project management lecture budgeting and cost control
TRANSCRIPT
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Project Management
LectureBudgeting and Cost Control
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Overview Cost Estimation Project Budgets Project Costing
Cost Benefit Analysis Payback NPV
Cost Control
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Cost Estimation - Factors Hardware and Software costs
including maintenance Travel and Training costs Effort costs (costs of paying SW engineers)
Heating lighting and office space Support staff (accountants, cleaners etc) Infrastructure (network + communications) Facilities (library, refreshments, recreation) Social security, employee benefits, pensions
etc
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Salary and Overheads Average Salary for Software Engineers
in the UK (2002) = £25,000 Average Salary for IT managers in the
UK (2002) = £50,000
Overhead is typically 2 x Salary So a software engineer costs
£75,000pa
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CoCoMo Constructive Cost Model Uses lines of code as a measure Assumes that the waterfall model of
software development will be used For well understood applications
developed by small teams: PM = 2.4(KDSI)1.05 x M
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CoCoMo Example How long will it take to produce
10,000 lines of code?PM = 2.4(10)1.05 x 1 = 26.9PMCost is > £150,000
What if the Programmer(s) is(are) very inexperiencedPM = 2.4(10)1.05 x 1.46 = 39.3PM
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CoCoMo2 Uses Object points rather than lines
of code Allows for different development
approaches
See Somerville “Software Engineering” Chapter 23 for more detail
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Cost Benefit Analysis Compare the costs of carrying out
a project with the estimated benefits
Identify all costs Development Costs Running Costs – annual costs
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Cost Benefit Analysis Include all direct benefits of the project
Will normally accrue on completion – but not always
May be annual benefits/savings
Express costs and benefits in a common unit
£, €, $ etc
What about intangible benefits?
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Cost Benefit Analysis Example layout
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Project Costs Direct Costs – Costs that can be
directly attributed to a project task (labour, materials etc.)
Indirect Costs – Overheads that do not directly contribute to the project (rent, heating, lighting, admin)
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Pricing vs. Costing Price to charge for software
= Cost + Profit Other factors may effect the pricing e.g. competitive environment, loss
leader project Pricing therefore involves:
project managers for costing senior management for pricing
strategies
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Costs vs. Budget Cost = how much it will cost to
produce system Budget = how much you will be
allowed to spend on producing system
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Top Down Budget High level management set budget
against high level tasks This is then divided amongst lower
level tasks – by lower levels of management
Generally results in: Inaccurate low level budgets Competition for available funds
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Bottom up Budget Estimates are made on resource costs
etc. for low level tasks (WBS) These are aggregated to provide direct
costs for the project PM adds indirect costs – admin, etc. and
reserve (and profit figures)
Senior management then cut the budget!
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Evaluating a Project
Year 0 1 2 3 4 5
Project AAA -100000 10000 10000 10000 20000 100000
Project BBB -1000000 200000 200000 200000 200000 300000
Project CCC -100000 30000 30000 30000 30000 30000
Project DDD -120000 30000 30000 30000 30000 75000
Which of these projects is the best?
