Chapter 6
(part 2)
Project Cost Management.
Objectives:
Define and understand key cost management terms
Understand all the components of a project budget
Cost Management consists of 2 main components:
- estimate costs - determine budget
Cost Management: main parts
Importance of Cost Management Planning
Cost is a resourcesacrificed or fore-gone to achieve a specific objective or something given up in exchange
Costs are usually measured in monetary units like dollars Project cost managementis concerned with the
1) planning, 2) estimating, 3) budgeting, and 4) control
of the cost of project resources needed to complete 100% of the activities of the project
Cost estimating:developing an estimate of the costs and resources needed to complete an entire project
Cost budgeting:allocating the overall cost estimate to individual work items to establish a baseline for measuring performance
Basic Principles of Cost Management
Burden Rate
is the overall cost of a human resource which takes into consideration more than just his/her salary or hourly rate, for things such as benefits, medical insurance, paid vacation and holidays, etc.
Direct vs. Indirect Costs
Direct costs are directly attributable to the activities of the project (purchasing hardware or software, labor cost of workers on the team.
Indirect costs, the opposite of direct, are costs that are not directly attributable to the activities of the project (overhead rates such as energy costs, rents, etc.).
Recurring vs. Nonrecurring costs
Recurring costs appear more than once throughout the life of the project (annual hardware and software maintenance).
Nonrecurring (one-time) costs appear only once (initial purchase cost of hardware and software). Fixed vs. Variable Costs
Fixed costs are expenses whose total does not change in proportion to the activity of a business or project, within the relevant time period or scale of production (rent, insurance).
Variable costs change based on the activity of a business or project (project employee costs). Sunk Cost
Cost expended that cannot be retrieved on a product or service. Money already spent that can not be recovered
Life Cycle Costs
All costs incurred over the life time of the product or service
Basic Principles of Cost Management
Reserves are dollars included in a cost estimate to mitigate cost risk by allowing for future situations that are difficult to predict. (Critical Chain buffers)
Contingency reserves allow for future situations that may be partially planned for (sometimes called known unknowns) and are included in the project cost baseline Management reserves allow for future situations that are unpredictable (sometimes
called unknown unknowns)
The cost estimating process is used to develop accurate cost estimates for the resources needed to complete each activity of the project
The human resource and time estimates have already been done, so in this part of the process simply apply the relevant burden rate for each selected resource
Next, accurate cost estimates need to be created for all types of resources not just human resources such as: materials, equipment, and facilities
Lab 2:
Project Cost Management
(Project Cost Estimates)
Function Points (FP)-Based
Project Cost Estimate
(create Excel electronic spreadsheets at home based on your
PERSONALIZED
Lab2 assignment)
Function Point (FP-Based) Approach
The estimated number of FP is derived:
FP
estimated= count-total 3 [0.65 + 0.01 3 S (F
i)]
FP
estimated= 375
organizational average productivity = 6.5 FP/pm.
burdened (above and beyond) labor rate = $8000 per month, approximately
$1230/FP.
Based on the FP estimate and the historical productivity data,
total estimated
project cost is $461,000 and estimated effort is 58 person-months.
FP-Based Approach: Pros and Cons
Advantages:
It is independent of programming language and technology
It can be used early in the project life cycle at the end of the requirements discovery phase or design phase
A wealth of research exists to support the process
Impact of scope changes easier for all to comprehend and track
Organizations can track their own results and improve the function point estimates It can be used in any development environment
Disadvantages:
Requires many subjective evaluations (complexity ratings and environmental factors) Accuracy is greatly increased only after the detailed design phase or after a few project
iterations have been performed
Takes some time (training) to perfect and can vary depending on who is doing the calculations due to personal bias
Lab2: FP-Based Estimation (2/4)
Lab2: FP-Based Estimation (4/4)
Lines of Code (LOC)-Based
Project Cost Estimate
(create Excel electronic spreadsheets at home based
on your
PERSONALIZED
Lab2 assignment)
Lines of Code (LOC)-Based Approach
1. Average productivity for systems of this type = 620 LOC/pm.
2. Burdened labor rate =$8000 per month, the cost per line of code is
approximately $13.
3. Based on the LOC estimate and the historical productivity data, the total
estimated project cost is
$431,000 and the estimated effort is 54
person-months.
LOC-Based Estimation: Tools Available
(for example, OHLOC tool)
Task Sizing Method: Lines of Code (LOC)
Has been one of the most used methods Based on historical results
Effort, dollars, documentation, software bugs, and number of resources Advantages
Can be very quick and inexpensive to generate Can be done early in the process
Universal metric
Can be generated easily, in most environments automatically Facilitate a lessons-learned process
Disadvantages
Must compensate for technology differences Can’t be done well unless relevant history exists Must determine what counts as a line of code What level of resource is generating the code No industry standards
Need to distinguish between auto-generated code and original work Needs to be continually updated
Project Cost Estimate: Hourly Rates
(create Excel electronic spreadsheets at home
based on your
PERSONALIZED
Lab2
assignment)
Project Cost Estimate: Materials’ Table
(create Excel electronic spreadsheets at home based
on your
PERSONALIZED
Lab2 assignment)
The Bottom Line:
Project Cost Budget
PM presents to the stakeholders and project team the entire picture of all costs (one-time, recurring, HR, materials, etc.) for the project
taking into account all of the following cost categories: direct and indirect, recurring and nonrecurring, fixed and variable, and all life cycle costs