Cost Management

Cost Management Plan

A component of a project or program management plan that describes how costs will be planned, structured, and controlled. The cost management plan may establish the following: A definition of units of measure for resources. For example, time measurements may be specified for staff hours, days, and weeks; Level of precision for activity cost estimates; for example, will the team round to the nearest $100... $1000... or track costs to the penny? Levels of accuracy expected for activity cost estimates; Links to the W-B-S; the work breakdown structure provides the framework for the cost management plan; the control account is the W-B-S component used for project cost accounting and has a unique code that should link to the organization's accounting system; Thresholds for variances; for example, if an activity exceeds 15% of the estimated cost, the team member should take action or report the condition; Reporting formats for desired schedule reports; Performance measurements, such as the following: Establishing control accounts in the W-B-S; Selecting earned value measurement techniques to be used; such as, the most appropriate formula for Estimate at Completion, or E-A-C, in this project. The cost management plan becomes a valuable reference point for the team to review as they plan and manage the project costs.

Cost of Quality

A method of determining the costs incurred to ensure quality. Prevention and appraisal costs (cost of conformance) include costs for quality planning, quality control (QC), and quality assurance to ensure compliance to requirements (i.e., training, QC systems, etc.). Failure costs (cost of nonconformance) include costs to rework products, components, or processes that are non-compliant, costs of warranty work and waste, and loss of reputation.

Estimate Costs - Tool: Data Analysis - Alternatives Analysis

A technique used to evaluate identified options in order to select which options or approaches to use to execute and perform the work of the project.

The team is discussing terms like percent complete, 50-50, and level of effort. What are they deciding and in which process? A. These are earning methods, or earned value techniques, to be applied to the project; Plan Cost Management B. These are team bonus salary methods, based on the profitability and progress of the project; Plan Resource Management C. These are reporting approaches for control accounts and how finance accrues project costs to the budget; Control Costs D. These are resource utlization parameters used in creating the histogram of resource usage; Plan Resource Management

A. These are some of the various earning methods for determing the earned value of partially completed activities. This is planned in the Plan Cost Management process under rules of performance measurement.

If the CPI is 0.1, this indicates: A. The project is performing extremely poorly on cost. B. The project is costing 10% over what was expected. C. The project is only costing 90% of what was expected. D. The project is performing extremely well on cost.

A. Understanding the concepts behind the earned value calculations is important for the exam and will help you with questions like this one. In this question, the terrible cost performance index indicates that we are getting ten cents of value for every dollar we spent; thus the project is doing very poorly on cost performance.

Reserve Analysis

An analytical technique to determine the essential features and relationships of components in the project management plan to establish a reserve for the schedule duration, budget, estimated cost, or funds for a project.

Value Engineering

An approach used to optimize project life cycle costs, save time, increase profits, improve quality, expand market share, solve problems, and/or use resources more effectively.

Analogous estimating is also called: A. Vendor bid analysis B. Bottom-up estimating C. Scalable model estimating D. Top-down estimating

Another name for analogous estimating is top-down estimating because it looks at projects as a lump sum and not broken down into pieces (which is known as bottom-up estimating).

Which of the following sequences places the process of Determine Budget and related processes in the correct order? A. Define Activities, then Create WBS, then Determine Budget, then Estimate Costs B. Create WBS, then Define Activities, then Estimate Costs, then Determine Budget C. Determine Budget, then Estimate Costs, then Create WBS, then Control Costs D. Create WBS, then Define Activities, then Control Costs, then Determine Budget

B. You might experience a dull pain in your head thinking through this one! First, let's look at the processes that have been listed in the answers. Given these processes, we would begin by defining the project deliverables, so Create WBS should be first. Next, we should Define Activities that must be carried out to create these deliverables in the WBS. Other activities follow that place the activities in order and estimate the resources and duration. But, these processes are not listed as possible answers. Next in the sequence come cost management processes. The correct order here is Estimate Costs, Determine Budget, and (finally) Control Costs. Therefore, the only correct choice is answer 'B' from the list.

Your best cost estimate for an activity is $200,000, but the estimate you document has a range of $150,000 to $350,000. This ranged estimate represents a(n): A. Cost estimate. B. Budgeted estimate. C. Order of magnitude estimate. D. Definitive estimate

C. Order of magnitude estimates can be -25% to +75%. In this example, $150,000 and $350,000 are -25% to +75% of $200,000.

