CS301.

3 – IT PROJECT
MANAGEMENT
Project Budgeting : METHODS AND TECHNIQUES TO SET THE
RIGHT COST TO SOFTWARE

Chalani Oruthotaarachchi
GOALS OF THE UNIT

• Questions you might face:

– How much does the development of the software cost?
– Is the project on budget?

• Goals of the Unit

– Budgeting
– Managing Project Costs

2
(SOFTWARE)
PROJECT
COSTING
(SOFTWARE) PROJECT COSTING

• Project cost:
– The expenses we will incur into to finish a project
– It does not take into account profit
– Made of
– direct costs
– indirect costs

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(SOFTWARE) PROJECT COSTING CONTD.
• Direct costs: costs related to the production of the project
outputs

• Direct Costs for software projects

– Personnel:
* The salaries of people directly involved in the project (gross, not net!)
– Materials and Supply
* Costs of the material necessary to produce project outputs
* Usually accounted if the project has specific needs
– Hardware and software
* Systems required for developing the system
* Usually accounted if the project has specific needs
– Travel, meetings and events
– Other Costs 5
* Books, Training, Renting equipment, …
(SOFTWARE) PROJECT COSTING CONTD.
• Indirect Costs: expenses necessary to run the
facility and make work actually doable

• Main cost elements for software development:

– General Overheads
* Office space costs (rent, heating, ...)
* Consumables
* Standard equipment
* Administrative Staff

– Project Overheads
* For larger projects, overheads directly accountable to a project 6
INDIRECT COSTS COMPUTATION

1. Identification of the expenses contributing to the indirect

costs

2. Identification of a strategy to allocate indirect costs to a

project
– According to the effort (more effort = more indirect expenses) - Flat
or proportional rate
– According to the project budget (as a percentage of the project
budget)

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CES – COST ESTIMATION STRUCTURE
• Budget should count each expense only once and no
double accounting of the same costs should take
place.

• CES –
• a hierarchical structure that defines precisely what are the cost
items to take into account in each project.

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 INTERACTIVE SESSION

• Consider any software development project you prefer.

Identify the direct and indirect costs related to it.
o Draw the CSE.
GOALS OF MANAGING PROJECT COST
• Goals
– Ensuring that the money is available when it needs to be
spent
– Monitoring project expenditures so that the project remains
within budget, or the appropriate actions can be taken
when this is not the case

• Means
– Definition of a baseline/cash flow
– Expense Authorization
– Expense book keeping (double entry accounting is quite
fine) 10
 AGILE BUDGETING:
HOW MUCH WILL IT COST?
EFFORT ESTIMATION IN AGILE

• The product owner manage a list of project deliverables (the

product backlog).

• The team will estimate the effort required to complete each

item. Rather than using time or cost estimates, they will look at
• user stories and
• story points.

• A story point is a unit that measures the amount of work in

implementing a user story, taking into account the level of
difficulty involved and the potential risk.
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AGILE EFFORT ESTIMATION TECHNIQUES

• There are many different Agile effort estimation techniques to

choose from.
• Planning poker
• Three-point estimation
• Dot voting
• Etc.

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THREE-POINT ESTIMATION

• Three-point estimating is a technique for making projects. It's a

compilation of three estimate types:
• Optimistic estimate:
• This is the value that represents the best-case scenario, and it's what you get if
everything proceeds smoothly and there are no project challenges.
• Pessimistic estimate:
• This value represents the results you can expect if you encounter unfavourable
conditions in the course of your project. You can refer to this estimate as the
worst-case scenario, where everything goes wrong.
• Realistic estimate:
• This third estimate is a realistic estimate, where you encounter some
challenges, but mostly everything goes smoothly. It accounts for unforeseen
circumstances, which are likely over the course of the entire project.
THREE-POINT ESTIMATION

• Three-point Estimate (E) is based on the simple

average and follows triangular distribution.
THREE-POINT ESTIMATION

• Three-point Estimation Steps

• Step 1 − Arrive at the WBS.
• Step 2 − For each task, find three values − most optimistic estimate (O),
a most likely estimate (M), and a pessimistic estimate (P).
• Step 3 − Calculate the Mean of the three values.
Mean = (O + M + P) / 3
• Step 4 − Calculate the Three-point Estimate of the task. Three-point
Estimate is the Mean. Hence,
E = Mean = (O + M + P) / 3
• Step 5 − Repeat Steps 2, 3, 4 for all the Tasks in the WBS.
• Step 6 − Calculate the Three-point Estimate of the project.
E (Project) = ∑ E (Task)
EXERCISE 1

1. Calculate the most likely duration for the below tasks.

• Task 1:
Optimistic estimate 15 days
Pessimistic estimate 31 days

• Task 2: Optimistic estimate 10 days

Pessimistic estimate 30 days

• Task 3: Optimistic estimate 12 days

Pessimistic estimate 28 days

2. Calculate the effort estimation using three-point estimation for task 1, task
2, and task 3.
CALCULATING THE COST

• Use the cost of the resource requirements and calculate the cost of the
project.

• Example:

Task Resource Allocation Resource cost

Task 1 Resource 1 $ 10 per day

Task 2 Recourse 2 $ 15 per day

Task 3 Resource 3 $ 12 per day

• Based on these details calculate the personal resource cost of the

project given in the exercise 1.
 CALCULATING THE COST
• Calculate the personal cost of the below project following the three-point
estimation approach.
• Daily costs of individuals are R1 – $10, R2 - $12, R3 - $15

Task ID Task Optimistic Pessimistic Resource

est. (Days) est. (Days) allocation
1 Requirement Analysis - -

2 Analysis and Design 12 20 R1

3 Coding - -

4 Testing - -

1.1 Scenario Analysis 14 25 R1

1.2 Security Req. Analysis 18 32 R1

1.3 Sup. Rep. Analysis 10 17 R1

3.1 Cycle 1 25 37 R2

3.2 Cycle 2 17 30 R2

3.3 Integration 15 26 R3

4.1 System Test 14 30 R3

4.2 Acceptance Test 12 19 R1

END OF THE SESSION