IT Project Management
INSTRUCTOR,SHU LIU
HIT SCHOOL OF SOFTWARE
Fall 2005
All rights reserved
Review
Project Cost Management 2
Project Scope Management
Initiation
Scope Planning
Scope Definition
Scope Verification
Scope Change Control
Project Charter
Scope Statement
WBS
Verification
Document
Change control
process
Project Cost Management 3
Project Time Management
Activity definition
Activity sequencing
Activity duration
estimating
Schedule development
Schedule control
All Activities
Project Network
Diagrams
Duration
Estimates
Gantt Chart
Control Changes
Topic:
Project Cost Management
IT Project Management
INSTRUCTOR,SHU LIU
HIT SCHOOL OF SOFTWARE
Fall 2005
All rights reserved
Project Cost Management 5
Outline
Importance of Project Cost Management
Basic Principles of Cost Management
Project Cost Management Process
Resource Planning
Cost Estimating
Cost Budgeting
Cost Control
IT Project Management
Project Cost Management 6
The Importance of Project Cost
Management
Cost management is another trouble spot for IT
projects,
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
It is usually not difficult for IT professionals
to learn about project cost management;
they just often are not interested in the subject,
IT Project Management
Project Cost Management 7
What is Cost?
Accountants usually define cost as a resource
sacrificed or fore-gone to achieve a specific
objective.
Webster’s dictionary defines cost as,something
given up in exchange.”
Costs are usually measured in monetary units
like dollars
Many IT professionals think preparing cost
estimates is beneath them- a job for accountants.
On the contrary,preparing good cost estimates
is a very demanding,important skill that all
information technology project
managers need to acquire.
IT Project Management
Project Cost Management 8
What is Project Cost Management?
Project cost management includes the processes
required to ensure that the project is completed
within an approved budget
Resource planning
Cost estimating
Cost budgeting
Cost control
IT Project Management
Project Cost Management 9
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
IT Project Management
Project Cost Management 10
Basic Principles of Cost Management (1)
Profits（利润）
are revenues minus expenses
Profit Margin （利润率）
is the ratio between revenues and profits
Life cycle costing （全寿命期成本计算）
is estimating the cost of a project over its entire
life
IT Project Management
Project Cost Management 11
Cost of Software Defects
Wh e n D e fe c t i s 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 Re quire m e n t s $10 0- $1,0 00
Co di ng / U ni t T e s t i ng $1,000 or m ore
S y s t e m T e s t i ng $7,000 - $8,000
A c c e pt a nc e T e s t i ng $1,000 - $100,000
A ft e r I m pl e m e nt a t i on U p to m i l l i ons of do l l a rs
It is important to spend money up-front on IT
projects to avoid spending a lot more later.
IT Project Management
Project Cost Management 12
Basic Principles of Cost Management (2)
Cash flow analysis（现金流分析）
is determining the estimated annual costs and
benefits for a project
Internal rate of return (IRR) （内部收益率）
Is the discount rate that makes net present value
equal to zero.
It is also called the time-adjusted rate of return.
IT Project Management
Project Cost Management 13
Basic Principles of Cost Management (3)
Sunk cost
Is money that has been spent in the past.
Consider it gone,like a sunken ship that can
never be returned.
The rule is – when deciding what project to
invest in or continue,you should not include
sunk costs
IT Project Management
Project Cost Management 14
Basic Principles of Cost Management (4)
Tangible costs or benefits（有形成本或收益）
Costs or benefits that can be easily measured in
dollars
Like training cost
IT Project Management
Project Cost Management 15
Basic Principles of Cost Management (5)
Intangible costs or benefits （无形成本或收益）
Costs or benefits that are difficult to measure in
monetary terms
Like out of personal interest,spent some time
using home computers,books,and other
resources to research areas related to the project
IT Project Management
Project Cost Management 16
Basic Principles of Cost Management (6)
Direct costs （直接成本）
Are costs related to a project that can be traced
back in a cost-effective way
For example,the salaries of people working
full-time on the project and cost of hardware
and software purchased specifically for the
project are direct costs
IT Project Management
Project Cost Management 17
Basic Principles of Cost Management (7)
Indirect costs（间接成本）
Are costs related to a project that cannot be
traced back in a cost-effective way
For example,the cost of electricity,paper
towels,and so on,.
