Pmp cost chapter 7

1. 1
Project Cost Management
Chapter 7

2. 2
Project Cost Management
Why do we need to manage our project cost ?
Sponsor Project manager
I need fund for the
project
You didn’t tell
before. I don’t have
now
No
money……No

3. 3
Project Cost Management
Why do we need to manage our project cost ?

4. 4
 Definitions
 7.1 Plan Cost Management
 7.2 Estimate Costs
 7.3 Determine Budget
 7.4 Control Costs
 Earned Value Management
KEY TERMS

5. Project Cost Management
5
Knowledge
Area
Process
Initiating Planning Executing
Monitoring &
Control
Closing
Cost
7.1 Plan Cost Management
7.2 Estimate Costs
7.3 Determine Budget
 7.4 Control
Costs
Enter phase/
Start project
Exit phase/
End project
Initiating
Processes
Closing
Processes
Planning
Processes
Executing
Processes
Monitoring &
Controlling Processes

6. Project Cost Management
6
7.1 Plan Cost Management—The process that establishes
the policies, procedures, and documentation for planning,
managing, expending, and controlling project costs.
7.2 Estimate Costs—The process of developing an
approximation of the monetary resources needed to
complete project activities.
7.3 Determine Budget—The process of aggregating the
estimated costs of individual activities or work
packages to establish an authorized cost baseline.
7.4 Control Costs—The process of monitoring the status of
the project to update the project costs and managing
changes to the cost baseline.

7. Definitions
7
 Profit = Revenue – Costs
 Direct costs are costs that can be directly related
to producing the deliverable of the project: Salaries, cost
of hardware & software purchased specifically for the
project
 Indirect costs are costs that are not directly related to
the deliverable of the project, but are indirectly related
to performing the project, e.g. cost of electricity,
Internet, rent and office supplies.

8. 8

9. 9
 Variable Costs: change with the amount of production
(cost of material).
 Fixed Costs: do not change with production (rent,
setup costs, … etc.).
BUS IS
Fixed cost
Variable
cost
Variable
cost
Variable
cost

10. 10
 Contingency reserves:  Cost Baseline : the cost
impacts of the remaining risk ( known-unknown )
 Management reserves:  Cost Budget : extra fund
to cover unforeseen risk or changes to the project
( unknown-unknown )

11. 11
• Cost Of Quality
Refers to the total cost of the conformance work and the
nonconformance work

12. 12
**** Life Cycle Costing
• Costs over the entire life of the product.
• You plan the project to produce the product at a lower
level of quality and save $9,000.
• Project is completed. Maintenance costs are $100,000
over the product's life.
• Maintenance cost could be $20,000 if higher quality was
applied.
• Your $9,000 project "savings" cost the company $80,000.

13. 13
• Level of precision. ( measure of exactness )
The degree to which activity cost estimates will be rounded
up or down (e.g., US$100.49 to US$100, or US$995.59 to
US$1,000).
based on the scope of the activities and magnitude of the
project.
• Level of accuracy. ( assessment of correctness )
The acceptable range (e.g., ―/+ 10%) used in determining
realistic activity cost estimates is specified, and may include
an amount for contingencies

14. 14
**** Analogous Estimate ( Top Down )
• Use actual values of a similar in fact project.
• Is used in project initiation when no details.
• Quick, less costly but less accurate.
• Difficult for projects with uncertainty.
• ( Rough Order Of Magnitude ) Accuracy of estimate
- 50 % to + 75 % or -25 % to +75 %
**** Parametric Estimate ( Budgetary)
• Is used in project Planning when more details are available.
• ( Budgetary estimate ) Accuracy of estimate is
-10 % to +25 % or -25% to +25%

15. 15
**** Bottom-Up Estimating
• Creating detailed estimates for each part of an activity (if
available) or work package (if activities are not defined).
• Accurate WBS is needed.
• Applied before project execution.
• ( Definitive estimate ) Accuracy of estimate is
-5 % to +10 % or -10 % to +10 %
• Takes time and more costly.
• Based on details

