setting your fees project cost and setting your fees
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Setting Your Fees
Project Cost andSetting Your Fees
The Importance of Project Cost Management
IT projects have a poor track record for meeting cost goals
Average cost overrun from 1995 CHAOS study was 189% of the original estimates; improved to 145% in the 2001 study
In 1995, cancelled IT projects cost the U.S. over $81 billion
What is Cost and Project Cost Management?
Cost is a resource sacrificed or foregone to achieve a specific objective or something given up in exchange
Costs are usually measured in monetary units like dollars
Project cost management includes the processes required to ensure that the project is completed within an approved budget
Project Cost Management Processes
Resource planning: determining what resources and quantities of them should be used
Cost estimating: developing an estimate of the costs and resources needed to complete a project
Cost budgeting: allocating the overall cost estimate to individual work items to establish a baseline for measuring performance
Cost control: controlling changes to the project budget
Basic Principles of Cost Management
Most CEOs and boards know a lot more about finance than IT, so IT project managers must speak their language Profits are revenues minus expenses Life cycle costing is estimating the cost of a project
plus the maintenance costs of the products it produces
Cash flow analysis is determining the estimated annual costs and benefits for a project
Benefits and costs can be tangible or intangible, direct or indirect
Sunk cost should not be a criteria in project selection
Developing the Project Budget Cost Estimation Steps
1. Defining what resources will be needed to perform the work
2. Determining the quantity of resources that are needed
3. Defining the cost of using each resource 4. Calculating the cost of the task or activity 5. Ensuring that the resources are leveled,
that is, resources have not been over allocated.
Types of Costs
Direct Indirect Sunk Learning Curve Reserves
Client wants you to do the work in its entirety just as proposed
You have to be scientific about your fees
Must be able to break it down into components
Your fees must do four things
Fees Must Provide Four Things Must provide with personal income
appropriate to your skills, knowledge, and experience
Must meet all the costs of running your business
Must provide a surplus or profit (to recompense you for the risk you’re taking with your resources)
Must enable to you to compete effectively in your chosen market
Step-By-Step Calculation
1. Make an assessment of what your skills, knowledge and experience would bring in marketplace as an employee (i. e. annual salary).
2. Find your working days in a year by subtracting number of weekends from 365 days.
3. Divide salary in No. 1 by the working days to get your labor rate.
Step-By-Step Calculation
4. Forecast the day you expect to be able to bill clients, on average, each month.
5. List and cost all your monthly overheads6. Multiply each monthly cost by 12 and add
these up to get annual cost of being in business
7. Divide the annual overhead by the number of days in a year which you expect to invoice to customers
8. Add No. 3 and No.7 to get Total Cost9. Add your profit margin
OVERHEADS
Monthly Annual ($)Secretary 1,000 12,000*
Office rent 250 3000*
Telephone 100 1200Postage 65 780Personnel benefits 40 480*
Equipment 25 300Stationery 12 144
OVERHEADS Marketing
Personnel (5 days) 958 11,496*
Direct Mkt (2.5 x d. labor rate) 500 6,000 Practice management 958 11,496*
(5 days) Dues and subscriptions 12 144
Automotive 345 4, 140 Insurance 26 312 Accounting and legal 225 2,700 Miscellaneous 200 2,400*
OVERHEADS Totals 4,716 56,592 Day you expect to invoice 144 days Daily overhead rate = 56,592/144=
393.00 Total cost of doing business =
191.50 + 393.00 = 584.50 Profit (15-25%) = 146.13 GRAND TOTAL = 730.63 == 735.00/day
Finalizing the Project Schedule and Budget Project schedule and budget may
require several iterations before it is acceptable to the sponsor, the project manager, and the project team
Once the project schedule and project plan are accepted, the project plan becomes the baseline plan.
Once accepted, the project manager and project team have the authority to execute or carry out the plan.
Cost of Software DefectsWhen Defect is Detected Typical Cost of Correction
User Requirements $100-$1,000Coding/Unit Testing $1,000 or moreSystem Testing $7,000 - $8,000Acceptance Testing $1,000 - $100,000After Implementation Up to millions of dollars
It is important to spend money up-front on IT projects to avoid spending a lot more later.
Resource Planning
The nature of the project and the organization will affect resource planning
Some questions to consider: How difficult will it be to do specific tasks on the
project? Is there anything unique in this project’s scope
statement that will affect resources? What is the organization’s history in doing similar
tasks? Does the organization have or can they acquire
the people, equipment, and materials that are capable and available for performing the work?
