Cost Management Week 6-7 Learning Objectives

You should be able to: Describe cost management processes and their

inputs, outputs, activities, and tools Distinguish between cost estimation and cost control Apply a function point approach to cost estimating a

business information system List and define cost drivers used in COCOMO II to

estimate software development effort List the requirements of a Cost Control System

Cost Estimation Difficulties Cost overruns occur because original estimates

inaccurate Bias toward underestimating Cost = accounting, not IT Lack of experience, knowledge in cost

management Requires significant effort for large complex

software Frequent changes in technology?

– Not a common cause of cost difficulties

Cost Management Basics

Profits = revenues - expenses– focus on impact on profits

Profit margin = profits / revenues Life cycle costing

– total cost of ownership– development, plus maintenance and support– cost of software defect increases over time

Cash Flow Analysis Estimated annual costs and benefits Internal Rate of Return (IRR)

– discount rate that sets NPV to 0 Tangible and intangible costs and benefits

– tangible easier to measure and justify Direct costs - PM has more control Indirect costs - overhead, admin Sunk costs - should NOT be considered Learning curve theory - like economy of scale Reserves: contingency, management

4 Cost Management Processes Resource Planning

– resources, quantities Cost Estimation

– software cost estimation Budgeting

– cost allocation Cost Control

– controlling changes

(1) Resource Planning determining the resources & quantities needed to

perform project activities– people, equipment, materials

Difficulty of tasks Experience and skills of available workers Inputs: WBS, scope, resource pool, org. policy Tools:

– expert judgment (internal, external), historical data Outputs: resource requirements

– staff acquisition, procurement may be needed

(2) Cost Estimation

Developing estimates of resource costs– how much will it cost the performing

organization Differs from pricing Identifying alternatives and trade-offs ROM (rough order of magnitude) Budgetary (more accurate) Definitive (most accurate)

Cost Estimation Inputs WBS Resource needs Resource rates Activity duration estimates Data

– previous projects– commercial databases– team expertise and experience

Chart of accounts– performing organization’s financial reporting

Cost Estimation Outputs Cost estimates

– quantitative estimates of costs of resources– dollars or staff-hours/days– may be refined during project execution

Supporting detail– scope of work estimated– basis for estimate and assumptions– range of possible results

Cost management plan– how variances will be managed

Cost Estimating Tools Analogous

– top-down– use previous, similar project(s)– expert judgment

Bottom-up– costing individual work items– takes more time

Parametric– uses project characteristics (parameters)– based on reliable, accurate, quantifiable data

Cost estimation software tools

Software Cost Estimation Metrics Lines of Code (LOC) Function Points Core Measures

– Level of Effort (time)– Labor cost: training, contract, travel, overhead– Defects: pre- and post-implementation– Duration

New system vs. enhanced system vs. GUI (graphical user interface)

Common Software Metrics

Size: of deliverables (programs) Effort: number of people X number of months Duration: number of months Development cost: labor cost of effort Productivity: size / effort Responsiveness: size / duration Quality: defects / size Business: cost / size

Software Estimating Models Estimate = Size * Complexity * Influencers COCOMO II +

– modifies initial effort estimate– Constructive Cost Model– cost drivers / effort multipliers / factors– product, platform, personnel, project– depends on LOC, more recently added FP’s

Software: CoStar, CostXpert, others COCOMO Process Maturity

– integrated with CMM

Cost Factors (Drivers)General System Characteristics Data communication Distributed Data

Processing Performance Heavily Used

Configuration Transaction Rate On-line data entry End-user efficiency

On-line update Complex Processing Reusability Installation ease Operational ease Multiple sites Facilitate change

Estimation issues How to measure size:

– LOC (lines of code), function points, classes? Hard to estimate before developing specs Lack of experience Lack of historical data Depends on size, complexity, number of

programmers, productivity, team, tools, ... Brooks’ Law:

– adding more programmers to a late project makes it later

(3) Budgeting Process

Allocating overall cost to individual work items Inputs: cost estimates, WBS, schedule Outputs: Cost baseline Software measurement baselines

– collect, analyze, & calibrate data– used to monitor progress– systems/application and delivery baselines– may be segmented by:

• technology, platform, application, industry

Software ProjectEffort / Budget allocation

Workflows – Management 10%– Environment 10%– Requirements 10%– Design 15%– Implementation 25%– Assessment 25%– Deployment 5%

Software Development Phases: Effort and Schedule Distribution

Effort (Cost) Schedule(Time)

Inception 5% 10%

Elaboration 20% 30%

Construction 65% 50%

Transition 10% 10%

(4) Cost Control Process

Monitoring, analyzing, acting on cost data Influence factors that change cost baseline Ensure changes are beneficial and recorded

accurately Detect baseline changes and variance from

plan Manage changes Inform stakeholders of authorized changes

Cost Control Inputs

Cost baseline Performance reports Change requests Cost management plan

Cost Control Outputs Revised cost estimates Budget updates

– changes to approved baseline– revised in response to scope changes

Corrective actions Estimate at Completion (EAC)

– forecast of total project costs– actuals plus variations on remaining budget

Lessons Learned– causes of variances, why corrective actions, etc.

Cost Control Tools

Cost change control system– definition of procedures, approvals for change

Performance measurement– identify variances, magnitude, causes– Earned Value Analysis (EVA)

Software– tracks planned vs. actual costs– projects or forecasts effects of changes

Earned Value Analysis (EVA)

Integrates scope, time, and cost data Compares actuals to baseline Baseline: original plan plus approved changes Actuals: how much of a WBS item has been

completed BCWP - budgeted cost of work performed ACWP - actual cost of work performed BCWS - budgeted cost of work scheduled

Performance Measures CV (cost variance)

= BCWP - ACWP (budgeted cost - actual cost)

SV (schedule variance)

= BCWP - BCWS

(cost of work performed -cost of work scheduled)

CPI (cost performance index)

= BCWP / ACWP

SPI (schedule performance index)

= BCWP / BCWS

– used to re-estimate time to completion

Applying EVA to IT projects

Estimates keep changing (budgeted) Simplified evaluation of percent complete for

tasks can still provide useful tracking information