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