PMP Chap 7 - Project Cost Management - Part 2

By: Anand Bobade (nmbobade@gmail.com)
Plan Cost
management
Estimate Cost Determine Budget Control cost
PMBOK Chapter 7 :
Project Cost Management
(Part 2)
Learn Project Management & prepare for PMP exam:
• Learn visually
• Detailed coverage of all PMP concepts
• Sample Questions
Monitoring &
Controlling
Planning

By: Anand Bobade (nmbobade@gmail.com)By: Anand Bobade (nmbobade@gmail.com)
7.1 Plan Cost Management:
Establishes the Policies, procedures, and documentation for
planning, managing, expending, controlling project costs.
7.2 Estimate Cost:
Developing an APPROXIMATION of the monetary resources needed
to complete project activities.
7.3: Determine Budget:
AGGREGATING the estimated costs of individual activities or WP to
establish cost baseline.
7.4 Control Cost:
MONITORING the status to update costs and managing changes to
the cost baseline
7. Project Cost Management Processes

Aggregating the estimated costs of individual
activities or work packages to establish an
authorized cost baseline.
Determines the cost baseline against which project
performance can be monitored and controlled.
7.3 Determine Budget -> Definition
Cost Baseline
Aggregation
Activity cost estimates Contingency Reserve

Input (9)
• Cost management
plan
• Scope baseline
• Activity cost
estimates
• Basis of estimates
• Project schedule
• Resource calendars
• Risk register
• Agreements
• OPA
Tools &
Techniques (5)
• Cost aggregation
• Reserve analysis
• Expert judgment
• Historical
relationships
• Funding limit
reconciliation
Outputs (3)
• Cost baseline
• Project funding
requirements
• Project documents
updates
7.3 Determine Budget

Cost
Management
Plan
Scope Baseline
Activity cost
estimates
Basis of
estimates
Project
schedule
Resource
calendars
Risk Register Agreements OPA
7.3 Determine Budget -> Inputs

Cost
Management
Plan
Define how project costs will be planned, structured, and
controlled.
Provide information about how to execute determine Budget
Process.
Specify preferred method or techniques to be used.
Provides below key details.
Units of
Measure
Level of
Precision
Level of
Accuracy
Process
Description
Control account
7.3 Determine Budget->Input->Cost Management Plan

Scope Baseline
• Project Scope (Inclusion & exclusions)
• Assumptions and constraints.
Scope
Statement
• Activity grouped into deliverables or
work packages.
• WBS provide framework for cost
management.
WBS
• Control account
• List of Deliverables
• Resources
WBS
Dictionary
7.3 Determine Budget->Input->Scope Baseline

Activity Cost
Estimates
Cost estimate
for each
activity
Activity
Grouping
Cost estimate
for each Work
package
Direct Cost Indirect Cost Variable cost Fixed Cost
Estimation of the probable costs required to
complete project work. (summary form or in detail)
7.3 Determine Budget->Input->Activity Cost Estimate

Basis of
Estimates
Documentation consist of :
Method of
estimations
All
assumptions
Any known
constraints
Scope of
Work
The supporting documentation that provide a
clear & complete understanding of how cost
estimate was derived.
7.3 Determine Budget-> Input-> Basis of Estimate
Estimate Cost Determine Budget
Basis of
Estimates
Activity Cost
Estimates

Project Schedule
Schedule provide overall timeline with milestones.
Cost is always time bound, hence its important to know
when these activities are scheduled.
Information can be used to determine aggregated cost
for specific period & payment milestones.
7.3 Determine Budget->Input->Project schedule

Risk Register
Examine cost & schedule related risks.
Reserve should be planned to mitigate & inspect Risks.
Potential benefits from the positive risk should be
considered.
7.3 Determine Budget-> Input->Risk Register

Resource
Calendars
Identifies the working days and shifts on which each
specific resource is available.
Provides details about when & how long identified
project resource will be available.
Helps to determine resource cost.
7.3 Determine Budget->Input->Resource Calendar

Agreements
Provide information about contracted resource costs
like Human resource cost, equipment costs etc
Provide payment milestone of each contractual
agreements.
Project can have one or more agreements.
7.3 Determine Budget ->Inputs->Agreement

OPA
Existing cost policies, procedures, and guidelines (e.g.,
Budget approval process)
Financial controls procedures.
Cost Budgeting tools.
Financial reporting methods/templates.
7.3 Determine Budget->Input->OPA

How project costs will be managed and controlled
Project scope statement , WBS & WBS dictionary
Cost estimates for each activity within a work package are
aggregated
Any basic assumptions dealing with the inclusion or exclusion
of indirect or other costs in the project budget
Information can be used to aggregate costs to the calendar
periods in which the costs are planned to be incurred.
7.3 Determine Budget -> Inputs overview

Provide information on which resources are assigned to the
project and when they are assigned
To consider how to aggregate the risk response costs
Applicable agreement information and costs relating to
products purchase
Existing policies, procedures, and guidelines; Cost budgeting
tools, Reporting methods
7.3 Determine Budget -> Inputs overview

Cost
Aggregation
Reserve
Analysis
Expert
Judgment
Historical
Relationships
Funding limit
Reconciliation
7.3 Determine Budget-> Tools & Techniques

