Cost Management Week 67 Learning Objectives

1
Cost Management Week 6-7 Learning Objectives

• You should be able to
• Describe cost management processes and their
  inputs, outputs, activities, and tools
• Distinguish between cost estimation and cost
  control
• Apply a function point approach to cost
  estimating a business information system
• List and define cost drivers used in COCOMO II to
  estimate software development effort
• List the requirements of a Cost Control System

2
Cost Estimation Difficulties

• Cost overruns occur because original estimates
  inaccurate
• Bias toward underestimating
• Cost accounting, not IT
• Lack of experience, knowledge in cost management
• Requires significant effort for large complex
  software
• Frequent changes in technology?
• Not a common cause of cost difficulties

3
Cost Management Basics

• Profits revenues - expenses
• focus on impact on profits
• Profit margin profits / revenues
• Life cycle costing
• total cost of ownership
• development, plus maintenance and support
• cost of software defect increases over time

4
Cash Flow Analysis

• Estimated annual costs and benefits
• Internal Rate of Return (IRR)
• discount rate that sets NPV to 0
• Tangible and intangible costs and benefits
• tangible easier to measure and justify
• Direct costs - PM has more control
• Indirect costs - overhead, admin
• Sunk costs - should NOT be considered
• Learning curve theory - like economy of scale
• Reserves contingency, management

5
4 Cost Management Processes

• Resource Planning
• resources, quantities
• Cost Estimation
• software cost estimation
• Budgeting
• cost allocation
• Cost Control
• controlling changes

6
(1) Resource Planning

• determining the resources quantities needed to
  perform project activities
• people, equipment, materials
• Difficulty of tasks
• Experience and skills of available workers
• Inputs WBS, scope, resource pool, org. policy
• Tools
• expert judgment (internal, external), historical
  data
• Outputs resource requirements
• staff acquisition, procurement may be needed

7
(2) Cost Estimation

• Developing estimates of resource costs
• how much will it cost the performing organization
• Differs from pricing
• Identifying alternatives and trade-offs
• ROM (rough order of magnitude)
• Budgetary (more accurate)
• Definitive (most accurate)

8
Cost Estimation Inputs

• WBS
• Resource needs
• Resource rates
• Activity duration estimates
• Data
• previous projects
• commercial databases
• team expertise and experience
• Chart of accounts
• performing organizations financial reporting

9
Cost Estimation Outputs

• Cost estimates
• quantitative estimates of costs of resources
• dollars or staff-hours/days
• may be refined during project execution
• Supporting detail
• scope of work estimated
• basis for estimate and assumptions
• range of possible results
• Cost management plan
• how variances will be managed

10
Cost Estimating Tools

• Analogous
• top-down
• use previous, similar project(s)
• expert judgment
• Bottom-up
• costing individual work items
• takes more time
• Parametric
• uses project characteristics (parameters)
• based on reliable, accurate, quantifiable data
• Cost estimation software tools

11
Software Cost Estimation Metrics

• Lines of Code (LOC)
• Function Points
• Core Measures
• Level of Effort (time)
• Labor cost training, contract, travel, overhead
• Defects pre- and post-implementation
• Duration
• New system vs. enhanced system vs. GUI (graphical
  user interface)

12
Common Software Metrics

• Size of deliverables (programs)
• Effort number of people X number of months
• Duration number of months
• Development cost labor cost of effort
• Productivity size / effort
• Responsiveness size / duration
• Quality defects / size
• Business cost / size

13
Software Estimating Models

• Estimate Size Complexity Influencers
• COCOMO II
• modifies initial effort estimate
• Constructive Cost Model
• cost drivers / effort multipliers / factors
• product, platform, personnel, project
• depends on LOC, more recently added FPs
• Software CoStar, CostXpert, others
• COCOMO Process Maturity
• integrated with CMM

14
Cost Factors (Drivers)General System
Characteristics

• Data communication
• Distributed Data Processing
• Performance
• Heavily Used Configuration
• Transaction Rate
• On-line data entry
• End-user efficiency

• On-line update
• Complex Processing
• Reusability
• Installation ease
• Operational ease
• Multiple sites
• Facilitate change

15
Estimation issues

• How to measure size
• LOC (lines of code), function points, classes?
• Hard to estimate before developing specs
• Lack of experience
• Lack of historical data
• Depends on size, complexity, number of
  programmers, productivity, team, tools, ...
• Brooks Law
• adding more programmers to a late project makes
  it later

16
(3) Budgeting Process

• Allocating overall cost to individual work items
• Inputs cost estimates, WBS, schedule
• Outputs Cost baseline
• Software measurement baselines
• collect, analyze, calibrate data
• used to monitor progress
• systems/application and delivery baselines
• may be segmented by
• technology, platform, application, industry

17
Software ProjectEffort / Budget allocation

• Workflows
• Management 10
• Environment 10
• Requirements 10
• Design 15
• Implementation 25
• Assessment 25
• Deployment 5

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Software Development Phases Effort and Schedule
Distribution
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(4) Cost Control Process

• Monitoring, analyzing, acting on cost data
• Influence factors that change cost baseline
• Ensure changes are beneficial and recorded
  accurately
• Detect baseline changes and variance from plan
• Manage changes
• Inform stakeholders of authorized changes

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Cost Control Inputs

• Cost baseline
• Performance reports
• Change requests
• Cost management plan

21
Cost Control Outputs

• Revised cost estimates
• Budget updates
• changes to approved baseline
• revised in response to scope changes
• Corrective actions
• Estimate at Completion (EAC)
• forecast of total project costs
• actuals plus variations on remaining budget
• Lessons Learned
• causes of variances, why corrective actions, etc.

