ISDS 351 Final Exam

Types of cost estimates

- Rough Order of Magnitude (ROM) - Budgetary - Definitive

Free slack or free float

Amount of time an activity can be delayed without delaying the early start of any immediately following activities

Total slack or total float

Amount of time an activity may be delayed from its early start without delaying the planned project finish date

Workflow

Automates the various activities in SAP's ERP software; performs task flow analysis and prompts employees via email if they need to take action

ROI

Calculated by subtracting the project costs from the benefits and then dividing by the costs ROI = (total discounted benefits-total discounted costs) / discounted costs The higher the ROI, the better Many organizations have a required rate of return - Minimum acceptable rate of return on investment for projects Internal rate of return (IRR) can by calculated by finding the discount rate that makes the NPV equal to zero

Critical Chain Scheduling

Considers limited resources when creating a project schedule and includes buffers to protect the project completion date - Uses the Theory of Constraints (TOC) Additional concepts: - Buffer - Murphy's Law - Parkinson's Law - Project buffer - Feeding buffers

NPV calculations

Determine estimated costs and benefits for the life of the project and the products it produces Determine the discount rate Calculate the net present value

Forward pass

Determines the early start and finish dates

Backward pass

Determines the late start and finish dates

Calculating the critical path

Develop a good network diagram and add the duration estimates for all activities on each path through the network diagram - Longest path is the critical path If one or more of the activities on the critical path takes longer than planned, the whole project schedule will slip unless the project manager takes corrective action

Estimating activity duration

Duration includes the actual amount of time worked on an activity plus elapsed time - Effort is the number of workdays or work hours required to complete a task and does not normally equal duration People doing the work should help create estimates - An expert should review them

Enterprise Systems

Ensures that business transactions are processed efficiently and accurately - Employs a database of key operational and planning data that can be shared with authorized users across the organization Examples: - Enterprise resource planning system - Customer relationship management system - Product life cycle management system

Types of dependencies or relationships between activities

Finish-to-start Start-to-start Finish-to-finish Start-to-finish

Enterprise Resource Planning (ERP) System

Set of integrated programs that manage a company's vital business operations

Analogous or top-down estimates

Use the actual cost of a previous, similar project as the basis for estimating the cost of the current project

Parametric estimating

Uses project characteristics (parameters) in a mathematical model to estimate project costs

Developing the schedule

Uses results of the other time management processes to determine the start and end date of the project - Ultimate goal is to create a realistic project schedule that provides a basis for monitoring project progress for the time dimension of the project Important tools and techniques - Gantt charts - Critical path analysis - Critical chain scheduling - PERT analysis

Budgetary

When Done: Early, 1-2 years out Why Done: Puts dollars in the budget plans Typical Range: -10% to +25%

Definitive

When Done: Later in the project, less than 1 year out Why Done: Provides details for purchases, estimates actual costs Typical Range: -5% to +10%

Rough Order of Magnitude (ROM)

When Done: Very early in the project life cycle, often 3-5 years before project completion Why Done: Provides estimate of cost for selection decisions Typical Range: -50% to +100%

To-complete performance index (TCPI)

a measure of the cost performance that must be achieved with the remaining resources to meet a specific goal

Sequencing activities

a process which involves evaluating the reasons for dependencies and the different types of dependencies

What is Cost?

a resource sacrificed or foregone to achieve a specific objective or something given up in exchange - Usually measured in monetary units like dollars that must be paid to acquire goods and services

Milestone

a significant event that normally has no duration - It often takes several activities and a lot of work to complete a milestone They're useful tools for setting schedule goals and monitoring progress - Examples: obtaining customer sign-off on key documents or completion of specific products

Activity list

a tabulation of activities to be included on a project schedule - Activity name, activity identifier or number, and brief description of the activity

Feeding buffers

additional time added before tasks on the critical path

Project buffer

additional time added before the project's due date

Buffer

additional time to complete a task

Determining the budget

allocating the overall cost estimate to individual work items to establish a baseline for measuring performance Budgeting involves allocating the project cost estimate to individual work items over time - Material resources or work items are based on the activities in the WBS for the project Important goal is to produce a cost baseline - Time-phased budget that project managers use to measure and monitor cost performance

Management reserves

allow for future situations that are unpredictable (sometimes called unknown unknowns)

Contingency reserves

allow for future situations that may be partially planned for (sometimes called known unknowns) and are included in the project cost baseline

Three-point estimate

an estimate that includes an optimistic, most likely, and pessimistic estimate - Needed for PERT and Monte Carlo simulations

Estimate at completion (EAC)

an estimated cost of completing a project based on performance to date

Life cycle costing

considers total cost of ownership, or development plus support costs, for a project

Controlling costs

controlling changes to the project budget Activities involved in controlling project costs - 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 Several tools and techniques assist in project cost control - Expert judgment, data analysis, project management information systems, and the to-complete performance index

Tangible costs or benefits

costs or benefits that an organization can easily measure in dollars

Intangible costs or benefits

costs or benefits that are difficult to measure in monetary terms

Indirect costs

costs that are not directly related to the products or services of the project, but are indirectly related to performing the project

