Chapter 6,
Project Cost Management
2013-3-1 2
Learning Objectives
? Understand the importance of good project cost management
? Explain basic cost management principles,concepts,and terms
? Describe the resource planning,cost estimating,cost budgeting,
and cost control processes
? Explain the different types of cost estimates
? Understand what is involved in preparing a cost estimate for an
information technology project
? Perform calculations for earned value management
? Understand the benefits of using earned value management
? Describe how software can assist in project cost management
2013-3-1 3
Chapter Outline
? 6.1 The Importance of Project Cost Management
? 6.2 Basic Principles of Cost Management
? 6.3 Resource Planning
? 6.4 Cost Estimating
? 6.4.1 Types of Cost Estimates
? 6.4.2 Cost Estimation Tools and Techniques
? 6.4.3 Typical Problems with Information Technology Cost
Estimates
? 6.4.4 Sample Cost Estimates and Supporting Detail for an
Information Technology Project
? 6.5 Cost Budgeting
? 6.6 Cost Control
? 6.6.1 Earned Value Management
? 6.7 Using Software to Assist in Cost Management
6.1 The Importance of Project
Cost Management
2013-3-1 5
The Importance
? IT projects have a poor track record for
meeting cost goals
? Average cost overrun from 1995 CHAOS
study 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
2013-3-1 6
What is Cost and Project Cost
Management?
? Cost is a resource sacrificed or fore-
gone 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
2013-3-1 7
Project Cost Management
Processes
? Resource planning,determining what
resources and quantities of them should be
used
? Cost estimating,developing an estimate of
the costs and resources needed to complete
a project
? Cost budgeting,allocating the overall cost
estimate to individual work items to establish
a baseline for measuring performance
? Cost control,controlling changes to the
project budget
2013-3-1 8
Quick Quiz on Cost Concepts
? Suppose you sell 10 widgets per day on
average,and the average cost per widget is
$10,If you sold 11 widgets on day,what
would the affect on profits be?
? Suppose you were buying 10 PCs for your
new business,What would some of the life
cycle costs be?
? Give examples of,tangible” vs.,intangible”
benefits of a new project
6.2 Basic Principles of Cost
Management
2013-3-1 10
Basic Principles of Cost
Management
? Most CEOs and boards know a lot more about
finance than IT,IT project managers must
speak their 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 estimated
annual costs and benefits for a project
? Benefits and costs can be tangible or intangible,
direct or indirect
? Sunk cost should not be a criteria in project
selection
2013-3-1 11
Cost of Software Defects W h e n D e fe c t is D e te c t e d Ty p i c al C o s t o f C o r r e c ti o n
U s e r R e qu i re m e n t s $1 00 - $1,0 00
Co ding / U nit Te s t i ng $1,0 00 o r more
S y s t e m Te s t i ng $7,0 00 - $ 8,00 0
A c c e pta nce T e s t i ng $1,0 00 - $ 10 0,00 0
A ft e r I m ple m e nt a t i on U p t o m i l l i on s o f d oll a rs
It is important to spend money up-front on IT projects
to avoid spending a lot more later,
6.3 Resource Planning
2013-3-1 13
Resource Planning
? The nature of the project and the organization
will affect resource planning
? Some questions to consider,
? How difficult will it be to do specific tasks on the
project?
? Is there anything unique in this project’s scope
statement that will affect resources?
? What is the organization’s history in doing similar
tasks?
? Does the organization have or can they acquire the
people,equipment,and materials that are capable
and available for performing the work?
