ch 4 pcost mgmt.ppt - Chapter 3: Project Cost Management...

Chapter 3:
Chapter 3:
Project Cost Management
Project Cost Management
Information Technology Project
Information Technology Project
Management,
Management,
Fifth Edition
Fifth Edition

Learning Objectives

Understand the importance of project cost
management
 Explain basic project cost management
principles, concepts, and terms
 Discuss different types of cost estimates and
methods for preparing them
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Information Technology Project Management, Fifth Edition, Copyright 2007

The Importance of Project Cost
Management
 IT projects have a poor track record for meeting
budget goals
 The CHAOS studies found the average cost
overrun (the additional percentage or dollar
amount by which actual costs exceed estimates)
ranged from 180 percent in 1994 to 43 percent in
2002; other studies found overruns to be 33-34
percent
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Information Technology Project Management, Fifth Edition, Copyright 2007

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
 Project managers must make sure their projects are well
defined, have accurate time and cost estimates and have
a realistic budget that they were involved in approving
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Information Technology Project Management, Fifth Edition, Copyright 2007

Reasons for Cost Overruns
 Not emphasizing the importance of realistic project cost
estimates from the outset
 Many of the original cost estimates for IT projects are low
to begin with and based on very unclear project
requirements
 Many IT professionals think preparing cost estimates is a
job for accountants when in fact it is a very demanding
and important skill that project managers need to acquire
 Many IT projects involve new technology or business
processes which involve untested products and inherent
risks
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Information Technology Project Management, Fifth Edition, Copyright 2007

Project Cost Management Processes
 There are three project cost management
processes:
 Cost estimating : developing an approximation or
estimate of the costs of the resources needed to
complete a project
 Cost budgeting : allocating the overall cost
estimate to individual work items to establish a
baseline for measuring performance

Cost control : controlling changes to the project
budget
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Information Technology Project Management, Fifth Edition, Copyright 2007

Project Cost Management Summary
Information Technology Project Management, Fifth Edition, Copyright 2007
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Basic Principles of Cost Management
 Cash flow analysis determines the estimated annual costs
and benefits for a project and the resulting annual cash
flow

Too many projects with high cash flow needs in the same year
may not be able to be supported which will impact profitability

Tangible costs or benefits are those costs or benefits that