Project Cost Management: The Importance of Project Cost Management

Just as information technology projects have a poor track record in meeting project schedules, they also have a poor track record in project cost management. Information technology projects are expensive and known for coming in way over budget, when they are completed at all. The 1995 CHAOS report showed that the average cost overrun for information technology projects was 189 percent of their original estimates. This means a project that was estimated to cost $100,000 ended up costing $189,000. In 1995, over 31 percent of information technology projects were canceled before completion, costing United States companies and government agencies over $81 billion (1). The 2001 CHAOS report showed that companies have made great improvements in reducing cost overruns since 1995—from 189 percent to 45 percent—but that most completed projects still went over their approved budgets. This section describes important concepts in project cost management, particularly the use of earned value management (EVM) to assist in cost control.

What is cost? A popular textbook in cost accounting states that “Accountants usually define cost as a resource sacrificed or foregone to achieve a specific objective.” Webster’s dictionary defines cost as “something given up in exchange.”(4) Costs are often measured in monetary amounts, such as dollars, that must be paid to acquire goods and services. Because projects cost money and take away re sources that could be used elsewhere, it is very important for project managers to understand project cost management.

Many information technology professionals, however, often react to cost overrun information with a smirk. They know that many of the original cost estimates for information technology projects were low to begin with or based on very unclear project requirements, so naturally there were cost overruns. Not emphasizing the importance of realistic project cost estimates from the outset is only one part of the problem. In addition, many information technology professionals think preparing good cost estimates is beneath them — a job for accountants. On the contrary, preparing good cost estimates is a very demanding, important skill that all information technology project managers need to acquire.

Another perceived reason for cost overruns is that many information technology projects involve new technology or business processes. Any new technology or business process is untested and has inherent risks. Thus, costs grow and failures are to be expected. Right? Wrong. Using good project cost management can change this false perception. In fact, the 1995 Standish Group study mentions that many of the information technology projects in their study were as mundane as a new accounting package or an order entry system. The state of California and the IRS examples also demonstrate that many information technology projects cannot blame untested technology for their cost problems. What is needed is better project cost management.

What Went Wrong?

According to the San Francisco Chronicle front-page story, “Computer Bumbling Costs the State $1 Billion,” the state of California had a series of expensive information technology project failures in the late 1990s, costing taxpayers nearly $1 billion. Some of the poorly managed projects included the Department of Motor Vehicles registration and driver’s license databases, a statewide child support database, the State Automated Welfare System, and a Department of Corrections system for tracking inmates. Senator John Vasconcellos thought it was ironic that the state that was leading in the creation of computers was also the state most behind in using computer technology to improve its services (2).

Also consider the Internal Revenue Service’s expensive reengineering and information technology project failures. The Internal Revenue Service (IRS) managed a series of project failures in the 1990s that cost taxpayers over $50 billion a year—roughly as much money as the annual net profit of the entire computer industry that year (3).

What is project cost management? Project cost management includes the processes required to ensure that the project is completed within an approved budget. Notice two crucial phrases in this definition: “the project” and “approved budget.” Project managers must make sure their projects are well defined, have accurate time and cost estimates, and have a realistic budget that they were involved in approving. It is the project manager’s job to satisfy project stakeholders while continuously striving to reduce and control costs. The project cost management processes include:

• Resource planning, which involves determining what resources (people, equipment, and materials) and what quantities of each resource should be used to perform project activities. The output of the resource planning process is a list of resource requirements.



• Cost estimating, which involves developing an approximation or estimate of the costs of the resources needed to complete a project. The main outputs of the cost estimating process are cost estimates, supporting detail, and a cost management plan.



• Cost budgeting, which involves allocating the overall cost estimate to individual work items to establish a baseline for r performance. The main output of the cost budgeting process is a cost baseline.



• Cost control, which involves controlling changes to the project budget. The main outputs of the cost control process are revised cost estimates, budget updates, corrective action, estimate at completion, and lessons learned.

To understand each of the project cost management processes, you must first understand the basic principles of cost management. Many of these principles are not unique to project management; however, project managers need to understand how these principles relate to their specific projects.

1. Johnson, Jim. “CHAOS: The Dollar Drain of IT Project Failures,” Application Development Trends (January 1995) www.standishgroup.com/chaos.html.

2. Lucas, Greg, “Computer Bumbling Costs the State $1 Billion,” San Francisco Chronicle ( 2/21/99) 1.

3. James, Geoffrey, “IT Fiascoes ... and How to Avoid Them,” Datamation (November 1997).

4. Horngren, Charles T., George Foster, and Srikanti M. Datar, Cost Accounting, 8th ed. Englewood Cliffs, NJ: Prentice-Hall, 1994.