chapter 7&8

Chapter 7: Project Cost Management

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
 Understand the processes involved in cost budgeting and preparing a cost estimate, and budget for an information technology project
 Understand the benefits of earned value management and project portfolio management to assist in cost control

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 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

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

Basic Principles of Cost Management
 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

 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)

Cost Estimating
 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
Table 7-2: Types of Cost Estimates
Cost Management Plan
 A cost management plan is a document that describes how the organization will manage cost variance on the project
 A large percentage of total project costs are often labor costs, so project managers must develop and track estimates for labor

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

Typical Problems with IT Cost Estimates
 Estimates are done too quickly
 Lack of estimating experience
 Human beings are biased toward underestimation
 Management desires accuracy

Cost Budgeting
 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
 An important goal is to produce a cost baseline
 A time-phased budget that project managers use to measure and monitor cost performance

Cost Control
 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

Earned Value Management (EVM)
 EVM is a project performance measurement technique that integrates scope, time, and cost data
 Given a baseline (original plan plus approved changes), you can determine how well the project is meeting its goals
 More and more organizations around the world are using EVM to help control project costs

Earned Value Management Terms
 The planned value (PV), formerly called the budgeted cost of work scheduled (BCWS), also called the budget, is that portion of the approved total cost estimate planned to be spent on an activity during a given period
 Actual cost (AC), formerly called actual cost of work performed (ACWP), is the total of direct and indirect costs incurred in accomplishing work on an activity during a given period
 The earned value (EV), formerly called the budgeted cost of work performed (BCWP), is an estimate of the value of the physical work actually completed
 EV is based on the original planned costs for the project or activity and the rate at which the team is completing work on the project or activity to date

Rate of Performance
 Rate of performance (RP) is the ratio of actual work completed to the percentage of work planned to have been completed at any given time during the life of the project or activity
 Brenda Taylor, Senior Project Manager in South Africa, suggests this term and approach for estimating earned value
 For example, suppose the server installation was halfway completed by the end of week 1; the rate of performance would be 50% because by the end of week 1, the planned schedule reflects that the task should be 100% complete and only 50% of that work has been completed

Rules of Thumb for Earned Value Numbers
 Negative numbers for cost and schedule variance indicate problems in those areas
 CPI and SPI less than 100% indicate problems
 Problems mean the project is costing more than planned (over budget) or taking longer than planned (behind schedule)
 The CPI can be used to calculate the estimate at completion (EAC)—an estimate of what it will cost to complete the project based on performance to date; the budget at completion (BAC) is the original total budget for the project
Project Portfolio Management
 Many organizations collect and control an entire suite of projects or investments as one set of interrelated activities in a portfolio
Benefits of Portfolio Management
 Schlumberger saved $3 million in one year by organizing 120 information technology projects into a portfolio
 META Group research shows that:
 Organizations that evaluate information technology projects by what their business impacts are and what their potential business values will be implement projects that result in 25 percent more improvement to the bottom line


Chapter 8: Project Quality Management

Learning Objectives
 Understand the importance of project quality management for information technology products and services
 Define project quality management and understand how quality relates to various aspects of information technology projects
 Describe quality planning and its relationship to project scope management
 Discuss the importance of quality assurance
 Explain the main outputs of the quality control process

The Importance of Project Quality Management
 Many people joke about the poor quality of IT products to accept systems being down occasionally or needing to reboot their PCs
 But quality is very important in many IT projects

What Is Project Quality?
 The International Organization for Standardization (ISO) defines quality as “the degree to which a set of inherent characteristics fulfills requirements” (ISO9000:2000)
 Other experts define quality based on:
 Conformance to requirements: the project’s processes and products meet written specifications
 Fitness for use: a product can be used as it was intended

What Is Project Quality Management?
 Project quality management ensures that the project will satisfy the needs for which it was undertaken
 Processes include:
 Quality planning: identifying which quality standards are relevant to the project and how to satisfy them
 Quality assurance: periodically evaluating overall project performance to ensure the project will satisfy the relevant quality standards
 Quality control: monitoring specific project results to ensure that they comply with the relevant quality standards

Quality Planning
 Implies the ability to anticipate situations and prepare actions to bring about the desired outcome
 Important to prevent defects by:
 Selecting proper materials, Training and indoctrinating people in quality, and Planning a process that ensures the appropriate outcome

Design of Experiments
 Design of experiments is a quality planning technique that helps identify which variables have the most influence on the overall outcome of a process
 Also applies to project management issues, such as cost and schedule trade-offs
 Involves documenting important factors that directly contribute to meeting customer requirements

Scope Aspects of IT Projects:
 Functionality is the degree to which a system performs its intended function
 Features are the system’s special characteristics that appeal to users
 System outputs are the screens and reports the system generates
 Performance addresses how well a product or service performs the customer’s intended use
 Reliability is the ability of a product or service to perform as expected under normal conditions
 Maintainability addresses the ease of performing maintenance on a product

Who’s Responsible for the Quality of Projects?
 Project managers are ultimately responsible for quality management on their projects
 Several organizations and references can help project managers and their teams understand quality
 International Organization for Standardization (www.iso.org)
 IEEE (www.ieee.org)

Quality Assurance
 Quality assurance includes all the activities related to satisfying the relevant quality standards for a project
 Another goal of quality assurance is continuous quality improvement
 Benchmarking generates ideas for quality improvements by comparing specific project practices or product characteristics to those of other projects or products within or outside the performing organization
 A quality audit is a structured review of specific quality management activities that help identify lessons learned that could improve performance on current or future projects

