Project Cost Management

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 The Importance of Project Cost Management

 SW 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 43 percent in 2002; other studies found overruns to be
33-34 percent

Source: Information Technology Project Management, Fifth Edition, Copyright 2007 2

 What is Cost and Project Cost Management?

 Cost is a resource sacrificed or fore-gone to achieve a

specific objective or something given up in exchange
 Costs are usually measured in monetary units like birr, dollar, etc

 Project cost management includes the processes

required to ensure that the project is completed within an
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 3
 Reasons for Cost Overruns
 Not emphasizing the importance of realistic project cost
estimates from the outset
 Many of the original cost estimates for IT/SW/IS

projects are low to begin with and based on very

unclear project requirements
 Many IT professionals think preparing cost estimates is a
job for accountants when in fact it is a very demanding
and important skill that project managers need to acquire
 Many IT projects involve new technology or business
processes which involve untested products and inherent
risks
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 Project Cost Management Processes
 Resource planning: determining what
resources and quantities of them should be used
 Cost estimating: developing an estimate of the
costs and resources needed to complete a project
 Cost budgeting: allocating the overall cost
estimate to individual work items to establish a
baseline for measuring performance
 Cost control: controlling changes to the project
budget
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 Basic Principles of Cost Management

 Profits are revenues minus expenses

 Life cycle costing is estimating the cost of a project

over its entire life

 Cash flow analysis is determining the estimated

annual costs and benefits for a project

 Sunk cost should not be a criteria in project selection

 Sunk costs are retrospective (past) costs that have already
been incurred and cannot be recovered
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 Cost of Software Defects

 It is much more cost-effective to spend money on defining user

requirements and doing early testing on IT projects than to wait for
problems to appear after implementation
 If it would cost $1,000 to repair a software defect in the
requirements and analysis phase but it would cost $30,000 to fix it in
the post-product release phase 7
 Resource Planning
 The nature of the project and the organization will
affect resource planning
 Some questions to consider:
 How difficult will it be to do specific tasks on the project?
 Is there anything unique in this project’s scope
statement that will affect resources?
 What is the organization’s history in doing similar tasks?
 Does the organization have or can it acquire the people,
equipment, and materials that are capable and available for
performing the work?
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 Cost Estimating
 An important output of project cost management is a cost
estimate

 There are several types of cost estimates, and tools and

techniques

 It is also important to develop a cost management plan

that describes how cost variances will be managed on the
project

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 Types of Cost Estimates
Type of Estimate When Done Why Done How Accurate
Rough Order of Very early in the Provides rough –25%, +75%
Magnitude (ROM) project life cycle, ballpark of cost for
often 3–5 years selection decisions
before project
completion
Budgetary Early, 1–2 years out Puts dollars in the –10%, +25%
budget plans
Definitive Later in the project, < Provides details for –5%, +10%
1 year out purchases, estimate
actual costs

• A ROM estimate that actually cost $100,000 would range between $75,000 to $175,000.
• A budgetary estimate that actually costs $100,000 would range between $90,000 to $125,000.
• A definitive estimate that actually costs $ 100,000 would rang between $95,000 to $110,000.

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 Cost Estimation Tools and Techniques

 3 basic tools and techniques for cost estimates:

 Analogous or top-down: use the actual cost of a
previous, similar project as the basis for the new estimate

 Bottom-up: estimate individual work items and sum

them to get a total estimate

 Parametric: use project characteristics in a

mathematical model to estimate costs
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 Constructive Cost Model (COCOMO)

 Barry Boehm helped develop the COCOMO models for

estimating software development costs

 Parameters include source lines of code or function points

 COCOMO II is a computerized model available on the web

 Boehm suggest that only parametric models do not suffer

from the limits of human decision-making

Reading Assignment on COCOMO

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 Typical Problems with Cost Estimates
 Developing an estimate for a large software project is a
complex task requiring a significant amount of effort.
Remember that estimates are done at various stages of
the project
 Many people doing estimates have little experience doing
them. Try to provide training and mentoring
 People have a bias toward underestimation. Review
estimates and ask important questions to make sure
estimates are not biased
 Management wants a number for a bid, not a real
estimate. Project managers must negotiate with project
sponsors to create realistic cost estimates 13
 Cost Budgeting
 Cost budget involves allocating the project cost
estimate to individual work items and providing a
cost baseline

 For example, in the Business Systems Replacement

project, there was a total purchased costs estimate
for XY of $600,000 and another $1.2 million for
Information Services and Technology.
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 Cost Control
 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

 Earned value management is an important tool for cost

control
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Earned Value Management (EVM)

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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.
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Earned Value Management
“Earned Value Analysis” is:
• an industry standard way to:
• measure a project’s progress,
• forecast its completion date and final cost,
and
• provide schedule and budget variances
along the way.

