BTS730BTS730

Cost ManagementCost Management

Cost ManagementCost Management

• Average cost overrun:– 1995 CHAOS study: 189% of the original

estimates– 2001 study: 145%

Cost ManagementCost Management

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

overrun

Cost Management ProcessesCost 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

Cost of Software DefectsCost of Software Defects(table 7.1, text)(table 7.1, text)

When Defect is Detected Typical Cost of CorrectionUser Requirements $100-$1,000Coding/Unit Testing $1,000 or moreSystem Testing $7,000 - $8,000Acceptance Testing $1,000 - $100,000After Implementation Up to millions of dollars

Cost ManagementCost Management

• Basic Principles

Cost EstimatingCost Estimating (table 7.2, text)(table 7.2, text)

Type of Estimate When Done Why Done How Accurate

Rough Order ofMagnitude (ROM)

Very early in theproject life cycle,often 3–5 yearsbefore projectcompletion

Provides roughballpark of cost forselection decisions

–25%, +75%

Budgetary Early, 1–2 years out Puts dollars in thebudget plans

–10%, +25%

Definitive Later in the project, <1 year out

Provides details forpurchases, estimateactual costs

–5%, +10%

Cost Estimating TechniquesCost 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.)

Cost Estimating ProblemsCost 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

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

Cost BudgetingCost 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.

Cost BudgetingCost Budgeting

• See figure 7-4 (5th ed) in text for sample baseline– (p282, 5th edition)

Cost ControlCost 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

Difficulties Controlling Costs?Difficulties Controlling Costs?

• Examples p. 284

Cost Control: EVMCost 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.

Cost Control:EVMCost 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

Cost Control :EVMCost 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

Cost Control: EVMCost 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)