6.4 Cost Estimating
2013-3-1 15
Cost Estimating
? An important output of project cost
management is a cost estimate
? There are several types of cost
estimates and tools and techniques to
help create them
? It is also important to develop a cost
management plan that describes how
cost variances will be managed on the
project
2013-3-1 16
Types of Cost Estimates
T y p e o f E s ti m a te W h en D o n e W h y D o n e Ho w A cc u rat e
R o u g h Or d er o f
Ma g n i tu d e (R OM)
V er y earl y in t h e
p ro j ec t l i fe cy cl e,
o fte n 3 – 5 y ea rs
b efor e pr o j e ct
comp l e t i o n
P ro v i d es ro u g h
b al l p ark o f cos t fo r
s el ec t i o n d ec i s i o n s
– 2 5 %,+7 5 %
B u d g etary Ea rly,1 – 2 y ea rs o u t P u t s d o l l ars in t h e
b u d g et p l ans
– 1 0 %,+2 5 %
D efi n i tive L at er in the p ro j e ct,<
1 y ea r o u t
P ro v i d es d et ai l s fo r
p u rchas es,es t i m at e
ac t u a l cos t s
– 5 %,+1 0 %
2013-3-1 17
Cost Estimation Tools and
Techniques
? 3 basic tools and techniques for cost
estimates,
? analogous or top-down,use the actual cost
of a previous,similar project as the basis for
the new estimate
? bottom-up,estimate individual work items
and sum them to get a total estimate
? parametric,use project characteristics in a
mathematical model to estimate costs
2013-3-1 18
Constructive Cost Model
(COCOMO)
? Barry Boehm helped develop the COCOMO
models for estimating software development
costs
? Parameters include source lines of code or
function points
? COCOMO II is a computerized model available
on the web
? Boehm suggest that only parametric models
do not suffer from the limits of human
decision-making
2013-3-1 19
Typical Problems with IT Cost
Estimates
? Developing an estimate for a large software project is
a complex task requiring a significant amount of
effort,Remember that estimates are done at various
stages of the project
? Many people doing estimates have little experience
doing them,Try to provide training and mentoring
? People have a bias toward underestimation,Review
estimates and ask important questions to make sure
estimates are not biased
? Management wants a number for a bid,not a real
estimate,Project managers must negotiate with
project sponsors to create realistic cost estimates
2013-3-1 20
Business Systems Replacement Project
Cost Estimate Overview
C ate go r y D e s c r i p ti on
O b je c ti ve I ns t a l l a s ui t e of pa c ka g e d fi na n c i a l a ppl i c a t i ons
s oft w a re w hi c h w i l l e na b l e m or e t i m e l y
i nform a t i on for m a n a g e m e nt d e c i s i on- m a ki ng,
e a s i e r a c c e s s t o da t a by t he ul t i m a t e e nd us e r,a nd
a l l ow for c os t s a v i ng s t hrou g h produc t i v i t y
i m prov e m e nt s t hroug hout t he c o m pa ny,
S c op e T he c ore f i na n c i a l s y s t e m s w i l l be re pl a c e d by
O ra c l e fi n a nc i a l a ppl i c a t i ons, T he s e s y s t e m s
i nc l ude,
? G e ne ra l L e d g e r
? F i xe d A s s e t s
? O ps Re port [A U, s pe l l out O ps ]
? A c c ount s P a y a bl e
? A c c ount s Re c e i v a bl e
? P roj e c t A c c ount i ng
? P roj e c t M a na g e m e nt
A s s u mp ti on s O ra c l e 's s oft w a re pro v i de s
? M i ni m a l c us t om i z a t i on
? N o c ha ng e i n proc ure m e nt s y s t e m s duri ng
a c c ount s pa y a bl e i m p l e m e nt a t i on
C os t/ Be n e fi t A n al y s i s
& I n te r n al R ate o f R e tu r n ( I R R )
B S R w a s broke n dow n i nt o a t hre e -y e a r c a s h
out l a y w i t hout de pre c i a t i on,Cos t s a r e
re pre s e nt e d i n t hous a nds, Ca p i t a l a nd e xpe ns e s
a re c om b i ne d i n t hi s e x a m pl e,
2013-3-1 21
Business Systems Replacement
Project Cash Flow Analysis
F Y 95
($000 )
F Y 96
($000 )
F Y 97
($000 )
3 Y e ar
To tal
($000 )
F u tu r e A n n u al
C os ts / S avi n gs
($000 )
C os ts
O ra c l e / P M S oft w a re
