ch7

True/False
Indicate whether the statement is true or false.

____ 1. Although information technology projects have a poor track record in meeting project goals, they have a good
track record in meeting budget goals. F
____ 2. Preparing cost estimates is a job for accountants. F
____ 3. Any new technology or business process is untested and has inherent risks. T
____ 4. Many projects that are started never finish because of cost management problems. T
____ 5. When justifying investments in new information systems and technology, the focus should only be on revenues or
expenses. F
____ 6. Organizations have a history of spending too much money in the early phases of information technology projects.
F
____ 7. Project managers must conduct cash flow analysis to determine net present value. T
____ 8. Direct costs cannot be directly attributed to a certain project. F
____ 9. When deciding what projects to invest in or continue, you should include sunk costs. F
____ 10. Learning curve theory does not apply to the amount of time it takes to complete some tasks. F
____ 11. If a project manager gets sick for two weeks or an important supplier goes out of business, management reserve
could be set aside to cover the resulting costs. T
____ 12. ROM estimates can be referred to as a ballpark estimate, a guesstimate, a swag, or a broad gauge. T
____ 13. A definitive estimate should be the least accurate of the three types of estimates. F
____ 14. Estimates are usually done at various stages of a project and should become more accurate as time progresses.T
____ 15. The cost management plan is part of the overall project management plan. T
____ 16. A large percentage of total project costs are often labor costs. T
____ 17. Parametric models are least reliable when historical information was used to create the model. F
____ 18. When developing an estimate for a large software project, estimates cannot be made before clear system
requirements have been produced. F
____ 19. The people who develop software cost estimates often have a great deal of experience with cost estimation. F
____ 20. Every cost estimate is unique. T
____ 21. The WBS is not a required input when developing a cost estimate. F
____ 22. Most organizations have a well-established process for preparing budgets. T
____ 23. Cost budgeting provides information for project funding requirements. T
____ 24. There does not need to be a change control system to define procedures for changing the cost baseline. F
____ 25. The formulas for variances and indexes start with EV, the earned value. T
____ 26. If cost variance is a positive number, it means that performing the work cost more than planned. F
____ 27. If the cost performance index is less than one or less than 100 percent, the project is under budget. F
____ 28. In an earned value chart, when the actual cost line is right on or above the earned value line, costs are less than or
equal to planned. F
____ 29. Many projects, particularly information technology projects, do not have good planning information, so tracking
performance against a plan might produce misleading information. T
____ 30. Databases are a common tool for cost estimating, cost budgeting, and cost control. F

Multiple Choice
Identify the choice that best completes the statement or answers the question.

