Chapter 7: Project Cost Management

TRUE/FALSE

	1.	Although information technology projects have a poor track record in meeting project goals, they have a good track record in meeting budget goals.

ANS:	F	PTS:	1	REF:	254

	2.	Preparing cost estimates is a job for accountants.

ANS:	F	PTS:	1	REF:	256

	3.	Any new technology or business process is untested and has inherent risks.

ANS:	T	PTS:	1	REF:	256

	4.	Many projects that are started never finish because of cost management problems.

ANS:	T	PTS:	1	REF:	257

	5.	When justifying investments in new information systems and technology, the focus should only be on revenues or expenses.

ANS:	F	PTS:	1	REF:	257

	6.	Organizations have a history of spending too much money in the early phases of information technology projects.

ANS:	F	PTS:	1	REF:	258

	7.	Project managers must conduct cash flow analysis to determine net present value.

ANS:	T	PTS:	1	REF:	259

	8.	Direct costs cannot be directly attributed to a certain project.

ANS:	F	PTS:	1	REF:	260

	9.	When deciding what projects to invest in or continue, you should include sunk costs.

ANS:	F	PTS:	1	REF:	260

	10.	Learning curve theory does not apply to the amount of time it takes to complete some tasks.

ANS:	F	PTS:	1	REF:	260

	11.	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.

ANS:	T	PTS:	1	REF:	260

	12.	ROM estimates can be referred to as a ballpark estimate, a guesstimate, a swag, or a broad gauge.

ANS:	T	PTS:	1	REF:	261

	13.	A definitive estimate should be the least accurate of the three types of estimates.

ANS:	F	PTS:	1	REF:	262

	14.	Estimates are usually done at various stages of a project and should become more accurate as time progresses.

ANS:	T	PTS:	1	REF:	262

	15.	The cost management plan is part of the overall project management plan.

ANS:	T	PTS:	1	REF:	262

	16.	A large percentage of total project costs are often labor costs.

ANS:	T	PTS:	1	REF:	263

	17.	Parametric models are least reliable when historical information was used to create the model.

ANS:	F	PTS:	1	REF:	264

	18.	When developing an estimate for a large software project, estimates cannot be made before clear system requirements have been produced.

ANS:	F	PTS:	1	REF:	265

	19.	The people who develop software cost estimates often have a great deal of experience with cost estimation.

ANS:	F	PTS:	1	REF:	265

	20.	Every cost estimate is unique.

ANS:	T	PTS:	1	REF:	265

	21.	The WBS is not a required input when developing a cost estimate.

ANS:	F	PTS:	1	REF:	266

	22.	Most organizations have a well-established process for preparing budgets.

ANS:	T	PTS:	1	REF:	270

	23.	Cost budgeting provides information for project funding requirements.

ANS:	T	PTS:	1	REF:	271

	24.	There does not need to be a change control system to define procedures for changing the cost baseline.

ANS:	F	PTS:	1	REF:	272

	25.	The formulas for variances and indexes start with EV, the earned value.

ANS:	T	PTS:	1	REF:	274

	26.	If cost variance is a positive number, it means that performing the work cost more than planned.

ANS:	F	PTS:	1	REF:	275

	27.	If the cost performance index is less than one or less than 100 percent, the project is under budget.

ANS:	F	PTS:	1	REF:	275

	28.	In an earned value chart, when the actual cost line is right on or above the earned value line, costs are less than or equal to planned.

ANS:	F	PTS:	1	REF:	276

	29.	Many projects, particularly information technology projects, do not have good planning information, so tracking performance against a plan might produce misleading information.