Direct costs

costs that can be directly related to producing the products and services of the project

Discretionary dependencies

defined by the project team, sometimes referred to as soft logic, and should be used with care since they may limit later scheduling options

Arrows (on Gantt Charts)

dependencies between tasks

Cash flow analysis

determines estimated annual costs and benefits for a project and resulting annual cash flow

Planning cost management

determining the policies, procedures, and documentation that will be used for planning, executing, and controlling project cost The first step in project cost management is planning how the costs will be managed throughout the life of the project - The project team uses expert judgment, analytical techniques, and meetings to develop the cost management plan

Estimating costs

developing an approximation or estimate of the costs of the resources needed to complete a project Project managers must take cost estimates seriously if they want to complete projects within budget constraints

Reserves

dollars included in a cost estimate to mitigate cost risk by allowing for future situations that are difficult to predict

Light gray horizontal bars (on Gantt Charts)

durations of tasks

Murphy's Law

if something can go wrong, it will

What is Project Cost Management?

includes the processes required to ensure that the project is completed within an approved budget

Mandatory dependencies

inherent in the nature of the work being performed on a project, sometimes referred to as hard logic

External dependencies

involve relationships between project and non-project activities

Profits

revenues minus expenditures

Critical path

series of activities that determine the earliest time by which the project can be completed - The longest path through the network diagram and has the least amount of slack or float; amount of time an activity may be delayed without delaying a succeeding activity or the project finish date

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

Thick black bars (on Gantt Charts)

summary tasks

Cost overrun

the additional percentage or dollar amount by which actual costs exceed estimates

Payback period

the amount of time it will take to recoup, in the form of net cash inflows, the total dollars invested in a project - Determines how much time will elapse before accrued benefits overtake accrued and continuing costs - Payback occurs when the net cumulative discounted benefits equals the costs - Many organizations have requirements for the length of the payback period of an investment

Cost variance (CV)

the earned value minus the actual cost

Schedule variance (SV)

the earned value minus the planned value

Network diagrams

the preferred technique for showing activity sequencing Schematic display of the logical relationships among, or sequencing of, project activities - Two main formats are the arrow and precedence diagramming methods

Cost performance index (CPI)

the ratio of earned value to actual cost

Schedule performance index (SPI)

the ratio of earned value to planned value

Dependency (or Relationship)

the sequencing of project activities or tasks

Parkinson's Law

work expands to fill the time allowed

Steps to create an AOA network diagram

1. Find all of the activities that start at Node 1. Draw their finish nodes, and draw arrows between Node 1 and each of the finish nodes. Put the activity letter or name on the associated arrow. If you have a duration estimate, write it next to the activity letter or name, as shown in Figure 6-2. For example, A = 1 means that the duration of Activity A is one day, week, or other standard unit of time. Be sure to put arrowheads on all arrows to signify the direction of the relationships. 2. Continue drawing the network diagram, working from left to right. Look for bursts and merges. Bursts occur when two or more activities follow a single node. A merge occurs when two or more nodes precede a single node. For example, in Figure 6-2, Node 1 is a burst because it goes into Nodes 2, 3, and 4. Node 5 is a merge preceded by Nodes 2 and 3. 3. Continue drawing the AOA network diagram until all activities are included. 4. As a rule of thumb, all arrowheads should face toward the right, and no arrows should cross on an AOA network diagram. You may need to redraw the diagram to make it look presentable.

Finish-to-start dependency

A relationship in which the "from" activity or predecessor must finish before the "to" activity or successor can start - Most common type of relationship or dependency - AOA network diagrams use only finish-to-start dependencies For example, you cannot provide user training until after software or a new system has been installed.

Start-to-start dependency

A relationship in which the "from" activity cannot start until the "to" activity or successor is started For example, on IT projects, a group of activities might start simultaneously, such as the many tasks that occur when a new system goes live

Finish-to-finish dependency

A relationship in which the "from" activity must be finished before the "to" activity can be finished - One task cannot finish before another finishes For example, quality control efforts cannot finish before production finishes, although the two activities can be performed at the same time

Start-to-finish dependency

A relationship in which the "from" activity must start before the "to" activity can be finished - This type of relationship is rarely used, but it is appropriate in some cases For example, an organization might strive to stock raw materials just in time for the manufacturing process to begin. A delay in starting the manufacturing process should delay completion of stocking the raw materials Another example would be a babysitter who wants to finish watching a young child but is dependent on the parent's arrival. The parent must show up or "start" before the babysitter can finish the task.

Arrow diagramming method (ADM) (i.e., activity-on-arrow network diagrams)

Activities are represented by arrows Nodes or circles are the starting and ending points of activities Only show finish-to-start dependencies

What is the goal of ERP and how is at achieved?

