PMP Process – Cost Management – Input, Tools an Outputs

Project cost management includes the process involved in planning, estimating, financing, funding, managing and controlling costs so that the project can be completed within approved budget.

Knowledge Area	Process	Input	Tools	Output
Cost	Plan Cost   Management	Project management   plan	Expert judgment	Cost Management   Plan
		Project charter	Analytical techniques
		Enterprise environmental   factor	Meetings
		Organizational process   asset
	Estimate Costs	Cost management plan	Expert judgment	Activity cost   estimation
		Human resource management   plan	Analogous estimation	Basis of estimates
		Scope baseline	Parametric estimation	Project document   updates
		Project schedule	Bottom-up   estimation
		Risk register	Three-point   estimation
		Enterprise environmental   factor	Reserve analysis
		Organizational process   asset	Cost of quality
			Project management   software
			Vendor bid   analysis
			Group decision-making   technique
	Determine Budget	Cost management   plan	Cost aggregation	Cost baseline
		Scope baseline
		Activity cost   estimate	Reserve analysis
		Basis of estimates		Project funding   requirements
		Project schedule	Expert judgment
		Resource calendar
		Risk register	Historical   relationship	Project document   updates
		Agreement
		Organizational process   asset	Funding limit reconciliation
	Control Cost	Project management   plan	Earned value   management	Work performance   information
		Project funding   requirements	Forecasting	Cost forecasts
		Work performance   data	To-complete   performance index (TCPI)	Change requests
		Organizational process   assets	Performance reviews	Project management   plan update
			Project management   software	Project documents   update
			Reserve analysis	Organizational   process asset update

Cost Estimating – Developing an approximation (estimate) of the costs of the resources needed to complete project activities.

Cost Budgeting – Aggregating the estimated costs of individual activities or work packages to complete project activities.

Cost Control – Controlling changes to the project budget and influencing the factors that causes cost variance.

Life Cycle Costing – Broader view of Project Cost Management, which includes cost of resources needed to complete schedule activities along with effect of cost decisions on using, maintaining & supporting the product, service or result of the project. Life cycle costing together with value engineering can improve decision making and is used to reduce cost and execution time.

Cost Management Plan – It is created as part of the Develop Project Management Plan process. It can establish

• Precision Level ($100, $1000 etc)
• Units of Measure (Staff hours/days/lump sum etc)
• Organizational Procedure Links (Control Account, code or account number directly linked accounting system)
• Control thresholds (Agreed amount of variation allowed)
• Earned Value rules (1.Computation Formula 2.Earned Value Credit Criteria 3.WBS Level)
• Reporting Formats
• Process descriptions (Each of the three cost management Processes are documented.)

ROM – Accuracy of project estimate will increase as it progresses, project at initial stages can have rough order of magnitude (ROM) in the range of –50 to +100% later it will narrow to a range of definite estimate –10 to +15%.

Cost Management Plan – (from Cost Estimating) the action taken by the project manager for all variances are described in the Cost Management Plan.

Cost Estimating (Tools)

1. Analogous estimating – also called top-down estimating, means using the actual cost of a previous, similar project. It is given by management as an expectation. It is less costly and less precise.
2. Parametric modeling – mathematical model to predict project costs – per square foot of living space. It uses statistical relationship between historical data and other variables to calculate cost estimate. It can produce higher levels of accuracy depending on sophistication, resource quantity and cost data.
3. Bottom-up estimating – The cost of individual activities or work packages rolled up to get the estimate for whole component. It is more accurate and costly.
4. Reserve Analysis – Contingency Reserve are estimated to be used at the discretion of the project manger to deal with anticipated but not certain events, called “known unknowns”. They are managed as a buffer kept at the end of the network path for that group of activities. As the schedule progresses, reserve is measure by resource consumption by the schedule activities. Management reserve: they are there to manage events called “unknown unknowns”. Since they are not distributed as budget to project hence they are not used for calculating earned values metrics.
5. Cost of Quality – cost of quality initiative in an organization like training, audits etc, cost of poor quality: warranty cost, claims

EV equals PV when the project is completed.

Cost Calculations – Costs are more practical to calculate at one level higher (Control Account) than work package level

Cost Budgeting Tools and Techniques

Cost aggregation

1. Funding Limit Reconciliation – Customer/sponsor will set limits on disbursement of funds for the project. Funding Limit Reconciliation will necessitate the scheduling of work to be adjusted to smooth or regulate those expenditures. It is accomplished by placing imposed date constraints for some work packages and compressing the schedule to reduce the estimated cost of the project. Conciliation happens for the cash flow of the project and with any cost constraint of the project.
2. Cost baseline (output)- The cost baseline is a time-phased budget that will be used to measure and monitor cost performance on the project. It is shown as an S curve. The difference between maximum funding and the end of the cost baseline is Management Reserve in the S curve.
3. Project Funding requirement (output)