__c__ 31. The Standish Group’s CHAOS studies reported an average cost overrun for unsuccessful IT projects ranged from
180 percent in 1994 to ____ percent in 2004.
a. 28 c. 56-
b. 43 d. 73
__c__ 32. Three separate surveys of software project cost overruns found that the average cost overrun for all of the projects
in their survey samples (not just unsuccessful projects) were ____ percent.
a. 13–14 c. 33–34-
b. 23–24 d. 43–44
___d_ 33. ____ includes the processes required to ensure that a project team completes a project within an approved budget.
a. Cost budgeting c. Cost control
b. Cost estimating d. Project cost
management-
___d_ 34. ____ involves developing an approximation or estimate of the costs of the resources needed to complete a project.
a. Determining the c. Controlling costs
budget
b. Consolidation of d. Estimating costs-
costs
_a___ 35. ____ involves allocating the overall cost estimate to individual work items to establish a baseline for measuring
performance.
a. Determining the c. Controlling costs
budget-
b. Consolidation of d. Estimating costs
costs
__b__ 36. ____ is the ratio of revenues to profits.
a. Profit c. Cost structure
b. Profit margin- d. Cost margin
__c__ 37. ____ helps you develop an accurate projection of a project’s financial costs and benefits.
a. Profit cycle costing c. Life cycle costing-
b. Financial costing d. Profit margin costing
__b__ 38. ____, with assistance from financial experts in their organizations, should create estimates of the costs and
benefits of the project for its entire life cycle.
 a. Financial managers c. Budget managers
b. Project managers- d. System managers
__d__ 39. Since organizations depend on reliable information technology, there are also huge costs associated with ____.
a. work time c. Uptime
b. technical planning d. Downtime-
__d__ 40. ____ is a method for determining the estimated annual costs and benefits for a project and the resulting annual
cash flow.
a. Life cycle costing c. Cost estimating
b. Profit margin d. Cash flow analysis-
analysis
_c___ 41. ____ are those costs that an organization can easily measure in dollars.
a. Intangible costs c. Tangible costs-
b. Direct costs d. Indirect costs
__c__ 42. Project managers should focus on ____, since they can control them.
a. sunk costs c. direct costs-
b. indirect costs d. intangible costs
__d__ 43. ____ are costs that are not directly related to the products or services of the project, but are indirectly related to
performing the project.
a. Intangible costs c. Direct costs
b. Tangible costs d. Indirect costs-
__a__ 44. ____ should be forgotten.
a. Sunk costs- c. Direct costs
b. Indirect costs d. Intangible costs
__a__ 45. ____ allow for future situations that may be partially planned for.
a. Contingency c. Unknown unknowns
reserves-
b. Management reserves d. Direct reserves
__b__ 46. ____ allow for future situations that are unpredictable.
a. Contingency reserves c. Known unknowns
b. Management d. Indirect reserves
reserves-
_c___ 47. A ____ provides an estimate of what a project will cost.
a. budgetary estimate c. rough order of
magnitude estimate
flu-
b. definitive estimate d. final estimate
__c__ 48. A ____ is done very early in a project or even before a project is officially started.
a. budgetary estimate c. rough order of
magnitude estimate-
 b. definitive estimate d. final estimate
__a__ 49. A ____ is used to allocate money into an organization’s budget.
a. budgetary estimate- c. rough order of
magnitude estimate
b. definitive estimate d. final estimate
_b___ 50. A ____ is used for making many purchasing decisions for which accurate estimates are required and for
estimating final project costs.
a. budgetary estimate c. rough order of
magnitude estimate
b. definitive estimate- d. final estimate
__d__ 51. ____ use the actual cost of a previous, similar project as the basis for estimating the cost of the current project.
a. Actual estimates c. Bottom-up estimates
b. Parametric estimates d. Analogous estimates-
_c___ 52. ____ involve estimating individual work items or activities and summing them to get a project total.
a. Actual estimates c. Bottom-up estimates-
b. Parametric estimates d. Analogous estimates
__b__ 53. A(n) ____ might provide an estimate of $50 per line of code for a software development project based on the
programming language the project is using, the level of expertise of the programmers, the size and complexity of
the data involved, and so on.
a. analogous cost c. bottom-up estimate
estimate
b. parametric model- d. reserve analysis
__b__ 54. Tom DeMarco, a well-known author on software development, suggests ____ reasons for the inaccuracies of
many information technology project cost estimates and some ways to overcome them.
a. Three c. Five
b. Four- d. Six
_b___ 55. If the cost estimate will be the basis for contract awards and performance reporting, it should be a ____ and as
accurate as possible.
a. budgetary estimate c. rough order of
magnitude estimate
b. definitive estimate- d. final estimate
__a__ 56. The main goal of the ____ process is to produce a cost baseline for measuring project performance and project
funding requirements.
a. cost budgeting- c. cost control
b. cost consolidation d. cost estimating
__c__ 57. A ____ is a time-phased budget that project managers use to measure and monitor cost performance.
a. budget baseline c. cost baseline-
b. Ledger d. cost line
__a__ 58. The project management plan, project funding requirements, work performance data, and organizational process
assets are inputs for the process of ____.
 a. controlling costs- c. consolidating costs
b. budgeting costs d. estimating costs
__b__ 59. ____ is a project performance measurement technique that integrates scope, time, and cost data.
a. Cost baseline c. Constructive cost
modeling
b. Earned value d. Parametric modeling
management-
__d__ 60. The ____ is that portion of the approved total cost estimate planned to be spent on an activity during a given
period.
a. AC c. RP
b. EV d. PV-
__c__ 61. The ____ 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.
a. AC c. RP-
b. EV d. PV
__b__ 62. The ____ is an estimate of the value of the physical work actually completed.
a. AC c. RP
b. EV- d. PV
_a___ 63. The ____ is the total direct and indirect costs incurred in accomplishing work on an activity during a given period.
a. AC- c. RP
b. EV d. PV
__a__ 64. Variances are calculated by subtracting the actual cost or planned value from ____.
a. EV- c. PV
b. AC d. RP
__b__ 65. ____ is the earned value minus the actual cost.
a. SV c. CPI
b. CV- d. SPI
__a__ 66. ____ is the earned value minus the planned value.
a. SV- c. CPI
b. CV d. SPI
__c__ 67. The ____ is the ratio of earned value to actual cost and can be used to estimate the projected cost of completing
the project.
a. SV c. CPI-
b. CV d. SPI
__d__ 68. The ____ is the ratio of earned value to planned value and can be used to estimate the projected time to complete
the project.
a. SV c. CPI
b. CV d. SPI-
___c_ 69. The ____ is an estimate of what it will cost to complete the project based on performance to date.
a. CPI c. EAC-
b. SV d. SPI
___a_ 70. Using simplified percentage complete amounts for a one-year project with weekly reporting and an average task
or work packet size of one week, you can expect about a(n) ____ percent error rate.
a. 1- c. 11
b. 5 d. 15

