EM 612 Project Management of
Complex Systems
Lecture 6– Estimating, Resources
and Budgeting
Dr. Feng Liu
Assistant Professor
School of Systems and Enterprises
Stevens Institute of Technology
Part 1: Controlling the Schedule
2
Part 1: Controlling the Schedule
• Goals of control schedule:
–
–
–
–
know the status of the schedule
influence factors that cause schedule changes
determine if the schedule has changed,
and manage changes when they occur
• Tools and techniques include
– Progress reports
– A schedule change control system
– Project management software, including schedule comparison
charts like the tracking Gantt chart
– Variance analysis, such as analyzing float or slack
3
Schedule
Control
Suggestions
• Perform reality checks on
schedules
• Allow for contingencies
• Don’t plan for everyone to work
at 100% capacity all the time
• Hold progress meetings with
stakeholders and be clear and
honest in communicating
schedule issues
Buffers and Critical Chain
• Buffer: additional time to complete a task
• Murphy’s Law: if something can go wrong, it will
• Parkinson’s Law: work expands to fill the time
allowed (e.g. submitting your report in the last
minute)
• People often add a buffer to each task and use
it if it’s needed or not
Discussion on Buffer and Critical Chain:
Tenera, A. B. (2008). Critical chain buffer sizing: a comparative study. Paper presented
at PMI® Research Conference: Defining the Future of Project Management, Warsaw,
Poland. Newtown Square, PA: Project Management Institute.
https://www.pmi.org/learning/library/critical-chain-project-management-theory7118
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Three-Point Estimates
• Instead of providing activity estimates as a
discrete number, such as four weeks, it’s often
helpful to create a three-point estimate
– an estimate that includes an optimistic, most
likely, and pessimistic estimate, such as three
weeks for the optimistic, four weeks for the most
likely, and five weeks for the pessimistic estimate
– Estimated time using three-point estimate:
T = (OT+MLT+PT)/3
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Program Evaluation and Review Technique (PERT)
• PERT is a network analysis technique used to
estimate project duration when there is a high
degree of uncertainty about the individual
activity duration estimates
• PERT uses probabilistic time estimates
– duration estimates based on using optimistic,
most likely, and pessimistic estimates of activity
durations, or a three-point estimate
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PERT Formula and Example
• PERT weighted average =
optimistic time + 4X most likely time + pessimistic time
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• Example:
PERT weighted average =
8 workdays + 4 X 10 workdays + 24 workdays = 12 days
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If we use three-point estimate, what’s the estimated
duration ?
where optimistic time= 8 days
most likely time = 10 days, and
pessimistic time = 24 days
Therefore, you’d use 12 days on the network diagram
instead of 10 when using PERT for the above example
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Crashing & Fast tracking
• Crashing: adding resources to reduce the project duration.
Crashing adds costs to the project
• Fast tracking: Allows projects phases to overlap to reduce
the project duration. Fast tracking adds risk to the project.
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Part 2: Cost management
10
Part 2.1: What is Project Cost Management? (1 of 2)
• Project cost management includes the processes
required to ensure that the project is completed within
an approved budget
– Planning cost management: determining the policies,
procedures, and documentation that will be used for
planning, executing, and controlling project cost
– Estimating costs: developing an approximation or
estimate of the costs of the resources needed to
complete a project
– Determining the budget: allocating the overall cost
estimate to individual work items to establish a baseline for
measuring performance
– Controlling costs: controlling changes to the project
budget
What is Project Cost Management? (2 of 2)
ITTOs
Basic Principles of Cost Management (1 of 3)
• Most members of an executive board better understand
and are more interested in financial terms than IT terms;
they need to be able to present and discuss the following
project information
– Profits: revenues minus expenditures
– Profit margin: ratio of profits to revenues
– Life cycle cost: considers total cost of ownership, or
development plus support costs, for a project
– Cash flow analysis: determines estimated annual costs and
benefits for a project and resulting annual cash flow
Basic Principles of Cost Management (2 of 3)
Types of costs and benefits
– 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 (reputation skill level of employees)
– Direct costs: Costs are attributed directly to the project work and
cannot be shared among projects (for example, airfare, hotels, longdistance phone charges, and so on).
– Indirect costs: Costs that are representative of more than one
project (for example, utilities for the performing organization, access
to a training room, PM software license, and so on).
– Fixed cost: Constant through the project. Rented equipment, fixedprice consultant
– Variable cost: Vary based on conditions in the project (# of
participants, supply and demand of materials)
– 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
Basic Principles of Cost Management (3 of 3)
• Additional concepts
– 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.
Comment: Contingency reserve need not refer exclusively to monetary terms. It
can also refer to a specific quantity of time in man hours.
