Project Cost Management

Learning Objectives*Understand the importance of project cost managementExplain basic project cost management principles, concepts, and termsDiscuss different types of cost estimates and methods for preparing themUnderstand the processes involved in cost budgeting and preparing a cost estimate and budget for an information technology projectUnderstand the benefits of earned value management and project portfolio management to assist in cost controlDescribe how project management software can assist in project cost management

The Importance of Project Cost Management*IT projects have a poor track record for meeting budget goalsThe CHAOS studies found the average cost overrun (the additional percentage or dollar amount by which actual costs exceed estimates) ranged from 180 percent in 1994 to 56 percent in 2004; other studies found overruns to be 33-34 percent

What Went Wrong?*The U.S. government, especially the Internal Revenue Service (IRS), continues to provide examples of how not to manage costsA series of project failures by the IRS in the 1990s cost taxpayers more than $50 billion a yearA 2008 Government Accountability Office (GAO) report stated that more than 400 U.S. government agency IT projects, worth an estimated $25 billion, suffer from poor planning and under performanceThe United Kingdoms National Health Service IT modernization program was called the greatest IT disaster in history with an estimated $26 billion overrun

What is Cost and Project Cost Management?*Cost is a resource sacrificed or foregone to achieve a specific objective or something given up in exchangeCosts are usually measured in monetary units like dollarsMany IT project managers show little concern on cost overruns because of following reasonsMany IT project cost estimates are low to begin with or The cost estimates are based on very unclear requirementsPMs think its not their job to estimate costIT projects involve new technology or business process Project cost management includes the processes required to ensure that the project is completed within an approved budget

Project Cost Management Processes*Estimating costsDeveloping an approximation or estimate of the costs of the resources needed to complete a projectOutputs of this process are activity cost estimates and supporting detail, requested changes and updates to the cost management plan.Determining the budgetAllocating the overall cost estimate to individual work items over time to establish a baseline for measuring performanceOutputs of this process are a cost baseline, project funding requirements, requested changes and updates to the cost management plan.Controlling costsControlling costs include monitoring cost performance, ensuring that only appropriate project changes are included in cost revisions and informing stakeholders about authorized changes effecting project costs.Outputs to this process are performance measurements, forecasted completion information and updates to cost management plan, cost estimates and organizations process assets (as lessons learned)

Project Cost Management Summary*

Basic Principles of Cost Management*Most members of an executive board better understand and are more interested in financial terms than IT terms, so IT project managers must speak their languageProfits are revenues minus expendituresProfit margin is the ratio of revenues to profitsLife cycle costing gives you an overview of cost incurred by a project during its lifecycle. It 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. If an organization selects too many projects with high cash flow needs in the same year, the company wont be able to support all its projects and maintain its profitabiliy

Cost of Downtime for IT Applications*Downtime effects direct or indirect loss of revenue

What Went Right?*

Many organizations use IT to reduce operational costsTechnology has decreased the costs associated with processing an ATM transaction:In 1968, the average cost was $5In 1978, the cost went down to $1.50In 1988, the cost was just a nickelIn 1998, it only cost a pennyIn 2008, the cost was just half a penny!

Basic Principles of Cost Management*Tangible costs or benefits are 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 termsDirect 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 projectSunk 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. In other words sunk costs should be forgotten.

Basic Principles of Cost Management*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 producedReserves are dollars included in a cost estimate to mitigate cost risk by allowing for future situations that are difficult to predictContingency reserves allow for future situations that may be partially planned for (sometimes called known unknowns) and are included in the project cost baselineManagement reserves allow for future situations that are unpredictable (sometimes called unknown unknowns)

Estimating Costs*Project managers must take cost estimates seriously if they want to complete projects within budget constraintsAfter developing the activity resource requirements list PMs and project team must develop estimates for cost of these resources. Its important to know the types of cost estimates, how to prepare cost estimates, and typical problems associated with IT cost estimates

Types of Cost Estimates*When conducting ROM estimates for IT projects the accuracy range is often much wider.Budgetary estimate involves allocating money into an organizations budget for the desired project.Definitive estimate should be the most accurate of the three types of estimates.All these estimates must provide supporting details (ground rules, assumptions, project descriptions and estimation tool & techniques)in order to facilitate preparation of updated estimate or similar estimate for another project.

Cost Management Plan*A cost management plan is a document that describes how the organization will manage cost variances on the project The cost management plan should covey information like how to respond to proposals that stand higher or lower than the estimated costs. A large percentage of total project costs are often labor costs, so project managers must develop and track estimates for labor

Maximum Departmental Headcounts by Year for Northwest Airlines Project*

Cost Estimation Tools and Techniques*Analogous or top-down estimatesUse the actual cost of a previous, similar project as the basis for estimating the cost of the current project.Requires a good deal of expert judgment and is less costly than othersIf the project to be estimated for example requires use of new programming language or technology, this technique could result is too low estimateBottom-up estimates:Involve estimating individual work items or activities and summing them to get a project total Using smaller work items increases accuracy of this cost estimate.Drawback Very time consuming and therefore expensive.Parametric modeling Uses project characteristics (parameters) in a mathematical model to estimate project costs Parametric models are most reliable when the historical information that was used to create the models is accurate, the parameters are readily quantifiable and the model is flexible in terms of size of the project.

