Course : ISYS 8032 – IT Project Management

Period : September / February 2018

IT PROJECT COST MANAGEMENT

Session 06

D5727 – Dr. Eng. Nico Surantha, ST., MT.

 Learning Objectives

• Understand the importance of project cost

management
• Explain basic project cost management
principles, concepts, and terms
• Discuss different types of cost estimates
and methods for preparing them

Information Technology Project Management,

Sixth Edition 2
 Learning Objectives
(continued)
• Understand the processes involved in cost
budgeting and preparing a cost estimate
and budget for an information technology
project
• Understand the benefits of earned value
management and project portfolio
management to assist in cost control
• Describe how project management
software can assist in project cost
management
Information Technology Project Management,
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 The Importance of Project
Cost Management
• IT projects have a poor track record for
meeting budget goals
• The CHAOS studies found the average cost
overrun (the additional percentage or dollar
amount by which actual costs exceed
estimates) ranged from 180 percent in 1994 to
56 percent in 2004; other studies found
overruns to be 33-34 percent

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 What Went Wrong?

• The U.S. government, especially the Internal Revenue

Service (IRS), continues to provide examples of how not to
manage costs
– A series of project failures by the IRS in the 1990s cost
taxpayers more than $50 billion a year
– In 2006, the IRS was in the news for a botched upgrade to
its fraud-detection software, costing $318 million in
fraudulent refunds that didn’t get caught
– A 2008 Government Accountability Office (GAO) report
stated that more than 400 U.S. government agency IT
projects, worth an estimated $25 billion, suffer from poor
planning and underperformance
• The United Kingdom’s National Health Service IT
modernization program was called the greatest IT disaster in
history with an estimated $26 billion overrun
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 What is Cost and Project Cost
Management?
• 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 like dollars
• Project cost management includes the processes
required to ensure that the project is completed within
an approved budget

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 Project Cost Management
Processes

• Estimating costs: developing an approximation or estimate

of the costs of the 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

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 Figure 7-1. Project Cost Management
Summary

Ref: Schwalbe, Kathy. (2016). Information Technology Project Management. 8 th edition. Course Technology.
Augsburg. ISBN: 978-1285452340

Information Technology Project Management,

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 Basic Principles of Cost
Management
• Most members of an executive board better understand
and are more interested in financial terms than IT terms, so
IT project managers must speak their language
– Profits are revenues minus expenditures
– Profit margin is the ratio of revenues to profits
– Life cycle costing considers the total cost of ownership,
or development plus support costs, for a project
– Cash flow analysis determines the estimated annual
costs and benefits for a project and the resulting annual
cash flow

Information Technology Project Management,

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 Table 7-1. Cost of Downtime
for IT Applications

Ref: Schwalbe, Kathy. (2016). Information Technology Project Management. 8th edition. Course Technology.
Augsburg. ISBN: 978-1285452340
Information Technology Project Management,
Sixth Edition 10
 What Went Right?
• Many organizations use IT to reduce operational costs
• Technology has decreased the costs associated with
processing an ATM transaction:
– In 1968, the average cost was $5
– In 1978, the cost went down to $1.50
– In 1988, the cost was just a nickel
– In 1998, it only cost a penny
– In 2008, the cost was just half a penny!
• Investing in green IT and other initiatives has helped
both the environment and companies’ bottom lines;
Michael Dell, CEO of Dell, reached his goal to make his
company “carbon neutral” in 2008
Information Technology Project Management,
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 Basic Principles of Cost
Management
• Tangible costs or benefits are those costs or
benefits that an organization can easily measure in
dollars
• Intangible costs or benefits are costs or benefits
that are difficult to measure in monetary terms
• Direct costs are costs that can be directly related to
producing the products and services of the project
• Indirect costs are costs that are not directly related
to the products or services of the project, but are
indirectly related to performing the project
• Sunk cost is money that has been spent in the past;
when deciding what projects to invest in or continue,
you should not include sunk costs

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 Basic Principles of Cost
Management
• Learning curve theory states that when many items
are produced repetitively, the unit cost of those items
decreases in a regular pattern as more units are
produced
• Reserves are dollars included in a cost estimate to
mitigate cost risk by allowing for future situations that
are difficult to predict
– Contingency reserves allow for future situations
that may be partially planned for (sometimes called
known unknowns) and are included in the project
cost baseline
– Management reserves allow for future situations
that are unpredictable (sometimes called unknown
unknowns)

