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–Once again, not explicitly stated in text, yet PMBOK explicitly associates planning with each knowledge area |
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–Developing an approximation or estimate of the costs of the resources needed to complete a project |
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–Allocating the overall cost estimate to individual work items to establish a baseline for measuring performance |
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–Controlling changes to the project budget |
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•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 |
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–Costs or benefits easily measured in dollars |
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| Intangible costs/benefits |
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–Difficult to measure in monetary terms |
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–Directly related to producing project deliverables |
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–Note directly related to deliverables, but necessary for completion and indirectly related to performing the project |
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–Money already spent
–Should never be a consideration in a decision to continue |
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•Dollars included in a cost estimate to mitigate cost risk by allowing for future situations that are difficult to predict |
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–Allow for future situations that may be partially planned for (sometimes called “known unknowns”)
–Example: Staff turnover and associated training costs |
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–Allow for future situations that are unpredictable (sometimes called “unknown unknowns”)
–Example: Major illness of key player |
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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% |
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•A cost management plan is a document that describes how the organization will manage cost variances on the project |
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| Labor is often a large percentage of total project costs, so... |
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–Project managers must develop and track estimates for labor
–We’ll discuss a bit more in project HR management |
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| Analogous or top-down estimates |
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–Use the actual cost of a previous, similar project as the basis for estimating the cost of the current project |
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–Estimating costs of individual work items or activities
–Sum them to get a project total
–Activity Based Costing, perhaps using standard rates |
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–Use project characteristics (parameters) as proxies for actual work
–Enter in a mathematical model to estimate project costs |
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–Combination of these methods, perhaps aided by expert judgment, often produces best results |
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| Parameters of parametric modeling |
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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 |
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| Problems with IT cost estimates |
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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 |
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| Before creating a cost estimate... |
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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 |
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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 |
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| Project cost control includes: |
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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 |
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Term
| Earned value management (EVM) |
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Definition
•EVM is a project performance measurement technique that integrates scope, time, and cost data |
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•Given a baseline (original plan plus approved changes), you can determine how well the project is meeting its goals |
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–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 |
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–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 |
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–Formerly called the budgeted cost of work performed (BCWP)
–The initially estimated cost of the physical work actually completed |
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| EV is a dollar value based on... |
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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) |
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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 |
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| Schedule variance equation |
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Definition
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| Cost performance Index formula |
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Definition
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| Schedule Performance Index Formula |
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| Three common approaches for value earned |
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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 |
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| Three options for forecasting: |
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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.
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| Using Earned schedule to refine SPI |
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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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