pmbok chapter 6 - cost

8/3/2019 PMBOK Chapter 6 - Cost

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Chapter 6:

Project Cost Managementadopted from PMIs PMBOK 2000 and

Textbook : Information Technology Project Management

(author : Dr. Kathy Schwalbe)


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Contents

Importance of Project Cost Management Problem: cost overrun and cannot meet cost goals

Costs are measured in monetary units

Project Cost Management Resource planning, Cost estimating, Cost budgeting,

Cost control Resource Planning consideration

difficulty, uniqueness, track record, people, equipment andmaterials

Types of cost estimate

basic tools and techniques

Earned value management is an important tool for costcontrol


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The Importance of Project Cost

Management IT projects have a poor track record formeeting cost goals

Average cost overrun from 1995 CHAOSstudy was 189% of the original estimates;

improved to 45% in the 2001 study

In 1995, cancelled IT projects cost the U.S.over $81 billion

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Typical allocation of cost


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What is Cost and Project Cost

Management? Cost is a resource sacrificed or fore-gone toachieve a specific objective or something given up

in exchange

Costs are usually measured in monetary units likedollars

This is the process group to ensure the project is

completed within the approved budget.

The major output is the cost management plan

There are 4 processes in Project Cost Management

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Project Cost Management Processes

Resource planning (planning phase)

determining what resources and quantities of them should be

used

Cost estimating (planning phase)

developing an estimate of the costs and resources needed to

complete a project

Cost budgeting (planning phase)

allocating the overall cost estimate to individual work items to

establish a baseline for measuring performance

Cost control (control phase)

controlling changes to the project budget

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Basic Principles of Cost

Management Most CEOs and boards know a lot more about

finance than IT, IT project managers must speaktheir language

Profits are revenues minus expenses Life cycle costing is estimating the cost of a project

over its entire life

Cash flow analysis is determining the estimatedannual costs and benefits for a project

Benefits and costs can be tangible or intangible, director indirect

Sunk cost should not be a criteria in project selection

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Cost of Software Defects

When Defect is Detected Typical Cost of Correction

User Requirements $100-$1,000

Coding/Unit Testing $1,000 or moreSystem Testing $7,000 - $8,000

Acceptance Testing $1,000 - $100,000After Implementation Up to millions of dollars

It is important to spend money up-front on IT

projects to avoid spending a lot more later.

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Resource Planning

8th of 21 planning phase process

The nature of the project and the organization willaffect resource planning

Some questions to consider: How difficult will it be to do specific tasks on the

project?

Is there anything unique in this projects scopestatement that will affect resources?

What is the organizations history in doing similartasks?

Does the organization have or can they acquire thepeople, equipment, and materials that are capable and

available for performing the work?


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Inputs to Resource Planning

WBS

identifies the project elements that require resources.

Historical information

identifies required resourced used in similar work on previous project.

Scope statement contains the project justification and the project objectives.

Resource pool description

identifies available project resources.

Organizational policies

may impact some of the project management decision. These areconstraints, such as staffing, rentals, and purchasing supplies andequipment.

Activities duration estimates

the best estimates of the time that it will take to perform the work

It is the output of Time Management Process: Activity Duration

Estimating.


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Tools & techniques

Expert judgmentaccess the inputs to the process by subject-

matter expect, group, or individual, including

consultants, professional or technicalassociations, industrial advisory groups.

Project management software

help to organize resource pools, defineresource availabilities and their rates, anddefine resource calendars.


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Outputs from Resource Planning

Resources requirement

describes the types (e.g. skills levels) and

number of resources required by each element

of the WBS.


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Cost Estimating

9th planning phase process

collecting and predicting the costs over the lifecycle of a project or phase of a project

developing cost estimates for all the resources neededto complete project activities.

An important output of project cost management is acost estimate

There are several types of cost estimates and tools andtechniques to help create them

It is also important to develop a cost managementplan that describes how cost variances will be

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Inputs to Cost Estimating (1)

WBS

Resource requirement Outputs from Resource Planning

Resource ratesunit rates for each resource thatare used to calculate project costs.

Activities duration estimates output of Time Management Process: Activity

Duration Estimating.

Estimating publication provide commercial cost data.


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Inputs to Cost Estimating (2)

Historical information the cost of many categories of resources is available

from the following sources: a) project file; b)

commercial cost-estimating databases; c) project teamknowledge.

Chart of accounts (COA) describes the coding structure or the budget categories

that the performing organization uses to report

financial information in its general ledger.

Risk to show the importance of considering the impacts of

both opportunities and threats for costs estimates for

each activity


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Tools & techniques

Analogous estimating known as top-down

A form of expert judgment because it uses actual costs fromprevious, similar projects to estimate current costs

Although it is less costly than other estimates, it is the leastaccurate

It is frequently used to estimate total project costs when a limitedamount of detailed information is available.

Parametric modeling

uses project characteristics as the parameters is a mathematicalmodel to predict project costs

Models may be simple or complex (e.g. simulations usingstatistics or function point analysis to estimate softwaredevelopment durations)

The costs and accuracy of parameters model vary.


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Tools & techniques (2)

Bottom up estimating estimating the cost of individual activities or work

packages and then adding the individual estimates toarrive at a project total

Defining smaller activities or work packages increasesboth the cost and accuracy of the estimate.

Computerized tools Project management software, spreadsheets,

simulation tools, and statistical packages can helpestimate costs.

Other cost estimating methods includes vendor bid analyses.


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Types of Cost Estimates

Type of Estimate When Done Why Done How Accurate

Rough Order ofMagnitude (ROM)

Very early in theproject life cycle,often 35 years

before projectcompletion

Provides roughballpark of cost forselection decisions

25%, +75%

Budgetary Early, 12 years out Puts dollars in thebudget plans

10%, +25%

Definitive Later in the project,

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