INSE 6230

Total Quality Project Management ` Multiple choice questions

` True/False questions
` Completion questions
Lecture 7
` Simple calculations
` Full-sized problems
Project Cost Management

INSE 6230
Total Quality Project Management 2

` Cost is a resource sacrificed or foregone to achieve a

` IT projects have a poor track record for meeting specific objective or something given up in exchange
x Usually measured in monetary units
g g
budget goals
` Project
P j t costt managementt includes
i l d the th processes
` Cost overrun is the additional percentage or required to ensure that the project is completed within
dollar amount by which actual costs exceed an approved budget. It involves 3 processes:
estimates x Estimating costs: developing an approximation or
` The average cost overrun ranges from 33% to estimate of the costs of the resources needed to complete
a project
180%, depending on the study and year
x Determining the budget: allocating the overall cost
estimate to individual work items to establish a baseline for
measuring performance
x Controlling costs: controlling changes to the project
budget

INSE 6230 INSE 6230

Total Quality Project Management 3 Total Quality Project Management 4

1
 ` Profits are revenues minus expenditures
` Break-even point is the level of business activity where
total costs equal total revenue
revenue.
◦ Profit region
◦ Loss region

INSE 6230 INSE 6230

Total Quality Project Management 5 Total Quality Project Management 6

` Fixed costs are constant regardless of level of

output or activity
` Profit margin is the ratio of revenues to profits (%) x Factory floor space, equipment, property tax
` Life cycle costing considers the total cost of ` Variable costs depend on level of output or activity
ownership, or development plus support costs, for a x Labor, material
project
x Firms often do not spend enough money in the early phases of ` Direct costs are costs that can be directly related
IT projects, which impacts the total cost of ownership to producing the products and services of the
` Cash flow analysis determines the estimated project
annual costs and benefits for a project and the x Salaries of employees working full time on the project,
project cost of
resulting annual cash flow hardware or software purchased specifically for the project
` Indirect costs are costs that are not directly related
to the products or services of the project
x Electricity, paper towels
INSE 6230 INSE 6230
Total Quality Project Management 7 Total Quality Project Management 8

2
 ` Tangible costs or benefits are those costs or ` Learning curve theory
◦ When many items are produced repetitively, the unit cost
benefits that an organization can easily measure in of those items decreases in a regular pattern as more
dollars units
it are produced
d d
` Intangible costs or benefits are costs or benefits
that are difficult to measure in monetary terms 80% learning curve
x Prestige, statements of improved productivity, improved • Denotes 20% of unit time
morale, lost time (cost) with each doubling of
x Harder to justify cumulative production

` Sunk cost is money that has been spent in the

past
x When deciding what projects to invest in or continue, you
should not include sunk costs
x Sunk costs should be forgotten!

INSE 6230 INSE 6230

Total Quality Project Management 9 Total Quality Project Management 10

• Based on the resource requirements

` Top-down estimates (analogous estimates)
• People, skills, hours, equipment, etc.
◦ Use the actual cost of a previous, similar project as the
• Types of cost estimates: g the cost of the current p
basis for estimating project
j
` Bottom-up estimates (activity based costing)
◦ Involve estimating individual work items or activities and
summing them to get a project total
◦ Based on WBS
` Parametric modeling
◦ Uses project characteristics (parameters) in a
mathematical model to estimate project costs

INSE 6230 INSE 6230

Total Quality Project Management 11 Total Quality Project Management 12

3
 Estimate annual labor and material costs for a new production facility
based on the following data:
` Labor costs: Labor cost index value was 124 ten years ago and is 188
Power-sizing model today. Annual labor costs for a similar facility were $575,500 ten years
◦ Used to estimate costs of industrial p
plants and g
ago
equipment. ` Material costs: Material cost index value was at 544 three years ago

◦ Uses the power-sizing exponent, to represent and is 715 today. Annual material costs for a similar facility were
$2,455,000 three years ago
economies of scale in size or capacities
` Solution:
` Cost index ` Labor costs: Annual cost today Index value today
=
◦ Dimensionless number reflecting the change in price over Annual cost 10 yrs ago Index value 10 yrs ago
time (commodity price index, e.g. labor costs, composite Annual cost today = (188/124)*$575 500 = $871,800
(188/124)*$575,500 $871 800
index, e.g. Manufacturer’s Price Index)
◦ Cost at time A = Index value at time A ` Material costs: Annual cost today = Index value today
Cost at time B Index value at time B Annual cost 3 yrs ago Index value 3 yrs ago
Annual cost today = (715/544)*$2,455,000 = $3,227,000

INSE 6230 INSE 6230

Total Quality Project Management 13 Total Quality Project Management 14

z Goal of the project is

z to produce 100 handheld devices
z to continue developing the software (user interface)
z to test the new system in the field
z to train 100 surveyors on how to use the new system
z Estimate based on WBS