Typical Problems with IT Cost Estimates*Estimates are done too quicklyLack of estimating experienceHuman beings are biased toward underestimationManagement desires accuracy

Sample Cost Estimate*See pages 265-270 for a detailed example of creating a cost estimate for the Surveyor Pro project described in the opening caseBefore 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 estimateIf possible, estimate costs by major WBS categoriesCreate a cost model to make it easy to make changes to and document the estimate

Surveyor Pro Project Cost Estimate*

Estimating Program Volume (COCOMOII)*One measure of program volume is the number of Source Lines of Code, or SLOCA SLOC is a human written line of code that is not a blank line or commentDo not count the same line more than one time even if the code is included multiple times in an applicationWe typically work with a related number, thousands of SLOC, or KSLOC, when estimatingThe Constructive Cost Model, or COCOMO popularized SLOC as an estimating metric

Estimating Program Volume (COCOMOII)*If you are aware of the number of KSLOC your developers must write, and you know the effort required per KSLOCYou could multiply these two numbers together to arrive at the person months of effort required for your project This concept is the heart of the estimating models

Estimating Program Volume (COCOMOII)**The above table shows some common values that researchers have found for this linear productivity factor

Estimating Program Volume (COCOMOII)*OK, lets apply this approach. Suppose we were going to build an e-commerce system consisting of 15,000 lines of code. How many person months of effort would this take using just this equation?Productivity * KSLOC = 3.08 * 15 = Effort = 46 Person-Months If all of your projects are small, then you can use this basic equation Researchers have found, however, that productivity does vary with project size. In fact, large projects are significantly less productive than small projects The probable causes are a combination of increased coordination and communication time, plus more rework required due to misunderstandings.

Estimating Program Volume (COCOMOII)*This productivity decrease with increasing project size is factored in by raising the number of KSLOC to a number greater than 1.0This exponential factor then penalizes large projects for decreased efficiency. The following table shows some typical size penalty factors for various project types

Estimating Program Volume (COCOMOII)*So, after we do a size penalty adjustment, how many person months of effort would our 15,000 lines of code e-commerce system require? The answer is computed as follows: Productivity * KSLOCPenalty = 3.08 * 15 1.030 = 3.08 * 16.27 = Effort = 50 Person-Months OK, all of this is pretty straightforward. The next logical question is, How do I know my project will end up as 15,000 SLOC?

Estimating Function Points (COCOMOII)*SLOC estimating is to start with function points, then use a process called backfiring to convert from function points to SLOC Function Points were first utilized by IBM as a measure of program volume Function points are a unit measure for software much like an hour is to measuring time, miles are to measuring distance or Celsius is to measuring temperatureThe idea is simple. The programs delivered functionality (and hence, cost) is measured by the number of ways it must interact with the users.

Estimating Function Points (COCOMOII)*To determine the number of Function Points, start by estimating the number of External inputs - are largely your data entry screens. If a screen contains a tabbed notebook or similar metaphor then each tab would count as a separate external input External interface files - are file based inputs or outputs. Each record format within the file, or in the case of XML, each data object type, would count as a separate interface file even if residing in the same physical file External outputs - are your reportsExternal queries - are message or external function based communication into or out of your application Logical internal tables - are the number of tables in the database assuming the database was 3rd normal form or better

Estimating Function Points (COCOMOII)*To convert from these raw values into an actual count of function points, you multiply the raw numbers by a conversion factor from the following table

Estimating Function Points (COCOMOII)*So, if we had a system consisting of 25 data entry screens, 5 interface files, 15 reports, 10 external queries, and 20 logical internal tables, how many function points would we have? (25*4) + (5*7) + (15*5) + (10*4) + (20*10) = 450 FPs

Calculating SLOC (COCOMOII)*The only remaining step is to use backfiring to convert from function points to an equivalent number of SLOC. This can be done using a table of language equivalencies. Some common values are as follows

Calculating SLOC & Effort (COCOMOII)*So, to implement the above project (450 function points) using Java 2 would require approximately the following number of SLOC450 * 46 = 20,700 SLOCAnd would require the following effort to implement, assuming that this was an e-commerce system: Productivity * KSLOCPenalty = 3.08 * 20.7 1.030 = 3.08 * 22.67 = Effort = 70 Person-Months

Surveyor Pro Software Development Estimate*

Determining the Budget*Cost budgeting involves allocating the project cost estimate to individual work items over timeThe WBS is a required input to the cost budgeting process since it defines the work itemsImportant goal is to produce a cost baselineA time-phased budget that project managers use to measure and monitor cost performance Cost budgeting provides information for project funding requirements. Specially for those projects which do not have all funds available when the project starts

Surveyor Pro Project Cost Baseline**Numbers are rounded, so some totals appear to be off.

