Lecture-4: Project Cost Management PDF

Lecture-4: Project Cost Management Course GNR2103: Project Management Assoc. Prof. Mohammed Gadelrab School of Artificial Intelligence & Data Management Badr University in Assiut (BUA) Outline  The importance of project cost management  What is Cost...

Lecture-4: Project Cost Management Course GNR2103: Project Management Assoc. Prof. Mohammed Gadelrab School of Artificial Intelligence & Data Management Badr University in Assiut (BUA) Outline  The importance of project cost management  What is Cost and Project Cost Management?  Project Cost Management Process  Cost Estimation Techniques  Typical Problems with Cost Estimates of IT Projects  Some Important Concepts Fall 2024 BUA-AI & DM School 2  Generic Project LifeCycle  Initiate  Project scope /Project phases are defined and approved. Monitor & Control  Plan  Project objectives are defined, refined, and the planning takes place.  Execute  Project work is carried out.  Monitor & Control  Monitors/measures progress and identifies ways to make corrections.  Close  Formal acceptance of a product, service or result. Fall 2024 BUA-AI & DM School 3  The Importance of Project Cost Management? To avoid wasting money. Project Success To avoid over-budget or out-of- Delivers on the requirements & scope budget. Execution quality is of a high standard IT projects are known for not Completed within schedule Completed within budget. meeting budget goals cost overrun. A 2011 Harvard Business Review study reported an average cost overrun of 27 percent. Fall 2024 BUA-AI & DM School 4  What is Cost? Cost is a resource sacrificed to achieve a specific objective or something given up in exchange. 5 Type of costs: – Direct costs: associated with the production of a product or service. Includes items such as the raw materials needed to create a product, the cost of labor, and any distribution or delivery costs. – Indirect costs: are expenses that the company still has to pay that aren't directly related to production such as heating, lighting, office space rental, stocking the communal coffee machine and so on. – Fixed costs: Costs of a business that don't vary over time and don't change depending on output. They're generally one of the easiest costs to work out. Example: Rent of a building. – Variable cost: Type of business expense that varies with production. If production/Scope increases, the variable costs increase and if the production /Scope decreases, the variable costs also decrease. Example: labor costs or sales commissions. – Sunk cost: Costs that have already been incurred. Fall 2024 BUA-AI & DM School 5  What is Project Cost Management? Project cost management – Process of estimating, budgeting and controlling costs throughout the project life cycle, with the objective of keeping costs within the approved budget. – includes the processes required to ensure that the project is completed within an approved budget. – It can be broken down into four areas: Resource planning Cost estimation Cost budget: Allocate the money to work packages and aggregate the total cost of the work packages. Cost control: Influencing the factors that create cost variances and controlling changes to the project budget. Fall 2024 BUA-AI & DM School 6  Project Cost Management Processes Scope Schedule Baseline Baseline Estimate Project bases Funding Determine Req. Estimate Costs Control Costs Budget Activity Cost Cost Baseline Estimates Process Group Cost Management Process Major Output CP1: Planning Cost Mgmt Cost Management Plan Planning CP2: Estimating Costs Activity Cost Estimates CP3: Determining the Budget Cost Performance Baseline Monitoring and Work Perf. Measurements MC1: Controlling Costs Controlling Budget Forecasts Fall 2024 BUA-AI & DM School 7  CP1: Planning Cost Management The project team uses 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 BUA-AI & DM School 8  CP2: Estimating Costs Project managers must take cost estimates seriously if they want to complete