Indirect cost are allocated to projects and
project managers have very little control over
them
IT Project Management
Project Cost Management 18
Basic Principles of Cost Management (8)
Learning curve theory（学习曲线理论）
A theory that states that when many items are
produced repetitively,the unit cost of those
items normally decreases in a regular pattern as
more units are produced
Cost..
Time…
IT Project Management
Project Cost Management 19
Basic Principles of Cost Management (9)
Reserves（储备金）
Reserves are dollars included in a cost
estimate to mitigate（减轻） cost risk
by allowing for future situations that
are difficult to predict.
IT Project Management
Project Cost Management 20
Basic Principles of Cost Management (10)
Reserves（储备金）
Contingency reserves (应急储备金 ):
allow for future situations that may be partially
planned for (sometimes called known
unknowns)-已知的未知事件
Management reserves (管理储备金 ):
Allow for future situations that are unpredictable
(sometime called unknown unknowns)-未知的未知事件
IT Project Management
Project Cost Management 21
Resource Planning
To estimate,budget,and control costs,project
managers and their team must determine what
physical resources and what quantities of
those resources are required to complete the
project
People
Equipment
Materials
IT Project Management
Project Cost Management 22
Resource Planning
Input
1,WBS
2,Scope Statement
3,Historical info.
4,Resource Info.
5,Policies
Output
A list of resource
requirements
IT Project Management
Project Cost Management 23
Resource Planning
The nature of the project and the
organization will affect resource planning
Expert judgment and the availability of
alternatives are the only real tools available
to assist in resource planning.
IT Project Management
Project Cost Management 24
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?
IT Project Management
Project Cost Management 25
Cost Estimating
Project managers must take cost
estimates seriously if they want to
complete projects within budget
constraints
Cost estimate is an important output of
project cost management
IT Project Management
Project Cost Management 26
Cost Estimating （ 成本估计）
Outputs from cost estimating:
Cost estimates
Supporting details
Cost management plan
A document that describes how cost variances
will be managed on the project.
IT Project Management
Project Cost Management 27
Types of Cost Estimates
There are several types of cost estimates:
Rough Order of Magnitude (ROM) estimate
（ 量级估算）
Provides a rough idea of what a project will cost.
Budgetary estimate （ 预算估算）
Is used to allocate money into an organization’s
budget
Definitive estimate（ 最终估算）
Provides an accurate estimate of project costs.
IT Project Management
Project Cost Management 28
Types of Cost Estimates
T y p e o f E s ti m at e W h e n D o n e W h y D o n e Ho w A c c u r at e
R ou gh Or d e r o f
Magn i tu d e ( R OM)
V e r y ea rl y in the
pr oje c t l i fe c y c l e,
of t e n 3– 5 y e a rs
befor e p ro j e c t
c omp l e t i on
P ro v i des r ou g h
bal l park of c os t f or
s e l e c t i on d e c i s i on s
–2 5%,+7 5%
B u d getary Ea rly,1– 2 y e a rs o ut P uts d oll a rs in the
bu dg e t p l a ns
–1 0%,+2 5%
D e fin i tive L a t e r i n t he pr oje c t,<
1 y e a r ou t
P ro v i des d e t a i l s f or
pu rchas e s,e s t i m a t e
a c t ua l cos t s
–5 %,+1 0%
IT Project Management
Project Cost Management 29
Cost Estimation Techniques
Analogous or top-down（ 类比估算法）
It uses the actual cost of a previous,similar
project as the basis for the new estimate
It is a form of expert judgment.
