1. BTS730 Cost Management

2. Average cost overrun: –1995 CHAOS study: 189% of the original estimates –2001 study: 145%

3. Cost Management Cost Management disasters (p265): –IRS…> $50 billion cost to taxpayers –UK National Health Service…$26 billion overrun

4. Cost Management Processes Cost estimating: estimating costs and resources needed to complete a project Cost budgeting: allocating cost estimate to work items over time intervals to establish a baseline for measuring performance Cost control: controlling changes to the project budget/financial health

5. Cost of Software Defects (table 7.1, text)

6. Cost Management Basic Principles

7. Cost Estimating (table 7.2, text)

8. Cost Estimating Techniques –Top Down (analogous): use the actual cost of a previous, similar project as the basis for the new estimate –Bottom-up: estimate individual work items and roll up to get a total estimate –Parametric: use parameters to estimate project costs (e.g. lines of code/function points, I/O, files etc.)

9. Cost Estimating Problems Complexity, Time: many estimates are done in a hurry before fully understanding the system. Lack of Experience: people doing the estimating don’t have much experience in $ Bias towards under-estimation: a human trait; and people also tend to estimate at their skill level Estimates “to order”: sometimes managers don’t really want “the truth” but an estimate that would help them win a bid…etc. PMs must stand by estimates

10. Sample Cost Estimate (fig 7-2 text)

11. Cost Budgeting Allocating $ to “items” over time and creating a cost “baseline” Cost baseline is a time phased budget used to measure and monitor cost performance.

12. Cost Budgeting See figure 7-4 (5 th ed) in text for sample baseline –(p282, 5 th edition)

13. Cost Control Activities include: –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 Earned value management (EVM) is an important tool for cost control

14. Difficulties Controlling Costs? Examples p. 284

15. Cost Control: EVM EVM: a project performance measurement technique; it integrates scope, time, and cost data Uses a baseline (original plan plus approved changes), to determine how well the project is meeting its goals Actual and planned cost figures are used.

16. Cost Control:EVM Planned Value (PV): $ planned to be spent on an activity for a given period Actual Cost (AC): total $ incurred on an activity for a given period Rate of Performance (RP): ratio of actual work completed to % of work planned to have been completed at any given time. Earned Value (EV): estimate of the value of the work completed. –EV = PV (to date) x RP

17. Cost Control :EVM Example –After week 1: PV = $10,000 AC = $15,000 Only 50% of the work planned for week 1 has been completed. EV = PV x 50% = 10,000 x 50% = $5,000

18. Cost Control: EVM Cost Variance (CV): EV – AC $5,000 - $15000 = -$10,000 Schedule Variance (SV): EV – PV $5,000 - $10,000 = -$5,000 Cost Performance Index (CPI): EV/AC $5,000/$15,000 = 33% (.3) Schedule Performance Index (SPI): EV/PV $5,000/$10,000 = 50% (.5)