Controlling Costs*Project cost control includes:Monitoring cost performanceEnsuring that only appropriate project changes are included in a revised cost baselineInforming project stakeholders of authorized changes to the project that will affect costsMany organizations around the globe have problems with cost controlAccording to a report Pakistan has sustained Rs 1.798 billion cost overrun on 66.5 megawatt hydropower project in the Neelum Valley due to massive mismanagement, embezzlement of funds and changes made in the project without the approval of a competent authority.

Earned Value Management (EVM)*EVM is a project performance measurement technique that integrates scope, time, and cost dataGiven a baseline (original plan plus approved changes), you can determine how well the project is meeting its goalsYou must enter actual information periodically to use EVMMore and more organizations around the world are using EVM to help control project costs

Earned Value Management Terms*The 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 periodActual 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 periodThe earned value (EV), formerly called the budgeted cost of work performed (BCWP), is an estimate of the value of the physical work actually completedEV is 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

Example of EVA*A $10,000 software project is scheduled for 4 weeks. At the end of the third week, the project is 50% complete and the actual costs to date is $9,000Planned Value (PV) = $7,500 ($2500 PerWeek)Actual Cost (AC) = $9,000

Earned Value is (PV) * RP = $10000 * 0.5Earned Value (EV) = $5,000

What is the project health?Schedule Variance = EV PV = $5,000 $7,500 = - $2,500Schedule Performance Index (SPI) = EV/PV = $5,000 / $7,500 = .66Cost Variance= EV AC = $5,000 - $9,000 = - $4,000Cost Performance Index (CPI) = EV/AC = $5,000 / $9,000 = .55

Objective metrics indicate the project is behind schedule and over budget. On-target projects have an SPI and CPI of 1 or greater

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Forecasting CostsThe CPI can be used to calculate the estimate at completion (EAC), an estimate 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 projectIf the project continues at the current performance, what is the true cost of the project?

Estimate At Complete = Budget At Complete (BAC) / CPI = $10,000 / .55 = $18,181At the end of the project, the total project costs will be $18,181

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Earned Value ChartThis chart shows EVA values for a 12 months project worth $100,000*

Project Portfolio Management*Many organizations collect and control an entire suite of projects or investments as one set of interrelated activities in a portfolioFive levels for project portfolio managementPut all your projects in one databasePrioritize the projects in your databaseDivide your projects into two or three budgets based on type of investmentAutomate the repositoryApply modern portfolio theory, including risk-return tools that map project risk on a curve

Benefits of Portfolio Management*Schlumberger saved $3 million in one year by organizing 120 information technology projects into a portfolio ROI of implementing portfolio management software by IT departments:Savings of 6.5 percent of the average annual IT budget by the end of year oneImproved annual average project timeliness by 45.2 percentReduced IT management time spent on project status reporting by 43 percent and IT labor capitalization reporting by 55 percentDecreased the time to achieve financial sign-off for new IT projects by 20.4 percent, or 8.4 days

Best Practice*A global survey released by Borland Software in 2006 suggests that many organizations are still at a low level of maturity in terms of how they define project goals, allocate resources, and measure overall success of their information technology portfolios; some of the findings include the following:Only 22 percent of survey respondents reported that their organization either effectively or very effectively uses a project plan for managing projectsOnly 17 percent have either rigorous or very rigorous processes for project plans, which include developing a baseline and estimating schedule, cost, and business impact of projectsOnly 20 percent agreed their organizations monitor portfolio progress and coordinate across inter-dependent projects

Using Software to Assist in Cost Management*Spreadsheets are a common tool for resource planning, cost estimating, cost budgeting, and cost controlMany companies use more sophisticated and centralized financial applications software for cost informationProject management software has many cost-related features, especially enterprise PM softwarePortfolio management software can help reduce costs

Chapter Summary*Project cost management is a traditionally weak area of IT projects, and project managers must work to improve their ability to deliver projects within approved budgetsMain processes include:Estimate costsDetermine the budgetControl costs

Assignment#1 Part2For the project proposed in the Part1 of this assignmentDevelop the initial version of project scope statement Develop the WBS for the project. Break down the work to at-least level 2Develop a Gantt chart for the project with milestones and also mark the task dependencies.The assignment is due on 12 Nov 2013

Note: Please use the format for each of these elements as proposed in the course text book under Chapter3 and Chapter5. *

Quiz # 2 Develop a AOA network diagram for following data. Calculate the critical path? What is the shortest time to complete the project?

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ActivityInitial NodeFinal NodeTask DurationA122B232C243D254E362F463G576H682I675J781K892

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