Project Time Management SEII - Lecture 7

Project Cost ManagementSEII-Lecture 7Dr. Muzafar KhanAssistant ProfessorDepartment of Computer ScienceCIIT, Islamabad.RecapDeveloping the scheduleTracking Gantt chartsCritical path methodLongest path, earliest timeSchedule trade-offs using CPMFree slack, total slackShortening the scheduleCrashing, fast trackingCritical chain schedulingAvailability of critical resources, project and feeding bufferPERT techniqueControlling the schedule2ImportanceCHAOS studies180% in 1994 56% in 2004Other studies33-34% (in all projects)US Internal Revenue Service$50 billion loss in 1990UK National Health Service$26 billion loss in 20023Basic Concepts [1/4]CostA resource sacrificed to achieve a specific objectiveSomething given up in exchangeOften measured in monetary amountsProfitRevenues minus expendituresProfit marginRatio of revenues to profits4Basic Concepts [2/4]Life cycle costingCost of a project throughout its life cycleCash flow analysisDetermining the estimated annual costs and benefits and resulting annual cash flowTangible cost and benefitEasily measurable in monetary termsIntangible cost and benefitDifficult to measure in monetary termsHarder to justify5Basic Concepts [3/4]Direct costsDirectly related to producing the products and servicesCan be controlled Indirect costsNot directly relatedVery little controlSunk costMoney spent in the pastNot included while deciding further investmentLearning curve theoryContinuous production reduces unit cost6Basic Concepts [4/4]ReservesThe money reserved to mitigate cost riskContingency reserves / known unknownsManagement reserves / unknown unknowns7Main ProcessesEstimating costsMain outputs: activity cost estimates and basis of estimates Determining the budgetMain outputs: cost performance baseline, project funding requirementsControlling costsMain outputs: work performance measurements, budget forecasts, and change requests8Estimating Costs [1/2]Rough Order of Magnitude (ROM) estimateA ballpark estimateVery early in the projectHelps in project selection decisions3+ years prior to project completionAccuracy: -50% to +100%Budgetary estimateAllocating money into an organization’s budget1-2 years prior to project completionAccuracy: -10% to +25%9Estimating Costs [2/2]Definitive estimateThe most accurate estimatePurchasing decisions and final project costs1 year or less prior to project completionAccuracy: -5% to +10%Estimates vary in different domainsLabor cost: number of people and hours requiredDifferentiation between external and internal resources10Cost Estimation Tools and Techniques [1/2]Top-down estimatesAnalogous estimateBased on the previous projects’ costExpert judgment requiredBottom-up estimatesActivity based costingEstimating individual work items and summing themOrganizations often have resource cost rates11Cost Estimation Tools and Techniques [2/2]Parametric modelingBased on project characteristics/parametersMost reliable if previous estimates were accurateExample: line of code cost, language used, level of programmer expertise, size and complexity of data involvedCOCOMO II12Example – Project Cost Estimate13Figure source: IT Project Management, K. Schwalbe, 6th ed., p. 269Cost Estimate Problems in IT ProjectsEstimates are done too quicklyComplex task, needs serious effortsNeed to understand system requirementsLack of estimating experienceUnavailability of reliable project dataTraining requiredBiasness towards underestimationDo not forget juniors and allow extra costManagement desires accuracyNegotiation skills required14Determining the BudgetAllocating the project cost estimate to individual work items over timeMain inputs: activity cost estimates, project schedule, and resource calendars Main goal: cost baselineWell established processBudget categories such as travel and depreciation etc.Information used for legal and tax purposesProvides project funding information15Example – Project Budget16Figure source: IT Project Management, K. Schwalbe, 6th ed., p. 271Controlling CostMonitoring cost performanceRevised cost baselineMain inputs: project management plan, project funding requirements, and work performance dataChange control systemPerformance review meetingsPerformance measurement techniques17Earned Value Management [1/5]Project performance measurement techniqueIntegrates scope, time, and cost dataComparison of actual information and baselineCalculating three values for each/summary activityPlanned Value (PV)Also called budgetApproved cost estimate for an activity18Earned Value Management [2/5]Actual Cost (AC)Total direct and indirect costsEarned Value (PV)Estimated value of the work completedBased on the original planned cost and the rate of work completed to dateRate of Performance (RP): ratio of actual work completed to the percentage of work planned19Earned Value Management [3/5]Cost Variance (CV)Earned value minus the actual costIf negative, spent more than plannedIf positive, spent less than plannedSchedule Variance (SV)Earned value minus the planned valueIf negative, it took longer than plannedIf positive, it took less than planned20Earned Value Management [4/5]Cost Performance Index (CPI)Ratio of earned value to actual costEstimate the projected cost of project completionIf 100%, planned and actual costs are sameIf less than 100%, over budgetIf greater than 100%, under budgetSchedule Performance Index (SPI)Ratio of earned value to planned valueEstimate the projected time of project completionIf 100%, project is on scheduleIf less than 100%, behind scheduleIf greater than 100%, ahead of schedule21Earned Value Management [5/5]Estimate at Completion (EAC)CPI for estimating cost to complete the project based on the performance to dateSPI for estimating time to complete the project based on the performance to dateBudget at Completion (BAC)The original total project budget 22Example 1 – EVM Activity: purchasing and installing a new web serverTime required: one weekTotal cost: $10,000When executedActual time: two weekActual cost: $20,000 (15,000 in week 1 and 5,000 in week 2)23Example 1 – EVM 24Figure source: IT Project Management, K. Schwalbe, 6th ed., p. 274Example 2 – EVM 25Figure source: IT Project Management, K. Schwalbe, 6th ed., p. 276SummaryBasic ConceptsCost, profit, profit margin, direct and indirect costs, sunk cost, learning curve theoryEstimating costsRough Order of Magnitude, budgetary, and definitive cost estimatesCost estimation tools and techniquesTop-down and bottom-up estimates, and parametric modelingProblems related to IT project costs estimatesDetermining and controlling budgetEarned Value Management26