Cost
Aggregation
Accumulation of costs based on WBS structure.
Considers distribution of payments w.r.t schedule
base line.
7.3 Determine Budget->T&T->Cost Aggregation
Cost estimates are aggregated by:
Work packages Control accounts Entire project.
Activity (Level1)
Work Package (Level2)
Component/control Account
(Level3)
Project (Level4) 500 K
200 K
100 100
300K
100 150
100 50
50

Cost
Aggregation
It is placed at the selected management points in the WBS.
It has unique code , which can be linked to accounting system.
CRM Project –
Cost Baseline
(850 K)
Call Center
upgrade
(100 K)
Installations
(40K)
Call center
software
Customization
(60 K)
Contact Center
setup
(250K)
Infrastructure
setup
(200 K)
Software
implementation
(50 K)
CRM system
implementation
(500K)
CRM System Cost
(400 K)
Software
Customization &
implementation
(100 K)
Control Account (CA) : It is a management control
point where scope, cost and schedule are integrated
7.3 Determine Budget->T&T->Cost Aggregation
CA01 CA02 CA03

Reserve Analysis
Management Reserve:
• Project budget withheld for management
control purposes.
• Reserved for unforeseen work that is within
scope of the project (unknown unknowns).
• Not included in the cost baseline
• Part of overall project budget & funding
requirements.
Contingency Reserve:
• Budget within cost baseline
• Allocated for identified & accepted risks
(known-unknowns)
• Contingency should be clearly documented.
• Part of the cost baseline & overall funding
requirements.
7.3 Determine Budget->T&T->Reserve Analysis

Reserve Analysis
Activity contingency reserve
+ Activity Estimate
+ Work Package Estimates
Control Accounts
+COST BASELINE
PROJECT BUDGET 400
70 330
330
20 110
10010
200
18020
7.3 Determine Budget->T&T->Reserve Analysis
No
reserves

Expert
Judgment
Guided by experience in an application area,
Knowledge Area, discipline, industry, or similar project
PM may apply experience & information from prior
similar projects.
Consultants, SME or financial experts can provide
budgeting expertise.
7.3 Determine Budget->T&T->Expert Judgment

Historical
Relationships
• Home construction -> Cost per square meterSimple
• Software development Model
• Multiple adjustment factors, each of which has
numerous points within it.
• E.g., Code, integrations, function point, data migration
Complex
• Accurate Historical information is available
• Quantifiable parameters
• Scalable models (Can work with Large, small or phases of the projects)
Reliable
when:
Any historical relationships that result in parametric
estimates or analogous estimates.
It uses project characteristics (parameters) to develop
mathematical models to predict total project costs.
7.3 Determine Budget->T&T->Historical Relationship

Funding limit
Reconciliation
The expenditure should be reconciled with any funding limits
on the commitment of funds for the project.
A variance between funding limits and planned expenditures
will sometimes necessitate rescheduling of work.
This is accomplished by placing imposed date constraints for
activities.
Q1 Q2 Q3 Q4
Project planned expenditure 100K 100K 100K 100K
Actual project cost 110K 115K
7.3 Determine Budget->T&T->Funding limit reconciliation
Project is moving fast ahead of schedule & hence spending more than planned.
However, management has Imposed Quarterly Funds limit on project.
Hence project has to re-schedule & slow down.
re-schedule & slow down

Cost baseline Project funding
requirements
Project doc.
updates
7.3 Determine Budget -> Outputs

Cost baseline
Approved version of time-phased project budget,
excluding any management reserves.
It is used as a basis for comparison to actual expenditure.
7.3 Determine Budget -> Outputs->Cost Baseline
0
500
1,000
1,500
2,000
2,500
3,000
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
Thousands
Monthly Budget Cummulative Budget

Project funding
requirements
The total funds required:
Cost baseline
•Projected expenditures
•Contingency Reserves
Management reserves (if any).
Total funding requirements derived from cost baseline.
Funding often occurs in incremental amounts that are not
continuous, and may not be evenly distributed.
7.3 Determine Budget->Outputs->Project funding Req.
It may also refer to source(s) of the funding.

Approved version of the time-phased project budget,
excluding any management reserves, used as a basis for
comparison to actual results
Total funding requirements & periodic funding
requirements are derived from the cost baseline.
Risk Register, Activity register & Project schedule
7.3 Determine Budget -> Outputs

7.3 Determine Budget->Data Flow Diagram

7.3 Determine Budget -> Question1
Which of the following output of Determine Budget process
is used as an input in the Control Costs Process?
A. Project Funding Requirements
B. Cost Baseline
C. Project Document
D. None
A– Project Funding Requirements
Refer to ITTO of Determine Budget & Control cost processes

To Learn Project Management, Contact Anand Bobade (055 5932004)
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•https://ae.linkedin.com/in/anandbobade
•http://www.slideshare.net/anandbobade
•Conduct Online training, Corporate Training, evening & weekend workshops.

