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The Importance of Project CostManagement

IT projects have a poor track record for meetingcost goals

Average cost overrun from 1995 CHAOS studywas 189% of the original estimates; improved to45% in the 2001 study

In 1995, cancelled IT projects cost the U.S. over$81 billion

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What Went Wrong?According to the San Francisco Chronicle front-page story,

"Computer Bumbling Costs the State $1 Billion," the stateof California had a series of expensive IT project failures inthe late 1990s, costing taxpayers nearly $1 billionironicthat the state which leads in creation of computers is thestate most behind in using computer technology to improvestate services.The Internal Revenue Service (IRS) managed a series of

project failures that cost taxpayers over $50 billion ayear roughly as much money as the annual net profit ofthe entire computer industry.

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What is Cost and Project CostManagement?

Cost is a resource sacrificed or fore-gone toachieve a specific objective or something givenup in exchange

Costs are usually measured in monetary unitslike dollars

Project cost management includes the processesrequired to ensure that the project is completedwithin an approved budget

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Project Cost Management Processes

Resource planning: determining what resourcesand quantities of them should be used

Cost estimating: developing an estimate of thecosts and resources needed to complete a project

Cost budgeting: allocating the overall costestimate to individual work items to establish a baseline for measuring performance

Cost control: controlling changes to the project budget

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Quick Quiz on Cost Concepts

Suppose you sell 10 widgets per day on average,and the average cost per widget is $10. If yousold 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 cyclecosts be?

Give examples of tangible vs. intangible benefits of a new project

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Basic Principles of CostManagement

Most CEOs and boards know a lot more about financethan IT, IT project managers must speak their language Profits are revenues minus expenses

Life cycle costing is estimating the cost of a project over itsentire life Cash flow analysis is determining the estimated annual costs

and benefits for a project

Benefits and costs can be tangible or intangible, direct orindirect Sunk cost should not be a criteria in project selection

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Table 6-1. Cost of SoftwareDefects

When Defect is Detected Typical Cost of CorrectionUser Requirements $100-$1,000Coding/Unit Testing $1,000 or moreSystem Testing $7,000 - $8,000Acceptance Testing $1,000 - $100,000After Implementation Up to millions of dollars

It is important to spend money up-front on IT projectsto avoid spending a lot more later.

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Resource Planning

The nature of the project and the organization willaffect resource planning

Some questions to consider: How difficult will it be to do specific tasks on the project?

Is there anything unique in this projects scope statement thatwill affect resources?

What is the organizations 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?

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Cost Estimating

An important output of project cost managementis a cost estimate

There are several types of cost estimates andtools and techniques to help create them

It is also important to develop a costmanagement plan that describes how costvariances will be managed on the project

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Table 6-2. Types of CostEstimates

Type of Estimate When Done Why Done How Accurate

Rough Order of Magnitude (ROM)

Very early in the project life cycle,often 35 years before projectcompletion

Provides rough ballpark of cost for selection decisions

25%, +75%

Budgetary Early, 12 years out Puts dollars in the budget plans

10%, +25%

Definitive Later in the project,