1. Cost Management Week 6-7 Learning Objectives
You should be able to:
Describe cost management processes and their inputs, outputs, activities, and tools
Distinguish between cost estimation and cost control
Apply a function point approach to cost estimating a business information system
List and define cost drivers used in COCOMO II to estimate software development effort
List the requirements of a Cost Control System

2. Cost Estimation Difficulties
Cost overruns occur because original estimates inaccurate
Bias toward underestimating
Cost = accounting, not IT
Lack of experience, knowledge in cost management
Requires significant effort for large complex software
Frequent changes in technology?
Not a common cause of cost difficulties

3. Cost Management Basics
Profits = revenues - expenses
focus on impact on profits
Profit margin = profits / revenues
Life cycle costing
total cost of ownership
development, plus maintenance and support
cost of software defect increases over time

4. Cash Flow Analysis Estimated annual costs and benefits
Internal Rate of Return (IRR)
discount rate that sets NPV to 0
Tangible and intangible costs and benefits
tangible easier to measure and justify
Direct costs - PM has more control
Indirect costs - overhead, admin
Sunk costs - should NOT be considered
Learning curve theory - like economy of scale
Reserves: contingency, management

5. 4 Cost Management Processes
Resource Planning
resources, quantities
Cost Estimation
software cost estimation
Budgeting
cost allocation
Cost Control
controlling changes

6. (1) Resource Planning
determining the resources & quantities needed to perform project activities
people, equipment, materials
Difficulty of tasks
Experience and skills of available workers
Inputs: WBS, scope, resource pool, org. policy
Tools:
expert judgment (internal, external), historical data
Outputs: resource requirements
staff acquisition, procurement may be needed

7. (2) Cost Estimation Developing estimates of resource costs
how much will it cost the performing organization
Differs from pricing
Identifying alternatives and trade-offs
ROM (rough order of magnitude)
Budgetary (more accurate)
Definitive (most accurate)

8. Cost Estimation Inputs
WBS
Resource needs
Resource rates
Activity duration estimates
Data
previous projects
commercial databases
team expertise and experience
Chart of accounts
performing organization’s financial reporting

9. Cost Estimation Outputs
Cost estimates
quantitative estimates of costs of resources
dollars or staff-hours/days
may be refined during project execution
Supporting detail
scope of work estimated
basis for estimate and assumptions
range of possible results
Cost management plan
how variances will be managed

10. Cost Estimating Tools Analogous Bottom-up Parametric
top-down
use previous, similar project(s)
expert judgment
Bottom-up
costing individual work items
takes more time
Parametric
uses project characteristics (parameters)
based on reliable, accurate, quantifiable data
Cost estimation software tools

11. Software Cost Estimation Metrics
Lines of Code (LOC)
Function Points
Core Measures
Level of Effort (time)
Labor cost: training, contract, travel, overhead
Defects: pre- and post-implementation
Duration
New system vs. enhanced system vs. GUI (graphical user interface)

12. Common Software Metrics
Size: of deliverables (programs)
Effort: number of people X number of months
Duration: number of months
Development cost: labor cost of effort
Productivity: size / effort
Responsiveness: size / duration
Quality: defects / size
Business: cost / size

13. Software Estimating Models
Estimate = Size * Complexity * Influencers
COCOMO II +
modifies initial effort estimate
Constructive Cost Model
cost drivers / effort multipliers / factors
product, platform, personnel, project
depends on LOC, more recently added FP’s
Software: CoStar, CostXpert, others
COCOMO Process Maturity
integrated with CMM

14. Cost Factors (Drivers) General System Characteristics
Data communication
Distributed Data Processing
Performance
Heavily Used Configuration
Transaction Rate
On-line data entry
End-user efficiency
On-line update
Complex Processing
Reusability
Installation ease
Operational ease
Multiple sites
Facilitate change

15. Estimation issues How to measure size:
LOC (lines of code), function points, classes?
Hard to estimate before developing specs
Lack of experience
Lack of historical data
Depends on size, complexity, number of programmers, productivity, team, tools, ...
Brooks’ Law:
adding more programmers to a late project makes it later

16. (3) Budgeting Process Allocating overall cost to individual work items
Inputs: cost estimates, WBS, schedule
Outputs: Cost baseline
Software measurement baselines
collect, analyze, & calibrate data
used to monitor progress
systems/application and delivery baselines
may be segmented by:
technology, platform, application, industry

17. Software Project Effort / Budget allocation
Workflows
Management 10%
Environment 10%
Requirements 10%
Design 15%
Implementation 25%
Assessment 25%
Deployment 5%

18. Software Development Phases: Effort and Schedule Distribution

19. (4) Cost Control Process
Monitoring, analyzing, acting on cost data
Influence factors that change cost baseline
Ensure changes are beneficial and recorded accurately
Detect baseline changes and variance from plan
Manage changes
Inform stakeholders of authorized changes

20. Cost Control Inputs Cost baseline Performance reports Change requests
Cost management plan

21. Cost Control Outputs Revised cost estimates Budget updates
changes to approved baseline
revised in response to scope changes
Corrective actions
Estimate at Completion (EAC)
forecast of total project costs
actuals plus variations on remaining budget
Lessons Learned
causes of variances, why corrective actions, etc.

22. Cost Control Tools Cost change control system Performance measurement
definition of procedures, approvals for change
Performance measurement
identify variances, magnitude, causes
Earned Value Analysis (EVA)
Software
tracks planned vs. actual costs
projects or forecasts effects of changes

23. Earned Value Analysis (EVA)
Integrates scope, time, and cost data
Compares actuals to baseline
Baseline: original plan plus approved changes
Actuals: how much of a WBS item has been completed
BCWP - budgeted cost of work performed
ACWP - actual cost of work performed
BCWS - budgeted cost of work scheduled

24. Performance Measures CV (cost variance)
= BCWP - ACWP (budgeted cost - actual cost)
SV (schedule variance)
= BCWP - BCWS
(cost of work performed -cost of work scheduled)
CPI (cost performance index)
= BCWP / ACWP
SPI (schedule performance index)
= BCWP / BCWS
used to re-estimate time to completion

25. Applying EVA to IT projects
Estimates keep changing (budgeted)
Simplified evaluation of percent complete for tasks can still provide useful tracking information