0
100
200
300
400
500
600
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
Thousands
Planned Actuals
Frequency of
measurement
Activity cost
WBS
components
(Control
accounts)
Total project
cost
7.4 Control Cost -> Introduction
Don’t include unapproved
change cost
Influence factor affecting cost
baselines
Manage changes & cost
overrun
Measure
Monitor
Control
Report

• The factors that create changes to baselineInfluencing
• All change requests are acted on in a timely mannerEnsuring
• The actual changes when and as they occurManaging
• That cost expenditures do not exceed the authorized
funding by period, WBS ,activity, in totalEnsuring
• Cost performance to isolate and understand variancesMonitoring
• Work performance against funds expendedMonitoring
• Unapproved changes reported or resource usage;Preventing
• Appropriate stakeholders of all approved changes and
associated cost;Informing
• Expected cost overruns within acceptable limitsBringing
7.4 Control Cost

Monitoring the status of the project to update the
project costs & managing changes to the cost baseline.
Provides the means to recognize variance from the plan
in order to take corrective action and minimize risk.
7.4 Control Cost
Monitoring Project
status
Update project
Cost
Manage cost
baseline changes

Input (4)
• Project
Management
Plan
• Project
Funding
Requirements
• Work
Performance
Data
• OPA
Tools & Techniques (6)
• Earned value
management
• Forecasting
• To-complete
performance index
(TCPI)
• Performance reviews
• PM Software
• Reserve analysis
Outputs (6)
• Work
performance
information
• Cost forecasts
• Change
requests
• PMP updates
• Project
documents
updates
• OPA updates
7.4 Control Cost

PMP Project funding
requirements
Work
performance data
OPA
7.4 Control Cost -> Input

Cost baseline & Cost management plan.
Include projected expenditures plus anticipated liabilities (Cost
baseline with management reserves)
It includes progress information (started/ finished activities, their
progress) ,costs authorized and incurred.
Existing policies, procedures, and guidelines; Cost control tools;
Monitoring and reporting methods.
7.4 Control Cost -> Input

Earned value
management
Forecasting To-complete
performance
index (TCPI)
Performance
reviews
Project
management
software
Reserve analysis
7.4 Control Cost -> Tools & Techniques

Earned value
management
It combines SCOPE, SCHEDULE, & RESOURCE measurements to
assess project performance and progress.
It integrates the scope ,cost & schedule baselines, to form the
performance baseline
• It is authorized budget planned for work
to be accomplished.
Planned
Value (PV)
• Realized cost incurred for the work
performed on an activity during a
specific time period.
Actual cost
(AC)
• A measure of work performed
expressed in terms of the budget
authorized.
Earned
value (EV)
7.4 Control Cost -> T&T -> EVM

Earned value Calculation based on the Percentage completion
• 100% of work completed
• EV = 100% of 10,000
• EV = 10,000
Day1
• Only 80% of work completed
• EV = 80% of 10,000
• EV = 8,000
Day2
• EV = EV of Day1 + EV of Day2
• EV = 10,000 + 8,000
• EV = 18,000
Combined EV
Schedule Planned Value (PV) Percentage Complete Actual Cost (AC)
Earn Value
(EV)
Day1 10,000 100% 10,000
Day2 10,000 80% 10,000
10,000
8,000
18,000

EV Calculation based on planned vs actual work done.
Schedule
Planned
Work
Planned Value
(PV)
Actual
work
Actual Cost
(AC)
Earn Value (EV)
Day1 10 computer 10,000 9 computers 10,000
Day2 10 computer 10,000 10 computers 10,000
Plan : Install 10 computers each day costing 10,00 per day.
• Only 9 computer installed on Day1
• Hence, EV of spending 10,000 is only 9,000
Day1
• 10 computer installed on Day 2
• Hence, EV of spending 10,000 is 10,000
Day2
10,000
9,000

7.4 Control Cost ->T&T-> EVM
Task/Days Day1 Day2 Day3 Day4 Day5 Day6 Day7
Setup Setup
Installation 10 comp 10 comp 10 comp 10 comp 10 comp
Training & Handover Handover
Project : Install 50 computers for school Lab.
• Assumption:
• Resource cost is 1000/day. One resource first & last day.
• Two resources during execution (Day 2 to Day6)
Planned cost(Cumulative) 1,000 3,000 5,000 7,000 9,000 11,000 12,000
Planned cost 1,000 2,000 2,000 2,000 2,000 2,000 1,000
We could not get resource with 1,000/per day, hence hired resource with 1100 per day
Actual cost (Cumulative) 1,100 3,300 5,500 7,700
Actual cost 1,100 2,200 2,200 2,200
Earn Value 1,000 1,600 1,600 1,600
Earn Value (Cumulative) 1,000 2,600 4,200 5,800
Only 8 computer installed
on each day, so 80% earn
value
8 / 10 8 / 10 8 / 10

PV: 7,000
BAC: 12,000
AC: 7,700
EV: 5,800
-
2,000
4,000
6,000
8,000
10,000
12,000
14,000
Day1 Day2 Day3 Day4 Day5 Day6 Day7
Cost Variance
Schedule Variance
Hints about Formula:
Always start with “EV”
Variance uses “-”
Index uses “/”
Only AC is used for Cost
• SPI = EV/PV
Schedule
performance
index
• CPI = EV/ACCost performance
index
• SV = EV –PV
Schedule
variance
• CV= EV − ACCost variance

• = 5,800 –7,000
• = -1,200
Schedule variance
SV = EV – PV
• = 5,800− 7,700
• = -1,900
Cost variance
CV = EV − AC
• = 5,800 / 7,000
• = 0.82
Schedule performance
Index
SPI = EV / PV
• = 5,800 / 7,700
• = 0.75
Cost performance Index
CPI = EV / AC
Indexes
CPI
SPI
> 1
Under
budget
Ahead of
schedule
< 1
Over
Budget
Behind
schedule
= 1
On Budget
(planned
cost)
On
Schedule
Project is over
budget & behind
Schedule

