Chapter 7:

Project Cost
Management
Information Technology Project Management, Ninth
Edition
Note: See the text itself for full citations

Information Technology Project Management, Ninth Edition. © 2019 Cengage. May not be copied, scanned, or duplicated, in whole or in part, except
for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Learning Objectives (1 of 2)

• Develop a justification for project cost management and

its importance in achieving project success
• Explain basic project cost management principles,
concepts, and terms
• Describe the process of planning cost management
• Discuss different types of cost estimates and methods
for preparing them
• Using an example of an information technology (IT)
project, list and describe the processes of determining a
budget and preparing a cost estimate

Information Technology Project Management, Ninth Edition. © 2019 Cengage. May not be copied, scanned, or duplicated, in whole or in part, except
for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Learning Objectives (2 of 2)

• Justify the use of earned value management and project

portfolio management to assist in cost control
• Describe how project management software can assist in
project cost management
• Discuss considerations for agile/adaptive environments

Information Technology Project Management, Ninth Edition. © 2019 Cengage. May not be copied, scanned, or duplicated, in whole or in part, except
for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
The Importance of Project Cost Management

• IT projects have a poor track record for meeting budget

goals
• Cost overrun is the additional percentage or dollar amount by
which actual costs exceed estimates
• A 2011 Harvard Business Review study reported an average
cost overrun of 27 percent
• Most important finding was the discovery of a large number of gigantic
overages or “black swans”; a high-impact event that is rare and
unpredictable, but not improbable in retrospect

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for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
What Went Wrong?

• The United Kingdom’s National Health Service IT

modernization program was called the greatest IT
disaster in history with an estimated $26 billion overrun
• Program had problems due to incompatible systems, resistance
from physicians, and arguments among contractors about
who’s responsible for what
• Scrapped in 2011

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for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
What is Cost?

• Cost is a resource sacrificed or foregone to achieve a

specific objective or something given up in exchange
• Usually measured in monetary units like dollars that must be
paid to acquire goods and services

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for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
What is Project Cost Management? (1 of 2)

• Project cost management includes the processes

required to ensure that the project is completed within
an approved budget
• Planning cost management: determining the policies,
procedures, and documentation that will be used for planning,
executing, and controlling project cost
• Estimating costs: developing an approximation or estimate of
the costs of the resources needed to complete a project
• Determining the budget: allocating the overall cost estimate to
individual work items to establish a baseline for measuring
performance
• Controlling costs: controlling changes to the project budget

Information Technology Project Management, Ninth Edition. © 2019 Cengage. May not be copied, scanned, or duplicated, in whole or in part, except
for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
What is Project Cost Management? (2 of 2)

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for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Basic Principles of Cost Management (1 of 3)

• Most members of an executive board better understand

and are more interested in financial terms than IT terms;
they need to be able to present and discuss project
information in both
• Profits: revenues minus expenditures
• Profit margin: ratio of profits to revenues
• Life cycle costing: considers total cost of ownership, or
development plus support costs, for a project
• Cash flow analysis: determines estimated annual costs and
benefits for a project and resulting annual cash flow

Information Technology Project Management, Ninth Edition. © 2019 Cengage. May not be copied, scanned, or duplicated, in whole or in part, except
for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Media Snapshot

• You cannot measure ROI unless you have a benefits

measurement process in place
• 2015 report by PMI findings
• Many organizations do not have a benefits measurement
process
• 20 percent of organizations report having a high level of
benefits realization maturity
• 39 percent of high-performing organizations report high
benefits realization maturity compared to nine percent of low
performers

Information Technology Project Management, Ninth Edition. © 2019 Cengage. May not be copied, scanned, or duplicated, in whole or in part, except
for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
What Went Right?

