PMP Cost Management (Project Management Professional Exam)

PMP – Cost Management
Chapter 7

Related Definitions
Life cycle costing
The costing over product life
Value analysis (engineering)
Analysis to minimize cost of a work
Cost risk
The risk of cost possessionThis document is a partial preview. Full document download can be found on Flevy:
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Plan Cost Management
How will you plan cost?
How will you manage and control costs and its variences?
How the costs will be paid?
Which cost accounts are existing and need to create?
Which cost will be assigned to which account?
How to finance, lease or buy? (also a procurement topic)
What is Net present value (NPV) and payback period and internal
rate of return of the project?
The key benefit of this process is that it provides guidance and
direction on how the project costs will be managed throughout the
project.
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7. Cost Management Processes
•establishes the policies for planning, managing, expending, and
controlling project costs
7.1. Plan Cost management
•developing an approximation of the monetary resources needed to
complete project activities.
7.2. Estimate costs
•aggregating the estimated costs of individual activities or work packages
to establish an authorized cost baseline
7.3. Determine budget
•monitoring the status of the project to update the project costs
7.4. Control costs

7.2. Estimate Costs
Cost estimates are a prediction that is based on the
information known at a given point in time.
Cost estimates include the identification and consideration
of costing alternatives to initiate and complete the project.
Cost estimates are generally expressed in units of some
currency (i.e., dollars, euros, yen, etc.), although in some
instances other units of measure, such as staff hours or staff
days
Cost estimates should be reviewed and refined during the
course of the project

Estimation Methods – Time and Cost
Bottom-up
•Cost of individual
work packages
or activities is
estimated to the
greatest level of
specified detail
Three-Point
•Optimistic,
pessimistic and
most likely 3
points are
estimated
•Risk register is
used
•Simple or
weighted
average is used
Analogous
•Expert
judgement and
historical
information is
used
•Previous similar
project estimate
•Basicly a
prediction
•Less costly less
accurate
Parametric
•Calculates with
data
•Uses historical
data
•Regression and
learning curve
afffect it
•E.g. 1 operator
build 20 brick, 40
operators 800
brick.

Estimate Costs
# Have you included these in your project? Response
1 Project management activities cost
2 Assets cost
3 PM’s time cost
4 Labor cost
5 Quality costs
6 Risk management costs (Contingency Reserves cost)
7 Training and other HRM costs
8 Materials cost
9 Rental of PMO cost
10 Management salaries and overhead costs

Outputs of Estimate Cost
•quantitative assessments of the probable costs
•can be presented in summary form or in detail
Activity
Cost
estimate
•additional details supporting the cost estimate
•complete understanding of how the cost
estimate was derived
•Assumptions, constraints, ranges and confidence
levels
Basis of
estimates

Determine Budget
PM needs to find the total cost of the project and
contingency reserves and management reserves.
Inputs
Cost man.Plan
Scope baseline
Schedule
Activity Cost
estimates
Basis of estimate
HRM plan
Risk Register
Resource calendar
Org. Pro. Assets
Ent. Env. Factors
Determinebudget Cost aggregation
Reserve analysis
Expert judgment
Historical
relationships
Funding limit
reconcilation
Outputs
Cost baseline
Project funding
Requirements
Updates to project
docs

Outputs
Total funding requirements and periodic funding
requirements (e.g., quarterly, annually) are derived from
the cost baseline
Funding often occurs in incremental amounts that are
not continuous

Why do we use Reserve Analysis as a
Control costs Tool?
As project progresses the risks identified in planning will
happen or not. Therefore, we will have a bright idea if
contingency reserves will be needed still or may be
removed.
On the other hand, regarding Management reserves, as
project progresses the unknown risks will appear or not so
you can more accurately manage Management
Reserves which also influence budget.
Reserve analysis is basically update reserve amounts.

Earned Value Measurement
Definitions
Acro Terms Meaning
PV Planned Value Work planned till today
EV Earned Value Work accomplished till today
AC Actual Cost Cost till today
BAC Budget at completion Budget dedicated to the project
EAC Estimate at completion Expection cost at the end
ETC Estimate to complete How much more do you need?
VAC Variance at completion
How much more exceeded your
budget?

Definitions
Actual cost.
Actual cost (AC) is the realized cost incurred for the work
performed on an activity during a specific time period.
It is the total cost incurred in accomplishing the work that the
EV measured.
The AC needs to correspond in definition to what was
budgeted in the PV and measured in the EV (e.g., direct
hours only, direct costs only, or all costs including indirect
costs).
The AC will have no upper limit; whatever is spent to achieve
the EV will be measured.

Definitions
Cost variance. CV= EV − AC.
amount of budget deficit or surplus at a given point in time,
expressed as the difference between earned value and the
actual cost.
It is a measure of cost performance on a project. It is equal
to the earned value (EV) minus the actual cost (AC).
The cost variance at the end of the project will be the
difference between the budget at completion (BAC) and
the actual amount spent.
The CV is particularly critical because it indicates the
relationship of physical performance to the costs spent.
Negative CV is often difficult for the project to recover.

S-curve
First draw PV and BAC
Then, you can draw EV, AC and EAC according to
progression

Forecasting
Term Formula
Estimate at
completion EAC
BAC/CPI
AC+ BAC – EV
AC + ((BAC-EV)/
(CPI.SPI))
TCPI To complete
performance index
(BAC-EV)/(BAC-AC)
Estimate to
complete ETC
EAC- AC
Variance at
completion VAC
BAC – EAC

Method 2
EAC with same rate assumption
EAC forecast for ETC work performed at the present CPI.
This method assumes what the project has experienced to
date can be expected to continue in the future.
The ETC work is assumed to be performed at the same
cumulative cost performance index (CPI) as that incurred by
the project to date.
Equation: EAC = BAC / CPI

Exercise
You are managing a software project, heretofore you
spent $ 10 Million and controlling department reports tells
that your CPI is 1.2 and SPI 1.1, What is your EV?
Solution
CPI = EV/AC where your AC= 10 million
EV = $ 12 million

Exercise – Interpretation CPI
Your CPI is 0.84, what information you can understand from this
statement?
You are producing 84 cents (kurus) VALUE, out of each $1.
You are spending more than planned. You are overbudget. Your CV is
negative.
You need to be more productive in terms of cost to complete project,
on planned budget.
Your CPI is 1.2, what information you can understand from this
statement?
You are producing $1.2 VALUE for each$1.
You are spending less than planned. You are under-budget. CV is +.
You can achieve you planned budget, if you possess this track and
effectiveness.

Control Costs
• roject management
plan
• Project funding
• requirements
• Work performance
data
• .Organizational process
assets
Inputs
• Earned value
management
• .Forecasting
• To-complete
performance index
(TCPI)
• Performance reviews
• Project management
software
• Reserve analysis
Tools
• Work performance
information
• Cost forecasts
• Change requests
• Project management
plan update
• Project documents
updates
• Organizational process
assets updates
Outputs

EVM

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PMP Cost Management (Project Management Professional Exam)

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PMP Cost Management (Project Management Professional Exam)