Indexes
CPI
SPI
> 1
You are earning
more than the
spending. In other
words, you are
under budget.
More work has
been completed
than the planned
work. In other
words, you are
ahead of schedule.
< 1
You are earning
less than the
spending. In other
words, you’re over
budget
Less work is
completed than
the planned work.
In other words, you
are behind
schedule.
= 1
Earning &
spending are equal.
Or proceeding
exactly as per
planned budget
spending
On Schedule

• Slowdown
with spending
to try to reach
optimal level
• Try to move
to optimal
otherwise re-
baseline.
• Continue as it
is
• Spend more
to catch up
Under Budget
but behind
schedule
Optimal –
Under Budget
& ahead of
Schedule
Over Budget
but ahead of
schedule
Worst case:
Over Budget
& behind
schedule
CPI >1
[Ahead of
Schedule]
CPI < 1
CPI >1
[Behind
Schedule]
CPI < 1
SPI < 1 [Under Budget] SPI >1
SPI < 1 [Over Budget] SPI >1

• SV is a measure of schedule performance on a project.
Schedule
variance (SV)
• It measure of cost performance on a project.
• It indicates relationship of performance to costs spent.
Cost variance
(CV)
• SPI is a measure of progress achieved compared to progress
planned.
Schedule
performance
index (SPI)
• CPI is a measure of value of work completed compared to
actual cost.
Cost
performance
index (CPI)

7.4 Control Cost -> T&T -> EVM -> Exercise
Your earned value analysis shows the following values. Which of the following is true?
- PV = 110,000,
- AC = 90,000
- EV = 90,000,
- BAC = 200,000
A) The project is ahead of schedule and on budget
B) The project is on schedule and below budget
C) The EAC is incorrect
D) The project is behind schedule and on budget
Answer : The project is behind schedule because as PV is 110,000 & EV is only 90,000. We are 20,000 behind
schedule.
We are on budget because both our Actual Cost and Earned Value are 90,000. Hence answer is D) The
project is behind schedule and on budget

Task Duration Planned
Value
Actual Jan Feb Mar Apr May Jun
Analysis 20 1,000 1,400
Design 40 2,000 1,000
Development 60 10,000 4,000
Testing 10 2,000 -
Go-live 10 1,000 -
closure 0 - -
Below graph shows the Project schedule & current performance of the IT project managed by
Anand. What is the current SPI of the project.
A: -1
B: 0.58
C: 1.21
D: 1
100%
75%
50%

Calculate PV of completed or in progress activities
• = Activity1(PV)+ Activity2(PV)+ Activity3(PV)
• = 1,000+2,000+10,000
• = 13,000
Calculate EV of completed or in progress activities
• = Activity1(PV * % complete)+ Activity2(PV * % complete)+ Activity3(PV * % complete)
• = (1,000* 100%) + (2,000 * 75%) + (10,000 * 50%)
• = 1,000+1,500+5,000
• = 7,500
SPI = EV / PV
• = 7,500 /13,000
• = 0.5769
• (SPI <1 means project is behind schedule)
Answer- B: 0.58

Forecasting
Prediction of conditions & events in project's future based on
information & knowledge available during forecast.
7.4 Control Cost ->T&T-> Forecasting
ETC - Estimate to complete:
• Expected cost to finish all remaining
project work.
EAC - Estimate at completion:
• Expected total cost of completing all work
expressed as “sum of actual cost to date” &
“estimate to complete”.
• Forecasted estimate for total cost of the
Project.

ETC - Estimate to
complete
EAC - Estimate at
completion
Remaining
Cost
Total Cost
at end

EAC - Estimate at
completion
ETC - Estimate to
complete
The information is derived from:
Project's past performance
Information that could impact project in future
Expected future performance

EAC - Estimate at completion
• Expected total cost of completing all work expressed
as “sum of actual cost to date” & “estimate to
complete”.
Consider forecasted EAC, If BAC is no longer viable.
EAC involves projections of project’s future based on
current performance.
Key input is work performance data.

EAC - Estimate at completion
• Expected total cost of completing all work expressed
as “sum of actual cost to date” & “estimate to
complete”.
EAC based on Budgeted Rate:
• Absorb the Variance (originally planed budgeted
rate)
EAC based on Current Progress:
• Take the ongoing project trend (CPI & SPI or only
CPI)
EAC - Erroneous scenario:
• Re-estimate the remaining portion
• Original estimates were fundamentally flowed.