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Earned Value Management
 Earned Value Management Systems
allow the project manager to answer
the following three questions, as they
relate to the project:
 Where have we been?
 Where are we now?
 Where are we going?

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 Earned Value Management Terms
 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

 Earned value (EV), formerly called the budgeted cost

of work performed (BCWP), is the percentage of work
actually completed multiplied by the planned value
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 Item Questions
Planned Value (PV) How much work should be done?

Earned Value (EV) How much work was done?

Actual Cost (AC) How much did the work cost?

Budget at Completion (BAC) What is the total job budgeted to cost?

Estimate at Completion (EAC) What do we expect the total job to

cost?

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 Earned Value Formulas

To estimate what it will cost to complete a project or how long it will take
based on performance to date, divide the budgeted cost or time by the
appropriate index.
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 Rules of Thumb for EVA Numbers

 Negative numbers for cost and schedule variance

indicate problems in those areas. The project is costing

more than planned or taking longer than planned

 CPI and SPI > 1.0 indicate exceptional performance

 CPI and SPI < 1.0 indicate poor performance

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 Earned Value Chart for Project After Five Months
 EAC = $122,308 = BAC/CPI = $100,000/.81761
 ETC = 12.74 months = Original Time Estimate/SPI = 12 months/.94203

If EV line is below PV line, it shows poor performance.

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 Example
 Suppose you have a budgeted cost of a project
at Birr 900,000. The project is to be completed
in 9 months. After a month, you have completed
10% of the project at a total expense of Birr
100,000. The planned completion should have
been 15%.
 Given:
 Budget At Complete (BAC) = Birr 900,000
 AC = Birr 100,000

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 …solution
 Planned Value = Planned Completion (%) * BAC

= 15% * Birr 900,000

= Birr 135,000

 Earned Value = Percent Completed (%) * BAC

= 10% * Birr 900,000

= Birr 90,000
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 …continued
 CV = EV – AC The project is
costing more
= 90,000 – 100,000 than planned
because CV is
less than zero.
= -10,000
 SV = EV – PV
= 90,000 – 135,000 The project is
taking longer
= - 45,000 than planned
because SV is
less than zero.

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 …continued
 CPI= EV / AC
= 90,000 / 100,000
It shows Poor
= 0.90 Performance
because CPI
 SPI= EV/PV and SPI are
= 90,000 / 135,000 less than one.

= 0.67

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Forecasting Cost
 If the project continues at the current
performance, what is the true cost of
the project?
 Estimate At Complete
= Budget At Complete (BAC) / CPI
= Birr 900,000 / 0.90 = Birr 1,000,000
At the end of the project, the total project
costs will be Birr 1,000,000
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 Establish Ranges to Guide Traffic
Light Status

 Traffic Light status is useful in conveying

overall project’s status with one color
 Establish objective SPI and CPI ranges to
determine the true project color.
 Average of CPI & SPI i.e. (CPI+SPI)/2
Good
Green [1.0 - 0.95]
Warning
Yellow [0.94 - 0.85] Bad
Red [0.84 - 0] 30
 Therefore, for the above example,
 Overall project’s traffic light status
= (CPI+SPI)/2
= (0.90+0.67)/2
= 0.78 Bad

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Project Quality Management

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What is PQM?
 PQM is the process of continually
measuring the quality of all activities
and taking corrective action until the
team achieves the desired quality.

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 Project Quality Management Processes

 Quality planning: identifying which quality

standards are relevant to the project and how to
satisfy them
 Quality assurance: evaluating overall project
performance to ensure the project will satisfy the
relevant quality standards
 Quality control: monitoring specific project results
to ensure that they comply with the relevant quality
standards while identifying ways to improve overall
quality
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 Modern Quality Management
 Modern quality management
 requires customer satisfaction

 prefers prevention to inspection

 recognizes management responsibility for

quality

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 Quality Planning
 It is important to design in quality and communicate
important factors that directly contribute to meeting the
customer’s requirements
 Design of experiments helps identify which variables have
the most influence on the overall outcome of a process
 Many scope aspects of software projects affect quality like
functionality, features, system outputs, performance,
reliability, and maintainability

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 Quality Assurance
 Quality assurance includes all the activities related to
satisfying the relevant quality standards for a project

 Another goal of quality assurance is continuous quality

improvement

 Benchmarking can be used to generate ideas for quality

improvements

 Quality audits help identify lessons learned that can

improve performance on current or future projects
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 Quality Control
 The main outputs of quality control are
◦ acceptance decisions
◦ rework
◦ process adjustments
 Some tools and techniques include
◦ pareto analysis
◦ statistical sampling
◦ quality control charts
◦ testing

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 Pareto Analysis
 Pareto analysis involves identifying the vital few
contributors that account for the most quality problems
in a system