( L i s t P ri c e )
992 500 0 1492 0
60% D i s c oun t (595) (595)
O ra c l e Cre d i t s (397) 0 (397)
N e t Ca s h for S oft w a re 0 500 500
S oft w a re M a i nt e n a nc e 0 90 250 340 250
H a rdw a re & M a i nt e na n c e 0 270 270 540 270
Consul t i ng & T ra i ni ng 205 320 0 525 0
T a x & A c qui s i t i on 0 150 80 230 50
To tal P u r c h as e d C o s t s 205 1330 600 2135 570
I nform a t i on S e rv i c e s &
T e c hno l ogy ( I S & T )
500 1850 1200 3550 0
F i na nc e / O t he r S t a ff 200 990 580 1770
To tal C o s t s 905 4170 2380 7455 570
S avi n gs
M a i nfra m e (101) (483) (584) (597)
F i na nc e / A s s e t / P M (160) (1160 ) (1320 ) (2320 )
I S & T S upp ort / D a t a E nt ry (88) (384) (472) (800)
I nt e re s t 0 (25) (25) (103)
To tal S avi n gs (349) (2052 ) (2401 ) (3820 )
N e t C os t (S avi n gs ) 905 3821 328 5054 (3250 )
8 Y e ar I n te r n al
R ate o f R e tu r n
35%
6.5 Cost Budgeting
2013-3-1 23
Cost Budgeting
? Cost budget involves allocating the project cost
estimate to individual work items and providing
a cost baseline
? For example,in the Business Systems
Replacement project,there was a total
purchased costs estimate for FY97 of $600,000
and another $1.2 million for Information
Services and Technology
? These amounts were allocated to appropriate
budgets as shown in Table 6-5
2013-3-1 24
Business Systems Replacement Project Budget
Estimates for FY97 and Explanations
Bu d ge t C ate go r y Es ti m ate d C os ts Exp l an ati o n
H e a dc ount ( F T E ) 13 I nc l ude d a re 9 prog ra m m e r/ a na l y s t s,2
da t a ba s e a na l y s t s,2 i nfra s t ruc t ure
t e c hni c i a ns,
Com pe ns a t i on $1,008,500 Ca l c ul a t e d by e m pl o y e e c ha ng e not i c e s
( E CN s ) a nd a s s um e d a 4% pa y i nc re a s e i n
J une, O v e rl oa d s upport w a s pl a nn e d a t
$10,000.
Cons ul t a nt / P urc ha s e d
S e rv i c e s
$424,500 E xpe c t e d c ons ul t i ng ne e ds i n s upport of t he
P roj e c t A c c ount i ng a nd Ca s c a d e
i m pl e m e nt a t i on e ffor t s ; m a i n t e na n c e
e xpe ns e s a s s oc i a t e d w i t h t he H e w l e t t -
P a c ka rd (H P ) c om put i ng pl a t form s ;
m a i nt e na nc e e xp e ns e s a s s oc i a t e d w i t h t h e
s oft w a re purc ha s e d i n s upport of t he B S R
proj e c t,
T ra v e l $25,000 I nc i de nt a l t r a v e l e xpe ns e s i n c urre d i n
s upport of t he B S R proj e c t,m os t a s s oc i a t e d
w i t h a t t e nda nc e of us e r c onf e re nc e s a nd
off- s i t e t ra i ni ng,
D e pre c i a t i on $91,000 I nc l ude d i s t he pe r h e a d s ha re of
w orks t a t i on de pre c i a t i on,t he Ca s c a de H P
pl a t form d e pre c i a t i on,a nd t he de pr e c i a t i on
e xpe ns e a s s oc i a t e d w i t h c a p i t a l i z e d
s oft w a re purc ha s e s,
Re nt s / L e a s e s $98,000 E xpe ns e s a s s oc i a t e d w i t h t h e M a c h1
c om put i ng pl a t for m s,
O t he r S uppl i e s
a nd E xpe ns e s
$153,000 I nc i de nt a l e xp e ns e s a s s oc i a t e d w i t h t hi ng s
s uc h a s t ra i ni ng,re w a rd a nd r e c og ni t i on,
l ong di s t a nc e phone c h a rg e s,m i s c e l l a ne ous
offi c e s uppl i e s,
To tal C o s t s $1,800,000
6.6 Cost Control
2013-3-1 26
Cost Control
? Project cost control includes
? 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 is an
important tool for cost control
2013-3-1 27
Earned Value Management (EVM)
? EVM is a project performance measurement
technique that integrates scope,time,and
cost data
? Given a baseline (original plan plus approved
changes),you can determine how well the
project is meeting its goals
? You must enter actual information periodically
to use EVM,Figure 6-1 shows a sample form
for collecting information
2013-3-1 28
Cost Control Input Form for Business
Systems Replacement Project
W B S #,6, 8, 1, 2
D e s c r i p t i o n, D esi gn In te r fa ce P r ocess -
