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Setting Your Fees

Setting Your Fees. Project Cost and Setting Your Fees. The Importance of Project Cost Management. IT projects have a poor track record for meeting cost goals Average cost overrun from 1995 CHAOS study was 189% of the original estimates; improved to 145% in the 2001 study

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Setting Your Fees

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  1. Setting Your Fees Project Cost and Setting Your Fees

  2. The Importance of Project Cost Management • IT projects have a poor track record for meeting cost goals • Average cost overrun from 1995 CHAOS study was 189% of the original estimates; improved to 145% in the 2001 study • In 1995, cancelled IT projects cost the U.S. over $81 billion

  3. What is Cost and Project Cost Management? • Cost is a resource sacrificed or foregone to achieve a specific objective or something given up in exchange • Costs are usually measured in monetary units like dollars • Project cost management includes the processes required to ensure that the project is completed within an approved budget

  4. Project Cost Management Processes • Resource planning: determining what resources and quantities of them should be used • Cost estimating: developing an estimate of the costs and resources needed to complete a project • Cost budgeting: allocating the overall cost estimate to individual work items to establish a baseline for measuring performance • Cost control: controlling changes to the project budget

  5. Basic Principles of Cost Management • Most CEOs and boards know a lot more about finance than IT, so IT project managers must speak their language • Profits are revenues minus expenses • Life cycle costing is estimating the cost of a project plus the maintenance costs of the products it produces • Cash flow analysis is determining the estimated annual costs and benefits for a project • Benefits and costs can be tangible or intangible, direct or indirect • Sunk cost should not be a criteria in project selection

  6. Developing the Project Budget • Cost Estimation Steps • Defining what resources will be needed to perform the work • Determining the quantity of resources that are needed • Defining the cost of using each resource • Calculating the cost of the task or activity • Ensuring that the resources are leveled, that is, resources have not been over allocated.

  7. Types of Costs • Direct • Indirect • Sunk • Learning Curve • Reserves

  8. Client wants you to do the work in its entirety just as proposed • You have to be scientific about your fees • Must be able to break it down into components • Your fees must do four things

  9. Fees Must Provide Four Things • Must provide with personal income appropriate to your skills, knowledge, and experience • Must meet all the costs of running your business • Must provide a surplus or profit (to recompense you for the risk you’re taking with your resources) • Must enable to you to compete effectively in your chosen market

  10. Step-By-Step Calculation • Make an assessment of what your skills, knowledge and experience would bring in marketplace as an employee (i. e. annual salary). • Find your working days in a year by subtracting number of weekends from 365 days. • Divide salary in No. 1 by the working days to get your labor rate.

  11. Step-By-Step Calculation • Forecast the day you expect to be able to bill clients, on average, each month. • List and cost all your monthly overheads • Multiply each monthly cost by 12 and add these up to get annual cost of being in business • Divide the annual overhead by the number of days in a year which you expect to invoice to customers • Add No. 3 and No.7 to get Total Cost • Add your profit margin

  12. OVERHEADS Monthly Annual ($) Secretary 1,000 12,000* Office rent 250 3000* Telephone 100 1200 Postage 65 780 Personnel benefits 40 480* Equipment 25 300 Stationery 12 144

  13. OVERHEADS • Marketing • Personnel (5 days) 958 11,496* • Direct Mkt (2.5 x d. labor rate) 500 6,000 • Practice management 958 11,496* (5 days) • Dues and subscriptions 12 144 • Automotive 345 4, 140 • Insurance 26 312 • Accounting and legal 225 2,700 • Miscellaneous 200 2,400*

  14. OVERHEADS • Totals 4,716 56,592 • Day you expect to invoice 144 days • Daily overhead rate = 56,592/144= 393.00 • Total cost of doing business = 191.50 + 393.00 = 584.50 • Profit (15-25%) = 146.13 • GRAND TOTAL = 730.63 == 735.00/day

  15. Finalizing the Project Schedule and Budget • Project schedule and budget may require several iterations before it is acceptable to the sponsor, the project manager, and the project team • Once the project schedule and project plan are accepted, the project plan becomes the baseline plan. • Once accepted, the project manager and project team have the authority to execute or carry out the plan.

  16. Cost of Software Defects It is important to spend money up-front on IT projects to avoid spending a lot more later.

  17. Resource Planning • The nature of the project and the organization will affect resource planning • Some questions to consider: • How difficult will it be to do specific tasks on the project? • Is there anything unique in this project’s scope statement that will affect resources? • What is the organization’s history in doing similar tasks? • Does the organization have or can they acquire the people, equipment, and materials that are capable and available for performing the work?

  18. Types of Cost Estimates

  19. Typical Problems with IT Cost Estimates • Developing an estimate for a large software project is a complex task requiring a significant amount of effort. Remember that estimates are done at various stages of the project • Many people doing estimates have little experience doing them. Try to provide training and mentoring • People have a bias toward underestimation. Review estimates and ask important questions to make sure estimates are not biased • Management wants a number for a bid, not a real estimate. Project managers must negotiate with project sponsors to create realistic cost estimates

  20. Business Systems Replacement Project Cost Estimate Overview

  21. Business Systems Replacement Project Cash Flow Analysis

  22. Cost Budgeting • Cost budgeting involves allocating the project cost estimate to individual work items and providing a cost baseline • For example, in the Business Systems Replacement project, there was a total purchased cost estimate for FY97 of $600,000 and another $1.2 million for Information Services and Technology • These amounts were allocated to appropriate budgets as shown in the next table.

  23. Business Systems Replacement Project Budget Estimates for FY97 and Explanations

  24. Cost Control • Project cost control includes • monitoring cost performance • ensuring that only appropriate project changes are included in a revised cost baseline • informing project stakeholders of authorized changes to the project that will affect costs

  25. Cost Control Input Form for Business Systems Replacement Project

  26. Project Portfolio Management • Many organizations collect and control an entire suite of projects or investments as one set of interrelated activities in a portfolio • Five levels for project portfolio management • Put all your projects in one database • Prioritize the projects in your database • Divide your projects into two or three budgets based on type of investment • Automate the repository • Apply modern portfolio theory, including risk-return tools that map project risk on a curve

  27. Sample Enterprise Project Management Screen

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