ANS:	T	PTS:	1	REF:	277

	30.	Databases are a common tool for cost estimating, cost budgeting, and cost control.

ANS:	F	PTS:	1	REF:	279

MULTIPLE CHOICE

	1.	The Standish Group’s CHAOS studies reported an average cost overrun for unsuccessful IT projects ranged from 180 percent in 1994 to ____ percent in 2004.
a.	28	c.	56	
b.	43	d.	73	

ANS:	C	PTS:	1	REF:	254

	2.	Three separate surveys of software project cost overruns found that the average cost overrun for all of the projects in their survey samples (not just unsuccessful projects) were ____ percent.
a.	13–14	c.	33–34	
b.	23–24	d.	43–44	

ANS:	C	PTS:	1	REF:	254

	3.	____ includes the processes required to ensure that a project team completes a project within an approved budget.
a.	Cost budgeting	c.	Cost control	
b.	Cost estimating	d.	Project cost management	

ANS:	D	PTS:	1	REF:	256

	4.	____ involves developing an approximation or estimate of the costs of the resources needed to complete a project.
a.	Determining the budget	c.	Controlling costs	
b.	Consolidation of costs	d.	Estimating costs	

ANS:	D	PTS:	1	REF:	256

	5.	____ involves allocating the overall cost estimate to individual work items to establish a baseline for measuring performance.
a.	Determining the budget	c.	Controlling costs	
b.	Consolidation of costs	d.	Estimating costs	

ANS:	A	PTS:	1	REF:	256

	6.	____ is the ratio of revenues to profits.
a.	Profit	c.	Cost structure	
b.	Profit margin	d.	Cost margin	

ANS:	B	PTS:	1	REF:	257-258

	7.	____ helps you develop an accurate projection of a project’s financial costs and benefits.
a.	Profit cycle costing	c.	Life cycle costing	
b.	Financial costing	d.	Profit margin costing	

ANS:	C	PTS:	1	REF:	258

	8.	____, with assistance from financial experts in their organizations, should create estimates of the costs and benefits of the project for its entire life cycle.
a.	Financial managers	c.	Budget managers	
b.	Project managers	d.	System managers	

ANS:	B	PTS:	1	REF:	258

	9.	Since organizations depend on reliable information technology, there are also huge costs associated with ____.
a.	work time	c.	uptime	
b.	technical planning	d.	downtime	

ANS:	D	PTS:	1	REF:	258

	10.	____ is a method for determining the estimated annual costs and benefits for a project and the resulting annual cash flow.
a.	Life cycle costing	c.	Cost estimating	
b.	Profit margin analysis	d.	Cash flow analysis	

ANS:	D	PTS:	1	REF:	259

	11.	____ are those costs that an organization can easily measure in dollars.
a.	Intangible costs	c.	Tangible costs	
b.	Direct costs	d.	Indirect costs	

ANS:	C	PTS:	1	REF:	259

	12.	Project managers should focus on ____, since they can control them.
a.	sunk costs	c.	direct costs	
b.	indirect costs	d.	intangible costs	

ANS:	C	PTS:	1	REF:	260

	13.	____ are costs that are not directly related to the products or services of the project, but are indirectly related to performing the project.
a.	Intangible costs	c.	Direct costs	
b.	Tangible costs	d.	Indirect costs	

ANS:	D	PTS:	1	REF:	260

	14.	____ should be forgotten.
a.	Sunk costs	c.	Direct costs	
b.	Indirect costs	d.	Intangible costs	

ANS:	A	PTS:	1	REF:	260

	15.	____ allow for future situations that may be partially planned for.
a.	Contingency reserves	c.	Unknown unknowns	
b.	Management reserves	d.	Direct reserves	

ANS:	A	PTS:	1	REF:	260

	16.	____ allow for future situations that are unpredictable.
a.	Contingency reserves	c.	Known unknowns	
b.	Management reserves	d.	Indirect reserves	

ANS:	B	PTS:	1	REF:	260

	17.	A ____ provides an estimate of what a project will cost.
a.	budgetary estimate	c.	rough order of magnitude estimate	
b.	definitive estimate	d.	final estimate	

ANS:	C	PTS:	1	REF:	261

	18.	A ____ is done very early in a project or even before a project is officially started.
a.	budgetary estimate	c.	rough order of magnitude estimate	
b.	definitive estimate	d.	final estimate	

