TTTE6504-SOFTWARE

MANAGEMENT
Software Costing
https://www.youtube.com/watch?v=rN0FrDpQNUk
 Software Projects are
‘Special’
 The software product is intangible and complex.
 Software cannot be seen or touched. Software project managers cannot see
progress by simply looking at the artefact that is being constructed.
 Software products are more complex than other engineered artifacts.

 Many software projects are 'one-off' projects.

 Large software projects are usually different in some ways from previous projects.
Even managers who have lots of previous experience may find it difficult to
anticipate problems.

 Software processes are variable and organisation specific.

 We still cannot reliably predict when a particular software process is likely to lead to
development problems.
 Software Projects are
‘Special’
 Software engineering is complex.
 “Traditional engineers” work with consistent physical laws. Software
engineers have to conform to inconsistent “people laws”.

 Software business is dynamic.

 Software always change (i.e. user requirements change, people change,
policy changes, organisation changes etc.).
 Software Pricing

 The aim of proposal planning is to provide information that will be used in

setting a price for the system to customers.

 Project cost estimation and scheduling are management activities

that are normally carried out together.

 Cost estimation involves the following questions:

 How much effort is required to complete an activity?
 What is the total cost of an activity?
 Software Pricing

 The components involved in computing the total cost of a software

project:
 Hardware and software costs (including maintenance)
 Travel and training costs
 Effort costs (the dominant factor in most projects)
 The salaries of engineers involved in the project
 Social security and insurance costs

 Effort costs must take overheads into account:

 Costs of building, heating, lighting
 Costs of networking and communications
 Costs of shared facilities (e.g library, staff restaurant, etc.)
 Software Pricing
 The objective is to accurately predict the cost of developing the
software.

 Classically, price is simply cost plus profit.

 But in reality, no simple relationship between the development cost and

the price charged to the customer.

 Broader organisational, economic, political and business considerations

influence the price charged.
 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 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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 The Importance of Project Cost
Management

 IT projects have a poor track record for meeting

budget goals
 The CHAOS studies found the average cost overrun
(the additional percentage or dollar amount by which
actual costs exceed estimates) ranged from 180
percent in 1994 to 56 percent in 2004; other studies
found overruns to be 33-34 percent
 Project Cost Management
Processes

 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.

 Cost control: Controlling changes to the project budget.

 Additional: Resource Planning

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Flow of Cost Management

Resource Identify the resources uses

Planning

Determine quantity of resources

Cost
needed
Estimating

Allocating the estimate cost

Cost Budgeting

Monitoring the cost from over

Cost Control budget
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 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 are revenues minus expenses.
 Life 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
12 and the resulting annual
 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.
 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
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deciding what projects to invest in or continue, you should
 Basic Principles of Cost Management
 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
14 unknown unknowns).
 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.
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 Some problems with estimating

 Subjective nature of much of estimating

 It may be difficult to produce evidence to support your
precise target
 Political pressures
 Managers may wish to reduce estimated costs in order to
win support for acceptance of a project proposal
 Changing technologies
 these bring uncertainties, especially in the early days when
there is a ‘learning curve’
 Projects differ
 Experience on one project may not be applicable to another
 Typical 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.
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 Basis for successful estimating

 Information about past projects

 Need to collect performance details about past
project: how big were they? How much
effort/time did they need?
 Need to be able to measure the amount of work
involved
 Traditional size measurement for software is
‘lines of code’ – but this can have problems
 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.
 Parametric modeling: Uses project characteristics (parameters) in
a mathematical model to estimate project costs.
 Computerized tools: Tools, such as spreadsheets and project
management software, that can make working with different cost
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estimates and cost estimation tools easier.
 Some other estimation method

 Top-down approach
 Bottom-up approach
 Expert Judgment
 Ian Parkinson
 Price-to Win
 User Story
 Playing Poker
 Analogy
 Machine Learning
 Use Case Point
 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.
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 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.
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 Cost Budgeting

 Cost budgeting involves allocating the project cost estimate to

individual work items over time.

 The Work Breakdown Structure (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.
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 Cost Control

 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), 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
26 work on the project or activity
to date.
 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.
 Brenda Taylor, Senior Project Manager in South Africa, suggests
using this approach for estimating earned value.
 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.
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Thanks /
Q&A
 Tutorial Session 1

1. Form a group of 5 members

2. Pick one of the estimation methods. Discuss on the following matters
- How does the methods works?
- Advantages / Disadvantages
- Issues/Challenges/Problems
- Example
3. Present your findings within 10 minutes.