Chapter7:

ProjectCostManagementChapter7:

ProjectCostManagementTheImportanceofProjectCostManagementBasicPrinciplesofCostManagementPlanningCostManagementEstimatingCostDeterminingtheBudgetControlling

CostUsingSoftwaretoAssistinCostManagement3TheImportanceofProjectCostManagementITprojectshaveapoortrackrecordinmeetingbudgetgoals.TheCHAOSstudiesfoundtheaveragecostoverrun(theadditionalpercentageordollaramountbywhichactualcostsexceedestimates)rangedfrom180percentin1994to43percentin2010A2011HarvardBusinessReviewstudyreportedanaveragecostoverrunof27percent.Themostimportantfindingwasthediscoveryofalargenumberofgiganticoveragesor“blackswans”4WhatisCost?Costisaresourcesacrificedorforegonetoachieveaspecificobjective,orsomethinggivenupinexchange.Thereasonsofcostoverrun:TheoriginalcostestimatesforITprojectsarelowtobeginwithorbasedonveryunclearprojectrequirementsNotemphasizingtheimportanceofrealisticprojectcostestimatesfromtheoutset.Manyinformationtechnologyprofessionalsthinkpreparingcostestimatesissjobofaccountants.Preparinggoodcostestimatesisaverydemanding,importantskillthatallinformationtechnologyprofessionalsneedtoacquire.Manyinformationtechnologyprojectsinvolvenewtechnologyorbusinessprocesses.Costgrowandfailurearetobeexpected?Wrong.Usinggoodprojectcostmanagementcanchangethisfalseperception.5WhatisProjectCostManagement?Projectcostmanagementincludestheprocessesrequiredtoensurethattheprojectiscompletedwithinanapprovedbudget.Itisprojectmanager’sjobtosatisfyprojectstakeholderswhilecontinuouslystrivingtoreduceandcontrolcosts.6ProjectCostManagementProcessesPlanningcostmanagement:determiningthepolicies,procedures,anddocumentationthatwillbeusedforplanning,executing,andcontrollingprojectcost.Estimatingcost:Developinganapproximationorestimateofthecostsoftheresourcesneededtocompleteaproject.Determiningthebudget:Allocatingtheoverallcostestimatetoindividualworkitemstoestablishabaselineformeasuringperformance.Costcontrol:Controllingchangestotheprojectbudget.7ProjectcostmanagementsummaryChapter7:

ProjectCostManagementTheImportanceofProjectCostManagementBasicPrinciplesofCostManagementPlanningCostManagementEstimatingCostDeterminingtheBudgetControlling

CostUsingSoftwaretoAssistinCostManagement9BasicPrinciplesofCostManagementMostmembersofanexecutiveboardhaveabetterunderstandingandaremoreinterestedinfinancialtermsthanITterms,soITprojectmanagersmustspeaktheirlanguage.Profits/Profitmargin

LifecyclecostingCashflowanalysisTangiblecostsorbenefitsIntangiblecostsorbenefitsDirectcostsIndirectcostsSunkcostLearningcurvetheoryReservesContingencyreserves(sometimescalledknownunknowns)Managementreserves(sometimescalledunknownunknowns).Chapter7:

ProjectCostManagementTheImportanceofProjectCostManagementBasicPrinciplesofCostManagementPlanningCostManagementEstimatingCostDeterminingtheBudgetControlling

CostUsingSoftwaretoAssistinCostManagement11PlanningCostManagementTheprojectteamusesexpertjudgment,analyticaltechniques,andmeetingstodevelopthecostmanagementplanAcostmanagementplanincludes:LevelofaccuracyandunitsofmeasureOrganizationalprocedurelinksControlthresholdsRulesofperformancemeasurementReportingformatsProcessdescriptionsChapter7:

ProjectCostManagementTheImportanceofProjectCostManagementBasicPrinciplesofCostManagementPlanningCostManagementEstimatingCostDeterminingtheBudgetControlling

CostUsingSoftwaretoAssistinCostManagement13CostEstimatingProjectmanagersmusttakecostestimatesseriouslyiftheywanttocompleteprojectswithinbudgetconstraints.It’simportanttoknowthetypesofcostestimates,howtopreparecostestimates,andtypicalproblemsassociatedwithITcostestimates.14TypesofCostEstimates15MoreonCostEstimatingAfterdevelopingagoodresourcerequirementslist,projectmanagerandtheirteammustdevelopseveralestimatesofthecostsfortheseresources.Thenumberandtypeofcostestimatesvarybyapplicationarea,themainpointisthatestimatesareusuallydoneatvariousstagesofaprojectandshouldbecomemoreaccurateastimeprogresses.ForITprojectestimates,thisaccuracyrangeisoftenmuchwider.Inadditiontocreatingcostestimates,itisalsoimportanttoprovidesupportingdetailsfortheestimates.Thesedetailsshouldmakeiteasiertoprepareanupdatedestimateorsimilarestimateasneeded.GroundrulesandassumptionsAdescriptionoftheproject(scopestatement,WBS,andsoon)usedDetailsonthecostestimationtoolsandtechniquesusedtocreatetheestimate.16CostManagementPlanAcostmanagementplanisadocumentthatdescribeshowtheorganizationwillmanagecostvariancesontheproject.Alargepercentageoftotalprojectcostsareoftenlaborcosts,soprojectmanagersmustdevelopandtrackestimatesforlabor.17CostEstimationToolsandTechniquesAnalogousortop-downestimates:

