/9/17 22

Business Systems Replacement Project Cash Flow Analysis 2020/9/17 23

6. 5 Cost Budgeting

Cost Budgeting n n n Cost budget involves allocating the project cost estimate to individual work items and providing a cost baseline For example, in the Business Systems Replacement project, there was a total purchased costs estimate for FY 97 of $600, 000 and another $1. 2 million for Information Services and Technology These amounts were allocated to appropriate budgets as shown in the following table 2020/9/17 25

Business Systems Replacement Project Budget Estimates for FY 97 and Explanations 2020/9/17 26

6. 6 Cost Control

Cost Control n Project cost control includes n n 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 Earned value management is an important tool for cost control 2020/9/17 28

Earned Value Management (EVM) n n n EVM is a 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 its goals You must enter actual information periodically to use EVM. Following figure shows a sample form for collecting information 2020/9/17 29

Cost Control Input Form for Business Systems Replacement Project 2020/9/17 30

EVM Terms n n n Planned value (PV)-how much work “SHOULD BE DONE”? BCWS(1996), 应该完成多少 作? , 计 划值 Actual cost (AC), how much did the “IS DONE WORK” cost? , ACWP(1996), 完成 作的成本是多 少? , 完成 作实际成本 Earned value (EV), how much work “IS DONE” on a budgeted cost? , BCWP(1996), 完成 作的 预算成本? , 挣值 BAC, budget at completion, 完 预算 EAC, estimate at completion, 完 估算 ETC, estimate to completion, 完 尚需估算 2020/9/17 31

Earned Value Calculations for One Activity After Week One 2020/9/17 32

Earned Value Formulas* §Estimate at completion (EAC) 完 估算=PV(BAC)/CPI *注意: 所有 基本指标计 算以EV为基 础, 与其比较 §Estimate to complete(ETC)完 尚需估算=EAC-AC §Estimated time to complete完 期估算=project plan time/SPI 2020/9/17 33

Rules of Thumb for EVM Numbers n n Negative numbers for cost and schedule variance indicate problems in those areas. The project is costing more than planned or taking longer than planned CPI and SPI less than 100% indicate problems 2020/9/17 34

Earned Value Calculations for a One. Year Project After Five Months 2020/9/17 35

Earned Value Chart for Project After Five Months 2020/9/17 36

6. 7 Using Software to Assist in Cost Management

Using Software to Assist in Cost Management n n n 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 2020/9/17 38

Quick Quiz Suppose you sell 10 widgets per day on average, and the average cost per widget is $10. If you sold 11 widgets one day, what would the affect on profits be? What is another name for earned value? n n ANSWER: There is not enough information to answer this question. You are given costs and asked to estimate profits. You do not know what the average profit is per widget. You might lose money by selling more widgets. n n ANSWER: BCWP or budgeted cost of work performed 2020/9/17 39

Assignment for chapter 6 n n Create a cost estimate for your web site project Given the following information for a oneyear project(PV = $23000, EV = $20000, AC = $25000, BAC = $120, 000) n n What is the cost variance, schedule variance, cost performance index (CPI), and schedule performance index (SPI) for the project? How is the project doing? Is it ahead of schedule or behind schedule? Is it under budget or over budget? Use the CPI to calculate the estimate at completion (EAC) for this project. Is the project performing better or worse than planned? Use the schedule performance index (SPI) to estimate how long it will take to finish this project? 2020/9/17 40