Project Management

1
Project Management

• LectureBudgeting and Cost Control

2
Overview

• Cost Estimation
• Project Budgets
• Project Costing
• Cost Benefit Analysis
• Payback
• NPV
• Cost Control

3
Cost Estimation - Factors

• Hardware and Software costs
• including maintenance
• Travel and Training costs
• Effort costs (costs of paying SW engineers)
• Heating lighting and office space
• Support staff (accountants, cleaners etc)
• Infrastructure (network communications)
• Facilities (library, refreshments, recreation)
• Social security, employee benefits, pensions etc

4
Salary and Overheads

• Average Salary for Software Engineers in the UK
  (2002) 25,000
• Average Salary for IT managers in the UK (2002)
  50,000
• Overhead is typically 2 x Salary
• So a software engineer costs 75,000pa

5
CoCoMo

• Constructive Cost Model
• Uses lines of code as a measure
• Assumes that the waterfall model of software
  development will be used
• For well understood applications developed by
  small teams
• PM 2.4(KDSI)1.05 x M

6
CoCoMo Example

• How long will it take to produce 10,000 lines of
  code?
• PM 2.4(10)1.05 x 1 26.9PM
• Cost is gt 150,000
• What if the Programmer(s) is(are) very
  inexperienced
• PM 2.4(10)1.05 x 1.46 39.3PM

7
CoCoMo2

• Uses Object points rather than lines of code
• Allows for different development approaches
• See Somerville Software Engineering Chapter 23
  for more detail

8
Cost Benefit Analysis

• Compare the costs of carrying out a project with
  the estimated benefits
• Identify all costs
• Development Costs
• Running Costs annual costs

9
Cost Benefit Analysis

• Include all direct benefits of the project
• Will normally accrue on completion but not
  always
• May be annual benefits/savings
• Express costs and benefits in a common unit
• , , etc
• What about intangible benefits?

10
Cost Benefit Analysis

• Example layout

11
Project Costs

• Direct Costs Costs that can be directly
  attributed to a project task (labour, materials
  etc.)
• Indirect Costs Overheads that do not directly
  contribute to the project (rent, heating,
  lighting, admin)

12
Pricing vs. Costing

• Price to charge for software Cost Profit
• Other factors may effect the pricing
• e.g. competitive environment, loss leader project
• Pricing therefore involves
• project managers for costing
• senior management for pricing strategies

13
Costs vs. Budget

• Cost how much it will cost to produce system
• Budget how much you will be allowed to spend on
  producing system

14
Top Down Budget

• High level management set budget against high
  level tasks
• This is then divided amongst lower level tasks
  by lower levels of management
• Generally results in
• Inaccurate low level budgets
• Competition for available funds

15
Bottom up Budget

• Estimates are made on resource costs etc. for low
  level tasks (WBS)
• These are aggregated to provide direct costs for
  the project
• PM adds indirect costs admin, etc. and reserve
  (and profit figures)
• Senior management then cut the budget!

16
Evaluating a Project
Which of these projects is the best?
17
Net Profit
18
Net Profit

• The most obvious criteria for comparison
• Does not give the full picture regarding the
  viability of the project

19
Cash Flow

• Can the organisation afford the ve cash flow
  required for the development of the project
• e.g. Project BBB requires an initial outlay of
  1000,000

20
Cash Flow

• We need to spend money during the development of
  a product
• We hope to get it back once the product is
  finished
• Therefore projects will have a ve cash flow
  during their development
• This should become ve once the project is
  complete

21
Cash Flow Diagram
b
Income
Time
a
c
Cotterell and Hughes page 43
22
Cash Flow
23
Evaluating a Project
24
Payback Period

• The period of time it takes to recoup your
  initial investment
• A shorter payback period is preferred as it
  minimises the amount of time a project is in debt

25
Payback Period
26
Payback Period
27
Payback Period

• Find the payback period for projects BBB and DDD

28
Payback Period
29
Return on Investment

• Is it really worth investing all that time, money
  and effort into the project?
• To help make that decision we use the return on
  investment
• The investment will be the initial development
  costs of the project

30
Return on Investment

• Used to discover the percentage of return on the
  original project investment
• ROI average annual profit x 100
• total investment

