 Cost – is a resource sacrificed or foregone to achieve a specific objective, or something given up

in exchange; is usually measured in monetary units

 Many of IT projects have cost overruns because:
- The original cost estimates were set very low to begin with (unrealistic cost estimate)
- Unclear project requirements
- Many IT professionals think that project cost estimate is a job for accountants
- IT projects involve new technologies and/or business processes that are usually untested
(risk and failure are to be expected in the project)
 Project cost management includes processes required to ensure that the project is completed
within an approved budget.
 3 Project Cost Mngt Processes
- Cost estimating: Developing an approximation or estimate of the costs of the resources
needed to complete a project (main process output: activity cost estimate; supporting
details: requested changes and updates to the cost mngt plan which should be under
project integration mngt)
- Cost budgeting: Allocating the overall cost estimate to individual work items to establish a
baseline for measuring performance (main output: cost baseline & project funding
requirement)
- Cost control: Controlling changes to the project budget (main output: performance
measurement, forecasted completion information, requested changes, recommended
corrective actions and updates to proj mngt plan)
 Basic Principles of cost mngt
- Profits – revenues minus expenses
- Life cycle costing – considers the total cost of ownership, or development plus support costs
for a project (helps develop accurate projection of project financial cost and benefits)
- Cash flow analysis – determines the estimated annual costs and benefits for a project and
the resulting annual cash flow (conduct cash flow analysis to determine net present value;
analyze proj cash flows to determine which projects should be prioritized/invested at to be
able to support the projs and maintain profitability)
 Many started projects are never finished because of cost mngt problems. Since members of
executive board have better understanding and are more interested in financial terms than IT
terms, therefore IT proj managers need to present and discuss in financial and technical terms
(e.g. net present value analysis, return of investment and payback analysis).
 Tangible costs and benefits – those that can be easily measured by an organization in monetary
terms
 Intangible costs and benefits – cannot be easily measured in monetary terms
 Direct cost – can be directly related to producing the products and services of a project
 Indirect cost – not directly related to products/services but are indirectly related to performing
the project
 Sunk cost – money that have been spent in the past; when deciding what projects to invest in or
continue, you should not include sunk costs
 Learning curve theory – state that when many items are produced repetitively, the unit cost
decreases in a regular pattern as more units are produced
 Reserves – money included in cost estimate to mitigate cost-raise by allowing for future
situations that are difficult to predict
 Contingency reserves – allow for future situations that may be partially planned or reserved for
times called known unknowns and included in project baseline
 Mngt reserves – for unpredictable future situations or unknown unknowns
 It is important to spend money up-front on IT projects to avoid spending a lot more later.
 Types of Cost Estimates:

- ROM – can also be referred to as a ballpark estimate / guesstimate

 Cost mngt plan – document that describes how the organization will manage cost variances on
the project (describes how to respond to proposals that are higher/lower than the estimates)
 A cost proposal within 10% of estimate is acceptable
 A large percentage of total proj costs are often labor costs or human resource costs