Description
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.
Project Cost Management
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Objectives
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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.
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What is Project Cost Management?
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Cost of Resources Needed to Complete Project Cost of Using the Project Product (Life-Cycle Costing) ROI, Discounted Cash Flow, Payback Analysis, etc. Stakeholder Information, Measures Controllable vs. Uncontrollable Costs Rewards and Recognition
Project Cost Management?
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? ? ?
Resource Planning Cost Estimating Cost Budgeting Control
What can go wrong…
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According to the San Francisco Chronicle’s front-page story, ?Computer Bumbling Costs the State $1 Billion,? the state of California had a series of expensive IT project failures in the late 1990s, costing taxpayers nearly $1 billion…It was ironic that the state that was leading in the creation of computers was also the state most behind in using computer technology to improve its services. The Internal Revenue Service (IRS) managed a series of project failures that cost taxpayers over $50 billion a year— roughly as much money as the annual net profit of the entire computer industry. Connecticut General Life Insurance Co. sued PeopleSoft over an aborted installation of a finance system.
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Cost and Project Management
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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, such as dollars. Project cost management includes the processes required to ensure that the project is completed within an approved budget.
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Resource Management
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What Resources? People, Equipment, Material What Quantities?
Tools & Techniques Expert Judgement Alternatives Identification Outputs Resource Requirements
Inputs Work Breakdown Structure Historical Information Scope Statement
Resource Pool Description
Organizational Policies
Resource Management
Resource planning involves determining what physical resources (people, equipment and material) and what quantities should be used to perform the project activities. ? Approximations of Costs not price… ? Will Additional costs offset expected savings?
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Resource Inputs
Inputs ? Work Breakdown Structure – identifies the project components which would require the resources ? Historical Information – Historical information about what resources are required for a similar activity in the previous projects should also be made available. ? Scope Statement – contains the project justification and the project objective which should be considered for resource planning ? Resource Pool Description – Knowledge of what kind of people are available in the resource pool ? Organization Policies - the organizational policy of performing organization on the staffing and rental or purchase of supplies and equipment should be considered
Cost Tools and Techniques
Tools and Techniques ? Expert Judgment – required to Asses the inputs to this process. This by done by other units within the performing organization, consultants, profession and technical associations or industrial groups ? Alternatives Identification – catch all technique through brain storming and lateral thinking
Cost Management Process
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Cost estimating: Developing an approximation or estimate of the costs of the resources needed to complete a project.
Cost budgeting: Allocating the overall cost estimate to individual work items to establish a baseline for measuring performance.
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Cost control: Controlling changes to the project budget.
Resourcing Output
Outputs ? Resource Requirement – output of resources planning is the description of what type of resource and in what quantity is required for the project and the resources are obtained either through staff acquisition or procurement
Basic Principles of Cost Management
?
Most members of an executive board have a better understanding and are more interested in financial terms than IT terms, so IT project managers must speak their language.
? Profits ? Life
are revenues minus expenses.
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.
Basic Principles of Cost Management
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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.
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Direct costs are costs that can be directly related to producing the products and services of the project.
Basic Principles of Cost Management
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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.
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Cost of Software Defects
It is important to spend money up-front on IT projects to avoid spending a lot more later.
Cost Estimation
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Cost Estimating involves developing an approximation (estimate) of the cost of resources required to complete the project. It is developing an assessment of the like quantitative result – how much will it cost for the performing organization to provide the product or service. Pricing is a business decision how much the performing organization charge for the product and service and uses the cost estimate as an input to pricing. Cost Estimate involves identifying and considering the various costing alternative (more time during design would it off set the reduced cost during development)
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Cost Estimation
?Approximation of Costs, Not Price ?Will Additional Costs Offset Expected Savings?
Inputs
Work Breakdown Structure
Tools & Techniques
Analogous Estimating
Outputs
Cost Estimates
Resource Requirements
Resource Rates Activity Duration Estimates Historical Information
Parametric Modeling
Bottom-Up Estimating Computerized Tools
Supporting Detail
Cost Management Plan
Chart of Accounts
Cost Estimating
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Project managers must take cost estimates seriously if they want to complete projects within budget constraints.
