Project Cost Management 1
Learning Objectives n n n 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 2
Learning Objectives (continued) n n n 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 Describe how project management software can assist in project cost management 3
The Importance of Project Cost Management n n n IT projects have a poor track record for meeting cost goals Average cost overrun was 189% of the original estimates In 1995, cancelled IT projects cost the U. S. over $81 billion 4
What Went Wrong? According to the San Francisco Chronicle front-page story, "Computer Bumbling Costs the State $1 Billion, " the state of California had a series of expensive IT project failures in the late 1990 s, costing taxpayers nearly $1 billion. Some of the poorly managed projects included the Department of Motor Vehicles vehicle registration and driver's license databases, a statewide child support database, the State Automated Welfare System, and a Department of Corrections system for tracking inmates. Senator John Vasconcellos thought it was ironic that the state which leads in creation of computers is the state most behind in using computer technology to improve state services. Also consider the Internal Revenue Service's expensive reengineering and IT project failures. The Internal Revenue Service (IRS) managed a series of project failures that cost taxpayers over $50 billion a year—roughly as much money as the annual net profit of the entire computer industry. 5
What is Cost and Project Cost Management? n n n Cost is a resource sacrificed or fore-gone 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 6
Project Cost Management Processes n n Estimate Activity Resources: determine what resources and quantities of them should be used Estimate costs: developing an approximation or estimate of the costs of the resources needed to complete a project Determine budget: allocating the overall cost estimate to individual work items to establish a baseline for measuring performance Control costs: controlling changes to the project budget 7
Proposal Pricing Strategies-Kerzner n Type I Acquisition: One of a kind project with little or no follow-on opportunity n n win the project, perform well and make a profit Type II Acquisition: New Program with potential for large follow-on business or representing a desired surge into a new market n win the project, perform well and gain a foothold in a new market segment, usually at a loss
Basic Principles of Cost Management n Most members of an executive board better understand are more interested in financial terms than IT terms, so IT project managers must speak their language n Profits are revenues minus expenditures n Profit margin is the ratio of revenues to profits n Life cycle costing considers the total cost of ownership, or development plus support costs, for a project n Cash flow analysis determines the estimated annual costs and benefits for a project and the resulting annual cash flow 9
Basic Principles of Cost Management n Most CEOs and boards know a lot more about finance than IT. IT project managers must speak their language n n n Profits are revenues minus expenses Life cycle costing is estimating the cost of a project over its entire life Cash flow analysis is determining the estimated annual costs and benefits for a project Benefits and costs can be tangible or intangible, direct or indirect Sunk cost should not be a criteria in project selection 10
Table 6 -1. Cost of Software Defects It is important to spend money up-front on IT projects to avoid spending a lot more later. 11
What Went Right? Ford Motor Company had great success with its Taurus/Sable project. Ford excels in team product development and seeks to remove barriers among design, engineering, production, marketing, sales, and purchasing. However, the Taurus team went far beyond that by creating a car that excelled in design and quality at half the typical development cost. They brought together all the relevant disciplines as a team and took the various steps in designing, producing, marketing, and selling the cars simultaneously as well as sequentially. Ford even included people outside the company for advice—car dealerships, insurance companies, and suppliers. One supplier even offered the services of its own drafting department to prepare initial designs for Ford's approval. Bringing together all the key players provided extremely valuable ideas at the conceptual stage, when changes can be made without much extra cost. "Not only were there substantial savings in cost and design time, but major production contracts were being negotiated and set up some three years ahead of production, with the duration of the contract some five years. This also led to cost economies. " 12
Resource Planning n n The nature of the project and the organization will affect resource planning Some questions to consider: n n How difficult will it be to do specific tasks on the project Is there anything unique in this project’s scope statement that will affect resources? What is the organization’s history in doing similar tasks? Does the organization have or can they acquire the people, equipment, and materials that are capable and available for performing the work? 13