C usto m er I nf or m at i on
R ev is io n, R ev is io n Dat e:
A ss ig n m e n t s F o r ec as t
Ho u r s p e r d a y E f f o r t ( i n h o u r s )
C a l c u l a t e d
Re s p o n s i b l e,
S M C
Ro l e,
PA
A v a i l a b i l i t y,
6
O p t i m i s t i c,
20
M o s t L i k e l y,
30 P l a n
E f f o r t,
30
Hr s
I n v o l v e d, Ro l e, A v a i l a b i l i t y, P e s s i m i s t i c,
40
I n v o l v e d, Ro l e, A v a i l a b i l i t y,
P l a n
D u r a t i o n
:
5
Da y s
I n v o l v e d, Ro l e, A v a i l a b i l i t y, De l a y ( Da y s ),
D es cr ip t io n A ss u m p t io n s
R es u lt s / D el iv er ab le s D ep en d en ci es
P r ed ec es s o r s ( W B S #), S u c c e s s o r s ( W BS # ),
4, 7
D e v e l o p a n o pe r a t i o n a l pr o c e s s de s i g n f o r t h e C us t o m e r I nf o r m a t i o n
i n t e r f a c e f r o m t h e I n v o i c i ng S y s t e m to O r a c l e R e c e i va b l e s, T hi s t a s k w i ll
a c c e pt a s i n put t h e b u s i ne s s / f u n c t i o n a l r e qu i r e m e n t s de ve l o pe d dur i n g t h e
t a c t i c a l a n a ly s i s p ha s e a n d pr o duc e a s o u t pu t a phy s i c a l o pe r a t i o n a l de s i g n,
w hi c h pr o vi de s t h e s pe c i f i c a t i o ns,r e qu i r e d f o r c o de dev e l opm e nt,
Pr o c e s s D e s i g n D o c u m e n t - T e c h ni c a l
- O pe r a t i o n /P hy s i c a l D F D
- Pr o c e s s Spe c i f i c a t i o ns
- I n t e r f a c e D a t a M a p
- A l l b us i ne s s r u l e s a n d i s s ue s w il l b e r e s o l v e d pr i o r to t hi s t a s k.
- T h e E R D & da t a m o de l f o r O r a c l e R e c e i va bl e s & a ny O r a c l e
e x t e ns i o n r e qu i r e d w i ll be c o m p l e t e d a n d a v a il a bl e pr i o r to t h i s t a s k,
- T h e E R D f o r t h e I n v o i c i ng S y s t e m w i ll be c o m p l e t e d a n d a v a il a bl e
pr i o r to t hi s t a s k.
- F e w i t e r a t i o ns o f t h e r e vi e w / m o d i f y c y c l e w il l b e r e qu i r e d,
- P rim a ril y a docum e nt a t i on t a s k.
2013-3-1 29
EVM Terms
? The planned value (PV),formerly called the
budgeted cost of work scheduled (BCWS),also called
the budget,is that portion of the approved total cost
estimate planned to be spent on an activity during a
given period
? Actual cost (AC),formerly called actual cost of work
performed (ACWP),is the total of direct and indirect
costs incurred in accomplishing work on an activity
during a given period
? The earned value (EV),formerly called the budgeted
cost of work performed (BCWP),is the percentage of
work actually completed multiplied by the planned
value
2013-3-1 30
Earned Value Calculations for One
Activity After Week One
2013-3-1 31
Earned Value Formulas
To estimate what it will cost to complete a project or how
long it will take based on performance to date,divide the
budgeted cost or time by the appropriate index,
2013-3-1 32
Rules of Thumb for EVA
Numbers
? Negative numbers for cost and
schedule variance indicate problems in
those areas,The project is costing
more than planned or taking longer
than planned
? CPI and SPI less than 100% indicate
problems
2013-3-1 33
Earned Value Calculations for a One-
Year Project After Five Months
Excel file
2013-3-1 34
Earned Value Chart for
Project After Five Months
Excel file
6.7 Using Software to Assist in
Cost Management
2013-3-1 36
Using Software to Assist in
Cost Management
? Spreadsheets are a common tool for
resource planning,cost estimating,cost
budgeting,and cost control
? Many companies use more sophisticated
and centralized financial applications
software for cost information
? Project management software has many
cost-related features
2013-3-1 37
Quick Quiz
? Suppose you sell 10 widgets per day on average,and the
average cost per widget is $10,If you sold 11 widgets one
day,what would the affect on profits be?
? What is another name for earned value?
