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 Costsis 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 Budgetis 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 requirementsand 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 Costis 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 EVvalue 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 |