Cost Estimating n n n An important output of project cost management is a cost estimate There are several types of cost estimates and tools and techniques to help create them It is also important to develop a cost management plan that describes how cost variances will be managed on the project 14
Name three Types of Cost Estimates 15
Name three techniques for Estimation n History data base Expert judgment a model like COCOMO n Tools and Techniques 16
Name Four Cost Estimation Tools and Techniques n 4 basic tools and techniques for cost estimates: n n Analogous or top-down: use the actual cost of a previous, similar project as the basis for the new estimate Bottom-up: estimate individual work items and sum them to get a total estimate Parametric: use project characteristics in a mathematical model to estimate costs Computerized tools: use spreadsheets, project management software, or other software to help estimate costs 17
Constructive Cost Model (COCOMO) n n Barry Boehm helped develop the COCOMO models for estimating software development costs Parameters include source lines of code or function points COCOMO II is a computerized model available on the web Boehm suggests that only parametric models do not suffer from the limits of 18 human decision-making
Typical Problems with IT Cost Estimates n n Developing an estimate for a large software project is a complex task requiring a significant amount of effort. Remember that estimates are done at various stages of the project—estimates are done too quickly Many people doing estimates have little experience doing them. Try to provide training and mentoring People have a bias toward underestimation. Review estimates and ask important questions to make sure estimates are not biased Management often wants a bid, not a real estimate. Project managers must negotiate with project sponsors to create realistic cost estimates 19
Cost Control—used during the Execution and Control Stages n Project cost control includes n n 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 Earned value analysis is an important tool for cost control 20
Earned Value Analysis (EVA) n n n EVA 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 You must enter actual information periodically to use EVA. Figure 6 -1 shows a sample form for collecting information 21
Using Software to Assist in Cost Management n n n Spreadsheets are a common tool for resource planning, cost estimating, cost budgeting, and cost control Many companies use more sophisticated and centralized financial applications software for cost information Project management software has many costrelated features 22
Discussion Questions n n n Do most colleges and companies provide adequate education and training in cost management for IT project managers? Give examples to support your answer. Give an example of using the following techniques for creating a cost estimate: analogous, parametric, bottom-up, and computerized tools. What is earned value analysis? Why is it the preferred method for measuring project performance? Why isn't it used more often? 23
Project Quality Management 24
Quality of Information Technology Projects n n n Many people joke about the poor quality of IT products (cars and computers joke) People seem to accept systems being down occasionally or needing to reboot their PCs There are many examples in the news about quality-related problems 25
Cars and Computer Joke n n Every time they repainted the lines on the road, you would have to buy a new car Occasionally your car would die on the freeway for no reason, and you would just accept this, restart, and drive on 26
Cars and Computer Joke, Continued n n Occasionally, executing a maneuver such as a left turn, would cause your car to shut down and refuse to restart, in which case you would have to reinstall the engine Only one person at a time could use the car, unless you bought Car. NT; but then you would have to buy more seats 27
Cars and Computer Joke, Continued n n The air bag system would say “Are you sure? ” before going off You would press the Start button to shut off the engine 28
What Went Wrong? n In one of the biggest software errors in banking history, Chemical Bank mistakenly deducted about $15 million from more than 100, 000 customer accounts one evening. The problem resulted from a single line of code in an updated computer program that caused the bank to process every withdrawal and transfer at its automated teller machines (ATMs) twice. For example, a person who withdrew $100 from an ATM had $200 deducted from his or her account, though the receipt only indicated a withdrawal of $100. The mistake affected 150, 000 transactions from Tuesday night through Wednesday afternoon. 29
Three most expensive programming errors: all maintenance errors n $1. 6 billion n n $900 million n n Company went bankrupt Company forced out of business $245 million All involved a single line of code MORAL: Maintenance must be done with great care and lots of testing 31
More “Wrongs…” n n n IRS—mismanagement in the 1990’s cost the taxpayer $60, 000, 000 a year—as much as the annual net profit of the entire computer industry State of California—$1, 000, 000 dollars of additional cost in software bumbling City of Lubbock—costing the taxpayer $5, 200, 000 in additional costs for its criminal justice system n A client/server system with front implementation in d. BASE IV 32
