1 Project Cost Management Understand the importance of project cost management Explain basic project cost management principles, concepts, and terms.

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Project Cost Management

Understand the importance of project cost management

Explain basic project cost management principles, concepts, and terms

Discuss different types of cost estimates and methods for preparing them

Learning Objectives

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Understand the processes involved in cost budgeting and preparing a cost estimate and budget for an information technology project

Understand the benefits of earned value management and project portfolio management to assist in cost control

Describe how project management software can assist in project cost management

Learning Objectives (continued)

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The Importance of Project Cost Management IT projects have a poor track

record for meeting cost goals Average cost overrun was 189% of

the original estimates In 1995, cancelled IT projects cost

the U.S. over $81 billion

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What Went Wrong?

According to the San Francisco Chronicle front-page story, "Computer Bumbling Costs the State $1 Billion," the state of California had a series of expensive IT project failures in the late 1990s, costing taxpayers nearly $1 billion. Some of the poorly managed projects included the Department of Motor Vehicles vehicle registration and driver's license databases, a statewide child support database, the State Automated Welfare System, and a Department of Corrections system for tracking inmates. Senator John Vasconcellos thought it was ironic that the state which leads in creation of computers is the state most behind in using computer technology to improve state services.

Also consider the Internal Revenue Service's expensive reengineering and IT project failures. The Internal Revenue Service (IRS) managed a series of project failures that cost taxpayers over $50 billion a year—roughly as much money as the annual net profit of the entire computer industry.

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What is Cost and Project Cost Management?

Cost is a resource sacrificed or fore-gone 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

Estimate Activity Resources: determine what resources and quantities of them should be used

Estimate costs: developing an approximation or estimate of the costs of the resources needed to complete a project

Determine budget: allocating the overall cost estimate to individual work items to establish a baseline for measuring performance

Control costs: controlling changes to the project budget

Project Cost Management Processes

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Proposal Pricing Strategies--Kerzner Type I Acquisition: One of a kind

project with little or no follow-on opportunity

win the project, perform well and make a profit Type II Acquisition: New Program with

potential for large follow-on business or representing a desired surge into a new market

win the project, perform well and gain a foothold in a new market segment, usually at a loss

Most members of an executive board better understand and are more interested in financial terms than IT terms, so IT project managers must speak their language Profits are revenues minus expenditures Profit margin is the ratio of revenues to profits Life cycle costing considers the total cost of

ownership, or development plus support costs, for a project

Cash flow analysis determines the estimated annual costs and benefits for a project and the resulting annual cash flow

Basic Principles of Cost Management

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Basic Principles of Cost Management Most CEOs and boards know a lot more

about finance than IT. IT project managers must speak their language Profits are revenues minus expenses Life cycle costing is estimating the cost of a

project over its entire life 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

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Table 6-1. Cost of Software Defects

When Defect is Detected Typical Cost of CorrectionUser Requirements $100-$1,000Coding/Unit Testing $1,000 or moreSystem Testing $7,000 - $8,000Acceptance Testing $1,000 - $100,000After Implementation Up to millions of dollars

It is important to spend money up-front on ITprojects to avoid spending a lot more later.

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What Went Right?Ford Motor Company had great success with its Taurus/Sable project. Ford excels in team product development and seeks to remove barriers among design, engineering, production, marketing, sales, and purchasing. However, the Taurus team went far beyond that by creating a car that excelled in design and quality at half the typical development cost. They brought together all the relevant disciplines as a team and took the various steps in designing, producing, marketing, and selling the cars simultaneously as well as sequentially. Ford even included people outside the company for advice—car dealerships, insurance companies, and suppliers. One supplier even offered the services of its own drafting department to prepare initial designs for Ford's approval. Bringing together all the key players provided extremely valuable ideas at the conceptual stage, when changes can be made without much extra cost. "Not only were there substantial savings in cost and design time, but major production contracts were being negotiated and set up some three years ahead of production, with the duration of the contract some five years. This also led to cost economies."

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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?

