Project Cost Management: Section Summary, Discussion Questions, Exercises and Recommended Reading

Summary of Project Cost Management

Project cost management is a traditionally weak area of information technology projects. Information technology professionals must acknowledge the importance of cost management and take responsibility for improving resource planning, cost estimating, budgeting, and cost control.

Project managers must understand several basic principles of cost management in order to be effective in managing project costs. Important concepts include profits and profit margins, life cycle costing, cash flow analysis, sunk costs, and learning curve theory.

Resource planning involves determining what people, equipment, and materials should he used to perform project activities. It is important to evaluate alternatives and use expert judgement in determining resource requirements.

Cost estimating is a very important part of project cost management. There are several types of cost estimates: rough order of magnitude, budgetary, and definitive. Each type of estimate is done during different stages of the project life cycle, and each has a different level of accuracy. There are four basic tools and techniques for developing cost estimates: analogous, bottom-up, parametric modeling, and computerized tools. The main parts of a cost estimate include an objective statement, scope, assumptions, cost/benefit analysis, cash flow analysis, budget breakdown, and explanations or supporting detail.

Cost budgeting involves allocating costs to individuate work items over time. It is important to understand how particular organizations prepare budgets so estimates are made accordingly.

Project cost control includes monitoring cost performance, reviewing changes, and notifying project stakeholders of changes related to costs. Many basic accounting and finance principles are related to project cost management. However, earned value management is the main method used for measuring project performance. Earned value management integrates scope, cost, and schedule information.

You can use several software products to assist with project cost management. Microsoft Project has many cost management features, including earned value management.

Some Discussion Questions

1. Discuss why many information technology professionals have a poor attitude toward project cost management.

2. Do most colleges and companies provide adequate education and training in cost management for information technology project managers? Give examples to support your answer.

3. Give examples of rough order of magnitude, budgetary, and definitive cost estimates for an information technology project.

4. Give an example of using each of the following techniques for creating a cost estimate: analogous, parametric, bottom-up, and computerized tools.

5. What is earned value management? Why is it the preferred method for measuring project performance? Why isn’t it used more often?

6. What are some general rules of thumb for deciding if cost variance, schedule variance, cost performance index, and schedule performance index numbers are good or bad?

Exercises

1. Given the following information for a one-year project, answer the following questions:

PV= $23,000

EV= $20,000

AC= $25,000

BAC= $120,000

Recall that PV is the planned value, EV is the earned value, AC is the actual cost, and BAC is the budget at completion.

a. What is the cost variance, schedule variance, cost performance index (CPI), and schedule performance index (SPI) for the project?

b. How is the project doing? Is it ahead of schedule or behind schedule? Is it under budget or over budget?

c. Use the CPI to calculate the estimate at completion (EAC) for this project. Is the project performing better or worse than planned?

d. Use the schedule performance index (SPI) to estimate how long it will take to finish this project.

2. Using the data in Figure 2 for cumulative PV, AC, and EV, create an earned value chart similar to the one shown in Figure 3.

3. Create a cost estimate for building a new state-of-the art multimedia classroom for your organization within the next six months. The class room should include twenty high-end personal computers with appropriate software for your organization, a network server, Internet access for all machines, a teacher station, and a projection system. Be sure to include personnel costs associated with the project management for this project. Document the assumptions you made in preparing the estimate and provide explanations for key numbers.

4. Research online information, textbooks, and local classes for using the cost management features of Microsoft Project. Ask three different people in different information technology organizations that use Microsoft Project if they use the cost management features and in what ways they use them. Write a brief report of what you learned from your research.

5. Do the project cost management. Print the reports mentioned and write a one-page paper interpreting the results.

A Sample Case

You’ve decided that you are now an expert in project cost estimating, and you want to hold some public classes or workshops on this topic. You have done some training in the past and are confident in your abilities. Your first project is to develop materials, then market and hold your first seminar. You plan to do all of the work within the next six months.

You want to create a good cost estimate for this project. Below are some of your assumptions:

• You will charge $600 per person for a two-day class.

• Your most-likely estimate of how many people will attend is 30.

• Your fixed costs include $500 to rent a room for both days, setup fees of $400 for registration, and $300 for designing a postcard for advertising.

• You will not include any of your labor costs for this estimate, but you estimate that you will spend at least 150 hours developing materials, managing the project, and giving the actual class.

• You will order 5,000 postcards, mail 4,000, and distribute the rest to friends and colleagues.

Your variable costs include the following:

• $5/registration plus 4% of the class fee per person to handle credit card processing

• $40/postcard if you order 5,000 or more; $60 if you order fewer

• $.25/postcard for mailing and postage

• $25/person for beverages and lunch

• $30/person for class handouts

Assume 30 people register for and attend the class.

Part 1: Using Excel, create a spreadsheet to calculate your projected total costs, total revenues, and total profits given the preceding information. Be sure to have input cells for any variables that might change such as the cost of postage, handouts, and so on. Calculate your profits based on the following number of people who attend: 10, 20, 30, 40, 50, and 60. Try to use the Excel scenario feature (under the Tools menu) to create a scenario pivot table showing total profits based on the number of people who attend.

Part 2: Research the local market (or the location of your choice) for short classes on topics like project cost estimating. Find at least three organizations that offer estimating courses. You can search the Registered Education Provider’s database for organizations from PMI’s Web site (www.pmi.org), using “estimating” in the title. Given your research into similar classes and the work you think is required for this project, what assumptions, variables, or costs would you change from the information provided above? Justify your changes to the estimate, and create a spreadsheet with your best estimate for this project. Then write a paragraph describing whether or not you think this particular project is worth pursuing.

Suggested Readings

1. Brandon, Daniel M., Jr. “Implementing Earned Value Easily and Effectively.” Project Management .Journal (June 1998): 29, no.2, 11-18.

Brandon describes the benefits of using earned value management and the reasons that more organizations do not use it. This paper provides suggestions for overcoming some of the problems associated with this technique.

2. Harnaker, Joseph W. “But What Will It Cost? The History of NASA Cost Estimating.” http:Ilwww.jsc.nasa.govlbu2lhamaker.html (2000).

This article provides a wealth of information on how NASA develops cost estimates. Sections of the Web site include cost estimating models, handbooks to assist in cost estimating, salaries, and many links to great references and software.

3. Kernerer, Chris F. “Software Cost Estimation Models.” Software Project Management Readings and Cases. Chicago: The McGraw-Hill Companies, Inc. (1997).

This article summarizes the three basic types of software cost estimating models. The earliest models are sometimes called the economic stream and are based on work done at TRW and IBM. Boehm’s COCOMO is the most popular of these economic stream models. The second stream, called the Rayleigh stream, is based on the work of Putnam. The third stream, called the function point stream, first appeared in 1979 and is based on work done by Albrecht.

4. Meyer, N. Dean and Mary E. Boone. The information Edge. 2d ed. Toronto, CA: Educational Publishing Company (1989).

This book provides over sixty case histories to demonstrate how to measure the value or benefits of information systems. It provides detailed techniques for justifying and evaluating information technology projects.

5. The COCOMO Suite, cocomosuite

The University of Southern California’s Center for Software Engineering provides a detailed Web site with references to COCOMO, COCOMO II, and other models.