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Chapter 7 : Project Cost Management - Coggle Diagram
Chapter 7 : Project Cost Management
Introduction
Cost
is a resource sacrificed or foregone to achieve a specific objective or something given up in exchange
Project cost
management includes the processes required to ensure that the project is completed within an approved budget
Project Cost Management Processes
Planning cost management
:determining the policies, procedures, and documentation that will be used for planning, executing, and controlling project cost.
Estimating costs
: developing an approximation or estimate of the costs of the resources needed to complete a project
Determining the budget
: allocating the overall cost estimate to individual work items to establish a baseline for measuring performance
Controlling costs
: controlling changes to the project budget
Basic Principles of Cost Management
Profits
are revenues minus expenditures
Profit margin
is the ratio of revenues to profits
Life cycle costing
considers the total cost of ownership, or development plus support costs, for a project
Cash flow analysis
determines the estimated annual costs and benefits for a project and the resulting annual cash flow
Types of Costs and Benefits
Tangible costs
or
benefits
are those costs or benefits that an organization can easily measure in dollars
Intangible costs
or
benefits
are costs or benefits that are difficult to measure in monetary terms
Direct cost
s are costs that can be directly related to producing the products and services of the project
Indirect costs
are costs that are not directly related to the products or services of the project, but are indirectly related to performing the project
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
Cost Management Plan
Level of accuracy and units of measure
Organizational procedure links
Control thresholds
Rules of performance measurement
Reporting formats
Process descriptions
Cost Estimation Tools and Techniques
Analogous
or
top-down estimates
: use the actual cost of a previous, similar project as the basis for estimating the cost of the current project
Bottom-up estimates
: involve estimating individual work items or activities and summing them to get a project total
Parametric modeling
uses project characteristics (parameters) in a mathematical model to estimate project costs
Typical Problems with IT Cost Estimates
Estimates are done too quickly
People lack estimating experience
Human beings are biased toward underestimation
Management desires accuracy
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
Earned Value Management (EVM)
EVM is a project performance measurement technique that integrates scope, time, and cost data
Given a baseline (original plan plus approved changes), you can determine how well the project is meeting its goals
You must enter actual information periodically to use EVM
Earned Value Management Terms
The planned value (PV), formerly called the budgeted cost of work scheduled
Actual cost (AC), formerly called actual cost of work performed
The earned value (EV), formerly called the budgeted cost of work performed
Rate of Performance
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
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
Using Software to Assist in Cost Management
Spreadsheets are a common tool for resource planning, cost estimating, cost budgeting, and cost control
Many companies use more sophisticated and centralized financial applications software for cost information
Project management software has many cost-related features, especially enterprise PM software
Portfolio management software can help reduce costs