It is generally less costly than others,but it is
also less accurate
IT Project Management
Project Cost Management 30
Cost Estimation Techniques
Bottom-up
It estimates individual work items and sum them to get a
total estimate
It is more accurate than analogous,but time consuming
Parametric（ 参数模型估算法）
It uses project characteristics in a mathematical model to
estimate costs
IT Project Management
Project Cost Management 31
Constructive Cost Model (COCOMO)
- 建设性的成本模型
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
Project Cost Management 32
Reality in 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
IT Project Management
Project Cost Management 33
Reality in IT Cost Estimates
People have a bias(偏见 ) toward underestimation,
Review estimates and ask important questions to
make sure estimates are not biased
Management wants a number for a bid（ 投标）,
not a real estimate,Project managers must
negotiate with project sponsors to create realistic
cost estimates
IT Project Management
Project Cost Management 34
IT Project Management
Cost Budgeting（ 成本预算）
Project cost budgeting involves allocating the
project cost estimate to individual work items
The main goal of the cost budgeting process is
to prepare budgetary estimates and to produce
a cost baseline for measuring project
performance
The WBS is a required input to the cost budgeting
process,
The project schedule is also required to allocated
costs over time
A cost baseline is a time-phased budget
that project manager use to measure and
Monitor cost performance,
Project Cost Management 35
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 Ex p l an ati o n
H e a dc oun t ( F T E ) 13 I nc l ude d a re 9 p rog 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 infra s t ruc t ure
t e c hni c i a ns,
Co m 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 noti c e s
( E CN s ) a nd a s s ume d a 4% p a y i nc re a s e i n
J une,O v e rl oa d s upp ort w a s pla nn e d a t
$10,000.
Co ns 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 upp ort of the
P roj e c t A c c oun t i ng a nd C a s c a d e
i m pl e m e nt a t i on e ffort 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 omput i ng pla t forms ;
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 th e
s oft w a re purc ha s e d i n s upp ort of the B S R
proje 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 in
s upp ort of the B S R p roj e c t,mos 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 is t he pe r h e a d s ha re of
w orks t a t i on d e 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 th e M a c h1
c omput i ng pla t for m s,
O t he r S upp l i e s
a nd Expe 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 dis t a nc e pho ne c h a rg e s,mi s c e l l a ne ous
offi c e s upp l i e s,
To tal C o s t s $1,800,000
Project Cost Management 36
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 (EVM) is an
important tool for cost control
IT Project Management
Project Cost Management 37
Earned Value Management (EVM)
EVM is a project performance measurement
technique that integrates scope,time,and cost data,
EVM is sometimes called Earned Value Analysis
(EVA)
Given a cost performance baseline,project
managers and their teams can determine how well
the project is meeting scope,time and cost goals by
entering actual information and then comparing it
to the baseline.
Baseline is the original project
plan plus approved changes
Whether or not a WBS item was completed
or approximately how much of the work was
completed,when the work actually started
and ended,and how much it actually cost to
do the work that was completed.
IT Project Management
Project Cost Management 38
Earned Value Management (EVM)
You must enter actual information
periodically to use EVM,
Figure on next slide shows a sample form
for collecting information
IT Project Management
Project Cost Management 39
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,Des i g n In te r fa ce P r o ce ss -
Cus to m e r I n fo r m a ti o n
Rev is io n,Rev is io n Da t e,
A s s ig n m e n t s F o r e c a s t
H o 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
R e s p o n s ib le,
S M C
R o le,
PA
A v a i la b i lit y,
6
Op t im is t i c,
20
M o s t L ik e ly,
30 P l a n
E f f o r t,
30
H r s
In v o l v e d,R o le,A v a i la b i lit y,P e s s im is t ic,
40
In v o l v e d,R o le,A v a i la b i lit y,
P l a n
D u r a t i o n
:
5
D a y s
In v o l v e d,R o le,A v a i la b i lit y,D e la y ( D a y s ),
Des c r ip t io n A s s u m p t io n s
Res u lt s / De li v e r a b le s Dep e n d e n c ie s
P r e d e c e s s o r s ( WB S # ),
S u c c e s s o r s ( W B S # ),
4,7
De v e l o p a n o per a t i o n a l pr o c e s s des 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 Or a c l e R e c e i va b l e s,T hi s t a s k wi ll
a c c e pt a s i n put t h e b u s i nes s / f u n c t i o n a l r e qu i r e m e n t s deve l o ped dur i n g t h e
t a c t i c a l a n a ly s i s p has e a n d pr o duce a s o u t pu t a phy s i c a l o per a t i o n a l des i g n,
whi c h pr o vi de s t h e s pec i f i c a t i o ns,r e qu i r e d f o r c o de de v e l opm e nt,
P r o c e s s De s i g n Do c u m e n t - T e c h ni c a l
- Ope r a t i o n /P hy s i c a l D F D
- P r o c e s s S pec i f i c a t i o ns
- I n t e r f a c e Da t a M a p
- Al l b us i ne s s r u l e s a n d i s s ues 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 Or a c l e R e c e i va bl e s & a ny Or 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 ri m a ri l y a doc um e nt a t i on t a s k.
