Project Cost
Management
Information Technology
Project Management
The Importance of Project Cost
Management
IT projects have a poor track record for meeting
budget goals
A 2011 Harvard Business Review study reported an
average 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?
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 like
dollars/ shillings
Project cost management includes the processes
required to ensure that the project is completed
within an approved budget
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Project Cost Management Processes
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
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Basic Principles of Cost Management
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 Cost of Downtime for IT
Applications
Source: The Standish Group International, “Trends in IT Value,” www.standishgroup.com (2008).
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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
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More 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 unknown
unknowns
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Planning Cost Management
The project team uses expert judgment, analytical
techniques, and meetings to develop the cost
management plan
A cost management plan includes:
◦ Level of accuracy and units of measure
◦ Organizational procedure links
◦ Control thresholds
◦ Rules of performance measurement
◦ Reporting formats
◦ Process descriptions
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Estimating Costs
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 Types of Cost Estimates
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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
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Typical Problems with IT Cost
Estimates
Estimates are done too quickly
People lack estimating experience
Human beings are biased toward underestimation
Management desires accuracy
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Sample Cost Estimate
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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Surveyor Pro Project Cost Estimate
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Figure 7-3. Surveyor Pro Software
Development Estimate
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Determining the Budget
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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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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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
1. Put all your projects in one database
2. Prioritize the projects in your database
3. Divide your projects into two or three budgets based on
type of investment
4. Automate the repository
5. Apply modern portfolio theory, including risk-return tools
that map project risk on a curve
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Benefits of Portfolio Management
Schlumberger saved $3 million in one year by
organizing 120 information technology projects into a
portfolio
ROI of implementing portfolio management software
by IT departments:
◦ Savings of 6.5 percent of the average annual IT budget by
the end of year one
◦ Improved annual average project timeliness by 45.2 percent
◦ Reduced IT management time spent on project status
reporting by 43 percent and IT labor capitalization reporting
by 55 percent
◦ Decreased the time to achieve financial sign-off for new IT
projects by 20.4 percent, or 8.4 days
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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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