Project and Change Management

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Project and Change Management

• Cost management

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What is Cost and Project Cost Management?

• Cost is a resource sacrificed or foregone to
  achieve a specific objective or something given
  up in exchange
• Costs are usually measured in monetary units like
  euros
• Project cost management includes the processes
  required to ensure that the project is completed
  within an approved budget

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Cost Management Definition

• Is the controlling of costs as they apply to the
  project. It includes the estimation of costs,
  cash flows, direct and indirect costs and costs
  associated with the project life cycle

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Basic Principles of Cost Management

• Most CEOs and boards know a lot more about
  finance than IT, so IT project managers must
  speak their language
• Profits are revenues minus expenses
• Life cycle costing is estimating the cost of a
  project plus the maintenance costs of the
  products it produces
• 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 Management Overview

• Resource planning
• Resource planning involves determining and
  quantifying the resources needed to perform
  project activities
• Cost estimating
• Assembles and predicts the cost of a project
• Cost Budgeting
• Establishes budgets, standards and a monitoring
  system to measure and manage project costs
• Cost controls
• Gathers analyses, reports and manages project
  costs

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Resource planning

• People
• Equipment
• Materials

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Resource Planning- Identify the knowledge and
skill requirements

• Review the WBS, activities list, and network
  diagram to understand the nature and extent of
  the work
• Identify the types of knowledge and skills
  required
• Estimate the number of people required to perform
  the work
• Decide when different people will be needed and
  create a time-phased human resource plan

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Identify equipment and material requirements

• Identify the types and quantities of equipment
  that will be required
• Estimate non-tangible equipment needs such as
  time required on specialised computers or test
  equipment
• Estimate the types and quantities of materials
  that will be required
• Estimate when equipment will be needed and create
  a time-phase resource plan

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Describe the resource pool

• Consult with the relevant functional managers to
  identify what resources can be made available to
  the project
• Identify the names and dates of available people

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Define resource alternatives and trade-offs

• Creatively identify alternative approaches to
  getting the work done that do not require the use
  of constrained resources
• Identify how available resources should be
  deployed differently to accomplish project
  resources
• Evaluate the possibility of using outside sellers
  or contracting out entire deliverables or
  activities
• When the use of alternative approaches is not
  satisfactory, identify potential trade-offs that
  can be made, including hiring new staff, reducing
  the project scope or delaying the schedule
• Review critical resource concerns with the
  project sponsor to get input and advice

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Types of cost estimating

• Order of magnitude estimate (-25 to 75 )
• Normally used during formative stages for initial
  evaluation of the project
• Budget estimate (-10 to 25 )
• Prepared from flow sheets, layouts and equipment
  details. Used to prepare funding and obtain
  project approval
• Definitive estimate (-5 to 10 )
• Well defined information specs etc. normally used
  fro proposals, bid evaluations, contract changes
  and extra works

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Estimating Methods

• Top down
• Relate to cost of projects which are similar in
  fact and not just in appearance
• Parametric
• Use parameter such as cost per m2, line of code
• Bottom Up
• Break into little tasks
• Standards
• Estimate the job components using standard cost
  and times
• Ratios
• Get minor items cost and time by ratioing them
  to major items on previous projects

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Estimating effort techniques

• Historical approach how long has it taken for
  similar tasks/
• Catalogue of time standards are there industrial
  engineering or other standards available?
• Process mapping data while analysing work
  processes a length of time is usually assigned to
  each process element
• PERT formula an algebraic formula

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Estimating duration efficiency impact

• Learning curve for a new task and/or an
  inexperienced team member
• Meetings can consume 5 to 10 hours a week
• Administrative tasks may take anywhere between 5
  and 30 hours per week
• Team members may be working on other projects
• Training and development time can account for 10
  days per year
• Vacation time 20 days per year
• Public holidays 10 days per year
• Sick time 10 days per year
• Paternal/maternity leave

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Estimating duration efficiency impact

