Project Cost Management
Review pages 273, 274, and 275!!!
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)
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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