Types of Cost EstimatesType of Estimate When Done Why Done How Accurate
Rough Order ofMagnitude (ROM)
Very early in theproject life cycle,often 3–5 yearsbefore projectcompletion
Provides roughballpark of cost forselection decisions
–25%, +75%
Budgetary Early, 1–2 years out Puts dollars in thebudget plans
–10%, +25%
Definitive Later in the project, <1 year out
Provides details forpurchases, estimateactual costs
–5%, +10%
Typical Problems with IT Cost Estimates
Developing an estimate for a large software project is a complex task requiring a significant amount of effort. Remember that estimates are done at various stages of the project
Many people doing estimates have little experience doing them. Try to provide training and mentoring
People have a bias toward underestimation. Review estimates and ask important questions to make sure estimates are not biased
Management wants a number for a bid, not a real estimate. Project managers must negotiate with project sponsors to create realistic cost estimates
Business Systems Replacement Project Cost Estimate Overview
Business Systems Replacement Project Cash Flow Analysis
FY95
($000)
FY96
($000)
FY97
($000)
3 YearTotal($000)
Future AnnualCosts/Savings
($000)CostsOracle/PM Software(List Price)
992 500 0 1492 0
60% Discount (595) (595)Oracle Credits (397) 0 (397)
Net Cash for Software 0 500 500Software Maintenance 0 90 250 340 250Hardware & Maintenance 0 270 270 540 270Consulting &Training 205 320 0 525 0Tax & Acquisition 0 150 80 230 50Total Purchased Costs 205 1330 600 2135 570Information Services &Technology (IS&T)
500 1850 1200 3550 0
Finance/Other Staff 200 990 580 1770Total Costs 905 4170 2380 7455 570
SavingsMainframe (101) (483) (584) (597)Finance/Asset/PM (160) (1160) (1320) (2320)IS&T Support/Data Entry (88) (384) (472) (800)Interest 0 (25) (25) (103)Total Savings (349) (2052) (2401) (3820)
Net Cost (Savings) 905 3821 328 5054 (3250)
8 Year InternalRate of Return
35%
Cost Budgeting
Cost budgeting involves allocating the project cost estimate to individual work items and providing a cost baseline
For example, in the Business Systems Replacement project, there was a total purchased cost estimate for FY97 of $600,000 and another $1.2 million for Information Services and Technology
These amounts were allocated to appropriate budgets as shown in the next table.
Business Systems Replacement Project Budget Estimates for FY97 and Explanations
Budget Category Estimated Costs ExplanationHeadcount (FTE) 13 Included are 9 programmer/analysts, 2
database analysts, 2 infrastructuretechnicians.
Compensation $1,008,500 Calculated by employee change notices(ECNs) and assumed a 4% pay increase inJune. Overload support was planned at$10,000.
Consultant/PurchasedServices
$424,500 Expected consulting needs in support of theProject Accounting and Cascadeimplementation efforts; maintenanceexpenses associated with the Hewlett-Packard (HP) computing platforms;maintenance expenses associated with thesoftware purchased in support of the BSRproject.
Travel $25,000 Incidental travel expenses incurred insupport of the BSR project, most associatedwith attendance of user conferences andoff-site training.
Depreciation $91,000 Included is the per head share ofworkstation depreciation, the Cascade HPplatform depreciation, and the depreciationexpense associated with capitalizedsoftware purchases.
Rents/Leases $98,000 Expenses associated with the Mach1computing platforms.
Other Suppliesand Expenses
$153,000 Incidental expenses associated with thingssuch as training, reward and recognition,long distance phone charges, miscellaneousoffice supplies.
Total Costs $1,800,000
Cost Control
Project cost control includes 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
Cost Control Input Form for Business Systems Replacement ProjectWBS#: 6.8.1.2 Description: Design Interface Process -
Customer InformationRevision: Revision Date:
Assignments ForecastHours per day Effort (in hours) Calculated
Responsible: SMC Role: PA Availability: 6 Optimistic: 20Most Likely: 30 Plan
Effort:30 Hrs
Involved: Role: Availability: Pessimistic: 40
Involved: Role: Availability: PlanDuration
:
5 Days
Involved: Role: Availability: Delay (Days):
Description Assumptions
Results / Deliverables Dependencies Predecessors (WBS#): Successors (WBS#):
4.7
Develop an operational process design for the Customer Informationinterface from the Invoicing System to Oracle Receivables. This task willaccept as input the business/functional requirements developed during thetactical analysis phase and produce as output a physical operational design,which provides the specifications, required for code development.
Process Design Document - Technical - Operation/Physical DFD - Process Specifications - Interface Data Map
- All business rules and issues will be resolved prior to this task.- The ERD & data model for Oracle Receivables & any Oracleextension required will be completed and available prior to this task.- The ERD for the Invoicing System will be completed and availableprior to this task.- Few iterations of the review/modify cycle will be required.- Primarily a documentation task.
Project Portfolio Management
Many organizations collect and control an entire suite of projects or investments as one set of interrelated activities in a portfolio
Five levels for project portfolio management Put all your projects in one database Prioritize the projects in your database Divide your projects into two or three budgets
based on type of investment Automate the repository Apply modern portfolio theory, including risk-
return tools that map project risk on a curve
Sample Enterprise Project Management Screen
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