 Also called the 80-20 rule, meaning that 80% of

problems are often due to 20% of the causes

 Pareto diagrams are histograms that help identify and

prioritize problem areas
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Sample Pareto Diagram

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 Statistical Sampling and Standard
Deviation

 Statistical sampling involves choosing part of a

population of interest for inspection

 The size of a sample depends on how

representative you want the sample to be

 Sample size formula:

Sample size = .25 × (certainty Factor/acceptable error)2

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Commonly Used Certainty Factors

Confidence Level Certainty Factor

95% 1.960
90% 1.645
80% 1.281

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 Standard Deviation
 Standard deviation measures how much variation
exists in a distribution of data
 A small standard deviation means that data cluster
closely around the middle of a distribution and there
is little variability among the data
 A normal distribution is a bell-shaped curve that is
symmetrical about the mean or average value of a
population
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Normal Distribution and Standard Deviation

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 Sigma and Defective Units
Specification Percent of Defective
Range Population Units
(in +/- Sigmas) Within Range Per Billion
1 68.27 317,300,000
2 95.45 45,400,000
3 99.73 2,700,000
4 99.9937 63,000
5 99.999943 57
6 99.9999998 2
Note: “Six sigma” often refers to +/-3 sigma, meaning 2.7 million defects per billion
units produced, or 2.7 defects per million.
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 Quality Control Charts, Six Sigma, and the
Seven Run Rule

 A control chart is a graphic display of data that

illustrates the results of a process over time. It
helps prevent defects and allows you to determine
whether a process is in control or out of control
 Operating at a higher sigma value, like 6 sigma,
means the product tolerance or control limits have
less variability
 The seven run rule states that if seven data
points in a row are all below the mean, above the
mean, or increasing or decreasing, then the process
needs to be examined for non-random problems
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Sample Quality Control Chart

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Reducing Defects with Six Sigma

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 Testing
 Many SW professionals think of testing as
a stage that comes near the end of SW
product development

 Testing should be done during almost

every phase of the SW product
development life cycle
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Testing tasks in the
software development
life cycle

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 Types of Tests
 A unit test is done to test each individual
component (often a program) to ensure it is as
defect free as possible
 Integration testing occurs between unit and
system testing to test functionally grouped
components
 System testing tests the entire system as one
entity
 User acceptance testing is an independent test
performed by the end user prior to accepting the
delivered system 51
Gantt Chart for Building Testing into a Systems
Development Project Plan

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 Improving Software Project Quality

 Several suggestions for improving quality for

Software projects include
 Leadership that promotes quality

 Understanding the cost of quality

 Focusing on organizational influences and workplace

factors that affect quality

 Following maturity models to improve quality

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 Leadership
 “It is most important that top management be
quality-minded. In the absence of sincere
manifestation of interest at the top, little will
happen below.” (Juran, 1945)

 A large percentage of quality problems are

associated with management, not technical
issues 54
 The Cost of Quality

 The cost of quality is

 the cost of conformance or delivering products that

meet requirements and fitness for use

 the cost of nonconformance or taking responsibility for

failures or not meeting quality expectations

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 Cost Categories Related to Quality

The Cost of Quality category codes are the

following:
 Prevention Costs

 Appraisal Costs

 Internal Error Costs

 External Error Costs

 Measurement and test equipment costs:

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 Prevention Costs
 Prevention costs are investments made ahead of
time in an effort to ensure conformance to
requirements.

 Examples include activities such as orientation of team

members, training, and the development of project
standards and procedures.

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 Appraisal Costs
 Appraisal costs are costs incurred to
identify defects after the fact.

 Examples include activities such as

walk-throughs and testing.

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 Internal Error Costs
 Internal error costs are the costs of rework
and repair before delivery to a customer.

 An example is fixing faults detected during

internal testing.

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 External Error Costs
 External error costs are the costs of rework and
repair after delivery to a customer.
 One example would be rework and repair resulting
from acceptance testing.

 Another example would be the actual costs incurred

during warranty support.

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 Measurement and test equipment costs:

 Measurement and test equipment costs: capital

cost of equipment used to perform prevention
and appraisal activities

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 ISO 9000
 An international set of standards for quality
management.
 Applicable to a range of organisations from
manufacturing to service industries.
 ISO 9001 applicable to organisations which design,
develop and maintain products.
 ISO 9001 is a generic model of the quality process
that must be instantiated for each organisation using
the standard. 62
 ISO 9000 certification
 Quality standards and procedures should be
documented in an organisational quality manual.
 An external body may certify that an organisation’s
quality manual conforms to ISO 9000 standards.
 Some customers require suppliers to be ISO 9000
certified although the need for flexibility here is
increasingly recognised.

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 Software quality attributes

Safety Understandability Portability

Security Testability Usability
Reliability Adaptability Reusability
Resilience Modularity Efficiency
Robustness Complexity Learnability

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Many thanks

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