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It’s important to know the types of cost estimates, how to prepare cost estimates, and typical problems associated with IT cost estimates.
Cost Estimation Inputs
Inputs ? Work Breakdown Structure – used to organize the cost and ensure that all identified work has been estimated ? Resource requirement ? Resource Rates – the team preparing the estimate must know the Unit resource rate. It this is not available the rates themselves should be estimated ? Activity duration Estimates - will have an effect on cost estimates if the budget has an allowance on cost of financing ? Historical Information – on cost of resources may be available in project files, commercial cost estimating database and project team knowledge ? Chart of Accounts - coding structure to report financial information in the ledger.
Types of Cost Estimates
Estimates
Charter Approval Plan Approval
Pre-Launch
Launch
Execute
Size Estimates (Macro)
Task-based Estimates
Project Schedule
+/- 35% range
+/- 15% range
+/- 10% range
Cost Management Plan
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A cost management plan is a document that describes how the organization will manage cost variances on the project. A large percentage of total project costs are often labor costs, so project managers must develop and track estimates for labor.
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Typical Departmental headcount by year
Year 1 Year 2 Year 3 Year 4 Year 5
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A large percentage of the costs of many IT projects are human resource costs.
Cost Estimation Tools and Techniques
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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.
Cost Estimation Tools and Techniques
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Basic tools and techniques for cost estimates:
? Parametric
modeling: Uses project characteristics (parameters) in a mathematical model to estimate project costs. Models can be simple or complex. The method is most reliable when:
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? ?
The historical information used to develop the model was accurate The parameters used in the model are readily quantifiable Model is scalable
? Computerized
tools: Tools, such as spreadsheets and project management software, that can make working with different cost estimates and cost estimation tools easier.
Constructive Cost Model (COCOMO)
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Barry Boehm helped develop the COCOMO models for estimating software development costs. Parameters include:
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Function points: Technology-independent assessments of the functions involved in developing a system. Source Lines of Code (SLOC): A human-written line of code that is not a blank line or comment.
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Boehm suggests that only parametric models do not suffer from the limits of human decision-making.
Problems with IT Cost Estimates
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Developing an estimate for a large software project is a complex task that requires a significant amount of effort. People who develop estimates often do not have much experience. Human beings are biased toward underestimation. Management might ask for an estimate, but really desire a bid to win a major contract or get internal funding.
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Sample Cost Estimation using WBS
Sample Cost Estimation
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Detailed example that describes how to create a cost estimate for the project described in the case. Before creating an estimate, know what it will be used for, Gather as much information about the project as possible, Clarify the ground rules and assumptions for the estimate. If possible, estimate costs by major WBS categories. Create a cost model to make it easy to change and document the estimate.
Cost Estimation Outputs
Outputs ? Cost Estimates – quantitative assessments of the like cost of the resources required to complete project activities ? Supporting Detail - would include
? ? ?
Description of the scope always provided as a reference to WBS Documentation for Basis for the estimates Assumptions
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Cost Management Plan – how changes to cost (cost variances) are managed
Cost Budgeting
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Cost budgeting involves allocating the project cost estimate to individual work items over time. The WBS is a required input for the cost budgeting process because it defines the work items. Important goal is to produce a cost baseline:
?A
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time-phased budget that project managers use to measure and monitor cost performance.
Sample Cost Baselining
Cost Budgeting Inputs
Inputs ? Work Breakdown Structure – identifies the project work items to which the budget of the project has to be allocated ? Cost Estimates ? Project Schedule – includes the project start dates and project end dates to which the cost of the project has to be allocated. This information is needed to allocate the cost to a project time period
Tools & Techniques
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Cost Estimate Tools & Techniques used for Cost budgeting also. They are: Analogous Estimating, Parametric modeling, Button-up Estimation and Computerized tools
Cost Budgeting Output
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Cost Baseline – the cost baseline is a time phased budget that will be used to measure and monitor cost performance on the project.
