Chapter 6: Project cost management. This chapter describes important concepts in project cost management, particularly planning cost management, creating good estimates, and using earned value management (EVM) to assist in cost control.
Chapter 6: Project Cost Management adopted from PMI’s PMBOK 2000 and Textbook : Information Technology Project Management (author : Dr. Kathy Schwalbe) Contents • Importance of Project Cost Management – Problem: cost overrun and cannot meet cost goals – Costs are measured in monetary units • Project Cost Management – Resource planning, Cost estimating, Cost budgeting, Cost control • Resource Planning consideration – difficulty, uniqueness, track record, people, equipment and materials • Types of cost estimate • basic tools and techniques • Earned value management is an important tool for cost control The Importance of Project Cost Management • 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 Chapter 6 Typical allocation of cost What is Cost and Project Cost Management? • 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 • This is the process group to ensure the project is completed within the approved budget. – The major output is the cost management plan – There are 4 processes in Project Cost Management Chapter 6 Project Cost Management Processes • Resource planning (planning phase) – determining what resources and quantities of them should be used • Cost estimating (planning phase) – developing an estimate of the costs and resources needed to complete a project • Cost budgeting (planning phase) – allocating the overall cost estimate to individual work items to establish a baseline for measuring performance • Cost control (control phase) – controlling changes to the project budget Chapter 6 Basic Principles of Cost Management • Most CEOs and boards know a lot more about finance than IT, IT project managers must speak their language – 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 Chapter 6 Cost of Software Defects When Defect is Detected User Requirements Coding/Unit Testing System Testing Acceptance Testing After Implementation Typical Cost of Correction $100$1,000 $1,000 or more $7,000 $8,000 $1,000 $100,000 Up to millions of dollars It is important to spend money upfront on IT projects to avoid spending a lot more later Chapter 6 Resource Planning • 8th of 21 planning phase process • The nature of the project and the organization will affect resource planning • Some questions to consider: – 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? Inputs to Resource Planning • WBS – identifies the project elements that require resources • Historical information – identifies required resourced used in similar work on previous project • Scope statement – contains the project justification and the project objectives • Resource pool description – identifies available project resources • Organizational policies – may impact some of the project management decision. These are constraints, such as staffing, rentals, and purchasing supplies and equipment • Activities duration estimates – the best estimates of the time that it will take to perform the work – It is the output of Time Management Process: Activity Duration 10 Estimating Cost Control • 5th of 8 controlling phase process • Project cost control include – 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 • During this process, project manager try to determine what facts impact, cost, how these factors can be influenced, whether these changes are beneficial to the project or product. • Earned value management (EVM) is an important tool for cost control Chapter 6 25 Inputs to Cost Control • Cost baseline – includes a timephased budget used to measure and monitor cost performance on the project – The cost baseline is usually shown as costbyperiod and can be charted in the form of an Scurve • Performance reports – provide information on cost performance, such as which budgets have been met and which have not • Change requests – take many forms: oral or written, direct or indirect, external or internally initiated, and legally mandated or optional • Cost management plan – describes managing cost variances 26 Tools & techniques • Cost change control system – defines the procedures by which the cost baseline may be changed – It includes the paperwork, tracking systems, and approval levels necessary for authorizing changes • Performance measurement techniques – help to assess the magnitude or any variation that do occur. – Earned value analysis is especially useful for cost control • Earned value management (EVM) is the tools commonly used to determine variance causes and deciding if the variance requires corrective action • Additional planning – prospective changes may require new or revised cost estimates or analysis of alternative approaches • Other general computerized tools – project management software or spreadsheets that track planned versus actual costs or that forecast the effects of cost changes 27 Earned Value Management (EVM) • 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. • The following shows a sample form for collecting information Chapter 6 28 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 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 • The earned value (EV), formerly called the budgeted cost of work performed (BCWP), is the percentage of work actually completed multiplied by the planned value Chapter 6 29 Earned Value Calculations for One Activity After Week One 30 Earned Value Formulas To estimate what it will cost to complete a project or how long it will take based on performance to date, divide the budgeted cost or time by the appropriate index Chapter 6 31 Rules of Thumb for EVA Numbers • Negative numbers for cost variance (CV) and schedule variance (SV) indicate problems in those areas. – The project is costing more than planned – The project is taking longer than planned • CPI and SPI less than 100% indicate problems – The % of the project is over budget in cost – The % of the project is behind schedule in time Chapter 6 32 Earned Value Calculations for a OneYear Project After Five Months Excel file 33 Earned Value Chart for Project After Five Months Excel file 34 Using Software to Assist in Cost Management • 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 costrelated features Chapter 6 35 Outputs from Cost Control • Revised cost estimates – update of the project cost estimates • Budget updates – changes to an approval cost baseline. The numbers are generally revised only in response to scope changes – Cost variance may be so severe that rebaselining is needed in order to provide a realistic measure of performance • Corrective action – anything done to bring expected future project performance into line with the project plan 36 Outputs from Cost Control (2) • Estimate at completion (EAC) – A forecast of total project costs based on project performance. The most common variations are • actual cost to date plus the remaining project budget modified by a performance factor • actual costs to date plus a new estimate for all remaining works • actual cost to date plus the remaining budget • Project closeout – processes and procedures for closing or canceling the project • Lessons learned 37 – document the causes of variances, reasons behind the corrective action chosen, and other lessons learned Summary • Importance of Project Cost Management – Problem: cost overrun and cannot meet cost goals – Costs are measured in monetary units • Project Cost Management • – 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 Resource Planning consideration – difficulty, uniqueness, track record, people, equipment and materials 38 Summary (2) • Types of cost estimate – ROM, Budgetary and definitive • Basic tools and techniques in cost estimation – topdown, bottomup, parametric: Cocomo • Cost budget involves allocating the project cost estimate to individual work items and providing a cost baseline • Project cost control includes – 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 39 ... Importance of Project Cost Management – Problem: cost overrun and cannot meet cost goals – Costs are measured in monetary units • Project Cost Management – Resource planning, Cost estimating, Cost budgeting, ... improved to 45% in the 2001 study • In 1995, cancelled IT projects cost the U.S. over $81 billion Chapter 6 Typical allocation of cost What is Cost and Project Cost Management? • Cost is a resource sacrificed or foregone to ... There are 4 processes in Project Cost Management Chapter 6 Project Cost Management Processes • Resource planning (planning phase) – determining what resources and quantities of them should be used • Cost estimating (planning phase)