Unit 7_Project Cost Managment.pdf

Project Cost Management WEEK 11 Dr. Bader Alshoumr Ass. Professor • Discuss the importance of cost management in achieving project success • Explain the cost management principles, concepts and terms Learning Objectives • Describe the process of planning cost management • Discuss different typ...

Project Cost Management WEEK 11 Dr. Bader Alshoumr Ass. Professor • Discuss the importance of cost management in achieving project success • Explain the cost management principles, concepts and terms Learning Objectives • Describe the process of planning cost management • Discuss different types of cost estimates • Describe the processes of determining a budget and preparing a cost • Justify the use of earned value management and project portfolio management to assist in cost control The importance of Project Cost Management • IT projects have a poor track record in meeting budget goals • Cost usually is defined as a resource sacrificed or foregone to achieve a specific objective • Cost overrun is the additional percentage or dollar amount by which actual costs exceed estimates • Many IT professionals think that many of the original cost estimates for IT projects are low or based on unclear project requirements and think that preparing cost estimates is a job for accountants • In addition, many IT project involve new technology or business processes cause cost overruns for the project • Thus, preparing good cost estimates is a demanding, important skill that project managers need to acquire 11/11/2023 Dr. Bader Alshoumr - Health Informatics - UoH 3 Project Cost Management • Project cost management includes the processes required to ensure that a project team completes a project within an approved budget • There are 4 processes for project cost management 1. 2. 3. 4. Planning cost management Estimating costs Determining the budget Controlling costs 11/11/2023 Dr. Bader Alshoumr - Health Informatics - UoH 4 Basic Principles of Cost Management • Profits are revenues minus expenditures • Profit margin is the ratio of profits to revenues • Life cycle costing provides a big-picture view of the cost of a project throughout its life cycle • Cash flow analysis is a method for determining the estimated annual costs and benefits for a project and the resulting annual cash flow • Direct cost is related to process for creating the products and services of the project. While, indirect costs are indirectly related to performing work on the project. • Sunk cost is money that has been spent in the past 11/11/2023 Dr. Bader Alshoumr - Health Informatics - UoH 5 Planning Cost Management • Planning cost management involves determining the policies, procedures, and documentation that will be used for planning, executing, and controlling project cost • The project manager and other stakeholders use expert judgment, data analysis, and meetings as tools and techniques to produce the cost management plan • The main output of this process is a cost management plan. This plan should include the following information: • Level of accuracy of estimated cost of activities • Units of measure (e.g., labor hours or days) • Organizational procedures links = Eash organization uses in its accounting system a unique code “link” of WBS components • Control threshold = cost often have a specified amount of variation allowing • Rules of performance measurement (e.g., how often actual costs will be tracked and to what level of detail) • Reporting formats • Process descriptions 11/11/2023 Dr. Bader Alshoumr - Health Informatics - UoH 6 Estimating Costs • Estimating costs involves developing an approximation or estimate of the costs of the resources needed to complete a project • Tools and techniques including judge experiment, bottom-up estimating, and project estimating software are used in cost estimates • The main outputs of the cost estimating process are activity cost estimates, basis of estimates, and project documents updates. 11/11/2023 Dr. Bader Alshoumr - Health Informatics - UoH 7 Important Considerations in Preparing Cost Estimates • The number and type of cost estimates vary by application area • It is important to provide supporting details for the estimates and updates to project documents • Another important consideration in preparing cost estimates is labor costs, because a large percentage of total project costs are often labor costs • Many reasons for inaccuracies with IT cost estimates, especially those for new technologies or software development such as • • • • Estimates are done too quickly People lack estimating experience Human beings are biased toward underestimation Management desires accuracy 11/11/2023 Dr. Bader Alshoumr - Health Informatics - UoH 8 Determining the Budget • Determining the budget involves allocating the overall cost estimate to individual work items to establish a baseline for measuring performance • Determining the budget estimates the cost to individual material resources or work items over time which are based on the activities in the WBS for the project • The project management plan, project documents, business documents, agreements, enterprise environmental factors and organizational process assets are all inputs for determining the budget • The main outputs of the cost budgeting process are a cost baseline, project funding requirements, and project documents updates 11/11/2023 Dr. Bader Alshoumr - Health Informatics - UoH 9 Controlling Costs • Controlling project costs involves controlling changes to the project budget. • These include monitoring cost performance, validating change requests, and informing stakeholders for authorization • The project management plan, project documents, project funding requirements, work performance data, and organizational process assets are inputs for controlling costs • Several tools and techniques assist in project cost control, including expert judgment, data analysis, project management information systems • The main outputs of the cost control process are work performance information, cost forecasts, change requests, and project management plan updates, and project documents updates 11/11/2023 Dr. Bader Alshoumr - Health Informatics - UoH 10 Earned Value Management • Earned value management (EVM) is a project performance measurement technique that integrates scope, time, and cost data • Project managers and their teams can determine how well the project is meeting scope, time, and cost goals by entering actual information and then comparing it to the cost performance baseline. These information includes • • • • whether or not a WBS item was completed ? how much of the work was completed approximately ? when the work actually started and ended ? how much the completed work actually cost ? • EVM involves calculating three values for each activity or WBS: • The planned value (PV) = authorized budget • The actual cost (AC) = cost for the completed work “activity” during a specific time • The Earned value = PV for all completed work 11/11/2023 Dr. Bader Alshoumr - Health Informatics - UoH 11