It is developed by summarizing the cost for a period and displaying in the form of a S-curve
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Cost Control
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Project cost control includes:
? ? ? ? ? ?
Monitoring cost performance. Influencing the factors which create the cost changes to ensure that they are beneficial Determining the cost changes has occured 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. Managing the Cost changes when they actually occur
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Many organizations around the globe have problems with cost control.
Inputs for Cost Control
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Work Breakdown Structure – identifies the project work items to which the budget of the project has to be allocated Cost Estimates Project Schedule – includes the project start dates and project end dates to which the cost of the project has to be allocated. This information is needed to allocate the cost to a project time period
Cost Control Tools & Techniques
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Cost Estimate Tools & Techniques –
?Cost
Change Control Measurement
?Performance ?Additional
Planning Tools
?Computerized
Output of Cost Control
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Outputs
? ? ? ? ?
Revised Cost Estimates Budget Updates Corrective Action Estimate at Completion Lessons Learned
Earned Value Management (EVM)
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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. More and more organizations around the world are using EVM to help control project costs.
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Earned Value Management Terms
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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 an estimate of the value of the physical work actually completed. EV 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.
Sample Earned value Chart
If the EV line is below the AC or PV line, there are problems in those areas.
Project Portfolio Management
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Many organizations collect and control an entire suite of projects or investments as one set of interrelated activities in a portfolio. Project portfolio management has five levels:
Put all your projects in one database. 2. Prioritize the projects in your database. 3. Divide your projects into two or three budgets based on type of investment. 4. Automate the repository. 5. Apply modern portfolio theory, including risk-return tools that map project risk on a curve.
1.
Cost Management using tools
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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, especially enterprise PM software.
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Sample Dashboard for Project Health
Cost Management: Key Definitions
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Baseline: The original plan plus or minus approved changes. Budget At Completion (BAC) : The estimated total cost of the project when done. Budgeted Cost of Work Performed (BCWP): The sum of the approved cost estimates for activities completed during a given period (usually project-to-date). Budgeted Cost of Work Scheduled (BCWS): The sum of the approved cost estimates for activities scheduled to be performed during a given period. Chart of Accounts: Any numbering system used to monitor project costs by category (e.g., labor, supplies, materials). The project chart of accounts is usually based upon the corporate chart of accounts of the primary performing organization.
Cost Management: Key Definitions
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? ? ?
Code of Accounts: Any numbering system used to uniquely identify each element of the WBS. Contingency Reserve: A separately planned quantity used to allow for future situations which may be planned for only in part ("known unknowns"). Contingency reserves are intended to reduce the impact of missing cost or schedule objectives. Contingency reserves are normally included in the project's cost and schedule baselines. Cost Budgeting: Allocating the cost estimates to individual project components. Cost Control: Controlling changes to the project budget. Cost Estimating: Estimating the cost of the resources needed to complete project activities.
Cost Management: Key Definitions
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Cost Performance Index (CPI): The ratio of budgeted costs to actual costs (BCWP/ACWP). CPI is often used to predict the magnitude of a possible cost overrun using the following formula: original cost estimate/CPI = projected cost at completion. Cost Variance (CV): Any difference between the estimated cost of an activity and the actual cost of that activity. In earned value, CV = BCWP-ACWP. Earned Value: 1) A method for measuring project performance. It compares the amount of work that was planned with what was actually accomplished to determine if cost and schedule performance is as planned. (2) The BCWP for an activity or group of activities. Definition (1) is also called Earned Value Analysis.
Cost Management: Key Definitions
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Estimate To Complete (ETC): The expected additional cost needed to complete an activity, a group of activities, or the project. Most techniques for forecasting ETC include some adjustment to the original cost estimate based on project performance to date.
