Chapter 14 - Costs
A project was estimated to cost $200,000 with a timeline of 10 months. Due to a shipment delay, the schedule was slightly delayed. However, this was made up by shipping the first batch of materials for the project by air. The net result was that there was some additional cost in the project. At the end of the second month, the Project Manager reviews the project and finds that the project is 20% complete and Actual Costs are $50,000. The Estimate to Complete (ETC) for the project would now be: $160,000 Incorrect response: $210,000 Incorrect response: $200,000 Incorrect response: $250,000
$160,000 The budget at completion (BAC) = $200,000 (given). The Actual Cost (AC) = $50,000 (given). The Earned value (EV) = (2/10) * 200,000 since 20% of the project is complete; i.e., 2 months out of 10. Hence, Earned Value (EV) = $40,000. This is an instance of an atypical situation in the project. Late arrival of materials does not mean that all subsequent material will arrive late. Hence, the calculation used for EAC is EAC = AC + BAC - EV = 50,000 + 200,000 - 40,000 = $210,000. Since ETC = EAC - AC = 210,000 - 50,000 = $160,000. [PMBOK® Guide 6th edition, Page 267]
If a project has a 60% chance of a $100,000 profit and a 40% chance of a $100,000 loss, the expected monetary value of the project is: $40,000 loss $60,000 loss $20,000 profit $100,000 profit
$20,000 profit EMV = Probability * Impact. 0.6 * $100,000 = $60,000. 0.4 * ($100,000) = ($40,000). $60,000 - $40,000 = $20,000 profit. [PMBOK® Guide 6th edition, Page 435]
Agile Estimation
- assumes complexity and uncertainty -estimates are necessary for sizing and approvals, calculating ROI etc -Holistic estimate require inclusion of development, rollout, and sustainment cost. -estimates should always be given as ranges -estimation must be done continuously -team member must do estimates
Expected Monetary Value (EMV)
-calculates the average outcome when future evens are uncertain
Contingency Reserve
-reserves controlled by the project manager and they are to be used for known unknowns. This means the project manager and team can plan for an event they see as possible
Management Reserves
-reserves controlled by the project sponsor or the Sr mgmt. The cannot be accessed without their permission. Mgmt reserves are used to respond to unknown unknowns. They are events that cannot be planned for
Earned Value (EV)
2 letter looking for zero 3 letter looking for a one > is good
Cost Baseline
A time-phased budget that project managers use to measure and monitor cost performance
As the project manager of a large project, you have just completed the Estimate Costs process. As you begin the Determine Budget process, which of the following would you require as inputs to the process from the Estimate Costs process? Activity cost estimates, basis of estimates Incorrect response: Resource breakdown structure, agreements Incorrect response: Activity cost estimates, activity resource estimates Incorrect response: Activity cost estimates, staff management plan
Activity cost estimates, basis of estimates Activity cost estimates are quantitative assessments of the probable costs required to complete project work. The basis of estimates consists of additional details supporting the cost estimate. These include documentation of the basis for the estimate, documentation of all assumptions, documentation of any known constraints and indication of the range of possible estimates. These are produced during the Estimate Costs process and form inputs to the Develop Budget process. [PMBOK® Guide 6th edition, Page 240, 248]
Contingency Reserves are estimated costs to be used at the discretion of the project manager to deal with: Anticipated but not certain events Anticipated and certain events Unanticipated events Scope creep
Anticipated but not certain events Contingency Reserves are estimated costs to be used at the discretion of the project manager to deal with anticipated but not certain events. These events are also called "Known unknowns." [PMBOK® Guide 6th edition, Page 245]
Since the start, your software development project has failed to meet the cost objectives. So far, the project's CPI has varied between 0.5 and 0.75 throughout the project. It is becoming clearer that you will continue to witness such variations going forward. Which of the following methods of forecasting EAC and ETC is the most accurate? ETC based on new estimate Incorrect response: ETC based on BAC Incorrect response: ETC based on CPI Incorrect response: ETC based on CPI and SPI
CORRECT RESPONSEREASON ETC based on new estimate The bottom-up ETC gives the most accurate results. [PMBOK® Guide 6th edition, Page 264]
Which of the following EAC formulas cannot be applied in any project context or situation? EAC = AC + [(BAC-EV)/(CPIxSPI)] EAC = BAC/CPI EAC = AC + BAC - EV EAC = (BAC-EV)/(BAC-AC)