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 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

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 Table 7-2. Types of Cost
Estimates

Ref: Schwalbe, Kathy. (2016). Information Technology Project Management. 8th edition. Course Technology.
Augsburg. ISBN: 978-1285452340

Information Technology Project Management,

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 Cost Management Plan

• A cost management plan is a document that

describes how the organization will manage
cost variances on the project
• A large percentage of total project costs are
often labor costs, so project managers must
develop and track estimates for labor

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 Table 7-3. Maximum Departmental
Headcounts by Year

Ref: Schwalbe, Kathy. (2016). Information Technology Project Management. 8th edition. Course Technology.
Augsburg. ISBN: 978-1285452340

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 Cost Estimation Tools and
Techniques
• Basic tools and techniques for cost estimates:
– Analogous or top-down estimates: use the actual cost
of a previous, similar project as the basis for estimating
the cost of the current project
– Bottom-up estimates: involve estimating individual work
items or activities and summing them to get a project
total
– Parametric modeling uses project characteristics
(parameters) in a mathematical model to estimate project
costs

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 Typical Problems with IT Cost
Estimates
• Estimates are done too quickly
• Lack of estimating experience
• Human beings are biased toward
underestimation
• Management desires accuracy

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 Sample Cost Estimate

• See pages 265-270 for a detailed example of creating

a cost estimate for the Surveyor Pro project
described in the opening case
• Before creating an estimate, know what it will be
used for, gather as much information as possible,
and clarify the ground rules and assumptions for the
estimate
• If possible, estimate costs by major WBS categories
• Create a cost model to make it easy to make changes
to and document the estimate

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 Figure 7-2. Surveyor Pro Project Cost
Estimate

Ref: Schwalbe, Kathy. (2016). Information Technology Project Management. 8 th edition. Course Technology.
Information Technology Project Management,
Augsburg. ISBN: 978-1285452340
Sixth Edition 21
 Figure 7-3. Surveyor Pro Software
Development Estimate

Ref: Schwalbe, Kathy. (2016). Information Technology Project Management. 8 th edition. Course Technology.
Augsburg. ISBN: 978-1285452340
Information Technology Project Management,
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 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
• Important goal is to produce a cost baseline
– A time-phased budget that project managers
use to measure and monitor cost
performance

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 Figure 7-4. Surveyor Pro
Project Cost Baseline

Ref: Schwalbe, Kathy. (2016). Information Technology Project Management. 8th edition. Course Technology.
Augsburg. ISBN: 978-1285452340

Information Technology Project Management,

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 Media Snapshot
• U.S. President Barack Obama successfully used the
media and information technology in his campaign
– The Obama campaign used 16 different online
social platforms to interact with people of various
backgrounds; sources say 80 percent of all
contributions originated from these social networks
– In a 60 Minutes episode shortly after the election,
campaign leaders discussed some of the details of the
campaign
– The Web site My.BarackObama was created to develop an
online community with more than a million members

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 Controlling Costs

• Project cost control includes:

– Monitoring cost performance
– Ensuring that only appropriate project
changes are included in a revised cost baseline
– Informing project stakeholders of authorized
changes to the project that will affect costs
• Many organizations around the globe have
problems with cost control

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 Earned Value Management
(EVM)
• EVM is a project performance measurement technique
that integrates scope, time, and cost data
• Given a baseline (original plan plus approved changes),
you can determine how well the project is meeting its
goals
• You must enter actual information periodically to use EVM
• More and more organizations around the world are using
EVM to help control project costs

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 Earned Value Management
Terms
• The planned value (PV), formerly called the budgeted cost of
work scheduled (BCWS), also called the budget, is that portion
of the approved total cost estimate planned to be spent on an
activity during a given period
• Actual cost (AC), formerly called actual cost of work performed
(ACWP), is the total of direct and indirect costs incurred in
accomplishing work on an activity during a given period
• The earned value (EV), formerly called the budgeted cost of
work performed (BCWP), is an estimate of the value of the
physical work actually completed
• EV is based on the original planned costs for the project or
activity and the rate at which the team is completing work on
the project or activity to date

