FIT2002 Lecture Notes - Lecture 6: Whole-Life Cost, Cost Overrun, Cost Estimate
13 May 2018
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• 2010 – estimated average cost overrun of 43% for IT projects. This includes a large number
of exeptional ases or lak swans.
• Perceived that cost overruns are because IT projects involve risky new technology or
business processes.
• Project cost management includes processes required to ensure that the project is
completed within an approved budget. Four main processes:
o Planning cost management – within planning
o Estimating costs – within planning
o Determining budget – within planning
o Controlling costs – within monitoring/controlling
• Basic principles of cost management:
o Profits – revenues minus expenditures
o Profit margin - ratio of profits to revenues
o Life cycle costing – total cost of ownership for a project
• Costs/benefits can be tangible or intangible.
• Direct vs indirect costs – related to producing products and services of project, vs. indirectly
related to performing the project.
• Sunk cost – money that has been spent in the past, should not be considered when deciding
what projects to invest in or continue.
• Learning curve theory – when many items are produced repetitively, unit cost of those items
decreases in a regular pattern as more units are produced
• Reserves – dollars included in cost estimate to mitigate cost risk, allows for future situations
which are difficult to predict
o Contingency reserves – allow for situations which may be partially planned for
o Management reserves – allow for situations which are unpredictable.
• Planning management – expert judgement, analytical techniques, meetings used to develop
cost management plan. This includes:
o Level of accuracy/units of measure
o Organisational procedure links
o Control thresholds
o Rules of performance measurement
o Reporting formats
o Process descriptions
• Large percent of total project costs are generally labour costs.
• Type of cost estimates:
o Rough order of magnitude. Very early in project life cycle, estimate of cost for
selection. Accuracy - -50% to +100%.
o Budgetary. Early in project life cycle, puts dollars in budget plans. Accuracy: -10% to
+25%.
o Definitive. Later in the project, provides details for purchases. Accuracy: -5% to
+10%.
• Cost estimate techniques:
o Analogous/top-down
o Bottom-up – estimating individual work items/activities and summing them for total.
o Parametric – uses characteristics in mathematical model.
• Typical problems with cost estimates:
o Done too quickly
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