You are in the second week of a 12-month project. Your boss asks you to provide an estimate for the expected expenditures for the project, but you have very little data collected to analyze. What is your best course of action? A. Perform an analgesic estimate B. Use parametric estimating and roll up the detail to an overall total C. Provide a control estimate and document your assumptions D. Provide an order-of-magnitude estimate or range and list your assumptions

D. As the project manager, you are in a tough spot. You're asked to estimate the total budget, yet you've got very little data to work from. 'A' is nearly a valid answer, close to analogous, but maybe an aspirin would be a good plan right now! Analogous estimates or top-down estimates are very helpful for early, high-level estimates of the costs of individual activities or total projects when there is a similar project to the one you are analyzing. In the case of 'A', the term is made up. 'B' assumes you have clearly-defined metrics across the WBS that would allow for parametric estimating. The scenario does not match; therefore, 'B' is incorrect. 'C' lists a control estimate, and 'D' mentions an order-of-magnitude estimate. 'D' is correct here because the order-of-magnitude estimate provides a broader range which is more appropriate for the scenario described.

Direct vs. Indirect costs

Direct costs are those expenditures that are directly attributed to the project. These include materials used on the project, contractors working on the project, and equipment rented or purchased for the project. On the other hand, indirect costs are sometimes referred to as shared costs or overhead. Examples of indirect costs include the following: Office space or shared equipment, Staff or services that support several teams, Supplies and materials common to many groups, such as paper, printers, and software. So, direct costs are directly attributed to one, specific project. Whereas, indirect costs are expenditures that benefit more than one project.

Control Costs - Tools: Data Analysis - Earned Value Analysis

Earned Value Management - The EVM technique converts progress into a dollar amount.- can be applied to diverse projects across all industries The 1st key value is called Budget at Completion or B-A-C. the total cost of the project. The 2nd key value is called Planned Value or P-V. how much you plan to spend, cost baseline The 3rd key value is called Earned Value or E-V. the value of the work that has been performed.Where PV represents the plan, EV represents the results. EV measures the value of the actual work carried out. The 4th key value is Actual Cost or A-C. This is the total cost actually incurred for the work that has been performed.

Determine Budget - Output: Project Funding Requirements

Forecast project costs to be paid that are derived from the cost baseline for total or periodic requirements, including projected expenditures plus anticipated liabilities. The project manager starts with the cost baseline to determine those funds needed from period to period and in total. Added to these budget requirements are the management reserves. Project funding requirements are comprised of both the cost baseline and management reserves.

Earned Value Analysis

Method of measuring actual performance against original plan.

Which of the following statements about cost estimates is correct? A. Output of Estimate Costs and an input to Determine Budget B. Output of Determine Budget and an input to Estimate Costs C. Output of Estimate Costs and an input to Control Costs D. Output of Determine Budget and an input to Control Costs

Only 'A' is correct. It might seem to obvious to be true, but cost estimates are an output of Estimate Costs. Then, these estimated costs for each activity feed into the Determine Budget process.

Estimate Costs - Tools: Parametric Estimating

Parametric estimating works well for activities that are scalable or linear, and it requires reliable historical information. Here's a scenario where this tool would prove useful. Your project team must estimate costs for a minor power grid expansion. The utility is exploring several options, and your team must estimate the total costs to extend transmission lines 12 miles from a substation. You have access to records of past expansion projects and have determined the average cost per mile to be 1 million dollars. Using parametric estimating, your team develops the estimate of 12 million dollars. Parametric estimating is generally considered more accurate than analogous estimating but less accurate than our next estimating technique...Bottom-Up Estimating.

Control Costs - Tools: Data Analysis - Variance Analysis

Schedule: A negative Schedule Variance indicates that we are behind schedule. Our schedule performance is suffering. The work is not going per the plan! Conversely, a positive SV indicates that we are ahead of schedule. If the project is exactly on plan, the EV and PV will be equal, resulting in a Schedule Variance of zero Cost: a negative Cost Variance is bad news. Negative CV indicates that we are over budget. We're spending more money than we should, based on the value earned into the project. On the other hand, a positive CV indicates that we are under budget. If the project is exactly on plan, the EV and AC will be equal, resulting in a Cost Variance of zero.

