1. Project Management Lecture Budgeting and Cost Control

2. Overview Cost Estimation Project Budgets Project Costing Cost Benefit Analysis Payback NPV Cost Control

3. Cost Estimation - Factors Hardware and Software costs including maintenance Travel and Training costs Effort costs (costs of paying SW engineers) Heating lighting and office space Support staff (accountants, cleaners etc) Infrastructure (network + communications) Facilities (library, refreshments, recreation) Social security, employee benefits, pensions etc

4. Salary and Overheads Average Salary for Software Engineers in the UK (2002) = £25,000 Average Salary for IT managers in the UK (2002) = £50,000 Overhead is typically 2 x Salary So a software engineer costs £75,000pa

5. CoCoMo Constructive Cost Model Uses lines of code as a measure Assumes that the waterfall model of software development will be used For well understood applications developed by small teams: PM = 2.4(KDSI) 1.05 x M

6. CoCoMo Example How long will it take to produce 10,000 lines of code? PM = 2.4(10) 1.05 x 1 = 26.9PM Cost is > £150,000 What if the Programmer(s) is(are) very inexperienced PM = 2.4(10) 1.05 x 1.46 = 39.3PM

7. CoCoMo2 Uses Object points rather than lines of code Allows for different development approaches See Somerville “Software Engineering” Chapter 23 for more detail

8. Cost Benefit Analysis Compare the costs of carrying out a project with the estimated benefits Identify all costs Development Costs Running Costs – annual costs

9. Cost Benefit Analysis Include all direct benefits of the project Will normally accrue on completion – but not always May be annual benefits/savings Express costs and benefits in a common unit £, €, $ etc What about intangible benefits?

10. Cost Benefit Analysis Example layout

11. Project Costs Direct Costs – Costs that can be directly attributed to a project task (labour, materials etc.) Indirect Costs – Overheads that do not directly contribute to the project (rent, heating, lighting, admin)

12. Pricing vs. Costing Price to charge for software = Cost + Profit Other factors may effect the pricing e.g. competitive environment, loss leader project Pricing therefore involves: project managers for costing senior management for pricing strategies

13. Costs vs. Budget Cost = how much it will cost to produce system Budget = how much you will be allowed to spend on producing system

14. Top Down Budget High level management set budget against high level tasks This is then divided amongst lower level tasks – by lower levels of management Generally results in: Inaccurate low level budgets Competition for available funds

15. Bottom up Budget Estimates are made on resource costs etc. for low level tasks (WBS) These are aggregated to provide direct costs for the project PM adds indirect costs – admin, etc. and reserve (and profit figures) Senior management then cut the budget!

16. Evaluating a Project Which of these projects is the best?

17. Net Profit

18. The most obvious criteria for comparison Does not give the full picture regarding the viability of the project

19. Cash Flow Can the organisation afford the –ve cash flow required for the development of the project e.g. Project BBB requires an initial outlay of £1000,000

20. Cash Flow We need to spend money during the development of a product We hope to get it back once the product is finished Therefore projects will have a –ve cash flow during their development This should become +ve once the project is complete

21. Cash Flow Diagram Cotterell and Hughes page 43 Income Time a b c

22. Cash Flow

23. Evaluating a Project

24. Payback Period The period of time it takes to recoup your initial investment A shorter payback period is preferred as it minimises the amount of time a project is in debt

25. Payback Period

27. Find the payback period for projects BBB and DDD

28. Payback Period

29. Return on Investment Is it really worth investing all that time, money and effort into the project? To help make that decision we use the return on investment The investment will be the initial development costs of the project

30. Return on Investment Used to discover the percentage of return on the original project investment ROI = average annual profit x 100 total investment

31. Return on Investment For Project AAA Average annual profit = £50,000/5 (years) Initial investment = £100,000 ROI = £10,000 x 100 £100,000 ROI = 10%

32. Return on Investment Calculate the ROI for the remaining projects and show which one provides the best return

33. Return on Investment Project BBB Project CCC Project DDD ROI = (100,000/5)/100000 0x100 = 2% ROI = (50,000/5)/100000 x100 = 10% ROI = (75,000/5)/120000 x100 = 12.5% Project BBB Project CCC Project DDD

34. Net Present Value Takes into account the profitability of a project and the timing of cash flows Receiving £1000 today is better then receiving £1000 next year Inflation – things will cost more Investment – we lose a year’s interest

35. Net Present Value - Examples If we invested £100 this year it would be worth £110 next year (assuming 10% interest rate – not likely) Therefore if we were given £100 next year it would have been the same as investing £90(ish) this year. This 10% is called the discount rate

36. Net Present Value The present value of any future cash flow can be calculated using the following formula: Present Value = value in year t (1 + r) t

37. PV Exercise If I gave you £100 in one year’s time, what would be its present value? Assume a percentage rate of 20% 100/(1.20) 1 = £83.33 How about in three years? 100/(1.20) 3 = £57.87

38. Net Present Value An alternative approach is to break down the problem into cash flow and discount factor: Discount factor = 1 (1+r) t Therefore: Present Value = Cash Flow x Discount Factor

39. Discount factor table

40. Net Present Value Net Present Value is the sum of the present values (aka discounted cash flows) As can be seen on the next slide, the profit figures can differ significantly using Net PV instead of Net Profit The payback period may also be effected

41. Net Present Value

43. NPV Exercise Calculate the Discounted Cash Flows and annual NPV for Projects BBB, CCC and DDD Does this effect the payback period for any of these projects?

44. More Detailed NPV Example (Cadle and Yeates 2001)

45. NPV Tutorial Exercise Have a go at the tutorial exercise handed out in the lecture To do this you will need to think about Cost Benefit Analysis and NPV A model answer will be provided next week

46. Cost Control We have established the projected costs for the project Each activity will have been given a cost value (in WBS) As the project progresses we must monitor the costs

47. Example 1

48. Cost Control -Questions 3 weeks into my 10 week project I find I have spent over 50% of the budget. What does this mean for the rest of the project? Check original cost plan (BCWS) Check actual work performed – may be ahead of schedule (BCWP) Check actual cost of planned activities – may be overspend (ACWP)

49. Cost Control Monitors work in progress Uses Three Measures BCWS – Budgeted Cost of Work Scheduled BCWP – Budgeted Cost of Work Performed Also known as Earned Value ACWP – Actual Cost of Work Performed

50. Cost Control

51. Cost and Schedule Variance Diagram Shows relationship between BCWS, BCWP and ACWP Lockyer and Gordon Page 84

52. Variance Analysis BCWP – ACWP = Cost Variance BCWP – BCWS = Schedule Variance ACWP – BCWS = Budget Variance These can be used to assess the state of the project e.g. negative cost variance with zero schedule variance implies the project is on time but over budget

53. Conclusions Costs and Benefits may be incurred annually Development time for a project incurs a negative cash flow – which may be large A number of factors can be combined to assess suitability of a project Incorporating NPV into the calculations can alter the payback period of a project NPV provides a more realistic model as it takes into account the future value of money

54. References Hughes and Cotterell “Software Project Management” (Ch 3+9) Lockyer and Gordon “Project Management” Cadle and Yeates “Project Management for Information Systems” Somerville “Software Engineering” A useful link http://www.cw360ms.com/pmsurveyresults/index. asp http://www.cw360ms.com/pmsurveyresults/index. asp