ANS:	C	PTS:	1	REF:	261

	19.	A ____ is used to allocate money into an organization’s budget.
a.	budgetary estimate	c.	rough order of magnitude estimate	
b.	definitive estimate	d.	final estimate	

ANS:	A	PTS:	1	REF:	261

	20.	A ____ is used for making many purchasing decisions for which accurate estimates are required and for estimating final project costs.
a.	budgetary estimate	c.	rough order of magnitude estimate	
b.	definitive estimate	d.	final estimate	

ANS:	B	PTS:	1	REF:	261

	21.	____ use the actual cost of a previous, similar project as the basis for estimating the cost of the current project.
a.	Actual estimates	c.	Bottom-up estimates	
b.	Parametric estimates	d.	Analogous estimates	

ANS:	D	PTS:	1	REF:	263

	22.	____ involve estimating individual work items or activities and summing them to get a project total.
a.	Actual estimates	c.	Bottom-up estimates	
b.	Parametric estimates	d.	Analogous estimates	

ANS:	C	PTS:	1	REF:	264

	23.	A(n) ____ might provide an estimate of $50 per line of code for a software development project based on the programming language the project is using, the level of expertise of the programmers, the size and complexity of the data involved, and so on.
a.	analogous cost estimate	c.	bottom-up estimate	
b.	parametric model	d.	reserve analysis 	

ANS:	B	PTS:	1	REF:	264

	24.	Tom DeMarco, a well-known author on software development, suggests ____ reasons for the inaccuracies of many information technology project cost estimates and some ways to overcome them.
a.	three	c.	five	
b.	four	d.	six	

ANS:	B	PTS:	1	REF:	264-265

	25.	If the cost estimate will be the basis for contract awards and performance reporting, it should be a ____ and as accurate as possible.
a.	budgetary estimate	c.	rough order of magnitude estimate	
b.	definitive estimate	d.	final estimate	

ANS:	B	PTS:	1	REF:	266

	26.	The main goal of the ____ process is to produce a cost baseline for measuring project performance and project funding requirements.
a.	cost budgeting	c.	cost control	
b.	cost consolidation	d.	cost estimating	

ANS:	A	PTS:	1	REF:	270

	27.	A ____ is a time-phased budget that project managers use to measure and monitor cost performance.
a.	budget baseline	c.	cost baseline	
b.	ledger	d.	cost line	

ANS:	C	PTS:	1	REF:	271

	28.	The project management plan, project funding requirements, work performance data, and organizational process assets are inputs for the process of ____.
a.	controlling costs	c.	consolidating costs	
b.	budgeting costs	d.	estimating costs	

ANS:	A	PTS:	1	REF:	272

	29.	____ is a project performance measurement technique that integrates scope, time, and cost data.
a.	Cost baseline	c.	Constructive cost modeling	
b.	Earned value management	d.	Parametric modeling	

ANS:	B	PTS:	1	REF:	273

	30.	The ____ is that portion of the approved total cost estimate planned to be spent on an activity during a given period.
a.	AC	c.	RP	
b.	EV	d.	PV	

ANS:	D	PTS:	1	REF:	273

	31.	The ____ is the ratio of actual work completed to the percentage of work planned to have been completed at any given time during the life of the project or activity.
a.	AC	c.	RP	
b.	EV	d.	PV	

ANS:	C	PTS:	1	REF:	273

	32.	The ____ is an estimate of the value of the physical work actually completed.
a.	AC	c.	RP	
b.	EV	d.	PV	

ANS:	B	PTS:	1	REF:	273

	33.	The ____ is the total direct and indirect costs incurred in accomplishing work on an activity during a given period.
a.	AC	c.	RP	
b.	EV	d.	PV	