Project Cost Management 40
Earned Value Management Terms
Earned value management involves
calculating three values for each activity
or summary activity from a project’s
WBS
The Planned Value (PV)
The Actual Cost (AC)
The Earned Value (EV)
IT Project Management
Project Cost Management 41
Earned Value Management Terms 1
The planned value (PV) 预算
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
IT Project Management
Project Cost Management 42
Earned Value Management Terms 2
The Actual cost (AC)实际成本
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
IT Project Management
Project Cost Management 43
Earned Value Management Terms 3
The earned value (EV)净值
formerly called the budgeted cost of work
performed (BCWP)
is the percentage of work actually completed
multiplied by the planned value
EV= PV*completed%
IT Project Management
Project Cost Management 44
Earned Value Management Terms 4
Cost Variance (CV)成本偏差
Is the earned value minus the actual cost.
CV = EV - AC
Shows the difference between the estimated cost of
an activity and the actual cost of that activity
If cost variance is a negative number,it means that
performing the work cost more than planned,
IT Project Management
Project Cost Management 45
Earned Value Management Terms 5
Schedule Variance (SV)进度偏差
Is the earned value minus the planned value.
SV = EV - PV
Shows the difference between the scheduled
completion of an activity and the actual completion
of that activity.
A negative schedule variance means that it took
longer than planned to perform the work,
IT Project Management
Project Cost Management 46
Earned Value Management Terms 6
The Cost Performance Index (CPI)成本执行指数
Is the ratio of earned value to actual cost and can
be used to estimate the projected cost of
completing the project.
CPI = EV/AC
If the CPI is equal to one or 100%,then the
planned and actual costs are equal,or the costs are
exactly as budgeted.
If the CPI is less than 1 or 100%,the project is
over budget.
IT Project Management
Project Cost Management 47
Earned Value Management Terms 7
The Schedule Performance Index (SPI)
进度执行指数
Is the ratio of earned value to planned value and
can be used to estimate the projected time to
complete the project.
SPI = EV/PV
If the SPI is equal to one or 100% then the project
is on schedule.
If the SPI is greater than one or 100%,then the
project is ahead of schedule,
IT Project Management
Project Cost Management 48
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.
IT Project Management
Project Cost Management 49
Earned Value Calculations for One Activity After Week One
IT Project Management
Project Cost Management 50
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
IT Project Management
Project Cost Management 51
Earned Value Calculations for a One-Year
Project After Five Months
IT Project Management
Project Cost Management 52
Earned Value Calculations for a One-Year
Project After Five Months
IT Project Management
Project Cost Management 53
Earned Value Calculations for a One-Year
Project After Five Months
IT Project Management
Project Cost Management 54
Earned Value Chart for Project After 5 Months
IT Project Management
Project Cost Management 55
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
IT Project Management
Project Cost Management 56
Project Cost Management
Cost Estimating
Cost Budgeting
Cost Control
A list of Resource
Requirement
Cost Estimates
Cost Manage,Plan
A Cost Baseline
EVM
Resource Planning
IT Project Management
Project Cost Management 57
Group Exercise
Exercise 1 on page 185
IT Project Management
Project Cost Management 58
Group Exercise
Customer demand requires one of the
functions to be delivered three months
earlier than planned,or 10 millions
sale will be lost,What's your
response,as a project manager? What
possible actions you will take in
response to this change? List and state
possible scenarios you might go through.
IT Project Management
Project Cost Management 59
Project Cost Management 60
NPV Analysis （ 净现值 ）
Net Present Value (NPV) analysis is a method of
calculating the expected net monetary gain or loss
from a project by discounting all expected future cash
inflows and outflows to the present point in time
Projects with a positive NPV should be considered if
financial value is a key criterion
The higher the NPV,the better
IT Project Management
Project Cost Management 61
NPV Analysis
The mathematical formula for calculating NPV
NPV =∑t=1… n A/(1+r)^t
t – the year of the cash flows
A – the amount of cash flow each year
r – the discount rate
IT Project Management
Project Cost Management 62
NPV Analysis
To determine NPV,follow these steps:
Determine the cash inflows and outflows for
the project
Determine the discount rate,
A discount rate is the minimum acceptable rate of
return on an investment,It is also called the
required rate of return,hurdle rate,or opportunity
cost of capital.