Estimate at Completion (EAC): The expected total cost of an activity, a group of activities, or of the project when the defined scope of work has been completed. Most techniques for forecasting EAC include some adjustment of the original cost estimate based on project performance to date. EAC = Actuals-to-date + ETC. (Also known as Forecast Final Cost)
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Cost Management: Key Definitions
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Schedule Performance Index (SPI): The ratio of work performed to work scheduled. (BCWP/BCWS) Schedule Variance (SV): Any difference between the scheduled completion of an activity and the actual completion of that activity. In earned value, BCWP BCWS. Value Analysis: A cost-reduction tool that involves careful analysis of a design or item to identify all the functions and the cost of each. It considers whether the function is necessary and whether it can be provided at a lower cost without degrading performance or quality. Working Capital: Current assets minus liabilities.
Summary
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Project cost management is traditionally a weak area in IT projects, and project managers must work to improve their ability to deliver projects within approved budgets.
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Main processes include:
? Cost ? Cost ? Cost
estimating
budgeting
control
Problem Solving: Earned Value
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The project of total 12 weeks duration. The total planned budget for the project is $120000 for work that is evenly spread over 12 weeks. Status is taken at the end of the week 2. The project staff has completed work that was scheduled to have been completed by half way through the middle of the week 2. Actual costs incurred to date on this project total is $16000. BAC or TV = $120000 and AC=$16000
Earned Value: problem solving
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Budgeted Cost of Work Scheduled (BCWS) after 2 weeks:
? BCWP=
$120000/12 *2 (for 2 weeks) = $20000
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Budgeted Cost of Work Performed (BCWP) after 2 weeks:
? BCWP=
$120000/ 12 (budget per week )*1.5 (for 1.5 weeks) = $15000
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Actual Cost of Work Performed (ACWP) is given = $16000
Earned Value: problem solving
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Cost Variance = Budgeted Cost of Work Performed minus Actual Cost of Work Performed
? CV
= 15000 – 16000 = ($1000) (unfavorable)
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Cost Variance Percentage = Cost Variance divided by Budgeted Cost of Work Performed times 100
? CPI
= $15000/$16000 = 0.9375 (less than 1, less than planned performance)
Earned Value: problem solving
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Schedule Variance = Budgeted Cost of Work Performed minus Budgeted Cost of Work Scheduled
? SV
= $15000 - $20000 = ($5000) (unfavorable – schedule is slipping)
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Schedule Variance Percentage = Schedule Variance divided by Budgeted Cost of Work Scheduled times 100
? SPI
= $15000/ $20000 = 0.75 (unfavorable)
Earned Value: problem solving
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To complete: calculations that consider only CPI provide the most optimistic estimates
? ETC
= ($120000 - $15000) / 0.9375 = $112,000 ? EAC = $16000 + 112,000 = $128,000 ($8000 more than original estimates)
?
To Complete Performance Index = (Budget At Completion minus Budgeted Cost of Work Performed) divided by (Estimate At Completion minus Actual Cost of Work Performed)
? TCI
= ($120,000 - $15000) / ($128,000 - $16,000) = 0.9375 (less than one unfavorable)
Earned Value: problem solving
?
? ? ?
Alternative to complete: Calculations that take into account both the CPI and the SPI provide most pessimistic estimates ETC = ($120,000 - $15000)/ 0.9375*.75 = $149,333 EAC= $16000+$149,000 = $165333 ($45,333 more than the original estimate) TCI = ($120,000 - $15,000) / ($165,000 $16000) = 0.703 (much more unfavorable than the optimistic estimates that considered only the CPI)
Thank You
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Thank You…
Agile Planning
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Provides project teams with a means to produce features in a short amount of time in order to gain useful feedback from users, customers, and stakeholders. It also allows teams to defer decisions on detailed requirements until the feature is being developed, allowing them to apply the most current and accurate information possible. This approach works when the team has decided to follow an iterative and incremental project approach and is most useful in situations where the product of the project can be delivered in small increments
Project Life Cycle
Project Life Cycle Sequential Model
Planning Definition Design Implementation Integration System Test Operation
Phased (Waterfall) Model
Planning Definition Design Implementation Integration Time System Test
Shortened Interval
Earlier Time-to-Market
Operation
doc_812127715.pptx
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.