?ANSWER,There is not enough information to answer this
question,You are given costs and asked to estimate profits,
You do not know what the average profit is per widget,You
might lose money by selling more widgets,
?ANSWER,BCWP or budgeted cost of work performed
Project Cost Management
2013-3-1 2
Learning Objectives
? Understand the importance of good project cost management
? Explain basic cost management principles,concepts,and terms
? Describe the resource planning,cost estimating,cost budgeting,
and cost control processes
? Explain the different types of cost estimates
? Understand what is involved in preparing a cost estimate for an
information technology project
? Perform calculations for earned value management
? Understand the benefits of using earned value management
? Describe how software can assist in project cost management
2013-3-1 3
Chapter Outline
? 6.1 The Importance of Project Cost Management
? 6.2 Basic Principles of Cost Management
? 6.3 Resource Planning
? 6.4 Cost Estimating
? 6.4.1 Types of Cost Estimates
? 6.4.2 Cost Estimation Tools and Techniques
? 6.4.3 Typical Problems with Information Technology Cost
Estimates
? 6.4.4 Sample Cost Estimates and Supporting Detail for an
Information Technology Project
? 6.5 Cost Budgeting
? 6.6 Cost Control
? 6.6.1 Earned Value Management
? 6.7 Using Software to Assist in Cost Management
6.1 The Importance of Project
Cost Management
2013-3-1 5
The Importance
? IT projects have a poor track record for
meeting cost goals
? Average cost overrun from 1995 CHAOS
study 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
2013-3-1 6
What is Cost and Project Cost
Management?
? Cost is a resource sacrificed or fore-
gone 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
2013-3-1 7
Project Cost Management
Processes
? Resource planning,determining what
resources and quantities of them should be
used
? Cost estimating,developing an estimate of
the costs and resources needed to complete
a project
? Cost budgeting,allocating the overall cost
estimate to individual work items to establish
a baseline for measuring performance
? Cost control,controlling changes to the
project budget
2013-3-1 8
Quick Quiz on Cost Concepts
? Suppose you sell 10 widgets per day on
average,and the average cost per widget is
$10,If you sold 11 widgets on day,what
would the affect on profits be?
? Suppose you were buying 10 PCs for your
new business,What would some of the life
cycle costs be?
? Give examples of,tangible” vs.,intangible”
benefits of a new project
6.2 Basic Principles of Cost
Management
2013-3-1 10
Basic Principles of Cost
Management
? Most CEOs and boards know a lot more about
finance than IT,IT project managers must
speak their 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 estimated
annual costs and benefits for a project
? Benefits and costs can be tangible or intangible,
direct or indirect
? Sunk cost should not be a criteria in project
selection
2013-3-1 11
Cost of Software Defects W h e n D e fe c t is D e te c t e d Ty p i c al C o s t o f C o r r e c ti o n
U s e r R e qu i re m e n t s $1 00 - $1,0 00
Co ding / U nit Te s t i ng $1,0 00 o r more
S y s t e m Te s t i ng $7,0 00 - $ 8,00 0
A c c e pta nce T e s t i ng $1,0 00 - $ 10 0,00 0
A ft e r I m ple m e nt a t i on U p t o m i l l i on s o f d oll a rs
It is important to spend money up-front on IT projects
to avoid spending a lot more later,
6.3 Resource Planning
2013-3-1 13
Resource Planning
? The nature of the project and the organization
will affect resource planning
? Some questions to consider,
? How difficult will it be to do specific tasks on the
project?
? Is there anything unique in this project’s scope
statement that will affect resources?
? What is the organization’s history in doing similar
tasks?
? Does the organization have or can they acquire the
people,equipment,and materials that are capable
and available for performing the work?