Completion
Complete each statement.

71. Using good _________________________ can change the false perception that costs grow and failures are to be
expected.
72. The main outputs of the ____________________ process are activity cost estimates, basis of estimates, and
project document updates.
73. The main outputs of the ____________________ process are a cost performance baseline, project funding
requirements, and project document updates.
74. The main outputs of the ____________________ process are work performance measurements, budget forecasts,
organizational process asset updates, change requests, project management plan updates, and project document
updates.
75. Information technology project managers need to be able to present and discuss project information in
____________________ terms as well as in technical terms.
76. ____________________ are revenues minus expenditures.
77. ____________________ allows you to see a big-picture view of the cost of a project throughout its life cycle.
78. ____________________ considers the total cost of ownership, or development plus support costs, for a project.
79. ____________________ costs or benefits are costs or benefits that are difficult to measure in monetary terms.
80. ____________________ cost is money that has been spent in the past.
81. ____________________ states that when many items are produced repetitively, the unit cost of those items
decreases in a regular pattern as more units are produced.
82. A(n) ____________________ is a document that describes how the organization will manage cost variances on
the project.
83. ____________________ costs are often much higher for contractors.
84. ____________________ uses project characteristics in a mathematical model to estimate project costs.
85. In practice, many people find that using a combination or hybrid approach involving analogous, bottom up, and/or
parametric modeling provides the best ____________________.
86. It is helpful to analyze the total dollar value as well as the percentage of the total amount for each major
______________________________ category.
87. It’s important for the team to ____________________ assumptions they made when developing the cost baseline
and have several experts review it.
 88. In addition to providing input for budgetary estimates, cost budgeting provides a(n) ____________________.
89. ____________________ has many cost management features to help you enter budgeted costs, set a baseline,
enter actuals, calculate variances, and run various cost reports.
90. A(n) ____________________ is the original project plan plus approved changes.
91. After you total the EV, AC, and PV data for all activities on a project, you can use the CPI and
___________________________________ to project how much it will cost and how long it will take to finish the
project based on performance to date.
92. In general, ____________________ numbers for cost and schedule variance indicate problems in those areas.
93. _________________________ and SPI less than one or less than 100 percent indicate problems.
94. The cost performance index can be used to calculate the ______________________________.
95. Many organizations now collect and control an entire suite of projects or investments as one set of interrelated
activities in one place, called a(n) ____________________.

