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IMS654 CHAPTER 7: PROJECT COST MANAGEMENT by: Nur Kamielia Laila…
IMS654 CHAPTER 7: PROJECT COST MANAGEMENT
by: Nur Kamielia Laila Binti Mohd Hamizan
The importance of project cost management
IT projects have a poor track record for meeting budget goals
COST
a resource sacrificed or foregone to achieve a specific objective or something given up in exchange
What is project cost management
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 item to establish a baseline for measuring performance
Controlling costs
: controlling changes to the project budget.
Basic principles of cost management
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 costs are costs that can be directly related to producing the products and services of the projects
Indirect costs are costs that are not directly related to the products or services of the project, but are indirectly related to performing the projects
Sunk costs is money that has been spent in the past, when deciding what projects to invest in or continue.
Planning cost management
How the costs will be managed throughout the life of the projects
including level of accuracy, units of measure, organizational procedure links, control thresholds, rules of performance measurement, reporting formats and process descriptions.
Life cycle costing
: considers total cost of ownership, or development plus support costs, for a project
Profits
: revenues minus expenditures
Profit margin
: ratio of profits to revenues
Cash flow analysis
: determines estimated annual costs and benefits for a project and resulting annual cash flow
Estimates costs
project managers must take cost estimates seriously if they want to complete projects within budget constraints.
Types of cost estimates
The association for the Advancement of Cost Engineering International identifies five types of for construction projects
-- order of magnitude, conceptual, preliminary, definitive and control
Estimates are usually done at various stages of a project
-- should become more accurate
Important to provide supporting details
A large percentage of total projects costs are often labor costs.
Tools and techniques for estimating costs
Analogous or top- down estimates
Bottom- up estimates
Three- point estimates
Parametric estimating
Typical problem associated with IT cost estimates
Estimates are done too quickly
People lack estimating experience
Human beings are biased toward underestimation
Management desires accuracy
Earned value management
Project performance measurement technique that integrates scope, time and cost data- Earned value management involves calculating three values for each activity or summary activity from a project's WBS (planned value, actual costs, earned value)
Important concepts
Cost variance (CV) is the earned value minus the actual costs
Schedule variance (SV) is the earned value minus the planned value
Cost performance index (CPI) is the ratio of earned value to actual cost
Schedule performance index (SPI) is the ratio of earned value to planned value
Estimate at completion (EAC) is an estimated cost of completing a project based on performance date.
To- complete performance index (TCPI) is a measure of the cost performance to meet a specific goal