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Importance of Accurate Costs

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1. Determine why it is so important to have accurate costs. Name 3 specific areas of the financial statements that can be drastically misstated by having too high or too low of costs. What are the consequences of such errors?

2. Think of another area the internet has affected an industry or niche market. Explain why you think it was successful. What impact did this have, if any, on the accounting industry?

Includes some news stories to support response.

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The accuracy of your cost estimation process can make or break project success. Learn the strategies that will help you gain control of this key area and ensure future project profitability!

One of the greatest challenges for a project leader is to successfully deliver on all aspects of a project both according to the client's specifications and within the allotted budget. It is often the case that either one aspect or the other can be accomplished, but not necessarily both. When it comes to controlling costs, it is a critical first step to make appropriate estimations at the outset of a project. Being able to control costs is largely a matter of adhering to established guidelines, oftentimes by learning from previous projects and reacting to current circumstances efficiently and effectively.

Before You Begin, Estimate
In order to best examine how to maintain control of the costs involved in a software development project, it is important to begin with a sound guideline based on estimation. In researching the subject, an interesting model for cost estimation was uncovered.

Dr. Ricardo Valerdi, creator of the Constructive Systems Engineering Cost Model (COSYSMO), offers clarification on the subject and cites the motivation for pioneering COSYSMO as follows: "The COSYSMO model filled a need for organisations that needed to systematically estimate the cost (or effort) of their systems engineering. Some benefits include the ability to understand why certain systems are more complex than others and how certain characteristics of teams make them less efficient (e.g., disturbed development, unfamiliarity with product, low process maturity)." [1]

Estimating Initial Costs
From the outset, initial financial guidelines for the project can be established. Using data and lessons learned from previous projects is certainly a good place to start. According to Dr. Valerdi, "Estimate your existing project by analogy...comparing it to other very similar projects. Reuse, reuse, reuse." The information gained during the past project(s) and the results at project completion can assist in establishing the financials and the resources in total that are needed for the project at hand. It is important, though, to carefully consider the requirements unique to each initiative and to make the necessary allotments.

"Most organisations use multiple methods for estimating projects," notes Dr. Valerdi. "My favourite ones are parametric cost models and analogy. In the case of analogy, it is beneficial to consider the similarities between a previous system and the new system being estimated. This also provides an opportunity to explore the feasibility of reusing components from a similar system," he adds.

"A good example is the Joint Strike Fighter. Rather than building brand new airplanes for each type of customer (e.g., the U.S., the U.K., Italy, and so on), Lockheed Martin simply made modifications to a common platform. This form of reuse makes cost estimation much easier because it allows different countries to ask, 'How similar is my version of the Joint Strike Fighter to the common configuration?'"

Managing Risks

Another important consideration in building and maintaining a financially sound software development project is having an effective risk management plan in place to help in offsetting the unforeseeable costs. While learning from prior projects is an important cornerstone, incorporating risk management as a factor into the estimates provides cushioning for unexpected scenarios that may arise.

"All cost models contain some sort of risk assessment of their output," Dr. Valerdi notes. "Since a cost estimate is both a subjective and an objective probability, it can feed directly into a risk management ...

Solution Summary

The solution discusses why it is so important to have accurate costs.