Calculate the net present value.
BACK
IT Project Management
INSTRUCTOR,SHU LIU
HIT SCHOOL OF SOFTWARE
Fall 2005
All rights reserved
Review
Project Cost Management 2
Project Scope Management
Initiation
Scope Planning
Scope Definition
Scope Verification
Scope Change Control
Project Charter
Scope Statement
WBS
Verification
Document
Change control
process
Project Cost Management 3
Project Time Management
Activity definition
Activity sequencing
Activity duration
estimating
Schedule development
Schedule control
All Activities
Project Network
Diagrams
Duration
Estimates
Gantt Chart
Control Changes
Topic:
Project Cost Management
IT Project Management
INSTRUCTOR,SHU LIU
HIT SCHOOL OF SOFTWARE
Fall 2005
All rights reserved
Project Cost Management 5
Outline
Importance of Project Cost Management
Basic Principles of Cost Management
Project Cost Management Process
Resource Planning
Cost Estimating
Cost Budgeting
Cost Control
IT Project Management
Project Cost Management 6
The Importance of Project Cost
Management
Cost management is another trouble spot for IT
projects,
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
It is usually not difficult for IT professionals
to learn about project cost management;
they just often are not interested in the subject,
IT Project Management
Project Cost Management 7
What is Cost?
Accountants usually define cost as a resource
sacrificed or fore-gone to achieve a specific
objective.
Webster’s dictionary defines cost as,something
given up in exchange.”
Costs are usually measured in monetary units
like dollars
Many IT professionals think preparing cost
estimates is beneath them- a job for accountants.
On the contrary,preparing good cost estimates
is a very demanding,important skill that all
information technology project
managers need to acquire.
IT Project Management
Project Cost Management 8
What is Project Cost Management?
Project cost management includes the processes
required to ensure that the project is completed
within an approved budget
Resource planning
Cost estimating
Cost budgeting
Cost control
IT Project Management
Project Cost Management 9
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
IT Project Management
Project Cost Management 10
Basic Principles of Cost Management (1)
Profits（利润）
are revenues minus expenses
Profit Margin （利润率）
is the ratio between revenues and profits
Life cycle costing （全寿命期成本计算）
is estimating the cost of a project over its entire
life
IT Project Management
Project Cost Management 11
Cost of Software Defects
Wh e n D e fe c t i s 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 Re quire m e n t s $10 0- $1,0 00
Co di ng / U ni t T e s t i ng $1,000 or m ore
S y s t e m T e s t i ng $7,000 - $8,000
A c c e pt a nc e T e s t i ng $1,000 - $100,000
A ft e r I m pl e m e nt a t i on U p to m i l l i ons of do l l a rs
It is important to spend money up-front on IT
projects to avoid spending a lot more later.
IT Project Management
Project Cost Management 12
Basic Principles of Cost Management (2)
Cash flow analysis（现金流分析）
is determining the estimated annual costs and
benefits for a project
Internal rate of return (IRR) （内部收益率）
Is the discount rate that makes net present value
equal to zero.
It is also called the time-adjusted rate of return.
IT Project Management
Project Cost Management 13
Basic Principles of Cost Management (3)
Sunk cost
Is money that has been spent in the past.
Consider it gone,like a sunken ship that can
never be returned.
The rule is – when deciding what project to
invest in or continue,you should not include
sunk costs
IT Project Management
Project Cost Management 14
Basic Principles of Cost Management (4)
Tangible costs or benefits（有形成本或收益）
Costs or benefits that can be easily measured in
dollars
Like training cost
IT Project Management
Project Cost Management 15
Basic Principles of Cost Management (5)
Intangible costs or benefits （无形成本或收益）
Costs or benefits that are difficult to measure in
monetary terms
Like out of personal interest,spent some time
using home computers,books,and other
resources to research areas related to the project
IT Project Management
Project Cost Management 16
Basic Principles of Cost Management (6)
Direct costs （直接成本）
Are costs related to a project that can be traced
back in a cost-effective way
For example,the salaries of people working
full-time on the project and cost of hardware
and software purchased specifically for the
project are direct costs
IT Project Management
Project Cost Management 17
Basic Principles of Cost Management (7)
Indirect costs（间接成本）
Are costs related to a project that cannot be
traced back in a cost-effective way
For example,the cost of electricity,paper
towels,and so on,.