6.4 Cost Estimating
2013-3-1 15
Cost Estimating
? An important output of project cost
management is a cost estimate
? There are several types of cost
estimates and tools and techniques to
help create them
? It is also important to develop a cost
management plan that describes how
cost variances will be managed on the
project
2013-3-1 16
Types of Cost Estimates
T y p e o f E s ti m a te W h en D o n e W h y D o n e Ho w A cc u rat e
R o u g h Or d er o f
Ma g n i tu d e (R OM)
V er y earl y in t h e
p ro j ec t l i fe cy cl e,
o fte n 3 – 5 y ea rs
b efor e pr o j e ct
comp l e t i o n
P ro v i d es ro u g h
b al l p ark o f cos t fo r
s el ec t i o n d ec i s i o n s
– 2 5 %,+7 5 %
B u d g etary Ea rly,1 – 2 y ea rs o u t P u t s d o l l ars in t h e
b u d g et p l ans
– 1 0 %,+2 5 %
D efi n i tive L at er in the p ro j e ct,<
1 y ea r o u t
P ro v i d es d et ai l s fo r
p u rchas es,es t i m at e
ac t u a l cos t s
– 5 %,+1 0 %
2013-3-1 17
Cost Estimation Tools and
Techniques
? 3 basic tools and techniques for cost
estimates,
? analogous or top-down,use the actual cost
of a previous,similar project as the basis for
the new estimate
? bottom-up,estimate individual work items
and sum them to get a total estimate
? parametric,use project characteristics in a
mathematical model to estimate costs
2013-3-1 18
Constructive Cost Model
(COCOMO)
? Barry Boehm helped develop the COCOMO
models for estimating software development
costs
? Parameters include source lines of code or
function points
? COCOMO II is a computerized model available
on the web
? Boehm suggest that only parametric models
do not suffer from the limits of human
decision-making
2013-3-1 19
Typical Problems with IT Cost
Estimates
? Developing an estimate for a large software project is
a complex task requiring a significant amount of
effort,Remember that estimates are done at various
stages of the project
? Many people doing estimates have little experience
doing them,Try to provide training and mentoring
? People have a bias toward underestimation,Review
estimates and ask important questions to make sure
estimates are not biased
? Management wants a number for a bid,not a real
estimate,Project managers must negotiate with
project sponsors to create realistic cost estimates
2013-3-1 20
Business Systems Replacement Project
Cost Estimate Overview
C ate go r y D e s c r i p ti on
O b je c ti ve I ns t a l l a s ui t e of pa c ka g e d fi na n c i a l a ppl i c a t i ons
s oft w a re w hi c h w i l l e na b l e m or e t i m e l y
i nform a t i on for m a n a g e m e nt d e c i s i on- m a ki ng,
e a s i e r a c c e s s t o da t a by t he ul t i m a t e e nd us e r,a nd
a l l ow for c os t s a v i ng s t hrou g h produc t i v i t y
i m prov e m e nt s t hroug hout t he c o m pa ny,
S c op e T he c ore f i na n c i a l s y s t e m s w i l l be re pl a c e d by
O ra c l e fi n a nc i a l a ppl i c a t i ons, T he s e s y s t e m s
i nc l ude,
? G e ne ra l L e d g e r
? F i xe d A s s e t s
? O ps Re port [A U, s pe l l out O ps ]
? A c c ount s P a y a bl e
? A c c ount s Re c e i v a bl e
? P roj e c t A c c ount i ng
? P roj e c t M a na g e m e nt
A s s u mp ti on s O ra c l e 's s oft w a re pro v i de s
? M i ni m a l c us t om i z a t i on
? N o c ha ng e i n proc ure m e nt s y s t e m s duri ng
a c c ount s pa y a bl e i m p l e m e nt a t i on
C os t/ Be n e fi t A n al y s i s
& I n te r n al R ate o f R e tu r n ( I R R )
B S R w a s broke n dow n i nt o a t hre e -y e a r c a s h
out l a y w i t hout de pre c i a t i on,Cos t s a r e
re pre s e nt e d i n t hous a nds, Ca p i t a l a nd e xpe ns e s
a re c om b i ne d i n t hi s e x a m pl e,
2013-3-1 21
Business Systems Replacement
Project Cash Flow Analysis
F Y 95
($000 )
F Y 96
($000 )
F Y 97
($000 )
3 Y e ar
To tal
($000 )
F u tu r e A n n u al
C os ts / S avi n gs
($000 )
C os ts
O ra c l e / P M S oft w a re
( L i s t P ri c e )
992 500 0 1492 0
60% D i s c oun t (595) (595)
O ra c l e Cre d i t s (397) 0 (397)
N e t Ca s h for S oft w a re 0 500 500
S oft w a re M a i nt e n a nc e 0 90 250 340 250
