Information technology project management 7th edition kathy schwalbe solutions manual

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Chapter 7: Project Cost Management Chapter Overview Chapter 7 provides an introduction to the third knowledge area of the triple constraint— project cost management. Important topics include basic project cost management principles, concepts, and terms, resource planning, types of cost estimates, cost budgeting, earned value management, and project portfolio management.

Chapter Objectives • • • • • • •

Understand the importance of project cost management Explain basic project cost management principles, concepts, and terms Describe the process of planning cost management Discuss different types of cost estimates and methods for preparing them Understand the processes of determining a budget and preparing a cost estimate for an information technology (IT) project Understand the benefits of earned value management and project portfolio management to assist in cost control Describe how project management software can assist in project cost management

Instructor Notes Importance of Project Cost Management Cost management is a trouble spot for IT project managers who are not interested in the subject. Most senior managers who make IT project decisions know more about cost issues than they do about technology, so project managers need to learn to speak the language of cost management. If students have had previous courses in accounting or finance, ask them to help explain some of the basic principles of cost management that all professionals should understand.

Basic Principles of Cost Management Many students confuse profits and costs. Give an example to illustrate the difference between the two concepts (see #2 in the “Quick Quiz” section near the end of this document).

Emphasize the importance of a project’s life cycle costs. Investment decisions for projects are usually based on projected life cycle costs and benefits. Because there are several important terms in this section, you might want to create a short quiz or matching exercise to help reinforce the meanings of the terms. When the economy is bad, it is even more important for project managers to understand these concepts.

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Planning Cost Management Planning cost management, similar to planning schedule management, is the first step in this knowledge area. The main output is a cost management plan. As you can see, every knowledge area now includes a process to plan for that knowledge area.

Estimating Costs Few students have created cost estimates. Table 7-2 provides a good summary of the types of cost estimates. Summarize the cost estimating tools and techniques, and then show students the sample estimate that is based on the opening case. If you have another sample cost estimate, show it to students to help them understand what an estimate looks like and how it is prepared. Stress that there are several ways to create cost estimates, and many resources are available on this topic.

Determining the Budget Many students have heard of budgeting, but few have experienced the process of creating budget inputs or spending money within budget guidelines. Share examples of cost budgeting and cost baselines. Figure 7-4 provides one example based on the sample cost estimate.

Many states have their budgets available online. Search the Internet for sample documents.

Many government cost estimates are available to the public. Emphasize that the cost baseline is a very important output of cost budgeting for a project. Project cost performance is measured against this baseline. Project managers should provide input into the budgeting process. Review the Media Snapshot to see how President Obama used new technologies to help raise money and volunteers for his election.

Controlling Costs An important part of a project manager's job is controlling project costs. Discuss the integrated change control systems described in Chapter 4, as well as standard reports that show a project’s budgeted and actual costs. Then plan to spend a fair amount of time explaining earned value management. Students may become confused by the many acronyms involved. Help students memorize the formulas in Table 7-4 and then work through a few of the examples that are provided in the text. Explain that although earned value management makes perfect sense in theory, it is difficult to implement in most projects. The government is a strong proponent of earned value management, and more and more private companies are starting to use this technique to help manage projects and control costs. Show the results of a recent study on the percentage and types of projects using earned value management (Figure 7-6). An increasing number of organizations are also using project portfolio management.

Using Software to Assist in Cost Management Demonstrate some of the cost-related features of Project 2010, as described in Appendix A. You can also demonstrate some features of Excel that help you prepare cost estimates, budgets, and earned value charts. If you have easy access to the Internet, search for project portfolio management software to view sample screens.

Classroom Activities 1. Earned Value

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Have students complete Exercise 1 during class. Make sure they know how to perform earned value calculations and interpret the results.

2. Examples of Real Cost Data Find examples of cost estimates or budget inputs. Let students review and critique the information. There are many examples of budgets for weddings, for example. Microsoft even provides an Excel wedding budget template.

Troubleshooting Tips Go through several examples in this chapter. Have students complete earned value exercises during class and make sure they understand this concept of project cost management.

