Project Cost Management

Project Cost Management

• Project cost management involves processes to ensure a project is completed within an approved budget.
• Project managers must ensure projects are well-defined, have accurate time and cost estimates, and a realistic budget they were involved in approving.

Importance of Project Cost Management

• IT/SW projects have a poor track record for meeting budget goals.
• The CHAOS studies found the average cost overrun ranged from 180% in 1994 to 43% in 2002.
• Other studies found overruns to be 33-34%.

Reasons for Cost Overruns

• Not emphasizing the importance of realistic project cost estimates from the outset.
• Many original cost estimates for IT/SW/IS projects are low to begin with and based on unclear project requirements.
• Many IT professionals think preparing cost estimates is a job for accountants, when in fact it's a demanding and important skill for project managers.

Basic Principles of Cost Management

• 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.

Typical Problems with Cost Estimates

• Developing an estimate for a large software project is a complex task requiring a significant amount of effort.
• Many people doing estimates have little experience doing them.
• People have a bias toward underestimation.
• Management wants a number for a bid, not a real estimate.

Cost Budgeting

• Cost budget involves allocating project cost estimates to individual work items and providing a cost baseline for performance measures.

Cost Control

• Cost control means controlling changes to the project budget.
• The process includes monitoring status, updating project costs, and managing changes to the project cost baseline.

Earned Value Management (EVM)

• EVM is a project performance measurement technique that integrates scope, time, and cost data.
• It helps determine how well the project is meeting its goals based on a baseline.

Types of Cost Estimates

• Rough Order of Magnitude (ROM) estimates are done very early in the project life cycle, providing a rough ballpark of cost for selection decisions.
• Budgetary estimates are done early, providing details for budget plans.
• Definitive estimates are done later in the project, providing details for purchases and estimating actual costs.

Cost Estimation Tools and Techniques

• Three basic tools and techniques for cost estimates are:
  • Analogous or top-down: using the actual cost of a previous, similar project as the basis for the new estimate.
  • Bottom-up: estimating individual work items and summing them to get a total estimate.
  • Parametric: using project characteristics in a mathematical model.

Constructive Cost Model (COCOMO)

• COCOMO is a model developed by Barry Boehm for estimating software development costs.
• Parameters include source lines of code or function.
• 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.