Estimate Costs - Inputs: Project Management Plan

Scope Baseline. The Scope Baseline is made up of 3 parts. The first part, the Project Scope Statement, provides important information that may influence your cost estimates. For instance, the scope statement describes the product, acceptance criteria, and constraints and assumptions. These factors could easily influence costs, if you think about the impacts they may have on level of quality, the skill-level required, or the grade of materials to be used.

Determine Budget - Output: Cost Baseline

The approved version of the time-phased project budget, excluding any management reserves, which can be changed only through formal change control procedures and is used as a basis for comparison to actual results. is the approved, time-phased activities budget. The cost baseline is comprised of the cost estimates and contingency reserves for all scheduled activities. The cost baseline specifies the costs of the project activities and when they will be incurred.

Determine Budget

The process of aggregating the estimated costs of individual activities or work packages to establish an authorized cost baseline. (Planning) Inputs: PM Plan (cost, resource, scope baseline), Project docs (basis of estimates, *Cost estimates, project schedule, risk register), Business docs (business case, benefits mgmt plan), *Agreements, EEFs (exchange rates), OPAs, Tools: Expert judgement, *Cost Aggregation, Data analysis (reserve analysis), Historical Information Review, *Funding limit Reconciliation, financing Outputs: *Cost Baseline, *Project Funding Requirements, Project docs updates

Estimate Costs

The process of developing an approximation of the monetary resources needed to complete project activities. (Planning) Inputs: Project management plan (cost, quality, scope baseline) project documents (lessons learned register, project schedule, resource requirements, risk register), EEFs, OPAs Tools: Expert judgement, *Analogous estimating, *Parametric estimating, *Bottom Up estimating, *3 point estimating, data analysis (alternatives, reserve, cost of quality), PMIS, decision making Outputs: *Cost estimates, basis of estimates, project documents updates

Control Costs

The process of monitoring the status of the project to update the project costs and managing changes to the cost baseline. (Monitoring and Controlling) Inputs: *Project Management Plan (cost baseline, cost management plan, performance meausrement baseline), project docs, *Project Funding Requirements, work performance data, OPAs Tools: Expert Judgement, Data analysis (*Earned Value Analysis, variance, trend, reserve), *TCPI, PMIS Outputs: *WPI (CV, SV, CPI, SPI, TCPI, VAC), *Cost forecasts (EAC, ETC), Change requests, PM plan updates, Project docs updates

Plan Cost Management

The process that establishes the policies, procedures, and documentation for planning, managing, expending, and controlling project costs. (Planning) Inputs: project charter, PM plan, EEFs, OPAs Tools: Expert judgement, data analysis (alternative analysis), meetings Outputs: *Cost management plan

Control Costs - Tools: Data Analysis - Earned Value Analysis - Cost Performance Index

The rate at which the project performance is meeting cost expectations during a given period of time. CPI = EV/AC

Control Costs - Tools: Data Analysis - Earned Value Analysis - Schedule Performance Index

The rate at which the project performance is meeting schedule expectations up to a point in time SPI = EV/PV If the Schedule Performance Index is below 1, then less work was completed than planned. SPI of greater than 1 indicates more work was completed than planned. And, SPI of 1 means that your performance exactly matches the plan.

Estimate Costs - Output: Cost Estimates

These estimates are simply how much we anticipate it will cost to complete each schedule activity on the project. We include the costs of all resources applicable to the activity - people, material, equipment, services, information technology, and facilities. We want to place price tags on each activity that capture all costs. Earlier, we talked about direct versus indirect costs. These Cost Estimates should state whether indirect costs are included at this low level or at a higher level. Also, we've discussed a number of different methods or techniques for developing these cost estimates.

Estimate Costs - Tools: Three Point Estimating

Three-Point Estimates are also known as PERT estimates - that stands for Program Evaluation and Review Technique. As a quick review, the PERT or Three-Point Estimates use three data points, instead of one. Those 3 data points are pessimistic, optimistic, and most likely. Those data points are used in two common formulas...triangular and beta. With the triangular distribution, take the "Optimistic" value plus the "Most Likely" value plus the "Pessimistic" value and divide by 3. This is a simple average of the three values. With the beta distribution, the most likely or realistic estimate is emphasized or "weighted." This approach leads to the following formula for a weighted average: Take the "Optimistic" value plus 4 times the "Most Likely" value plus the "Pessimistic" value. Now, divide that total by 6.

