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PowerPoint Presentation

Information Technology

FIT2002

IT Project Management

Lecture 6

Project Cost Management

Initiating Planning Executing
Monitoring &

Controlling
Closing

Project Integration

Management

1. Develop Project

Charter

2. Develop Project

Management Plan

3. Direct & manage

project work

4. Manage Project

Knowledge

5. Monitor & control

project work

6. Close Project or

Phaase

Project Scope

Management

1. Plan Scope

Management

2.. Collect requirements

3. Define Scope

4. Create WBS

5. Validate Scope;

6. Control Scope

Project Schedule

Management

1. Plan Schedule

Management

2. Define Activities

3. Sequence Activities

4. Estimate Activity

Durations

5. Develop Schedule

6. Control Schedule

Project Cost

Management

1. Plan Cost

Management

2. Estimate Costs

3. Determine Budget

4. Control Costs

Knowledge Areas
Project Management Process Group

Mark C. Layton, Steven J. Ostermiller. (2017). Agile Project Management For Dummies, (2e) For Dummies

2

Lecture 3

Lecture 4

Lecture 5

Lecture 6

So Far…

Video 1:
Learning Objectives

 Understand the importance of project cost management

 Discuss what project cost management involves

 Explain basic project cost management principles,

concepts, and terms

Mark C. Layton, Steven J. Ostermiller. (2017). Agile Project Management For Dummies, (2e) For Dummies 3

The Importance of Project Cost Management

 IT projects have a poor track record for meeting budget goals

 A cost overrun is the additional percentage or dollar amount by

which actual costs exceed estimates

 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” in IT projects

 A perceived reason for cost overruns is that many IT projects

involve new technology or business processes and thus pose an

inherent risk.

 However, using good project cost management can change this

false perception.
Mark C. Layton, Steven J. Ostermiller. (2017). Agile Project Management For Dummies, (2e) For Dummies 4

What Went Wrong?

 The United Kingdom’s National Health Service IT

modernisation program was called the greatest IT disaster

in history with an estimated $26 billion overrun

 The program had problems due to incompatible systems,

resistance from physicians, and arguments among

contractors about who’s responsible for what

 It was finally scrapped in 2011

Mark C. Layton, Steven J. Ostermiller. (2017). Agile Project Management For Dummies, (2e) For Dummies 5

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

 Project cost management includes the processes required to

ensure that the project is completed within an approved budget

Mark C. Layton, Steven J. Ostermiller. (2017). Agile Project Management For Dummies, (2e) For Dummies 6

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

Mark C. Layton, Steven J. Ostermiller. (2017). Agile Project Management For Dummies, (2e) For Dummies 7

Figure 7-1. Project Cost Management

Summary

Mark C. Layton, Steven J. Ostermiller. (2017). Agile Project Management For Dummies, (2e) For Dummies 8

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

Mark C. Layton, Steven J. Ostermiller. (2017). Agile Project Management For Dummies, (2e) For Dummies 9

Types of Costs and Benefits
 Tangible costs or benefits are those costs or benefits that an

organisation 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

Mark C. Layton, Steven J. Ostermiller. (2017). Agile Project Management For Dummies, (2e) For Dummies 10

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

Mark C. Layton, Steven J. Ostermiller. (2017). Agile Project Management For Dummies, (2e) For Dummies 11

Video 2:
Learning Objectives

 Describe the process of planning cost management

 Discuss different types of cost estimates

Mark C. Layton, Steven J. Ostermiller. (2017). Agile Project Management For Dummies, (2e) For Dummies 12

Mark C. Layton, Steven J. Ostermiller. (2017). Agile Project Management For Dummies, (2e) For Dummies

Project Cost Management Summary

1313

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

– Organisational procedure links

– Control thresholds

– Rules of performance measurement

– Reporting formats

– Process descriptions

Mark C. Layton, Steven J. Ostermiller. (2017). Agile Project Management For Dummies, (2e) For Dummies 14

Estimating Costs

Mark C. Layton, Steven J. Ostermiller. (2017). Agile Project Management For Dummies, (2e) For Dummies 15

 Project managers must take cost estimates seriously if they want

to complete projects within budget constraints

 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

 It’s important to know the types of cost estimates, how to prepare

cost estimates, and typical problems associated with IT cost

estimates

Types of Cost Estimates

Mark C. Layton, Steven J. Ostermiller. (2017). Agile Project Management For Dummies, (2e) For Dummies 16