Project Cost Management
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Objectives
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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.
?
?
What is Project Cost Management?
?
?
? ? ?
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Cost of Resources Needed to Complete Project Cost of Using the Project Product (Life-Cycle Costing) ROI, Discounted Cash Flow, Payback Analysis, etc. Stakeholder Information, Measures Controllable vs. Uncontrollable Costs Rewards and Recognition
Project Cost Management?
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? ? ?
Resource Planning Cost Estimating Cost Budgeting Control
What can go wrong…
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According to the San Francisco Chronicle’s front-page story, ?Computer Bumbling Costs the State $1 Billion,? the state of California had a series of expensive IT project failures in the late 1990s, costing taxpayers nearly $1 billion…It was ironic that the state that was leading in the creation of computers was also the state most behind in using computer technology to improve its services. The Internal Revenue Service (IRS) managed a series of project failures that cost taxpayers over $50 billion a year— roughly as much money as the annual net profit of the entire computer industry. Connecticut General Life Insurance Co. sued PeopleSoft over an aborted installation of a finance system.
?
?
Cost and Project Management
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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, such as dollars. Project cost management includes the processes required to ensure that the project is completed within an approved budget.
?
?
Resource Management
? ?
What Resources? People, Equipment, Material What Quantities?
Tools & Techniques Expert Judgement Alternatives Identification Outputs Resource Requirements
Inputs Work Breakdown Structure Historical Information Scope Statement
Resource Pool Description
Organizational Policies
Resource Management
Resource planning involves determining what physical resources (people, equipment and material) and what quantities should be used to perform the project activities. ? Approximations of Costs not price… ? Will Additional costs offset expected savings?
?
Resource Inputs
Inputs ? Work Breakdown Structure – identifies the project components which would require the resources ? Historical Information – Historical information about what resources are required for a similar activity in the previous projects should also be made available. ? Scope Statement – contains the project justification and the project objective which should be considered for resource planning ? Resource Pool Description – Knowledge of what kind of people are available in the resource pool ? Organization Policies - the organizational policy of performing organization on the staffing and rental or purchase of supplies and equipment should be considered
Cost Tools and Techniques
Tools and Techniques ? Expert Judgment – required to Asses the inputs to this process. This by done by other units within the performing organization, consultants, profession and technical associations or industrial groups ? Alternatives Identification – catch all technique through brain storming and lateral thinking
Cost Management Process
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Cost estimating: Developing an approximation or estimate of the costs of the resources needed to complete a project.
Cost budgeting: Allocating the overall cost estimate to individual work items to establish a baseline for measuring performance.
?
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Cost control: Controlling changes to the project budget.
Resourcing Output
Outputs ? Resource Requirement – output of resources planning is the description of what type of resource and in what quantity is required for the project and the resources are obtained either through staff acquisition or procurement
Basic Principles of Cost Management
?
Most members of an executive board have a better understanding and are more interested in financial terms than IT terms, so IT project managers must speak their language.
? Profits ? Life
are revenues minus expenses.
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.
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 terms.
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Direct costs are costs that can be directly related to producing the products and services of the project.
Basic Principles of Cost Management
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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.
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Cost of Software Defects
It is important to spend money up-front on IT projects to avoid spending a lot more later.
Cost Estimation
?
Cost Estimating involves developing an approximation (estimate) of the cost of resources required to complete the project. It is developing an assessment of the like quantitative result – how much will it cost for the performing organization to provide the product or service. Pricing is a business decision how much the performing organization charge for the product and service and uses the cost estimate as an input to pricing. Cost Estimate involves identifying and considering the various costing alternative (more time during design would it off set the reduced cost during development)
?
?
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Cost Estimation
?Approximation of Costs, Not Price ?Will Additional Costs Offset Expected Savings?
