1. Information Technology Project Management, Seventh Edition Note: See the text itself for full citations.

2. Learning Objectives Understand the importance of project cost management Explain basic project cost management principles, concepts, and terms Discuss different types of cost estimates and methods for preparing them Understand the processes involved in cost budgeting and preparing a cost estimate and budget for a project Understand the benefits of earned value management in cost control

3. Costs are usually measured in monetary units like dollars

4. Project cost management includes the processes required to ensure that the project is completed within an approved budget

5. 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 language Profits are revenues minus expenditures Profit margin is 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

6. 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 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

7. Learning curve theory When many items are produced repetitively, the unit cost of those items decreases in a regular pattern as more units are produced.

8. 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)

9. Table 7-1. Cost of Downtime for IT Applications Source: The Standish Group International, “Trends in IT Value,” www.standishgroup.com (2008).

10. 10 PROJECT MANAGEMENT KNOWLEDGE AREAS INTEGATION MANAGEMENT SCOPE MANAGEMENT TIME MANAGEMENT COST MANAGEMENT QUALITY MANAGEMENT RISK MANAGEMENT HUMAN RESOURCES MANAGEMENT COMMUNICATIONS MANAGEMENT PROCUREMENT MANAGEMENT STAKEHOLDERS MANAGEMENT

11. 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 Project Cost Management Processes PROJECT MANAGEMENT KNOWLEDGE AREAS COST MANAGEMENT

12. Figure 7-1. Project Cost Management Summary PROJECT MANAGEMENT KNOWLEDGE AREAS COST MANAGEMENT

13. PROJECT MANAGEMENT KNOWLEDGE AREAS COST MANAGEMENT

14. PROJECT MANAGEMENT KNOWLEDGE AREAS COST MANAGEMENT 7.1 Plan Cost Management The project team uses expert judgment, analytical techniques, and meetings to develop the cost management plan determining the policies, procedures, and documentation that will be used for planning, executing, and controlling project cost.

15. PROJECT MANAGEMENT KNOWLEDGE AREAS COST MANAGEMENT 7.2 Estimate Costs Project managers must take cost estimates seriously if they want to complete projects within budget constraints It’s important to know the types of cost estimates, how to prepare cost estimates, and typical problems associated with IT cost estimates developing an approximation or estimate of the costs of the resources needed to complete a project

16. PROJECT MANAGEMENT KNOWLEDGE AREAS COST MANAGEMENT 7.2 Estimate Costs Table 7-2. Types of Cost Estimates Based on the resource requirements People, skills, hours, equipment, etc

17. PROJECT MANAGEMENT KNOWLEDGE AREAS COST MANAGEMENT 7.2 Estimate Costs More on Cost Estimates Estimates are usually done at various stages of a project and should become more accurate as time progresses A large percentage of total project costs are often labor costs

18. PROJECT MANAGEMENT KNOWLEDGE AREAS COST MANAGEMENT 7.2 Estimate Costs 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 Cost Estimation Tools and Techniques

19. Typical Problems with Cost Estimates Estimates are done too quickly Lack of estimating experience Human beings are biased toward underestimation Management desires accuracy PROJECT MANAGEMENT KNOWLEDGE AREAS COST MANAGEMENT 7.2 Estimate Costs

20. PROJECT MANAGEMENT KNOWLEDGE AREAS COST MANAGEMENT 7.2 Estimate Costs Figure 7-2. Surveyor Pro Project Cost Estimate

21. PROJECT MANAGEMENT KNOWLEDGE AREAS COST MANAGEMENT 7.3 Determine Budget allocating the overall cost estimate to individual work items to establish a baseline for measuring performance  Cost budgeting involves allocating the project cost estimate to individual work items over time  The WBS is a required input to the cost budgeting process since it defines the work items  Important goal is to produce a cost baseline ◦ a time-phased budget that project managers use to measure and monitor cost performance

22. PROJECT MANAGEMENT KNOWLEDGE AREAS COST MANAGEMENT 7.3 Determine Budget Figure 7-4. Surveyor Pro Project Cost Baseline

23. PROJECT MANAGEMENT KNOWLEDGE AREAS COST MANAGEMENT 7.4 Control Costs PLANNINGEXECUTING CLOSING INITIATING Monitors the status of the project to update the project costs and manages changes to the cost baseline.