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Cost Estimating An important output of project cost

management is a cost estimate There are several types of cost

estimates and tools and techniques to help create them

It is also important to develop a cost management plan that describes how cost variances will be managed on the project

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Name three Types of Cost Estimates

Type of Estimate When Done Why Done How Accurate

Rough Order of Magnitude (ROM) WAG SWAG

Very early in the project life cycle, often5 years before project completion

Provides rough ballpark of cost for selection decisions

–25%, +75%

Budgetary Early, 2 years out Puts dollars in the budget plans

–10%, +25%

Definitive Later in the project, < 1 year out and just prior to execution

Provides details for purchases, estimate actual costs

–5%, +10%

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Name three techniques for Estimation History data base Expert judgment a model like COCOMO

Tools and Techniques

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Name Four Cost Estimation Tools and Techniques

4 basic tools and techniques for cost estimates: Analogous or top-down: use the actual cost of

a previous, similar project as the basis for the new estimate

Bottom-up: estimate individual work items and sum them to get a total estimate

Parametric: use project characteristics in a mathematical model to estimate costs

Computerized tools: use spreadsheets, project management software, or other software to help estimate costs

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Constructive Cost Model (COCOMO)

Barry Boehm helped develop the COCOMO models for estimating software development costs

Parameters include source lines of code or function points

COCOMO II is a computerized model available on the web

Boehm suggests that only parametric models do not suffer from the limits of human decision-making

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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—estimates are done too quickly

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 often wants a bid, not a real estimate. Project managers must negotiate with project sponsors to create realistic cost estimates

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Cost Control—used during the Execution and Control Stages 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

Earned value analysis is an important tool for cost control

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Earned Value Analysis (EVA)

EVA is a project performance measurement technique that integrates scope, time, and cost data

Given a baseline (original plan plus approved changes), you can determine how well the project is meeting its goals

You must enter actual information periodically to use EVA. Figure 6-1 shows a sample form for collecting information

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Using Software to Assist in Cost Management Spreadsheets are a common tool for

resource planning, cost estimating, cost budgeting, and cost control

Many companies use more sophisticated and centralized financial applications software for cost information

Project management software has many cost-related features

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Discussion Questions

Do most colleges and companies provide adequate education and training in cost management for IT project managers? Give examples to support your answer.

Give an example of using the following techniques for creating a cost estimate: analogous, parametric, bottom-up, and computerized tools.

What is earned value analysis? Why is it the preferred method for measuring project performance? Why isn't it used more often?

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Project Quality Management

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Quality of Information Technology Projects Many people joke about the poor

quality of IT products (cars and computers joke)

People seem to accept systems being down occasionally or needing to reboot their PCs

There are many examples in the news about quality-related problems

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Cars and Computer Joke Every time they repainted the lines

on the road, you would have to buy a new car

Occasionally your car would die on the freeway for no reason, and you would just accept this, restart, and drive on

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Cars and Computer Joke, Continued Occasionally, executing a maneuver

such as a left turn, would cause your car to shut down and refuse to restart, in which case you would have to reinstall the engine

Only one person at a time could use the car, unless you bought CarNT; but then you would have to buy more seats

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Cars and Computer Joke, Continued The air bag system would say “Are

you sure?” before going off You would press the Start button

to shut off the engine

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What Went Wrong?

In one of the biggest software errors in banking history, Chemical Bank mistakenly deducted about $15 million from more than 100,000 customer accounts one evening. The problem resulted from a single line of code in an updated computer program that caused the bank to process every withdrawal and transfer at its automated teller machines (ATMs) twice. For example, a person who withdrew $100 from an ATM had $200 deducted from his or her account, though the receipt only indicated a withdrawal of $100. The mistake affected 150,000 transactions from Tuesday night through Wednesday afternoon.

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Three most expensive programming errors: all

maintenance errors $1.6 billion

Company went bankrupt $900 million

Company forced out of business $245 million All involved a single line of code MORAL: Maintenance must be done

with great care and lots of testing

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More “Wrongs…” IRS—mismanagement in the 1990’s cost

the taxpayer $60,000,000,000 a year—as much as the annual net profit of the entire computer industry

State of California—$1,000,000,000 dollars of additional cost in software bumbling

City of Lubbock—costing the taxpayer $5,200,000 in additional costs for its criminal justice system A client/server system with front implementation

in dBASE IV

33Ch 3 - 2© 2000 by Prentice-Hall IncRussell/Taylor Oper Mgt 3/e

What Is Quality?

“The degree of excellence of a thing” (Webster’s Dictionary)

“The totality of features and characteristics that satisfy needs” ( ASQC)

Fitness for useNew computers without monitors/keyboards is not FITNESS FOR USE, even though it lives up to the letter of the specs

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What is the relationship between quality and cost?? The better the quality, the higher the

cost? The better the quality, the lower the

cost? There is no relationship between quality

and cost

Use Watt’s Humphrey’s PSP Concepts Track time required to do

personal tasks Track defects entered into

analyses, designs, code, tests and try to reduce the personal defect rate

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Dimensions Of Product Quality (Garvin)

1. Performance basic operating characteristics

2. Features “extra” items added to basic features

3. Reliability probability product will operate over time


4. Conformance to requirementsmeeting pre-established specifications

5. Durability life span before replacement

6. Serviceability ease of getting repairs, speed & competence of repairs

Dimensions Of Product Quality, Continued


7. Aestheticslook, feel, sound, smell or taste

8. Safetyfreedom from injury or harm

9. Other perceptionssubjective perceptions based on brand name, advertising, etc

Dimensions Of Product Quality, Continued

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What is the BIG STORY in quality management? Want to do something fast?? Do it right the first time! Want to do something cheap?? Do it right the first time! Want to do something well?? Do it right the first time! DO I DETECT A PATTERN HERE??