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

Mark C. Layton, Steven J. Ostermiller. (2017). Agile Project Management For Dummies, (2e) For Dummies 17

Typical Problems with IT Cost Estimates

 Estimates are done too quickly

 People lack estimating experience

 Human beings are biased toward underestimation

 Management desires accuracy

Mark C. Layton, Steven J. Ostermiller. (2017). Agile Project Management For Dummies, (2e) For Dummies 18

Surveyor Pro Project Cost Estimate

Mark C. Layton, Steven J. Ostermiller. (2017). Agile Project Management For Dummies, (2e) For Dummies 19

Surveyor Pro Software Development

Estimate

Mark C. Layton, Steven J. Ostermiller. (2017). Agile Project Management For Dummies, (2e) For Dummies 20

Video 3:
Learning Objectives

 Understand the processes of determining a budget and

preparing a cost estimate for an information technology (IT)

project

 Understand the benefits of earned value management and

project portfolio management to assist in cost control

Mark C. Layton, Steven J. Ostermiller. (2017). Agile Project Management For Dummies, (2e) For Dummies 21

Mark C. Layton, Steven J. Ostermiller. (2017). Agile Project Management For Dummies, (2e) For Dummies

Project Cost Management Summary

2222

Determining the Budget

Mark C. Layton, Steven J. Ostermiller. (2017). Agile Project Management For Dummies, (2e) For Dummies 23

 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

– Team members should document any assumptions made

when developing the cost baseline

Surveyor Pro Project Cost Baseline

Mark C. Layton, Steven J. Ostermiller. (2017). Agile Project Management For Dummies, (2e) For Dummies 24

Controlling Costs

Mark C. Layton, Steven J. Ostermiller. (2017). Agile Project Management For Dummies, (2e) For Dummies 25

 Project cost control includes

– Monitoring cost performance

– Ensuring that only appropriate project changes are included

in a revised cost baseline

– Informing project stakeholders of authorised changes to the

project that will affect costs

 Change control system to define procedures for changing the

cost baseline is necessary

 Tools and techniques to assist in project cost control:

– Performance review meetings

– Performance measurement – Earned value management

(EVM)

Earned Value Management (EVM)

Mark C. Layton, Steven J. Ostermiller. (2017). Agile Project Management For Dummies, (2e) For Dummies 26

 EVM is a project performance measurement technique that

integrates scope, time, and cost data

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

determine how well the project is meeting its goals

 You must enter actual information periodically to use EVM

– whether or not a WBS item was completed

– how much of the work was completed

– how much the completed work actually cost

Earned Value Management Terms

 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

Mark C. Layton, Steven J. Ostermiller. (2017). Agile Project Management For Dummies, (2e) For Dummies 27

Rate of Performance

 Rate of performance (RP) is 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

 Brenda Taylor, Senior Project Manager in South Africa, suggests
this term and approach for estimating earned value

 For example, suppose the server installation was halfway
completed by the end of week 1. The rate of performance would
be 50% because by the end of week 1, the planned schedule
reflects that the task should be 100 percent complete and only
50 percent of that work has been completed

Mark C. Layton, Steven J. Ostermiller. (2017). Agile Project Management For Dummies, (2e) For Dummies 28

50%/100% =

50%

Table 7-3. Earned Value Calculations for

One Activity After Week One

Mark C. Layton, Steven J. Ostermiller. (2017). Agile Project Management For Dummies, (2e) For Dummies 29

Table 7-4. Earned Value Formulas

Mark C. Layton, Steven J. Ostermiller. (2017). Agile Project Management For Dummies, (2e) For Dummies 30

Rules of Thumb for 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 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

Mark C. Layton, Steven J. Ostermiller. (2017). Agile Project Management For Dummies, (2e) For Dummies 31

Earned Value Chart for Project after Five Months

Mark C. Layton, Steven J. Ostermiller. (2017). Agile Project Management For Dummies, (2e) For Dummies 32

Project Portfolio Management

 Many organisations 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

Mark C. Layton, Steven J. Ostermiller. (2017). Agile Project Management For Dummies, (2e) For Dummies 33

