Project Management - Chapter 7

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Actual cost (AC)

The total of direct and indirect costs incurred in accomplishing work on an activity during a given period; formerly called the actual cost of work performed (ACWP).

Analogous estimate

A cost-estimating technique that uses the actual cost of a previous, similar project as the basis for estimating the cost of the current project; also called top-down estimate.

Baseline

The original project plan plus approved changes.

Bottom-up estimate

A cost-estimating technique based on estimating individual work items and summing them to get a project total.

Budget at completion (BAC)

The original total budget for a project.

Budgetary estimate

A cost estimate used to allocate money into an organization's budget.

Cash flow analysis

A method for determining the estimated annual costs and benefits for a project.

COCOMO II

A newer, computerized cost-estimating tool based on Barry Boehm's original model that allows one to estimate the cost, effort, and schedule when planning a new software development activity.

Computerized tools

Cost-estimating tools that use computer software, such as spreadsheets and project management software.

Constructive Cost Model (COCOMO)

A parametric model developed by Barry Boehm for estimating software development costs.

Contingency reserves

Dollars included in a cost estimate to allow for future situations that may be partially planned for (sometimes called known unknowns) and are included in the project cost baseline.

Cost baseline

A time-phased budget that project managers use to measure and monitor cost performance.

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.

Cost estimating

Developing an approximation or estimate of the costs of the resources needed to complete the project.

Cost management plan

A document that describes how cost variances will be managed on the project.

Cost performance index (CPI)

The ratio of earned value to actual cost; can be used to estimate the projected cost to complete the project.

Cost variance (CV)

The earned value minus the actual cost.

Definitive estimate

A cost estimate that provides an accurate estimate of project costs.

Direct costs

Costs that can be directly related to producing the products and services of the project.

Earned value (EV)

The percentage of work actually completed multiplied by the planned cost; formerly called the budgeted cost of work performed (BCWP).

Earned value management (EVM)

A project performance measurement technique that integrates scope, time, and cost data.

Estimate at completion (EAC)

An estimate of what it will cost to complete the project based on performance to date.

Function points

Technology-independent assessments of the functions involved in developing a system.

Indirect costs

Costs that are not directly related to the products or services of the project, but are indirectly related to performing the project.

Intangible costs or benefits

Costs or benefits that are difficult to measure in monetary terms.

Learning curve theory

A theory that states that when many items are produced repetitively, the unit cost of those items normally decreases in a regular pattern as more units are produced.

Life cycle costing

Considers the total cost of ownership, or development plus support costs, for a project.

Management reserves

Dollars included in a cost estimate to allow for future situations that are unpredictable (sometimes called unknown unknowns).

Overrun

The additional percentage or dollar amount by which actual costs exceed estimates.

Parametric modeling

A cost-estimating technique that uses project characteristics (parameters) in a mathematical model to estimate project costs.

Planned value (PV)

The portion of the approved total cost estimate planned to be spent on an activity during a given period; formerly called the budgeted cost of work scheduled (BCWS).

Profit margin

The ratio between revenues and profits.

Profits

Revenues minus expenses.

Project cost management

The processes required to ensure that the project is completed within the approved budget.

Rate of performance (RP)

The ratio of actual work completed to the percentage of work planned to have been completed at any given time during the life of the project or activity.

Reserves

Dollars included in a cost estimate to mitigate cost risk by allowing for future situations that are difficult to predict.

Rough order of magnitude (ROM) estimate

A cost estimate prepared very early in the life of a project to provide a rough idea of what a project will cost.

Schedule performance index (SPI)

The ratio of earned value to planned value; can be used to estimate the projected time to complete a project.

Schedule variance (SV)

The earned value minus the planned value.

Source Lines of Code (SLOC)

A human-written line of code that is not a blank line or comment.

Sunk cost

Money that has been spent in the past.

Tangible costs or benefits

Costs or benefits that can be easily measured in dollars

3 Project Management Processes

1 - Estimating the cost
2 - Determining the budget
3 - Controlling costs

Outputs of estimating costs

activity cost estimates
basis of estimates
project document updates

Outputs of determining the budget

cost performance baseline
project funding requirements
project document updates

Outputs of controlling costs

work performance measurements
budget forecasts
organizational process asset updates
change requests
project management plan updates
project document updates

Why do many projects never finish?

Cost management problems cause many problems to never finish.

What are most executives concerned with more than other issues?

profits

When do organizations have a history of not spending enough money and what does it impact?

They have a history of not spending enough money in the early phases of projects and it impacts the total cost of ownership.

Why is cash flow important?

If top management selects too many projects that have high cash flow needs in the same year, the company will not be able to support all of its projects and maintain profitability.

Why is it important to define clearly the year on which the company bases its dollar amounts?

If a company bases all costs on a previous years estimates it would need to account for inflation and other factors when projecting costs and benefits in future-year dollars.