• Investing in green IT and other initiatives has helped

both the environment and companies’ bottom lines
• Michael Dell, CEO of Dell, reached his goal to make his
company “carbon neutral” in 2008
• As of March 2012, Dell had helped its customers save almost $7
billion in energy costs
• In 2014 Dell reported being on track toward reaching their goal
of recovering two billion pounds of used electronics by 2020

Information Technology Project Management, Ninth Edition. © 2019 Cengage. May not be copied, scanned, or duplicated, in whole or in part, except
for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Basic Principles of Cost Management (2 of 3)

• Types of costs and benefits

• 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
• Direct costs are costs that can be directly related to producing
the products and services of the project
• 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

Information Technology Project Management, Ninth Edition. © 2019 Cengage. May not be copied, scanned, or duplicated, in whole or in part, except
for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Basic Principles of Cost Management (3 of 3)

• Additional concepts
• Learning curve theory states that when many items are
produced repetitively, the unit cost of those items decreases in
a regular pattern as more units are produced
• Reserves are dollars included in a cost estimate to mitigate cost
risk by allowing for future situations that are difficult to predict
• Contingency reserves allow for future situations that may be partially
planned for (sometimes called known unknowns) and are included in the
project cost baseline
• Management reserves allow for future situations that are unpredictable
(sometimes called unknown unknowns)

Information Technology Project Management, Ninth Edition. © 2019 Cengage. May not be copied, scanned, or duplicated, in whole or in part, except
for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Advice for Young Professionals

• If you have never done so, take a class or do self-study in

accounting, financial statements, or financial
management
• There are many online resources and short books available on
the topics of finance for the non-financial manager, how to use
financial statements, or similar content
• Financial specialists are often willing to help less-experienced
people better understand the key terminology of the financial
field

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for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Planning Cost Management

• The first step in project cost management is planning

how the costs will be managed throughout the life of the
project
• The project team uses expert judgment, analytical techniques,
and meetings to develop the cost management plan
• Cost management plan includes:
• Level of accuracy
• Units of measure
• Organizational procedure links
• Control thresholds
• Rules of performance measurement
• Reporting formats
• Process descriptions

Information Technology Project Management, Ninth Edition. © 2019 Cengage. May not be copied, scanned, or duplicated, in whole or in part, except
for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Estimating Costs (1 of 4)

• Project managers must take cost estimates seriously if

they want to complete projects within budget constraints
• Types of cost estimates
• Tools and techniques for estimating costs
• Typical problems associated with IT cost estimates

Information Technology Project Management, Ninth Edition. © 2019 Cengage. May not be copied, scanned, or duplicated, in whole or in part, except
for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Estimating Costs (2 of 4)

Type of When Done Why Done Typical Range

Estimate
Rough order of Very early in the project Provides estimate of -50% to + 100%
magnitude life cycle, often 3–5 years cost for selection
(ROM) before project completion decisions
Budgetary Early, 1–2 years out Puts dollars in the -10% to +25%
budget plans
Definitive Later in the project, less Puts dollars in the -5% to +10%
than 1 year out budget plans

Table 7-1 Types of cost estimates

Information Technology Project Management, Ninth Edition. © 2019 Cengage. May not be copied, scanned, or duplicated, in whole or in part, except
for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Estimating Costs (3 of 4)

• The number and type of cost estimates vary by

application area
• The Association for the Advancement of Cost Engineering
International identifies five types of cost estimates for
construction projects
• Order of magnitude, conceptual, preliminary, definitive, and control
• Estimates are usually done at various stages of a project
• Should become more accurate as time progresses
• It is important to provide supporting details for estimates and
updates to project documents
• A large percentage of total project costs are often labor costs

Information Technology Project Management, Ninth Edition. © 2019 Cengage. May not be copied, scanned, or duplicated, in whole or in part, except
for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Estimating Costs (4 of 4)

Department Year 1 Year 2 Year 3 Year 4 Year 5 Totals

Information 24 31 35 13 13 116
systems
Marketing 3 3 3 3 3 15
systems
Reservations 12 29 33 9 7 90
Contractors 2 3 1 0 0 6
Totals 41 66 72 25 23 227

