PROECT COST MANAGEMENT

WHAT IS COST AND PROJECT COST MANAGEMENT PLAN?

- 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
o There are intangible costs
 Not measured in monetary terms
- Project cost management includes the processes required to ensure that the project is
completed within an approved project
o You have to prepare or plan on things to make sure that the budget will not go
beyond the agreed limit

PROJECT COST MANAGEMENT COSTS

- Planning cost management
o Determining the policies, procedures, and documentation that will be used for
planning, executing, and controlling project costs
o Prepare project cost management plant
o Done in first step or phase
- Estimating cost
o Developing an approximation or estimate of the costs of the resources needed
to complete a project
o Covers all resources
o You will now the total cost after determining all individual expenses
- Determining the project
o Allocating the overall cost estimate to individual work items toe stablish a
baseline for measuring performance
o May not be fixed
o The amount that should be allocated may increase if there are problems
encountered
o Just creating a cost baseline
- Controlling costs
o Controlling changes to the project budget
o Make sure you don’t go beyond the budget

PROJECT COST MANAGEMENT SUMMARY

- Planning
o Process: plan cost management
o Outputs: cost management plan
o Process: estimate costs
o Output: activity cost estimate, basis of estimates, project document updates
 There will be changes in the initial cost estimate, and this is where you
update those changes
o Process: determine budget
 o Outputs: cost baseline, project funding requirements, project documents
updates
- Monitoring and controlling
o Process: control costs
o Output: work performance information, cost forecasts, change requests, project
management plan updates, project documents updates, organizational process
assets updates
 Work performance information should be related to costs or expenses
made in the project
 Change requests – there should be approval before performing the
change
 Update the document based on changes
 Assets – all the resources used in project (documents)

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
- ???
o Profits
 Are revenues minus expenditures
 ???
o Profit margin
 Is the ratio of revenues to profits
 Estimation
o Life cycle costing
 Considers the total cost of ownership, or development plus support costs,
for a project
 Amount spent in the entire development process
o Cash flow analysis
 Determined the estimated annual costs and benefits for a project and the
resulting annual cash flow
 Money flowing in and out of the organization

COST OF DOWNTIME FOR IT APPLICATIONS

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- When the application is already operational and is being used by clients
- Applications related to security has the highest cost
- How much money will be lost to your customer?
- Even if email malfunctions, it doesn’t cost much compared to others

TYPES OF COST 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
o Cost – losses
 Loss of employee morale
o Benefits – gains
 Boost of employee morale
- Direct costs are costs that can be directly related to producing the products and services
of the project
o Anything that you spend for the project itself
o Getting people, buying equipment, etc.
o Not shared – for the project only
- Indirect costs re costs that are not directly related to the products or services of the
project, but are indirectly related to performing the project
o Electricity, place to work in, internet allowance, food allowance, meeting and
team building expenses, pantry food
o Can be shared by all employees, regardless of 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
o Initially you have a prospective project and they company thinks that it will really
push through. They have started hiring people but they suddenly the project was
postponed

MORE BASIC PRINCIPLES OF COST MANAGEMENT

- Learning curve theory states that wen many items are produced repetitively, the unit
cost of those items decreases in a regular pattern as more units are produced
 o It gets cheaper because it is easier and you will only be repeating what you’ve
done before. There is no preparation time.
o You are learning to produce or create that product in the long run
o Should be considered when estimating costs
- Reserves re dollars included in a cost estimate t mitigate cost risk by allowing the future
situations that are difficult to predict
o Contingency reserves
 Allow for future situations that may be partially planned for and are
included in the project cost baseline
 Sometimes known as unknowns
 You know that it can happen anytime
 Anticipated event
o Management reserves
 Allow for future situations that are unpredictable
 Sometimes called unknown unknowns
 Budget for an event that is unexpected
 You have no concrete idea what might happen in the future

PLANNING COST MANAGEMENT

- The project team uses expert judgement, analytical techniques, and meetings to
develop the cost management plan
o Expert judgement is the application of expertise or knowledge of those who are
part of the project or look for an expert (consultant) for consultation
- A cost management plan includes
o Level of accuracy and units of measure
 Is the estimate per week, per day or per hour?
o Organizational procedure links
 Documents
o Control thresholds
 When do you need to take action?
o Rules of performance measurement
 How to measure or tell if you’re spending too much or not getting the
expected return
o Reporting formats
 Reports for recording costs
o Process descriptions
 How to do the work

ESTIMATING COSTS
- Project managers must take cost estimates seriously if they want to complete projects
within budget constraints
- Its important to known the types of cost estimates, how to prepare cost estimates, and
typical problems associated with IT cost estimates
TYPES OF COST ESTIMATES
Type of Estimate When done why done how accurate
Rough Order of Very early in the Provides estimate of -50% to +100%
Magnitude or ROM project life cycle, cost for selection
(rough estimate) often 3-5 years decisions It is only rough
before project estimate
completion Just like when
canvasing
You don’t have a
clear idea of what
may happen
Budgetary Early, 1-2 years out Put dollars in the -10% to +25%
budget plans
Definitive Later in the project, Provides details of -5% to +10%
less than 1 year out purchases, estimates
actual costs There is a clear idea
Projects almost done how much everything
costs

MORE ON COST ESTIMATES

- The number and type of cost estimates vary b application area. The Association for
Advancement of Cost Engineering International identifies five type of cost estimates for
construction projects: order of magnitude, conceptual, preliminary, definitive, and
control
o Type of cost estimate depends on the classification of project
o Different projects, different number of estimates
o Engineering projects have 5, IT projects have 3
- Estimates are usually done at various stages of a project and should become more
accurate as tie progresses
- A large percentage of total project costs are often labor costs

