Project Cost Management Quiz

Project Cost Management

• Project cost management is crucial for avoiding wasted money and over-budget or out-of-budget projects.
• IT projects often experience cost overruns.
• A 2011 Harvard Business Review study reported an average cost overrun of 27%.
• Project Cost Management is the process of estimating, budgeting, and controlling costs throughout the project life cycle.
• The goal is to maintain costs within the approved budget.
• It can be broken down into Resource planning, Cost estimation, Cost budgeting, and Cost control.

Generic Project Life Cycle

• Initiate: Project scope/phases are defined and approved.
• Plan: Project objectives are defined, refined, and planning takes place.
• Execute: Project work is carried out.
• Monitor & Control: Progress is monitored and measures taken to make necessary corrections.
• Close: Formal acceptance of the product, service, or result.

Cost

• Cost is a resource sacrificed to achieve a specific objective or given up in exchange.
• Types of Costs:
  • Direct costs: Associated with product creation including raw materials, labor, and distribution.
  • Indirect costs: Expenses not directly related to production like lighting, heating, office space, and communal resources.
  • Fixed costs: Expenses that don't change with production output, like rent.
  • Variable costs: Expenses that change based on production, like labor costs or sales commissions.
  • Sunk costs: Costs already incurred and not recoverable.

What Is Project Cost Management?

• It's a process for estimating, budgeting, and controlling costs throughout a project's life cycle.
• The objective is to maintain costs within the approved budget.
• Broken down into four areas:
  • Resource planning
  • Cost estimation
  • Cost budgeting
  • Cost control

Project Cost Management Processes

• Process Group: Planning, Monitoring, and Controlling
• Cost Management Process
  • CP1: Planning Cost Management
  • CP2: Estimating Costs
  • CP3: Determining the Budget
  • MC1: Controlling Costs
• Major Output: Cost Management Plan, Activity Cost Estimates, Cost Performance Baseline, Work Performance Measurements, and Budget Forecasts.

CP1: Planning Cost Management

• Project teams use expert judgment, analytical techniques, and meetings to develop the cost management plan.

• A cost management plan includes:

  • Level of accuracy and units of measure
  • Organizational procedure links
  • Control thresholds
  • Rules of performance measurement
  • Reporting formats
  • Process descriptions

CP2: Estimating Costs

• Project managers must take cost estimates seriously to achieve budget constraints.

• It’s important to know types of cost estimates, how cost estimates are prepared, and typical problems associated with IT cost estimates.

• Input: HR Plan, Project Schedule, Scope Baseline, Risk Register

• Tools/Techniques: Estimating Techniques, Cost of Quality, Reserve Analysis, PM Estimate Software, Expert Judgment

• Output: Activity cost estimates, Estimate bases, Updated documents.

Cost Estimation Techniques

• Expert Judgment: based on the known costs of past comparable projects. Useful when little information about the current project is available.
• Analogous Estimating: based on historical data and statistical modeling to assign dollar value to project costs. More accurate than analogous estimating but needs more historical data.
• Parametric Estimating: Based on historical data and statistical modeling to assign dollar value to project costs. More accurate but requires more initial data.
• Bottom-up Estimating: Break down projects into several components and estimate the cost of each component, then sum them up.
• Three Point Estimating (PERT): a technique involving determining optimistic estimates, pessimistic estimates, and most likely estimates from which an expected project estimate is calculated.
• Reserve Analysis: includes analyzing risks as a planned buffer for costs.
• Cost of Quality (Cost of Poor Quality): assesses the costs associated with producing poor quality work.
• Vendor Bid Analysis: analyzing bids provided by vendors to get the best price.

Typical Problems with IT Project Cost Estimates

• Estimates are often done too quickly.
• People lack estimating experience.
• Human beings tend to underestimate costs.
• Management desires accuracy.

CP3: Determining the Budget

• Cost budgeting involves allocating project cost estimates to individual work items over time.
• The work breakdown structure (WBS) is needed to define and allocate costs.
• Reserve Analysis: Includes addressing risks with contingency reserves (planned money/time for particular risks) and management reserves (for unforeseeable issues).

Example Project Cost Baseline

• (Data provided in a tabular format) This table shows example project costs.

Some Important Concepts

• Revenue: Total amount of money generated from selling goods/services.
• Cash Flow: Movement of money into and out of a project over time.
• Total Cost of Ownership (TCO): All costs associated with a project over its entire life cycle. Includes initial expenses, ongoing costs like maintenance.
• Profit: Difference between revenue and total expenses.
  • Gross Profit: Revenue minus direct costs.
  • Net Profit: Revenue minus all costs (direct and indirect).
• Profit Margin: Percentage of revenue remaining after all expenses.
• Return on Investment (ROI): Comparison of project gains and investment costs.
• Bootstrap Financing: Starting or operating a company using personal finances or operating revenue.
• Crowdfunding: Raising funds from a large number of people online.
• Venture Capital: Investment in start-ups in exchange for equity.
• Solvency: Ability of a company to meet its long-term debts and obligations.
• Break-Even Point: The point at which total revenue equals total costs.