H a rdw a re & M a i nt e na n c e 0 270 270 540 270
Consul t i ng & T ra i ni ng 205 320 0 525 0
T a x & A c qui s i t i on 0 150 80 230 50
To tal P u r c h as e d C o s t s 205 1330 600 2135 570
I nform a t i on S e rv i c e s &
T e c hno l ogy ( I S & T )
500 1850 1200 3550 0
F i na nc e / O t he r S t a ff 200 990 580 1770
To tal C o s t s 905 4170 2380 7455 570
S avi n gs
M a i nfra m e (101) (483) (584) (597)
F i na nc e / A s s e t / P M (160) (1160 ) (1320 ) (2320 )
I S & T S upp ort / D a t a E nt ry (88) (384) (472) (800)
I nt e re s t 0 (25) (25) (103)
To tal S avi n gs (349) (2052 ) (2401 ) (3820 )
N e t C os t (S avi n gs ) 905 3821 328 5054 (3250 )
8 Y e ar I n te r n al
R ate o f R e tu r n
35%
6.5 Cost Budgeting
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Cost Budgeting
? Cost budget involves allocating the project cost
estimate to individual work items and providing
a cost baseline
? For example,in the Business Systems
Replacement project,there was a total
purchased costs estimate for FY97 of $600,000
and another $1.2 million for Information
Services and Technology
? These amounts were allocated to appropriate
budgets as shown in Table 6-5
2013-3-1 24
Business Systems Replacement Project Budget
Estimates for FY97 and Explanations
Bu d ge t C ate go r y Es ti m ate d C os ts Exp l an ati o n
H e a dc ount ( F T E ) 13 I nc l ude d a re 9 prog ra m m e r/ a na l y s t s,2
da t a ba s e a na l y s t s,2 i nfra s t ruc t ure
t e c hni c i a ns,
Com pe ns a t i on $1,008,500 Ca l c ul a t e d by e m pl o y e e c ha ng e not i c e s
( E CN s ) a nd a s s um e d a 4% pa y i nc re a s e i n
J une, O v e rl oa d s upport w a s pl a nn e d a t
$10,000.
Cons ul t a nt / P urc ha s e d
S e rv i c e s
$424,500 E xpe c t e d c ons ul t i ng ne e ds i n s upport of t he
P roj e c t A c c ount i ng a nd Ca s c a d e
i m pl e m e nt a t i on e ffor t s ; m a i n t e na n c e
e xpe ns e s a s s oc i a t e d w i t h t he H e w l e t t -
P a c ka rd (H P ) c om put i ng pl a t form s ;
m a i nt e na nc e e xp e ns e s a s s oc i a t e d w i t h t h e
s oft w a re purc ha s e d i n s upport of t he B S R
proj e c t,
T ra v e l $25,000 I nc i de nt a l t r a v e l e xpe ns e s i n c urre d i n
s upport of t he B S R proj e c t,m os t a s s oc i a t e d
w i t h a t t e nda nc e of us e r c onf e re nc e s a nd
off- s i t e t ra i ni ng,
D e pre c i a t i on $91,000 I nc l ude d i s t he pe r h e a d s ha re of
w orks t a t i on de pre c i a t i on,t he Ca s c a de H P
pl a t form d e pre c i a t i on,a nd t he de pr e c i a t i on
e xpe ns e a s s oc i a t e d w i t h c a p i t a l i z e d
s oft w a re purc ha s e s,
Re nt s / L e a s e s $98,000 E xpe ns e s a s s oc i a t e d w i t h t h e M a c h1
c om put i ng pl a t for m s,
O t he r S uppl i e s
a nd E xpe ns e s
$153,000 I nc i de nt a l e xp e ns e s a s s oc i a t e d w i t h t hi ng s
s uc h a s t ra i ni ng,re w a rd a nd r e c og ni t i on,
l ong di s t a nc e phone c h a rg e s,m i s c e l l a ne ous
offi c e s uppl i e s,
To tal C o s t s $1,800,000
6.6 Cost Control
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Cost Control
? Project cost control includes
? 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 is an
important tool for cost control
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Earned Value Management (EVM)
? EVM is a project performance measurement
technique that integrates scope,time,and
cost data
? Given a baseline (original plan plus approved
changes),you can determine how well the
project is meeting its goals
? You must enter actual information periodically
to use EVM,Figure 6-1 shows a sample form
for collecting information
2013-3-1 28
Cost Control Input Form for Business
Systems Replacement Project
W B S #,6, 8, 1, 2
D e s c r i p t i o n, D esi gn In te r fa ce P r ocess -
C usto m er I nf or m at i on
R ev is io n, R ev is io n Dat e:
A ss ig n m e n t s F o r ec as t
Ho u r s p e r d a y E f f o r t ( i n h o u r s )
C a l c u l a t e d
Re s p o n s i b l e,
S M C
