Project Cost Management

Topics: Project management, Costs, Cost Pages: 10 (1638 words) Published: December 4, 2012
Project Cost Management

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The Importance of Project Cost Management

IT projects have a poor track record for meeting budget goals.

The CHAOS studies found the average cost overrun (the additional percentage or dollar amount by which actual costs exceed estimates) ranged from 180 percent in 1994 to 56 percent in 2004; other studies found overruns to be 33-34 percent.

What is Cost and Project Cost Management?

Cost is a resource sacrificed or foregone to achieve a specific objective or something given up in exchange

Costs are usually measured in monetary units like dollars

Project cost management includes the processes required to ensure that the project is completed within an approved budget.

Project Cost Management Processes

Estimating costs developing an approximation or estimate of the costs of the resources needed to complete a project

Determining the budget allocating the overall cost estimate to individual work items to establish a baseline for measuring performance

Controlling costs controlling changes to the project budget

Figure 7-1. Project Cost Management Summary

Basic Principles of Cost Management

Most members of an executive board better understand and are more interested in financial terms than IT terms, so IT project managers must speak their language

Profits are revenues minus expenditures

Profit margin is the ratio of revenues to profits

Life cycle costing considers the total cost of ownership, or development plus support costs, for a project

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

Table 7-1. Cost of Downtime for IT Applications

What Went Right?

Many organizations use IT to reduce operational costs

Technology has decreased the costs associated with processing an ATM transaction:

In 1968, the average cost was $5

In 1978, the cost went down to $1.50

In 1988, the cost was just a nickel

In 1998, it only cost a penny

In 2008, the cost was just half a penny!

Basic Principles of Cost Management

Tangible costs or benefits are those costs or benefits that an organization can easily measure in dollars –

Vendor bills you for $25k for Services

Intangible costs or benefits are costs or benefits that are difficult to measure in monetary terms –

Intangible Benefit – Goodwill, Prestige, General Productivity Improvements, Lesson Learned

Intangible Cost – Intangible costs represent a variety of expenses such as losses in productivity, customer goodwill or drops in employee morale. While these costs do not have a firm value, managers often attempt to estimate the impact of the intangibles.

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

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

Sunk cost is money that has been spent in the past; when deciding what projects to invest in or continue, you should not include sunk costs

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

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

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

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

Estimating Costs

Project managers must take cost estimates seriously

It’s important to know the types of cost estimates, how to prepare cost estimates, and typical problems associated with IT...
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