16. 16
GANTT Chart tells the progress of each activity

17. 17
Acronym Term Interpretation
PV Planed Value Authorized budget for work scheduled
EV Earned Value Budget cost for work done.
AC Actual Cost Actual cost incurred for the work accomplished.
BAC
Budget At
Completion
Budget for the total project effort.
EAC
Estimate At
Completion
Expectation of the total project to cost (a forecast).
ETC
Estimate To
Complete
How much more do we expect it to cost to finish the
project (a forecast) ?
VAC
Variance At
Completion
How much over or under budget do we expect to be at
the end of the project?
**** Earned Value Management
• EVM is a Project Performance Measurement technique that
integrates scope, time, & cost data.

18. CV ( Cost Variance )
 The difference between Earned Value and Actual Cost
 Negative value = Cost Overrun or over budget
 Positive value = on or under cost or under budget
 Are we under or over budget  1.0 or greater is good
EV = Earned Value
AC = Actual Costs
CV = EV – AC
18

19. SV ( Schedule Variance )
 The difference between Earned Value and Planned Value
 Negative value = behind schedule
 Positive value = on or ahead of schedule
 Are we ahead or behind schedule  1.0 or greater is good
EV = Earned Value
PV = Planned Value
SV = EV – PV
19

20. CPI - Cost Performance Index
 The ratio of Earned Value to Actual Cost
 Value < 1 = Cost over budget
 Value > 1 = Cost below budget
 How efficiently are we using our resources
 Ex: We are only getting about 89 cents out of every dollar we put
into the project – THIS IS BAD
EV = Earned Value
AC = Actual Costs
CPI = EV / AC
20

21. SPI - Schedule Performance Index
 The ratio of Earned Value to Planned Value
 Value < 1 = behind schedule
 Value > 1 = on or ahead of schedule
 How efficiently are we using time
 Ex: We are only progressing at about 83 percent of the rate
planned – THIS IS BAD
EV = Earned Value
PV = Planned Value
SPI = EV / PV
21

22. 22
Estimate At Completion
Budget At Completion
Variance At
Completion

23. EAC – Estimate At Completion
 The ratio of Budget at Completion to Cost Performance Index
 This formula is used if no variances from the BAC
have occurred
 This formula is used if you will continue typically at the
same rate of spending ( same performance ).
Default way if exam mentioned nothing.
 Past performance will be typically in future.
EAC = BAC / CPI
32

24. EAC – Estimate At Completion
 This formula calculates actual costs to date + a new
estimate for the remaining work.
 It is used when the original estimate was fundamentally
flawed.
 It is used when your plan is no longer valid
EAC = AC+ ETC (bottom-up)
24

25. EAC – Estimate At Completion
 This formula calculates Actual Costs + Remaining Budget.
 It is used when current variances are thought to be atypical
of the future.
 It is used if you will follow plan.
 It accepts the actual project performance to date (whether
favorable or unfavorable)
EAC = AC+ (BAC ‫ـــ‬ EV)
25

26. EAC – Estimate At Completion
 ETC work will be performed at an efficiency rate that
considers both the cost and schedule performance.
 It is used when current variances are thought to be typical
of the future and when project schedule constraints will
influence the completion of the remaining effort.
 example, it might be used when the cumulative CPI is less
than one and a firm completion date must be met.
EAC = AC+
BAC - EV
CPI X SPI
26

27. To-Complete Performance Index (TCPI)
If CPI > 1
If CPI < 1
 This formula divides the work remaining to be done by the
money remaining to do it.
 It answers the question "In order to stay within budget, what
rate must we meet for the remaining work?"
 Greater than one is bad and less than 1 is good.
TCPI = BAC - EV
BAC - AC
TCPI = BAC - EV
EAC - AC
27