24. PROJECT MANAGEMENT KNOWLEDGE AREAS COST MANAGEMENT 7.4 Control Costs Project cost control includes: ◦ Monitor cost performance - Comparing “budgeted” and “actual” ◦ Determine the appropriate project changes to be included in a revised cost baseline ◦ Inform project stakeholders of authorized changes to the project that will affect costs

25. 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 More and more organizations around the world are using EVM to help control project costs

26. Planned Value (PV) Budgeted Cost of Work Scheduled (BCWS) Planned cost of the total amount of work scheduled to be performed Earned Value (EU) Budgeted Cost of Work Performed (BCWP) The planned (not actual) cost to complete the work that has been done Earned Value Management Terms Actual Cost (AC) Actual Cost of Work Performed (ACWP) Cost incurred to accomplish the work that has been done to date

27. Example 1 - Assume a small four-week project is budgeted for $10,000. - While reporting status during the third week, the project manager determines his team has only completed 50 percent of the work. - Based on the project schedule, the team was supposed to complete 75 percent of the work during the third week. - The project manager also noticed they've spend $9,000 to date on the project. What is the overall health of the project?

28. Example 1 - In this example, the Planned Value (PV) is $7,500. Based on the project schedule, the team should have been 75 percent complete. The PV can be calculated by multiplying the planned percent complete by the project budget. (During the Third Week) PV = Planned % Complete * Project Budget = 75% * $10,000 = $7,500 - The Earned Value (EV) is determined by multiplying the actual percent complete by the project budget. The EV determines that amount of value that has been delivered to the project to date. EV = Actual % Complete * Project Budget = 50% * $10,000 = $5,000 - Finally, the Actual Costs (AC) to deliver 50 percent of the project were $9,000. The AC is calculated by tracking the actual spend against the project budget. AC = $9,000

29. Example 1 - By applying these calculations, we can determine Cost and Schedule Variances. The Cost Variance (CV) measures the difference between the actual costs of work performed to the project budget. The Schedule Variance (SV) is a measure of the actual progress to the project schedule. These variances are described by two simple equations. CV = EV – AC SV = EV – PV The CV for this project is $5,000 - $9,000 = - $4,000. The SV for this project is $5,000 - $7,500 = - $2,500. - When reviewing CV and SV, the project manager wants the variances to be zero or greater. Positive (+) variances indicate a cost savings or schedule efficiency. In this example, the project has negative cost and schedule variances.

30. Example 1 - In this example, the project has negative CV and SV. - By reviewing these calculations, the project manager can quickly determine that the project had spent 90 percent of its budget only to only complete 50 percent of the work. - The project is behind schedule and will be over budget at the end of the project. - The project manager will likely need to reduce scope, extend the project schedule or obtain more funding to deliver the Project.

31. Example 1

32. - In the project example, the CPI is 0.55 and the SPI is 0.66. - Both numbers are less than 1 and the project schedule and budget need to be examined. - If the project continues at this rate, it will cost the company at total of $18,181 to complete a project that was originally budgeted for $10,000. - To calculate the Estimate At Completion (EAC), divide the original budget by the cost performance index. EAC = BAC/CPI = $10,000/0.55 = $18,181

33. Example 2 What is PV, AC and EV on day X? Planned Value (budgeted cost until this point) PV = 18 + 10 + (20*0.8) + (40*0.15) = 18 + 10 + 16 + 6 = $50 Earned Value (actual cost of the work performed) EV = 18 + (10*0.8) + (20*0.7) + 0 = 18 + 8 + 14 + 0 = $40 Actual Cost (actual cost spent until this point) AC = $45 (Data from the accounting system, not evident from the above chart)

34. Example 3

35. Earned Value Chart for Project after Five Months

36. Chapter Summary