Usetheactualcostofaprevious,similarprojectasthebasisforestimatingthecostofthecurrentproject.Bottom-upestimates:AlsocalledActivityBasedCosting,involveestimatingindividualworkitemsoractivitiesandsummingthemtogetaprojecttotal.Parametricmodeling:

Usesprojectcharacteristics(parameters)inamathematicalmodeltoestimateprojectcosts.Functionpoints:Technology-independentassessmentsofthefunctionsinvolvedindevelopingasystem.SourceLinesofCode(SLOC):Ahuman-writtenlineofcodethatisnotablanklineorcomment.Computerizedtools:

Tools,suchasspreadsheetsandprojectmanagementsoftware,thatcanmakeworkingwithdifferentcostestimatesandcostestimationtoolseasier.18TypicalProblemswithITCostEstimatesDevelopinganestimateforalargesoftwareprojectisacomplextaskthatrequiresasignificantamountofeffort.Manyestimatemustbedonequicklyandbeforesystemrequirementshavebeenproduced.Estimatearedoneatvariousstagesoftheproject,andprojectmanagerneedtoexplaintherationaleforeachestimate.Peoplewhodevelopestimatesoftendonothavemuchexperience.Humanbeingsarebiasedtowardunderestimation.Managementmightaskforanestimate,butreallydesireabidtowinamajorcontractorgetinternalfunding.19SampleCostEstimateBeforecreatinganestimate,knowwhatitwillbeusedfor,gatherasmuchinformationabouttheprojectaspossibleClarifythegroundrulesandassumptionsfortheestimate.Ifpossible,estimatecostsbymajorWBScategories.Createacostmodeltomakeiteasytochangeanddocumenttheestimate.20SurveyorProProjectCostEstimate21SurveyorProSoftware

DevelopmentEstimateChapter7:

ProjectCostManagementTheImportanceofProjectCostManagementBasicPrinciplesofCostManagementPlanningCostManagementEstimatingCostDeterminingtheBudgetControlling

CostUsingSoftwaretoAssistinCostManagement23DeterminingtheBudgetDeterminingtheBudgetinvolvesallocatingtheprojectcostestimatetoindividualworkitemsovertime.Importantgoalistoproduceacostbaseline:Atime-phasedbudgetthatprojectmanagersusetomeasureandmonitorcostperformance.24SurveyorProProjectCostBaselineChapter7:

ProjectCostManagementTheImportanceofProjectCostManagementBasicPrinciplesofCostManagementPlanningCostManagementEstimatingCostDeterminingtheBudgetControllingCostUsingSoftwaretoAssistinCostManagement26ControllingCostProjectcostcontrolincludes:Monitoringcostperformance.Ensuringthatonlyappropriateprojectchangesareincludedinarevisedcostbaseline.Informingprojectstakeholdersofauthorizedchangestotheprojectthatwillaffectcosts.Manyorganizationsaroundtheglobehaveproblemswithcostcontrol.27EarnedValueManagement(EVM)EVMisaprojectperformancemeasurementtechniquethatintegratesscope,time,andcostdata.Givenabaseline(originalplanplusapprovedchanges),youcandeterminehowwelltheprojectismeetingitsgoals.YoumustenteractualinformationperiodicallytouseEVM.EarnedValueManagementTermsTheplannedvalue(PV),alsocalledthebudget,isthatportionoftheapprovedtotalcostestimateplannedtobespentonanactivityduringagivenperiod.Actualcost(AC),isthetotalofdirectandindirectcostsincurredinaccomplishingworkonanactivityduringagivenperiod.Theearnedvalue(EV),isanestimateofthevalueofthephysicalworkactuallycompleted.Itisbasedontheoriginalplannedcostsfortheprojectoractivityandtherateatwhichtheteamiscompletingworkontheprojectoractivitytodate.Rateofperformance(RP)istheratioofactualworkcompletedtothepercentageofworkplannedtohavebeencompletedatanygiventimeduringthelifeoftheprojectoractivity.28EarnedValueCalculationsforOneActivityAfterWeekOne29ProjectPortfolioManagementManyorganizationscollectandcontrolanentiresuiteofprojectsorinvestmentsasonesetofinterrelatedactivitiesinaportfolio.Projectportfoliomanagementhasfivelevels:Putallyourprojectsinonedatabase.Prioritizetheprojectsinyourdatabase.Divideyourprojectsintotwoorthreebudgetsbasedontypeofinvestment.Automatetherepository.Applymodernportfoliotheory,includingrisk-returntoolsthatmapprojectriskonacurve.30BenefitsofPortfolioManagementSchlumbergersaved$3millioninoneyearbyorganizing120informationtechnologyprojectsintoaportfolio.METAGroupresearchshowsthat:Organizationsthatevaluateinformatio