28. VAC -Variance at Completion
 The difference between the Budget at Completion and the
Estimate at Completion ratio.
 This is a variance formula.
 Ex : As of today will we be under or over budget at the end
of the project
VAC = BAC ‫ـــ‬ EAC
28

29. 29
QUIZ
A project is estimated to cost $ 50,000 with a timeline of 50
days. After 25 days, the project manager finds that 50% of
the project is complete and Actual costs are $ 50,000. What
is the Cost Performance Index (CPI) ?
A. The CPI is 1
B. The CPI is 2
C. The CPI is 0.5
D. The CPI is 1.5

30. 30
QUIZ
A project is estimated to cost $ 50,000 with a timeline of 50
days. After 25 days, the project manager finds that 50% of
the project is complete and Actual costs are $ 50,000. What
is the Cost Performance Index (CPI) ?
A. The CPI is 1
B. The CPI is 2
C. The CPI is 0.5
D. The CPI is 1.5
Answer : C

31. 31
Task Progress Cost spent
Side 1 ||||||||||||||||||||||||||||||||||||||||100% $1,200
Side 2 ||||||||||||||||||||||||||||||||||||||||100% $1,000
Side 3 ||||||||||||||||||||||||||||||75% $750
Side 4 ||||||||||||||||||||50% $500
Side 5 0% $0
Side 6 0% $0
Question
You have a project to build a box. The box is six sided. Each side is to take
one day to build and is budgeted for $1000 per side. The sides are
planned to be completed one after the other. Today is the end of day
three.
• Using the following project status chart, calculate PV, EV, AC, BAC,
CV, CPI, SV, SPI, EAC, ETC, VAC.

32. 32
Parameter Calculation Result
PV 1000 + 1000 + 1000 3000
EV (100% x 1000) + (100% x 1000) + (75% x 1000) + (50% x 1000) 3250
AC 1200 + 1000 + 750 + 500 3450
BAC 6 x 1000 6000
CV EV – AC = 3250 - 3450 -200
CPI EV / AC = 3250 / 3450 0.942
SV EV – PV = 3250 - 3000 250
SPI EV / PV = 3250/ 3000 1.08
EAC BAC / CPI = 6000 / 0.942 6369.42
ETC EAC – AC = 6369.42 - 3450 2919.42
VAC BAC – EAC = 6000 – 6369.42 -369.42
• Over budget, getting 0.94 dollar for every dollar we spent,
• Ahead schedule, progressing 108% of the rate planned,
• Probably will spend $6369.42 at the end (estimation),
• Need $2919.42 to complete,
• Over budget at the end for about $369.42 (estimation)

33. 7.1- Plan Cost
Management
33

34. 34
7.1- Plan Cost Management.
The process that establishes the policies, procedures, and
documentation for planning, managing, expending, and
controlling project costs.

35. 35

36. 7.1- Plan Cost Management INPUTS
36
1. Project
Management Plan
Scope Baseline
Schedule Baseline
2. Project Charter
3- EEF
4- OPA
7.1- Plan Cost Management T & T
1. Expert Judgment
1. Analytical Techniques
1. Meetings

37. 7.1- Plan Cost Management OUTPUTS
37
CostManagementPlan • Units of Measure staff hours, staff days, meters, liters,
tons, kilometers
• Level of Precision (measure of exactness)
• Level of Accuracy (assessment of correctness)
• Control Accounts
• Control Thresholds (Percentage deviations from the
baseline plan.)
• Rules for Performance Measurement
Specify tracking methodologies
Earned value measurement techniques
Earned value management computation equations
• Reporting Formats (cost reports)
• Process Description
• Additional Details

38. 7.2- Estimate Cost
38

39. 39
7.2 Estimate Costs
The process of developing an approximation of the
monetary resources needed to complete project activities.