• Unlikely that an efficiency rate greater than 75
  in a 40 hour week i.e. 30 hours would be
  planned for a person
• If a task requires 80 hours of expended effort or
  time and a person will be working on the activity
  for approximately 30 hours per week use the
  following formula to convert expended time to
  duration
• 80/30 2.6 weeks duration

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Things to remember when estimating

• Better estimates require better information
• Never estimate alone
• Approximately right v absolutely wrong
• Use a consistent process
• Overly optimistic ends in trouble
• Must be combined with risk assessment
• Changes are inevitable

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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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Contingency allowance

• Provides for unforseeable elements of cost within
  the defined project scope which we know will
  happen but which we cannot quantify
• Example Rework is certain but we dont know how
  much
• It is used to reduce the impact of missing cost
  and schedule objectives
• It is not normally carried in the cost or
  schedule baseline

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Contingency examples

• False assumptions
• Unavailability of resources when needed
• Lack of competence in key individuals
• Lack of timely info. For project performance
• Disruption due to personal conflict or internal
  politics

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Managerial reserves are for unknown unknowns

• A reserve for situations that are impossible to
  predict
• E.g. Natural disasters, political crises

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Building the budget

• Direct costs e.g. Labour and materials
• Indirect costs overheads travel, accommodation
  etc.
• Contingency safety net or profit. For known
  unknowns

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Building The Budget Direct Costs Labour
Materials
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Building The Budget Indirect Costs
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Building the Budget Total
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Techniques used to rank capital investments

• NPV net present value
• Payback period
• Return on investment

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NPV

• The expected value of future cash flows of the
  investment are discounted at the cost of capital
  to the base year (present time) to obtain the
  present value of these flows
• The initial cost of the investment is subtracted
  from the Present Value (PV) to obtain the net
  present value (NPV)
• If the cost of the investment is spread over more
  than one year, future cost must also be
  discounted at the cost capital of the base year.

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Present Value

• A method of discounting future cash flows based
  on a minimum desired rate of return
• PV FV/(1i)n
• PV Present value
• FV Future value
• i interest rate
• n number of periods
• Projects with a positive NPV exceed the minimum
  rate of return
• Projects with a negative NPV do not

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Present Value once off expenditure

• Example what is the PV of 2000 tw0 years from
  now at 12 per annum
• FV 2000
• N 2
• I 12
• PV 2000/(10.12)2 2000/1.2544 1594.39

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Present value Annual Expenditure

• Example what is the present value of an annual
  expenditure of 3000 over the next three years _at_
  14 per annum
• PV 3000(0.877) 3000(0.769) 3000 (0.675)
  3000(2.321) 6936

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Equipment purchase evaluation NPV calculation

• Example Management is considering an equipment
  purchase which costs 20,000 and is expected to
  save 7500 per annum over three years should we
  proceed with the investment. Use 14 as the rate
• NPV -20000 7500 (0.877 0.796 0.675)
• NPV -20000 17407.5 - 2592.5
• Since NPV is less than zero the purchase should
  be rejected

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Payback Period

• The payback period is the number of years needed
  to recover the initial cost of the investment
  from the future net cash flows resulting from the
  investment
• Shorter payback periods are more attractive. A
  cut-off number of years is often used to select
  or reject projects
• It may lead to the wrong decision as it ignores
  the time value of money
• The payback period is popular because it is easy
  to calculate
• Some organisations use it in conjunction with NPV
  method in this case NPV is used to indicates
  profitability while payback period is used as an
  indicator of risk

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Return on investment (ROI)

• Investment 100,000
• Expected return on investment is 40,000 per
  annum for four years 160,000
• ROI 160,000/100,000
• 160

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Investment returns without reference to time
value of money
Year Project A Project B Project C
0 - 1000 -1000 -1000
1 300 1500 525
2 300 250 525
3 300 250 525
4 300 250 525
5 1500 250 525
Total 1700 1500 1625
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Investment Returns comparison of techniques
Ranking Method Project A Project B Project C
NPV 882.34 1084.06 990.16
Payback 3 yrs 4 mths 8 mths 2 years
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Incorporating Risk

• Often cant just look at the project with the
  shortest payback period need to incorporate risk
• E.g.