EAC based on
Budgeted Rate:
EAC based on Current
Progress:
EAC - Erroneous
scenario:
• EAC = AC + (BAC –EV)Based on Budgeted rate
• EAC = BAC / CPI
Based on CPI.
• EAC = AC + [(BAC –EV) / (CPI ×SPI)]Based on SPI & CPI
• EAC = AC + re-estimateErroneous scenario:

There are many ways to calculate EAC based on project progress.
Questions about the EAC will always contain some information about the
current “health” (or progression) of the project.
There are certain keywords that you can look for to pick correct formula.
• EAC = AC + (BAC –EV)
• Current variances are
thought to be
atypical in the
future.
• Note: atypical means
unusual or abnormal.
EAC based on Budgeted
Rate:
• EAC = BAC / CPI
• No variances from
the BAC have
occurred or are
expected to
continue at the
same rate of
spending.
•This is most often
required on the exam.
Cost Progress
• EAC = AC + [(BAC –
EV) / (CPI ×SPI)]
• Current variances
are thought to be
typical in the
future.
cost & schedule Progress
• EAC = AC+ETC
• Original estimate
was fundamentally
flawed or conditions
have changed and
invalidated original
estimating
assumptions
EAC - Erroneous
scenario:

Bridge construction Project:
• Duration : 12 months
• Cost of the Project: 10,000,000
• Current status at end of month 3:
• The pillar was collapsed & hence progress was
slowed.
• Work completed: only 20% of complete project
• Actual cost: 3,000,000
BAC = 10,000,000
AC = 3,000,000
EV = 20% of 10,,000,000 = 2,000,000 (0nly 20% work done)
EAC = AC + (BAC – EV)
EAC = 3,000,000 + (10,000,000 – 2,000,000) = 11,000,000
EAC = 11 Million
Considering this as rare incident. Project will continues as
originally planned then it will need 11 Million to complete.

EAC based on Current Progress (Based on CPI):
EAC = BAC / CPI
• Duration : 12 months
• Cost of the Project: 10,000,000
• Current status at end of month 6:
• Work completed: only 40% of complete
project
• Actual cost: 6,000,000
BAC = 10,000,000
AC = 6,000,000
EV = 40% of 10,000,000 = 4,000,000 (0nly 40% work done)
CPI = EV / AC = 4,000,000 / 6,000,000 = 0.66
EAC = BAC/CPI = 10,000,000/0.66 = 15,151,515
EAC = 15,151,515
If project continues to progress CPI 0.66 until end, you have
to spend 15.15 Million to complete project.

EAC based on Current Progress (Based on CPI & SPI):
EAC = AC + [(BAC –EV) / (CPI ×SPI)]
Duration : 12 months
Cost of the Project: 10,000,000
Current status at end of month 6:
Work completed: only 40% of complete project
Actual cost: 6,000,000
BAC = 10,000,000 & AC = 6,000,000
PV = 50% of 10,000,000 = 5,000,000 (six months completed)
EV = 40% of 10,000,000 = 4,000,000 (0nly 40% work done)
CPI = EV / AC = 4,000,000 / 6,000,000 = 0.66
SPI = EV / PV = 4,000,000 / 5,000,000 = 0.8
EAC = 6,000,000 + [ (10,000,000 – 4,000,000)/ (0.66 * 0.8) ]
EAC = 6,000,000 + [6,000,000 / 0.528 ] = 17,363,636
If project continues with similar CPI & SPI, you have to spend 17.36
Million to complete project.

Duration : 12 months, Cost of the Project: 10,000,000
Current status at end of month 6:
Work completed: only 55% of complete project
Actual cost: 5,000,000
• BAC = 10,000,000
• AC = 5,000,000
• EV = 55%10,000,000 = 5,500,000
• EAC = 5,000,000 + ( 10,000,000 –
5,500,000)
• EAC = 5,000,000 + 4,500,000
• EAC = 9,500,000
EAC based on Current Progress (Based
on CPI):
• EAC = BAC / CPI
• BAC = 10,000,000
• AC = 5,000,000
• EV= 55%10,000,000
• EV =5,500,000
• CPI = EV / AC
• CPI = 5,500,000 / 5,000,00= 1.1
• EAC = 10,000,000 / 1.1
• EAC = 9,090,909
EAC based on Current Progress (Based
on CPI & SPI):
• EAC = AC + [(BAC –EV) / (CPI ×SPI)]
• PV = 50% of 10,000,000 = 5,000,000
(six months completed)
• EV & CPI calculation is same.
• SPI = EV / PV
• SPI = 5,500,000 / 5,000,000 = 1.1
• EAC = 5,000,000 + [(10,000,000 –
5,500,000) / (1.1 * 1.1)]
• EAC = 5,000,000 +( 4,500,000 / 1.21)
• EAC = 5,000,000 + 3,719,008.26
• EAC = 8,719,008.26
7.4 Control Cost ->T&T-> Exercise

7.4 Control Cost -> T&T -> Exercise
You presenting project status to Steering committee at the end of first Quarter in one
year project. The project is progressing as planned and you expect no major problems
in the foreseeable future.
Your PMIS is showing following data:
BAC = 500,000, SPI = 1.1, CPI = 1.05, EV = 173,000, AC = 164,761.
What you should report about EAC in the meeting?
A) 491,761
B) 454,545
C) 189,761
D) 476,190
Answer: Highlighted information indicates there were no variances after atypical situation & expect to
continue at same rate.
Hence, we will use second formula EAC= BAC/CPI =500,00/1.05 = 476,190; Hence, answer is D) 476,190

Task Duration Planned
Value
Actual Jan Feb Mar Apr May Jun
Analysis 20 1,000 1,400
Design 40 2,000 2,000
Development 60 10,000 -
Testing 10 2,000 -
Go-live 10 1,000 -
closure 0 - -
Below schedule depicts the CRM Project schedule managed by Project managed Anand. As of
today first two activities should have been 100% completed and third 50%. However PM
reported 100% completion of first two, and remaining activities are not yet started.
Assuming projects future performance will be at budgeted rate, what will be the projects EAC
(Estimate at completion)?
100%
100%
A: 3,400 B: 16,000 C: 16,400 D: 3,000