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 Rate of Performance

• Rate of performance (RP) is the ratio of actual work

completed to the percentage of work planned to have
been completed at any given time during the life of the
project or activity
• Brenda Taylor, Senior Project Manager in South Africa,
suggests this term and approach for estimating earned
value
• For example, suppose the server installation was
halfway completed by the end of week 1: the rate of
performance would be 50% because 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

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 Table 7-4. Earned Value Calculations for
One Activity after Week One

Ref: Schwalbe, Kathy. (2016). Information Technology Project Management. 8 th edition. Course Technology.
Augsburg. ISBN: 978-1285452340
Information Technology Project Management,
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 Table 7-5. Earned Value
Formulas

Ref: Schwalbe, Kathy. (2016). Information Technology Project Management. 8th edition. Course Technology.
Augsburg. ISBN: 978-1285452340

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 Rules of Thumb for Earned
Value Numbers
• Negative numbers for cost and schedule variance
indicate problems in those areas
• CPI and SPI less than 100% indicate problems
• Problems mean the project is costing more than
planned (over budget) or taking longer than
planned (behind schedule)
• The CPI can be used to calculate the estimate at
completion (EAC), an estimate of what it will cost
to complete the project based on performance to
date; the budget at completion (BAC) is the
original total budget for the project

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 Earned Value Calculations for a
One-Year Project After Five
Months

Ref: Schwalbe, Kathy. (2016). Information Technology Project Management. 8th edition. Course Technology.
Augsburg. ISBN: 978-1285452340
Information Technology Project Management,
Sixth Edition 33
 Figure 7-5. Earned Value
Chart for Project after Five
Months

Ref: Schwalbe, Kathy. (2016). Information Technology Project Management. 8th edition. Course Technology.
Augsburg. ISBN: 978-1285452340
Information Technology Project Management,
Sixth Edition 34
 Project Portfolio Management

• Many organizations collect and control an entire

suite of projects or investments as one set of
interrelated activities in a portfolio
• Five levels for project portfolio management
1. Put all your projects in one database
2. Prioritize the projects in your database
3. Divide your projects into two or three
budgets based on type of investment
4. Automate the repository
5. Apply modern portfolio theory, including risk-
return tools that map project risk on a curve

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 Benefits of Portfolio Management
• Schlumberger saved $3 million in one year by organizing
120 information technology projects into a portfolio
• ROI of implementing portfolio management software by IT
departments:
– Savings of 6.5 percent of the average annual IT budget by
the end of year one
– Improved annual average project timeliness by 45.2
percent
– Reduced IT management time spent on project status
reporting by 43 percent and IT labor capitalization
reporting by 55 percent
– Decreased the time to achieve financial sign-off for new
IT projects by 20.4 percent, or 8.4 days

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 Best Practice

• A global survey released by Borland Software in 2006 suggests

that many organizations are still at a low level of maturity in
terms of how they define project goals, allocate resources, and
measure overall success of their information technology
portfolios; some of the findings include the following:
– Only 22 percent of survey respondents reported that their
organization either effectively or very effectively uses a
project plan for managing projects
– Only 17 percent have either rigorous or very rigorous
processes for project plans, which include developing a
baseline and estimating schedule, cost, and business
impact of projects
– Only 20 percent agreed their organizations monitor
portfolio progress and coordinate across inter-dependent
projects

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 Using Software to Assist in
Cost Management
• Spreadsheets are a common tool for resource
planning, cost estimating, cost budgeting, and
cost control
• Many companies use more sophisticated and
centralized financial applications software for
cost information
• Project management software has many cost-
related features, especially enterprise PM
software
• Portfolio management software can help
reduce costs
Information Technology Project Management,
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 Chapter Summary

• Project cost management is a traditionally

weak area of IT projects, and project
managers must work to improve their ability
to deliver projects within approved budgets
• Main processes include:
– Estimate costs
– Determine the budget
– Control costs

Information Technology Project Management,

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 Reference
1. Schwalbe, Kathy. (2016). Information Technology
Project Management. 8th edition. Course Technology.
Augsburg. ISBN: 978-1285452340

Information Technology Project Management,

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