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IST 410
Cost Management
41
Other
Undergraduate 4
03/26/2013

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Term
Cost planning
Definition
Once again, not explicitly stated in text, yet PMBOK explicitly associates planning with each knowledge area
Term
Cost estimating
Definition
Developing an approximation or estimate of the costs of the resources needed to complete a project
Term
Cost budgeting
Definition
Allocating the overall cost estimate to individual work items to establish a baseline for measuring performance
Term
Cost control
Definition
Controlling changes to the project budget
Term
Discussing costs
Definition
Sponsors are…or should be…from the organization’s business leaders
Project managers must speak their language
Profits, profit margin
Life cycle costs
Cash flow analysis
Others
Cost management tools and terms must also be precise enough to manage project details
Term
Tangible costs/benefits
Definition
Costs or benefits easily measured in dollars
Term
Intangible costs/benefits
Definition
Difficult to measure in monetary terms
Term
Direct costs
Definition
Directly related to producing project deliverables
Term
Indirect costs
Definition
Note directly related to deliverables, but necessary for completion and indirectly related to performing the project
Term
Sunk cost
Definition
Money already spent
Should never be a consideration in a decision to continue
Term
Cost reserves
Definition
Dollars included in a cost estimate to mitigate cost risk by allowing for future situations that are difficult to predict
Term
Contingency reserves
Definition
Allow for future situations that may be partially planned for (sometimes called “known unknowns”)
Example:  Staff turnover and associated training costs
Term
Management reserves
Definition
Allow for future situations that are unpredictable (sometimes called “unknown unknowns”)
Example:  Major illness of key player
Term
Types of cost estimates
Definition

Rough order of magnitude (ROM):

- done early in the project life cycle, often 3-5 years before project completion

- Done because it provides an estimate of costs for project selection

- -50%-+100% accurate

Budgetary:

- Done early, 1-2 years out

- puts dollars in the budget plan

- -10%-+25% accurate

Definitive:

- Done later in the project, less than one year out

- provides details for purchases, estimates actual costs

- -5%-+10%

Term
Cost management plan
Definition
A cost management plan is a document that describes how the organization will manage cost variances on the project
Term
Labor is often a large percentage of total project costs, so...
Definition
Project managers must develop and track estimates for labor
We’ll discuss a bit more in project HR management
Term
Analogous or top-down estimates
Definition
Use the actual cost of a previous, similar project as the basis for estimating the cost of the current project
Term
Bottom-up estimates
Definition
Estimating costs of individual work items or activities
Sum them to get a project total
Activity Based Costing, perhaps using standard rates
Term
Parametric modeling
Definition
Use project characteristics (parameters) as proxies for actual work
Enter in a mathematical model to estimate project costs
Term
Hybrid approach
Definition
Combination of these methods, perhaps aided by expert judgment, often produces best results
Term
Parameters of parametric modeling
Definition
Function points: Technology-independent assessments of the functions involved in developing a system 
Source Lines of Code (SLOC): A human-written line of code that is not a blank line or comment
Term
Problems with IT cost estimates
Definition
Developing an estimate for a large project
A complex, effort-demanding task
Sometimes done too quickly
Due to time pressures
Before requirements are fully defined
People who develop estimates may be experts in the task but inexperienced in cost estimating
Human beings are biased toward underestimation
Management might ask for an estimate but need more
Greater bid accuracy to win a contract or internal funding
Pressure for “winning” estimate
Term
Before creating a cost estimate...
Definition
Know its planned use because this can influence the detail required and associated effort/cost to produce
Gather as much information about the project as possible
Clarify the ground rules and assumptions for the estimate
Term
Cost budgeting
Definition
Cost budgeting involves allocating the project cost estimate to individual work items over time
The WBS is a required input for the cost budgeting process because it defines the work items
Recall that a goal of project time management was to refine the initial WBS to the point that work was sufficiently defined that plans for resource requirements and, therefore, estimates of duration and cost became possible
Important goal is to produce a cost baseline:
A time-phased budget that project managers use to measure and monitor cost performance
Term
Project cost control includes:
Definition
Monitoring cost performance
Ensuring that only appropriate, approved project changes are included in a revised cost baseline
Informing project stakeholders of authorized changes to the project that will affect costs
Term
Earned value management (EVM)
Definition
EVM is a project performance measurement technique that integrates scope, time, and cost data
Term
What does EVM determine?
Definition
Given a baseline (original plan plus approved changes), you can determine how well the project is meeting its goals
Term
Planned value
Definition
Formerly called the budgeted cost of work scheduled (BCWS).  The “budget” at any point in time in a project.
That portion of the approved total cost estimate planned to be spent on an activity during a given period
Term
Actual cost (AC)
Definition
Formerly called actual cost of work performed (ACWP)
Total of direct and indirect costs incurred in accomplishing work on an activity during a given period
Term
Earned value (EV)
Definition
Formerly called the budgeted cost of work performed (BCWP)
The initially estimated cost of the physical work actually completed
Term
EV is a dollar value based on...
Definition
The work actually accomplished as of the reference date
The costs originally estimated/planned for those work activities (not actual cost of the work)
Term
Rate of performance (RP)
Definition
Ratio of actual work completed to the work planned to have been completed at any given time during the life of the project or activity
Example…
Plan at Week 5 of a project:  50% complete with a particular work element
Actual:  Only  30% complete
RP = 30% /50% = 60%
Project is completing that work at only 60% the pace anticipated
Term
Earned value equation
Definition
EV= PV * RP
Term
Cost Variance
Definition
CV= EV-AC
Term
Schedule variance equation
Definition
SV= EV-PV
Term
Cost performance Index formula
Definition
CPI= EV/AC
Term
Schedule Performance Index Formula
Definition
SPI= EV/PV
Term
Three common approaches for value earned
Definition
Binary/milestone:  EV is zero until task is completed
Simple but likely to present a pessimistic picture
Proportional:  Based on percent complete
Most accurate, IF percents are determined objectively, accurately
Demands most effort to develop
50/50 method:  Zero until started, then 50%.  100% earned at completion.
Can inadvertently mask overspending early, perhaps pessimistic late
Term
Three options for forecasting:
Definition

 

Re-estimate from scratch for remaining work elements.  Time and resource consuming.  Likely not justified.

 

Deviation(s) to reference date are notlikely to continue.  Use existing cost/schedule estimates for work remaining.

 

Deviations can be expected to continue at about the same rate.

 

New estimates for budget and schedule calculated with CPI/SPI and original budget (BAC) and project duration.

Term
Using Earned schedule to refine SPI
Definition
Compare EV to PV values
Note latest time period EV exceeds PV.
This is the ES whole time period.
Interpolate fraction of next time period earned
ES Fraction=(EV -PV1)/(PV2 -PV1)
ES = Whole period + Fractional period
SPI(t) = ES / Time of reference
Estimated duration = Planned duration / SPI(t)
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