Chapter 7

1. Discuss why many information technology professionals may overlook project cost management and how this might affect completing projects within budget.

One of the most difficult tasks is cost management within an information technology project. An important factor to consider when analyzing the success of cost management practices on a particular project is estimating the various costs that go into an IT project.

Many IT projects have very vague or undefined requirements initially so is one of the trouble with cost management.

IT projects also includes a heavy reliance on new technologies and full business process analysis, any use of new technology has an associated risk, which often leads to complex problems, or even abandonment of the technology itself.

Many information technology professionals have a limited business background, which includes not understanding the importance of basic accounting and finance principles.

2. Explain some of the basic principles of cost management, such as profits, life cycle costs, tangible and intangible costs and benefits, direct and indirect costs, reserves, and so on.

PROFITS are revenues minus expenditures. To increase profits, a company can increase revenues, decrease expenses, or try to do both.

LIFE CYCLE COSTS allows you to see a big-picture view of the cost of a project throughout its life cycle. This helps you develop an accurate projection of a project’s financial costs and benefits.

TANGIBLE AND INTANGIBLE COSTS AND BENEFITS Tangible costs or benefits are those costs or benefits that an organization can easily measure in dollars. Intangible costs or benefits are costs or benefits that are difficult to measure in monetary terms.

DIRECT AND INDIRECT COSTS Direct costs are costs that can be directly related to producing the products and services of the project. 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.

RESERVES are dollars included in a cost estimate to provide a cushion for future situations that are difficult to predict.

3. Give examples of when you would prepare rough order of magnitude (ROM), budgetary, and definitive cost estimates for an information technology project. Give an example of how you would use each of the following techniques for creating a cost estimate: analogous, parametric, and bottom-up.

ROM provides an estimate of what a project will cost. This estimate is done very early in a project or even before a project is officially started.

BUDGETARY is used to allocate money into an organization´s budget. Budgetary estimates are made one to two years prior to project completion.

DEFINTIVE COST ESTIMATES 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.

4. Explain what happens during the process to determine the project budget.

Determining the project budget involves allocating

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