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Setting Your Fees. Project Cost and Setting Your Fees. The Importance of Project Cost Management. IT projects have a poor track record for meeting cost goals Average cost overrun from 1995 CHAOS study was 189% of the original estimates; improved to 145% in the 2001 study
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Setting Your Fees Project Cost and Setting Your Fees
The Importance of Project Cost Management • IT projects have a poor track record for meeting cost goals • Average cost overrun from 1995 CHAOS study was 189% of the original estimates; improved to 145% in the 2001 study • In 1995, cancelled IT projects cost the U.S. over $81 billion
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
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
Basic Principles of Cost Management • Most CEOs and boards know a lot more about finance than IT, so IT project managers must speak their language • Profits are revenues minus expenses • Life cycle costing is estimating the cost of a project plus the maintenance costs of the products it produces • Cash flow analysis is determining the estimated annual costs and benefits for a project • Benefits and costs can be tangible or intangible, direct or indirect • Sunk cost should not be a criteria in project selection
Developing the Project Budget • Cost Estimation Steps • Defining what resources will be needed to perform the work • Determining the quantity of resources that are needed • Defining the cost of using each resource • Calculating the cost of the task or activity • Ensuring that the resources are leveled, that is, resources have not been over allocated.
Types of Costs • Direct • Indirect • Sunk • Learning Curve • Reserves
Client wants you to do the work in its entirety just as proposed • You have to be scientific about your fees • Must be able to break it down into components • Your fees must do four things
Fees Must Provide Four Things • Must provide with personal income appropriate to your skills, knowledge, and experience • Must meet all the costs of running your business • Must provide a surplus or profit (to recompense you for the risk you’re taking with your resources) • Must enable to you to compete effectively in your chosen market
Step-By-Step Calculation • Make an assessment of what your skills, knowledge and experience would bring in marketplace as an employee (i. e. annual salary). • Find your working days in a year by subtracting number of weekends from 365 days. • Divide salary in No. 1 by the working days to get your labor rate.
Step-By-Step Calculation • Forecast the day you expect to be able to bill clients, on average, each month. • List and cost all your monthly overheads • Multiply each monthly cost by 12 and add these up to get annual cost of being in business • Divide the annual overhead by the number of days in a year which you expect to invoice to customers • Add No. 3 and No.7 to get Total Cost • Add your profit margin
OVERHEADS Monthly Annual ($) Secretary 1,000 12,000* Office rent 250 3000* Telephone 100 1200 Postage 65 780 Personnel benefits 40 480* Equipment 25 300 Stationery 12 144
OVERHEADS • Marketing • Personnel (5 days) 958 11,496* • Direct Mkt (2.5 x d. labor rate) 500 6,000 • Practice management 958 11,496* (5 days) • Dues and subscriptions 12 144 • Automotive 345 4, 140 • Insurance 26 312 • Accounting and legal 225 2,700 • Miscellaneous 200 2,400*
OVERHEADS • Totals 4,716 56,592 • Day you expect to invoice 144 days • Daily overhead rate = 56,592/144= 393.00 • Total cost of doing business = 191.50 + 393.00 = 584.50 • Profit (15-25%) = 146.13 • GRAND TOTAL = 730.63 == 735.00/day
Finalizing the Project Schedule and Budget • Project schedule and budget may require several iterations before it is acceptable to the sponsor, the project manager, and the project team • Once the project schedule and project plan are accepted, the project plan becomes the baseline plan. • Once accepted, the project manager and project team have the authority to execute or carry out the plan.
Cost of Software Defects It is important to spend money up-front on IT projects to avoid spending a lot more later.
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 they acquire the people, equipment, and materials that are capable and available for performing the work?
Typical Problems with IT 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
Cost Budgeting • Cost budgeting 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 cost estimate for FY97 of $600,000 and another $1.2 million for Information Services and Technology • These amounts were allocated to appropriate budgets as shown in the next table.
Business Systems Replacement Project Budget Estimates for FY97 and Explanations
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
Cost Control Input Form for Business Systems Replacement Project
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 • Put all your projects in one database • Prioritize the projects in your database • Divide your projects into two or three budgets based on type of investment • Automate the repository • Apply modern portfolio theory, including risk-return tools that map project risk on a curve