IS5540 Project Management & Quality IS5540 Project Management & Quality AssuranceAssurance

Week 6 - Project Cost ManagementWeek 6 - Project Cost Management

Schwalbe: Managing Information Technology Projects, Chapter 7Schwalbe: Managing Information Technology Projects, Chapter 7

Adapted by Janet Yu, Frank LoAdapted by Janet Yu, Frank Lo

PMI Framework: 9 Knowledge Areas

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Integration

ScopeTime Cost

Quality

PeopleCommunication Risk

Procurement

Learning ObjectivesExplain basic project cost management

principles, concepts, and terms

Discuss different types of cost estimates and methods for preparing them

Understand the processes involved in cost budgeting and preparing a cost estimate, and budget for an information technology project

Understand the benefits of earned value management and project portfolio management to assist in cost control

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The Importance of Project Cost ManagementIT projects have a poor track record for meeting

budget goalsThe CHAOS studies found the average cost

overrun was:180 percent in 199456 percent in 2004

Other studies found overruns to be 33-34 percent

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Cost Overrun ExamplesThe U.S. Internal Revenue Service (IRS)

1990s: A series of project failures cost taxpayers more than $50 billion a year (=annual net profit of the entire computer industry)

In 2004, CIO Magazine reported problems with the IRS’s $8 billion modernization project, resulting in > $200 million cost overrun

In 2006, the IRS tried to upgrade its fraud-detection software but project was delayed costing $318 million in fraudulent refunds that didn’t get caught

in 2008, a report stated that more than 400 U.S. government agency IT projects, worth an estimated $25 billion, suffer from poor planning and underperformance

http://www.cio.com/article/32202/Five_Ongoing_IRS_Modernization_Projects

The UK’s National Health Service IT modernization program the greatest IT disaster in history with an estimated $26 billion overrun

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If costs not managed carefully…..

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Project Cost Management ProcessesEstimate costs: developing an approximation or

estimate of the costs of the resources needed to complete a project

Determine budget: allocating the overall cost estimate to individual work items to establish a baseline for measuring performance

Control cost: controlling changes to the project budget

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Basic Principles & Terminology

Profits are revenues minus expendituresProfit margin is the ratio of revenues to profitsLife cycle costing

Considers the total cost of ownership, or development plus support costs, for a project when making financial decisions

E.g. Buying a low-cost but low-quality equipment may cost less initially but require a high maintenance fee later on.

Cash flow analysis determines the estimated annual costs and benefits for a project and the resulting annual cash flow

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Basic Principles & Terminology

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, e.g improved company image

Direct costs are costs that can be directly related to producing the products and services of the project

Indirect costs are costs that are not directly related to the products or services 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

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Table 7-1: Costs of Downtime for IT Applications

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Learning curve theory states that when many items are produced repetitively, the unit cost of those items decreases in a regular pattern as more units are produced

Reserves are dollars included in a cost estimate to mitigate cost risk by allowing for future situations that are difficult to predict

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Basic Principles of Cost Management

Contingency reserves allow for future situations that may be partially planned forTo cater for known unknownsE.g. increase in labor and material costIncluded in the cost baselineE.g. $10M (Project Budget) + $1M (Contingency Reserve) = $11M

(Cost Baseline)Management reserves allow for future situations that are

unpredictableTo cater for unknown unknownsE.g. supplier goes bankrupt, hurricaneNot included in the cost baseline, but included in the total cost

budgetE.g. $11M (Cost Baseline) + $1.1M (Management Reserve) =

$12.1M (Cost Budget)12

Types of Reserves

Table 7-2: Types of Cost Estimates

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Cost Management PlanA Cost Management Plan is a document that

describes how the organization will manage cost variance on the project

Produced as part of the Project Management Plan

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Estimate Costs

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Cost Estimation Tools and TechniquesBasic tools and techniques for cost estimates

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. E.g. cost of renovating a house

Bottom-up estimates: involve estimating individual work items or activities and summing them to get a project total

Parametric modeling: uses project characteristics (parameters) in a mathematical model to estimate project costs. E.g. no. of workstations x cost of installation per workstation

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Figure 7-2: Surveyor Pro Project Cost Estimate

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Figure 7-3: Surveyor Pro Software Development Estimate

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Determine Budgets

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Determine Budget

An important goal is to produce a cost baselineA time-phased budget that project managers use to

measure and monitor cost performance

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Figure 7-4: Surveyor Pro Project Cost Baseline

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*Numbers are rounded, so some totals appear to be off.

