BTS730

1. BTS730 Cost Management

2. Cost Management • Average cost overrun: • 1995 CHAOS study: 189% of the original estimates • 2001 study: 145%

3. Cost Management • Cost Management disasters (p265): • IRS…> $50 billion cost to taxpayers • UK National Health Service…$26 billion overrun

4. Cost Management Processes • Cost estimating: estimating costs and resources needed to complete a project • Cost budgeting: allocating cost estimate to work items over time intervals to establish a baseline for measuring performance • Cost control: controlling changes to the project budget/financial health

5. Cost of Software Defects(table 7.1, text)

6. Cost Management • Basic Principles

7. Cost Estimating(table 7.2, text)

8. Cost Estimating Techniques • Top Down (analogous): use the actual cost of a previous, similar project as the basis for the new estimate • Bottom-up: estimate individual work items and roll up to get a total estimate • Parametric: use parameters to estimate project costs (e.g. lines of code/function points, I/O, files etc.)

9. Cost Estimating Problems • Complexity, Time: many estimates are done in a hurry before fully understanding the system. • Lack of Experience: people doing the estimating don’t have much experience in $ • Bias towards under-estimation: a human trait; and people also tend to estimate at their skill level • Estimates “to order”: sometimes managers don’t really want “the truth” but an estimate that would help them win a bid…etc. PMs must stand by estimates

10. Sample Cost Estimate (fig 7-2 text)

11. Cost Budgeting • Allocating $ to “items” over time and creating a cost “baseline” • Cost baseline is a time phased budget used to measure and monitor cost performance.

12. Cost Budgeting • See figure 7-4 (5th ed) in text for sample baseline • (p282, 5th edition)

13. Cost Control • Activities include: • 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 (EVM) is an important tool for cost control

14. Difficulties Controlling Costs? • Examples p. 284

15. Cost Control: EVM • EVM: a project performance measurement technique; it integrates scope, time, and cost data • Uses a baseline (original plan plus approved changes), to determine how well the project is meeting its goals • Actual and planned cost figures are used.

16. Cost Control:EVM • Planned Value (PV): $ planned to be spent on an activity for a given period • Actual Cost (AC): total $ incurred on an activity for a given period • Rate of Performance (RP): ratio of actual work completed to % of work planned to have been completed at any given time. • Earned Value (EV): estimate of the value of the work completed. • EV = PV (to date) x RP

17. Cost Control :EVM • Example • After week 1: • PV = $10,000 • AC = $15,000 • Only 50% of the work planned for week 1 has been completed. • EV = PV x 50% = 10,000 x 50% = $5,000

18. Cost Control: EVM • Cost Variance (CV): EV – AC $5,000 - $15000 = -$10,000 • Schedule Variance (SV): EV – PV $5,000 - $10,000 = -$5,000 • Cost Performance Index (CPI): EV/AC $5,000/$15,000 = 33% (.3) • Schedule Performance Index (SPI): EV/PV $5,000/$10,000 = 50% (.5)