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Overview
Cost Control
including maintenance
Heating lighting and office space Support staff (accountants, cleaners etc) Infrastructure (network + communications) Facilities (library, refreshments, recreation) Social security, employee benefits, pensions etc
Average Salary for Software Engineers in the UK (2002) = 25,000 Average Salary for IT managers in the UK (2002) = 50,000 Overhead is typically 2 x Salary So a software engineer costs 75,000pa
CoCoMo
Constructive Cost Model Uses lines of code as a measure Assumes that the waterfall model of software development will be used For well understood applications developed by small teams:
PM = 2.4(KDSI)1.05 x M
CoCoMo Example
How long will it take to produce 10,000 lines of code? PM = 2.4(10)1.05 x 1 = 26.9PM Cost is > 150,000 What if the Programmer(s) is(are) very inexperienced PM = 2.4(10)1.05 x 1.46 = 39.3PM
CoCoMo2
Uses Object points rather than lines of code Allows for different development approaches See Somerville Software Engineering Chapter 23 for more detail
Compare the costs of carrying out a project with the estimated benefits Identify all costs
Will normally accrue on completion but not always May be annual benefits/savings
, , $ etc
Example layout
Project Costs
Direct Costs Costs that can be directly attributed to a project task (labour, materials etc.) Indirect Costs Overheads that do not directly contribute to the project (rent, heating, lighting, admin)
Other factors may effect the pricing e.g. competitive environment, loss leader project project managers for costing senior management for pricing strategies
Cost = how much it will cost to produce system Budget = how much you will be allowed to spend on producing system
High level management set budget against high level tasks This is then divided amongst lower level tasks by lower levels of management Generally results in:
Bottom up Budget
Estimates are made on resource costs etc. for low level tasks (WBS) These are aggregated to provide direct costs for the project PM adds indirect costs admin, etc. and reserve (and profit figures)
Evaluating a Project
Year Project AAA Project BBB Project CCC Project DDD 0 -100000 -1000000 -100000 -120000 1 10000 200000 30000 30000 2 10000 200000 30000 30000 3 10000 200000 30000 30000 4 20000 200000 30000 30000 5 100000 300000 30000 75000
Net Profit
Year 0 1 10000 2 10000 3 10000 4 5 Net Profit 50000 100000 50000 75000 Project AAA -100000 20000 100000
Project BBB -1000000 200000 200000 200000 200000 300000 Project CCC -100000 Project DDD -120000 30000 30000 30000 30000 30000 30000 30000 30000 30000 75000
Net Profit
The most obvious criteria for comparison Does not give the full picture regarding the viability of the project
Cash Flow
Can the organisation afford the ve cash flow required for the development of the project
Cash Flow
We hope to get it back once the product is finished Therefore projects will have a ve cash flow during their development This should become +ve once the project is complete
Time
a c
Cash Flow
Thousands
400 200 0
Evaluating a Project
Year Project AAA Project BBB Project CCC Project DDD 0 -100000 -1000000 -100000 -120000 1 10000 200000 30000 30000 2 10000 200000 30000 30000 3 10000 200000 30000 30000 4 20000 200000 30000 30000 5 100000 300000 30000 75000
Payback Period
The period of time it takes to recoup your initial investment A shorter payback period is preferred as it minimises the amount of time a project is in debt
Payback Period
Year Project AAA Cumulative Total Project CCC Cumulative Total 0 -100000 100,000.00 -100000 100,000.00 1 10000 90,000.00 30000 70,000.00 2 10000 80,000.00 30000 40,000.00 3 10000 70,000.00 30000 10,000.00 4 20000 5 100000
20,000.00 50,000.00
Payback Period
Payback Period
60 40 20 0 -20 -40 -60 -80 -100 -120
0 1 2 3 4 5
Thousands
Project AAA
Project CCC
Year
Payback Period
Payback Period
Year Project BBB Cumulative Total Project DDD Cumulative Total 0 -1000000 -1000000 -120000 -120000 1 200000 -800000 30000 -90000 2 200000 -600000 30000 -60000 3 200000 -400000 30000 -30000 4 200000 -200000 30000 0 5 300000 100000 75000 75000
Return on Investment
Is it really worth investing all that time, money and effort into the project? To help make that decision we use the return on investment The investment will be the initial development costs of the project
Return on Investment
Used to discover the percentage of return on the original project investment ROI = average annual profit x 100 total investment
Return on Investment
Return on Investment
Calculate the ROI for the remaining projects and show which one provides the best return
Return on Investment
Project BBB
Project CCC
ROI = (100,000/5)/100000 0x100 = 2% ROI = (50,000/5)/100000 x100 = 10% ROI = (75,000/5)/120000 x100 = 12.5%
Takes into account the profitability of a project and the timing of cash flows Receiving 1000 today is better then receiving 1000 next year
If we invested 100 this year it would be worth 110 next year (assuming 10% interest rate not likely) Therefore if we were given 100 next year it would have been the same as investing 90(ish) this year. This 10% is called the discount rate
The present value of any future cash flow can be calculated using the following formula: Present Value = value in year t (1 + r)t
PV Exercise
If I gave you 100 in one years time, what would be its present value? Assume a percentage rate of 20%
An alternative approach is to break down the problem into cash flow and discount factor: Discount factor = 1 (1+r)t
Therefore: Present Value = Cash Flow x Discount Factor
Net Present Value is the sum of the present values (aka discounted cash flows) As can be seen on the next slide, the profit figures can differ significantly using Net PV instead of Net Profit The payback period may also be effected
100000.00
90291.26
80865.30
71713.89
53944.15
32316.73
NPV Exercise
Calculate the Discounted Cash Flows and annual NPV for Projects BBB, CCC and DDD Does this effect the payback period for any of these projects?
Have a go at the tutorial exercise handed out in the lecture To do this you will need to think about Cost Benefit Analysis and NPV A model answer will be provided next week
Cost Control
We have established the projected costs for the project Each activity will have been given a cost value (in WBS) As the project progresses we must monitor the costs
Example 1
Task 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 1 5 2 5 3 5 4 10 5 5 6 5 7 10 8 5 9 5 60 55 50 45 40 35 30 25 20 15 10 5 Budgeted Costs
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26
3 weeks into my 10 week project I find I have spent over 50% of the budget. What does this mean for the rest of the project?
Check original cost plan (BCWS) Check actual work performed may be ahead of schedule (BCWP) Check actual cost of planned activities may be overspend (ACWP)
Cost Control
BCWS Budgeted Cost of Work Scheduled BCWP Budgeted Cost of Work Performed
Diagram Shows relationship between BCWS, BCWP and ACWP Lockyer and Gordon Page 84
Variance Analysis
BCWP ACWP = Cost Variance BCWP BCWS = Schedule Variance ACWP BCWS = Budget Variance
e.g. negative cost variance with zero schedule variance implies the project is on time but over budget
Conclusions
Costs and Benefits may be incurred annually Development time for a project incurs a negative cash flow which may be large A number of factors can be combined to assess suitability of a project Incorporating NPV into the calculations can alter the payback period of a project NPV provides a more realistic model as it takes into account the future value of money
References
Hughes and Cotterell Software Project Management (Ch 3+9) Lockyer and Gordon Project Management Cadle and Yeates Project Management for Information Systems Somerville Software Engineering A useful link
http://www.cw360ms.com/pmsurveyresults/index. asp