Project Management – PTM712S Faculty of Computing and Informatics 14 August 2017 Project Management – PTM712S Lesson 7 – Project cost management

Project cost management Faculty of Computing and Informatics Project cost management Project cost management and processes Basic principles of cost management Resource planning Cost estimating Cost budgeting Cost control Earned value management

Project cost management Faculty of Computing and Informatics Project cost management Cost is a resource sacrificed or forgone to achieve a specific objective Project cost management is a process required to ensure that a project team completes a project within an approved budget

Project cost management processes Faculty of Computing and Informatics Project cost management processes Resource planning: people, equipment, materials a project team should use to perform activities and quantities of each resource – Resource list Cost estimating: approximate cost of resources needed to complete a project – Cost management plan

Project cost management processes Faculty of Computing and Informatics Project cost management processes Cost budgeting: involves allocating overall cost estimate to individual work items to establish a baseline for measuring performance – Cost baseline Cost control involves controlling changes to the project budget – Revised cost estimates

Basic principles of cost management Faculty of Computing and Informatics Basic principles of cost management Profits – revenue minus expenses Profit margin – ratio between revenue and profit, i.e. if N$ 100 generates N$2 in profit, there is a 2% profit margin Life cycle costing – an accurate projection of a project’s financial benefits. Total cost of ownership or development plus support costs

Basic principles of cost management Faculty of Computing and Informatics Basic principles of cost management Cash flow analysis – determining the estimated annual costs and benefits for a project and resulting annual cash flow Internal rate of return – the discount rate that makes net present value equal to zero. It is also called Time-adjusted-rate –of-return Tangible costs – costs or benefits that can easily be measured

Basic principles of cost management Faculty of Computing and Informatics Basic principles of cost management Tangible costs – costs or benefits that can easily be measured in monetary terms Intangible costs – costs and benefits that are difficult to measure in monetary terms Direct costs – costs related to a project that an organisation can trace back in a cost-effective way, e.g. salaries

Basic principles of cost management Faculty of Computing and Informatics Basic principles of cost management Indirect costs – costs related to a project that an organisation cannot trace back in a cost-effective way, e.g. electricity costs, paper Sunk cost – money that has been spent in the past Learning curve theory – when many items are produced repetitively, the unit cost of these items decreases in a regular pattern as more units are produced

Basic principles of cost management Faculty of Computing and Informatics Basic principles of cost management Learning curve theory – when many items are produced repetitively, the unit cost of these items decreases in a regular pattern as more units are produced Reserves – money included in a cost estimate to mitigate cost risk but allowing for future situations that are difficult to predict

People, equipment and materials Faculty of Computing and Informatics Resource planning Resource planning is: What physical resources and in what quantities are required to complete the project? People, equipment and materials

Types of cost estimates Faculty of Computing and Informatics Types of cost estimates Rough order of magnitude (ROM) estimate – provides a rough idea of what a product will cost Budgetary estimate – is used to allocate money into an organisation’s budget (10-25% more than budget estimate) Definitive estimate – an accurate estimate of project costs Cost management plan – a document that describes how the organisation will manage cost variances on the project

Types of cost estimates Faculty of Computing and Informatics Types of cost estimates

Cost estimation tools and techniques Faculty of Computing and Informatics Cost estimation tools and techniques Analogous estimates / top-down estimates– use the actual cost of a previous similar project as a basis for estimating the cost of current project Bottom-up estimating– estimating individual work items Parametric modelling– project characterization (parameters) in a mathematical model to estimate project costs, e.g. $150 for a line of code Constructive cost model (COCOMO) uses lines of code

Typical challenges with IT cost estimates Faculty of Computing and Informatics Typical challenges with IT cost estimates Estimates are done too quickly Lack of estimating experience Human beings are biased toward underestimation Management desires accuracy Order of Magnitude or Budgetary estimates carried over without thorough review

Faculty of Computing and Informatics Cost budget Involves allocating the project cost estimate to individual work items. These items are based on WBS

