Education Edge Office Read: Cost Knowledge Area – PMBOK Guide – PMP Prep Course

Cost Management Knowledge Area: Project Cost Management includes the processes involved in planning, estimating, budgeting, financing, funding, managing, and controlling costs so that the project can be completed within the approved budget. Project Cost Management is primarily concerned with the cost of the resources needed to complete project activities. The knowledge area of Project Cost Management consists of the following four processes:

Process Name	Project Management Process Group	Key Deliverables
Plan Cost Management	Planning	Cost management Plan
Estimate Costs	Planning	Activity Cost Estimates, Basis of Estimates
Determine Budget	Planning	Cost Baseline
Control Costs	Monitoring and Controlling	Work Performance Information

Plan Cost Management process establishes the policies, procedures, and documentation for planning, managing, expending, and controlling project costs. Cost management plan includes: ·       Units of measure ·       Level of precision ·       Level of accuracy ·       Organizational procedures links ·       Control thresholds ·       Rules of performance measurement The Inputs, Tools and Techniques and Output of Plan Cost Management process are given below:

Project Management Plan	Expert Judgment	Cost Management Plan
Project Charter	Analytical Techniques
Enterprise Environmental Factors	Meetings
Organizational Process Assets

Estimate Costs is the process of developing an approximation of funds needed to complete project activities. The project in the initiation phase has a rough order of magnitude (ROM) -25% to +75% Later with more information is knows, definitive estimates could narrow the range of accuracy to -5% to +10% Direct Costs are attributed directly to the project work and cannot be shared among projects (wages, material, equipment, etc.). Indirect Costs are overhead costs that incurred for the benefit of more than one project (taxes, training, software licenses etc.). Variable Costs vary depending on the amount of work or production (cost of materials, supplies, wages, etc.). Fixed Costs remain constant throughout the project (cost of office setup, rentals, etc.). Cost of quality includes all costs incurred over the life of the product. Contingency Reserves are used for known risks, which are specifically identified risks. Management Reserves are used to accommodate unknown risks, or unidentified risks. Rolling Wave is a common technique used to estimate high-risk projects. The Inputs, Tools and Techniques and Output of Estimate Costs process are given below:

Cost Management Plan	Expert Judgment	Activity Cost Estimates
Human Resource Management Plan	Analogous Estimating	Basis of Estimates
Scope Baseline	Parametric Estimating	Project Documents updates
Project Schedule	Bottom-up Estimating
Risk Register	Three-Point Estimating
Enterprise Environmental Factors	Reserve Analysis
Organizational Process Assets	Cost of Quality
	Project Management Software
	Vendor Bid Analysis
	Group Decision Making Techniques

Determine Budget is the process of aggregating the estimated cost of individual activities or work packages to establish an authorized cost baseline. The cost baseline is the approved version of the time-phased project budget. Cost baseline includes all authorized budgets, but excludes management reserves. Cost baseline can only be changed through formal change control procedures. Project Cost performance will be measured against the authorized budget. Cost estimates are aggregated by work packages in accordance with the WBS. The expenditure of funds should be reconciled with any funding limits on the commitment of funds for the project. Total funding requirements and periodic funding requirements (e.g., quarterly, annually) are derived from the cost baseline. The Inputs, Tools and Techniques and Output of Determine Budget process are given below:

Cost Management Plan	Cost Aggregation	Cost Baseline
Scope Baseline	Reserve Analysis	Project Funding Requirements
Activity Cost Estimates	Expert Judgment	Project Documents updates
Basis of Estimates	Historical Relationships
Project Schedule	Funding Limit Reconciliation
Resource Calendars
Risk Register
Agreements
Organizational Process Assets

Control Cost is the process of monitoring status of the project to update the project budget and managing changes to the cost baseline. Monitoring cost performance to isolate and understand variances from the approved cost baseline. Cost baseline compared with actual results. Project cost controls seeks out the causes of positive and negative variances and is part of the Perform Integrated Change Control process Earned value management (EVM) is a methodology that combines scope, schedule, and resource measurements to assess project performance and progress. Forecasting involves making projections of conditions and events in the project’s future based on current performance information and other knowledge available at the time of the forecast. To-Complete Performance Index (TCPI) is a measure of the cost performance that is required to be achieved with the remaining resources in order to meet a specified management goal. AC is the actual cost incurred Earned Value EV value of the work actually accomplished Planned Value (PV) is the value of the work planned to be done. CPI refers to Cost Performance Index. It is defined as CPI = EV/AC (If CPI is less than 1, this means that the project is over budget). SPI refers to Schedule Performance Index. It is defined as SPI = EV/PV Budget at Completion (BAC) funds you have BUDGETED for the total Job. EAC = BAC/CPI Estimate at Complete (EAC) current total expectation of project cost. Estimate to Complete (ETC) from now on, how much MORE do we expect it to cost to finish the project. ETC = EAC – AC Variance at Completion (VAC) how much over or under budget do we expect it to be. VAC = BAC – EAC The calculated CV, SV, CPI, SPI, TCPI, and VAC values for WBS components, in particular the work packages and control accounts, are documented and communicated to stakeholders. If the schedule is inflexible, then the only possible tradeoffs available to the project manager may be cost versus quality. The following will help you answer over 8 questions on the exam: 1.       CV = EV – AC 2.       SV = EV – PV 3.       CPI = EV/AC 4.       SPI = EV/PV 5.       BAC = Sum total of all the planned values 6.       EAC = BAC / CPI 7.       EAC = AC + ETC — Initial Estimates are flawed 8.       EAC = AC + BAC – EV — Future variance are Atypical 9.       EAC = AC + (BAC – EV) / CPI — Future Variance would be typical 10.    ETC = EAC – AC 11.    % of work complete – EV/ BAC 12.    VAC = BAC – EAC 13.    Formula for To-Complete Performance Index (TCPI), TCPI = (Work Remaining)/(Budget Remaining) This formula can be interpreted in two ways: If you’re under budget TCPI = (BAC–EV)/(BAC–AC) If you’re over Budget TCPI = (BAC–EV)/(EAC–AC) The Inputs, Tools and Techniques and Output of Control Costs process are given below:

Project Management Plan	Earned Value Management	Work Performance Information
Project Funding Requirements	Forecasting	Cost Forecasts
Work Performance Data	To-Complete Performance Index (TCPI)	Change Requests
Organizational Process Assets	Performance Reviews	Project Management Plan Updates
	Project Management Software	Project Documents updates
	Reserve Analysis	Organizational Process Assets updates