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Computing 3 Management
Lecture 4
Managing IT Project: Cost
Semester 1, 2021 Dr Rabiul Hasan
The University of Sydney
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Source:
Schwalbe, K, Information Technology Project Management (9th Edition). Cengage Learning, 2019
Recapture From Lecture 3
We discussed Managing IT Project: Time
Time Management Network Diagram CPM
PERT
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Where Are We Now ? — Course map
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What Will We Do Today ?
Lecture
– Plan Cost Management – Estimate Cost
– Determine Budget
– Control Costs
Class activities
– Critical Thinking / Problem Solving – Tools to use: https://padlet.com
https://answergarden.ch
Assessment
– Tutorial: No separate practices provided during the tutorials in
weeks 5-8 . All teams will work on their group projects. – Assignment: Group project is due in week 8
Announcement (if any): ?
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Learning Objectives
Discuss the importance of project cost management
Explain basic project cost management principles, concepts,
and terms
Describe the processes of planning cost management
Discuss the processes of determining a budget
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What is Cost?
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
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Project Cost Management
Project cost management includes the processes required to ensure that the project is completed within an approved budget
IT projects have a poor track record for meeting budget goals. Why?
Write your response here
https://docs.google.com/document/d/1X22Qs-mtIKwlxN- ygDPkpQqOg-w8o5rlHSYKGgnrtAw/edit?usp=sharing
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Project Cost Management Overview
The University of Sydney Source: A Guide to the Project Management Body of Knowledge, Fifth Edition (PMBOK® Guide) © 2013 Project Management Institute Page 8
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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Financial Terms To Use
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 (financial terms)
– Profitsarerevenuesminusexpenditures
– Profitmarginistheratioofrevenuestoprofits,netincomedividedby
revenue, or net profits divided by sales
– Lifecyclecostingconsidersthetotalcostofownership,ordevelopment plus support costs, for a project
– Cashflowanalysisdeterminestheestimatedannualcostsandbenefits for a project and the resulting annual cash flow
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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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What Is Reserve?
Reserves are dollars included in a cost estimate to mitigate cost risk by allowing for future situations that are difficult to predict
– Contingencyreservesallowforfuturesituationsthatmaybepartially planned for (sometimes called known unknowns) and are included in the project cost baseline
– Managementreservesallowforfuturesituationsthatareunpredictable (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:
– Levelofaccuracyandunitsofmeasure – Organizationalprocedurelinks
– Controlthresholds
– Rulesofperformancemeasurement
– Reportingformats
– Processdescriptions
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Planning Cost Management
The University of Sydney Source: A Guide to the Project Management Body of Knowledge, Fifth Edition (PMBOK® Guide) © 2013 Project Management Institute Page 14
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,
– typical problems associated with IT cost estimates
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Estimating Costs
The University of Sydney Source: A Guide to the Project Management Body of Knowledge, Fifth Edition (PMBOK® Guide) © 2013 Project Management Institute Page 16
Estimating Costs — Tools and Techniques Basic tools and techniques for cost estimates:
– Analogousortop-downestimates:usetheactualcostofaprevious, similar project as the basis for estimating the cost of the current project
– Bottom-upestimates:involveestimatingindividualworkitemsor activities and summing them to get a project total
– Parametricmodelingusesprojectcharacteristics(parameters)ina mathematical model to estimate project costs
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Estimating Costs — Issues with IT Projects
Estimates are done too quickly
People lack estimating experience
Human beings are biased toward underestimation Management desires accuracy
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Things to Know for Cost Estimate
Know what it will be used for,
Gather as much information as possible,
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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Sample Cost Estimate
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Sample Cost Estimate — Software Development
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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
– atime-phasedbudgetthatprojectmanagersusetomeasureandmonitor
cost performance
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Determining the Budget
The University of Sydney Source: A Guide to the Project Management Body of Knowledge, Fifth Edition (PMBOK® Guide) © 2013 Project Management Institute Page 23
Project Budget Components
The University of Sydney Source: A Guide to the Project Management Body of Knowledge, Fifth Edition (PMBOK® Guide) © 2013 Project Management Institute Page 24
Cost Baseline – Sample Project
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Controlling Costs
Project cost control includes
– Monitoringcostperformance
– Ensuringthatonlyappropriateprojectchangesareincludedina revised cost baseline
– Informingprojectstakeholdersofauthorizedchangestotheprojectthat will affect costs
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Controlling Costs
The University of Sydney Source: A Guide to the Project Management Body of Knowledge, Fifth Edition (PMBOK® Guide) © 2013 Project Management Institute Page 27
Earned Value Management (EVM)
Earned value management (EVM) is a technique that combines scope, time, cost and resource measurements to assess project performance and progress.