Risk Event Project A Project B Project C
Unproven Technology 3 5 4
High Investment 3 5 3
Tight Delivery 3 5 3
Risk score 9 15 10
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Cost Management is managed by the project manager
through

• Gathering accumulating, analyzing, reporting and
  managing the cost on an ongoing-basis
• Monitoring actual vs. budgets
• Integrated cost/ schedule reporting
• Contingency and change management
• Corrective action
• Variance analysis

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Cost control - compliance

• Review the guidelines and procedures for making
  changes to the cost baseline with the project
  team, as defined in the cost management plan and
  overall change management system
• Require that all requests for cost baseline
  changes be formally managed
• Review the rate of project expenditure to ensure
  that no unauthorized changes to the cost baseline
  take place

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Cost control - changes

• Identify the root cause of the change request
• Prepare the benefits of making the change to the
  proposed increase in costs
• Identify the implications of the cost change on
  the other elements of the project plan, including
  scope, time and quality
• Assess the risks involved with making the change
• Assess the direct impact on the customer if any
• Discuss the implications of making the change
  with key project stakeholders, especially the
  project sponsor and upper management

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Cost Control Monitor

• Attempt to contain costs in other areas before
  authorizing increasing the baseline
• Ensure the proposed action is properly authorized
  as defined in the cost management plan and change
  control system
• Require feedback or formal status reporting on
  the change
• Evaluate the actual versus planned costs after
  authorizing the change
• Initiate further action as needed

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Cost control documentation

• Make changes to the cost baseline and spending
  plan
• Use a consistent version control numbering system
  to identify each document update and effective
  date
• Review the updated documents for completeness and
  distribute as needed to affected project
  stakeholders
• Document the causes of cost variance, rationale
  for decisions along with other lessons learned
  from the change to become part of the project
  history file as reference for current and future
  projects

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Why variances occur?

• Estimating errors
• Technical Problems design, software, test
• Manpower problems personnel skill level,
  manpower availability, organisation matrix
• Economic / inflation
• Acts of nature
• Changing business base
• Subcontractors/ vendors

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EV earned value

• EV is the primary project management tool that
  integrates the technical, schedule and cost
  parameters of the contract

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Acronyms and definitions

• ACWP actual cost of work performed (AC)
• BCWP Budgeted cost for work performed (BC)
• BCWS Budgeted cost for work scheduled (PV)
• CV Cost variance
• SV Schedule variance
• ETC Estimate to complete ( how much to finish)
• EAC Estimate at completion (forecast final cost)
• BAC Budget at completion (original or baseline
  budget)
• PMB Performance measurement baseline
• VAC Variance at completion ( baseline budget
  forecast)
• MR Management reserves

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Earned Value Analysis (EVA)

• a.k.a. Earned Value Management (EVM)
• a.k.a. Variance Analysis
• Metric of project tracking
• What you got for what you paid
• Physical progress
• Pre-EVA traditional approach
• 1. Planned time and costs
• 2. Actual time and costs
• Progress compare planned vs. actual
• EVA adds third dimension value
• Planned, actual, earned

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Earned Value Analysis

• Forecasting
• Old models include cost expenditure
• EVA adds schedule estimation
• Measured in dollars or hours
• Often time used in software projects
• Performance Measurement Baseline (PMB)
• Time-phased budget plan against which contract
  performance is measured
• Cost schedule variances go against this
• Best via a bottom-up plan

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Earned Value Analysis

• Different methods are available
• Binary Reporting
• Others include
• Based on complete
• Weights applied to milestones
• EVA can signal errors as early as 15 into
  project
• Alphabet Soup

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Earned Value Analysis

• 3 major components
• BCWS Budgeted Cost of Work Scheduled
• Now called Planned Value (PV)
• Yearned
• How much work should be done?
• BCWP Budgeted Cost of Work Performed
• Now called earned value (EV)
• Earned
• How much work is done?
• BCWS complete
• ACWP Actual Cost of Work Performed
• Now called Actual Cost (AC)
• Burned
• How much did the work done cost?

