Costing Assignment

1. Base on the class lecture on cost and the HBR article “Why Your IT project May be Risker than you Think – # F1109A” explain (50 points)

1. Why PM should understand BCWS (PV), ACWP (AC) and BCWP (EV).

Planned Value – Planned value is the budgeted cost of work that has been approved. This is important for a PM to understand because this is the so called “purse strings” of the project that he/she has to work with. Keeping the Planned Value in sight, helps keep the project on financial track and helps from unknowingly running over budget. From the article “Why your IT project may be riskier than you think” (Flyvbjerg, B., & Budzier 2011), there are numerous examples of improper budgeting or lack thereof, leading to stock drops, C level layoffs to company bankruptcy. Knowing your Planned Value helps to keep your budget in line and lessen the chances of blowing over budget.

Actual Cost – Is the sum incurred of completed work to date. It is important for a PM to know the actual cost for two reasons, you can know how much of budget has already been spent and how much you have for spending towards the rest of the project. For example, if a project is 10 months for a cost of 100,000 and 6 months have passed but 80,000 has been spent but the project is only 40% completed, the actual cost is still 80,000 because that is what was spend and this is information that is crucial to the PM so he/she knows how much more they can and have spent on the project so far.

Earned Value – Earned value is the value of the work that’s been completed. For example, if the project ended today, this will show the value that the project has given. For example, a project has been allocated 12 months. The PM and consultants have been onsite for 8 months but upon review, only 30% of the work has been completed. The earned value factors that 30% of work completed rather than the time spent on the job. This is important for a PM to understand because it lets him/her know the value of where their project rests currently so they can reflect these numbers to the client and to their employer. It will also help the PM assess the success of the current state of the project.

1. Which of these cost items will you focus on primarily to manage your IT project cost? Please explain clearly.

Of the elements of cost management, earned value is the value of what’s been completed up to current, planned value is the value that should have been earned and actual cost is the amount spent on the project to date. All elements are important for a PM to focus on but the most important of all, is actual cost. All projects are led and dictated by funding. For example, SAP is delivering consulting services to Company YYZ on a 10-month contract for $100,000. Company YYZ was given an agreement by SAP for $100,000 so therefore, that is what was budgeted by the company. To Company YYZ, earned value is important because they would want to know the value of what’s completed as well as the value that should have been earned but actual cost is the amount of money spent. As the saying goes “Cash is King”. Both the client and PM would be most concerned with what was spent on the project to date as this is the raw financial number that dictates what, if any, financial resources we can still work with.