Chapter No 7 – Project Cost Management
CE- 403: Computer Engineering Project Management
Course Description
Project Management Managing Information Technology projects within
an organizational context, including the processes
related to initiating, planning, executing,
Compiled By: controlling, monitoring and closing a project.
Muzammil Ahmad Khan This course covers topics such as project
[email protected] integration, scope, time, cost, risk management.
Sir Syed University of Engineering & Technology Project Management 2
Project Management
Course Objective
Course Learning Outcomes( CLO’s )
CLO
This course intends to give the student a basic No
Outcome Statement Level *
Identifying basic concepts of Project Management, thus, enabling
familiarity with Project Management. 1 him/her to functionally utilize these skills in his/her future C1
Information Technology (IT) bases project practices.
To provide students with a portfolio of project
Describing and understanding the Project Management concepts,
management tools that can be used in managing 2 principles, methods, project life cycle and the knowledge that is C2
required for managing the IT projects.
information technology projects. Applying and analyze the different processes of each knowledge
3 area with its Inputs, Outputs, Tools and Techniques. C3
To provide students with a real-world project Applying project management techniques for IT projects to
management experience. initiate, plan, execute and evaluate a project and work in teams to
4 C3
create a project plan for a project scenario that includes key tasks,
critical path, dependencies and a realistic timeline
* Bloom’s taxonomy level. C: Cognitive, P: Psychomotor, A: Affective
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Books Marks Distribution
Text Book
Information Technology Project Management
Assignments, Quizzes & Project 20
7th Edition, Mid Term 30
Kathy Schwalbe
Final Examination 50
Reference Book
Information Technology Project Management
Total Marks 100
4th Edition
Jack Marchewka https://sites.google.com/site/cedssuet
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CE - 403: Computer Engineering Project Management
Learning Objectives
Understand the importance of project cost management
Information Technology Project Management
7th Edition Explain basic project cost management principles, concepts,
and terms
Chapter No 7:
Project Cost Management Describe the process of planning cost management
Discuss different types of cost estimates and methods for
preparing them
Complied By: Muzammil Ahmad Khan
[email protected]Project Management Project Management 8
Learning Objectives The Importance of Project Cost Management
Understand the processes of determining a budget and IT projects have a poor track record for meeting budget goals
preparing a cost estimate for an Information Technology (IT) The CHAOS studies found the average cost overrun (the
project additional percentage or dollar amount by which actual costs
Understand the benefits of earned value management and exceed estimates) ranged from 180 percent in 1994 to 43 percent
project portfolio management to assist in cost control in 2010
Describe how project management software can assist in A 2011 Harvard Business Review study reported an average
project cost management cost overrun of 27 percent. The most important finding was the
discovery of a large number of gigantic overages or “black
swans”
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What is Cost and Project Cost Management? Project Cost Management Processes
Planning cost management :determining the policies,
Cost is a resource sacrificed or foregone (conclusion) to achieve a
procedures, and documentation that will be used for planning,
specific objective or something given up in exchange
executing, and controlling project cost.
Costs are usually measured in monetary units like dollars Estimating costs: developing an approximation or estimate of the
Project Cost Management includes the processes required to costs of the resources needed to complete a project
ensure that the project is completed within an approved budget 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
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Figure 7-1: Project Cost Management
Principles of Cost Management
Summary
Most members of an executive board better understand and are
more interested in financial terms than IT terms , so IT project
managers must speak their language
Profits are revenues minus expenditures
Profit margin is the ratio of revenues to profits
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 and the resulting annual cash flow
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Table 7-1: Cost of Downtime for IT
Types of Costs and Benefits
Applications
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
Source: The Standish Group International, “Trends in IT Value,” www.standishgroup.com (2008). include sunk costs
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More Basic Principles of Cost Management Planning Cost Management
Learning curve theory states that when many items are The project team uses expert judgment, analytical techniques, and
produced repetitively, the unit cost of those items decreases in a meetings to develop the cost management plan
regular pattern as more units are produced
A cost management plan includes:
Reserves are dollars included in a cost estimate to mitigate cost
Level of accuracy and units of measure
risk by allowing for future situations that are difficult to predict
Organizational procedure links
Contingency reserves allow for future situations that may be
partially planned for (sometimes called known unknowns)
Control thresholds
and are included in the project cost baseline Rules of performance measurement
Management reserves allow for future situations that are Reporting formats
unpredictable (sometimes called unknown unknowns Process descriptions
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Estimating Costs Table 7-2: Types of Cost Estimates
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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Table 7-3: Maximum FTE by Department by
More on Cost Estimates
Year
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 and
should become more accurate as time progresses
A large percentage of total project costs are often labor costs
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Cost Estimation Tools and Techniques Typical Problems with IT Cost Estimates
Basic tools and techniques for cost estimates: Estimates are done too quickly
Analogous or top-down estimates: use the actual cost of a People lack estimating experience
