IST 302 Chapter 7

What are the four processes in project cost management?

1. Planning cost management 2. Estimating costs 3. Determining the budget 4. Controlling costs

What types of items are included in a cost management plan?

1Level of accuracy 2Units of measure 3Organizational procedures links 4Control thresholds 5Rules of performance measurement 6Reporting formats 7Process descriptions

Level of accuracy

Activity cost estimates normally have rounding guidelines

Units of measure

Each unit used in cost measurements, such as labor hours or days, should be defined.

Rules of performance measurement

If the project uses EVM, as described later in this chapter, the cost management plan would define measurement rules, such as how often actual costs will be tracked and to what level of detail.

Which estimate do executives typically remember best?

It is also important to be cautious with initial estimates. Top management never forgets the first estimate and rarely, if ever, remembers how approved changes affect the estimate. It is a never-ending and crucial process to keep top management informed about revised cost estimates. It should be a formal process, albeit a possibly painful one.

Compare/contrast contingency reserves and management reserves. Which reserve type should be included in a project baseline?

Management reserves are not included in a cost baseline

There is a common reason why IT projects don't receive funding. What is the reason?

Many IT projects are never initiated because IT professionals do not know how to develop a financial justification for them.

Organizational procedures link

Many organizations refer to the work breakdown structure (WBS) component used for project cost accounting as the control account (CA).

How does cash flow relate to Net Present Value (NPV) calculations?

Project managers must conduct cash flow analysis to determine net present value. Top management must consider cash flow concerns when selecting projects in which to invest. If top management selects too many projects that have high cash flow needs in the same year, the company will not be able to support all of its projects and maintain its profitability.

Do project managers focus on controlling direct costs or indirect costs? Why?

Project managers should focus on direct costs because they can be controlled, rather than indirect costs where they aren't.

Control thresholds

Similar to schedule variance, costs often have a specified amount of variation allowed before action needs to be taken, such as 10 percent of the baseline cost.

When providing a cost estimate, what other supporting materials should be provided as well?

Some of these tools and techniques include expert judgment, analogous cost estimating, bottom-up estimating, three-point estimating, parametric estimating, the cost of quality, project management estimating software, vendor bid analysis, and reserve analysis GO INTO TYPEs

Process descriptions

The cost management plan would also describe how to perform all of the cost management processes.

Reporting formats

This section would describe the format and frequency of cost reports required for the project.

Why do we justify projects based on profit instead of revenue?

To increase profits, a company can increase revenues, decrease expenses, or try to do both. Most executives are more concerned with profits than with other issues. When justifying investments in new information systems and technology, it is important to focus on the impact on profits, not just revenues or expenses. Consider an e-commerce application that you estimate will increase revenues for a $100 million company by 10 percent. You cannot measure the potential benefits of the application without knowing the profit margin

If earned value management is so helpful, why don't more IT projects use it?

Two reasons are EVM's focus on tracking actual performance versus planned performance and the importance of percentage completion data in making calculations. Many projects, particularly IT projects, do not have good planning information, so tracking performance against a plan might produce misleading information. Several cost estimates are usually made on IT projects, and keeping track of the most recent cost estimate and the associated actual costs could be cumbersome. In addition, estimating percentage completion of tasks might produce misleading information.

Earned value management is considered one of the best methods for measuring project performance. It's not necessary to remember all of the calculations, but you should understand the components used in earned value analysis.

Viewing earned value information in chart form helps you visualize how the project is performing. For example, you can see the planned performance by looking at the planned value line. Top managers who oversee multiple projects often like to see performance information in a graphical form, such as the earned value chart

Determining the budget

allocating the overall cost estimate to individual work items to establish a baseline for measuring performance. The main outputs of the cost budgeting process are a cost baseline, project funding requirements, and project documents updates.

Management reserves

allow for future situations that are unpredictable (sometimes called unknown unknowns). For example, if a project manager gets sick for two weeks or an important supplier goes out of business, management reserve could be set aside to cover the resulting costs. Management reserves are not included in a cost baseline, as you will learn later in this chapter.

Contingency reserves

allow for future situations that may be partially planned for (sometimes called known unknowns) and are included in the project cost baseline. For example, if an organization knows it has a 20 percent rate of turnover for IT personnel, it should include contingency reserves to pay for recruiting and training costs of IT personnel.

What are function points, and why are they relevant to software estimation?

are a means of measuring software size based on what the software does for end users. Are comprised of inputs, outputs, inquiries, internal data, and external interface data. today it is the international standard used to measure software size.

Indirect costs

are not directly related to the products or services of the project, but are indirectly related to performing work on the project.

Direct costs

can be directly related to creating the products and services of the project.

Controlling costs

controlling changes to the project budget. The main outputs of the cost control process are work performance information, cost forecasts, change requests, and project management plan updates, and project documents updates.

Planning cost management

determining the policies, procedures, and documentation that will be used for planning, executing, and controlling project cost. The main output of this process is a cost management plan.

Estimating costs

developing an approximation or estimate of the costs of the resources needed to complete a project. The main outputs of the cost estimating process are activity cost estimates, basis of estimates, and project documents updates.

Describe cash flow analysis in your own terms.

is a method for determining the estimated annual costs and benefits for a project and the resulting annual cash flow.

Cost budgeting involves development of a project cost baseline. What is a cost baseline and how is it useful while managing a project?

is a time-phased budget that project managers use to measure and monitor cost performance. It does include contingency reserves but does not include management reserves. estimating costs for each major project activity over time provides project managers and top management with a foundation for project cost control, as described in the next section. If the cost baseline shows that more funds are required in certain months than are expected to be available, the organization must make adjustments to avoid financial problems.

The phrase "throwing good money after bad" is related to the concept of sunk costs of a project. What are sunk costs and why are they important to making good project funding decisions?

is money that has been spent in the past. Consider it gone, like a sunken ship that can never be raised. When deciding what projects to invest in or continue, you should not include sunk costs. Many people fall into the trap of continuing to spend money on a failing project because so much money has been spent on it already. This trap is similar to gamblers who continue betting because they have already lost money.

Define a project overrun.

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

budgetary estimate

is used to allocate money into an organization's budget. Many organizations develop budgets at least two years into the future. Are made one to two years prior to project completion.

definitive estimate

provides an accurate estimate of project costs. Used for making many purchasing decisions for which accurate estimates are required and for estimating final project costs.

rough order of magnitude (ROM) estimate

provides an estimate of what a project will cost. Also be referred to as a ballpark estimate, a guesstimate, a swag, or a broad gauge. This type of estimate is done very early in a project or even before a project is officially started. Project managers and top management use this estimate to help make project selection decisions. The time frame for this type of estimate is often three or more years prior to project completion.

Name the three cost estimate types described in the chapter and why they are used

rough order of magnitude (ROM) estimate budgetary estimate definitive estimate