What is the dollars included in a cost estimate to mitigate cost risk by allowing for future situations that are difficult to predict?

9.ROM estimates can also be referred to as a ball-park estimate, a guesstimate, aswag, or a(n) _broad_gauge.10.A budgetary _______estimate _____________ is used to allocate money into anorganization’s budget.11.In the cost estimating process, ________supporting____________ detailsinclude the ground rules and assumptions used in creating an estimate, adescription of the project used as a basis for the estimate, and details on the costestimation tools and techniques used to create the estimate.12.Function ______points______________ are technology-independentassessments of the functions involved in developing a system.13.A cost _____baseline_______________ is a time-phased budget that projectmanagers use to measure and monitor cost performance.14.The EAC, or estimate at _______completion_____________, is an estimate ofwhat it will cost to finish the project based on performance to date.ESSAY1.Explain what is meant by the term “learning curve theory.”Give an example toaccompany your explanation.

Activity
Explain what happens during project budgeting?
Why is it important to estimate cost and manage it?

IT projects have room for improvement in meeting cost goals. In project cost management, particularly planning cost management, creating good estimates, and using earned value management (EVM) to assist in cost control.

What is the Cost?

• “Accountants usually define cost as a resource sacrificed or foregone to achieve a specific objective.”
• Webster’s dictionary defines cost as “something given up in exchange.” Costs are often measured in monetary amounts, such as dollars, that must be paid to acquire goods and services.

What is Project Cost Management?

Project cost management includes the processes required to ensure that a project team completes a project within an approved budget. Notice two crucial phrases in this definition: “a project” and “approved budget.” Project managers must make sure their projects are well defined, have accurate time and cost estimates, and have a realistic budget that they were involved in approving. It is the project manager’s job to satisfy project stakeholders while continuously striving to reduce and control costs. There are four processes for project cost management:

1. Planning cost management involves determining the policies, procedures, and documentation that will be used for planning, executing, and controlling project costs. The main output of this process is a cost management plan.
2. Estimating costs involves developing an approximation or estimate of the costs of the resources needed to complete a project. The main outputs of the cost estimating process are activity cost estimates, the basis of estimates, and project documents updates.
3. Determining the budget involves allocating the overall cost estimate to individual work items to establish a baseline for measuring performance. The main outputs of the cost budgeting process are a cost baseline, project funding requirements, and project documents updates.
4. Controlling costs involves controlling changes to the project budget. The main outputs of the cost control process are work performance information, cost forecasts, change requests, project management plan updates, project documents updates, and organizational process assets updates

Basic Principles of Cost Management

• Profits – are revenues minus expenditures. To increase profits, a company can increase revenues, decrease expenses, or try to do both. Most executives are more concerned with profits than with other issues. When justifying investments in new information systems and technology, it is important to focus on the impact on profits, not just revenues or expenses. You cannot measure the potential benefits of the application without knowing the profit margin. Profit margin is the ratio of revenues to profits. If revenues of $100 generate $2 in profits, there is a 2 percent profit margin. If the company loses $2 for every $100 in revenue, there is a -2 percent profit margin.
• Life Cycle Costing – allows you to see a big-picture view of the cost of a project throughout its life cycle. This helps you develop an accurate projection of a project’s financial costs and benefits. It considers the total cost of ownership, or development plus support costs, for a project.

Example:
A company might complete a project to develop and implement a new customer service system in one or two years, but the new system could be in place for 10 years.

• Cash Flow Analysis – is a method for determining the estimated annual costs and benefits of a project and the resulting annual cash flow. Project managers must conduct cash flow analysis to determine net present value. Most consumers understand the basic concept of cash flow: If they do not have enough money in their wallets or bank accounts, they cannot purchase something. Top management must consider cash flow concerns when selecting projects in which to invest. If top management selects too many projects that have high cash flow needs in the same year, the company will not be able to support all of its projects and maintain its profitability. It is also important to clarify the year used to analyze dollar amounts.
• Tangible Costs or Benefits – can easily be measured in dollars.
• Intangible Costs or Benefits – are difficult to measure in monetary terms. Intangible benefits for projects often include items like goodwill, prestige, and general statements of improved productivity that an organization cannot easily translate into dollar amounts. Because intangible costs and benefits are difficult to quantify, they are often harder to justify.
• Direct Costs – can be directly related to creating the products and services of the project. You can attribute direct costs to a certain project.

Example:
It includes the salaries of people working full time on the project and the cost of hardware and software purchased specifically for the project. Project managers should focus on direct costs because they can be controlled.

• Indirect Costs – are not directly related to the products or services of the project, but are indirectly related to performing the project.

Example:
It would include the cost of electricity, paper towels, and other necessities in a large building that houses 1,000 employees who work on many projects. Indirect costs are allocated to projects, and project managers have very little control over them.

• Sunk Cost – is money that has been spent in the past. Consider it gone, like a sunken ship that can never be raised. When deciding what projects to invest in or continue, you should not include sunk costs. It should be forgotten, even though it is often difficult to think that way.
• 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.

Example: –
Suppose that the Surveyor Pro project would potentially produce 1,000 handheld devices that could run the new software and access information via satellite. The cost of the first handheld unit would be much higher than the cost of the thousandth unit.

• Reserves – are dollar amounts 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.

Example: – If an organization knows it has a 20 percent rate of turnover for IT personnel, it should include contingency reserves to pay for recruiting and training costs of IT personnel.

Management reserves allow for future situations that are unpredictable (sometimes called unknown unknowns). Example: – If a project manager gets sick for two weeks or an important supplier goes out of business, management reserve could be set aside to cover the resulting costs. Management reserves are not included in a cost baseline.

What should be included in a cost estimate?

What are the 3 main methods of cost estimating?

What are the 5 types of cost used in estimating?

What is the additional percentage or dollar amount by which actual cost exceed estimates known as?