Even though project is not performing as expected, we expect project to performed at
the planned rate (budgeted rate). The formula used in this scenario is EAC = AC +
(BAC – EV)
Calculate Actual Cost (AC) of completed or in progress activities.
• = Activity1(AC)+ Activity2(AC) = 1,400+2,000 = 3,400
Calculate BAC (Total of all the activities)
• BAC = 1,000 + 2,000 + 10,000 + 2,000 + 1,000 = 16,000
Calculate EV of completed or in progress activities
• = Activity1(PV * % complete)+ Activity2(PV * % complete)
• = (1,000* 100%) + (2,000 * 100%) = 1,000+2,000 = 3,000
EAC=AC+(BAC-EV)
• =3,400 + (16,000 – 3,000) = 3,400 + 13,000 = 16,400
Answer – C: 16,400

EAC - Estimate at completion (Re-estimate)
• EAC = AC + ETC (or Re-estimate)
Software Project:
•Project is to implement CRM Software for
government department for 5,000,000.
•To date project has spent 1,100,000.
•However, during execution, it was noticed
that present cost estimation were
fundamentally flawed & need to re-calculate
budget for remaining part of the project.
You discuss with your team & re-estimate the cost
of the remaining work.
Your new estimates: Design = 1,000,000,
Development=3,00,000, testing=1,500,500
Re-estimated cost = Design + Development +
testing
Re-estimated cost = 1,000,000 + 3,000,000 +
1,500,500 = 5,500,500
EAC = AC + Re-estimate
EAC = 1,100,000 + 5,500,500 = 6,500,500

Your Team Lead, who was leading the estimation team, tells you that he had missed
several key project components in estimation. So, his original cost estimations were
completely wrong. At the end of this meeting, he assured to provide new estimate in 2
days. Based on the new estimates, your PMIS shows below:
BAC: 5,000,000. AC= 1,100,000, CPI = 1.05, SPI = 1.05, EV = 1,000,000.
How much project will cost, if the new estimate to complete that you received from
your Team Lead is 5,500,500?
A) 5,500,500
B) 6,500,500
C) 6,600,500
D) 6,100,000
Answer: Highlighted information indicates there were fundamental flows in the estimates.
Hence, we will use fourth formula EAC= AC + ETC = 1,100,000 +5,500,500 = 6,600,500;
Hence, answer is C) 6,600,500

ETC - Estimate to complete
• ETC = EAC- AC or (Re-estimate remaining work)
House construction Project:
• You have a construction project to be
completed in 12 months with cost of
1,000,000.
• Six months passed & project have spent
600,000.
• In meeting PM reported that only 40% of
work is completed & project is expected to
perform with same cost performance.
• Management is interested to know what is
Estimate to complete?
BAC = 1,000,000, AC = 600,000
PV= 50% of 1,000,000 = 500,000 (six months completed)
EV= 40% of 1,000,000 = 400,000 (0nly 40% work done)
CPI= EV / AC = 400,000 / 600,000 = 0.66
EAC = BAC/CPI = 1,000,000/0.66 = 1,515,151
ETC = EAC- AC
ETC = 1,515,151 – 600,000
ETC = 915, 151

VAC (Variance at completion)
• Projection of budget difference between BAC & EAC.
VAC shows whether project is forecasted to finish under or over budget.
VAC = BAC – EAC
VAC % = EAC / BAC

To-complete
performance index
(TCPI)
TCPI calculation
Same Budget Use BAC
Revised Budget
Use Forecasted
EAC
If BAC is no longer viable, then forecasted EAC should be approved to
use in the TCPI calculation.
TCPI is measure of Cost Performance that is required to be
achieved in order to meet a specified management goal.
Ratio of “cost to finish outstanding work”, to “remaining
budget”.
7.4 Control Cost ->T&T-> TCPI

To-complete
performance index
(TCPI)
To-complete performance
index (TCPI)
Work Remaining
----------------------
Fund Remaining
Ratio of “cost to finish outstanding work” to
“remaining budget”.
TCPI
(based on the BAC):
( BAC – EV )
----------------
( BAC – AC )
TCPI
(based on the EAC):
( BAC – EV )
----------------
( EAC – AC )

7.4 Control Cost ->T&T-> TCPI->Same Budget
300,000
BAC:600,000
315,000
270,000
-
100,000
200,000
300,000
400,000
500,000
600,000
700,000
Month1 Month2 Month3 Month4 Month5 Month6
Planned Budget (PV) Actual Cost (AC) Earned Value (EV)
Fund Remaining
= BAC-AC
= 600,000-315,000
= 285,000
Work Remaining
= BAC-EV
= 600,000-270,000
= 330,000
Case1: Same
Budget
Project with current status BAC=600,000 PV=300,000 AC=315,000 EV=270,000

TCPI (based on BAC)
Work Remaining = BAC-EV = 600,000-270,000 =
330,000
Fund Remaining = BAC-AC = 600,000-315,000 =
285,000
TCPI = Work Remaining / Fund Remaining
= 330,000 / 285,000
= 1.15
You have to get output of 1.15 AED of every 1
AED spent.

