Cost Management Week 6-7 Learning Objectives

1. Cost Management Week 6-7 Learning Objectives You should be able to: • Describe cost management processes and their inputs, outputs, activities, and tools • Distinguish between cost estimation and cost control • Apply a function point approach to cost estimating a business information system • List and define cost drivers used in COCOMO II to estimate software development effort • List the requirements of a Cost Control System

2. Cost Estimation Difficulties • Cost overruns occur because original estimates inaccurate • Bias toward underestimating • Cost = accounting, not IT • Lack of experience, knowledge in cost management • Requires significant effort for large complex software • Frequent changes in technology? • Not a common cause of cost difficulties

3. Cost Management Basics • Profits = revenues - expenses • focus on impact on profits • Profit margin = profits / revenues • Life cycle costing • total cost of ownership • development, plus maintenance and support • cost of software defect increases over time

4. Cash Flow Analysis • Estimated annual costs and benefits • Internal Rate of Return (IRR) • discount rate that sets NPV to 0 • Tangible and intangible costs and benefits • tangible easier to measure and justify • Direct costs - PM has more control • Indirect costs - overhead, admin • Sunk costs - should NOT be considered • Learning curve theory - likeeconomy of scale • Reserves: contingency, management

5. 4 Cost Management Processes • Resource Planning • resources, quantities • Cost Estimation • software cost estimation • Budgeting • cost allocation • Cost Control • controlling changes

6. (1) Resource Planning • determining the resources & quantities needed to perform project activities • people, equipment, materials • Difficulty of tasks • Experience and skills of available workers • Inputs: WBS, scope, resource pool, org. policy • Tools: • expert judgment (internal, external), historical data • Outputs: resource requirements • staff acquisition, procurement may be needed

7. (2) Cost Estimation • Developing estimates of resource costs • how much will it cost the performing organization • Differs from pricing • Identifying alternatives and trade-offs • ROM (rough order of magnitude) • Budgetary (more accurate) • Definitive (most accurate)

8. Cost Estimation Inputs • WBS • Resource needs • Resource rates • Activity duration estimates • Data • previous projects • commercial databases • team expertise and experience • Chart of accounts • performing organization’s financial reporting

9. Cost Estimation Outputs • Cost estimates • quantitative estimates of costs of resources • dollars or staff-hours/days • may be refined during project execution • Supporting detail • scope of work estimated • basis for estimate and assumptions • range of possible results • Cost management plan • how variances will be managed

10. Cost Estimating Tools • Analogous • top-down • use previous, similar project(s) • expert judgment • Bottom-up • costing individual work items • takes more time • Parametric • uses project characteristics (parameters) • based on reliable, accurate, quantifiable data • Cost estimation software tools

11. Software Cost Estimation Metrics • Lines of Code (LOC) • Function Points • Core Measures • Level of Effort (time) • Labor cost: training, contract, travel, overhead • Defects: pre- and post-implementation • Duration • New system vs. enhanced system vs. GUI (graphical user interface)

12. Common Software Metrics • Size: of deliverables (programs) • Effort: number of people X number of months • Duration: number of months • Development cost: labor cost of effort • Productivity: size / effort • Responsiveness: size / duration • Quality: defects / size • Business: cost / size

13. Software Estimating Models • Estimate = Size * Complexity * Influencers • COCOMO II + • modifies initial effort estimate • Constructive Cost Model • cost drivers / effort multipliers / factors • product, platform, personnel, project • depends on LOC, more recently added FP’s • Software: CoStar, CostXpert, others • COCOMO Process Maturity • integrated with CMM

14. Data communication Distributed Data Processing Performance Heavily Used Configuration Transaction Rate On-line data entry End-user efficiency On-line update Complex Processing Reusability Installation ease Operational ease Multiple sites Facilitate change Cost Factors (Drivers)General System Characteristics

15. Estimation issues • How to measure size: • LOC (lines of code), function points, classes? • Hard to estimate before developing specs • Lack of experience • Lack of historical data • Depends on size, complexity, number of programmers, productivity, team, tools, ... • Brooks’ Law: • adding more programmers to a late project makes it later

16. (3) Budgeting Process • Allocating overall cost to individual work items • Inputs: cost estimates, WBS, schedule • Outputs: Cost baseline • Software measurement baselines • collect, analyze, & calibrate data • used to monitor progress • systems/application and delivery baselines • may be segmented by: • technology, platform, application, industry

17. Software ProjectEffort / Budget allocation • Workflows • Management 10% • Environment 10% • Requirements 10% • Design 15% • Implementation 25% • Assessment 25% • Deployment 5%

18. Software Development Phases: Effort and Schedule Distribution

19. (4) Cost Control Process Monitoring, analyzing, acting on cost data • Influence factors that change cost baseline • Ensure changes are beneficial and recorded accurately • Detect baseline changes and variance from plan • Manage changes • Inform stakeholders of authorized changes

20. Cost Control Inputs • Cost baseline • Performance reports • Change requests • Cost management plan

21. Cost Control Outputs • Revised cost estimates • Budget updates • changes to approved baseline • revised in response to scope changes • Corrective actions • Estimate at Completion (EAC) • forecast of total project costs • actuals plus variations on remaining budget • Lessons Learned • causes of variances, why corrective actions, etc.

22. Cost Control Tools • Cost change control system • definition of procedures, approvals for change • Performance measurement • identify variances, magnitude, causes • Earned Value Analysis (EVA) • Software • tracks planned vs. actual costs • projects or forecasts effects of changes

23. Earned Value Analysis (EVA) • Integrates scope, time, and cost data • Compares actuals to baseline • Baseline: original plan plus approved changes • Actuals: how much of a WBS item has been completed • BCWP - budgeted cost of work performed • ACWP - actual cost of work performed • BCWS - budgeted cost of work scheduled

24. Performance Measures • CV (cost variance) = BCWP - ACWP(budgeted cost - actual cost) • SV (schedule variance) = BCWP - BCWS (cost of work performed -cost of work scheduled) • CPI (cost performance index) = BCWP / ACWP • SPI (schedule performance index) = BCWP / BCWS • used to re-estimate time to completion

25. Applying EVA to IT projects • Estimates keep changing (budgeted) • Simplified evaluation of percent complete for tasks can still provide useful tracking information