ANS:	A	PTS:	1	REF:	273

	34.	Variances are calculated by subtracting the actual cost or planned value from ____.
a.	EV	c.	PV	
b.	AC	d.	RP	

ANS:	A	PTS:	1	REF:	274

	35.	____ is the earned value minus the actual cost.
a.	SV	c.	CPI	
b.	CV	d.	SPI	

ANS:	B	PTS:	1	REF:	275

	36.	____ is the earned value minus the planned value.
a.	SV	c.	CPI	
b.	CV	d.	SPI	

ANS:	A	PTS:	1	REF:	275

	37.	The ____ is the ratio of earned value to actual cost and can be used to estimate the projected cost of completing the project.
a.	SV	c.	CPI	
b.	CV	d.	SPI	

ANS:	C	PTS:	1	REF:	275

	38.	The ____ is the ratio of earned value to planned value and can be used to estimate the projected time to complete the project.
a.	SV	c.	CPI	
b.	CV	d.	SPI	

ANS:	D	PTS:	1	REF:	275

	39.	The ____ is an estimate of what it will cost to complete the project based on performance to date.
a.	CPI	c.	EAC	
b.	SV	d.	SPI	

ANS:	C	PTS:	1	REF:	275

	40.	Using simplified percentage complete amounts for a one-year project with weekly reporting and an average task or work packet size of one week, you can expect about a(n) ____ percent error rate.
a.	1	c.	11	
b.	5	d.	15	

ANS:	A	PTS:	1	REF:	277

COMPLETION

	1.	Using good _________________________ can change the false perception that costs grow and failures are to be expected.

ANS:	project cost management

PTS:	1	REF:	256

	2.	The main outputs of the ____________________ process are activity cost estimates, basis of estimates,  and project document updates.

ANS:	cost estimating

PTS:	1	REF:	256

	3.	The main outputs of the ____________________ process are a cost performance baseline, project funding requirements, and project document updates.

ANS:	cost budgeting

PTS:	1	REF:	256

	4.	The main outputs of the ____________________ process are work performance measurements, budget forecasts, organizational process asset updates, change requests, project management plan updates, and project document updates.

ANS:	cost control

PTS:	1	REF:	256

	5.	Information technology project managers need to be able to present and discuss project information in ____________________ terms as well as in technical terms.

ANS:	financial

PTS:	1	REF:	257

	6.	____________________ are revenues minus expenditures.

ANS:	Profits

PTS:	1	REF:	257

	7.	____________________ allows you to see a big-picture view of the cost of a project throughout its life cycle.

ANS:	Life cycle costing

PTS:	1	REF:	258

	8.	____________________ considers the total cost of ownership, or development plus support costs, for a project.

ANS:	Life cycle costing

PTS:	1	REF:	258

	9.	____________________ costs or benefits are costs or benefits that are difficult to measure in monetary terms.

ANS:	Intangible

PTS:	1	REF:	259

	10.	____________________ cost is money that has been spent in the past.

ANS:	Sunk

PTS:	1	REF:	260

	11.	____________________ states that when many items are produced repetitively, the unit cost of those items decreases in a regular pattern as more units are produced.

ANS:	Learning curve theory

PTS:	1	REF:	260

	12.	A(n) ____________________ is a document that describes how the organization will manage cost variances on the project.

ANS:	cost management plan

PTS:	1	REF:	262

	13.	____________________ costs are often much higher for contractors.

ANS:	Labor

PTS:	1	REF:	263

	14.	____________________ uses project characteristics in a mathematical model to estimate project costs.

ANS:	Parametric modeling

PTS:	1	REF:	264

	15.	In practice, many people find that using a combination or hybrid approach involving analogous, bottom up, and/or parametric modeling provides the best ____________________.

ANS:	cost estimates

PTS:	1	REF:	264

	16.	It is helpful to analyze the total dollar value as well as the percentage of the total amount for each major ______________________________ category.

ANS:	
WBS
work breakdown structure
work breakdown structure (WBS)
WBS (work breakdown structure)

PTS:	1	REF:	269

	17.	It’s important for the team to ____________________ assumptions they made when developing the cost baseline and have several experts review it.

