Project Cost Management: Basic Principles of Cost Management

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ProjectCostManagement:FundamentalPrinciplesofCostManagement

Many it projects are not initiated simply because information technologies experts don’t realize the significance of knowing basic accounting and finance principles. Similarly, many projects which are started never finish due to cost management problems. Most people in an executive board realize and care more about financial terms than information technologies terms.

information-technologiesprojectmanagementprofessionals needtobecomeinapositiontopresentprojectinformationinfinancialtenaswell aswithterminology. This part describes general subjects like profits, life cycle costing, money-flow analysis, internal speed of return, perceptible and intangible costs and benefits, direct costs, sunk costs, learning curve theory, and reserves. An additional important subject and one from the key tools and methods at managing project costs, earned value management, is described in depth within the section on cost control.

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To improve profit, a company may expand earnings, reduce the cost, or try to accomplish each. Most executives tend to be more focused on profits compared to other matters. When justifying purchases of new computer and technologies, it is essential to concentrate on the effect on profits, not only earnings or expenses.

Consider a digital business tool that you estimate increases revenues for any $100 zillion company by 10 percent. You are unable to look at the potential together with your system without understanding the margin. Margin is the proportion between earnings and profits.

If earnings of $100 produce $2 in profits, there is really a 2 percent margin. When the company loses $2 for each $100 in income, there is really a -2 percent margin. , a business might finish a project to build up and implement a brand new customer service system in a single or 2 years, however the new system could maintain spot for 10 years.

Project managers ought to develop estimates from the costs and together with your project because of its entire life, or 10 years within the preceding example. , it is a lot more cost-effective to invest cash on defining user requirements and doing early testing on it projects rather than wait around for problems to show up after imp1ementation The Table below summarizes the standard expenses of correcting software defects throughout multiple stages from the system development life cycle. In the event you identified and corrected an application defect throughout the user requirements stage of the project, you will need to incorporate $100 to $1,000 the actual project’s total cost of possession.

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In comparison, in the event you waited until after implementation to fix exactly the same software defect, you will need to incorporate probably huge amounts of money the actual project’s total cost of possession. Perceptible costs or benefits are the ones costs or benefits that will easily be measured in dollars. If a strong completed this research for $100,000, the perceptible cost of study is $100,000.

If Juan’s authorities estimated that it could have cost them $150,000 to perform the study themselves, the perceptible together with your study will be $50,000. Suppose Juan and several other people, out of private interest, spent some time using authorities-owned computer systems, books, and other resources to research areas linked to the study. theirhoursandthefederalgovernment-ownedmaterialsarenotbilledtheactualproject,theymightberegardedastoheintangiblecosts.

In together with your study might become the perceived potential advantage of having a method that can help the authorities lay water lines or fiber-optic cable faster or at a lower price. Simply because intangible costs and benefits are hard to quantify, they tend to be harder to warrant.

Direct expenses are costs involved to some project that could be traced way back in a cost-efficient way.

You are able to attribute direct costs straight to a specific project. Project managers ought to concentrate on direct costs, since they could control them.

Indirect expenses are costs involved to some project that should not be traced way back in a cost-efficient way.

, the cost of electrical energy, paper-towels, etc. in a big building housing one thousand employees who work in a few projects will be indirect costs. , within the opening case, suppose Juan’s office had spent $1 zillion on the project in the last 3 years to produce a geographical information system, hut nothing valuable was ever produced.

If his authorities was assessing what projects to finance the coming year and someone suggested they keep funding the geographical information system project simply because they had currently spent $1 zillion onto it, she or he would he incorrectly making sunk cost a key element in the project choice decision. Lots of people fall under the trap of considering how much cash continues to be spent on the failing project and, , hate to avoid spending cash on it. This trap is a lot like gamblers unwilling to stop gambling simply because they have previously lost money.

Learning curve theory claims that when many items are made repetitively, the device cost of these items decreases in a normal pattern as increasing numbers of units are made. Learning curve theory ought to be utilized to estimate costs on projects relating to the production of large volumes of products. Learning curve theory also relates to the number of time it requires to finish some tasks.

, the very first time a brand new employee performs a particular job, it can most likely take more than the tenth time that employee performs a really comparable job.

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