Project Management: Cost Overrun Analysis

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Questions and Answers

What is the primary purpose of estimating costs in a project?

To allocate the overall cost estimate to individual work items

To develop an approximation or estimate of the costs of the resources needed to complete a project (correct)

To establish a baseline for measuring performance

To control changes to the project budget

Why is it important for IT project managers to be familiar with financial terms?

Because IT terms are more important than financial terms

Because financial terms are easier to understand than IT terms

Because most members of an executive board are familiar with IT terms

Because most members of an executive board better understand and are more interested in financial terms than IT terms (correct)

What is the definition of profit margin?

The ratio of profits to expenditures

The ratio of expenditures to profits

The ratio of revenues to expenditures

The ratio of revenues to profits (correct)

What does life cycle costing consider?

The total cost of ownership, or development plus support costs, for a project Signup and view all the answers

What does cash flow analysis determine?

The estimated annual costs and benefits for a project and the resulting annual cash flow Signup and view all the answers

What is the source of the information 'Trends in IT Value'?

The Standish Group International Signup and view all the answers

What type of costs can be directly related to producing the products and services of the project?

Direct costs Signup and view all the answers

What is the term for costs that are difficult to measure in monetary terms?

Intangible costs Signup and view all the answers

What is the purpose of contingency reserves in cost estimation?

To mitigate cost risk by allowing for future situations that are difficult to predict Signup and view all the answers

What is the term for the money that has been spent in the past, which should not be included when deciding what projects to invest in or continue?

Sunk cost Signup and view all the answers

What is the theory that states that when many items are produced repetitively, the unit cost of those items decreases in a regular pattern as more units are produced?

Learning curve theory Signup and view all the answers

What is included in a cost management plan?

Level of accuracy and units of measure, organizational procedure links, control thresholds, rules of performance measurement, reporting formats, and process descriptions Signup and view all the answers

Why is it important for project managers to take cost estimates seriously?

So they can complete projects under budget constraints Signup and view all the answers

What is the importance of knowing the types of cost estimates and how to prepare cost estimates?

So project managers can complete projects within budget constraints Signup and view all the answers

What is the average cost overrun reported by the 2011 Harvard Business Review study?

27 percent Signup and view all the answers

What is the primary objective of project cost management?

To ensure project completion within an approved budget Signup and view all the answers

What is cost, according to the definition?

A resource sacrificed or foregone to achieve a specific objective Signup and view all the answers

What is the purpose of planning cost management in a project?

To determine the policies, procedures, and documentation for planning, executing, and controlling project cost Signup and view all the answers

What is the term for gigantic overages or extreme cost overruns in projects?

Black swans Signup and view all the answers

In which year did the CHAOS study report a cost overrun of 180 percent?

1994 Signup and view all the answers

What is the rate of performance if by the end of week 1, the planned schedule reflects that the task should be 100 percent complete and only 50 percent of that work has been completed?

50% Signup and view all the answers

What do negative numbers for cost and schedule variance indicate?

Problems in those areas Signup and view all the answers

What can be calculated using the CPI?

Estimate at completion (EAC) Signup and view all the answers

What is the purpose of project portfolio management?

To collect and control an entire suite of projects or investments Signup and view all the answers

What is the level of project portfolio management that involves dividing projects into two or three budgets based on type of investment?

3 Signup and view all the answers

What is the original total budget for the project?

Budget at completion (BAC) Signup and view all the answers

What is the primary goal of cost budgeting in a project?

To allocate the project cost estimate to individual work items over time Signup and view all the answers

What is the main difference between analogous and bottom-up estimates?

Analogous estimates are based on previous projects, while bottom-up estimates are based on individual work items Signup and view all the answers

Why do people tend to underestimate costs in project management?

Because they are biased towards underestimation Signup and view all the answers

What is the purpose of creating a cost model in project management?

To make it easy to make changes to and document the estimate Signup and view all the answers

What is the main goal of project cost control?

To monitor cost performance and ensure that only appropriate project changes are included in a revised cost baseline Signup and view all the answers

What is EVM in project management?

A project performance measurement technique that integrates scope, time, and cost data Signup and view all the answers

What is the planned value (PV) in EVM?

The portion of the approved total cost estimate planned to be spent on an activity during a given period Signup and view all the answers

What is the rate of performance (RP) in EVM?

The ratio of actual work completed to the percentage of work planned to have been completed at any given time Signup and view all the answers

Why is it important to know what the estimate will be used for before creating it?

Because it helps to gather as much information as possible and clarify the ground rules and assumptions for the estimate Signup and view all the answers

What is the main benefit of using a WBS in project cost budgeting?

It helps to define the work items and produce a cost baseline Signup and view all the answers

Study Notes

IT Projects and Cost Management

IT projects have a poor track record of meeting budget goals, with average cost overruns ranging from 180% in 1994 to 43% in 2010
A 2011 Harvard Business Review study reported an average cost overrun of 27%, with some projects experiencing gigantic overages, also known as "black swans"

Definition of Cost

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, such as dollars

Project Cost Management

Project cost management includes the processes required to ensure that a project is completed within an approved budget
The three main processes involved in project cost management are:
- Planning cost management: determining policies, procedures, and documentation for planning, executing, and controlling project costs
- Estimating costs: developing an approximation of the costs of resources needed to complete a project
- Determining the budget: allocating the overall cost estimate to individual work items to establish a baseline for measuring performance
- Controlling costs: controlling changes to the project budget

Financial Terms and Analysis

IT project managers must speak the language of finance to communicate effectively with executives, using terms such as:
- Profits: revenues minus expenditures
- Profit margin: the ratio of revenues to profits
- Life cycle costing: total cost of ownership, including development and support costs
- Cash flow analysis: determining estimated annual costs and benefits for a project and the resulting annual cash flow

Cost Classifications

Costs can be classified as:
- Tangible costs or benefits: easily measurable in dollars
- Intangible costs or benefits: difficult to measure in monetary terms
- Direct costs: directly related to producing products and services
- Indirect costs: not directly related to producing products and services
Sunk cost: money spent in the past, not to be included in decision-making for future projects

Cost Estimating and Budgeting

Cost estimating is a critical aspect of project management, and various techniques are used to develop cost estimates
Cost estimates can be classified into:
- Analogous estimates: using the actual cost of a previous, similar project as the basis for estimating the cost of the current project
- Bottom-up estimates: estimating individual work items or activities and summing them to get a project total
- Parametric modeling: using project characteristics in a mathematical model to estimate project costs
Cost budgeting involves allocating the project cost estimate to individual work items over time, and is used to produce a cost baseline

Cost Control and EVM

Cost control involves monitoring cost performance, ensuring only appropriate project changes are included in a revised cost baseline, and informing stakeholders of authorized changes
Earned Value Management (EVM) is a project performance measurement technique that integrates scope, time, and cost data to monitor and control project costs
EVM uses metrics such as:
- Planned Value (PV): the approved total cost estimate planned to be spent on an activity during a given period
- Actual Cost (AC): the total of direct and indirect costs incurred in accomplishing work on an activity during a given period
- Earned Value (EV): an estimate of the value of the physical work actually completed
- Cost Performance Index (CPI): the ratio of earned value to actual cost
- Schedule Performance Index (SPI): the ratio of earned value to planned value

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Description

This quiz assesses your understanding of cost overrun in IT projects, including the average cost overrun percentage and the concept of 'black swans' from the CHAOS studies and Harvard Business Review.