TCPI

To Complete Performance Index. The efficiency needed to complete project.

Control Costs - Tools: Data Analysis - Reserve Analysis

Used to monitor the contingency reserve and management reserve to see if they are adequate. Both reserve amounts may require more funding or less funding as the project moves forward. To-Complete Performance Index is a projection of the cost performance that must be achieved on the remaining work in order to hit the project budget or the current management goal. TCPIc = (BAC - EV)/ remaining funds Because TCPI projects the performance needed to achieve a budget target, an index below 1 is good...it means that you could under-perform and still hit your target. On the contrary, a TCPI greater than 1 is bad because it indicates that the team must perform better than the plan in order to meet your budget estimates.

Estimate Costs - Tools: Analogous Estimating

Webster defines the word "analogous" as meaning similar or comparable. So, when we talk about analogous estimating, we are comparing our current project to a similar, past project. We look at how much activities cost in the comparable project and make similar estimates for our current project. Analogous estimating is also known as top-down estimating. When we discussed this tool in the process of Estimate Activity Durations, we focused on time; here, the focus is on costs. For example, if we are building a 4-story condominium like one that our company constructed 2 years ago, we'll look to those results to guide our current cost estimates. We're asking the question of "how much did this cost the last time we did it?" The accuracy of these analogous estimates depends on how similar the two projects are. One benefit of analogous estimating is that it's not very expensive - it's a quick-and-dirty estimate. For that reason, analogous estimating might prove useful early in the project to obtain "ball-park" estimates that will be refined and made more accurate by other estimating methods later in the project life cycle. In summary, analogous estimating is less costly, less time-consuming, and generally less accurate.

Determine Budget - Tool: Aggregate Costs

add up the individual cost estimates to derive the overall project budget. we aggregate the costs from activity level up to the related work packages. We also "add up" the costs across all work packages that will be incurred each accounting period. There might be a need to sum them up further to component or control accounts or other high-level nodes of the work breakdown structure. Depending on your project and the needs of your stakeholders, you might manage or report costs at various levels of your WBS.

Life Cycle Costing

encourages making decisions based on the bigger picture of ownership costs

Estimate Costs - Tool: Data Analysis - Reserve Analysis

evaluates risk and determines the appropriate levels of reserve or contingency funds needed for each risk's impact. If the risk event occurs, you want to have adequate funding in place to handle it. These cost reserves are sometimes referred to as contingency allowances. The PMBOK Guide refers to 2 types of cost reserves: these contingency reserves and management reserves. Contingency reserves are established for identified risks or "known-unknowns". Contingency reserves are included in the cost baseline. Contrast those with management reserves which are not included in the cost baseline. These management reserves are included in project funding requirements for those "unknown-unknowns" - unidentified risks or unidentified project work. When this need is discovered, an approved change request is required to move management reserves into the cost baseline.

Estimate Costs - Tool: Data Analysis - Cost of Quality

examines all the costs incurred to achieve specified quality levels and all the costs related to poor quality Some organizations pay directly by investing to reach high standards of quality or conformance. Other organizations pay indirectly by accepting the consequences of lower levels of quality and non-conformance, such as more defects, rework, re-assembly, returns, or reduced customer satisfaction.

Control Costs - Tools: Data Analysis - Trend Analysis

looks at project results over time to see if performance is trending better or worse. Forecasting: EAC - Projecting the the total cost at completion based on project performance up to a point in time. EAC = BAC/CPIc ETC - Projecting how much more will be spent on the project, based on past performance. ETC = EAC - AC

Determine Budget - Tool: Funding Limit Reconciliation

matching planned project expenditures to the organization's ability to pay them

Cost Management

the activities managers undertake to use resources in a way that increases a product's value to customers and achieves an organization's goals Plan Cost Mgmt - Cost Management Plan Determine Budget - Cost Baseline, Project Funding Requirements Estimate Costs - Cost estimates Control Costs - Work performance info, Cost Forecasts

Estimate Costs - Tools: Bottom Up Estimating

very detailed and therefore considered a highly accurate prediction of cost. The downside of having this accurate detail is that this technique can be very time-consuming and costly to perform. The investment of bottom-up estimating is worthwhile when the organization's project funds are limited and it is necessary to know if the project is affordable before continuing.