Essay

96. List and briefly describe the three project cost management processes.
97. What are tangible, intangible, direct and indirect costs? Give examples of each.
98. What are the three basic types of cost estimating? Describe each type.
99. Describe four problems with Information Technology cost estimates.
100. List and describe the three values calculated for an activity in earned value management. Give examples of each.
ch7
Answer Section

TRUE/FALSE

1. ANS: F PTS: 1 REF: 254

2. ANS: F PTS: 1 REF: 256
3. ANS: T PTS: 1 REF: 256
4. ANS: T PTS: 1 REF: 257
5. ANS: F PTS: 1 REF: 257
6. ANS: F PTS: 1 REF: 258
7. ANS: T PTS: 1 REF: 259
8. ANS: F PTS: 1 REF: 260
9. ANS: F PTS: 1 REF: 260
10. ANS: F PTS: 1 REF: 260
11. ANS: T PTS: 1 REF: 260
12. ANS: T PTS: 1 REF: 261
13. ANS: F PTS: 1 REF: 262
14. ANS: T PTS: 1 REF: 262
15. ANS: T PTS: 1 REF: 262
16. ANS: T PTS: 1 REF: 263
17. ANS: F PTS: 1 REF: 264
18. ANS: F PTS: 1 REF: 265
 19. ANS: F PTS: 1 REF: 265
20. ANS: T PTS: 1 REF: 265
21. ANS: F PTS: 1 REF: 266
22. ANS: T PTS: 1 REF: 270
23. ANS: T PTS: 1 REF: 271
24. ANS: F PTS: 1 REF: 272
25. ANS: T PTS: 1 REF: 274
26. ANS: F PTS: 1 REF: 275
27. ANS: F PTS: 1 REF: 275
28. ANS: F PTS: 1 REF: 276
29. ANS: T PTS: 1 REF: 277
30. ANS: F PTS: 1 REF: 279

MULTIPLE CHOICE

31. ANS: C PTS: 1 REF: 254

32. ANS: C PTS: 1 REF: 254
33. ANS: D PTS: 1 REF: 256
34. ANS: D PTS: 1 REF: 256
35. ANS: A PTS: 1 REF: 256
36. ANS: B PTS: 1 REF: 257-258
37. ANS: C PTS: 1 REF: 258
38. ANS: B PTS: 1 REF: 258
39. ANS: D PTS: 1 REF: 258
40. ANS: D PTS: 1 REF: 259
41. ANS: C PTS: 1 REF: 259
42. ANS: C PTS: 1 REF: 260
43. ANS: D PTS: 1 REF: 260
44. ANS: A PTS: 1 REF: 260
45. ANS: A PTS: 1 REF: 260
46. ANS: B PTS: 1 REF: 260
47. ANS: C PTS: 1 REF: 261
48. ANS: C PTS: 1 REF: 261
49. ANS: A PTS: 1 REF: 261
50. ANS: B PTS: 1 REF: 261
51. ANS: D PTS: 1 REF: 263
52. ANS: C PTS: 1 REF: 264
53. ANS: B PTS: 1 REF: 264
54. ANS: B PTS: 1 REF: 264-265
55. ANS: B PTS: 1 REF: 266
56. ANS: A PTS: 1 REF: 270
57. ANS: C PTS: 1 REF: 271
58. ANS: A PTS: 1 REF: 272
59. ANS: B PTS: 1 REF: 273
60. ANS: D PTS: 1 REF: 273
61. ANS: C PTS: 1 REF: 273
62. ANS: B PTS: 1 REF: 273
 63. ANS: A PTS: 1 REF: 273
64. ANS: A PTS: 1 REF: 274
65. ANS: B PTS: 1 REF: 275
66. ANS: A PTS: 1 REF: 275
67. ANS: C PTS: 1 REF: 275
68. ANS: D PTS: 1 REF: 275
69. ANS: C PTS: 1 REF: 275
70. ANS: A PTS: 1 REF: 277

