Chapter 7: Project Cost Management

What is cost?

a resource that you give up or sacrificed in order to receive a specific objective or something of better value in exchange.

tangible costs or benefits

costs or benefits that you can touch and can be measured in dollars. example - laptop, employees

Indirect costs

costs that are not directly related to the products and services but are indirectly related to helping get the project done. (ex.lighting)

Direct Costs

costs that be directly related to the products or services of the project. (people - their time in exchange for renting their expertise)

3 tools for cost estimates:

1. Analogous/ Top Down Estimates => use the actual cost of a previous or similar project as the basis for estimating the cost. 2.Bottom-up estimates => estimating individual work items or activities and adding them up to get a project total. 3.Parametric Modeling => using project parameters in a mathematical model to estimate project costs.

Typical Problems with IT Cost Estimates

1. Estimates are done too quickly 2. People lack estimating experience 3. Human beings are biased toward underestimation 4. Management desires accuracy.

What are the 4 Project Cost Management Processes?

1. Planning Cost Management -This when you determine the policies, procedures, and documentation that will be used for planning, executing, and controlling a project cost. 2. Estimating costs -This is when you develop an estimate of the costs of resources you will need to complete a project. (self explanatory) 3. Determining the budget -This is when you allocate the overall cost estimate to individual work items in order to establish a baseline for measuring performance. 4. Controlling Cost -This is when you control changes to the project budget

Types of Cost Estimates

1.rough order of magnitude (ROM) (done very early, 3-5 years before project completion is used to provide estimate of cost for selection decisions) 2.budgetary (early, 1-2 years out and is to put dollars in the budget plans) 3.definitive (later in the project, 1 year out to provide details for purchases and estimates of actual costs)

learning curve theory

A theory that states that if you learned something once, you don't have to learn it completely.

What is cash flow analysis?

A type of analysis that determines the estimated annual costs and benefits for a project the result of the annual cash flow. This is allows you to have the amount of money at the right point of time.

Discuss Cost budgeting. What does it involve? What are the important inputs and outputs of this phase? What is an important output that should come out of determine the budget?

Cost budgeting involves allocating the proper cost estimates to individual work items within a project. input: Work Breakdown Structure to help define the work items. output goal: to product a cost baselines (a time-phased budget that project managers can use to measure and monitor cost performance)

Define Cost Controlling. What does it include?

Cost controlling 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.

Intangible costs or benefits

Costs or benefits that are hard to measure in terms of money. ex. a company's reputation

What is Earned Value Management? (EWM) Define the Earned Value Management Terms: planned value (pv), actual cost (ac), earned value (ev)

EWM: a project performance measurement technique that integrates scope, time, and cost data. It's when given a baseline (an original plan plus approved changes) that you determine how well the project is meeting its goals. Planned value (PV) is the approved budget of work that we had planned to spend. Actual cost (the real money we actually spent). Earned Value (EV) is the value of the actual work completed. It 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. note: you have to have that baseline estimate to determine if you are meeting the goals that you estimated.

method for project porfolio management

One method for project portfolio management: 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

What is the rate of performance? What is it used for?

ROP: 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 We use RP to calculate the earned value (EV). Tells me how close I am to meeting my projected value. Ratio of performance is 50% because only half is completed.

Using Software to assist in cost managment

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 Portfolio management software can help reduce costs

Reserves

extra money included in a cost estimate in case of something happening in the future.

Sunk costs

money that has been spent in the past. You don't get to include sunk cost in a cost that you worked on in the past.

Contingency Reserves

reserves made for the known unknowns (you know it may likely happen in the future but not when) note: contingency -> a future event or circumstance which is possible but cannot be predicted with certainty.

Management Reserves

reserves made for the unknown unknowns (unpredictable circumstances)

What how do you determine profits?

revenues - expenditures (money spent)

What is an overrun?

the additional percentage or dollar amount by which actual costs exceed estimates. In IT projects, the average cost overrun was of 27 percent.

What is project cost management?

the processes required to ensure that a project is being completed within its APPROVED budget.

What is profit margin?

the ratio of revenues to profits

What is life cycle costing?

the total cost of development plus support cost in a project. This includes recovery and recycling cost in the budget.