Indirect cost are allocated to projects and
project managers have very little control over
them
IT Project Management
Project Cost Management 18
Basic Principles of Cost Management (8)
Learning curve theory（学习曲线理论）
A theory that states that when many items are
produced repetitively,the unit cost of those
items normally decreases in a regular pattern as
more units are produced
Cost..
Time…
IT Project Management
Project Cost Management 19
Basic Principles of Cost Management (9)
Reserves（储备金）
Reserves are dollars included in a cost
estimate to mitigate（减轻） cost risk
by allowing for future situations that
are difficult to predict.
IT Project Management
Project Cost Management 20
Basic Principles of Cost Management (10)
Reserves（储备金）
Contingency reserves (应急储备金 ):
allow for future situations that may be partially
planned for (sometimes called known
unknowns)-已知的未知事件
Management reserves (管理储备金 ):
Allow for future situations that are unpredictable
(sometime called unknown unknowns)-未知的未知事件
IT Project Management
Project Cost Management 21
Resource Planning
To estimate,budget,and control costs,project
managers and their team must determine what
physical resources and what quantities of
those resources are required to complete the
project
People
Equipment
Materials
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Project Cost Management 22
Resource Planning
Input
1,WBS
2,Scope Statement
3,Historical info.
4,Resource Info.
5,Policies
Output
A list of resource
requirements
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Project Cost Management 23
Resource Planning
The nature of the project and the
organization will affect resource planning
Expert judgment and the availability of
alternatives are the only real tools available
to assist in resource planning.
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Project Cost Management 24
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?
IT Project Management
Project Cost Management 25
Cost Estimating
Project managers must take cost
estimates seriously if they want to
complete projects within budget
constraints
Cost estimate is an important output of
project cost management
IT Project Management
Project Cost Management 26
Cost Estimating （ 成本估计）
Outputs from cost estimating:
Cost estimates
Supporting details
Cost management plan
A document that describes how cost variances
will be managed on the project.
IT Project Management
Project Cost Management 27
Types of Cost Estimates
There are several types of cost estimates:
Rough Order of Magnitude (ROM) estimate
（ 量级估算）
Provides a rough idea of what a project will cost.
Budgetary estimate （ 预算估算）
Is used to allocate money into an organization’s
budget
Definitive estimate（ 最终估算）
Provides an accurate estimate of project costs.
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Project Cost Management 28
Types of Cost Estimates
T y p e o f E s ti m at e W h e n D o n e W h y D o n e Ho w A c c u r at e
R ou gh Or d e r o f
Magn i tu d e ( R OM)
V e r y ea rl y in the
pr oje c t l i fe c y c l e,
of t e n 3– 5 y e a rs
befor e p ro j e c t
c omp l e t i on
P ro v i des r ou g h
bal l park of c os t f or
s e l e c t i on d e c i s i on s
–2 5%,+7 5%
B u d getary Ea rly,1– 2 y e a rs o ut P uts d oll a rs in the
bu dg e t p l a ns
–1 0%,+2 5%
D e fin i tive L a t e r i n t he pr oje c t,<
1 y e a r ou t
P ro v i des d e t a i l s f or
pu rchas e s,e s t i m a t e
a c t ua l cos t s
–5 %,+1 0%
IT Project Management
Project Cost Management 29
Cost Estimation Techniques
Analogous or top-down（ 类比估算法）
It uses the actual cost of a previous,similar
project as the basis for the new estimate
It is a form of expert judgment.
