COST ESTIMATION and ECONOMIC EVALUATION of PROJECTS

Introduction

     Historical cost estimates vs. final costs

Cost Estimating Methods

     Top-down cost estimating
     Bottom-up cost estimating
     Parametric cost estimating
        — Simple models: power law and sizing factors
        — Complex models: Cost Estimating Relationships (CERs)
     Activity-based costing
     Ratio cost estimating
     Probability range estimating
     Delphi estimating
     Price-to-win estimating

Cost Estimation Problem Areas

     Software development and life cycle costs
     Maintenance costs
     Labor costs, fringe benefits, and overhead rates
     Learning curves for manufacturing costs and capital investments
     Documentation costs
     Obtaining good cost quotes

Types of Cost Estimates

     Order of magnitude
     Budget
     Detailed
     Corporate example

Managing the Cost Estimation Process

     Key questions to ask
     Contingency policy
     Cost estimate accuracy vs. precision
     Pareto's Law (80/20 Rule)
     The cost and time to do a cost estimate
     Cost of inadequate resource allocation
     Fantasy factor and 90% Syndrome
     Question the requirements to reduce over design
     Post-mortem variance analysis

Transition from Cost Estimation to Economic Evaluation

Time Value of Money and Interest Rates

     Compound interest formulas
     Capital recovery and sinking fund factors
     Present and future values
     Cash flow diagrams
     Amortized loans

Methods for Comparing and Evaluating Alternatives

     Present value methods
     Annual worth evaluations
     Rate of return methods
     Payback period methods
     Benefit-cost evaluations
     Cost effectiveness analyses
     Advantages, disadvantages, and potential pitfalls of each method
     Common applications and techniques
        — Break-even analysis
        — Life cycle cost analysis
        — Initial cost minimization
        — Design-to-cost evaluations
        — Public sector vs. private sector evaluations

Tax Considerations in Project Evaluations

     How to calculate federal, state, and local taxes—corporate and individual
     Personal economic and investment decisions

Inflation and Cost Indexes (Domestic and International)

     How to include inflation in estimates and evaluations
     Government and industrial cost indexes
     Actual vs. constant dollars

Managing Economic Evaluations

     Investment yardsticks
     Current corporate practice is changing
     Cost of money and Minimum Acceptable Rate of Return (MARR)
     Sensitivity and risk analysis

Common Errors and Rules of Thumb in Cost Estimation and Economic Evaluation

     Negotiating cost estimates vs. requirements
     Gold plating
     Rule of 10
     Inadequate project definition
     Misuse of contingency
     Requirements slippage
     Subjective factors and assumptions
     Overstating productivity improvements from high-technology advances

Emerging Factors in Cost Estimation and Economic Evaluation

     Cost of environmental, safety, and governmental regulations
     Cost of litigation
     International projects
     Software development costs abroad
     Global competition and regional competition in U.S.
     Quality considerations (TQM and ISO 9000)
     Concurrent engineering and construction
     Training costs
     Reengineering

Sources for Cost Estimating and Economic Evaluation Information

PROJECT MANAGEMENT PRINCIPLES and PRACTICE

Introduction

      Nature of projects
      Anatomy of a project
      Duties of the project manager

Project planning techniques

      Work breakdown structures
      Precedence diagrams
      Estimating effort and duration
      Estimates versus commitments
      Establishing contingency allowances
      Scheduling and budgeting
      Resource leveling
      Project planning exercises

Measuring cost, schedule, and technical performance

       Budgeted cost for work performed versus budgeted cost for work scheduled
       Actual cost for work performed versus budgeted cost for work performed
       Earned value
       Cost and schedule performance indices
       Estimated cost and duration at completion
       Acceptably small "inch-pebbles"

Project control techniques

       Elements of control
       Task control
       Schedule control
       Cost control
       Project control in a risk management context

Implementing planning and control techniques

       Schedule compression
       Setting priorities
       Project management information systems
       Project records and reports
       Integrating mechanisms

Project organizations and staffing

        Project management in functional organizations
        Projectized organizations
        Hybrid organizations

Project management in multiproject and matrix environments

        Structural aspects
        Mechanisms (system aspects)
        Cultural aspects
        Behavioral aspects for multibossed individuals, multiple bosses, and common bosses

Fiedler's contingency model of team effectiveness

        Team-building
        Project startup meetings
        Integrated project management
        Risk management
        —Essential thoughts about risk
        —Risk identification
        —Risk assessment: probability and consequence estimation
        —Risk reduction: uncertainty and consequence reduction, risk avoidance, and risk transfer
        —Establishing and managing contingency allowances, margins, and reserves
        —Risk control
        —Risks versus changes
        —Monitoring and contingency allowances: complementary aspects of risk management
        Project management exercise: complex project decision-making
        Summary and critique

Successfully juggling all the elements in complex IT projects takes more than experience and gut instict.  It takes metrics.

Most project managers are like pilots flying without instruments -- all is well until the weather turns ugly.

Cost metrics should be most flexible if an IT project delivery date is immovable and the primary business requirements are at stake.

If the business people aren't happy ontime delivery and tight budget controls don't matter much.

PM Equations:
    goals - time = SHORTCUTS
    time / milestones = COST SAVINGS
    time + cost = BUDGET
    projects - testing = DISASTER
    metrics - discipline = NO METRICS

Define project success criteria

Identify project drivers, constraints, and degrees of freedom

Define product release criteria

Negotiate commitments

Write a plan

Decompose tasks

Develop planning work sheets for common large tasks

Plan to do rework after a quality control activity

Plan time for process improvement

Manage project risks

Estimate based on effort, not calendar time

Don't schedule people for more than 80% of their time

Build training time into the schedule

Record estimates and how you derive them

Record estimates and use estimation tools

Respect the learning curve

Plan contingency buffers

Record actuals and estimates

Count tasks as complete only when they're 100% complete

Track project status openly and honestly.

People

Processes

Tools

Validation Test (run each competency against a validation test to see if it is worth having)

Sustainable?

Differentiating?

Defensible?

Quantifiable?

Leader

Manager

Mentor

Judge

Team Player

Coach

Therapist

Counselor

Cheerleader

Negotiator

Information Disseminator

Disturbance Handler

Micromanage to kill productivity

Make sure it works even if it's useless

Turn specifications into straitjackets

Only test what you're sure will work

Sacrifice utility for metrics