Cost budget estimate Faculty of Computing and Informatics Budget category Estimated costs Explanation Headcount 13 Including 9 programmers, 2 systems analysts and 2 technicians Remuneration N$2, 000, 000 Assumes a pay increase of 4% in June Consultants N$500,000 To support Project Accounting and auditing; maintenance of infrastructure Travel N$25, 000 Incidental travel expenses Rent /lease N$100, 000 Lease of computing platforms Other suppliers Incidental expenses associated with training and rewards Total costs N$2, 725,000

Faculty of Computing and Informatics Cost control Monitoring cost performance ensuring that only appropriate project changes are included in a revised cost baseline and informing project stakeholders of unauthorized changes to project will affect costs The tool for measuring cost performance is called: EARNED VALUE MANAGEMENT (EVM)

Earned value management (EVM) Faculty of Computing and Informatics Earned value management (EVM) Earned value management (EVM) is a project performance measurement technique that integrates scope, time and cost data It calculates 3 values for each activity - the planned value (PV) – budgeted cost of work scheduled - the actual cost (AC) – actual cost of work performed - the earned value (EV) – budgeted cost of work performed

Earned value management terms Faculty of Computing and Informatics Earned value management terms The planned value (PV), formerly called the budgeted cost of work scheduled (BCWS), also called the budget, is that portion of the approved total cost estimate planned to be spent on an activity during a given period Actual cost (AC), 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 The earned value (EV), formerly called the budgeted cost of work performed (BCWP), is an estimate of the value of the physical work actually completed EV is based on the original planned costs for the project or activity and the rate at which the team is completing work on the project or activity to date

Faculty of Computing and Informatics Rate of performance Rate of performance (RP) is the ratio of actual work completed to the percentage of work planned to have been completed at any given time during the life of the project or activity Approach for estimating earned value is as follows: 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 percent complete and only 50 percent of that work has been completed

Earned value management calculations Faculty of Computing and Informatics Earned value management calculations Activity Week 1 Formula Earned value (EV) 7500 EV=PV to date X performance completed Planned value (PV) 10,000 CV=EV-AC Actual cost (AC) 15,000 SV=EV-PV Cost variance (CV) -7,500 CPI = AV/AC Schedule variance (SV) -2,500 SPI = EV/PV Cost Performance Index (CPI) 50% Schedule Performance Index (SPI) 75% Estimate at completion (EAC) – estimated time to complete Original time estimate / SPI

Earned value management terms Faculty of Computing and Informatics Earned value management terms Cost variance (CV) – the difference between the estimated cost of an activity and the actual cost of that activity. If CV is positive it means performing work cost less than planned Scheduled variance (SV) – the difference between the scheduled completion of an activity and the actual completion of that activity. A negative CV means it took longer than planned to perform work and a positive CV means it took less time

Earned value management terms Faculty of Computing and Informatics Earned value management terms Cost performance index (CPI) – is the ratio of earned value to the actual cost and can be used to estimate the project cost of completing the project. If CPI = 100% the planned and actual cost are equal and exactly as budgeted; if CPI is less than 100%, the project is over the budget. If CPI is more than 100% the project is under the budget

Earned value management terms Faculty of Computing and Informatics Earned value management terms Scheduled performance index (SPI) – is the ratio of earned value to the planned value and can be used to estimate the projected time to complete project SPI of 100% means project is on schedule SPI greater than 100% means project is ahead of schedule SPI is less than 100% then project is behind schedule

Earned value management terms Faculty of Computing and Informatics Earned value management terms Estimate at completion (EAC) – an estimate of what it will cost to complete the project based on performance to date Budget at completion (BAC) – the original total budget for project

Determining the budget Faculty of Computing and Informatics Determining the budget Cost budgeting involves allocating the project cost 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 - a time-phased budget that project managers use to measure and monitor cost performance

Project cost control includes: -Monitoring cost performance Faculty of Computing and Informatics Controlling costs Project cost control includes: -Monitoring cost performance -Ensuring that only appropriate project changes are included in a revised cost baseline -Informing project stakeholders of authorized changes to the project that will affect costs Many organizations around the globe have problems with cost control

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