It is generally less costly than others,but it is
also less accurate
IT Project Management
Project Cost Management 30
Cost Estimation Techniques
Bottom-up
It estimates individual work items and sum them to get a
total estimate
It is more accurate than analogous,but time consuming
Parametric（ 参数模型估算法）
It uses project characteristics in a mathematical model to
estimate costs
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Project Cost Management 31
Constructive Cost Model (COCOMO)
- 建设性的成本模型
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
Project Cost Management 32
Reality in 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
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Project Cost Management 33
Reality in IT Cost Estimates
People have a bias(偏见 ) toward underestimation,
Review estimates and ask important questions to
make sure estimates are not biased
Management wants a number for a bid（ 投标）,
not a real estimate,Project managers must
negotiate with project sponsors to create realistic
cost estimates
IT Project Management
Project Cost Management 34
IT Project Management
Cost Budgeting（ 成本预算）
Project cost budgeting involves allocating the
project cost estimate to individual work items
The main goal of the cost budgeting process is
to prepare budgetary estimates and to produce
a cost baseline for measuring project
performance
The WBS is a required input to the cost budgeting
process,
The project schedule is also required to allocated
costs over time
A cost baseline is a time-phased budget
that project manager use to measure and
Monitor cost performance,
Project Cost Management 35
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 Ex p l an ati o n
H e a dc oun t ( F T E ) 13 I nc l ude d a re 9 p rog 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 infra s t ruc t ure
t e c hni c i a ns,
Co m 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 noti c e s
( E CN s ) a nd a s s ume d a 4% p a y i nc re a s e i n
J une,O v e rl oa d s upp ort w a s pla nn e d a t
$10,000.
Co ns 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 upp ort of the
P roj e c t A c c oun t i ng a nd C a s c a d e
i m pl e m e nt a t i on e ffort 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 omput i ng pla t forms ;
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 th e
s oft w a re purc ha s e d i n s upp ort of the B S R
proje 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 in
s upp ort of the B S R p roj e c t,mos 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 is t he pe r h e a d s ha re of
w orks t a t i on d e 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 th e M a c h1
c omput i ng pla t for m s,
O t he r S upp l i e s
a nd Expe 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 dis t a nc e pho ne c h a rg e s,mi s c e l l a ne ous
offi c e s upp l i e s,
To tal C o s t s $1,800,000
Project Cost Management 36
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 (EVM) is an
important tool for cost control
IT Project Management
Project Cost Management 37
Earned Value Management (EVM)
EVM is a project performance measurement
technique that integrates scope,time,and cost data,
EVM is sometimes called Earned Value Analysis
(EVA)
Given a cost performance baseline,project
managers and their teams can determine how well
the project is meeting scope,time and cost goals by
entering actual information and then comparing it
to the baseline.
Baseline is the original project
plan plus approved changes
Whether or not a WBS item was completed
or approximately how much of the work was
completed,when the work actually started
and ended,and how much it actually cost to
do the work that was completed.
IT Project Management
Project Cost Management 38
Earned Value Management (EVM)
You must enter actual information
periodically to use EVM,
Figure on next slide shows a sample form
for collecting information
IT Project Management
Project Cost Management 39
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,Des i g n In te r fa ce P r o ce ss -
Cus to m e r I n fo r m a ti o n
Rev is io n,Rev is io n Da t e,
A s s ig n m e n t s F o r e c a s t
H o 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
R e s p o n s ib le,
S M C
R o le,
PA
A v a i la b i lit y,
6
Op t im is t i c,
20
M o s t L ik e ly,
30 P l a n
E f f o r t,
30
H r s
In v o l v e d,R o le,A v a i la b i lit y,P e s s im is t ic,
40
In v o l v e d,R o le,A v a i la b i lit y,
P l a n
D u r a t i o n
:
5
D a y s
In v o l v e d,R o le,A v a i la b i lit y,D e la y ( D a y s ),
Des c r ip t io n A s s u m p t io n s
Res u lt s / De li v e r a b le s Dep e n d e n c ie s
P r e d e c e s s o r s ( WB S # ),
S u c c e s s o r s ( W B S # ),
4,7
De v e l o p a n o per a t i o n a l pr o c e s s des 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 Or a c l e R e c e i va b l e s,T hi s t a s k wi ll
a c c e pt a s i n put t h e b u s i nes s / f u n c t i o n a l r e qu i r e m e n t s deve l o ped dur i n g t h e
t a c t i c a l a n a ly s i s p has e a n d pr o duce a s o u t pu t a phy s i c a l o per a t i o n a l des i g n,
whi c h pr o vi de s t h e s pec i f i c a t i o ns,r e qu i r e d f o r c o de de v e l opm e nt,
P r o c e s s De s i g n Do c u m e n t - T e c h ni c a l
- Ope r a t i o n /P hy s i c a l D F D
- P r o c e s s S pec i f i c a t i o ns
- I n t e r f a c e Da t a M a p
- Al l b us i ne s s r u l e s a n d i s s ues 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 Or a c l e R e c e i va bl e s & a ny Or 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 ri m a ri l y a doc um e nt a t i on t a s k.