Table 7-2 Maximum FTE by department by year

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for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Cost Estimation Tools and Techniques

• 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
• Three-point estimates
• Involve estimating the most likely, optimistic, and pessimistic
costs for items
• Parametric estimating
• Uses project characteristics (parameters) in a mathematical
model to estimate project costs

Information Technology Project Management, Ninth Edition. © 2019 Cengage. May not be copied, scanned, or duplicated, in whole or in part, except
for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Typical Problems with IT Cost Estimates

• Reasons for inaccuracies

• Estimates are done too quickly
• People lack estimating experience
• Human beings are biased toward underestimation
• Management desires accuracy

Information Technology Project Management, Ninth Edition. © 2019 Cengage. May not be copied, scanned, or duplicated, in whole or in part, except
for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
How to Develop a Cost Estimate and Basis of
Estimates (1 of 3)

• See the text for a detailed example of creating a cost

estimate for the Surveyor Pro project described in the
opening case
• Before creating an estimate gather as much information as
possible about the project, ask how the organization plans to
use the cost estimate, and clarify the ground rules and
assumptions

Information Technology Project Management, Ninth Edition. © 2019 Cengage. May not be copied, scanned, or duplicated, in whole or in part, except
for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
How to Develop a Cost Estimate and Basis of
Estimates (2 of 3)

Information Technology Project Management, Ninth Edition. © 2019 Cengage. May not be copied, scanned, or duplicated, in whole or in part, except
for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
How to Develop a Cost Estimate and Basis of
Estimates (3 of 3)

Information Technology Project Management, Ninth Edition. © 2019 Cengage. May not be copied, scanned, or duplicated, in whole or in part, except
for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Best Practice

• Alvin Alexander wrote a book called Cost Estimating in

an Agile Development Environment in 2015
• Function points are a means of measuring software size in
terms that are meaningful to end users
• User stories are a common way to describe requirements in a
simple, concise way
• Developers can analyze user stories to estimate the number of
internal logical files (ILFs)—a group of logically related data that
resides entirely within the application boundary and is
maintained through external inputs

Information Technology Project Management, Ninth Edition. © 2019 Cengage. May not be copied, scanned, or duplicated, in whole or in part, except
for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Determining the Budget (1 of 2)

• Budgeting involves allocating the project cost estimate

to individual work items over time
• Material resources or work items are based on the activities in
the WBS for the project
• Important goal is to produce a cost baseline
• Time-phased budget that project managers use to measure and
monitor cost performance

Information Technology Project Management, Ninth Edition. © 2019 Cengage. May not be copied, scanned, or duplicated, in whole or in part, except
for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Determining the Budget (2 of 2)

Information Technology Project Management, Ninth Edition. © 2019 Cengage. May not be copied, scanned, or duplicated, in whole or in part, except
for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Controlling Costs

• Activities involved in controlling project costs

• 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
• Several tools and techniques assist in project cost control
• Expert judgment, data analysis, project management
information systems, and the to-complete performance index

Information Technology Project Management, Ninth Edition. © 2019 Cengage. May not be copied, scanned, or duplicated, in whole or in part, except
for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Earned Value Management (EVM) (1 of 5)

• 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 scope, time, and cost
goals
• Earned value management involves calculating three
values for each activity or summary activity from a
project’s WBS
• Planned value
• Actual cost
• Earned value

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for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Earned Value Management (EVM) (2 of 5)

Activity Week 1
Earned value (EV) 5,000
Planned value (PV) 10,000
Actual cost (AC) 15,000
Cost variance (CV) -10,000
Schedule variance (SV) -5,000
Cost performance index (CPI) 33%
Schedule performance index (SPI) 50%

Table 7-3 Earned value calculations for one activity after week 1

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Earned Value Management (EVM) (3 of 5)

