33 terms

7. Project Cost Management

7.1 Plan Cost Management 7.2 Estimate Costs 7.3 Determine Budget 7.4 Control Costs
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Project Cost Management
Includes the processes involved in planning, estimating, budgeting, financing, funding, managing, and controlling costs so that the project can be completed within the approved budget.
7.1 Plan Cost Management
The process that establishes the policies, procedures, and documentation for planning, managing, expending, and controlling project costs.

Provides guidance and direction on how the project costs will be managed throughout the project.
7.1.1 Plan Cost Management: Inputs
7.1.1.1 Project Management Plan
7.1.1.2 Project Charter
7.1.1.3 Enterprise Environmental Factors
7.1.1.4 Organizational Process Assets
7.1.2 Plan Cost Management: Tools and Techniques
7.1.2.1 Expert Judgment
7.1.2.2 Analytical Techniques
7.1.2.3 Meetings
7.1.3.1 Cost Management Plan
(Outputs)
A component of the project management plan and describes how the project costs will be planned, structured, and controlled. The cost management processes and their associated tools and techniques are documented.

The cost management plan can establish the following:

- Units of measure
- Level of precision
- Level of accuracy
- Organizational procedures links
- Control thresholds
- Rules of performance measurement
- Reporting formats
- Process descriptions
- Additional details
7.2 Estimate Costs
The process of developing an approximation of the monetary resources needed to complete project activities. It determines the amount of cost required to complete project work, such as:

- Project manager's time
- Overhead
- Project management activities
- Leased equipment
- Hardware purchases
- Consulting resources
- Risk estimating
- Quality assurance

Cost types: Fixed, Variable, Direct, Indirect, Sunk
7.2.1 Estimate Costs: Inputs
7.2.1.1 Cost Management Plan
7.2.1.2 Human Resource Management Plan
7.2.1.3 Scope Baseline
7.2.1.4 Project Schedule
7.2.1.5 Risk Register
7.2.1.6 Enterprise Environmental Factors
7.2.1.7 Organizational Process Assets
7.2.2 Estimate Costs: Tools and Techniques
7.2.2.1 Expert Judgment
7.2.2.2 Analogous Estimating
7.2.2.3 Parametric Estimating
7.2.2.4 Bottom-Up Estimating
7.2.2.5 Three-Point Estimating
7.2.2.6 Reserve Analysis
7.2.2.7 Cost of Quality (COQ)
7.2.2.8 Project Management Software
7.2.2.9 Vendor Bid Analysis
7.2.2.10 Group Decision-Making Techniques
7.2.2.5 Three-Point Estimating
(Tools and Techniques)
The accuracy of single-point activity cost estimates may be improved by considering estimation uncertainty and risk and using three estimates to define an approximate range for an activity's cost:

- Most likely (cM)
- Optimistic (cO) - best-case scenario
- Pessimistic (cP) - worst-case scenario

Triangular Distribution: cE = (cO + cM + cP) / 3
Beta Distribution (PERT): cE = (cO + 4cM + cP) / 6

Standard Deviation = cP - cO
7.2.3 Estimate Costs: Outputs
7.2.3.1 Activity Cost Estimates
7.2.3.2 Basis of Estimates
7.2.3.3 Project Documents Updates
7.3 Determine Budget
The process of 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.
7.3.1 Determine Budget: Inputs
7.3.1.1 Cost Management Plan
7.3.1.2 Scope Baseline
7.3.1.3 Activity Cost Estimates
7.3.1.4 Basis of Estimates
7.3.1.5 Project Schedule
7.3.1.6 Resource Calendars
7.3.1.7 Risk Register
7.3.1.8 Agreements
7.3.1.9 Organizational Process Assets
7.3.2 Determine Budget: Tools and Techniques
7.3.2.1 Cost Aggregation (by work packages in accordance with the WBS)
7.3.2.2 Reserve Analysis
7.3.2.3 Expert Judgment
7.3.2.4 Historical Relationships
7.3.2.5 Funding Limit Reconciliation (variance between the funding limits and the planned expenditures)
7.3.3 Determine Budget: Outputs
7.3.3.1 Cost Baseline
The approved version of the time-phased project budget, excluding any management reserves,which can only be changed through formal change control procedures and is used as a basis for comparison to actual results.

