Project Cost Management

Project Cost Management

Importance of Project Cost Management

Cost management is a trouble spot for IT projects.

According to the 1995 CHAOS study the average cost overrun on IT projects in the US was 89%, meaning that projects expected to cost $100,000 actually cost $189,000, and over 31% of IT projects were cancelled before completion, costing over $81 billion (yes, really!)

In the 2001 study the cost overrun was 45% and most projects still went over their approved budget.

Jim Johnson, “Chaos: the dollar drain of IT project failures”

www.standishgroup.com/chaos.html

(The IRS alone managed a series of project failures in the 1990’s that cost over $50 billion per year – as much as the annual net profit of the entire computer industry in a year.)

It is usually not difficult for IT professionals to learn about project cost management; they just often are not interested in the subject. Many information technology professionals have a poor attitude toward project cost management because they have had bad experiences in the past, they think it is a job for accountants, and they have not been trained on creating and adhering to cost estimates.

Most senior managers making IT project decisions know more about cost issues than they do about technology, and project managers need to learn to speak the language of cost management.

Basic Principles of Cost Management

Many people confuse profits and costs.

Q Suppose you sell 10 widgets per day on average, and the average cost per widget is $10.

If you sold 11 widgets one day, what would the affect on profits be?

A There is not enough information to answer this question. You are given costs and asked to estimate profits. You do not know what the average profit is per widget. You might actually lose money by selling more widgets.

Investment decisions for projects are usually based on projected life cycle costs and benefits. Project managers should have input into the budgeting process.

An...