Cost Management

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Cost Management
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(No Transcript)
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3 Perspectives of Cost

• PM view
• Recognize when committed
• Accounting view
• Recognize when the invoice is received
• Controller (finance) view
• Recognize when paid
• (an article by Hamburger)

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Methods of Estimating/Budgeting

• Analogous Estimating
• Top-down budgeting
• Top/middle managers use previous similar projects
  and expert judgment
• Bottom-up estimating
• People doing the work create cost and schedule
  estimates
• Estimates are rolled up through the WBS to get
  project total
• Parametric estimating
• Using a mathematical model to predict project
  costs
• Computerized estimating tools
• Commercially available packages
• Industry databases

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Analogous estimating

• Advantages
• Quick
• Tasks need not be identified
• Less costly to create
• Gives PM an idea of managements expectations
• Overall project costs will be capped

• Disadvantages
• Less accurate
• Estimates prepared with a limited amount of
  detail and understand of the project
• Requires considerable experience to do well
• Infighting at top-levels to get the biggest piece
  of pie
• Extremely difficult for projects with uncertainty

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Analogous estimating

• Issues with analogous estimating
• Jobs always look easier, faster and cheaper to
  the boss than to the person who has to do it
• Bosses are usually optimistic and never admit
  that details have been forgotten or that anything
  could go wrong
• Subordinates are naturally pessimistic and want
  to build in protection for everything that could
  possibly go wrong.

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Bottom-up estimating

• Advantages
• More accurate
• Gains buy-in from team
• Based on a detailed analysis of the project
• Provides a bases for monitoring and control

• Disadvantages
• Takes time and expense to do
• Tendency for team to pad estimates
• Requires that project be defined and understood
• Team infighting to gain the biggest piece of pie
• Task could be forgotten

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Bottom-up estimating

• It should be fundamental dogma that the person
  who has to do the work should predict the amount
  of time it will take.
• Accountability is the twin of empowerment.
• -- Jim McCarthy, Dynamics of Software
  Development

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Parametric estimating

• Examples
• Cost per line of code
• Cost per linear meter
• Determined using
• Regression analysis/scatter diagrams
• Learning curves
• 100th room painted will cost less than the 1st
  room painted

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Types of cost

• Variable cost or fixed cost
• Variable cost
• any cost that changes with the amount of work
• Cost of material, supplies, wages
• Fixed cost
• Cost that do not change with the amount of work
• Setup cost, rental cost

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Types of cost

• Direct or indirect cost
• Direct cost
• Costs that can be attributed to the work on the
  project
• Team travel, team wages, project material costs
• Direct overhead costs rental of a trailer for
  the team
• Indirect cost
• Overhead costs
• Costs that are incurred for the benefit of more
  than one project
• Taxes, fringe benefits, janitorial services
• General, sales and administrative (GSA) or
  general and administrative

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Budget Uncertainty

• Why do budgets need to be changed?
• Errors made by cost estimator about how to
  achieve tasks.
• New knowledge about the nature of the performance
  goal or setting. Either client or contractor
  initiates.
• A mandate from an external (usually government or
  governing) organization.

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Budget Uncertainty

• Best practice for client-ordered changes
• include in contract a formal change control
  procedure
• allows for renegotiation of price and schedule.