Inputs
Work Breakdown Structure
Tools & Techniques
Analogous Estimating
Outputs
Cost Estimates
Resource Requirements
Resource Rates Activity Duration Estimates Historical Information
Parametric Modeling
Bottom-Up Estimating Computerized Tools
Supporting Detail
Cost Management Plan
Chart of Accounts
Cost Estimating
?
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.
Cost Estimation Inputs
Inputs ? Work Breakdown Structure – used to organize the cost and ensure that all identified work has been estimated ? Resource requirement ? Resource Rates – the team preparing the estimate must know the Unit resource rate. It this is not available the rates themselves should be estimated ? Activity duration Estimates - will have an effect on cost estimates if the budget has an allowance on cost of financing ? Historical Information – on cost of resources may be available in project files, commercial cost estimating database and project team knowledge ? Chart of Accounts - coding structure to report financial information in the ledger.
Types of Cost Estimates
Estimates
Charter Approval Plan Approval
Pre-Launch
Launch
Execute
Size Estimates (Macro)
Task-based Estimates
Project Schedule
+/- 35% range
+/- 15% range
+/- 10% range
Cost Management Plan
?
A cost management plan is a document that describes how the organization will manage cost variances on the project. A large percentage of total project costs are often labor costs, so project managers must develop and track estimates for labor.
?
Typical Departmental headcount by year
Year 1 Year 2 Year 3 Year 4 Year 5
?
A large percentage of the costs of many IT projects are human resource costs.
Cost Estimation Tools and Techniques
?
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.
Cost Estimation Tools and Techniques
?
Basic tools and techniques for cost estimates:
? Parametric
modeling: Uses project characteristics (parameters) in a mathematical model to estimate project costs. Models can be simple or complex. The method is most reliable when:
?
? ?
The historical information used to develop the model was accurate The parameters used in the model are readily quantifiable Model is scalable
? Computerized
tools: Tools, such as spreadsheets and project management software, that can make working with different cost estimates and cost estimation tools easier.
Constructive Cost Model (COCOMO)
?
Barry Boehm helped develop the COCOMO models for estimating software development costs. Parameters include:
?
?
Function points: Technology-independent assessments of the functions involved in developing a system. Source Lines of Code (SLOC): A human-written line of code that is not a blank line or comment.
?
?
Boehm suggests that only parametric models do not suffer from the limits of human decision-making.
Problems with IT Cost Estimates
?
Developing an estimate for a large software project is a complex task that requires a significant amount of effort. People who develop estimates often do not have much experience. Human beings are biased toward underestimation. Management might ask for an estimate, but really desire a bid to win a major contract or get internal funding.
?
?
?
Sample Cost Estimation using WBS
Sample Cost Estimation
?
? ?
?
? ?
Detailed example that describes how to create a cost estimate for the project described in the case. Before creating an estimate, know what it will be used for, Gather as much information about the project as possible, Clarify the ground rules and assumptions for the estimate. If possible, estimate costs by major WBS categories. Create a cost model to make it easy to change and document the estimate.
Cost Estimation Outputs
Outputs ? Cost Estimates – quantitative assessments of the like cost of the resources required to complete project activities ? Supporting Detail - would include
? ? ?
Description of the scope always provided as a reference to WBS Documentation for Basis for the estimates Assumptions
?
Cost Management Plan – how changes to cost (cost variances) are managed
Cost Budgeting
?
Cost budgeting involves allocating the project cost estimate to individual work items over time. The WBS is a required input for the cost budgeting process because 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.
Sample Cost Baselining
Cost Budgeting Inputs
Inputs ? Work Breakdown Structure – identifies the project work items to which the budget of the project has to be allocated ? Cost Estimates ? Project Schedule – includes the project start dates and project end dates to which the cost of the project has to be allocated. This information is needed to allocate the cost to a project time period
Tools & Techniques
?
Cost Estimate Tools & Techniques used for Cost budgeting also. They are: Analogous Estimating, Parametric modeling, Button-up Estimation and Computerized tools
Cost Budgeting Output
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Cost Baseline – the cost baseline is a time phased budget that will be used to measure and monitor cost performance on the project.