40. 40

41. 7.2- Estimate Cost INPUTS
41
1. Cost Management Plan
2. Human Resource Management Plan
3. Scope Baselines
Scope Statement / WBS /
WBS Dictionary
4. Project Schedule
5. Risk Register (Risk mitigation costs)
6. EEF
 Market Conditions
 Published Commercial Data
7- OPA
 Cost Estimating Policies
 Cost Estimating Templates
 Historical Information
 Lessons Learned

42. 7.2- Estimate Cost T & T
42
1. Expert Judgment
2. Analogous Estimating (Top down)
3. Parametric Estimating
4. Bottom-up estimating
5. Three-point
Estimation
(Beta Distribution) Weighted Average (P+4M+O) / 6
(Triangular Distribution) ( P+M+O ) / 3
6. Reserve
Analysis
• Contingency Reserve ( Known Unknown ) by project
manager for activities
• Management Reserve ( Unknown Unknown ) by
management for whole project
7. Cost Of
Quality
• Cost Of Conformance
• Cost Of Non Conformance
8. PMIS
9. Group Decision making techniques: Unanimity, Majority (>50%),
Plurality, Dictatorship
10. Vendor Bid analysis

43. 7.2- Estimate Cost Outputs
43
1. Activity Cost Estimates
2. Basis of Estimates
• how the cost estimate was derived
• Documentation of :
Assumptions
Known constraints
Range of possible estimates
3. Project Documents Updates

44. 44
7.3- Determine Budget

45. 45
7.3- Determine Budget
The process of aggregating the estimated costs of individual
activities or work packages to establish an authorized cost
baseline

46. 46

47. 7.3- Determine Budget INPUTS
47
1. Cost Management Plan
2. Scope Baseline
3. Activity Costs Estimates
4. Basis of Estimates
5. Project Schedule
6. Resource
Calendars
which resources are assigned to the project and
when they are assigned
7. Risk Register
8. Agreements
9. OPA
• Existing formal and informal cost budgeting-
related policies, procedures, and guidelines.
• Cost budgeting tools.
• Reporting methods.

48. 7.3- Determine Budget T & T
48
1. Cost Aggregation
2. Reserve Analysis
3. Expert Judgment
4. Historical
Relationships
• Historical information used to develop the model.
• Parameters used in the model are readily quantifiable.
5. Funding
Limit
Reconciliation
When to supply the fund needed on time along with the
work being done

49. 7.3- Determine Budget Outputs
49
1. Cost Baseline
the approved version of the time-phased project
budget
Known UnknownUnknown Unknown
This is the level of divisions to track measurement

50. 7.3- Determine Budget Outputs
50
2. Project
Funding
Requirements
When I will provide fund supply to work being done

51. 51
7.4- Control Cost

52. 52
7.4- Control Cost.
The process of monitoring the status of the project to
update the project costs and managing changes to the cost
baseline

53. 53

54. 7.4- Control Cost INPUTS
54
1. Project Management
Plan
• Cost Baseline
• Cost Management Plan
2. Project Funding Requirements
3. Work Performance Data
4. OPA
1. Earned Value Management
2. Forecasting
3.To-Complete Performance Index
4. Performance Reviews
• Variance Analysis
• Trend Analysis
• Earned Value Performance
5. ReserveAnalysis
6. PMIS
7.4- Control Cost T & T

55. 7.4- Control Cost Outputs
55
1. Work Performance Measurements
2. Budget Forecasts ( EAC / ETC )
3. Change Requests
4. Project Management Plan
Updates
• Cost baseline.
• Cost management plan.
5. OPA Updates
6. Project Document Updates • Cost estimates, and
• Basis of estimates.