Steps to Come Up with a Project Budget?

Cost Budget

Management Reserve

Cost Baseline

Contingency Reserve

Project

Work Packages

Activities

?

?

?

?

?

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Control Costs

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Control Costs

Monitoring cost performanceEnsuring that only appropriate project changes are

included in a revised cost baselineInforming project stakeholders of authorized

changes to the project that will affect costs

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Earned Value Management (EVM)EVM is a project performance measurement

technique that integrates scope, time, and cost data

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

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Earned Value Management (EVM)

Planned Value (PV) How much work should have been done?

Earned Value (EV) How much work has been done?

Actual Cost (AC) How much has been spent?

Budget At Completion (BAC)

What was the entire project supposed to cost?

Estimate At Completion (EAC)

What is the project expected to cost now?

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Earned Value Management (EVM)

Cost Variance (CV) Deviation from the original budget (in monetary terms)?

Schedule Variance (SV) Deviation from the original schedule (in monetary terms)?

Cost Performance Index (CPI)

How well is the WBS component doing in terms of cost?

Schedule Performance Index (SPI)

How well is the WBS component doing in terms of schedule?

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EVM Example – Programming Project

Plan10 months to complete the project10 programs to writeEach requires 1 month to writeEach costs $10K to write

Actual after 3 monthsHas written 2 programsHas spent $16K

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Summary of Formulae

PV Planned Value Budgeted cost for the work scheduled

EV Earned Value Budgeted amount for the work actually completed

AC Actual Cost The total cost incurred

BAC Budget at Completion Original budget

CV Cost Variance EV – AC

CPI Cost Performance Index EV / AC

SV Schedule Variance EV – PV

SPI Schedule Performance Index EV / PV

ETC Estimate to Complete (BAC - EV) / CPI (assuming typical variances)

EAC Estimate at Completion AC + ((BAC – EV) / CPI) or simply

BAC / CPI

VAC Variance at Completion BAC – EAC

Estimated Time to Complete Original time estimate / SPI

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Performance of Programming Project

PV Planned Value $10K x 3 = $30K

EV Earned Value $10K x 2 = $20K

AC Actual Cost $16K

BAC Budget at Completion $10K x 10 = $100K

CV Cost Variance $20K – $16K = $4K

CPI Cost Performance Index $20K / $16K = 1.25

SV Schedule Variance $20K – $30K = $-10K

SPI Schedule Performance Index $20K / $30K = 0.67

ETC Estimate to Complete ($100K - $20K) / 1.25 = $64K

EAC Estimate at Completion $16K + $64K = $80K

$100K / 1.25 = $80K

VAC Variance at Completion $100K - $80K = $20K

Estimated Time to Complete

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Rate of PerformanceRate of performance (RP) =

Actual work completed / work planned to have been completed

For example, suppose the server installation was halfway completed by the end of week 1 but planned schedule shows the task should be 100% completedActual work completed 50%Work planned to have been completed 100% Rate of performance = 50%

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Rules of Thumb for Earned Value NumbersProblem appears when:

Negative numbers for cost or schedule varianceCPI or SPI less than 100%

Problems meanthe project is costing more than planned (over

budget) ortaking longer than planned (behind schedule)

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Figure 7-5: Earned Value Chart for Project after Five Months

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Quick Quiz (1)1.What kind of cost estimate will you give at the

initiation stage of the project?

2.I decided to select a cheaper brand in order to lower the project cost though I understood that the maintenance cost would be much higher than other brands. Which cost management principle did I violate?

3.By carrying out the project, the image of the company can be improved, this is __________ benefit.

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Quick Quiz (2)4.If you are asked to give an accurate cost estimate

for your project, which cost estimating method will you use?

5.The approved total cost estimate for the project is called the ___________.

6.A time-phased budget for the project for measuring performance is called the __________.

7.The technique that you’ll use in cost control is called __________.

8.Which reserve is not part of the cost baseline?

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Cost Budget

Management Reserve

Cost Baseline

Contingency Reserve

Project

Work Packages

Activities 10 + 20 30 + 40

30 70

100

100 x 10% = 10

100 + 10 = 110 (time-phased)

110 x 10% = 11

110 + 11 = 121

Steps to Come Up with a Project Budget?