Goals: - Enable easy access to business data - Create efficient, streamlined work processes Enables people in various organizational units to access and update the same information - Based on permission levels assigned within the system

Importance of Project Cost Management

IT projects have a poor track record for meeting budget goals A 2011 Harvard Business Review study reported an average cost overrun of 27 percent - Most important finding was the discovery of a large number of gigantic overages or "black swans"; a high-impact event that is rare and unpredictable, but not improbable in retrospect

Bottom-up estimates

Involve estimating individual work items or activities and summing them to get a project total

Three-point estimates

Involve estimating the most likely, optimistic, and pessimistic costs for items

Importance of Updating Critical Path Data

It is important to update the schedule with actual data - Note actual activity durations as they are completed - Revise estimates for activities in progress - Monitor changes to make informed decisions

Cost management plan includes:

Level of accuracy Units of measure Organizational procedure links Control thresholds Rules of performance measurement Reporting formats Process descriptions

Sales and distribution

Maintains—and allows access to—customer information, pricing, shipping information, and billing procedures; also records sales orders and scheduled deliveries

Importance of Project Schedule

Managers often cite delivering projects on time as one of their biggest challenges - Time has the least amount of flexibility; it passes no matter what happens on a project Individual work styles and cultural differences may also cause schedule conflicts - Different cultures and even entire countries have different attitudes about schedules

Plant maintenance

Manages maintenance resources and planning for preventive maintenance of plant equipment

Materials management

Manages the acquisition of raw materials from suppliers and the subsequent handling of raw materials from storage to work-in-progress goods; also manages the shipping of finished goods to customers

NPV Analysis

Method of calculating the expected net monetary gain or loss from a project by discounting all expected future cash inflows and outflows to the present point in time - Projects with a positive NPV should be considered if financial value is a key criterion - Projects with higher NPVs are preferred

Basic Principles of Cost Management

Most members of an executive board better understand and are more interested in financial terms than IT terms; they need to be able to present and discuss project information in both

Program Evaluation and Review Technique (PERT)

Network analysis technique used to estimate project duration when there is a high degree of uncertainty about the individual activity duration estimates - Uses probabilistic time estimates: duration estimates based on using optimistic, most likely, and pessimistic estimates of activity durations By using the PERT weighted average for each activity duration estimate, total project duration estimate takes into account the risk or uncertainty in the individual activity estimates

Precedence diagramming method (PDM)

Network diagramming technique in which boxes represent activities - It is particularly useful for visualizing certain types of time relationships.

Critical Path Method (CPM)

Network diagramming technique used to predict total project duration

Project time management processes

Planning schedule management Defining activities Sequencing activities Estimating activity resources Estimating activity durations Developing the schedule Controlling the schedule

Earned Value Management (EVM)

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 scope, time, and cost goals involves calculating three values for each activity or summary activity from a project's WBS - Planned value - Actual cost - Earned value

Gantt Chart (MS Project)

Provide a standard format for displaying project schedule information by listing project activities and corresponding start and finish dates in a calendar form Adding milestones to Gantt charts - Many people like to focus on meeting milestones, especially for large projects - Milestones emphasize important events or accomplishments on projects SMART Criteria for milestones - Specific - Measurable - Assignable - Realistic - Time-framed

Weighted Scoring method

Provides a systematic process for selecting projects based on many criteria - Identify criteria important to the project selection process - Assign weights (percentages) to each criterion so they add up to 100% - Assign scores to each criterion for each project - Multiply the scores by the weights and get the total weighted scores

Typical Problems with IT Cost Estimates

Reasons for inaccuracies - Estimates are done too quickly - People lack estimating experience - Human beings are biased toward underestimation - Management desires accuracy

Financial accounting

Records all financial transactions in the general ledger accounts and generates financial statements for external reporting

Main techniques for shortening schedules (Using the Critical Path)

Shortening durations of critical activities/tasks by adding more resources or changing their scope Crashing activities by obtaining the greatest amount of schedule compression for the least incremental cost Fast tracking activities by doing them in parallel or overlapping them

Important considerations of NPV

Some organizations refer to the investment year or years for project costs as Year 0 and do not discount costs in Year 0 Discount rate can vary, often based on the prime rate and other economic considerations Costs can be entered as negative numbers and can be listed first (and then benefits)

Controlling

Supports managerial decision making by assigning manufacturing costs to products and cost centers for analysis of the organization's profitability

Growing Grass Can Be on the Critical Path

The fact that its name includes the word critical does not mean that it includes all critical activities - Only accounts for time Example: growing grass for Disney's Animal Kingdom There can be more than one critical path if the lengths of two or more paths are the same - Project managers should closely monitor performance of activities on the critical path to avoid late project completion - Critical path can change as the project progresses

Defining activities

involves identifying the specific actions that will produce the project deliverables in enough detail to determine resource and schedule estimates

Theory of Constraints (TOC)

management philosophy developed by Eliyahu M. Goldratt; attempts to minimize multitasking when a resource works on more than one task at a time

Black diamond (on Gantt Charts)

milestones

Sunk cost

money that has been spent in the past; when deciding what projects to invest in or continue, you should not include this

Activity attributes

provide more information - Predecessors, successors, logical relationships, leads and lags, resource requirements, constraints, imposed dates, and assumptions related to the activity

Profit margin

ratio of profits to revenues