CHAPTER 7:

PROJECT
MANAGEMENT
FOR INFORMATION
SYSTEM
PROJECT COST MANAGEMENT
WHAT IS COST AND PROJECT COST
MANAGEMENT?

◊ Cost is a resource sacrificed or foregone to achieve a specific

objective, or something given up in exchange.
◊ Costs are usually measured in monetary units, such as dollars.
◊ Project cost management includes the processes required to ensure
that the project is completed within an approved budget.

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PROJECT COST MANAGEMENT PROCESSES

◊ Planning cost management :determining the policies, procedures,

and documentation that will be used for planning, executing, and
controlling project cost.
◊ Estimating costs: developing an approximation or estimate of the
costs of the resources needed to complete a project
◊ Determining the budget: allocating the overall cost estimate to
individual work items to establish a baseline for measuring
performance
◊ Controlling costs: controlling changes to the project budget

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PROJECT
COST
MANAGEME
NT
SUMMARY

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BASIC PRINCIPLES OF COST MANAGEMENT

◊ Most members of an executive board better understand and are more

interested in financial terms than IT terms , so IT project managers
must speak their language
◊ Profits are revenues minus expenditures
◊ Profit margin is the ratio of revenues to profits
◊ Life cycle costing considers the total cost of ownership, or
development plus support costs, for a project
◊ Cash flow analysis determines the estimated annual costs and
benefits for a project and the resulting annual cash flow

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COST OF
DOWNTIME
FOR IT
APPLICATIO
NS

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BASIC PRINCIPLES OF COST MANAGEMENT

◊ 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.
◊ 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, but are indirectly related to performing 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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MORE BASIC PRINCIPLES OF COST
MANAGEMENT

◊ 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
◊ Contingency reserves allow for future situations that may be
partially planned for (sometimes called known unknowns) and are
included in the project cost baseline
◊ Management reserves allow for future situations that are
unpredictable (sometimes called unknown unknowns )

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PLANNING COST ESTIMATING
MANAGEMENT COSTS

◊ The project team uses expert ◊ Project managers must take cost
judgment, analytical techniques, and estimates seriously if they want to
meetings to develop the cost complete projects within budget
management plan constraints.
◊ A cost management plan includes: ◊ It’s important to know the types of
◊ Level of accuracy and units of measure cost estimates, how to prepare cost
◊ Organizational procedure links estimates, and typical problems
◊ Control thresholds associated with IT cost estimates.
◊ Rules of performance measurement
◊ Reporting formats
◊ Process descriptions

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TYPE OF
COST
ESTIMATES

◊ The number and type of cost estimates vary by application area. The
Association for the Advancement of Cost Engineering International
identifies five types of cost estimates for construction projects: order of
magnitude, conceptual, preliminary, definitive, and control
◊ Estimates are usually done at various stages of a project and should
become more accurate as time progresses
◊ A large percentage of total project costs are often labor costs
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COST ESTIMATION ESTIMATING
TOOLS AND
COSTS
TECHNIQUES
◊ Basic tools and techniques for cost ◊ Developing an estimate for a large
estimates: software project is a complex task that
◊ Analogous or top-down estimates: use requires a significant amount of effort.
the actual cost of a previous, similar ◊ People who develop estimates often
project as the basis for estimating the
cost of the current project do not have much experience.
◊ Bottom-up estimates: involve ◊ Human beings are biased toward
estimating individual work items or underestimation.
activities and summing them to get a ◊ Management might ask for an
project total
◊ Parametric modeling uses project
estimate, but really desire a bid to win
a major contract or get internal
characteristics (parameters) in a
mathematical model to estimate funding.
project costs
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SAMPLE COST ESTIMATE

◊ Before creating an estimate, know what it will be used for, gather as

much information about the project as possible, and clarify the
ground rules and assumptions for the estimate.
◊ If possible, estimate costs by major WBS categories.
◊ Create a cost model to make it easy to change and document the
estimate.

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EXAMPLE: SURVEYOR PRO
PROJECT COST ESTIMATE
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

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COST CONTROL

◊ 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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 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.
◊ More and more organizations
around the world are using EVM
to help control project costs.

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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.

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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.

◊ Brenda Taylor, Senior Project Manager in South Africa, suggests using

this approach for estimating earned value.

◊ For example, suppose the server installation was halfway completed by

the end of week 1. The rate of performance would be 50 percent
(50/100) 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.

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 EXAMPLE: EARNED VALUE CALCULATIONS
FOR ONE ACTIVITY AFTER WEEK ONE
Activity Week 1 Week Total % Complete EV Calculation
after week 1
2 (RP)

Purchased web 10.000 0 10.000 75% 7.500 EV=PV*RP

server
Planned Value 10.000 0 10.000
(PV)
Actual Cost 15.000 5.000 20.000
(AC)
Cost Variance -7.500 CV=EV-AC
(CV)
Schedule -2.500 SV=EV-PV
Variance (SV)
Cost 50% CPI=EV/AC
Performance
Index (CPI)
Schedule 75% SPI=EV/PV
Performance
Index (SPI)

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RULES OF THUMB FOR EARNED VALUE NUMBERS

◊ Negative numbers for cost and schedule variance indicate problems in

those areas
◊ CPI and SPI less than 100% indicate problems
◊ Problems mean the project is costing more than planned (over
budget) or taking longer than planned (behind schedule)
◊ The CPI can be used to calculate the estimate at completion (EAC)—
an estimate of what it will cost to complete the project based on
performance to date. The budget at completion (BAC) is the original
total budget for the project

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EARNED VALUE CHART FOR PROJECT AFTER FIVE
MONTHS
PROJECT PORTFOLIO MANAGEMENT

◊ Many organizations collect and control an entire suite of projects or

investments as one set of interrelated activities in a portfolio.

◊ Project portfolio management has five levels:

1.Put all your projects in one database.
2.Prioritize the projects in your database.
3.Divide your projects into two or three budgets based on type of
investment.
4.Automate the repository.
5.Apply modern portfolio theory, including risk-return tools that map
project risk on a curve.

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USING SOFTWARE TO ASSIST IN COST
MANAGEMENT

◊ Spreadsheets are a common tool for resource planning, cost

estimating, cost budgeting, and cost control.
◊ Many companies use more sophisticated and centralized financial
applications software for cost information.
◊ Project management software has many cost-related features,
especially enterprise PM software.

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THANK
YOU !