Project Performance Reviews (TT of Cost Control) –

1. Variance Analysis
2. Trend Analysis
3. Earned Value Technique

Performance Measurement Analysis (TT of Cost Control) – PV, EV, AC, ETC, CV, SV, CPI, SPI

Benefit Cost Ratio	Expected Revenues   / Expected Costs. Measure benefits (payback) to costs; not just profits. The   higher the better (if rating over 1, the benefits are greater than the costs)
Internal Rate of   Return	Interest Rate   which makes the PV of costs equal to PV of benefits
Payback Period	Number of time   periods up to the point where cumulative revenues exceeds cumulative costs.   Weakness in this approach is the lack of emphasis on the magnitude of the   profitability. Does not account for time value of money nor consider value   benefits after payback.
Opportunity Cost	Cost of choosing   one alternative and therefore giving up the potential benefits of another   alternative: it is the value of the project not selected (lost opportunity).
Sunk Cost	Expended costs   which should be ignored when making decisions about whether to continue   investing in a project
Law of Diminishing   ReturnsStraight Line   Depreciation	The point beyond   which the marginal addition of resources does not provide a proportional   amount of utility. Same amount each time period (e.g. 10 – 10 – 10).Types 1. Straight   Line 2. Accelerated   (1. Double Declining Balance 2. Sum of Years   Digits)
Working Capital	Current Assets –   Current Liabilities
Value Analysis	Cost reduction   tool that considers whether function is really necessary and whether it can   be provided at a lower cost without degrading performance or quality. Finding   the least expensive way to do the scope of work.
Value Engineering   Tool	Tool for analyzing   a design, determining its function, and assessing how to provide those   functions cost effectively.
50-50 Rule	At beginning,   charge 50% of its BCWS to the account.  Charge remaining at completion.
Regression   Analysis	Statistical   technique graphically represented on scatter diagram
Learning Curve	Mathematically   models the intuitive notion that the more times we do something, the faster   we will be able to perform
Variable Costs	Costs rise   directly with the size and scope of the project
Fixed Costs	Costs do not   change; non-recurring (e.g. project setup costs)
Direct Costs	Incurred directly   by a specific project. Project training to project team.
Indirect Costs	Part of the   overall organization’s cost of doing business and are shared by all projects.   Usually computed as a percentage of the direct costs. General and administrative   cost, allocated to the project by the project team as a cost of doing   business.
Control accounts	Represent the   basic level at which project performance is measured and reported. The   purpose of control accounts is to monitor and report on project performance.
Cost Change   Control Systems	Documented in the   cost management plan, defines the procedures of the cost baseline   change.  Includes the documentation, tracking systems, and approval   levels needed to authorize a change and integrated with the integrated change   control process.
Operating profit	Amount of money   earned: Revenue – direct costs
Discounted   cash-flow approach	Present value   method determines the net present value of all cash flow by discounting it by   the required rate of return.
Project Closeout	(output to cost   control) Process and procedures developed for the closing or canceling of   projects

Formulas
Expected ValuePresent Value	Probability *   ImpactFV / (1 + r)t
Cost VarianceCV	EV = BAC * (work   completed/total work required)EV –   AC   (BCWP – ACWP)   Variance = planned – actual
Schedule VarianceSV	PV = BAC *(Total   time passed /total schedule time)EV – PV [BCWP –   BCWS] (if <0; work completed is less than what was planned)
Cost Performance   Index (CPI)	EV/AC [BCWP /   ACWP]     I am getting  ____ out of each dollar.   (>1 good; <1 bad)
Schedule   Performance Index (SPI)	EV/PV [BCWP /   BCWS]     I am progressing at ____% of the rate   originally planned
Estimate at   Completion (EAC)	BAC / CPI AC+ETC (when   original estimates are considered flawed)AC+BAC-EV (when   everything is OK and current variance will not occur in the future) AC+((BAC-EV)/CPI)   (when everything is OK and current variance will occur in the future)
Estimate to   Completion (ETC)	EAC – AC or (BAC –   EV) / CPI
Variance at   Completion (VAC)	BAC – EAC
% Spent	AC/BAC
Cost Variance in %	CV/EV
Schedule Variance   in %	SV/PV
To Complete   Performance Index (TCPI)	(BAC-EV)/(BAC –   AC)
BCWS (PV)	How much should be   done?  This is the performance measurement baseline.
BCWP (EV)	How much work is   done? (Progress) Budgeted cost of work performed. Value of the work completed   in terms of what you budgeted (your baseline)
ACWP (AC)	How much did the   “is done” work cost?
BAC	Budget at   Completion – How much is budgeted for the total job? BAC would change every   time there is a funded scope change approved for activity to be performed in   the future.
EAC	Based on project   performance and risk quantification
ETC	Estimate to   Completion
CPI	Cumulative CPI   does not change by more than 10% once a project is approximately 20%   complete. The CPI provides a quick statistical forecast of final project   costs.
AD	Work   Quantity(scope of the activity) / Production rate
Slope	(crash cost –   normal cost) / (crash time – normal time) ; if <0, as the time required   for a project/task decrease, the cost increase