Mis 448 Ch7 - Cost

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The CHAOS studies found the average cost overrun

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ranged from 180 percent in 1994 to 56 percent in 2004; other studies found overruns to be 33-34 percent

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What is Cost and Project Cost Management? Cost

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is a resource sacrificed or foregone to achieve a specific objective or something given up in exchange

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What is Cost and Project Cost Management? Management

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includes the processes required to ensure that the project is completed within an approved budget

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Project Cost Management Processes: Estimating

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developing an approximation or estimate of the costs of the resources needed to complete a project

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Project Cost Management Processes: Determine Budget

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allocating the overall cost estimate to individual work items to establish a baseline for measuring performance

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Project Cost Management Processes: Controlling costs

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controlling changes to the project budget

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Basic Principles of Cost Management: Tangible costs

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or benefits are those costs or benefits that an organization can easily measure in dollars

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Basic Principles of Cost Management: Intangible Costs

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or benefits are costs or benefits that are difficult to measure in monetary terms

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Basic Principles of Cost Management: Direct Costs

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

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Basic Principles of Cost Management: Indirect Costs

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are costs that are not directly related to the products or services of the project, but are indirectly related to performing the project

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Basic Principles of Cost Management: Sunk cost

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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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Learning curve theory states

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that when many items are produced repetitively, the unit cost of those items decreases in a regular pattern as more units are produced

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Reserves are

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dollars included in a cost estimate to mitigate cost risk by allowing for future situations that are difficult to predict

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Contingency reserves allow for

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future situations that may be partially planned for (sometimes called known unknowns) and are included in the project cost baseline

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Management reserves

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allow for future situations that are unpredictable (sometimes called unknown unknowns)

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When Estimating Costs

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Project managers must take cost estimates seriously if they want to complete projects within budget constraints

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When Estimating Costs

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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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A cost management plan is

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a document that describes how the organization will manage cost variances on the project

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Basic tools and techniques for cost estimates: Analogous or top-down estimates:

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use the actual cost of a previous, similar project as the basis for estimating the cost of the current project

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Basic tools and techniques for cost estimates: Bottom-up estimates:

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involve estimating individual work items or activities and summing them to get a project total

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Basic tools and techniques for cost estimates: Parametric modeling

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uses project characteristics (parameters) in a mathematical model to estimate project costs

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Typical Problems with IT Cost Estimates

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Estimates are done too quickly

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Cost budgeting involves

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allocating the project cost estimate to individual work items over time

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The WBS is a required input to the cost budgeting process since

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it defines the work items

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Important goal is to produce a cost baseline

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A time-phased budget that project managers use to measure and monitor cost performance

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Project cost control includes:

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Monitoring cost performance

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EVM is

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a project performance measurement technique that integrates scope, time, and cost data

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Given a baseline (original plan plus approved changes), you can

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determine how well the project is meeting its goals

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Earned Value Management Terms: Planned Value (PV)

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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

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Earned Value Management Terms: Actual Cost (AC)

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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

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Earned Value Management Terms: Earned Value (EV)

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formerly called the budgeted cost of work performed (BCWP), is an estimate of the value of the physical work actually completed

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EV is based on

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the original planned costs for the project or activity and the rate at which the team is completing work on the project or activity to date

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Rate of performance (RP) is

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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

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Rules of Thumb for Earned Value Numbers: Negative numbers

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for cost and schedule variance indicate problems in those areas

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Rules of Thumb for Earned Value Numbers: CPI and SPI less

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than 100% indicate problems

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Rules of Thumb for Earned Value Numbers: Problems mean

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the project is costing more than planned (over budget) or taking longer than planned (behind schedule)

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Rules of Thumb for Earned Value Numbers: The CPI can be used to calculate the estimate at completion (EAC),

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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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Five levels for project portfolio management

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Put all your projects in one database

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Earned Value (EV)

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EV = PV to date * RP

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Cost Variance (CV)

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CV = EV - AC

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Schedule Variance (SV)

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SV = EV - PV

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Cost Performace Index (CPI)

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CPI = EV / AC

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Schedule Performance Index (SPI)

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SPI = EV / PV

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Estimate at completion EAC

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EAC = BAC / CPI

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Estimates time to complete

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Original time / SPI