Chapter 6:
Project Cost
Management
Information Technology
Project Management,
Seventh Edition
Note: See the text itself for full citations.
Learning Objectives
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
Information Technology Project Management,
Seventh Edition
Learning Objectives
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
Information Technology Project Management,
Seventh Edition
What is Cost and Project Cost
Management?
Cost is a resource sacrificed or foregone to
achieve a specific objective or something
given up in exchange
Costs are usually measured in monetary units
like dollars
Project cost management includes the processes
required to ensure that the project is
completed within an approved budget
Information Technology Project Management,
Seventh Edition
Project Cost Management Processes
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 items to
establish a baseline for measuring performance
Controlling costs: controlling changes to the
project budget
Information Technology Project Management,
Seventh Edition
Figure 7-1. Project Cost Management
Summary
Information Technology Project Management,
Seventh Edition
Basic Principles of Cost Management
Most members of an executive board better
understand and are more interested in financial
terms than IT terms , so IT project managers must
speak their language
◦ Profits are revenues minus expenditures
◦ Profit margin is the ratio of revenues to profits
◦ Life cycle costing considers the total cost of
ownership, or development plus support costs, for a
project
◦ Cash flow analysis determines the estimated annual costs
and benefits for a project and the resulting annual cash
flow
Information Technology Project Management,
Seventh Edition
Table 7-1. Cost of Downtime
for IT Applications
Source: The Standish Group International, “Trends in IT Value,” [Link] (2008).
Information Technology Project Management,
Seventh Edition
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 project
Indirect costs are costs that are not directly
related to the products or services of the
project, but are indirectly related to performing
the project
Sunk cost is money that has been spent in the
past; when deciding what projects to invest in or
continue, you should not include sunk costs
Information Technology Project Management,
Seventh Edition
More Basic Principles of Cost Management
Learning curve theory states that when many items
are produced repetitively, the unit cost of those
items decreases in a regular pattern as more units
are produced
Reserves are dollars included in a cost estimate
to mitigate cost risk by allowing for future
situations that are difficult to predict
◦ 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
Information Technology Project Management,
Seventh Edition
Planning Cost Management
The project team uses expert judgment, analytical
techniques, and meetings to develop the cost
management plan
A cost management plan includes:
◦ Level of accuracy and units of measure
◦ Organizational procedure links
◦ Control thresholds
◦ Rules of performance measurement
◦ Reporting formats
◦ Process descriptions
Information Technology Project Management,
Seventh Edition
Estimating Costs
Project managers must take cost estimates
seriously if they want to complete projects within
budget constraints
It’s important to know the types of cost
estimates, how to prepare cost estimates, and
typical problems associated with IT cost estimates
Information Technology Project Management,
Seventh Edition
Cost Estimation Tools and Techniques
Basic tools and techniques for cost estimates:
◦ Analogous or top-down estimates: use the actual cost of a
previous, similar project as the basis for estimating the
cost of the current project
◦ Bottom-up estimates: involve estimating individual work
items or activities and summing them to get a project
total
◦ Parametric modeling uses project characteristics
(parameters) in a mathematical model to estimate project
costs
Information Technology Project Management,
Seventh Edition
THREE-POINT ESTIMATING
Most likely (cM).
The cost of the activity, based on realistic effort
assessment for the required work and any predicted
expenses.
Optimistic (cO).
The cost based on analysis of the best-case scenario
for the activity.
Pessimistic (cP).
The cost based on analysis of the worst-case
scenario for the activity.
Information Technology Project Management,
Seventh Edition
Typical Problems with IT Cost Estimates
Estimates are done too quickly
People lack estimating experience
Human beings are biased toward underestimation
Management desires accuracy
Information Technology Project Management,
Seventh Edition
Determining the Budget
Cost budgeting involves allocating the project cost
estimate to individual work items over time
The WBS is a required input to the cost budgeting
process since it defines the work items
Important goal is to produce a cost baseline
◦ a time-phased budget that project managers use to measure
and monitor cost performance
Information Technology Project Management,
Seventh Edition
Controlling Costs
Project cost control includes
◦ Monitoring cost performance
◦ Ensuring that only appropriate project changes are included
in a revised cost baseline
◦ Informing project stakeholders of authorized changes to the
project that will affect costs
Many organizations around the globe have problems with
cost control
Information Technology Project Management,
Seventh Edition
Using Software to Assist in Cost
Management
Spreadsheets are a common tool for resource
planning, cost estimating, cost budgeting, and
cost control
Many companies use more sophisticated and
centralized financial applications software for
cost information
Project management software has many cost-related
features, especially enterprise PM software
Portfolio management software can help reduce
costs
Information Technology Project Management,
Seventh Edition
Chapter Summary
Project cost management is a traditionally weak
area of IT projects, and project managers must
work to improve their ability to deliver projects
within approved budgets
Main processes include
◦ Plan cost management
◦ Estimate costs
◦ Determine the budget
◦ Control costs
Information Technology Project Management,
Seventh Edition
Information Technology Project Management,
Seventh Edition