7.3.3.2 Project Funding Requirements
Total funding requirements and periodic funding requirements

7.3.3.3 Project Documents Updates
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.

Provides the means to recognize variance from the plan in order to take corrective action and minimize risk.
7.4 Control Costs (cont.)
Project cost control includes:

- Influencing the factors that create changes to the authorized cost baseline
- Ensuring that all change requests are acted on in a timely manner
- Managing the actual changes when and as they occur
- Ensuring that cost expenditures do not exceed the authorized funding by period, by WBS component, by activity, and in total for the project
- Monitoring cost performance to isolate and understand variances from the approved cost baseline
- Monitoring work performance against funds expended
- Preventing unapproved changes from being included in the reported cost or resource usage
- Informing appropriate stakeholders of all approved changes and associated cost
- Bringing expected cost overruns within acceptable limits
7.4.1 Control Costs: Inputs
7.4.1.1 Project Management Plan
7.4.1.2 Project Funding Requirements
7.4.1.3 Work Performance Data
7.4.1.4 Organizational Process Assets
7.4.2.1 Earned Value Management (EVM)
(Tools and Techniques)
A methodology that combines scope, schedule, and resource measurements to assess project performance and progress.

- Planned value (PV)
- Earned value (EV)
- Actual cost (AC)

- Schedule variance (SV)
- Cost variance (CV)
- Schedule performance index (SPI)
- Cost performance index (CPI)
Planned value (PV)
The authorized budget assigned to scheduled work.

The authorized budget planned for the work to be accomplished for an activity or work breakdown structure component, not including management reserve.

The total planned value for the project is also known as budget at completion (BAC)
Earned value (EV)
A measure of work performed expressed in terms of the budget
authorized for that work that has been completed.
Actual cost.(AC)
The realized cost incurred for the work performed on an activity during
a specific time period.
Schedule variance (SV)
A measure of schedule performance expressed as the difference between the earned value and the planned value.

SV = EV - PV (+ve = ahead of schedule, -ve = behind of schedule)
Cost variance (CV)
The amount of budget deficit or surplus at a given point in time,
expressed as the difference between earned value and the actual cost.

CV= EV − ACC* (+ve = under budget, -ve = over budget)
Schedule performance index (SPI)
A measure of schedule efficiency expressed as the ratio of earned value to planned value.

SPI = EV/PV

>1.0 = more work was completed than was planned
< 1.0 = less work was completed than was planned
Cost performance index (CPI)
A measure of the cost efficiency of budgeted resources, expressed as a ratio of earned value to actual cost.

CPI = EV/AC

> 1.0 =cost under-run of performance to date
< 1.0 = cost overrun for work completed
7.4.2.2 Forecasting
(Tools and Techniques)
As the project progresses, the project team may develop a forecast for the estimate at completion (EAC) based on the project performance, which may differ from the budget at completion (BAC).

Involves making projections of conditions and events in the project's future based on current performance information and other knowledge available at the time of the forecast.
7.4.2.2 Forecasting (cont.)
(Tools and Techniques)
Requires a new estimate to complete the remaining project work
EAC = AC + Bottom-up ETC

EAC forecast for ETC work performed at the budgeted rate
EAC = AC + (BAC - EV)

EAC forecast for ETC work performed at the present CPI
EAC = BAC / CPI

EAC forecast for ETC work considering both SPI and CPI factors
EAC = AC + [(BAC - EV) / (CPI × SPI)]
7.4.2.3 To-Complete Performance Index (TCPI)
(Tools and Techniques)
A measure of the cost performance that is required to be achieved with the remaining resources in order to meet a specified management goal, such as the BAC or the EAC, expressed as the ratio of the cost to finish the outstanding work to the remaining budget.

TCPI based on the BAC: (BAC - EV) / (BAC - AC)
TCPI based on the EAC: (BAC - EV) / (EAC - AC)

If TCPI is < 1, work remaining is less than the funds needed to accomplish the work.

If TCPI is > 1, work remaining is more than the funds needed to accomplish the work.
7.4.2.4 Performance Reviews
(Tools and Techniques)
Compare cost performance over time, schedule activities or work packages overrunning and underrunning the budget, and estimated funds needed to complete work in progress.

- Variance analysis
- Trend analysis
- Earned value performance
Earned Value Calculations Summary Table
PMBOK 5th Edition - Page 223.
7.4.2.5 Project Management Software
(Tools and Techniques)
Project management software is often used to monitor the three EVM dimensions (PV, EV, and AC), to display graphical trends, and to forecast a range of possible final project results.
7.4.2.6 Reserve Analysis
(Tools and Techniques)
To monitor the status of contingency and management reserves for the project to determine if these reserves are still needed or if additional reserves need to be requested.
7.4.3 Control Costs
(Outputs)
7.4.3.1 Work Performance Information
- The calculated CV, SV, CPI, SPI, TCPI, and VAC values for WBS components

7.4.3.2 Cost Forecasts
- Either a calculated EAC value or a bottom-up EAC value

7.4.3.3 Change Requests

7.4.3.4 Project Management Plan Updates
- Cost baseline
- Cost management plan

7.4.3.5 Project Documents Updates
7.4.3.6 Organizational Process Assets Updates
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