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202 Part II: Planning Your Software Project The multiple views, searches, and tools increased the developers work time, which also drove costs up. Bonuses for the project team are based on the budget for the project. As the project s budget grew, so did the bonuses for the pro- ject team. However, team members became frustrated that they had to change their work throughout the project, so the loss of morale likely affected project performance. Marti and Thomas agreed that the changes to the project scope were value-added changes, but the changes value may be marginal. Track- ing the impact of the project benefits after the deliverable moves into production is the only method to analyze the true cost-effectiveness of the changes and their profitability for the organization. (continued) Conducting variance analysis Any time you experience differences between what was planned and what was experienced, you have a variance. Variance analysis enables you to complete root cause analysis. Your goal is to find out why the actual project costs are differing from your estimates so that you can stop the bleeding. You can even correct the overruns if you re good at root cause analysis. We cover variance analysis and root cause analysis in Chapter 14. When you track and measure, you have opportunities to react. For example, if Bob is slipping on his assignments, but Jan is way ahead, you can balance the load by giving some of Bob s work to Jan. Your root cause analysis may tell you that Bob s not confident in this area of the project work, or that he s on seven other projects, or that his time estimates were over-optimistic. Whatever the reason, you can now react and make process changes to correct the problem. Software project management tools, such as Microsoft Project, can help you determine where activities are slipping, complete trend analyses, and simulate what may happen if project costs continue to mushroom. The goal, of course, is to make corrective actions to get the project back on financial track and to prevent similar mistakes from entering the project again. Having More Project than Cash Ready for some bad news? Sometimes there s nothing you can do when it comes to your project being overbudget. Sometimes all your planning, hard work, efforts to control costs, attempts to keep changes at bay, and efforts to keep your project team on track all go down the drain. Whatever the reason your project has begun to rival the budget for the movie Waterworld (we hope the product isn t quite as bad), you re stuck between a failing project and a hard place. You ve got to fix this thing.
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Chapter 9: Building Your Project Budget 201 Knowing the actual cost of scope changes Meet Marti. She s a software project manager for a financial advisement firm. She s managing a project to create a software program that will enable the financial advisers within her com- pany to track clients activities, portfolios, con- tact information, and communications. The software will interact with databases and inter- nal and external Web servers, and provide real- time secure transactions with commodities, stocks, and bonds. Marti and the experts on her project team have been working closely with Thomas Lippy, the chief operating officer and main stakeholder, to develop the project requirements. Thomas has signed off on the requirements document and is eager for Marti to get to work on the project. He believes that the software will help their com- pany grow by 15 percent each year. The rough order of magnitude estimate for the project was $750,000, +75 percent to 25 per- cent. The moment the WBS was created, Marti provided a definitive estimate of $1.5 million, +10 percent to 5 percent. Thomas approved the definitive estimate, and the team went to work creating the software. At each milestone within the project, Thomas was given the opportunity to review the pro- ject s work and to inspect the timeline and the budget. This also provided Thomas an opportu- nity to tinker with the project requirements. At each milestone review, Thomas added more deliverables to the project scope. Over the course of the project, Thomas added the fol- lowing requirements to the project deliverable: Field changes to the financial adviser s input screen Interaction with the company s IP-based telephone system for customer lookup Incorporation of a client Web site for cus- tomers to securely access their portfolios Integration with legacy databases for trend analysis Multiple views, searches, and tools for cus- tomers and financial advisers to access data These changes increased the project scope, which, in turn, increased the project costs by $450,000. Remember the Iron Triangle? You can t increase the project scope without affect- ing either budget or schedule (or both). When Marti discussed the changes and their impact with Thomas, Thomas was unhappy that these changes could nearly double the original pro- ject budget. Marti explained that there are sev- eral factors that affect project costs: The time to research each change takes time away from doing the project work. Someone has to pay for the developers time to do the research. Some changes require that progress be reversed in order to incorporate the new changes. Some of the requested changes would add time to the system testing phase of the project. Many of the changes required modifica- tions to the training documentation. The legacy database change required Marti to hire a contractor because the project team did not have the skill set to configure the middleware to interact with the software. The project team had to expand to include a network engineer to configure the IP-based telephones to interact with the software the team was designing. (continued)
