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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