COMPLETION

71. ANS: project cost management

PTS: 1 REF: 256

72. ANS: cost estimating

PTS: 1 REF: 256

73. ANS: cost budgeting

PTS: 1 REF: 256

74. ANS: cost control

PTS: 1 REF: 256

75. ANS: financial

PTS: 1 REF: 257

76. ANS: Profits

PTS: 1 REF: 257

77. ANS: Life cycle costing

PTS: 1 REF: 258

78. ANS: Life cycle costing

PTS: 1 REF: 258

79. ANS: Intangible

PTS: 1 REF: 259

80. ANS: Sunk

PTS: 1 REF: 260

81. ANS: Learning curve theory

PTS: 1 REF: 260

82. ANS: cost management plan

PTS: 1 REF: 262

83. ANS: Labor
 PTS: 1 REF: 263
84. ANS: Parametric modeling

PTS: 1 REF: 264

85. ANS: cost estimates

PTS: 1 REF: 264

86. ANS:
WBS
work breakdown structure
work breakdown structure (WBS)
WBS (work breakdown structure)

PTS: 1 REF: 269

87. ANS: document

PTS: 1 REF: 270

88. ANS: cost baseline

PTS: 1 REF: 271

89. ANS:
Project 2007
Microsoft Project
Microsoft Project 2007

PTS: 1 REF: 272

90. ANS: baseline

PTS: 1 REF: 273

91. ANS:
SPI
schedule performance index
schedule performance index (SPI)
SPI (schedule performance index)

PTS: 1 REF: 275

92. ANS: negative

PTS: 1 REF: 275

93. ANS:
CPI
Cost performance index
Cost performance index (CPI)
CPI (cost performance index)

PTS: 1 REF: 275

94. ANS:
EAC
estimate at completion
estimate at completion (EAC)
EAC (estimate at completion)
 PTS: 1 REF: 275
95. ANS: portfolio

PTS: 1 REF: 278

ESSAY

96. ANS:
Estimating costs involves developing an approximation or estimate of the costs of the resources needed to
complete a project. The main outputs of the cost estimating process are activity cost estimates, basis of estimates,
and project document updates. A cost management plan is created as part of integration management when
creating the project management plan. It should include information related to the level of accuracy for estimates,
variance thresholds for monitoring cost performance, reporting formats, and other related information.

Determining the budget involves allocating the overall cost estimate to individual work items to establish a
baseline for measuring performance. The main outputs of the cost budgeting process are a cost performance
baseline, project funding requirements, and project document updates.

Controlling costs involves controlling changes to the project budget. The main outputs of the cost control
process are work performance measurements, budget forecasts, organizational process asset updates, change
requests, project management plan updates, and project document updates.

PTS: 1 REF: 256

97. ANS:
Tangible and intangible costs and benefits are categories for determining how definable the estimated costs and
benefits are for a project. Tangible costs or benefits are those costs or benefits that an organization can easily
measure in dollars. For example, suppose the Surveyor Pro project described in the opening case included a
preliminary feasibility study. If a company completed this study for $100,000, the tangible cost of the study is
$100,000. If Juan’s government estimated that it would have cost $150,000 to do the study itself, the tangible
benefits of the study would be $50,000 if it assigned the people who would have done the study to other projects.
Conversely, intangible costs or benefits are costs or benefits that are difficult to measure in monetary terms.
Suppose Juan and a few other people, out of personal interest, spent some time using government-owned
computers, books, and other resources to research areas related to the study. Although their hours and the
government-owned materials were not billed to the project, they could be considered intangible costs. Intangible
benefits for projects often include items like goodwill, prestige, and general statements of improved productivity
that an organization cannot easily translate into dollar amounts. Because intangible costs and benefits are difficult
to quantify, they are often harder to justify.

Direct costs are costs that can be directly related to producing the products and services of the project. You can
attribute direct costs directly to a certain project. For example, the salaries of people working full time on the
project and the cost of hardware and software purchased specifically for the project are direct costs. Project
managers should focus on direct costs, since they can control them.