56. 56
Questions
l. One common way to compute estimate at completion
(EAC) is to take the budget at completion BAC
and:
• A. Divide by SPI.
• B. Multiply by SPI.
• C. Multiply by CPI.
• D. Divide by CPI.
• Answer : D

57. 57
Questions
2. Estimate at completion (EAC) is a periodic evaluation of:
A. The cost of work completed.
B. The value of work performed.
C. The anticipated total cost at project completion.
D. What it will cost to finish the project.
• Answer : C

58. 58
Questions
3. If earned value (EV) = 350, actual cost (AC) = 400, and
planned value (PV) = 325,
what is cost variance (CV)?
A. 350
B. -75
c. 400
D. -50
• Answer : D

59. 59
Questions
4. Analogous estimating:
A. Uses bottom-up estimating techniques.
B. Is used most frequently during project executing.
C. Uses top-down estimating techniques.
D. Calculates estimates using actual detailed historical
costs.
• Answer : C

60. 60
Questions
5. A cost performance index (CPI) of 0.89 means:
A. At this time, we expect the total project to cost 89
percent more than planned.
B. When the project is completed, we will have spent 89
percent more than planned.
C. The project is progressing at 89 percent of the rate
planned.
D. The project is getting 89 cents out of every dollar
invested.
• Answer : D

61. 61
Questions
6. A schedule performance index (SPI) of 0.76 means:
A. You are over budget.
B. You are ahead of schedule.
C. You are progressing at 76 percent of the rate originally
planned.
D. You are progressing at 24 percent of the rate originally
planned.
• Answer : C

62. 62
Questions
7. Which type of cost is team training?
A. Direct
B. NPV
C. Indirect
D. Fixed
• Answer : A

63. 63
Questions
8. Project setup costs are an example of:
A. Variable costs.
B. Fixed costs.
C. Overhead costs.
D. Opportunity costs.
• Answer : B

64. 64
Questions
9. The project manager is allocating overall cost estimates
to individual activities to establish a baseline for measuring
project performance. What process is this?
A. Cost Management
B. Estimate Costs
C. Determine Budget
D. Control Costs
• Answer : C

65. 65
Questions
10. You provide a project cost estimate for the project to the
project sponsor. He is unhappy with the estimate, because
he thinks the price should be lower. He asks you to cut 15
percent off the project estimate. What should you do?
A. Start the project and constantly look for cost savings.
B. Tell all the team members to cut 15 percent from their
estimates.
C. Inform the sponsor of the activities to be cut.
D. Add additional resources with low hourly rates.
• Answer : C

66. 66
11. Lucy is currently preparing a high-level cost estimate for
her project in the initiation phase. Given the limited detail
available to her, what would you expect the range of her
estimate to be and what would you call such an estimate?
A. -25 to +75 %, Rough Order of Magnitude.
B. -5 to +10 %, Narrow.
C. 25 to +25 %, Rough Order of Magnitude.
D. -1 to +1 %, Definitive.
Questions

67. 67
11. Lucy is currently preparing a high-level cost estimate for
her project in the initiation phase. Given the limited detail
available to her, what would you expect the range of her
estimate to be and what would you call such an estimate?
A. -25 to +75 %, Rough Order of Magnitude.
B. -5 to +10 %, Narrow.
C. 25 to +25 %, Rough Order of Magnitude.
D. -1 to +1 %, Definitive.
Answer : A
Questions

68. 68
12. The Cost Performance Baseline is a time-phased
budget and is used as a basis to measure, monitor, and
control overall cost performance of the project. It is usually
displayed in the form of:
A. Pie-chart
B. An inverted S curve.
C. A Z curve
D. An S-curve
Questions

69. 69
12. The Cost Performance Baseline is a time-phased
budget and is used as a basis to measure, monitor, and
control overall cost performance of the project. It is usually
displayed in the form of:
A. Pie-chart
B. An inverted S curve.
C. A Z curve
D. An S-curve
Answer : D
Questions

70. 70
13. Contingency Reserves are estimated costs to be used
at the discretion of the project manager to deal with:
A. Anticipated but not certain events.
B. Scope creep
C. Anticipated and certain events
D. Unanticipated events
Questions

71. 71
13. Contingency Reserves are estimated costs to be used
at the discretion of the project manager to deal with:
A. Anticipated but not certain events.
B. Scope creep
C. Anticipated and certain events
D. Unanticipated events
Answer : A
Questions