Ro l e,
PA
A v a i l a b i l i t y,
6
O p t i m i s t i c,
20
M o s t L i k e l y,
30 P l a n
E f f o r t,
30
Hr s
I n v o l v e d, Ro l e, A v a i l a b i l i t y, P e s s i m i s t i c,
40
I n v o l v e d, Ro l e, A v a i l a b i l i t y,
P l a n
D u r a t i o n
:
5
Da y s
I n v o l v e d, Ro l e, A v a i l a b i l i t y, De l a y ( Da y s ),
D es cr ip t io n A ss u m p t io n s
R es u lt s / D el iv er ab le s D ep en d en ci es
P r ed ec es s o r s ( W B S #), S u c c e s s o r s ( W BS # ),
4, 7
D e v e l o p a n o pe r a t i o n a l pr o c e s s de s i g n f o r t h e C us t o m e r I nf o r m a t i o n
i n t e r f a c e f r o m t h e I n v o i c i ng S y s t e m to O r a c l e R e c e i va b l e s, T hi s t a s k w i ll
a c c e pt a s i n put t h e b u s i ne s s / f u n c t i o n a l r e qu i r e m e n t s de ve l o pe d dur i n g t h e
t a c t i c a l a n a ly s i s p ha s e a n d pr o duc e a s o u t pu t a phy s i c a l o pe r a t i o n a l de s i g n,
w hi c h pr o vi de s t h e s pe c i f i c a t i o ns,r e qu i r e d f o r c o de dev e l opm e nt,
Pr o c e s s D e s i g n D o c u m e n t - T e c h ni c a l
- O pe r a t i o n /P hy s i c a l D F D
- Pr o c e s s Spe c i f i c a t i o ns
- I n t e r f a c e D a t a M a p
- A l l b us i ne s s r u l e s a n d i s s ue s w il l b e r e s o l v e d pr i o r to t hi s t a s k.
- T h e E R D & da t a m o de l f o r O r a c l e R e c e i va bl e s & a ny O r a c l e
e x t e ns i o n r e qu i r e d w i ll be c o m p l e t e d a n d a v a il a bl e pr i o r to t h i s t a s k,
- T h e E R D f o r t h e I n v o i c i ng S y s t e m w i ll be c o m p l e t e d a n d a v a il a bl e
pr i o r to t hi s t a s k.
- F e w i t e r a t i o ns o f t h e r e vi e w / m o d i f y c y c l e w il l b e r e qu i r e d,
- P rim a ril y a docum e nt a t i on t a s k.
2013-3-1 29
EVM Terms
? The planned value (PV),formerly called the
budgeted cost of work scheduled (BCWS),also called
the budget,is that portion of the approved total cost
estimate planned to be spent on an activity during a
given period
? Actual cost (AC),formerly called actual cost of work
performed (ACWP),is the total of direct and indirect
costs incurred in accomplishing work on an activity
during a given period
? The earned value (EV),formerly called the budgeted
cost of work performed (BCWP),is the percentage of
work actually completed multiplied by the planned
value
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Earned Value Calculations for One
Activity After Week One
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Earned Value Formulas
To estimate what it will cost to complete a project or how
long it will take based on performance to date,divide the
budgeted cost or time by the appropriate index,
2013-3-1 32
Rules of Thumb for EVA
Numbers
? Negative numbers for cost and
schedule variance indicate problems in
those areas,The project is costing
more than planned or taking longer
than planned
? CPI and SPI less than 100% indicate
problems
2013-3-1 33
Earned Value Calculations for a One-
Year Project After Five Months
Excel file
2013-3-1 34
Earned Value Chart for
Project After Five Months
Excel file
6.7 Using Software to Assist in
Cost Management
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Using Software to Assist in
Cost Management
? Spreadsheets are a common tool for
resource planning,cost estimating,cost
budgeting,and cost control
? Many companies use more sophisticated
and centralized financial applications
software for cost information
? Project management software has many
cost-related features
2013-3-1 37
Quick Quiz
? Suppose you sell 10 widgets per day on average,and the
average cost per widget is $10,If you sold 11 widgets one
day,what would the affect on profits be?
? What is another name for earned value?
?ANSWER,There is not enough information to answer this
question,You are given costs and asked to estimate profits,
You do not know what the average profit is per widget,You
might lose money by selling more widgets,
?ANSWER,BCWP or budgeted cost of work performed