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The Quality Movement Has produced a focus on processes Has produced a focus on product Has reduced focus on individuals

Project quality management ensures that the project will satisfy the needs for which it was undertaken

What Is Project Quality Management?

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Do firms have a good handle on their costs of bad quality? NO!! Companies are spending 4% of

Revenues on defect prevention Meanwhile, companies are

spending 20% of Revenues to fix defect-created problems

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Modern Quality Management Modern quality management

requires customer satisfaction prefers prevention to inspection recognizes management

responsibility for quality Noteworthy quality experts include

Deming, Juran, Crosby, Ishikawa, Taguchi, and Feigenbaum

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Quality Experts

Deming was famous for his work in rebuilding Japan and his 14 points

Juran wrote the Quality Control Handbook and 10 steps to quality improvement

Crosby wrote Quality is Free and suggested that organizations strive for zero defects

Ishikawa developed the concept of quality circles and using fishbone diagrams

Taguchi developed methods for optimizing the process of engineering experimentation

Feigenbaum developed the concept of total quality control

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Deming Said quality is 85% managerial and

15% worker induced (Management decides what

processes, what products, what technology and what training)

Management decides on processes, training,

Gave us the PDCA cycle

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The Deming Wheel (or P-D-C-A Cycle)

Implement plan on test basis

Is the plan working

Institutionalizeimprovement…Continue cycle

2. Do

3. Study / Check

4. Act

Identify problemDevelop plan for improvement

1. Plan

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Figure 7-1. Sample Fishbone or Ishikawa Diagram

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Malcolm Baldrige Award and ISO 9000

The Malcolm Baldrige Quality Award was initiated by Congress in 1987 to recognize companies with world-class quality and to motivate American companies to improve the quality of their products

ISO 9000 provides minimum requirements for an organization to meet their quality certification standards—started by US Military first

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QUALITY PROCESS: Planning Quality

It is important to design in quality and communicate important factors that directly contribute to meeting the customer’s requirements

Design of experiments helps identify which variables have the most influence on the overall outcome of a process

Many scope aspects of IT projects affect quality like functionality, features, system outputs, performance, reliability, and maintainability

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QUALITY PROCESS: Performing Quality Assurance

Quality assurance includes all the activities related to satisfying the relevant quality standards for a project

Another goal of quality assurance is continuous quality improvement

Benchmarking can be used to generate ideas for quality improvements

Quality audits help identify lessons learned that can improve performance on current or future projects

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QUALITY PROCESS: Performing Quality Control The main outputs of quality control are

acceptance decisions rework process adjustments

Some tools and techniques include pareto analysis statistical sampling quality control charts testing

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Quality Checking (Control) Reviews Walkthroughs Testing, testing, testing Gates Catch defects, bugs, faulty design

as early in the lifecycle as possible

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Defects and the Lifecycle

When Defect is DetectedTypical Costs of CorrectionUser Requirements $100-$1000Coding/Unit Testing $1000 or moreSystem Testing $7000-$8000Acceptance Testing $1000 - $100,000After Implementation Up to millions of dollars

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Pareto Analysis Pareto analysis involves identifying the

vital few contributors that account for the most quality problems in a system

Also called the 80-20 rule, meaning that 80% of problems are often due to 20% of the causes

Pareto diagrams are histograms that help identify and prioritize problem areas

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Figure 7-2. Sample Pareto Diagram

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Statistical Sampling and Standard Deviation

Statistical sampling involves choosing part of a population of interest for inspection—runs counter to the quality movement

The size of a sample depends on how representative you want the sample to be

Sample size formula:Sample size = .25 X (certainty Factor/acceptable

error)

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Table 7-1. Commonly Used Certainty Factors

Desired Certainty Certainty Factor

95% 1.960

90% 1.645

80% 1.281

95% certainty: Sample size = 0.25 X (1.960/.05) = 38490% certainty: Sample size = 0.25 X (1.645/.10) = 6880% certainty: Sample size = 0.25 X (1.281/.20) = 10

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Standard Deviation Standard deviation measures how

much variation exists in a distribution of data

A small standard deviation means that data cluster closely around the middle of a distribution and there is little variability among the data