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. For example, the cost of electricity, paper towels, and so on in a large building
housing a thousand employees who work on many projects would be indirect costs. Indirect costs are allocated to
projects, and project managers have very little control over them.

PTS: 1 REF: 259-260

98. ANS:
 A rough order of magnitude (ROM) estimate provides an estimate of what a project will cost. ROM estimates
can also be referred to as a ballpark estimate, a guesstimate, a swag, or a broad gauge. This type of estimate is
done very early in a project or even before a project is officially started. Project managers and top management
use this estimate to help make project selection decisions. The timeframe for this type of estimate is often three or
more years prior to project completion. A ROM estimate’s accuracy is typically –50 percent to +100 percent,
meaning the project’s actual costs could be 50 percent below the ROM estimate or 100 percent above. For
information technology project estimates, this accuracy range is often much wider. Many information technology
professionals automatically double estimates for software development because of the history of cost overruns on
information technology projects.

A budgetary estimate is used to allocate money into an organization’s budget. Many organizations develop
budgets at least two years into the future. Budgetary estimates are made one to two years prior to project
completion. The accuracy of budgetary estimates is typically –10 percent to +25 percent, meaning the actual costs
could be 10 percent less or 25 percent more than the budgetary estimate.

A definitive estimate provides an accurate estimate of project costs. Definitive estimates are used for making
many purchasing decisions for which accurate estimates are required and for estimating final project costs.
Definitive estimates are made one year or less prior to project completion. A definitive estimate should be the
most accurate of the three types of estimates. The accuracy of this type of estimate is normally –5 percent to +10
percent, meaning the actual costs could be 5 percent less or 10 percent more than the definitive estimate.

PTS: 1 REF: 261-262

99. ANS:
1. Estimates are done too quickly. Developing an estimate for a large software project is a complex task requiring
a significant amount of effort. Many estimates must be done quickly and before clear system requirements have
been produced. Rarely are the more precise, later estimates less than the earlier estimates for information
technology projects. It is important to remember that estimates are done at various stages of the project, and
project managers need to explain the rationale for each estimate.

2. Lack of estimating experience. The people who develop software cost estimates often do not have much
experience with cost estimation, especially for large projects. There is also not enough accurate, reliable project
data available on which to base estimates. If an organization uses good project management techniques and
develops a history of keeping reliable project information, including estimates, it should help improve the
organization’s estimates. Enabling information technology people to receive training and mentoring on cost
estimating will also improve cost estimates.

3. Human beings are biased toward underestimation. For example, senior information technology professionals or
project managers might make estimates based on their own abilities and forget that many junior people will be
working on a project. Estimators might also forget to allow for extra costs needed for integration and testing on
large information technology projects. It is important for project managers and top management to review
estimates and ask important questions to make sure the estimates are not biased.

4. Management desires accuracy. Management might ask for an estimate, but really desire a more accurate
number to help them create a bid to win a major contract or get internal funding. It is important for project
managers to help develop good cost and schedule estimates and to use their leadership and negotiation skills to
stand by those estimates.

PTS: 1 REF: 265

100. ANS:
The planned value (PV), also called the budget, is that portion of the approved total cost estimate planned to be
spent on an activity during a given period. Suppose a project included a summary activity of purchasing and
installing a new Web server. Suppose further that, according to the plan, it would take one week and cost a total
of $10,000 for the labor hours, hardware, and software involved. The planned value (PV) for that activity that
week is, therefore, $10,000.

The actual cost (AC) is the total direct and indirect costs incurred in accomplishing work on an activity during a
given period. For example, suppose it actually took two weeks and cost $20,000 to purchase and install the new
Web server. Assume that $15,000 of these actual costs were incurred during Week 1 and $5,000 was incurred
during Week 2. These amounts are the actual cost (AC) for the activity each week.

The earned value (EV) is an estimate of the value of the physical work actually completed. It 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. The 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 percent
(50/100) 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.

PTS: 1 REF: 273