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IT Project Cost & Risk Management

Cost Management and Drivers

Information Technology has a bad track in project effort and cost estimating.

Any idea where this bad track-record comes from?

  • No clear project objective
  • Start with an inadequate budget
  • Too little time and/or resources
  • No use of benchmarking

The only Solution is Cost Management

Types of Cost

Variable Costs: material, supplies, wages

  • Change with the amount of production/work

Fixed Costs: set-up, rental

  • Do not change as production change

Direct Costs: team travel, recognition and team wages

  • Directly attributable to the work of project

Indirect Costs: taxes, fringe benefit, janitorial services

  • overhead or cost incurred for benefit of more than one project

Project Cost Management includes the processes involved in planning, estimating, budgeting, and controlling costs so that the project can be completed within the approved budget. The Project Cost Management processes include the following:

Cost Estimating

Developing an approximation of the costs of the resources needed to complete project activities.

Cost Budgeting

Cost budgeting involves aggregating the estimated costs of individual schedule activities or work packages to establish a total cost baseline for measuring project performance. The project scope statement provides the summary budget.

Cost Control

Monitoring cost performance to detect and understand variances from the cost baseline.

Assuring that potential cost overruns do not exceed the authorized funding, periodically and in total for the project.

Recording all appropriate changes accurately against the cost baseline.

Schedule and Cost Estimation Model

The process of developing approximation of the monetary resources needed to complete project activities.

Cost Estimation

It is difficult since there are many factors that influence the cost of a project and not all them are under the projects direct control. Delays in the project execution increase the chances of cost escalation.

Effort Vs Duration (Schedule)

The Duration of the Task is measured in Work Hours.

The Effort of the Task is measured in Man Hours.

Relationship between Effort and Duration

The relationship between Project Effort and Duration can be best expressed by following formula:

(Effort) = (Duration) x (Number of Resources)

COCOMO predicts the effort and schedule for a software product development based on inputs relating to the size of the software and a number of cost drivers that affect productivity

    COCOMO has three different models that reflect the complexity:

  • Basic Model
  • Intermediate Model
  • Detailed Model

Single Point Estimate

  • You take a single estimate per task

Three point Estimate

  • You take three estimates per task
  • Optimistic Estimate - Best Case Scenario
  • Pessimistic Estimate - Worst Case Scena rio
  • Most Likely Estimate
  • Average the three estimates to get a three point estimate

Six point Estimation (PERT)

  • You take three estimates per task
  • Optimistic Estimate - Best Case Scenario
  • Pessimistic Estimate - Worst Case Scenario
  • Most Likely Estimate
  • Multiply the Most Likely estimate by 4, add to the Optimistic and Pessimistic estimates and divide by 6.

How Cost Control Benefits Your Business?
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Nothing in business can maximize profit like Cost Control. Estimating will not; the most accurate quantity survey and the most detailed budget are pointless if the plan cannot be communicated effectively. Organizing will not; the most prepared plan and the finest resource allocation are irrelevant in the face of constant change. Directing will not; the most skilled field general can not realize the goals without knowing the plan and how to profit from constant change. Cost Control alone is the vehicle to bring them all together to "compel the events to happen according to the plan" and to thrive in the face of constant change.

The activity of maintaining cost as per the established norms is known as cost control.Cost Control is a preventive function as it ascertains the cost before its occurrence. Cost Reduction is a corrective action.

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Cost Control

How to control cost?

The process of monitoring the status of the project to update the project budget and managing changes to the cost baseline.

  • Follow the cost management plan
  • Look at any organizational process asset that are available
  • Manage change and Recording all appropriate change
  • Preventing incorrect change and Ensuring requested changes are agreed upon
  • Managing the actual changes when and as they occur
  • Measure and measure and measure (monitoring)


Project management plan, Project funding requirement, Work performance information and Organizational process assets

Tools and Techniques

Earned value management, Forecasting, To-complete performance index, Performance reviews, Variance analysis and Project management software


Work performance measurement, Budget forecast, Organizational process updates, Change requests, Project management plan updates and Project document updates

Formula's for Earned Value Technique:

Budget Forecasting

Forecasting includes making estimates or predictions of conditions in the project's future based on information and knowledge available at the time of the forecast. Forecasts are generated, updated, and reissued based on work performance information provided as the project is executed and progressed.

BAC is equal to the total PV at completion for a schedule activity, work package, control account, or other WBS component. Formula: BAC = total cumulative PV at completion.

ETC is the estimate for completing the remaining work for a schedule activity, work package, or control account.

ETC based on new estimate

ETC equals the revised estimate for the work remaining, as determined by the performing organization. This more accurate and comprehensive completion estimate is an independent, non-calculated estimate to complete for all the work remaining, and considers the performance or production of the resource(s) to date. Alternatively, to calculate ETC using earned value data, one of two formulas is typically used:

ETC based on atypical variances

This approach is most often used when current variances are seen as atypical and the project management team expectations are that similar variances will not occur in the future. ETC equals the BAC minus the cumulative earned value to date (EVC). Formula: ETC = (BAC - EVC)

ETC based on typical variances

This approach is most often used when current variances are seen as typical of future variances. ETC equals the BAC minus the cumulative EVC (the remaining PV) divided by the cumulative cost performance index (CPIC). Formula: ETC = (BAC - EVC) / CPIC


Financial Models:

Payback period

Return on Investment (ROI)

Net Present Value (NPV)

Internal Rate of Return (IRR)

Net present value: the total present value (PV) of a time series of cash flows. It is a standard method for using the time value of money to appraise long-term projects.

Numeric Scoring Models:

Factor model

Decision Matrix

Cost Breakeven Analysis