• Management reserves allow for future situations that are unpredictable
(sometimes called unknown unknowns)
Management reserves is not part of the performance measurement baseline
(PMB), but is included in the total contract budget. Stated another way, the
contract budget base (CBB) is equal to the PMB plus MR.
Cost Management Plan
• Subsidiary plan of the project management
plan
• Addresses three other cost management
processes
– How cost are estimated
– How the project budget is managed
– How cost will be controlled
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Planning Cost Management
•
•
The first step in project cost management is planning how the costs will be
managed throughout the life of the project
– The project team uses expert judgment, analytical techniques, and
meetings to develop the cost management plan
Cost management plan includes:
– Level of accuracy (rounding, contingency to include – 10 or 20%)
– Units of measure (labor hours, days, etc)
– Organizational procedure links (e.g., WBS component used for project
cost accounting known as the control account, Project teams charges
cost toward this account)
– Control thresholds (e.g., similar to variance, variation allowed, e.g., 10%)
– Rules of performance measurement (i.e., how often actual costs will be
tracked and to what level of detail)
– Reporting formats (format and frequency of reports required)
– Process descriptions (describes how to perform all of the cost
management processes)
Part 2.2: Cost Estimation Tools and Techniques
• 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
• Three-point estimates
– Involve estimating the most likely, optimistic, and
pessimistic costs for items
• Parametric estimating
– Uses project characteristics (parameters) in a
mathematical model to estimate project costs
Hybrid model – where combination of 2 or more (all) can be
used
Estimating Costs (1of 3)
Project managers must take cost estimates seriously if they want to complete
projects within budget constraints
Type of Estimate
When Done (a 5-year project)
Why Done
Typical Range
Rough order of
magnitude (ROM)
Very early in the project life cycle,
often 3–5 years
before project completion
Provides estimate of cost for
selection decisions
-25% to + 75%
Budgetary
Early, 1–2 years out
Puts dollars in the budget
plans
-10% to +25%
Definitive
Later in the project, less than 1 year
out
Puts dollars in the budget
plans
-5% to +10%
Table 7-1 Types of cost estimates
Estimating Costs (2 of 3)
• The number and type of cost estimates vary by application area
– The Association for the Advancement of Cost Engineering
International identifies five types of cost estimates for
construction projects
• Order of magnitude, conceptual, preliminary, definitive, and
control
– Estimates are usually done at various stages of a project
• Should become more accurate as time progresses
– It is important to provide supporting details for estimates and
updates to project documents
– A large percentage of total project costs are often labor costs
Estimating Costs (3 of 3)
Department
Year 1
Year 2
Year 3
Year 4
Year 5
Totals
Information
systems
24
31
35
13
13
116
Marketing
systems
3
3
3
3
3
15
Reservations
12
29
33
9
7
90
Contractors
2
3
1
0
0
6
Totals
41
66
72
25
23
227
Table 7-2 Maximum FTE (full time equivalent) by department by year
How to Develop a Cost Estimate and Basis of
Estimates (1 of 3)
Before creating an estimate gather as much information as
possible about the project, ask how the organization plans to
use the cost estimate, and clarify the ground rules and
assumptions
How to Develop a Cost Estimate and Basis of
Estimates (2 of 3)
•
•
This shows the cost per WBS item
Asterisks (SW Development) above provides a reference regarding how this estimation was made
– Higher of two estimation (Labor estimate versus Function Points estimate) was chosen as long as
difference is no more than 20%– see comparison in next slide
How to Develop a Cost Estimate and Basis of Estimates (3
of 3)
•
•
Labor estimate versus Function Points estimate comparison
–
Definition: Function points are a means of measuring software size in terms that are meaningful to end users
Lastly, it is very important to have several people review the project cost estimate
Best Practice
• Alvin Alexander wrote a book called Cost Estimating in an
Agile Development Environment in 2015
– Function points are a means of measuring software size in terms
that are meaningful to end users
– User stories are a common way to describe requirements in a
simple, concise way
– Developers can analyze user stories for function points
Definitions: A user story is a tool used in Agile software development to capture a description of a
software feature from an end-user perspective. A user story describes the type of user, what they
want and why. A user story helps to create a simplified description of a requirement.
The function point is a "unit of measurement" to express the amount of business functionality an
information system provides to a user.
Typical Problems with Cost Estimates
• Reasons for inaccuracies
– Estimates are done too quickly
– People lack estimating experience
– Human beings are biased toward underestimation
Part 2.3: Determining the Budget (1 of 2)
• Budgeting involves allocating the project cost estimate to
individual work items over time
– Material resources or work items are based on the
activities in the WBS for the project
• Important goal is to produce a cost baseline
– Time-phased budget that project managers use to
measure and monitor cost performance
Determining the Budget (2 of 2)
Project Budget… includes estimates + Reserves
A control account is a management control point at which budgets (resource plans) and actual costs are
accumulated and compared to earned value for management control purposes.