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Derived EVA Variances

• SV Schedule Variance
• BCWP BCWS
• Planned work vs. work completed
• CV Cost Variance
• BCWP ACWP
• Budgeted costs vs. actual costs
• Negatives are termed unfavorable
• Can be plotted on spending curves
• Cumulative cost (Y axis) vs. Time (X axis)
• Typically in an S shape
• What is the project status?
• You can use variances to answer this

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Earned Value Analysis
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Derived EVA Ratios

• SPI Schedule Performance Index
• BCWP / BCWS
• CPI Cost Performance Index
• BCWP / ACWP
• Problems in project if either of these less than
  1 (or 100)

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Summary of variance formulae

• CPI (cost performance index) BCWP/ACWP (EC/AC)
• CV (cost variance) BCWP -ACWP
• SPI (schedule performance index) BCWP/BCWS
• SV (schedule variance) BCWP- BCWS
• EAC ((BAC BCWP)/CPI) ACWP
• VAC BAC EAC
• Percent complete BCWP/BAC 100

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Earned Value Analysis

• BCWS
• Use loaded labor rates if possible
• Direct pay overhead
• Remember its an aggregate figure
• May hide where the problem lies
• Beware of counterbalancing issues
• Over in one area vs. under in another

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Earned Value Analysis

• Other Derived Values
• BAC Budget At Completion
• Sum of all budgets (BCWS). Your original budget.
• EAC Estimate At Completion
• Forecast total cost at completion
• EAC ((BAC BCWP)/CPI) ACWP
• Unfinished work divided by CPI added to sunk cost
• If CPI lt 1, EAC will be gt BAC
• CR Critical Ratio
• SPI x CPI
• 1 everything on track
• gt .9 and lt 1.2 ok
• Can be charted

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Earned Value Analysis

• Benefits
• Consistent unit of measure for total progress
• Consistent methodology
• Across cost and completed activity
• Apples and apples comparisons
• Ability to forecast cost schedule
• Can provide warnings early
• Success factors
• A full WBS is required (all scope)
• Beware of GIGO Garbage-in, garbage-out

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Earned value exercise

• You have a project to build a four sided wall.
  Each side is scheduled to take one day and is
  budgeted for 2000 per side. The sides are
  planned to be completed one after the other.
  Today is the end of day three Calculate BCWS,
  BCWP etc from the following status chart. Key S
  start, F finish, PS- planned start, PF -
  planned finish

Task Day 1 Day 2 Day 3 Day 4 Status at the end of day 3
Side1 S-----F Complete spent 2000
Side 2 S---PF ---F Complete spent 2400
Side 3 PS-----PF Half done spent 1200
Side 4 PS--PF Not started
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Solution
What is Calculation Answer Interpretation of the answer
BCWS 2000 2000 2000 6000 We should have done 6000 worth of work
BCWP Complete, complete half done or 2000 2000 1000 5000 We budgeted 5000 for the work we completed
ACWP 2000 2400 1200 5600 We actually spent 5600
BAC 2000 2000 2000 2000 8000 Our project budget is 8000
CV 5000 (5600) (-600) We are over budget by 600
CPI 5000/5600 0.893 We are only getting 89 cent out of every euro we put into the project
SV 5000 - 6000 (-1000) We are behind schedule
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Solution
What is Calculation Answer Interpretation of the answer
SPI 5000/6000 0.833 We are only processing at 83 of the rate planned
EAC 8000/0.893 8959 We currently estimate that the total project will cost 8959
ETC 8959 - 5600 3359 We need to spend 3358 to finish the project
VAC 8000 - 8959 (-959) We currently expect to be 959 over budget when the project is complete