Software Project Management (SPM)

Lecture 7
Cost Management

Dr. Daniel Keret

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Reading Assignment
Software Project Management, Bob Hughes and Mike Cotterell, McGraw-Hill, 3rd Edition. Chapter 9 A Guide to the Project Management Body of Knowledge, PMI Publications, 3rd Edition, 2004 Chapter 7

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Cost Management

Cost Management includes:

Cost Estimation Cost Budgeting Cost Control Estimation & Budgeting Main Tools & Techniques
Estimation Techniques Reserve Analysis ( Risk, Unknown, Cost of Quality) Cost Baseline Funding Requirements & Cash Flow

Cost Control.
Performance Measurement Analysis: Planned value, Actual Cost, Cost Variance, Cost Performance Index, Estimate to Complete Approved Change Requests

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Estimating Schedule Activity

Estimation Cost of the Resources Needed to complete the activity Includes variations to the cost estimate (Risk, Etc) Take into consideration Alternative Costing for the overall project time period
Cost of extended design effort VS. additional maintenance costs

Cost estimates include ALL resources that will be charged to the project including Inflation Forecast, Salary Increase, Contingency cost. ROM (Rough Order of Magnitude, E.G: 50/+100%) is allowed in the first stages. Refinement is required at later stages ( E.G: -10/+15%).
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Activity Estimating Inputs & Tools

Inputs
External Factors: Marketplace Condition, External Cost Information Databases Organization Assets: Historical Information, Estimating Policies and Templates, Team Knowledge Project Factors: Scope, WBS, Management Plan, Schedule Plan, Staffing Plan, Risk

Tools
Analogous Estimates Resource Cost Rates Parametric Estimates ( Function Points Etc) Vendor Bid Analysis Project Management Software
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Activity Estimating Inputs & Tools (Cont.)

Reserve Analysis (Contingency Allowance)

Will Be Used at the Discretion of the Project Manager Budgeting Project Unknowns

Risks
Will Be budgeted according to their severity level and probabilities The budget will cover mitigation activities and workarounds and will be implemented upon the project manager decision.

Cost of Quality (COQ)

Costs added to the project in order to ensure conformance with quality standards Cost of Non Quality Failure Cost/Rework. Costs that will added as a result of bugs and non-quality project activities

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Activity Estimating - Output

Activity Cost Estimating Most likely estimates of all the activity resources Estimate Details
Basis for the estimate (how it was developed) Assumptions made Constraints Possible range of the estimate ( 100000$ -10%/+15%)

Requested Changes ( If the estimate analysis recommends a change) CA Control Account (the corporate accounting number that will incur the cost of the activity) Cost Management Plan (Update)
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Cost Baseline

Aggregating the estimated costs of the individual scheduled activities to establish a total COST BASELINE for measuring and budgeting the project Inputs: WBS, Activity Cost Estimate, Project Schedule, Resource Calendar, Contracts, Cost Management Plan Tools & Techniques: Cost Aggregation, Reserve Analysis, Parametric Estimating ( adjustment to the aggregate cost), Funding Limit Reconciliation (can impact the schedule and overall cost) Output: Cost Baseline, Expected Cash Flow, Funding Requirements (including Management Reserve), Requested Changes, Updated Cost Management Plan
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Cost control

Assuring the Potential Cost Overrun do not exceed the authorized funding PERIODICALLY and in TOTAL Monitoring cost PERFORMANCE to detect and understand Variances from the Baseline Detect Changes as they occur Prevent unapproved changes Ensuring Requested Changes are Agreed Upon Report Changes to Stakeholders Acting to bring expected overruns within acceptable limits Influencing factors that creates changes to the cost baseline
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Performance Measurements

Planned Value (PV) or Budget Cost of Work Schedule (BCWS) baseline budget up to a given point in time. Earned Value of an Activity
0/100% technique ( The Recommended One): 0 if the activity is not fully completed. Full Actual Cost if the activity was completed. 50/50% technique: 50% of the planned cost if the activity started, 100% of the actual cost if it was completed Milestone Technique: Actual Cost at the milestone date.

Earned Value (EV) or Budget Cost of Work Performed (BCWP) the sum of the baseline costs of the work performed up to a given point in time Actual Cost (AC) or Actual Cost of Work Performed (ACWP) up to a given point in time
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Performance Indicators

Cost Variance The difference between actual and budget cost spent up to a given point in time: EV AC. Schedule Variance The difference of the baseline budget actually spend up to a given point of time and the baseline budget that was originally planned up to the same date: EV PV CPI (Cost Performance\Overrun Indicator): EV/AC Earned Value/Actual Cost. CPI < 1 indicates budget overrun SPI (Schedule Performance\Overrun Indicator): EV/PV Earned Value/Planned Value SPI<1 indicates schedule overrun
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Example

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Forecasting

Making Predictions or Estimates of the Project future Schedule or Cost based on the project available information at the time of the Forecasting. Forecasting is USED TOGETHER with Manual Forecasting of the remaining work. (which is considered to be more accurate) Definitions:
BAC (Budget At Completion): Cost baseline at the end of the project ETC (Estimate To Complete) EAC (Estimate At Completion) ADE Activity Duration Estimate

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Forecasting Techniques - Cost

Recalculate Cost of Future Scheduled Activities

Based on Typical Variance (History performance is a good prediction for the future performance) EV(NEW)=EV/CPI Based On Atypical Variance ( History deviation of planned performance is irrelevant for this activity) EV(NEW)=EV

ECT = SIGMA(Future Activities PV(NEW)). If all the future activities are typical then ETC=(BAC-EV)/CPI EAC = AC + ETC (actual cost to date + estimated cost to completion)
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Forecasting Techniques - Time

Recalculate Time of Future Activities

Based on Typical Variance (History performance of activity duration estimate is a good prediction for the future performance) ADE(NEW) = ADE/SPI Based On Atypical Variance ( History deviation of planned performance is irrelevant for this activity) ADE(NEW)=ADE

Estimate Time To Completion will be calculated according to the project work schedule and the critical path. If the variance is typical across the project we can use a rough estimate : ADE = Planned time to completion/SPI
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Example

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Cost Control Workflow

Input: Cost Baseline, Funding Requirements, Performance Information and Reports, Approved Change Requests, Project Management Plan Tools & Techniques: Cost Change Control System, Performance Measurement Analysis, Forecasting, Project Performance Review/Meeting, Variance Management Output: Cost Estimate Update, Cost Baseline Update, Performance Measurements, Forecasted Completion, Requested Changes, Recommended Corrective Actions, Organization Process Assets (lessons learned), Project Management Plan (update)
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Approved Change Requests

Changes in the Scope of the System

Requirements Requested By the Users and by Project Management. May Change the Baseline Cost of the project as well as the Planned Completion Date. Requires Stakeholders Approval

Changes that do not affect the project Scope

Usually Changed due to the project team requests Changed in Design, Architecture, Delays, Etc. Stakeholders will be notified if the changes are significant enough.

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