It is developed by summarizing the cost for a period and displaying in the form of a S-curve
?
Cost Control
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Project cost control includes:
? ? ? ? ? ?
Monitoring cost performance. Influencing the factors which create the cost changes to ensure that they are beneficial Determining the cost changes has occured 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. Managing the Cost changes when they actually occur
?
Many organizations around the globe have problems with cost control.
Inputs for Cost Control
?
? ?
Work Breakdown Structure – identifies the project work items to which the budget of the project has to be allocated Cost Estimates Project Schedule – includes the project start dates and project end dates to which the cost of the project has to be allocated. This information is needed to allocate the cost to a project time period
Cost Control Tools & Techniques
?
Cost Estimate Tools & Techniques –
?Cost
Change Control Measurement
?Performance ?Additional
Planning Tools
?Computerized
Output of Cost Control
?
Outputs
? ? ? ? ?
Revised Cost Estimates Budget Updates Corrective Action Estimate at Completion Lessons Learned
Earned Value Management (EVM)
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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. More and more organizations around the world are using EVM to help control project costs.
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Earned Value Management Terms
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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 an estimate of the value of the physical work actually completed. EV 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.
Sample Earned value Chart
If the EV line is below the AC or PV line, there are problems in those areas.
Project Portfolio Management
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Many organizations collect and control an entire suite of projects or investments as one set of interrelated activities in a portfolio. Project portfolio management has five levels:
Put all your projects in one database. 2. Prioritize the projects in your database. 3. Divide your projects into two or three budgets based on type of investment. 4. Automate the repository. 5. Apply modern portfolio theory, including risk-return tools that map project risk on a curve.
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Cost Management using tools
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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, especially enterprise PM software.
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Sample Dashboard for Project Health
Cost Management: Key Definitions
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Baseline: The original plan plus or minus approved changes. Budget At Completion (BAC) : The estimated total cost of the project when done. Budgeted Cost of Work Performed (BCWP): The sum of the approved cost estimates for activities completed during a given period (usually project-to-date). Budgeted Cost of Work Scheduled (BCWS): The sum of the approved cost estimates for activities scheduled to be performed during a given period. Chart of Accounts: Any numbering system used to monitor project costs by category (e.g., labor, supplies, materials). The project chart of accounts is usually based upon the corporate chart of accounts of the primary performing organization.
Cost Management: Key Definitions
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Code of Accounts: Any numbering system used to uniquely identify each element of the WBS. Contingency Reserve: A separately planned quantity used to allow for future situations which may be planned for only in part ("known unknowns"). Contingency reserves are intended to reduce the impact of missing cost or schedule objectives. Contingency reserves are normally included in the project's cost and schedule baselines. Cost Budgeting: Allocating the cost estimates to individual project components. Cost Control: Controlling changes to the project budget. Cost Estimating: Estimating the cost of the resources needed to complete project activities.
Cost Management: Key Definitions
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Cost Performance Index (CPI): The ratio of budgeted costs to actual costs (BCWP/ACWP). CPI is often used to predict the magnitude of a possible cost overrun using the following formula: original cost estimate/CPI = projected cost at completion. Cost Variance (CV): Any difference between the estimated cost of an activity and the actual cost of that activity. In earned value, CV = BCWP-ACWP. Earned Value: 1) A method for measuring project performance. It compares the amount of work that was planned with what was actually accomplished to determine if cost and schedule performance is as planned. (2) The BCWP for an activity or group of activities. Definition (1) is also called Earned Value Analysis.
Cost Management: Key Definitions
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Estimate To Complete (ETC): The expected additional cost needed to complete an activity, a group of activities, or the project. Most techniques for forecasting ETC include some adjustment to the original cost estimate based on project performance to date.