Students often want to do more hands-on activities, so let them use Excel or Project 2010 to prepare some cost estimates in class or at home. Using Project 2010 to handle cost and human resources data can be cumbersome, so review the appropriate section of the Appendix with the class beforehand. Warn students that if you assign resources to a task, Project 2010 assumes that the resources are full time. In real life, project tasks are usually not assigned full-time resources.

Quick Quiz 1. What is a black swan project? ANSWER: One with a huge overrun.

2. Suppose you sell ten widgets per day on average, and the average cost per widget is $10.

If you sold eleven widgets in one day, what would the effect on profits be?

ANSWER: There is not enough information to answer this question. You are given costs and asked to estimate profits. You do not know what the average profit is per widget.

You might lose money by selling more widgets.

3. What is the formula for calculating cost variance?

ANSWER: EV-AC

Discussion Questions 1. Why do you think it’s difficult to understand some of the basic cost terms in this chapter?

Why aren’t many technical people interested in cost-related subjects? What could be done to change this?

2. Suppose you were asked to prepare a cost estimate for a project to purchase laptops for all faculty and staff at your college or university. How would you start? How long would it take you to prepare a good estimate? What type of estimate would you prepare, and what approach would you use to develop a cost estimate?

3. What can organizations do to ensure that estimates are good? What can they do to prevent cost overruns?

Key Terms •

actual cost (AC) — The total of direct and indirect costs incurred in accomplishing work on an activity during a given period

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analogous estimates — A cost-estimating 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 baseline — The original project plan plus approved changes bottom-up estimates — A cost-estimating technique based on estimating individual work items and summing them to get a project total budget at completion (BAC) — The original total budget for a project budgetary estimate — A cost estimate used to allocate money into an organization’s budget cash flow analysis — A method for determining the estimated annual costs and benefits for a project contingency reserves — Dollar amounts included in a cost estimate to allow for future situations that may be partially planned for (sometimes called known unknowns) and that are included in the project cost baseline cost baseline — A time-phased budget that project managers use to measure and monitor cost performance cost performance index (CPI) — The ratio of earned value to actual cost; can be used to estimate the projected cost to complete the project cost variance (CV) — The earned value minus the actual cost definitive estimate — A cost estimate that provides an accurate estimate of project costs direct costs — Costs that can be directly related to creating the products and services of the project earned value (EV) — An estimate of the value of the physical work actually completed earned value management (EVM) — A project performance measurement technique that integrates scope, time, and cost data estimate at completion (EAC) — An estimate of what it will cost to complete the project based on performance to date indirect costs — Costs that are not directly related to the products or services of the project, but are indirectly related to performing the project intangible costs or benefits — Costs or benefits that are difficult to measure in monetary terms known unknowns — Dollar amounts included in a cost estimate to allow for future situations that may be partially planned for (sometimes called contingency reserves) and that are included in the project cost baseline learning curve theory — A theory that when many items are produced repetitively, the unit cost of those items normally decreases in a regular pattern as more units are produced life cycle costing — The total cost of ownership, or development plus support costs, for a project management reserves — Dollar amounts included in a cost estimate to allow for future situations that are unpredictable (sometimes called unknown unknowns) overrun — The additional percentage or dollar amount by which actual costs exceed estimates parametric estimating — A cost-estimating technique that uses project characteristics (parameters) in a mathematical model to estimate project costs

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planned value (PV) — The portion of the approved total cost estimate planned to be spent on an activity during a given period profit margin — The ratio between revenues and profits profits — Revenues minus expenses project cost management — The processes required to ensure that the project is completed within the approved budget rate of performance (RP) — The 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 reserves — Dollar amounts included in a cost estimate to mitigate cost risk by allowing for future situations that are difficult to predict rough order of magnitude (ROM) estimate — A cost estimate prepared very early in the life of a project to provide a rough idea of what a project will cost schedule performance index (SPI) — The ratio of earned value to planned value; can be used to estimate the projected time to complete a project schedule variance (SV) — The earned value minus the planned value sunk cost — Money that has been spent in the past tangible costs or benefits — Costs or benefits that can be easily measured in dollars top-down estimates — A cost-estimating technique that uses the actual cost of a previous, similar project as the basis for estimating the cost of the current project; also called analogous estimates unknown unknowns — Dollar amounts included in a cost estimate to allow for future situations that are unpredictable (sometimes called management reserves)