INSE 6230 INSE 6230

Total Quality Project Management 15 Total Quality Project Management 16

4
 ` Cost budgeting involves allocating the project cost
estimate to individual work items over time
` Required inputs to the cost budgeting process
◦ WBS
◦ Activity cost estimates
◦ Project schedule
` Important goal is to produce a cost baseline
◦ A time-phased budget that project managers use to
measure andd monitor
it costt performance
f

INSE 6230 INSE 6230

Total Quality Project Management 17 Total Quality Project Management 18

` Project cost control includes: Planned value (PV)

◦ Monitor cost performance • BCWS - Budgeted cost of work scheduled = the budget
• The portion of the approved total cost estimate planned
x Comparing “budgeted” and “actual”
to be spent on an activity during a given period
◦ Determine the appropriate project changes to be
included in a revised cost baseline
◦ Inform project stakeholders of authorized changes to the
project that will affect costs 120000

100000
` Earned Value Management (EVM) is a project 80000
performance
p measurement techniqueq that 60000 BCWS
PV
integrates scope, time, and cost data 40000

◦ Given a baseline (original plan plus approved changes), you can 20000

determine how well the project is meeting its goals 0

Feb-03

Apr-03
May-03

Oct-03
Jul-03
Jan-03

Jun-03

Aug-03
Sep-03

Nov-03
Dec-03
Mar-03
◦ You must enter actual information periodically to use EVM

INSE 6230 INSE 6230

Total Quality Project Management 19 Total Quality Project Management 20

5
 Earned value (EV)
Actual cost (AC) • BCWP = budgeted cost of work performed
• ACWP = actual cost of work performed • An estimate of the value of the physical work actually completed
• The total of direct and indirect costs incurred in g
• EV is based on the original p
planned costs for the p
project
j or
accomplishing work on an activity during a given period activity and the rate at which the team is completing work on the
project or activity to date

120000
120000
100000
100000
80000
80000 BCWS
56000 PV
56000 BCWP PV 60000 BCWP EV
60000 55000
ACWP AC 49000 ACWP AC
49000 40000
40000

20000 20000

0 0

Nov-03
Jan-03

Jun-03
Jul-03
Nov-03
Jan-03

Jun-03

Jul-03

Feb-03
Mar-03
Apr-03
May-03

Aug-03
Sep-03
Oct-03

Dec-03
Feb-03
Mar-03

Apr-03

May-03

Aug-03
Sep-03

Oct-03

Dec-03
INSE 6230 INSE 6230
Total Quality Project Management 21 Total Quality Project Management 22

` How to determine EV?

◦ We need to know how much work has been completed to date
Actual Cost:
Cost what you Today
have actually spent to
y Byy summing g the PV of all the completed
p tasks

Cost (Person-Hours)
this point in time.
time
y EV = Σ PV (completed tasks)
y Linking earned value to sub-task completions, where a
predetermined amount is accrued for each completed sub-task Planned Value:
Value what your
plan called for sending on
y Incremental milestones - earning value for draft, final, and the tasks planned to be
approval of a project document completed by this date.

Earned Value:
Value value (cost)
y By the percentage of the work completed of what you have
y EV = PV to date * % complete accomplished to date, per
the baseline plan.
y Pro-rating PV based on task percent completion
y Supervisor opinion

Time (Date)
INSE 6230 INSE 6230
Total Quality Project Management 23 Total Quality Project Management 24

6
 • According to the plan, a web server installation project should take 1 week
and $10,000 to be completed. After the first week, the cost was already
$15,000 and the project was only 75% complete.
¾ What is PV, AC and EV after the first week?

• Planned value – budgeted cost until this point

PV = 10,000
• What is PV, AC and EV on day X?
• Actual cost – actual cost spent until this point
AC = 15,000 • Planned Value (budgeted cost until this point)
PV = 18 + 10 + (20*0.8) + (40*0.15) = 18 + 10 + 16 + 6 = $50
• Earned value - actual cost of the work performed
• Earned Value (actual cost of the work performed)
EV = PV to date * % complete
EV = 18 + (10*0.8) + (20*0.7) + 0 = 18 + 8 + 14 + 0 = $40
EV = 10,000*75%
EV = 7,500 • Actual Cost (actual cost spent until this point)
AC = $45 (Data from the accounting system, not evident from the above chart)