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200 Part II: Planning Your Software Project Following simple strategies to manage project expenses You need to take active steps to monitor and control the costs within your project. Getting a plan together The first step in managing costs is to have an accurate and reliable project plan. Projects often fail at the beginning, instead of at the end. If your project plan is skewed, faulty, or half-cocked, the implementation will be as well. Flip to Chapter 2 for further information on project planning. One of the components of the project plan is a cost management plan, which describes how you will plan, estimate, budget, and control your project costs. The more detailed and accurate these estimates are, the less likely you are to have budget surprises. Another component of the project plan is the human resources management plan, which details processes and policies regarding the members of the project team, such as roles and responsibilities, reporting structures, improving project team members skills and enhancing their knowledge, accepted hiring and firing considerations, and staffing plans. Although the cost management plan and human resources management plan are listed separately, in actual practice, they interact and overlap. For example, your cost management plan probably lists the cost of resources (people) required to complete the software project. Reviewing costs and performance When you ve got a solid plan, then you need a method to review costs and performance of the project team. This is vital in every software development project because the project is built on how efficiently project team members use their time. You need to track and measure the team members time to complete the project activities. Just because you need to ensure that team members manage their time well does not mean that it s open season to micromanage. Everyone works his or her own way, and you need to allow staff to feel free to be idiosyncratic within reason, of course. However, using historical information and analogous information, you can (and should) attempt to estimate how long various tasks will take (see Chapter . You can also set incremental deadlines for partial deliverables.
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Chapter 9: Building Your Project Budget 199 Don t get too excited. This reserve is allotted for uncertain events, risks, and issues that are anticipated but not confirmed. You can t use contingency funds as part of your project budget for execution. Controlling Project Costs Great news! Your project is moving ahead and you re making progress. You re spending the project budget. As your project team develops the software, their labor consumes the monies that were allotted to pay for their labor. You ve also spent cash on resources such as training, support materials, servers and hardware, software, bonuses, and more. Well, not so fast. You have to account for every red cent your project consumes. Understanding accounting blue dollars In some organizations, everything you spend is blue dollars. Blue dollars describe the funds that are internal to an organization and just shift between departments no one s actually writing a check for the project work. If this scenario describes your organization, you still have to accurately keep an accounting of all the dollars you spend. Understanding work-for-hire accounting If you re a project manager in an organization that completes projects for other companies, then you ve got a more evident responsibility to guard the project costs: the project s profitability. A common reason that organizations lose money on projects is due to poor fiscal management on the part of the software project manager. Don t let that be you. If your company hopes to achieve a profit margin of 10 percent on every project you manage, errors, sloppy work, incomplete requirements gathering, late deliverables, and faulty judgments will quickly eat into that profit. If a software project is incredibly late, wrong, or buggy, the 10 percent margin begins to erode, and before you know it, your company is paying out-of-pocket to deliver the project. A project manager who s losing money is a project manager who s on the way out.
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198 Part II: Planning Your Software Project developers hourly costs. You have to worry only about adhering to your project budget. Someone (the customer or project stakeholder) is paying for the developers time, or their salaries are incorporated into the cost of doing business. You need to understand what approach your project should follow when it comes to accounting and billing for your project team members time. Planning for Contingencies Estimates are usually based on idealized concepts of how things will go, while the actual project is full of conditions, risks, and (if you re smart) contingency plans. Plan on dealing with known unknowns. A known unknown is any event that is governed by Murphy s Law. You know there will be problems; you just don t know exactly what those problems will be or when they ll crop up. If you don t accommodate for these snafus up front when you create your budget, things can go bad. Unfortunately, some problems may be unavoidable, but they can still devastate a budget: Errors and omissions in the product scope mean that the developers take longer than expected once they figure out what they ve missed. Errors and omissions in the project work mean that tasks need to be performed that were never planned for. Miscommunications of all kinds can cause work to be undone and require reworking. Failure in user acceptability testing can mean you go back to the drawing board. Failure in quality control may mean that you have to recode a bunch of stuff. A hard drive crashes during a routine backup, and some development work needs to be done. (We know you would never forget to back up your work!) Poor requirements gathering means that your developers are working without all the necessary information. Project management errors mean that you spin your wheels a bit (hey, you ll get better with time). What you need is a contingency reserve. A contingency reserve, sometimes called a contingency allowance, is hidden treasure, a set amount of funds that the project manager may use to respond to known unknowns throughout the project.