What Is Quality? n n n “The degree of excellence of a thing” (Webster’s Dictionary) “The totality of features and characteristics that satisfy needs” ( ASQC) Fitness for use New computers without monitors/keyboards is not FITNESS FOR USE, even though it lives up to the letter of the specs n © 2000 by Prentice-Hall Inc Russell/Taylor Oper Mgt 3/e Ch 3 - 2 33
What is the relationship between quality and cost? ? n n n The better the quality, the higher the cost? The better the quality, the lower the cost? There is no relationship between quality and cost 34
Use Watt’s Humphrey’s PSP Concepts n n Track time required to do personal tasks Track defects entered into analyses, designs, code, tests and try to reduce the personal defect rate 35
Dimensions Of Product Quality (Garvin) 1. Performance n basic operating characteristics 2. Features n “extra” items added to basic features 3. Reliability n probability product will operate over time © 2000 by Prentice-Hall Inc Russell/Taylor Oper Mgt 3/e Ch 3 - 3 37
Dimensions Of Product Quality, Continued 4. Conformance to requirements n meeting pre-established specifications 5. Durability n life span before replacement 6. Serviceability n ease of getting repairs, speed & competence of repairs © 2000 by Prentice-Hall Inc Russell/Taylor Oper Mgt 3/e Ch 3 - 4 38
Dimensions Of Product Quality, Continued 7. Aesthetics n look, feel, sound, smell or taste 8. Safety n freedom from injury or harm 9. Other perceptions subjective perceptions based on brand name, advertising, etc n © 2000 by Prentice-Hall Inc Russell/Taylor Oper Mgt 3/e Ch 3 - 5 39
What is the BIG STORY in quality management? n n n n Want to do something fast? ? Do it right the first time! Want to do something cheap? ? Do it right the first time! Want to do something well? ? Do it right the first time! DO I DETECT A PATTERN HERE? ? 40
The Quality Movement n n n Has produced a focus on processes Has produced a focus on product Has reduced focus on individuals 41
What Is Project Quality Management? n Project quality management ensures that the project will satisfy the needs for which it was undertaken 42
Do firms have a good handle on their costs of bad quality? n n n NO!! Companies are spending 4% of Revenues on defect prevention Meanwhile, companies are spending 20% of Revenues to fix defect-created problems 44
Modern Quality Management n Modern quality management n n requires customer satisfaction prefers prevention to inspection recognizes management responsibility for quality Noteworthy quality experts include Deming, Juran, Crosby, Ishikawa, Taguchi, and Feigenbaum 45
Quality Experts n n n Deming was famous for his work in rebuilding Japan and his 14 points Juran wrote the Quality Control Handbook and 10 steps to quality improvement Crosby wrote Quality is Free and suggested that organizations strive for zero defects Ishikawa developed the concept of quality circles and using fishbone diagrams Taguchi developed methods for optimizing the process of engineering experimentation Feigenbaum developed the concept of total 46 quality control
Deming n Said quality is 85% managerial and 15% worker induced n n n (Management decides what processes, what products, what technology and what training) Management decides on processes, training, Gave us the PDCA cycle 47
The Deming Wheel (or P-DC-A Cycle) 4. Act Institutionalize improvement… Continue cycle 1. Plan Identify problem Develop plan for improvement 2. Do Implement plan on test basis 3. Study / Check Is the plan working 48
Figure 7 -1. Sample Fishbone or Ishikawa Diagram 49
Malcolm Baldrige Award and ISO 9000 n n The Malcolm Baldrige Quality Award was initiated by Congress in 1987 to recognize companies with world-class quality and to motivate American companies to improve the quality of their products ISO 9000 provides minimum requirements for an organization to meet their quality certification standards—started by US Military first 50
QUALITY PROCESS: Planning Quality n n n It is important to design in quality and communicate important factors that directly contribute to meeting the customer’s requirements Design of experiments helps identify which variables have the most influence on the overall outcome of a process Many scope aspects of IT projects affect quality like functionality, features, system outputs, performance, reliability, and maintainability 51
QUALITY PROCESS: Performing Quality Assurance n n 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 can be used to generate ideas for quality improvements Quality audits help identify lessons learned that can improve performance on current or future projects 52
QUALITY PROCESS: Performing Quality Control n The main outputs of quality control are n n acceptance decisions rework process adjustments Some tools and techniques include n n pareto analysis statistical sampling quality control charts testing 53
Quality Checking (Control) n n n Reviews Walkthroughs Testing, testing Gates Catch defects, bugs, faulty design as early in the lifecycle as possible 54
Defects and the Lifecycle 55
Pareto Analysis n n n Pareto analysis involves identifying the vital few contributors that account for the most quality problems in a system Also called the 80 -20 rule, meaning that 80% of problems are often due to 20% of the causes Pareto diagrams are histograms that help identify and prioritize problem areas 56
Figure 7 -2. Sample Pareto Diagram 57
Statistical Sampling and Standard Deviation n Statistical sampling involves choosing part of a population of interest for inspection— runs counter to the quality movement 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) 58