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Net Profit
Year 0 1 2 3 4 5 Net Profit
Project AAA -100000 10000 10000 10000 20000 100000 50000
Project BBB -1000000 200000 200000 200000 200000 300000 100000
Project CCC -100000 30000 30000 30000 30000 30000 50000
Project DDD -120000 30000 30000 30000 30000 75000 75000
Year 0 1 2 3 4 5 Net Profit
Project AAA -100000 10000 10000 10000 20000 100000
Project BBB -1000000 200000 200000 200000 200000 300000
Project CCC -100000 30000 30000 30000 30000 30000
Project DDD -120000 30000 30000 30000 30000 75000
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Net Profit The most obvious criteria for
comparison Does not give the full picture
regarding the viability of the project
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Cash Flow Can the organisation afford the –ve
cash flow required for the development of the project e.g. Project BBB requires an initial
outlay of £1000,000
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Cash Flow We need to spend money during
the development of a product We hope to get it back once the
product is finished Therefore projects will have a –ve
cash flow during their development This should become +ve once the
project is complete
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Cash Flow Diagram
Cotterell and Hughes page 43
Income
Time
a
b
c
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Cash Flow
0 1 2 3 45
-1000
-800
-600
-400
-200
0
200
400£
Thousands
Year
Project AAA
Project BBB
Project DDD
Project CCC
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Evaluating a Project
Year 0 1 2 3 4 5
Project AAA -100000 10000 10000 10000 20000 100000
Project BBB -1000000 200000 200000 200000 200000 300000
Project CCC -100000 30000 30000 30000 30000 30000
Project DDD -120000 30000 30000 30000 30000 75000
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Payback Period The period of time it takes to
recoup your initial investment A shorter payback period is
preferred as it minimises the amount of time a project is in debt
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Payback Period
Year 0 1 2 3 4 5Project AAA -100000 10000 10000 10000 20000 100000Cumulative Total 100,000.00 90,000.00 80,000.00 70,000.00 50,000.00 50,000.00
Project CCC -100000 30000 30000 30000 30000 30000Cumulative Total 100,000.00 70,000.00 40,000.00 10,000.00 20,000.00 50,000.00
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Payback Period
Payback Period
-120
-100-80
-60-40
-200
2040
60
0 1 2 3 4 5
Thou
sand
s
YearProject AAA Project CCC
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Payback Period Find the payback period for
projects BBB and DDD
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Payback Period
Year 0 1 2 3 4 5Project BBB -1000000 200000 200000 200000 200000 300000Cumulative Total -1000000 -800000 -600000 -400000 -200000 100000
Project DDD -120000 30000 30000 30000 30000 75000Cumulative Total -120000 -90000 -60000 -30000 0 75000
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Return on Investment Is it really worth investing all that
time, money and effort into the project?
To help make that decision we use the return on investment
The investment will be the initial development costs of the project
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Return on Investment Used to discover the percentage of
return on the original project investment
ROI = average annual profit x 100 total investment
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Return on Investment For Project AAA
Average annual profit = £50,000/5 (years)
Initial investment = £100,000
ROI = £10,000 x 100 £100,000 ROI = 10%
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Return on Investment Calculate the ROI for the remaining
projects and show which one provides the best return
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Return on Investment Project BBB
Project CCC
Project DDD
ROI = (100,000/5)/1000000x100 = 2%
ROI = (50,000/5)/100000x100 = 10%
ROI = (75,000/5)/120000x100 = 12.5%
Project BBB
Project CCC
Project DDD
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Net Present Value Takes into account the profitability
of a project and the timing of cash flows
Receiving £1000 today is better then receiving £1000 next year Inflation – things will cost more Investment – we lose a year’s interest
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Net Present Value - Examples If we invested £100 this year it would
be worth £110 next year (assuming 10% interest rate – not likely)
Therefore if we were given £100 next year it would have been the same as investing £90(ish) this year.
This 10% is called the discount rate
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Net Present Value The present value of any future
cash flow can be calculated using the following formula:
Present Value = value in year t (1 + r)t
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PV Exercise If I gave you £100 in one year’s
time, what would be its present value?
Assume a percentage rate of 20% 100/(1.20)1
= £83.33 How about in three years?
100/(1.20)3
= £57.87
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Net Present Value An alternative approach is to break
down the problem into cash flow and discount factor:
Discount factor = 1 (1+r)t
Therefore: Present Value = Cash Flow x Discount
Factor
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Discount factor table
Year 1 2 3 4 5 6 7 8 9 10Discount rate
0.02 0.980 0.961 0.942 0.924 0.906 0.888 0.871 0.853 0.837 0.8200.03 0.971 0.943 0.915 0.888 0.863 0.837 0.813 0.789 0.766 0.7440.05 0.952 0.907 0.864 0.823 0.784 0.746 0.711 0.677 0.645 0.6140.1 0.909 0.826 0.751 0.683 0.621 0.564 0.513 0.467 0.424 0.3860.2 0.833 0.694 0.579 0.482 0.402 0.335 0.279 0.233 0.194 0.162
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Net Present Value Net Present Value is the sum of the
present values (aka discounted cash flows)
As can be seen on the next slide, the profit figures can differ significantly using Net PV instead of Net Profit
The payback period may also be effected
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Net Present Value
Year 0 1 2 3 4 5 Net ProfitProject AAA -100000 10000 10000 10000 20000 100000 50000Discount Rate 0.03 0.03 0.03 0.03 0.03 0.03Discount Factor 1.000 0.971 0.943 0.915 0.888 0.863 NPVDiscounted Cash Flow -100000 9708.738 9425.959 9151.417 17769.74 86260.88 32316.733
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Net Present ValueYear 0 1 2 3 4 5
Project AAA -100000 10000 10000 10000 20000 100000Cumulative Total 100000.00 90000.00 80000.00 70000.00 50000.00 50000Discount Rate 0.03 0.03 0.03 0.03 0.03 0.03Discount Factor 1.00 0.97 0.94 0.92 0.89 0.86Discounted Cash Flow -100000.00 9708.74 9425.96 9151.42 17769.74 86260.88Cumulative Discounted Total 100000.00 90291.26 80865.30 71713.89 53944.15 32316.73
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NPV Exercise Calculate the Discounted Cash
Flows and annual NPV for Projects BBB, CCC and DDD
Does this effect the payback period for any of these projects?
