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Education Edge PMP Prep Course Office Read – Project Cost Management

Project Cost Management

§  important cost management/calculation terms:

§  sunk cost – cost already incurred in the past and cannot be recovered, do not consider any more

§  opportunity cost – difference in value between one path vs alternative (= 100% of the value of next best alternative)

§  value analysis/ engineering – cost reduction without affecting the scope

§  Benefit-Cost Analysis (BCA) / Cost-Benefit Analysis (CBA) – determine feasibility, bigger benefit/cost ratio (BCR)

§  Payback Period – the length of time to recover the investment

§  Return on Investment (ROI) – the efficiency of investment = (Gain-Cost)/Cost

§  Time Value of Money – Present Value (PV) = value / (1+interest rate)*year, Future Value (FV) = value * (1+interest rate)*year

§  Net Present Value (NPV) = PV of cash inflows – PV of cash outflows (cost)

§  funding for the project: self-fund, funding with equity, funding with debts

§  discount rate – rate used to calculate the present value of expected yearly benefits and costs

Plan Cost Management

§  Inputs: Project Charter, Project Management Plan, EEF, OPA

§  Tools & Techniques: Expert Judgement, Data Analysis, Meetings

§  Outputs: Cost Management Plan


§  The Cost Management Plan establishes

§  level of accuracy and level of precision

§  unit of measurement

§  WBS procedure links (to control account (CA))

§  control threshold

§  earned value rules of performance, reporting, funding and processes

§  Life cycle costing = total cost of ownership: production cost, running and maintenance cost, etc.

§  Data analysis techniques include:

§  alternatives analysis — strategic funding options, ways to acquire project resources

Estimate Costs

§  Inputs: Project Management Plan, Project Documents, EEF, OPA

§  Tools & Techniques: Expert Judgement, Analogous Estimating, Parametric Estimating, Bottom-up Estimating, Three-point Estimating, Data Analysis, Project Management Information System, Decision Making

§  Outputs: Cost Estimates, Basis of Estimates, Project Document Updates
§  look for ways to reduce cost

§  ensure the subject matter experts (SME) to deliver the estimates (which is much more accurate)

§  cost estimate to be based on WBS

§  Cost Types

§  Variable costs – costs change with the amount of work, e.g. hourly consultants

§  Fixed costs – costs that are constant, e.g. equipment leases

§  Direct costs – directly attributed to the project

§  Indirect costs – shared costs like AC, lighting, etc.

§  Data Analysis Techniques

§  Alternatives analysis

§  Reserve analysis

§  Cost of quality – cost of conformance and non-conformance

§  Cost Estimate Tools

§  Analogous Estimating (Top Down Estimate) — compare to a similar project in the past (an estimating heuristic/rule of thumb)

§  Parametric Estimating — use a parameter and repetitive units of identical work

§  Bottom-up Estimating — detailed estimates of each individual activity from historical data, more accurate and time-consuming

§  Three-point Estimating — taking into accounts of the pessimistic, optimistic and most likely estimates

§  Activity Cost Estimates may include indirect cost and contingency reserves

§  usually to be expressed in a range of values

§  Basis of Estimates – detailed analysis on how the cost estimate was derived (assumptions, constraints, possible range (+/-15%), confidence level of final estimate)

Determine Budget

§  Inputs: Project Management Plan, Project Documents, Business Documents (business case, benefits management plan), Agreements,  EEF, OPA

§  Tools & Techniques: Expert Judgement, Cost Aggregation, Data Analysis, Historical Relationships, Funding Limit Reconciliation, Financing

§  Outputs: Cost Baseline, Project Funding Requirements, Project Document Updates

§  Budget is more about when to spend money

§  Historical Relationships – analogous/parametric estimation

§  Data Analysis => Reserve Analysis – addresses Management Reserve (unknown unknowns) and Contingency Reserve (known risks) [not included in calculation of earned value management]

§  Funding Limit Reconciliation – addresses variance between funding limit (e.g. monthly or yearly limit) and planned expenditure, may require rescheduling of work to level of the rate of expenditure

§  Value Engineering – to improve quality/shorten schedule without affecting the scope

§  Project Budget = Cost baseline (the approved time-phased budget) + Management Reserve

§  when management reserve is used during project execution, the amount is added to the cost baseline

§  S-curve: total project expenditure over project lifecycle

§  Financing: acquiring funding for projects, may source from internal and/or external sources
Control Costs

§  Inputs: Project Management Plan, Project Documents, Project Funding Requirements, Work Performance Data, OPA

§  Tools & Techniques: Expert Judgement, Data Analysis, To-complete Performance Index, Project Management Information System

§  Outputs: Work Performance Information, Cost Forecasts, Change Requests, Project Management Plan Updates, Project Document Updates

§  Check against the Project Funding Requirements

§  controlling costs including informing stakeholders of all approved changes and their costs

§  perform Control Cost more often during execution where money is spent fastest

§  Data analysis techniques:

§  Earned value analysis

§  Variance analysis — including schedule variance (SV), cost variance (CV), schedule performance index (SPI), and cost performance index (CPI)  to check against the baseline for any variance

§  Trend analysis

§  Reserve analysis

§  Estimate at Complete:

§  new estimate required (original flawed)

§  no BAC variance

§  CPI will continue

§  sub-standard cost/schedule will continue

§  TCPI (To-complete Performance Index):

§  >1 not enough funding remain (over budget)

§  <1 more fund available than needed (under budget)

§  Earned Value Accrual

§  Discrete Efforts – describes activities that can be planned/measured for output, including Fixed Formula (activity given a % of budget of work package at start and earn the remaining when completed, e.g. 50/50, 20/80 or 0/100), Weighted Milestone (earn value for milestones of deliverables of the work package), Percentage CompletePhysical Measurement 

§  Apportioned Efforts – describes work that has a direct/supporting relationship to discrete work, e.g. testing, pm activities, calculated as % of the discrete work

§  Level of Efforts (LOE) – describes activities without deliverables, e.g. troubleshooting, assigned the earned value as scheduled, without schedule variance but may have cost variance

§  SPI at end of project must be 1
§  SPI is NOT telling much information about whether the project is on schedule as the Critical Path must also be investigated to get a meaningful picture

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