7.4 Control Cost ->T&T-> TCPI->Same Budget
300,000
BAC:600,000
315,000
270,000
-
100,000
200,000
300,000
400,000
500,000
600,000
700,000
Month1 Month2 Month3 Month4 Month5 Month6
Planned Budget (PV) Actual Cost (AC) Earned Value (EV)
Fund Remaining
= EAC-AC
= 650,000-315,000
= 335,000
Work Remaining
= BAC-EV
= 600,000-270,000
= 330,000
Case1:
Revised
Budget
Project with current status BAC=600,000 PV=300,000 AC=315,000 EV=270,000
EAC = 650,000

TCPI (based on BAC)
Work Remaining = BAC-EV = 600,000-270,000
= 330,000
Fund Remaining = BAC-AC = 600,000-315,000
= 285,000
= 330,000 / 285,000
= 1.15
AED spent.
TCPI (Based on EAC)
Work Remaining = BAC-EV = 600,000-270,000
= 330,000
Fund Remaining = EAC-AC = 650,000-315,000
= 335,000
= 330,000/335,000
=0.98
AED spent.

• Project is in a comfortable position.If TCPI < 1
• Project have to perform with better cost performance than past.If TCPI > 1
• Project can continue with same cost performance.if TCPI = 1

Performance
reviews
A technique used to measure, compare, & analyse
actual performance of work in progress against
baseline.
Variance Analysis:
• A technique for determining cause & degree of
difference between baseline & actual performance.
Trend Analysis
• An analytical technique that uses mathematical
models to forecast future outcomes based on
historical results.
Earned value management:
• A methodology that combines scope, schedule, and
resource measurements to assess project
performance and progress.
7.4 Control Cost ->T&T->Performance review

Performance
reviews
Compare cost performance of activities overrunning &
under running budget.
Determining cause & degree of variance relative to cost
baseline.
Variance Analysis:
• Determining cause & degree of difference
between baseline & actual performance.
• CV = EV –ACCost Variance
• SV = EV –PVSchedule Variance
• VAC = BAC –EAC
Variance at
completion

Performance
reviews
Uses past performance (historical results) with
variance over time
Compare future performance goals in the form of
BAC versus EAC and completion dates.
Examines performance over time is improving or
deteriorating.
Trend Analysis
• Uses mathematical models to forecast
future outcomes based on historical data.

Performance
reviews
Compares the performance measurement baseline to actual
schedule and cost performance.
If not being used, then the analysis of the cost baseline
against actual costs for the work performed is used .
Earned value management:
• It combines scope, schedule & resource to
assess project performance & progress.

Project
management
software
Calculate earn value
Display graphical trends & calculate SPI & CPI
Show variances
Forecast a range of possible final project results
7.4 Control Cost ->Tools & Techniques->PM software

Reserve analysis
Monitor status of contingency & management reserves.
Determine, if these reserves are still needed or not.
If not then free up the reserves.
Determine, if additional reserves need to be requested.
7.4 Control Cost->Tools & Techniques->Reserve Analysis

Work Performance
Information
Cost Forecasts Change Requests
PMP Updates Project
Documents
Updates
OPA updates
7.4 Control Cost -> Outputs

Work Performance
Information
From results of Earn value calculation
Variances (CV, SV & VAC)
Performance indicators (SPI, CPI)
All information to be documented & communicated
to stakeholders.
The performance data collected from various
controlling processes, analysed in context &
integrated based on relationships across areas.
7.4 Control Cost->Outputs->Work Performance Information

Cost Forecasts
Calculated EAC value & ETC value is documented and
communicated to stakeholders
7.4 Control Cost->Outputs->Cost Forecasts
EAC - Estimate at
completion
ETC - Estimate to
complete
Total Cost
at end
Remaining
Cost

7.4 Control Cost->Outputs->Change Requests
• To improve future performancePreventive CR:
• Re-alignment of performanceCorrective CR:
Change Requests
A formal proposal to modify any document,
deliverable, or baseline.
Analysis of project performance may result in a CR
to cost baseline or other components of PMP.
Cost b baseline changes are mainly due to:
Behind
schedule or
Over budget
Activity
Resource
change
Change in
Cost
estimate
Risk
realization or
new risks

Cost baseline. :in response to approved changes in
scope, activity resources, or cost estimates. Cost
management plan. changes to control thresholds or
specified levels of accuracy required
Cost estimates, and Basis of estimates.
Causes of variances, Corrective action chosen and the
reasons, Financial databases, and Other types of
lessons learned from project cost control.
7.4 Control Cost -> Outputs

7. Project Cost Management -> Additional Concepts
Money – value depends on time
• Receiving AED 100 today has different meaning than receiving
it after 1 year.
Money
Value as of Today (PV) Future value (FV)

• Present Value (PV) =
1,000
• Years : 2 years
• Interest: 5% (0.05)
• Future Value (FV) = ??
The future value ( FV )
• It refers to a method of calculating how much present value (PV)
of an asset or cash will be worth at a specific time in the future
FV = PV (1 + R)^N
• FV: Future value
• PV: Present value
• N: time of years
• R: Interest rate
Above example, FV=??
• = 1,000 (1 + 0.05)^2 )
• = 1,000 * (1.05^2)
• = 1,000 * 1.1025
• = 1,102.5