31
Return on Investment

• For Project AAA
• Average annual profit 50,000/5 (years)
• Initial investment 100,000
• ROI 10,000 x 100
• 100,000
• ROI 10

32
Return on Investment

• Calculate the ROI for the remaining projects and
  show which one provides the best return

33
Return on Investment

• ROI (100,000/5)/1000000x100 2
• ROI (50,000/5)/100000x100 10
• ROI (75,000/5)/120000x100 12.5

• Project BBB
• Project CCC
• Project DDD

• Project BBB
• Project CCC
• Project DDD

34
Net Present Value

• Takes into account the profitability of a project
  and the timing of cash flows
• Receiving 1000 today is better then receiving
  1000 next year
• Inflation things will cost more
• Investment we lose a years interest

35
Net Present Value - Examples

• If we invested 100 this year it would be worth
  110 next year (assuming 10 interest rate not
  likely)
• Therefore if we were given 100 next year it
  would have been the same as investing 90(ish)
  this year.
• This 10 is called the discount rate

36
Net Present Value

• The present value of any future cash flow can be
  calculated using the following formula
• Present Value value in year t
• (1 r)t

37
PV Exercise

• If I gave you 100 in one years time, what would
  be its present value?
• Assume a percentage rate of 20
• 100/(1.20)1
• 83.33
• How about in three years?
• 100/(1.20)3
• 57.87

38
Net Present Value

• An alternative approach is to break down the
  problem into cash flow and discount factor
• Discount factor 1
  (1r)t
• Therefore
• Present Value Cash Flow x Discount Factor

39
Discount factor table
40
Net Present Value

• Net Present Value is the sum of the present
  values (aka discounted cash flows)
• As can be seen on the next slide, the profit
  figures can differ significantly using Net PV
  instead of Net Profit
• The payback period may also be effected

41
Net Present Value
42
Net Present Value
43
NPV Exercise

• Calculate the Discounted Cash Flows and annual
  NPV for Projects BBB, CCC and DDD
• Does this effect the payback period for any of
  these projects?

44
More Detailed NPV Example
(Cadle and Yeates 2001)
45
NPV Tutorial Exercise

• Have a go at the tutorial exercise handed out in
  the lecture
• To do this you will need to think about Cost
  Benefit Analysis and NPV
• A model answer will be provided next week

46
Cost Control

• We have established the projected costs for the
  project
• Each activity will have been given a cost value
  (in WBS)
• As the project progresses we must monitor the
  costs

47
Example 1
48
Cost Control -Questions

• 3 weeks into my 10 week project I find I have
  spent over 50 of the budget. What does this mean
  for the rest of the project?
• Check original cost plan (BCWS)
• Check actual work performed may be ahead of
  schedule (BCWP)
• Check actual cost of planned activities may be
  overspend (ACWP)

49
Cost Control

• Monitors work in progress
• Uses Three Measures
• BCWS Budgeted Cost of Work Scheduled
• BCWP Budgeted Cost of Work Performed
• Also known as Earned Value
• ACWP Actual Cost of Work Performed

50
Cost Control
51
Cost and Schedule Variance

• Diagram Shows relationship between BCWS, BCWP and
  ACWP
• Lockyer and Gordon Page 84

52
Variance Analysis

• BCWP ACWP Cost Variance
• BCWP BCWS Schedule Variance
• ACWP BCWS Budget Variance
• These can be used to assess the state of the
  project
• e.g. negative cost variance with zero schedule
  variance implies the project is on time but over
  budget

53
Conclusions

• Costs and Benefits may be incurred annually
• Development time for a project incurs a negative
  cash flow which may be large
• A number of factors can be combined to assess
  suitability of a project
• Incorporating NPV into the calculations can alter
  the payback period of a project
• NPV provides a more realistic model as it takes
  into account the future value of money

54
References

• Hughes and Cotterell Software Project
  Management (Ch 39)
• Lockyer and Gordon Project Management
• Cadle and Yeates Project Management for
  Information Systems
• Somerville Software Engineering
• A useful link
• http//www.cw360ms.com/pmsurveyresults/index.asp