IS 401 PROJECT MANAGEMENT

LECTURE FOUR - PROJECT COST

MANAGEMENT

Semester one, 2017

Divine Word University
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Project Management Framework

Overview
Initiating Planning Executing Controlling Closing

Project Integration
Scope
Time
Cost
Quality
Human Resources
Communication
Risk
Procurement
Stakeholder
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Todays Topics

Introduction to Project Cost Management

Basics of Project Cost Management
Main Processes of Project Cost Management
Project Cost Estimation
Project Cost Budgeting
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Introduction to Project Cost Management

Standish Group CHAOS report indicated that , Of the 50, 000 IT projects that were reviewed
across the globe show that the main cause for project failure or abandoned are results
of poor project cost and time management over their competitors.

Between 2004 and 2012, cost overrun has increased from 56% to 59%

1) 2013 CHAOS report, www.thestandishgroup.com/chaos

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Introduction to Project Cost Management (cont...)

Standish redefined what "successful" means in 2015 CHAOS report.

Previously, a successful project meant that a product was delivered on budget, on

time, and on target (e.g. scope). Standish however, admits "on target" was never a
good measure because it lacked any measure of customer outcome. They even
note there are many projects that met the triple constraints, but left the
customer unsatisfied.

So they replaced that measure (on target) with a measure of customer perceived
value. This resulted in a 7% decrease in the rate of successful projects.

In other words, despite how much money was invested in software development,
customers were not always satisfied about the value of software features as many
features were either not used or irregularly used.
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What do you think could be some possible reasons for cost

overrun?

Unclear Project requirments

Project managers think its a job for accountants
Use of New Technologies which are not tested
Poor cost management

Project managers have to manage project costs...

... to ensure projects are completed within the approved
budget
... because in general top management is more interested
in financial terms rather than technical terms
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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 value

Project cost management includes the processes

required to ensure that the project is completed within an

approved budget
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Basic Principles of Project Cost Management

Profit Margin (is the ratio between revenue and profit)

Profit = revenue expenses.
Important to focus on impact of profits (especially on new IT solutions)

Eg. Consider a commerce application that you estimate will increase revenues of K 100 million
company by 10 %. If company gains K2 for every K 100 it generates in revenue, this means you have
made a profit margin of 2%. If company looses K2 for every K 100, there is a -2% profit margin.

Life Cycle Costing

Consider the total costs of ownership (TCO) for a new information system: development,
implementation, support & maintenance
Life Cycle of commercial application
Commercial application Years 1 2 3 4 5

Development $ 500,000.00 - - - -

Implementation $ 700,000.00 - - - -

Support $ 300,000.00 $ 25,000.00 - - -

Maintenance $ 2,000,000.00 $ 2,000,000.00 - - -
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Basic Principles of Project Cost Management (cont.._

Correction costs

The costs for correcting an error grow exponentially with project progress. Not Spend
enough effort in early stages!
Further points
Direct vs. indirect costs
e.g Direct cost of people working full-time, equipment purchased
e.g Indirect cost of electricity, cost of water etc...

Sunk costs
e.g money spent in the past projects. Should be forgotten.

Learning curves
e.g involves production in large quantities. In the selling of 2000 gadgets, the cost of
selling the first 100 gadgets will be used to cover the production cost of the item.
Once the first 100 gadgets are sold to make up for the total production cost, then the rest
can be sold at the real price.

Reserves / contingency
e.g allow for situations that are partially planned for. Training of staff members, recruitment
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Main Processes of Cost Management

Initiating Planning Executing Controlling Closing

Cost Management
Resource Planning Cost Control
Budget updates

Cost Estimation
Cost estimates
Support. details
Cost mgmt. plan

Cost Budgeting
Cost baseline
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Cost Estimation

Outputs
Cost estimates (rough budgetary definite)
Supporting details (rules, assumptions, tools & techniques used)
Cost management plan (describes how cost variances will be
managed)
Techniques
Top-down (= analogous) estimation: uses actual costs of similiar
projects
Bottom-up estimation: estimate individual work items and sum them
up (time-expensive)
Parametric modelling: uses project characteristics (parameters) in a
mathematical model
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Table 7-2. Types of Cost Estimates

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Figure 7-2. Surveyor Pro Project Cost Estimate

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Cost Estimation
Typical Problems with IT Projects

Reasons for Inaccurate Cost Estimates

Estimates are required quickly and before all system requirements have been
established
Little experience of project managers in cost estimation for IT/IS projects

Lack of reliable historical data

Human bias towards underestimation e.g senior people may make a

judgement base on their abilities and neglect primary users.
Management pressure towards low estimates (e.g. to win a contract)
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Cost Budgeting

Task
Allocating the estimated project costs to individual tasks

Inputs
WBS & project schedule
Cost estimates

Output
Cost baseline, i.e. time-phased budget, used for performance monitoring
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Controlling Costs

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
Many organizations around the globe have problems with
cost control
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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

More and more organizations around the world are using

EVM to help control project costs

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Earned Value Management Terms

The planned value (PV), formally 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), formally 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), formally 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
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Earned Value Management Terms (cont)

Cost variance (CV)
Difference between the baseline cost and the total cost of a task, resource or
assignment.

Cost performance index (CPI)

Ratio of the baseline cost of work performed to the actual cost of work
performed

Schedule variance (SV)

Shows the difference in cost terms between the current progress and the
baseline plan of a task.

Schedule performance index (SPI)

Ratio of the budgeted cost of work performed to the budgeted cost or work
scheduled
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Rate of Performance

Rate of performance (RP) is the ratio of actual work

completed to the percentage of work planned to have been
completed at any given time during the life of the project or
activity

For example, suppose the server installation was halfway

completed by the end of week 1: the rate of performance
would be 50% because by the end of week 1, the planned
schedule reflects that the task should be 100 percent
complete and only 50 percent of that work has been
completed
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Table 7-4. Earned Value Calculations for One

Activity after Week One
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Table 7-5. Earned Value Formulas

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Figure 7-5. Earned Value Chart for Project after Five Months
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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 cost-
related features, especially enterprise PM software
Portfolio management software can help reduce
costs
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Chapter Summary

Project cost management is a traditionally weak area of IT

projects, and project managers must work to improve their
ability to deliver projects within approved budgets
Main processes include:
Estimate costs
Determine the budget
Control costs