3 basic types of estimates

1 - Rough order of magnitude (ROM)
2 - Budgetary estimate
3 - Definitive estimate

Tom DiMarco's 4 reasons for project cost estimate inaccuracies.

1 - Estimates often are done too quickly before clear system requirements have been produced.
2 - The person doing the estimating often has a lack of estimating experience.
3 - People have a tendency to underestimate. An experienced person may estimate based on how he/she would do the task, but the task may be performed by an inexperienced worker.
4 - Management desires accuracy. They are not looking for ballpark figures and often that is what they are given.

Earned value management involves calculating which three values for each activity or summary activity from a project's WBS?

1 - Planned Value
2 - Actual Cost
3 - Earned Value

Earned value formula

EV = PV to date * RP

Cost variance formula

CV = EV - AC

Schedule variance formula

SV = EV - PV

Cost performance index (CPI) formula

CPI = EV / AC

Schedule performance index (SPI) formula

SPI = EV / PV

Estimate at completion (EAC) formula

EAC = BAC / CPI

Estimated time to complete formula

Original time estimate / SPI

Five levels of project portfolio management from simplest to most complex

1 - Put all your projects in one database
2 - Prioritize the projects in your database
3 - Divide your projects into two or three budgets based on type of investment, such as utilities or required systems to keep things running, incremental upgrades, and strategic investments.
4 - Automate the repository
5 - Apply modern portfolio theory, including risk-return tools that map project risk on a curve.

_______ is a resource sacrificed or foregone to achieve a specific objective or something given up in exchange.

Cost

What is the main goal of project cost management?

to complete a project within an approved budget.

Which of the following is not a key output of project cost management?

a - activity cost estimates
b - a cost management plan
c - updates to the project management plan
d - a cost performance baseline

b - a cost management plan

If a company loses $5 for every $100 in revenue for a certain product, what is the profit margin for that product?

-5%

______ reserves allow for future situations that are unpredictable.

Management

You are preparing a cost estimate for a building based on its location, purpose, number of square feet, and other characteristics. What cost estimating technique are you using?

parametric

______ involves allocating the project cost estimate to individual work items over time.

Project cost budgeting

_____ is a project performance measurement technique that integrates scope, time, and cost data.

Earned value analysis

If the actual cost for a WBS item is over $1500 and its earned value was $2000, what is its cost variance, and is it under or over budget?

The cost variance is $500, which is under budget

If a project is halfway completed and its schedule performance index is 110 percent and its cost performance index is 95 percent, how is it progressing?

It is ahead of schedule and over budget.

The ________ is the additional percentage or dollar amount by which actual costs exceed estimates.

cost overrun

Which of the following processes of project cost management involves allocating the overall cost estimate to individual work items to establish a baseline for measuring performance?

cost budgeting

Which of the following processes of project cost management involves developing an approximation of the costs of the resources needed to complete a project?

cost estimating

The main outputs of the ________ process are work performance measurements, budget forecasts, organizational process asset updates, change requests, project management plan updates, and project document updates.

cost control

To increase ________, a company can increase revenues, decrease expenses, or try to do both.

profits

A company might complete a project to develop and implement a new customer service system in one or two years, but the new system could be in place for ten years. Project managers should create estimates of the costs and benefits of the project for ten years. This is an example of ________.

life cycle costing

Avoid ________ when deciding what project to invest in or continue.

sunk costs

________ for projects often include items like goodwill, prestige, and general statements of improved productivity that an organization cannot easily translate into dollar amounts.

Intangible costs

________ are used for making many purchasing decisions for which accurate estimates are required and for estimating final project costs.

Definitive estimates

Which type of estimate is done very early in a project or even before a project is officially started?

rough order of magnitude (ROM) estimate

The drawback with ________ is that they are usually time-intensive and therefore expensive to develop.

bottom-up estimates

A ________ might provide an estimate of $50 per line of code for a software development project based on the programming language the project is using, the level of expertise of the programmers, the size and complexity of the data involved, and so on.

parametric model

Which type of estimate uses the actual cost of a previous, similar project as the basis for estimating the cost of the current project?

top-down estimate

A(n) ________ is a time-phased budget that project managers use to measure and monitor cost performance.

cost baseline

The ________ is an estimate of the value of the physical work actually completed.

earned value (EV)

Suppose a project included a summary activity of purchasing and installing a new Web server. Suppose further that, according to the plan, it would take one week and cost a total of $10,000 for the labor hours, hardware, and software involved. The ________ for that activity that week is, therefore, $10,000.

planned value (PV)

Which of the following is the earned value minus the actual cost?

cost variance (CV)

Which of the following is the ratio of earned value to planned value and can be used to estimate the projected time to complete the project?

schedule performance index (SPI)

Which of the following is the earned value minus the planned value?

schedule variance (SV)

Which of the following is the ratio of earned value to actual cost and can be used to estimate the projected cost of completing the project?

cost of performance index (CPI)

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