ANS:	document

PTS:	1	REF:	270

	18.	In addition to providing input for budgetary estimates, cost budgeting provides a(n) ____________________.

ANS:	cost baseline

PTS:	1	REF:	271

	19.	____________________ has many cost management features to help you enter budgeted costs, set a baseline, enter actuals, calculate variances, and run various cost reports.

ANS:	
Project 2007
Microsoft Project
Microsoft Project 2007

PTS:	1	REF:	272

	20.	A(n) ____________________ is the original project plan plus approved changes.

ANS:	baseline

PTS:	1	REF:	273

	21.	After you total the EV, AC, and PV data for all activities on a project, you can use the CPI and ___________________________________ to project how much it will cost and how long it will take to finish the project based on performance to date.

ANS:	
SPI
schedule performance index
schedule performance index (SPI)
SPI (schedule performance index)

PTS:	1	REF:	275

	22.	In general, ____________________ numbers for cost and schedule variance indicate problems in those areas.

ANS:	negative

PTS:	1	REF:	275

	23.	_________________________ and SPI less than one or less than 100 percent indicate problems.

ANS:	
CPI
Cost performance index
Cost performance index (CPI)
CPI (cost performance index)

PTS:	1	REF:	275

	24.	The cost performance index can be used to calculate the ______________________________.

ANS:	
EAC
estimate at completion
estimate at completion (EAC)
EAC (estimate at completion)

PTS:	1	REF:	275

	25.	Many organizations now collect and control an entire suite of projects or investments as one set of interrelated activities in one place, called a(n) ____________________.

ANS:	portfolio

PTS:	1	REF:	278

ESSAY

	1.	List and briefly describe the three project cost management processes.

ANS:	
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, basis of estimates, and project document updates. A cost management plan is created as part of integration management when creating the project management plan. It should include information related to the level of accuracy for estimates, variance thresholds for monitoring cost performance, reporting formats, and other related information.

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 performance baseline, project funding requirements, and project document updates.

Controlling costs involves controlling changes to the project budget. The main outputs of the cost control process are work performance measurements, budget forecasts, organizational process asset updates, change requests, project management plan updates, and project document updates.

PTS:	1	REF:	256

	2.	What are tangible, intangible, direct and indirect costs? Give examples of each.

ANS:	
Tangible and intangible costs and benefits are categories for determining how definable the estimated costs and benefits are for a project. Tangible costs or benefits are those costs or benefits that an organization can easily measure in dollars. For example, suppose the Surveyor Pro project described in the opening case included a preliminary feasibility study. If a company completed this study for $100,000, the tangible cost of the study is $100,000. If Juan’s government estimated that it would have cost $150,000 to do the study itself, the tangible benefits of the study would be $50,000 if it assigned the people who would have done the study to other projects. Conversely, intangible costs or benefits are costs or benefits that are difficult to measure in monetary terms. Suppose Juan and a few other people, out of personal interest, spent some time using government-owned computers, books, and other resources to research areas related to the study. Although their hours and the government-owned materials were not billed to the project, they could be considered intangible costs. 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 are costs that can be directly related to producing the products and services of the project. You can attribute direct costs directly to a certain project. For example, the salaries of people working full time on the project and the cost of hardware and software purchased specifically for the project are direct costs. Project managers should focus on direct costs, since they can control them.

Indirect costs are costs that are not directly related to the products or services of the project, but are indirectly related to performing the project. For example, the cost of electricity, paper towels, and so on in a large building housing a thousand employees who work on many projects would be indirect costs. Indirect costs are allocated to projects, and project managers have very little control over them.