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Chapter 9: Building Your Project Budget 197 Considering Project Profitability There are other approaches to estimating how much a project will cost. Software project management depends on the time your developers take to complete tasks. Obviously, the more time you estimate it ll take for your project team to complete the software, the more it ll cost to create the product. Your particular circumstances will vary: If you re billing just for the developers time, then you need to consider the resource rates for the programmers that will be working on the project. If your organization completes projects for other organizations, then you have to consider the profit margin your project should create. If you re a software project manager completing internal projects, then you ll be considering the straight rate for the developers time. If you re completing a project for another organization (that is, you re developing software for another company that s paying your company a fee to develop the software), you re in this business to make a profit for your company. The faster the team can successfully complete the work, the higher the project s profitability. As a project manager, you may have to consider the resource rates that you pay your project team members against what your company bills for their time. In other words, you want to have a higher variance between what you pay the developers and what you charge other companies for their time. For example, Susan is a senior developer who earns roughly $50 per hour from your firm. Your company likely charges more than $50 an hour for her time. Now consider Sammy. Sammy earns roughly $30 per hour because he s less experienced than Susan. Some organizations bill more for Susan s time than for Sammy s time because of the difference in experience. Some organizations, however, don t differentiate between developers; they just offer an hourly rate for each developer s time. If your company bills more experienced developers at a higher rate, you must examine whether it s more cost effective to utilize Sammy or more cost effective to pay more for Susan. For example, Sammy may take longer to complete a task than Susan would, but Susan could be better utilized on more higher- priority, more profitable activities. Making these decisions is called value engineering determining which resource is best for the project activities and which resource is best for the project profitability. On the other hand, if you re completing projects internally and not for organizations outside your own, it s likely you won t have to worry as much about the
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196 Part II: Planning Your Software Project your stakeholders confidence in you. In order to create an accurate estimate, you need to include the following in every estimate you create: Product scope: The product scope documents the product requirements and the characteristics of the product (for example, a list of the software functionality). It includes thorough detail in order to facilitate further project planning. Project scope: The project scope describes the project deliverables and defines the work that will be accomplished. It includes product requirements, schedule milestones, WBS, assumptions and constraints, and methods of change control. It also defines the process for how the final deliverable will be accepted by the customer. Assumptions: You assume there won t be delays. You assume you ll have all the resources you need. You assume that this is an estimate, not a quote. Constraints: Any constraints that have been brought to the table at this point need to be documented. A constraint is anything that limits the project manager s options; examples can include Time constraints: You must have the project done in four months. Resource constraints: You can only use two developers on the project. Development environment restraints: You must develop in COBOL. Budget restraints: Your budget is capped at $250,000. Timeframe: We discuss timeframe in detail in Chapter 8. Essentially, you need to let stakeholders know that this estimate is a limited-time offer that depends on currently available resources. If the stakeholders want to do this project in five months when all your developers are wrapped up in other projects, you might have different numbers. Range of variance: The range of variance describes the +/ every estimate should have. For example, as discussed previously in this chapter, you create a ROM estimate for a project to create a new piece of software. You estimate the project to cost $150,000 with a possible variance from +25 percent to 10 percent. For input into the range of variance, you use any or all of the following resources: marketplace conditions, commercial databases, cost-estimating policies and templates, historical information, project files, team members knowledge, lessons learned documentation, project scope statement, WBS, project management plan, schedule management plan, resource management plan, and risk register.