COST ESTIMATION TOOLS AND TECHNIQUES

- Basic tools and techniques for cost estimates
o 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
 Benchmarking
 You are comparing your project from other similar projects
o Bottom-up estimates
 Involve estimating individual work items or activities and summing them
to get a project total
o Parametric modeling
  Uses project characteristics (parameters) in a mathematical model to
estimate project costs
 Not really an estimate

TYPICAL PROBLEMS WITH IT COST ESTIMATES

- Estimates are done too quickly
o Estimate is too far from the actual
o There is no in-depth analysis before giving the figures
- People lack estimating experience
o Most people lack in experience
- Human beings are biased toward underestimation
o It is already proven that people tend to underestimate the costs
- Management desires accuracy
o If the management needs to get the actual estimate in a hurry, resulting to a less
accurate estimate because it is rushed

SAMPLE COST ESTIMATE

- Before creating an estimate, know what it will be used for, gather as much information
as possible, and clarify the ground riles 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

SURVEYOR PRO PROJECT COST ESTIMATE (SAMPLE)

SURVEYOR PRO SOFTWARE DEVELOPMENT ESTIMATE (SAMPLE)

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DETERMINING THE BUDGET

- Cost budgeting involves allocating the project costs 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
o A time-phased budget that project managers use to measure and monitor cost
performance
o Add up all the cost estimates

SURVEYOR PRO PROJECT COST BASELINE

CONTROLLING COSTS
- Project manager should make sure that there are only minimal changes on project cost
- If there are factors that may affect the cost, project manager must have an analysis to
test how much it will affect the cost before approving the request
 o He must also consult team members and stakeholders when approving such
requests
- Project cost control includes
o Monitoring cost performance
o Ensuring that only appropriate project changes are included in a revised cot
baseline
o Informing project stakeholders of unauthorized changes to the project that will
affect costs
- Many organizations around the globe have problems with cost control

EARNED VALUE MANAGEMENT (EVM)

- Help control the cost
- EVM is a project performance measurement technique that integrates scope, time, and
cost data
o You are able to foresee the performance of project in terms f cost and schedule
o You know if you are spending too much or behind schedule
- 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
- More and more organizations around the world are using EVM to help control project
costs

EARNED VALUE MANAGEMENT TERMS

- The planned value (PV)
o Formerly called the budgeted cost of work schedules (BCWS), also the budget
that is portion of the approved total cost estimate planned to be spent on an
activity during a given period
o Planned cost
- Actual cost (AC)
o 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
o How far is the actual cost from the planned budget?
- Earned value (EV)
o Formerly called the budgeted cost of work performed (BCWP) is an estimate of
the value of the physical work actually completed
o Measures actual work that has transpired in the project
- EV is based on the original planned costs or the project or activity and the rate at which
the team is collecting work on the project or activity to date

RATE OF PERFORMANCE
- Ration of actual work completed to percentage of work planned to have been
completed at any given time during the life of the project or activity
 - 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% complete and only 50% of that work has
been completed
- How much work have been spent or has been actually performed in reference to the
planned schedule or amount of work

EARNED VALUE CALCULATIONS FOR ONE ACTIVITY AFTER ONE WEEK

-
- Actual cost, planned cost, and earned value is given already
- If the number is negative, there is a problem

EARNED VALUE FORMULAS

RULES OF THUMB FOR EARNED VALUE NUMBERS

- Negative numbers for cot and schedule variance indicate problems in those areas
- CPI and SPU 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 in performance to date. The budget at
completion (BAC) is the original total budget for the project

EARNED VALUE CHART FOR PROJECT AFTER FIVE MONTHS

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EARNED VALUE USAGE

-
- EVM is widely used by some organizations

PROJECT PORTFOLIO MANAGEMENT

- Many organizations collect and control an entire suite of projects or investments a sone
set of interrelated activities in a portfolio
- Five levels of project portfolio management
o Put all your project in one database
o Prioritize the projects in your database
 Depends on the organization
Divide your projects into two or three budgets based on type of investment
o Automate the repository
 It is easy to get something from the portfolio if you need some
information
o Apply modern portfolio theory, including risk-return tools that map project risk
on a curve

BENEFITS OF PORTFOLIO MANAGEMENT

- Schlumberger saved $3 million in one year by organizing 120 information technology
projects into a portfolio
 - ROI of implementing portfolio management software by IT departments
o Saving of 6.5% of the average annual IT budget by the end of year one
o Improved annual average project timeliness by 45.2%
o Reduced IT management time spend in project status reporting by 43% and IT
labor capitalization reporting by 55%
o Decreased the time to achieve financial sign-off for new IT projects by 20.4% or
8.4 days
- All companies who keep a project portfolio are saving money in doing so

BEST PRACTICE
- A global survey released by Borland Software in 2006 suggests that many organizations
are still at a low-level of maturity in terms of how they define project goals, allocate
resources, and measure overall success of their information technology portfolios. Some
of the findings include the following:
o Only 22 percent of survey respondents reported that their organization either
effectively or very effectively uses a project plan for managing projects
o Only 17 percent have either rigorous or very rigorous processes for project plans,
which include developing a baseline and estimating schedule, cost, and business
impact of projects
o Only 20 percent agreed their organizations monitor portfolio progress and
coordinate across inter-dependent projects

USING SOFTWARE TO ASSIST IN COST MANAGEMENT

- Spreadsheets are a common tool for resource planning, cost estimating, cost budgeting,
and cost control
- Many companies use more sophisticated and centralized financial applications software
for cost information
- Project management software has many cost-related features, especially enterprise PM
software
- Portfolio management software a=can help reduce costs