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$

RevisionConcepts and terminology

Life cycle costing Cash flow analysis Tangible Vs intangible costs Direct Vs indirect costs Sunk cost Order of magnitude Vs Budgetary Vs Definitive

Reserves Contingency reserves Management reserves

Cost estimating methods Analogous / top-down Bottom-up Parametric modeling

Cost Baseline Earned Value Management (EVM)

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Appendix on Function Point

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Basic Functions Classification

outputs (OTOT): data items produced for the external world

inputs (IT): data items from external world to softwareinquiries (QT): inputs that cause some database

lookup and responsefiles (FT): externally observable data storesinterfaces (EI): connections to other systems

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Function Complexity Weightings

Function Type Low Average HighExternal Input 3 4 6

External Output 4 5 7Logical Internal File 7 10 15Ext. Interface File 5 7 10External Inquiry 3 4 6

1-5 Data element types

6-19 Data element types

20+ Data element types

0-1 File types referenced

Low Low Average

2-3 File types referenced

Low Average High

4+ File types referenced

Average High High40

Computing Raw FP Count

Raw FP Count

= 4*OTs + 5*OTa + 7*OTc

+ 3*ITs + 4*ITa + 6*ITc

+ 3*QTs+ 4*QTa + 6*QTc

+ 7*FTs + 10*FTa + 15*FTc

+ 5*EIs + 7*EIa + 10*EIc

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Complexity Adjustment Factors

Data CommunicationsDistributed FunctionsPerformanceHeavily Used

ConfigurationTransaction RateOnline Data EntryEnd User Efficiency

Online UpdateComplex ProcessingRe-useability Installation EaseOperational EaseMultiple SitesFacilitate Change

0 (not important) to 5 (very important)

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Computing the Function Point ValueUFP = raw FP count

CAFP = 0.65 + (Complexity Adjustment Score) / 100

AFP = UFP * CAFP

Size of Project = AFP * LOC of a given language

(LOC is adjusted by individual organization)

UFP: Unadjusted Function PointCAF: Complexity Adjustment Function PointAFP: Adjusted Function Point43

FP - Example

Bank accounts record system involving36 user inputs simple complexity

5 user outputs average complexity

20 user inquiries simple complexity

40 files accessed simple complexity

3 external interfaces average complexity

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FP - ExampleComplexity Weightingsimple average complex product

36 user inputs 36 3 + __ 4 + __ 6 = 108

5 user outputs __ 4 + 5 5 + __ 7 = 25

20 user inquiries 20 3 + __ 4 + __ 6 = 60

40 files 40 7 + __ 10+__ 15 = 280

3 external interfaces __ 5 + 3 7 + __ 10 = 21

TOTAL UFP = 494

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FP - Example

F1 require reliable backup & recovery? Significant 4

F2 data communications required? Moderate 2

F3 distributed processing functions? Significant 4

F4 performance critical? Average 3

F5 run on existing, heavily utilized environment? Essential 5

F6 require on-line data entry? Essential 5

F7 on-line data entry from multiple operations? Incidental 1

F8 master files updated on-line? No influence 0

F9 inputs, outputs, files, or inquiries complex? Incidental 1

F10 internal processing complex? Incidental 1

F11 code designed to be reusable? Average 3

F12 conversion and installation included in the design? Average 3

F13 system designed for multiple installations in different orgs? No influence 0

F14 application designed to facilitate change and ease of use? No influence 0 = 32

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FP - Example

AFP = UFP [0.65 + 0.01 Fi ]

= 494 [0.65 + 0.01 32 ] = 479.18

Size of Project = AFP * LOC of a given language

= 479.18 106 (COBOL)

= 50,793

If it costs $10 for a professional programmer to write 1 LOC, the cost of the system is:

10 50,793 = $507,930

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Sites on Function PointAn introductory article to function point counting

www.davidconsultinggrup.com/articles/pbfpart.htmFreebies on function point

www.softwaremetrics.com/freestuff.htmIT Metrics and Productivity Institute

www.itmpi.orgInternational Function Point Users Group

www.ifpug.orgOn-line tool for calculating function points

http://www.smlab.de/webapplications.html

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