Present Value:
• The value of an expected income(as of date of valuation)
• PV <= FV because money has interest-earning potential
• To calculate PV, discount FV by interest rate
•Present Value (PV) = ?? •Years : 2 years
•Interest: 5% (0.05)
•Future Value (FV) = 1,000
PV = FV/ (1 + R)^N
• PV: Present value
• FV: Future value
• N: time of years
• R: Interest rate
Above example, what is PV??
• PV = 1,000 / (1 + 0.05)^2 )
• PV = 1,000 / (1.05^2)
• PV = 1,000 / 1.1025
• PV = 907

Net present value (NPV):
• The total present value (PV) of a time series of cash flows.
• It allows calculating the accurate value of the project.
• If NPV > 0; then accept the project otherwise reject it.
Initial investment
( Express as negative number) All Present values (PV’s)
Example: If project costs 100,000 & generates income as below with discounted rate of 10%
Year 1 = 50,000 ; Year 1 = 37,000 ; Year 1 = 43,000
PV1 = 50,000 / (1 + 0.1) ^1 = 45455.54
PV2 = 37,000 / (1 + 0.1) ^2 = 30578.50
PV3 = 43,000 / (1 + 0.1) ^3 = 32306.53
NPV = (-100,000) + 45455.54
+ 30578.50 + 32306.53
= 8,339.57

7. Project Cost Management -> Questions
The project selection board was presented with following project opportunities:
Project A has a duration of 5 years and an NPV of 90,000,
Project B has a duration of 4 years and an NPV of 80,000,
Project C has a duration of 3 years and an NPV of 70,000
Project D has a duration of 2 years and an NPV of 60,000.
Which project will be selected by board based on above information?
A) Project A
B) Project B
C) Project C
D) Project D
Answer : When calculating the NPV of a project, the duration (no. of years) is already factored in the result.
So, you can simply select the one with the highest NPV. Hence, answer is A) Project A

7.4 Control Cost -> T&T -> Examples & Scenarios
Scenarios

7.4 Control Cost ->T&T-> Examples
• = 2,000PV
• = 2,000EV
• = 2,000AC
This is the ideal situation,
where everything goes
according to plan
• = 2,000PV
• = 1,500EV
• = 1,700AC
• = EV – AC = - 200Cost Variance
Without Earned Value
measurements, it appears
project is in good shape.
Expenditures are less than
planned.
Case 1
Case 2
Observation1

• = 2,000PV
• = 1,500EV
• = 1,700AC
With EV measurements, we
see 500 worth of work is
behind schedule;
i.e., We are 25% behind our
planed work
Case 2
Observation 2
• = EV – PV = - 500SV
• = (SV / PV) x 100 = -25%SV %

• = 2,000PV
• = 1,500EV
• = 1,700AC
We can see “Actuals” exceed “Earned
Value” (EV)
i.e., 1,500 worth of work was
accomplished but money spent was
1,700.
We have a 200 cost overrun (13.3% over
budget)
Case 2
Observation 3
• = EV – AC = - 200CV
• = (CV / EV) x 100 = -13.3%CV %

• = 2,000PV
• = 1,500EV
• = 1,700AC
This means only 75 cents of work
was done for each
$1 worth of work planned.
Only 88 cents worth of work was
actually done for each $1 spent
All performance indicators are
Negative
Case 2
Observation 4
• = EV/PV = 0.75SPI
• = EV/AC = 0.88CPI
• = EV-PV = -500SV
• = EV-AC = -200CV

• = 2,500PV
• = 2,300EV
• = 2,100AC
Case 3
Bad News:
Project work efficiency is a bit low,
we are getting only 92 cents of work
done on $1 spent.
As a result, we are behind schedule.
• = EV-PV = -200SV
• = SV / PV x 100 = -8%SV%
• = EV/PV = 0.92SPI
• = EV-AC = 200CV
• = CV/PV X 100 = 8%CV%
• = EV/AC = 1.095CPI
Good news:
Project is running under budget.
We’re getting $1.095 worth of work
done for each $1 spent.

• = 2,000PV
• = 1,800EV
• = 1,800AC
Case 4
Bad News:
Project work is not accomplished on
Schedule
• = EV-PV = -200SV
• = SV / PV x 100 = -10%SV%
• = EV/PV = 0.9SPI
• = EV-AC = 0CV
• = CV/PV X 100 = 0%CV%
• = EV/AC = 1CPI
Good news:
Project is running as per our budget.
The cost of the work accomplished is
as we budgeted.

• = 2,000PV
• = 2,200EV
• = 2,000AC
SPI & CPI =1.1
Project work is getting done at 1.1%
efficiency
Case 5
• = EV-AC = 200CV
• = CV/PV X 100 = 10%CV%
• = EV/AC = 1.1CPI
• = EV-PV = 200SV
• = SV / PV x 100 = 10%SV%
• = EV/PV = 1.1SPI
Ahead or Schedule & under-running
cost:
Work is ahead of schedule by 10% &
under-running cost by 10%.
Management View:
Too much
Pessimistic planning

7.4 Control Cost -> Data Flow Diagram

Thank You!
To Learn Project Management, Contact Anand Bobade (055 5932004)
•nmbobade@gmail.com
•https://ae.linkedin.com/in/anandbobade
•http://www.slideshare.net/anandbobade
•Conduct Online training, Corporate Training, evening & weekend workshops.
Free learning resources
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PMP Chap 7 - Project Cost Management - Part 2

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