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Project Budget Component
• Project budget is composed of Cost baseline plus
Management reserve
• Control Accounts are work package cost estimates
plus contingency reserve
• And work package cost estimates is activity cost
estimate plus activity contingency reserve
Part 2.4: Controlling Costs
• Activities involved in controlling project costs
– 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
• Several tools and techniques assist in project cost control
– Expert judgment, data analysis, project management
information systems, and the to-complete performance
index
Earned Value Management (EVM) (1 of 3)
•
EVM is project performance measurement technique that integrates scope, time, and
cost data
– Given a cost performance baseline (original plan plus approved changes),
project managers can determine how well the project is meeting the
scope, time and cost goals (by entering actual information and compare
to baseline)
– EV provides early warning signs, helping to control scope, time and cost
•
Current performance is the best indicator of future performance, and, therefore,
using trend data, it is possible to forecast cost or schedule overruns at an early stage
in a project.
•
In a nutshell, Earned Value is an approach where you monitor the project plan (or
planned value), actual work (Actual cost), and work completed (Earned value) value to
see if a project is on track.
Example
Find the calculator in the excel file on canvas
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Earned Value Management (EVM) (2 of 3)
• Calculating three values for each activity or summary activity
Table 7-3 Earned value calculations for one activity after week 1
• Planned Value (PV) = Suppose purchasing and installing a new web server is estimated as 1 week for 10k
• Actual Cost (AC) = It actually took 2 weeks and cost of 20K (week1=15K, week2 = 5K)
• Earned Value (EV) = PV of all completed work
• If 1 week work is estimated in PV with a corresponding $ amount (e.g., 1 week, and cost is 10K), but actual
work took for 2 weeks with each week incurring a different amount (Week1=15K, week2= 5K), then, according
to budget/plan 1week should cost 5 for total PV of10K, AND 10K-5K = EV.
Activity
Week 1
Earned value (EV) = PV of all completed work
5,000
Planned value (PV)
10,000
Actual cost (AC)
15,000
Cost variance (CV) = EV - AC
-10,000
Schedule variance (SV) = EV - PV
-5,000
Cost performance index (CPI) = EV/AC
33%
Schedule performance index (SPI) = EV/PV
50%
Estimate at completion (EAC)
EAC = BAC/CPI – ( BAC is Budget At Completion) and
EAC is Estimate At Completion)
Estimated to Complete (ETC)
ETC = EAC – AC
TCPI is a measure of the cost performance that must be achieved with remaining resources to meet EAC or BAC
To meet the current EAC: TCPI = (BAC-EV) / (EAC-AC)
To complete on plan or meet the BAC: TCPI = (BAC-EV) / (BAC-AC)
• Basically, if variances are positive, then project is on track
or under budget – good
– Cost variance (CV) = EV - AC
– Schedule variance (SV) = EV – PV
• If index es are at/above 100%, then project is on track or
under budget
– Cost performance index (CPI) = EV/AC
– Schedule performance index (SPI) = EV/PV
Earned Value Management (EVM) (3 of 3)
Usage of EVM
•
EVM is used worldwide, and it is
particularly popular in the Middle
East, South Asia, Canada, and
Europe
– Most countries require EVM for
large defense or government
projects, as shown in Figure
– EVM is also used in such privateindustry sectors as IT, construction,
energy, and manufacturing.
• However, most private companies
have not yet applied EVM to their
projects because management
does not require it, feeling it is too
complex and not cost effective
Using Project Management Software to Assist
in Project Cost Management (1 of 2)
• 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 can increase a project
manager’s effectiveness during each process of project cost
management
– Many IT project managers use other tools to manage cost
information because they do not know that they can use
project management software, or they do not track costs
based on a WBS, as most project management software does
Using Project Management Software to Assist
in Project Cost Management (2 of 2)
• Recent Studies on Project Portfolio Management (PPM)
Software
– 2017 Gartner report says the market continues to grow, with
annual sales over $2.3 billion
– Forrester estimates ROIs of 250 percent from PPM tools
– Pfizer and Ford use PPM software to improve transparency of the
many projects they manage
Summary
 Project managers must understand several
basic principles of cost management to be
effective in managing project costs
 Main processes




Plan cost management
Estimate costs
Determine the budget
Control costs
 Several software products can assist with
project cost management
• After class reading content
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Considerations for Agile/Adaptive Environments
• AgileEVM is an adapted implementation of EVM
– Uses the Scrum framework artifacts as inputs, uses
traditional EVM calculations, and is expressed in traditional
EVM metrics
– Requires a minimal set of input parameters
• Actual cost of a project, an estimated product backlog, a
release plan that provides information on the number of
iterations in the release and the assumed velocity
– All estimates can be in hours, story-points, team days or
any other consistent estimate of size
• The critical factor is that it must be a numerical estimate of
some kind