Estimate at Completion (EAC): The expected total cost of an activity, a group of activities, or of the project when the defined scope of work has been completed. Most techniques for forecasting EAC include some adjustment of the original cost estimate based on project performance to date. EAC = Actuals-to-date + ETC. (Also known as Forecast Final Cost)
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Cost Management: Key Definitions
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Schedule Performance Index (SPI): The ratio of work performed to work scheduled. (BCWP/BCWS) Schedule Variance (SV): Any difference between the scheduled completion of an activity and the actual completion of that activity. In earned value, BCWP BCWS. Value Analysis: A cost-reduction tool that involves careful analysis of a design or item to identify all the functions and the cost of each. It considers whether the function is necessary and whether it can be provided at a lower cost without degrading performance or quality. Working Capital: Current assets minus liabilities.
Summary
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Project cost management is traditionally a weak area in IT projects, and project managers must work to improve their ability to deliver projects within approved budgets.
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Main processes include:
? Cost ? Cost ? Cost
estimating
budgeting
control
Problem Solving: Earned Value
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The project of total 12 weeks duration. The total planned budget for the project is $120000 for work that is evenly spread over 12 weeks. Status is taken at the end of the week 2. The project staff has completed work that was scheduled to have been completed by half way through the middle of the week 2. Actual costs incurred to date on this project total is $16000. BAC or TV = $120000 and AC=$16000
Earned Value: problem solving
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Budgeted Cost of Work Scheduled (BCWS) after 2 weeks:
? BCWP=
$120000/12 *2 (for 2 weeks) = $20000
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Budgeted Cost of Work Performed (BCWP) after 2 weeks:
? BCWP=
$120000/ 12 (budget per week )*1.5 (for 1.5 weeks) = $15000
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Actual Cost of Work Performed (ACWP) is given = $16000
Earned Value: problem solving
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Cost Variance = Budgeted Cost of Work Performed minus Actual Cost of Work Performed
? CV
= 15000 – 16000 = ($1000) (unfavorable)
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Cost Variance Percentage = Cost Variance divided by Budgeted Cost of Work Performed times 100
? CPI
= $15000/$16000 = 0.9375 (less than 1, less than planned performance)
Earned Value: problem solving
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Schedule Variance = Budgeted Cost of Work Performed minus Budgeted Cost of Work Scheduled
? SV
= $15000 - $20000 = ($5000) (unfavorable – schedule is slipping)
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Schedule Variance Percentage = Schedule Variance divided by Budgeted Cost of Work Scheduled times 100
? SPI
= $15000/ $20000 = 0.75 (unfavorable)
Earned Value: problem solving
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To complete: calculations that consider only CPI provide the most optimistic estimates
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= ($120000 - $15000) / 0.9375 = $112,000 ? EAC = $16000 + 112,000 = $128,000 ($8000 more than original estimates)
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To Complete Performance Index = (Budget At Completion minus Budgeted Cost of Work Performed) divided by (Estimate At Completion minus Actual Cost of Work Performed)
? TCI
= ($120,000 - $15000) / ($128,000 - $16,000) = 0.9375 (less than one unfavorable)
Earned Value: problem solving
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Alternative to complete: Calculations that take into account both the CPI and the SPI provide most pessimistic estimates ETC = ($120,000 - $15000)/ 0.9375*.75 = $149,333 EAC= $16000+$149,000 = $165333 ($45,333 more than the original estimate) TCI = ($120,000 - $15,000) / ($165,000 $16000) = 0.703 (much more unfavorable than the optimistic estimates that considered only the CPI)
Thank You
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Thank You…
Agile Planning
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Provides project teams with a means to produce features in a short amount of time in order to gain useful feedback from users, customers, and stakeholders. It also allows teams to defer decisions on detailed requirements until the feature is being developed, allowing them to apply the most current and accurate information possible. This approach works when the team has decided to follow an iterative and incremental project approach and is most useful in situations where the product of the project can be delivered in small increments
Project Life Cycle
Project Life Cycle Sequential Model
Planning Definition Design Implementation Integration System Test Operation
Phased (Waterfall) Model
Planning Definition Design Implementation Integration Time System Test
Shortened Interval
Earlier Time-to-Market
Operation
doc_812127715.pptx