Benefits of Portfolio Management

Mark C. Layton, Steven J. Ostermiller. (2017). Agile Project Management For Dummies, (2e) For Dummies 34

 Schlumberger saved $3 million in one year by organizing 120
information technology projects into a portfolio

 Reduced redundant projects and coordinated those with overlap

 IT projects can be huge investments, so it makes sense to view
them as portfolios and track their progress as a whole

 Portfolio management software can help reduce costs

 Brandon Stewart (Borland):

– “The most successful organisations are taking a holistic view of
focusing, managing, and measuring their IT efforts…Portfolio
management enables IT to make fact-based investment decisions
in unison with business stakeholders, thus ensuring alignment,
improving visibility, and shifting the burden of investment
decisions from the CIO to all stakeholders.”

Best Practice

 Alvin Alexander wrote a book called Cost Estimating in an Agile

Development Environment in 2015

 Function points are a means of measuring software size in terms

that are meaningful to end users

 User stories are a common way to describe requirements in a

simple, concise way

 Developers can analyse user stories to estimate function points

and person-hours

Mark C. Layton, Steven J. Ostermiller. (2017). Agile Project Management For Dummies, (2e) For Dummies 35

Ref: Alvin Alexander, Cost Estimating in an Agile Development Environment (2015).

alvinalexander.com/downloads/Book3-EstimatingInAnAgileDevelopmentEnvironment.pdf

David Longsteet. “Function Points?” www.softwaremetrics.com/files/OneHour.pdf, p.16

http://www.softwaremetrics.com/files/OneHour.pdf

Video 4:
Learning Objectives

 Explore the difference between traditional and agile cost

management

Mark C. Layton, Steven J. Ostermiller. (2017). Agile Project Management For Dummies, (2e) For Dummies 3636

What’s different between traditional and

Agile Cost Management

Mark C. Layton, Steven J. Ostermiller. (2017). Agile Project Management For Dummies, (2e) For Dummies

Traditional Approach Agile Approach

Cost (like time), is based on fixed

scope.

Project schedule, not scope, has the

biggest impact on cost.

Organisations estimate project costs

and fund projects before the project

starts.

Product owners often secure project

funding after the product roadmap stage

is complete and sometimes even fund

agile projects one release at a time.

New requirements would most likely

mean higher costs. Therefore, cost

overruns are common.

Project teams can replace lower-priority

requirements with new, equivalently-

sized high-priority requirements with no

impact on time or cost.

37

What’s different between traditional and

Agile Cost Management (cont…)

Mark C. Layton, Steven J. Ostermiller. (2017). Agile Project Management For Dummies, (2e) For Dummies

Traditional Approach Agile Approach

Scope bloat may happen and so

money wasted on features that

is not required.

Only the product features that users really need

are created as agile development teams

complete requirements by priority.

Projects cannot generate

revenue until the project is

complete.

Project teams can release working, revenue-

generating functionality early, creating a self-

funding project.

38

Managing Cost in Agile

 In agile projects, cost is mostly a direct expression of project time

 Quite easy to determine team cost – as scrum teams consist of

full-time, dedicated team members, they have a set team cost

that should be the same for each sprint.

 Once we estimate the velocity (development speed), we can

determine how many sprints the project will take (i.e. how long

the project will be) and thus how much the scrum team will cost

for the whole project.

 Other project cost includes the cost for resources like hardware,

software, licenses, and other supplies needed to complete the

project.

39Mark C. Layton, Steven J. Ostermiller. (2017). Agile Project Management For Dummies, (2e) For Dummies

Ways to lower project costs (in Agile)

 Self-funding project

 Lowering cost by increasing velocity

– Eg: Product backlog contains 300 story points

Development team velocity ~ 10 story points per sprint

Project duration = 60 weeks

Cost: $20,000 per 2-week sprint  Total = $600,000

 Increasing velocity from 10 to 12, project duration will be shorten

to 50 weeks (300/12 x 2 )  Total cost = $500,000

 Lowering cost by reducing time

– Lowering the number of sprints required by not completing lower-

priority requirements

Schwalbe, K.. (2015). Information Technology Project Management. (8e) Cengage Learning

No. of sprints = 300/10 = 30 sprints

If 2-week sprint = 30 x 2 = 60 weeks

40