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More Detailed NPV Example
Year 0 1 2 3 4 5
CostsInitial Hardware Costs £500,000Hardware Maintenance Costs £50,000 £50,000 £50,000 £50,000 £50,000 £50,000
Initial Software Costs £180,000Software Support Costs £20,000 £20,000 £20,000 £20,000 £20,000 £20,000
Total Costs (Cumulative) £750,000 £820,000 £890,000 £960,000 £1,030,000 £1,100,000
BenefitsStaff Savings £220,000 £220,000 £220,000 £220,000 £220,000 £220,000
Total Benefits (Cumulative) £220,000 £440,000 £660,000 £880,000 £1,100,000 £1,320,000
Benefits less Costs -£530,000 -£380,000 -£230,000 -£80,000 £70,000 £220,000
Annual Interest Rate 0.2 0.2 0.2 0.2 0.2 0.2PV factor £1.00 £0.83 £0.69 £0.58 £0.48 £0.40
Annual Cash Flow -£530,000 £150,000 £150,000 £150,000 £150,000 £150,000Present Value -£530,000 £125,000 £104,167 £86,806 £72,338 £60,282
NPV -£530,000 -£405,000 -£300,833 -£214,028 -£141,690 -£81,408
(Cadle and Yeates 2001)
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NPV Tutorial Exercise Have a go at the tutorial exercise
handed out in the lecture To do this you will need to think
about Cost Benefit Analysis and NPV
A model answer will be provided next week
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Cost Control We have established the projected
costs for the project Each activity will have been given
a cost value (in WBS) As the project progresses we must
monitor the costs
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Example 1Task 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26
1 52 53 54 105 56 57 108 59 5
60 Budgeted Costs555045403530252015105
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26
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Cost Control -Questions 3 weeks into my 10 week project I
find I have spent over 50% of the budget. What does this mean for the rest of the project? Check original cost plan (BCWS) Check actual work performed – may
be ahead of schedule (BCWP) Check actual cost of planned
activities – may be overspend (ACWP)
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Cost Control Monitors work in progress Uses Three Measures
BCWS – Budgeted Cost of Work Scheduled
BCWP – Budgeted Cost of Work Performed
Also known as Earned Value ACWP – Actual Cost of Work Performed
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Cost and Schedule Variance Diagram Shows relationship
between BCWS, BCWP and ACWP Lockyer and Gordon Page 84
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Variance Analysis BCWP – ACWP = Cost Variance BCWP – BCWS = Schedule Variance ACWP – BCWS = Budget Variance
These can be used to assess the state of the project e.g. negative cost variance with zero
schedule variance implies the project is on time but over budget
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Conclusions Costs and Benefits may be incurred annually Development time for a project incurs a
negative cash flow – which may be large A number of factors can be combined to
assess suitability of a project Incorporating NPV into the calculations can
alter the payback period of a project NPV provides a more realistic model as it
takes into account the future value of money
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References Hughes and Cotterell “Software Project
Management” (Ch 3+9) Lockyer and Gordon “Project
Management” Cadle and Yeates “Project Management
for Information Systems” Somerville “Software Engineering” A useful link
http://www.cw360ms.com/pmsurveyresults/index.asp