previous, similar project as the basis for estimating the cost of
Human beings are biased toward underestimation
the current project
Management desires accuracy
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
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Sample Cost Estimate Figure 7-2: Surveyor Pro Project Cost Estimate
See pages 284-289 for a detailed example of creating a cost
estimate for the Surveyor Pro project described in the opening
case
Before creating an estimate, know what it will be used for, gather
as much information as possible, and 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 make changes to and
document the estimate
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Figure 7-3: Surveyor Pro Software
Determining the Budget
Development Estimate
Cost budgeting involves allocating the project cost estimate to
individual work items over time
The WBS is a required input to the cost budgeting process since
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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Figure 7-4: Surveyor Pro Project Cost
Media Snapshot
Baseline
U.S. President Barack Obama successfully used the media and
information technology in his campaign
The Obama campaign used 16 different online social
platforms to interact with people of various backgrounds;
sources say 80 percent of all contributions originated from
these social networks
In a 60 Minutes episode shortly after the election, campaign
leaders discussed some of the details of the campaign
The Web site My.BarackObama was created to develop an
online community with over a million members
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Controlling Costs Earned Value Management (EVM)
Project cost control includes EVM is a project performance measurement technique that
Monitoring cost performance integrates scope, time, and cost data
Ensuring that only appropriate project changes are included Given a baseline (original plan plus approved changes), you can
in a revised cost baseline determine how well the project is meeting its goals
Informing project stakeholders of authorized changes to the You must enter actual information periodically to use EVM
project that will affect costs More and more organizations around the world are using EVM
Many organizations around the globe have problems with cost to help control project costs
control
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Earned Value Management (EVM) Terms Rate of Performance (RP)
The planned value (PV), formerly called the budgeted cost of Rate of performance (RP) is the ratio of actual work
work scheduled (BCWS), also called the budget, is that portion completed to the percentage of work planned to have been
of the approved total cost estimate planned to be spent on an
completed at any given time during the life of the project or
activity during a given period
activity
Actual cost (AC), formerly called actual cost of work performed
(ACWP), is the total of direct and indirect costs incurred in Brenda Taylor, Senior Project Manager in South Africa,
accomplishing work on an activity during a given period suggests this term and approach for estimating earned value
The earned value (EV), formerly called the budgeted cost of For example, suppose the server installation was halfway
work performed (BCWP), is an estimate of the value of the
completed by the end of week 1. The rate of performance would
physical work actually completed
be 50% because by the end of week 1, the planned schedule
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 reflects that the task should be 100 percent complete and only
project or activity to date 50 percent of that work has been completed
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Table 7-4: Earned Value Calculations for
Table 7-5: Earned Value Formulas
One Activity after Week One
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Figure 7-5: Earned Value Chart for Project
Rule of Thumb for Earned Value Numbers
after Five Months
Negative numbers for cost and schedule variance indicate
problems in those areas
CPI and SPI less than 100% indicate problems
Problems mean the project is costing more than planned (over
budget) or taking longer than planned (behind schedule)
The CPI can be used to calculate the estimate at completion
(EAC)—an estimate of what it will cost to complete the project
based on performance to date. The budget at completion (BAC)
is the original total budget for the project
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Global Issues Figure 7-6: Earned Value Usage
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 7-6
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
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Project Portfolio Management Benefits of Portfolio Management
Many organizations collect and control an entire suite of projects Schlumberger saved $3 million in one year by organizing 120
or investments as one set of interrelated activities in a portfolio information technology projects into a portfolio
ROI of implementing portfolio management software by IT
Five levels for project portfolio management
departments:
1. Put all your projects in one database Savings of 6.5 percent of the average annual IT budget by the
2. Prioritize the projects in your database end of year one
3. Divide your projects into two or three budgets based on type of Improved annual average project timeliness by 45.2 percent
investment Reduced IT management time spent on project status
reporting by 43 percent and IT labor capitalization reporting
4. Automate the repository by 55 percent
5. Apply modern portfolio theory, including risk-return tools that Decreased the time to achieve financial sign-off for new IT
map project risk on a curve projects by 20.4 percent, or 8.4 days
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Using Software to assist in Cost Management Chapter Summary
Spreadsheets are a common tool for resource planning, cost Project cost management is a traditionally weak area of IT
estimating, cost budgeting, and cost control projects, and project managers must work to improve their
Many companies use more sophisticated and centralized ability to deliver projects within approved budgets
financial applications software for cost information Main processes include
Project management software has many cost-related features, Plan cost management
especially enterprise PM software
Estimate costs
Portfolio management software can help reduce costs
Determine the budget
Control costs
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