PTS:	1	REF:	259-260

	3.	What are the three basic types of cost estimating? Describe each type.

ANS:	
A rough order of magnitude (ROM) estimate provides an estimate of what a project will cost. ROM estimates can also be referred to as a ballpark estimate, a guesstimate, a swag, or a broad gauge. This type of estimate is done very early in a project or even before a project is officially started. Project managers and top management use this estimate to help make project selection decisions. The timeframe for this type of estimate is often three or more years prior to project completion. A ROM estimate’s accuracy is typically –50 percent to +100 percent, meaning the project’s actual costs could be 50 percent below the ROM estimate or 100 percent above. For information technology project estimates, this accuracy range is often much wider. Many information technology professionals automatically double estimates for software development because of the history of cost overruns on information technology projects.

A budgetary estimate is used to allocate money into an organization’s budget. Many organizations develop budgets at least two years into the future. Budgetary estimates are made one to two years prior to project completion. The accuracy of budgetary estimates is typically –10 percent to +25 percent, meaning the actual costs could be 10 percent less or 25 percent more than the budgetary estimate.

A definitive estimate provides an accurate estimate of project costs. Definitive estimates are used for making many purchasing decisions for which accurate estimates are required and for estimating final project costs. Definitive estimates are made one year or less prior to project completion. A definitive estimate should be the most accurate of the three types of estimates. The accuracy of this type of estimate is normally –5 percent to +10 percent, meaning the actual costs could be 5 percent less or 10 percent more than the definitive estimate.

PTS:	1	REF:	261-262

	4.	Describe four problems with Information Technology cost estimates.

ANS:	
1. Estimates are done too quickly. Developing an estimate for a large software project is a complex task requiring a significant amount of effort. Many estimates must be done quickly and before clear system requirements have been produced. Rarely are the more precise, later estimates less than the earlier estimates for information technology projects. It is important to remember that estimates are done at various stages of the project, and project managers need to explain the rationale for each estimate.

2. Lack of estimating experience. The people who develop software cost estimates often do not have much experience with cost estimation, especially for large projects. There is also not enough accurate, reliable project data available on which to base estimates. If an organization uses good project management techniques and develops a history of keeping reliable project information, including estimates, it should help improve the organization’s estimates. Enabling information technology people to receive training and mentoring on cost estimating will also improve cost estimates.

3. Human beings are biased toward underestimation. For example, senior information technology professionals or project managers might make estimates based on their own abilities and forget that many junior people will be working on a project. Estimators might also forget to allow for extra costs needed for integration and testing on large information technology projects. It is important for project managers and top management to review estimates and ask important questions to make sure the estimates are not biased.

4. Management desires accuracy. Management might ask for an estimate, but really desire a more accurate number to help them create a bid to win a major contract or get internal funding. It is important for project managers to help develop good cost and schedule estimates and to use their leadership and negotiation skills to stand by those estimates.

PTS:	1	REF:	265

	5.	List and describe the three values calculated for an activity in earned value management. Give examples of each.

ANS:	
The planned value (PV), also called the budget, is that portion of the approved total cost estimate planned to be spent on an activity during a given period. Suppose a project included a summary activity of purchasing and installing a new Web server. Suppose further that, according to the plan, it would take one week and cost a total of $10,000 for the labor hours, hardware, and software involved. The planned value (PV) for that activity that week is, therefore, $10,000.

The actual cost (AC) is the total direct and indirect costs incurred in accomplishing work on an activity during a given period. For example, suppose it actually took two weeks and cost $20,000 to purchase and install the new Web server. Assume that $15,000 of these actual costs were incurred during Week 1 and $5,000 was incurred during Week 2. These amounts are the actual cost (AC) for the activity each week.

The earned value (EV) is an estimate of the value of the physical work actually completed. It is based on the original planned costs for the project or activity and the rate at which the team is completing work on the project or activity to date. The rate of performance (RP) is the ratio of actual work completed to the percentage of work planned to have been completed at any given time during the life of the project or activity. For example, suppose the server installation was halfway completed by the end of week 1. The rate of performance would be 50 percent (50/100) because by the end of week 1, the planned schedule reflects that the task should be 100 percent complete and only 50 percent of that work has been completed.

PTS:	1	REF:	273