Term Formula

Earned value (EV) EV = PV of all completed work

Cost variance (CV) CV = EV - AC

Schedule variance (SV) SV = EV - PV

Cost performance index (CPI) CPI = EV/AC

Schedule performance index (SPI) SPI = EV/PV

Estimate at completion (EAC) EAC = BAC/CPI

Estimated to Complete (ETC) ETC = EAC - AC

Table 7-4 Earned value formulas

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for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Earned Value Management (EVM) (4 of 5)

• Important concepts
• Cost variance (CV) is the earned value minus the actual cost
• Schedule variance (SV) is the earned value minus the planned
value
• Cost performance index (CPI) is the ratio of earned value to
actual cost
• Schedule performance index (SPI) is the ratio of earned value to
planned value
• Estimate at completion (EAC) is an estimated cost of
completing a project based on performance to date
• To-complete performance index (TCPI) is a measure of the cost
performance that must be achieved with the remaining
resources to meet a specific goal

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for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Earned Value Management (EVM) (5 of 5)

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for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Global Issues (1 of 2)

• EVM is used worldwide, and it is particularly popular in

the Middle East, South Asia, Canada, and Europe
• Most countries require EVM for large defense or government
projects, as shown in Figure 7-7
• EVM is also used in such private-industry sectors as IT,
construction, energy, and manufacturing.
• However, most private companies have not yet applied EVM to their
projects because management does not require it, feeling it is too
complex and not cost effective

Information Technology Project Management, Ninth Edition. © 2019 Cengage. May not be copied, scanned, or duplicated, in whole or in part, except
for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Global Issues (2 of 2)

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for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Project Portfolio Management

• Many organizations collect and control an entire suite of

projects or investments as one set of interrelated
activities in a portfolio
• Five levels for project portfolio management
• Put all your projects in one database
• Prioritize the projects in your database
• Divide your projects into two or three budgets based on type of
investment
• Automate the repository
• Apply modern portfolio theory, including risk-return tools that
map project risk on a curve

Information Technology Project Management, Ninth Edition. © 2019 Cengage. May not be copied, scanned, or duplicated, in whole or in part, except
for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Using Project Management Software to Assist
in Project Cost Management (1 of 2)

• 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 can increase a project
manager’s effectiveness during each process of project
cost management
• Many IT project managers use other tools to manage cost
information because they do not know that they can use project
management software, or they do not track costs based on a
WBS, as most project management software does

Information Technology Project Management, Ninth Edition. © 2019 Cengage. May not be copied, scanned, or duplicated, in whole or in part, except
for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Using Project Management Software to Assist
in Project Cost Management (2 of 2)

• Recent Studies on PPM Software

• 2017 Gartner report says the market continues to grow, with
annual sales over $2.3 billion
• Forrester estimates ROIs of 250 percent from PPM tools
• Pfizer and Ford use PPM software to improve transparency of
the many projects they manage

Information Technology Project Management, Ninth Edition. © 2019 Cengage. May not be copied, scanned, or duplicated, in whole or in part, except
for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Considerations for Agile/Adaptive Environments

• AgileEVM is an adapted implementation of EVM

• Uses the Scrum framework artifacts as inputs, uses traditional
EVM calculations, and is expressed in traditional EVM metrics
• Requires a minimal set of input parameters
• Actual cost of a project, an estimated product backlog, a release plan
that provides information on the number of iterations in the release and
the assumed velocity
• All estimates can be in hours, story-points, team days or any
other consistent estimate of size
• The critical factor is that it must be a numerical estimate of some kind

Information Technology Project Management, Ninth Edition. © 2019 Cengage. May not be copied, scanned, or duplicated, in whole or in part, except
for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Chapter Summary

• Project cost management is a traditionally weak area of

IT projects
• Project managers must understand several basic principles of
cost management to be effective in managing project costs
• Main processes
• Plan cost management
• Estimate costs
• Determine the budget
• Control costs
• Several software products can assist with project cost
management

Information Technology Project Management, Ninth Edition. © 2019 Cengage. May not be copied, scanned, or duplicated, in whole or in
part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website
for classroom use.