projects within budget constraints. It’s important to know the types of cost estimates, how to prepare cost estimates, and typical problems associated with IT cost estimates. Input Tools/Techniques Output 1) HR Plan 1) EstimatingTechniques 1) Activity cost 2) Project Schedule 2) Cost of Quality estimates 3) Scope Baseline 3) Reserve Analysis 2) Estimate Bases 4) Risk Register 4) PM Estimate Software 3) Update docs 5) Expert Judgment BUA-AI & DM School 9  Cost Estimation Techniques Basic methods and techniques: – Expert Judgment – Analogous Estimating – Parametric Estimating – Bottom-up Estimating – Three Point Estimating – Reserve Analysis – Cost of Quality – Vendor Bid Analysis Fall 2024 BUA-AI & DM School 10  Cost Estimation Techniques Methods/Techniques: – Expert Judgment – Analogous Estimating: based upon the known costs associated with a similar project that was completed in the past. Suitable when little information is available about the current project. – Parametric Estimating: Based on historical data and statistical modeling are used to assign a dollar value to certain project costs. It is more accurate than analogous estimating but requires more initial data to accurately assess costs – Bottom-up Estimating: The project is broken down into a number of smaller components (like WBS). Then, cost is estimated specifically for each of these smaller work packages. This technique allows for a very accurate estimation. – Three Point Estimating: PERT – Reserve Analysis – Cost of Quality – Vendor Bid Analysis Fall 2024 BUA-AI & DM School 11  Examples of Cost Estimation PERT: Example: The pessimistic cost estimate for an activity is $11,000, the optimistic estimate is $3,000 and the most likely estimate is $4,000. What should you use for the expected estimate? Parametric: – It will take 20 hours of a programmer’s time to write this program. The average rate to hire a programmer is $50 per hour. Therefore, the cost of writing this program, assuming that everything else needed to write the program, such as a computer, is in place, is 20 x $50 = $1,000. BUA-AI & DM School 12  Using Cost Estimation Techniques Top-Down Technique – Externally: used by organizations completing IT projects for other companies – Internally: can be used for similar projects – Problem: You are dealing with IT Less Accurate Estimates Bottom-up Technique – Based on the WBS – Creates a detailed estimate of each work component – More Accurate Can separate across phases Would be better for controlling costs BUA-AI & DM School 13  Typical Problems with Cost Estimates of IT Projects Estimates are done too quickly People lack estimating experience Human beings are biased toward underestimation Management desires accuracy BUA-AI & DM School 14  CP3: Determining the Budget Cost budgeting involves allocating the project cost estimate to individual work items over time. The WBS is a required input to the cost budgeting process since it defines the work items. Reserve analysis must occur – Contingency reserves: A planned amount of money or time which is added to an estimate to address a specific risk. – Management reserve: A planned amount of money or time which is added to an estimate to address unforeseeable situations. Project budget is time-phased project cost (aggregating individual activity costs). Contingency Reserves – Deal with uncertainties in schedule/cost. – Deal with overruns of the project objectives. Analogous estimating takes less time but is also less accurate. BUA-AI & DM School 15 Example Project Cost Baseline BUA-AI & DM School 16  Some Important Concepts-1 Revenue/Income (‫)اإليرادات‬.‫إجماىل الدخل الناتج من بيع السلع أو الخدمات قبل خصم أى تكاليف‬ – Definition: Revenue, often referred to as "sales" or "income," is the total amount of money generated by a project from selling goods or services before deducting any expenses. In a project setting, revenue represents the financial inflow expected from the deliverables, whether from customer payments, licensing, or other sources. – Formula: Revenue = Quantity Sold × Price per Unit Cash Flow (‫)التدفق النقدى‬ – ‫ تدفق إيجابى يعنى المزيد من النقد الداخل مقارنة بالنقد الخارج‬.