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Chapter 9: Building Your Project Budget 195 Costs Definitive Estimate Figure 9-2: Definitive estimates -5% are the most accurate. To create a definitive estimate you need a work breakdown structure (WBS) in place. You have to examine every deliverable within the WBS. You also must consider all the needed materials, labor, resources, and risks that may influence project costs, as well as all the other elements that contribute to the bottom line of the project. The reason you must consider project risks when you create your cost estimates is that if a risk materializes, it may negatively affect the scheduled activities and the costs. Because so much of software development is based on labor, you may find that you re building your project estimates using a parametric model. A parametric model uses specific parameters, such as cost per hour, cost per line of code, or cost per network drop, to predict how much the project will cost. Parametric modeling is fine as long as you document how the estimate was created. In some organizations, parametric modeling won t work, because each developer s time is accounted for and billed independently. +10% Schedule Although it takes more time to create a definitive estimate, it s always better to spend time up front creating an accurate estimate than to spend time begging for more cash later (and explaining why your estimate was off the mark). Creating an Accurate Estimate Assuming that you have time and resources to create a definitive estimate (as we discuss in the previous section), you want to make sure that the estimate you create is as accurate as possible. An inaccurate cost estimate can upset stakeholders, make you appear foolish, put your project at risk, and shake
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194 Part II: Planning Your Software Project and on the questions would have to go. It s difficult, if not impossible, to give an accurate estimate on anything if the requirements and scope of the project are not defined. As you progress through the project planning and gain more information about the project requirements, your estimates will be more reliable. Instead of a range of +75 percent to 25 percent, your next estimate may be +40 percent to 10 percent. Traditionally, ROM estimates have a nice way of coming back to haunt project managers. There s something mystical about the first number management hears when it comes to estimates. Be wary of ROM estimates. Creating a budget estimate While a ROM estimate is nice for conversations, it s impossible to use for any substantial software project plan. ROM estimates are little more than wishes and blue sky. In order to create an accurate estimate, or at least a more accurate estimate, you need more information. The next level of estimating for a project is to create a budget estimate. The budget estimate is somewhat more reliable because you ve got a better grasp on what s actually to be included in your software as you spend more time gathering requirements. The qualifier for budget estimates is typically 10 percent to +25 percent. Budget estimates are typically created based on historical information. If you ve done a similar project in the past, you can use this historical information to predict what your current project is going to cost. Using historical information is called analogous estimating or top-down estimating because you start at the top of the project and you move quickly to the deliverables, drawing analogies to previous projects as you go. Again, although it s a great place to start, when used all alone, analogous estimating doesn t yield the most reliable results. We discuss analogous estimating in more depth in Chapter 8. Creating a definitive estimate The final, and most accurate, estimate type is the definitive estimate. Even its name sounds accurate. The definitive estimate requires a detailed decomposition of everything the project will create. It takes time to create and is also known as bottom-up estimating. Its qualifier is usually 5 percent to +10 percent. Figure 9-2 shows the range of variance customers can expect with a definitive estimate.
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Chapter 9: Building Your Project Budget 193 Do get project team input. Estimating is rarely a solo activity. You should rely on the input of your project team. Be aware, however, that team member recollections aren t as reliable as documented historical information. Do speak with other project managers who have worked on similar projects. Using lessons learned documentation is great, but you can also gain a lot by actually communicating with those who have gone down the same path that you re heading. It s amazing what people remember when you get them talking about a subject. Creating a rough estimate If you re ever asked to give your best-guess cost estimate under less-thanideal circumstances, then you ve been a project manager for at least two hours. Staving off impossible-to-answer questions without seeming as though you don t know anything is one of your primary jobs as a project manager. It s important that you remind everyone that an estimate is not a guarantee. Technically, this estimate is called a rough order of magnitude (ROM) estimate. Some folks call this a hallway estimate or an elevator estimate. These estimates usually have a wild qualifier, such as 25 percent to +75 percent on actual costs. You use these qualifiers because you provide a ROM estimate when you don t yet have enough detail to provide a more definitive cost estimate. Figure 9-1 shows the range of variance customers can expect with a ROM estimate; as you can see, it s not particularly reliable. Costs ROM Estimate Figure 9-1: ROM estimates -25% are wild and unreliable. +75% Schedule ROM estimates are unreliable, and some project managers, assuming that they have the power to just say no, won t offer them. Does it make sense to not provide a ROM? Sure. It s likeus asking how much it ll cost to build a house. Define a house. Define the materials. Define the time frame. And on
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