Project Cost Management 40
Earned Value Management Terms
Earned value management involves
calculating three values for each activity
or summary activity from a project’s
WBS
The Planned Value (PV)
The Actual Cost (AC)
The Earned Value (EV)
IT Project Management
Project Cost Management 41
Earned Value Management Terms 1
The planned value (PV) 预算
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
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Project Cost Management 42
Earned Value Management Terms 2
The Actual cost (AC)实际成本
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
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Project Cost Management 43
Earned Value Management Terms 3
The earned value (EV)净值
formerly called the budgeted cost of work
performed (BCWP)
is the percentage of work actually completed
multiplied by the planned value
EV= PV*completed%
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Project Cost Management 44
Earned Value Management Terms 4
Cost Variance (CV)成本偏差
Is the earned value minus the actual cost.
CV = EV - AC
Shows the difference between the estimated cost of
an activity and the actual cost of that activity
If cost variance is a negative number,it means that
performing the work cost more than planned,
IT Project Management
Project Cost Management 45
Earned Value Management Terms 5
Schedule Variance (SV)进度偏差
Is the earned value minus the planned value.
SV = EV - PV
Shows the difference between the scheduled
completion of an activity and the actual completion
of that activity.
A negative schedule variance means that it took
longer than planned to perform the work,
IT Project Management
Project Cost Management 46
Earned Value Management Terms 6
The Cost Performance Index (CPI)成本执行指数
Is the ratio of earned value to actual cost and can
be used to estimate the projected cost of
completing the project.
CPI = EV/AC
If the CPI is equal to one or 100%,then the
planned and actual costs are equal,or the costs are
exactly as budgeted.
If the CPI is less than 1 or 100%,the project is
over budget.
IT Project Management
Project Cost Management 47
Earned Value Management Terms 7
The Schedule Performance Index (SPI)
进度执行指数
Is the ratio of earned value to planned value and
can be used to estimate the projected time to
complete the project.
SPI = EV/PV
If the SPI is equal to one or 100% then the project
is on schedule.
If the SPI is greater than one or 100%,then the
project is ahead of schedule,
IT Project Management
Project Cost Management 48
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.
IT Project Management
Project Cost Management 49
Earned Value Calculations for One Activity After Week One
IT Project Management
Project Cost Management 50
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
IT Project Management
Project Cost Management 51
Earned Value Calculations for a One-Year
Project After Five Months
IT Project Management
Project Cost Management 52
Earned Value Calculations for a One-Year
Project After Five Months
IT Project Management
Project Cost Management 53
Earned Value Calculations for a One-Year
Project After Five Months
IT Project Management
Project Cost Management 54
Earned Value Chart for Project After 5 Months
IT Project Management
Project Cost Management 55
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
IT Project Management
Project Cost Management 56
Project Cost Management
Cost Estimating
Cost Budgeting
Cost Control
A list of Resource
Requirement
Cost Estimates
Cost Manage,Plan
A Cost Baseline
EVM
Resource Planning
IT Project Management
Project Cost Management 57
Group Exercise
Exercise 1 on page 185
IT Project Management
Project Cost Management 58
Group Exercise
Customer demand requires one of the
functions to be delivered three months
earlier than planned,or 10 millions
sale will be lost,What's your
response,as a project manager? What
possible actions you will take in
response to this change? List and state
possible scenarios you might go through.
IT Project Management
Project Cost Management 59
Project Cost Management 60
NPV Analysis （ 净现值 ）
Net Present Value (NPV) analysis is a method of
calculating the expected net monetary gain or loss
from a project by discounting all expected future cash
inflows and outflows to the present point in time
Projects with a positive NPV should be considered if
financial value is a key criterion
The higher the NPV,the better
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Project Cost Management 61
NPV Analysis
The mathematical formula for calculating NPV
NPV =∑t=1… n A/(1+r)^t
t – the year of the cash flows
A – the amount of cash flow each year
r – the discount rate
IT Project Management
Project Cost Management 62
NPV Analysis
To determine NPV,follow these steps:
Determine the cash inflows and outflows for
the project
Determine the discount rate,
A discount rate is the minimum acceptable rate of
return on an investment,It is also called the
required rate of return,hurdle rate,or opportunity
cost of capital.
Calculate the net present value.
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