INSE 6230 INSE 6230

Total Quality Project Management 25 Total Quality Project Management 26

Behind
Schedule

Under
Budget

INSE 6230 INSE 6230

Total Quality Project Management 27 Total Quality Project Management 28

7
 ` Variance - any schedule or cost deviation from a specific plan. ` Schedule variance (SV) SV = EV – PV
◦ Used within an organization to verify the budget and schedule for a ◦ A comparison of amount of work performed during a given period of
project and as a key component of plan reviews and performance time to what was scheduled to be performed.
measurement ◦ SV=0: according to the plan
x SV equals zero at project completion
` Cost variance (CV) CV = EV – AC
◦ Negative CV: it took longer than planned to perform the work
◦ A comparison of the budgeted cost of work performed with actual cost.
◦ Positive CV: it took shorter than planned to perform the work
◦ CV=0: according to the plan
x SV much greater than 0 could be a bad sign as well
◦ Negative CV: performing the work cost more than planned
◦ Positive CV: performing the work cost less than planned
x SV much greater than 0 could be a bad sign as well

INSE 6230 INSE 6230

Total Quality Project Management 29 Total Quality Project Management 30

• PV = 10,000
AC = 15,000
` Cost performance index (CPI) CPI = EV / AC EV = 7,500
◦ To estimate the projected cost of performing the project
◦ CPI = 1 the costs are exactlyy as budgeted
g
¾ CV,
CV SV,
SV CPI,
CPI SPI?
◦ CPI < 1 the project is over budget
◦ CPI > 1 the project is under budget
Cost variance: CV = EV – AC Cost performance index: CPI = EV/AC
` Schedule performance index (SPI) SPI = EV / PV CV = 7,500 – 15,000 CPI = 7,500/15,000
◦ To estimate the projected time to complete the project CV = -7,500 CPI = 50%
◦ SPI = 1 the project is on schedule
Schedule variance: SV = EV – PV Schedule performance index: SPI = EV/PV
◦ SPI < 1 the project is behind the schedule SV = 7
7,500
500 – 10
10,000
000 SPI=
SPI 77,500/10,000
500/10 000
◦ SPI > 1 the project is ahead of schedule SV = -2,500 SPI = 75%

INSE 6230 INSE 6230

Total Quality Project Management 31 Total Quality Project Management 32

8
 • On day X:
• Planned Value: PV = $50
• Earned Value: EV = $40
• Actual Cost: AC = $45
Therefore:
` Schedule Variance:
Variance SV = EV – PV = 40 - 50 = -10 (behind schedule)
` Schedule Performance Index: SPI = EV / PV = 0.8, or 80% of plan
` Cost Variance: CV = EV - AC = 40 - 45 = -5 (over budget)
` Cost Performance Index CPI = EV / AC = 40 / 45 = 0.89, or you are getting
an 89¢ return on every $ (person-hour) spent on this project

INSE 6230 INSE 6230

Total Quality Project Management 33 Total Quality Project Management 34

` Budget at completion (BAC) ` A project has an original total budget of $1,000,000. At month 10, the AC is
◦ The original total budget for the project $800,000. Suppose CPI=0.87, and SPI=0.93. Calculate the EAC under the 3
` Estimate at completion (EAC) situations:
◦ An estimate of what it will cost to complete the project based on ◦ (1) The project continues under the same conditions experienced to date.
performance to date ◦ (2) The project continues under the conditions as originally planned.
• Medium estimate: EAC = BAC / CPI ◦ (3) We expect further problems
If it is expected that the project continues under the same
conditions as experienced to date (i.e. we expect all future task
` BAC=1,000,000, At month 10: AC = 800,000, CPI=0.87, and SPI=0.93
overrun at the same rate as now):
• Low estimate: EAC= BAC + (AC - EV at present)
If it is expected that the project continues under the conditions as ` 1) EAC = BAC/CPI = 1,000,000/10.87 = 1,149,425
originally planned: (i.e. we have fixed the problems behind the 2) EAC = BAC + (AC-EV)
current cost overrun))
EV = SPI*AC = 0
0.93*800,000
93*800 000 = 744
744,000
000
• High estimate: EAC = BAC + (AC - EV) / (CPI * SPI)
If it is expected that the project continues even worse than EAC = 1,000,000 + (800,000 – 744,000) = 1,056,000
experienced to date: (i.e. we expect further problems) 3) EAC = BAC + (AC-EV) / (CPI * SPI)
` Estimated Time to Complete (ETC) EAC = 1,000,000 + (800,000 - 744,000) / (0.87 * 0.93) = 1,305,153
x ETC = Original Time Estimate / SPI
INSE 6230 INSE 6230
Total Quality Project Management 35 Total Quality Project Management 36

9
 ` Project cost management is a traditionally weak ` Midterm Exam!!!
area of IT p j , and p
projects, j
project g
managers must
work to improve their ability to deliver projects
within approved budgets
` Main processes include:
◦ Estimate costs
◦ Determine the budget
◦ C t l costs
Control t

INSE 6230 INSE 6230

Total Quality Project Management 37 Total Quality Project Management 38

10