22
Cost Control Tools

• Cost change control system
• definition of procedures, approvals for change
• Performance measurement
• identify variances, magnitude, causes
• Earned Value Analysis (EVA)
• Software
• tracks planned vs. actual costs
• projects or forecasts effects of changes

23
Earned Value Analysis (EVA)

• Integrates scope, time, and cost data
• Compares actuals to baseline
• Baseline original plan plus approved changes
• Actuals how much of a WBS item has been
  completed
• BCWP - budgeted cost of work performed
• ACWP - actual cost of work performed
• BCWS - budgeted cost of work scheduled

24
Performance Measures

• CV (cost variance)
• BCWP - ACWP (budgeted cost - actual cost)
• SV (schedule variance)
• BCWP - BCWS
• (cost of work performed -cost of work scheduled)
• CPI (cost performance index)
• BCWP / ACWP
• SPI (schedule performance index)
• BCWP / BCWS
• used to re-estimate time to completion

25
Applying EVA to IT projects

• Estimates keep changing (budgeted)
• Simplified evaluation of percent complete for
  tasks can still provide useful tracking
  information

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Project Cost Management Continued
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Importance of Project Cost Management

• IT projects have a poor track record for meeting
  cost goals
• Average cost overrun was 189 of the original
  estimates
• 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 state of California had a
series of expensive IT project failures in the
late 1990s, costing taxpayers nearly 1 billion.
Some of the poorly managed projects included the
Department of Motor Vehicles vehicle registration
and driver's license databases, a statewide child
support database, the State Automated Welfare
System, and a Department of Corrections system
for tracking inmates. Senator John Vasconcellos
thought it was ironic that the state which leads
in creation of computers is the state most behind
in using computer technology to improve state
services. Also consider the Internal Revenue
Service's expensive reengineering and IT project
failures. The Internal Revenue Service (IRS)
managed a series of project failures that cost
taxpayers over 50 billion a yearroughly as much
money as the annual net profit of the entire
computer industry.
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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

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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

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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

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Cost of Software Defects
It is important to spend money up-front on IT
projects to avoid spending a lot more later.
33
What Went Right?
Ford Motor Company had great success with its
Taurus/Sable project. Ford excels in team
product development and seeks to remove barriers
among design, engineering, production, marketing,
sales, and purchasing. However, the Taurus team
went far beyond that by creating a car that
excelled in design and quality at half the
typical development cost. They brought together
all the relevant disciplines as a team and took
the various steps in designing, producing,
marketing, and selling the cars simultaneously as
well as sequentially. Ford even included people
outside the company for advicecar dealerships,
insurance companies, and suppliers. One supplier
even offered the services of its own drafting
department to prepare initial designs for Ford's
approval. Bringing together all the key players
provided extremely valuable ideas at the
conceptual stage, when changes can be made
without much extra cost. "Not only were there
substantial savings in cost and design time, but
major production contracts were being negotiated
and set up some three years ahead of production,
with the duration of the contract some five
years. This also led to cost economies."
34
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 projects scope
  statement that will 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?

35
Lessons Learned for Project Resources

• Build up trust among the project members
• Establish management ownership
• Appoint a strong and effective management team
• Empower project management sufficiently
• Appoint a well-qualified and versatile project
  management team
• Recruit capable project members
• Define tasks and responsibilities clearly

36
Learned for Project Resources (Cont.)

• Engage full-time project members
• Ensure that the capabilities and skills of the
  project member match the project job requirements
• Include line experience in the project team
• Learn from qualified external consultants
• Establish a relationship of trust with a
  consulting company
• Avoid budget shortfalls
• Keep the throughput time as short as possible

37
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

38
Types of Cost Estimates
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Cost Estimation Tools and Techniques

• 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
• Computerized tools use spreadsheets, project
  management software, or other software to help
  estimate costs

40
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 suggests that only parametric models do not
  suffer from the limits of human decision-making

41
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

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Biz Systems Replacement Project
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Biz Systems Replacement Project (Cont.)
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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

45
Biz Systems Replacement Project (Cont.)
46
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 analysis is an important tool for
  cost control

47
Earned Value Analysis (EVA)

• EVA 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 EVA

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Cost Control Input Form
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Earned Value Analysis Terms

• 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 of work performed (ACWP), also called
  actual cost, are the total direct and indirect
  costs incurred in accomplishing work on an
  activity during a given period
• Budgeted cost of work performed (BCWP), also
  called earned value, is the percentage of work
  actually completed multiplied by the planned cost
  (or BCWS)

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Earned Value Calculations
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Earned Value Formulas
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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

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Earned Value Calculations
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Earned Value Chart
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Consulting

• Very essential and important to have a great deal
  of know-how for the complex IT projects
• Strongly depending on the capabilities of the
  consultants for the success of a IT project
• A major impact on the throughput time and the
  quality of a project via good consultants

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Internal vs. External Consulting

• Advantages of internal consulting
• Time saving
• Cost savings
• Know-how
• Customizing
• Communication
• Same philosophy
• Disadvantages of internal consulting
• Ownership
• Know-how
• Human resource capacity

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Tasks and Responsibilities of A Consultant

• Meeting deadlines
• Consulting, supporting, and training project
  group
• Creating, monitoring, and verifying
  implementation schedule
• Solving problems with specialists
• Configuring and customizing the system
• Providing quality assurance of the features
  implemented
• Documenting all activities