Quality Control
 The main outputs of quality control are: Acceptance decisions, Rework and Process adjustments

Quality Control Charts
 A control chart is a graphic display of data that illustrates the results of a process over time
 The main use of control charts is to prevent defects, rather than to detect or reject them
 Quality control charts allow you to determine whether a process is in control or out of control
 When a process is in control, any variations in the results of the process are created by random events; processes that are in control do not need to be adjusted

The Seven Run Rule
 You can use quality control charts and the seven run rule to look for patterns in data
 The seven run rule states that if seven data points in a row are all below the mean, above the mean, or are all increasing or decreasing, then the process needs to be examined for nonrandom problems: Quality, Control Chart, Run Chart, Scatter Diagram, Histograms, Flowcharts and Pareto Charts.
 A Pareto chart is a histogram that can help you identify and prioritize problem areas
 Pareto analysis is also called the 80-20 rule, meaning that 80 percent of problems are often due to 20 percent of the causes

Statistical Sampling
 Statistical sampling involves choosing part of a population of interest for inspection
 The size of a sample depends on how representative you want the sample to be
 Sample size formula: Sample size = .25 X (certainty factor/acceptable error)2
 Be sure to consult with an expert when using statistical analysis

 Six Sigma is “a comprehensive and flexible system for achieving, sustaining, and maximizing business success. Six Sigma is uniquely driven by close understanding of customer needs, disciplined use of facts, data, and statistical analysis, and diligent attention to managing, improving, and reinventing business processes.”*

Basic Information on Six Sigma:
 The target for perfection is the achievement of no more than 3.4 defects per million opportunities
 The principles can apply to a wide variety of processes
 Six Sigma projects normally follow a five-phase improvement process called DMAIC

DMAIC
 DMAIC is a systematic, closed-loop process for continued improvement that is scientific and fact based
 DMAIC stands for:
 Define: Define the problem/opportunity, process, and customer requirements
 Measure: Define measures, then collect, compile, and display data
 Analyze: Scrutinize process details to find improvement opportunities
 Improve: Generate solutions and ideas for improving the problem
 Control: Track and verify the stability of the improvements and the predictability of the solution

How Is Six Sigma Quality Control Unique?
 It requires an organization-wide commitment and Training follows the “Belt” system
 Six Sigma organizations have the ability and willingness to adopt contrary objectives, such as reducing errors and getting things done faster
 It is an operating philosophy that is customer-focused and strives to drive out waste, raise levels of quality, and improve financial performance at breakthrough levels

Six Sigma Projects Use Project Management
 The training for Six Sigma includes many project management concepts, tools, and techniques
 For example, Six Sigma projects often use business cases, project charters, schedules, budgets, and so on
 Six Sigma projects are done in teams; the project manager is often called the team leader, and the sponsor is called the champion

Six Sigma and Statistics
 The term sigma means standard deviation
 Standard deviation measures how much variation exists in a distribution of data
 Standard deviation is a key factor in determining the acceptable number of defective units found in a population
 Six Sigma projects strive for no more than 3.4 defects per million opportunities, yet this number is confusing to many statisticians
 Six Sigma Uses a Conversion Table
 Using a normal curve, if a process is at six sigma, there would be no more than two defective units per billion produced
 Six Sigma uses a scoring system that accounts for time, an important factor in determining process variations
 Yield represents the number of units handled correctly through the process steps
 A defect is any instance where the product or service fails to meet customer requirements

Six 9s of Quality
 Six 9s of quality is a measure of quality control equal to 1 fault in 1 million opportunities
 In the telecommunications industry, it means 99.9999 percent service availability or 30 seconds of down time a year
 This level of quality has also been stated as the target goal for the number of errors in a communications circuit, system failures, or errors in lines of code

Testing
 Many IT professionals think of testing as a stage that comes near the end of IT product development
 Testing should be done during almost every phase of the IT product development life cycle

Types of Tests
 Unit testing tests each individual component (often a program) to ensure it is as defect-free as possible
 Integration testing occurs between unit and system testing to test functionally grouped components
 System testing tests the entire system as one entity
 User acceptance testing is an independent test performed by end users prior to accepting the delivered system

ISO Standards
 ISO 9000 is a quality system standard that:
 Is a three-part, continuous cycle of planning, controlling, and documenting quality in an organization
 Provides minimum requirements needed for an organization to meet its quality certification standards
 Helps organizations around the world reduce costs and improve customer satisfaction
 See www.iso.org for more information

The Cost of Quality
 The cost of quality is the cost of conformance plus the cost of nonconformance
 Conformance means delivering products that meet requirements and fitness for use
 Cost of nonconformance means taking responsibility for failures or not meeting quality expectations
 A 2002 study reported that software bugs cost the U.S. economy $59.6 billion each year and that one-third of the bugs could be eliminated by an improved testing infrastructure

Five Cost Categories Related to Quality
 Prevention cost: cost of planning and executing a project so it is error-free or within an acceptable error range
 Appraisal cost: cost of evaluating processes and their outputs to ensure quality
 Internal failure cost: cost incurred to correct an identified defect before the customer receives the product
 External failure cost: cost that relates to all errors not detected and corrected before delivery to the customer
 Measurement and test equipment costs: capital cost of equipment used to perform prevention and appraisal activities

Maturity Models
 Maturity models are frameworks for helping organizations improve their processes and systems
 The Software Quality Function Deployment Model focuses on defining user requirements and planning software projects
 The Software Engineering Institute’s Capability Maturity Model Integration is a process improvement approach that provides organizations with the essential elements of effective processes