IST 302 : Project Cost Management

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1 IST 302 : Project Cost Management Project Cost Management : Why do we care? 1

2 Cost and Cost Management Cost: Cost Management: Project Cost Management Processes Cost Estimating Developing an estimate of the costs and resources Cost Budgeting Allocating the overall cost estimate to individual work items Cost Control Controlling changes to the project budget 2

3 Basic Principles of Cost Management Profit Life Cycle Costing Cash Flow Analysis Profit Margin Internal Rate of Return Cash Flow Analysis Learning Curve Theory Contingency Reserves Management Reserves There are various types of costs. Tangible Costs Costs that can be easily measured in dollar amounts Intangible Costs Costs that have no natural dollar measurement Fixed Costs Costs that are one-time occurrences for a project Recurring Costs Costs that occur periodically over the lifetime of a project Sunk Costs Costs that occurred prior to the project start Direct Costs Costs that can be associated directly to a project Indirect Costs Costs that are not associated directly to a project 3

4 Activity : Identify examples of the different cost types. Tangible Costs Intangible Costs Fixed Costs Recurring Costs Sunk Costs Direct Costs Indirect Costs There are 3 common approaches to cost estimation 4

5 Cost estimates are refined over time. Type When Why Accuracy Rough Order of Magnitude Early in the planning stages Project selection decisions 50% to 100% Budgetary When creating a schedule Budgetary planning for the organization 10% to 25% Definitive Before execution Baseline for performance tracking and purchase decisions. 5% to 10% COCOMO II is a parametric model crafted to aid in the estimation of software projects. Developed by BarryBoehm Many online resources Check Wikipedia Leads to other sources Online calculator: y.php?utility=cocomoii 5

6 Typical Problems with IT Cost Estimates Estimation for large projects is a complex task Many people have little experience doing estimates People have a bias toward underestimation Management wants a number, not reality Project cost control requires Monitoring cost performance Identifying and mitigating cost risks Ensuring that project changes are included in a revised cost baseline Informing stakeholders of changes that will affect costs 6

7 The key tool in measuring and managing project cost is Earned Value Management. Performance measurement Integrates scope, time, and cost data Determine how well the project is meeting its goals relative to a given baseline Requires actual data to be effective EVM Core Metrics Planned value (PV) Portion of the approved total cost estimate planned to be spent on an activity during a given period Earned value (EV) Estimate of the value of the physical work actually completed Actual cost (AC) Total of direct and indirect costs incurred in accomplishing work on an activity during a given period 7

8 EVM Performance Indices Cost Performance Index (CPI) CPI = EV / AC Schedule Performance Index (SPI) SPI = EV / PV Interpretation: 1 : Under =1 : As planned 1 : Over EVM Prediction Metrics Estimate at Completion (EAC) EAC = Original budgeted cost / CPI Estimate of Completion (EOC) EOC = Original project duration / SPI Projected Completion Date = Original start date + EOC 8

9 Visualizing the project s performance is helpful Worth Reiterating! Variances that arenegative indicate problems CPI and SPI less than 1 indicate problems Note: Some organizations view deviation to far in either direction a problem. 9

10 EVM Example Project Timeline : July 2009 July 2010 DUR = 1YR PV = $23K EV = $20K AC=$25K BAC=$120K How is the project performing? If it continues as is, what will be the final cost and duration? Create a graph! EVM Example Project Timeline : July 2009 July 2010 DUR = 1YR PV = $23K EV = $20K AC=$25K BAC=$120K CV = EV AC = 20K 25K = 5K SV = EV PV = 20K 23K = 3K CPI = EV / AC = 20K / 25K = 0.80 SPI = EV / PV = 20K / 23K = 0.87 EAC = BAC / CPI = 120K / 0.80 = 150K EOC = DUR / SPI = 1YR / 0.87 = 1.15YR END: AUG

11 EVM Chart Example BAC EAC PV AC EV

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