Table 7 -1. Commonly Used Certainty Factors 95% certainty: Sample size = 0. 25 X (1. 960/. 05) = 384 90% certainty: Sample size = 0. 25 X (1. 645/. 10) = 68 80% certainty: Sample size = 0. 25 X (1. 281/. 20) = 10 59
Standard Deviation n Standard deviation measures how much variation exists in a distribution of data A small standard deviation means that data cluster closely around the middle of a distribution and there is little variability among the data A normal distribution is a bell-shaped curve that is symmetrical about the mean or average value of a population 60
Figure 7 -3. Normal Distribution and Standard Deviation 61
Table 7 -2. Sigma and Defective Units 62
Quality Control Charts, Six Sigma, and the Seven Rule n n n A control chart is a graphic display of data that illustrates the results of a process over time. It helps prevent defects and allows you to determine whether a process is in control or out of control Operating at a higher sigma value, like 6 sigma, means the product tolerance or control limits have less variability The seven rule states that if seven data points in a row are all below the mean, above the mean, or increasing or decreasing, then the process needs to be examined for non-random problems 63
Figure 7 -4. Sample Quality Control Chart 64
Figure 7 -5. Reducing Defects with Six Sigma 65
Testing n n 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 66
Figure 7 -6. Testing Tasks in the Software Development Life Cycle 67
Types of Tests n n A unit test is done to test 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 the end user prior to accepting the delivered system 68
Figure 7 -7. Gantt Chart for Building Testing into a Systems Development Project Plan Project 98 file 69
Improving Information Technology Project Quality n Several suggestions for improving quality for IT projects include n n Leadership that promotes quality Understanding the cost of quality Focusing on organizational influences and workplace factors that affect quality Following maturity models to improve quality 70
Leadership n n “It is most important that top management be quality-minded. In the absence of sincere manifestation of interest at the top, little will happen below. ” (Juran, 1945) A large percentage of quality problems are associated with management, not technical issues (Deming) 71
The Cost of Quality n The cost of quality is n n the cost of conformance or delivering products that meet requirements and fitness for use the cost of nonconformance or taking responsibility for failures or not meeting quality expectations 72
Table 7 -3. Costs Per Hour of Downtime Caused by Software Defects 73
Five Cost Categories Related to Quality n n n Prevention cost: the cost of planning and executing a project so it is error-free or within an acceptable error range Appraisal cost: the 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 74
Organization Influences, Workplace Factors, and Quality n n Study by De. Marco and Lister showed that organizational issues had a much greater influence on programmer productivity than the technical environment or programming languages Programmer productivity varied by a factor of one to ten across organizations, but only by 21% within the same organization Study found no correlation between productivity and programming language, years of experience, or salary A dedicated workspace and a quiet work environment were key factors to improving programmer productivity 75
Maturity Models n Maturity models are frameworks for helping organizations improve their processes and systems n n The Software Engineering Institute’s Capability Maturity Model provides a generic path to process improvement for software development Several project management maturity models have been developed 76
Project Management Maturity Model 1. Ad-Hoc: The project management process is described as disorganized, and occasionally even chaotic. The organization has not defined systems and processes, and project success depends on individual effort. There are chronic cost and schedule problems. 2. Abbreviated: There are some project management processes and systems in place to track cost, schedule, and scope. Project success is largely unpredictable and cost and schedule problems are common. 3. Organized: There are standardized, documented project management processes and systems that are integrated into the rest of the organization. Project success is more predictable, and cost and schedule performance is improved. 4. Managed: Management collects and uses detailed measures of the effectiveness of project management. Project success is more uniform, and cost and schedule performance conforms to plan. 5. Adaptive: Feedback from the project management process and from piloting innovative ideas and technologies enables continuous improvement. Project success is the norm, and cost and schedule performance is continuously improving. 86
Discussion Questions n n Provide examples of improving IT project quality through improved leadership, better understanding of customer requirements, the cost of quality, and improved testing. What factors did De. Marco and Lister find to be correlated with improving productivity of programmers? Do these findings make sense to you? 87
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