A normal distribution is a bell-shaped curve that is symmetrical about the mean or average value of a population

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Figure 7-3. Normal Distribution and Standard Deviation

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Table 7-2. Sigma and Defective Units

Specification Range

(in +/- Sigmas)

Percent ofPopulation

Within Range

Defective Units

Per Billion

1 68.27 317,300,000

2 95.45 45,400,000

3 99.73 2,700,000

4 99.9937 63,000

5 99.999943 57

6 99.9999998 2

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Quality Control Charts, Six Sigma, and the Seven Run Rule

A control chart is a graphic display of data that illustrates the results of a process over time. It helps prevent defects and allows you to determine whether a process is in control or out of control

Operating at a higher sigma value, like 6 sigma, means the product tolerance or control limits have less variability

The seven run rule states that if seven data points in a row are all below the mean, above the mean, or increasing or decreasing, then the process needs to be examined for non-random problems

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Figure 7-4. Sample Quality Control Chart

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Figure 7-5. Reducing Defects with Six Sigma

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Testing Many IT professionals think of

testing as a stage that comes near the end of IT product development

Testing should be done during almost every phase of the IT product development life cycle

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Figure 7-6. Testing Tasks in the Software Development Life Cycle

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Types of Tests

A unit test is done to test each individual component (often a program) to ensure it is as defect free as possible

Integration testing occurs between unit and system testing to test functionally grouped components

System testing tests the entire system as one entity

User acceptance testing is an independent test performed by the end user prior to accepting the delivered system

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Figure 7-7. Gantt Chart for Building Testing into a Systems Development Project Plan

Project 98 file

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Improving Information Technology Project Quality Several suggestions for improving

quality for IT projects include Leadership that promotes quality Understanding the cost of quality Focusing on organizational

influences and workplace factors that affect quality

Following maturity models to improve quality

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Leadership “It is most important that top

management be quality-minded. In the absence of sincere manifestation of interest at the top, little will happen below.” (Juran, 1945)

A large percentage of quality problems are associated with management, not technical issues (Deming)

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The Cost of Quality The cost of quality is

the cost of conformance or delivering products that meet requirements and fitness for use

the cost of nonconformance or taking responsibility for failures or not meeting quality expectations

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Table 7-3. Costs Per Hour of Downtime Caused by Software Defects

Business Cost per Hour Downtime

Automated teller machines (medium-sized bank) $14,500

Package shipping service $28,250

Telephone ticket sales $69,000

Catalog sales center $90,000

Airline reservation center (small airline) $89,500

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Five Cost Categories Related to Quality

Prevention cost: the cost of planning and executing a project so it is error-free or within an acceptable error range

Appraisal cost: the cost of evaluating processes and their outputs to ensure quality

Internal failure cost: cost incurred to correct an identified defect before the customer receives the product

External failure cost: cost that relates to all errors not detected and corrected before delivery to the customer

Measurement and test equipment costs: capital cost of equipment used to perform prevention and appraisal activities

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Organization Influences, Workplace Factors, and Quality

Study by DeMarco and Lister showed that organizational issues had a much greater influence on programmer productivity than the technical environment or programming languages

Programmer productivity varied by a factor of one to ten across organizations, but only by 21% within the same organization

Study found no correlation between productivity and programming language, years of experience, or salary

A dedicated workspace and a quiet work environment were key factors to improving programmer productivity

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Maturity Models

Maturity models are frameworks for helping organizations improve their processes and systems The Software Engineering Institute’s Capability

Maturity Model provides a generic path to process improvement for software development

Several project management maturity models have been developed

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Project Management Maturity Model

1. Ad-Hoc: The project management process is described as disorganized, and occasionally even chaotic. The organization has not defined systems and processes, and project success depends on individual effort. There are chronic cost and schedule problems.

2. Abbreviated: There are some project management processes and systems in place to track cost, schedule, and scope. Project success is largely unpredictable and cost and schedule problems are common.

3. Organized: There are standardized, documented project management processes and systems that are integrated into the rest of the organization. Project success is more predictable, and cost and schedule performance is improved.

4. Managed: Management collects and uses detailed measures of the effectiveness of project management. Project success is more uniform, and cost and schedule performance conforms to plan.

5. Adaptive: Feedback from the project management process and from piloting innovative ideas and technologies enables continuous improvement. Project success is the norm, and cost and schedule performance is continuously improving.

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Discussion Questions

Provide examples of improving IT project quality through improved leadership, better understanding of customer requirements, the cost of quality, and improved testing.

What factors did DeMarco and Lister find to be correlated with improving productivity of programmers? Do these findings make sense to you?