25 terms

Chapter 7 Project Cost Management

Chapter 7
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Project Cost Management
(Knowledge Area) Includes the processes involved in estimating, budgeting, and controlling costs so that the project can be completed within the approved budget.
estimating cost
involves developing an approximation or estimate of the costs of the resources needed to complete a project.
The main outputs are:
1. activity cost estimates
2. basis of estimates
3. project document updates
determining the budget
involves allocating the overall cost estimate to individual work items to establish a baseline for measuring performance. The main outputs of the cost budgeting process are a cost performance baseline, project funding requirements, and project document updates.
controlling cost
involves controlling changes to the project budget.
The main out puts are:
work performance measurements, budget forecasts, organizational process asset updates, change request, project management plan updates, and project document updates
cash flow analysis
a method for determining the estimated annual costs and benefits for a project and the resulting annual cash flow.
Tangible Cost or benefits
cost or benefits that an organization can easily measure in dollars
intangible cost or benefits
cost or benefits that are difficult to measure in monetary terms
Direct cost
costs that can be directly related to producing the products and services of the project
Indirect cost
costs that are not directly related to the products or services of the project, but are indirectly related to performing of the project.
example: cost of electricity, paper towels in building
Sunk Cost
is money that has been spent in the past. when deciding what projects to invest in or continue, you should not include sunk costs.
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.
Learning curve theory should help estimate costs on projects involving the production of large quantities of items. Learning curve theory also applies to the amount of time it takes to complete some tasks.
Reserves
Reserves are dollars included in a cost estimate to mitigate cost risk by allowing for future situations that are difficult to predict.
Contingency Reserves
allow for future situations that may be partially planned for and are included in the project cost baseline.
Management Reserves
allow for future situations that are unpredictable.
Type of Cost estimates
> A Rough Order of Magnitude (ROM) - Provides an estimate of what a project will cost. referred to as: ballpark estimate, guesstimate, a swag, or broad gauge. This estimate is done early, or before it is started. typically -50 to + 100 percent
> budgetary estimate - used to allocate money into an organization's budget. typically -10 to + 25 percent
> Definitive estimate - provides an accurate estimate of project costs. Definitive estimates are used for making many purchasing decisions for which accurate estimates are required and for estimating final project costs. Most accurate method typically -5 to + 10 percent accurate.
Cost Management Plan
a document that describes how cost variances will be managed on the project.
Describes howto respond to proposals that are higher or lower than the estimates.
analogous estimates
a cost estimate 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 estimates
bottom-up estimates
a cost estimating technique based on estimating individual work items and summing them to get a project total. Sometimes referred to as activity based costing.
Parametric modeling
a cost-estimating technique that uses project characteristics in a mathematical model to estimate project costs.
$50 for line of code.
most reliable when historical information is accurate
Problems with information technology cost estimates
> Estimates are done too quickly
> Lack of estimating experience
> Human beings are biased toward underestimation
> Management Desires accuracy - Management may ask for a estimate, but really want a more accurate number to help them create a bid to win a contract
Cost Baseline
a time phased budget that project managers use to measure and monitor cost performance.
Earned Value Management
a project performance measurement technique that integrates scope, time, and cost data.
Baseline
original project plan plus approved changes
EVM formulas:
Earned Value = PV to date * Rate of performance
Cost Variance = EV - AC
Schedule Variance = EV - PV
CPI = EV / AC
SPI = EV / PV
Estimated at completion = BAC / CPI
Estimated time to complete = Original time estimate / SPI
Two potential flaws of EVM
its focus on tracking actual performance versus planned performance
the IMPORTANCE of percentage completion data in making calculations
it is important to remember that the hear and soul of EVM are estimates.