‫مقدارالنقد المتاح داخل و خارج الشركة فى فترة زمنية معينة‬ – Definition: Cash flow refers to the movement of money into and out of a project over time. Positive cash flow means more money is coming in than going out, while negative cash flow indicates more spending than income. Total Cost of Ownership (TCO) (‫)تكلفة االمتالك‬ ‫ بل يشمل أيًض ا التكاليف المستمرة مثل الصيانة واإلصالحات والتأمين‬،‫ وال يشمل سعر الشراء األولي فحسب‬.‫إجمالي النفقات المرتبطة بامتالك األصل والحفاظ عليه طوال عمره‬.‫ يعد فهم تكلفة الملكية أمًرا بالغ األهمية ألنه يسمح لألفراد والشركات باتخاذ قرارات مستنيرة بشأن استثماراتهم ويساعد في تقدير القيمة الحقيقية لألصل‬.‫واالستهالك‬ – Definition: TCO includes all costs related to a project over its entire lifecycle, including initial expenses, operating costs, maintenance, and end-of-life costs. BUA-AI & DM School 17  Some Important Concepts-2 Profit (‫)األرباح‬ – The amount of money that a company has after all its expenses are paid. There are two main types of profit: Gross Profit: Calculated by subtracting direct costs from total revenue. Net Profit (‫)صافى األرباح‬: Calculated by subtracting all costs (both direct and indirect) from total revenue. ‫الربح المتبقى بعد خصم جميع التكاليف و النفقات من اإليرادات‬ – Formulas: Gross Profit = Total Revenue - direct costs Net Profit = Total Revenue - direct costs – indirect costs Profit Margin (‫)هامش األرباح‬ ‫نسبة األرباح إىل اإليرادات‬ – Definition: Profit margin represents the percentage of revenue that remains after all project expenses have been paid. It indicates how much of each dollar earned is kept as profit. – Formula: Profit Margin = (Profit / Revenue) x 100% BUA-AI & DM School 18  Some Important Concepts-3 Return on Investment (ROI) ‫العائد عىل االستثمار‬ ‫مقياس لتحديد نسبة الربح أو الخسارة اىل حققها المشروع مقارنة باالستثمار‬ –.‫األصىل‬ – Definition: ROI measures the profitability of a project by comparing the expected gains from the project to the costs invested in it. – A positive ROI indicates that the project generates more revenue than it costs, making it a worthwhile investment. – Formula: ROI = (Net Profit / initial Investment) × 100 – Example: if a project has a net profit of $40,000 and an initial investment of $15,000, the ROI would be approximately 267% BUA-AI & DM School 19  Some Important Concepts-4 Bootstrap Financing (‫)التمويل الذاتى‬.‫تمويل األعمال باستخدام األموال الشخصية او األرباح المتراكمة بدال من االعتماد عىل مصادر تمويل خارجية‬ – – Definition: The process of founding and running a company using only personal finances or operating revenue. Crowdfunding (‫)التمويل الجماعى‬.‫جمع األموال من مجموعة كبيرة من الناس عبر اإلنترنت لتمويل مشروع أو شركة ناشئة‬ – – The practice of funding a project or venture by raising money from a large number of people who each contribute a relatively small amount, typically via the Internet. Venture Capital (‫)االستثمار المغامر‬.‫تمويل من مستثمرين متخصصين فى دعم الشركات الناشئة ذات النمو السريع مقابل الحصول عىل حصة من الملكية‬ Definition: A type of funding that provides funds to start-ups or, emerging companies in exchange for equity. BUA-AI & DM School 20  Some Important Concepts-5 Solvency (‫)المالءة المالية‬.‫قدرة الشركة عىل الوفاء بالتزاماتها المالية عىل المدى الطويل‬ – – The the ability of a company to meet its long-term debts and other financial obligations. Break-Even Point (‫)نقطة التعادل‬.‫النقطة التى تكون عندها اإليرادات كافية لتغطية جميع التكاليف‬ – – The point at which total cost and total revenue are equal, Assets & Liabilities (‫)األصول و الخصوم‬ – ‫ أما الخصومات فهى التزامات الشركة التى يجب سدادها لآلخرين‬.‫األصول هى ممتلكات الشركة التى تمتلك قيمة مالية‬ – Assets are the items your company owns that can provide future economic benefit. Liabilities are what you owe other parties. BUA-AI & DM School 21 ??? BUA-AI & DM School 22