You must enter actual information periodically to use EVM
It is a common method of measuring performance of projects
The University of Sydney Adapted from: A Guide to the Project Management Body of Knowledge, Fifth Edition (PMBOK® Guide) © 2013 Project Management Institute Page 28
Earned Value Management
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 work on the project or activity to date
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Earned Value Management
Schedule variance (SV) is a measure of schedule performance expressed as the difference between the earned value and the planned value. Equation: SV = EV – PV
Cost variance (CV) is the amount of budget deficit or surplus at a given point in time, expressed as the difference between earned value and the actual cost. Equation: CV= EV − AC.
The schedule performance index (SPI) is a measure of schedule efficiency expressed as the ratio of earned value to planned value. Equation: SPI = EV/PV
The cost performance index (CPI) is a measure of the cost efficiency of budgeted resources, expressed as a ratio of earned value to actual cost. Equation: CPI = EV/AC
The University of Sydney Source: A Guide to the Project Management Body of Knowledge, Fifth Edition (PMBOK® Guide) © 2013 Project Management Institute Page 30
Understanding Earned Value Numbers
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 budget at completion (BAC) is the original total budget for the project
The CPI can be used to calculate the estimate at completion (EAC = BAC/CPI )—an estimate of what it will cost to complete the project based on performance to date.
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Earned Value Calculation
Your budgeted cost of an IT project is $100,000, and it needs to be completed in 6 months. After two months of completion, you, as an IT project manager, wish to assess the project performance and progress. You have found that your team has completed 30% of the project works and spent $40,000. At this stage, your planned completion is 35%. How is your project performing?
Budget at Completion (BAC)= 100,000
AC = 40,000
PV = Planned Completion (%) * BAC = 35% * $100,000 = $35,000 EV = Actual Completion (%) * BAC = 30% * $100,000 = $30,000
CPI=EV/AC = 30,000/40,000 = 0.75, this means that for every 1 dollar your team spent, the project is producing only 75% of project work.
SPI= EV/PV = 30,000/35,000 = 0.86, this means that for every hour of work, the project team is completing only 0.86 hours.
Performance: ?
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IT Project appraisal – decision-making
Q: Which project should your organization choose?
Net Present Value (NPV) Benefit Cost Ratio (BCR) Budget/Cost
IT Project
NPV
B/C ratio
Budget/Cost
Project A
70,000
1.01
200,000
Project B
72,000
1.12
250,000
Project C
80,000
1.20
300,000
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Group Exercise — Cost Modeling, Baseline, Cash Flow
Prepare cost model for the project. Use the WBS provided, and be sure to document your assumptions in preparing the cost model.
Assume a labor rate of $100/hour for the project manager and $60/hour for other project team members.
Assume that none of the work is outsourced, labor costs for users are not included, and there are no additional hardware costs. The total estimate should be $200,000.
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(a) Cost Modeling
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(b) Cost Baseline
Using the cost model you created earlier, prepare a cost baseline by allocating the costs by WBS for each month of the project.
The following is a sample structure provided to guide you, your team may choose a different structure.
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(c) Cash Flow
Your team should now develop a cash flow table. The following is a sample structure provided to guide you, you may choose a different structure.
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Class Quiz
What would you need to determine the budget for your project?
Write your response here: https://docs.google.com/document/d/16LF79F49etAwtrzMwUL3
xHsG44bLl3t1tAcem9EAkrM/edit?usp=sharing
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Scenario Analysis
Review the scenario of Self-driving Uber Issue, in week 4 module on Canvas
Room A: write your response here https://docs.google.com/document/d/1SP46mIufH20BkBUK3KTX
SFfLaCM9kumSMuTMv4j6VXQ/edit?usp=sharing
Room B: write your response here https://docs.google.com/document/d/1rPf-4APbFX5-
LAf7CRb409LIkHAxv7wpxF7Ysi32ghE/edit?usp=sharing
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Discussion on Group Projects
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Lecture Summary
Project cost management is a traditionally weak area of IT projects, and project managers must work to improve their ability to deliver projects within approved budgets
Project cost management processes include – Plancostmanagement
– Estimatecosts
– Determinethebudget
– Controlcosts
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Announcement (if any)
Q &A?
Thanks everyone !
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