EAC = (BAC-EV)/(BAC-AC) The (BAC-EV)/(BAC-AC) gives you the TCPI of the project, not EAC. The rest of the EAC formulas are all correct. It must be noted that the correct EAC formula must be selected based on the project conditions to produce the right result. [PMBOK® Guide 6th edition, Page 267]
Bill is the project manager of a software project that was originally estimated to be completed in 12 months. Two months into the project, it is discovered that the original estimating assumptions were fundamentally flawed. The Estimate at Completion (EAC) in such a project will be: EAC = AC + Bottom-up ETC Incorrect response: EAC = BAC/CPI Incorrect response: EAC = AC + BAC - EV Incorrect response: EAC = AC + [BAC - EV]/CPI
EAC = AC + Bottom-up ETC The correct response is: EAC = AC + Bottom-up ETC, where AC stands for the Actual Cost and ETC stands for the Estimate to Complete. ETC based on a new estimate must be used because the original assumptions were fundamentally flawed. [PMBOK® Guide 6th edition, Page 267]
Large variations in the periodic expenditure of funds are undesirable for organizational operations. Therefore, the expenditure of funds is frequently reconciled with the disbursement of funds for the project. According to the PMBOK® Guide, this is known as: Funding Limit Reconciliation Incorrect response: Budget Reconciliation Incorrect response: Disbursement Reconciliation Incorrect response: Expenditure Reconciliation
Funding Limit Reconciliation This is known as funding limit reconciliation. This will necessitate the scheduling of work to be adjusted to smooth or regulate those expenditures. [PMBOK® Guide 6th edition, Page 253]
Jackie is the project manager of a large project. During the Determine Budget process, she identifies that contingency reserves need to be set up for unplanned but potentially necessary changes that could result from realized risks identified in the risk register. Which of the following is true about reserves? Management Reserves are not a part of project cost baseline, but will be included in the total budget for the project Incorrect response: Both the Management Reserves and the Contingency Reserves are not part of project cost baseline, but they are included in the total budget for the project Incorrect response: Both the Management Reserves and the Contingency Reserves are not part of project cost baseline, and they are also not included in the total budget for the project Incorrect response: Contingency Reserves are not a part of project cost baseline, but will be included in the total budget for the project
Management Reserves are not a part of project cost baseline, but will be included in the total budget for the project Management Reserves are not a part of the project cost baseline but will be included in the total budget for the project. [PMBOK® Guide 6th edition, Page 252]
Costs incurred in one area of a project can offset costs in another area of the same project. However, it is not enough to consider only the costs of project execution when making project decisions. What other costs external to the project must also be considered? Operating costs Incorrect response: Initiating costs Incorrect response: Planning costs Incorrect response: Costs of conformance
Operating costs Project Cost Management is primarily concerned with the cost of the resources needed to complete schedule activities. However, Project Cost Management should also consider the effect of project decisions on the costs of using, maintaining, and supporting the product, service, or result of the project. [PMBOK® Guide 6th edition, Page 233]
Cumulative Cost Curve
Planned Value - how much did we plan on spending based on our schedule - becomes BAC Actual Cost - how much has been spent cost becomes EAC Earned Value - work product - scope leg
A project manager needed to shorten a project schedule and decided to employ crashing, a schedule compression technique. Which of the following activities would NOT be an example of crashing? Reducing project scope Approving overtime Bringing in additional resources Paying to expedite delivery activities
Reducing project scope Schedule compression techniques such as crashing and fast-tracking shorten the project schedule without changing the project scope. Approving overtime, bringing in additional resources and paying to expedite delivery activities are valid examples of crashing. Reducing project scope is not a valid example of crashing. [PMBOK® Guide 6th edition, Page 215]
Rick, a project manager, is updating the status of his project. Based on the performance indices, he expects the project to finish a month earlier than the planned finish date. However, he expects the project to exceed the budgeted costs. What can you say about the schedule performance index (SPI) of the project? The SPI is greater than 1.0. Incorrect response: The SPI equals the CPI. Incorrect response: The SPI is equal to 1.0. Incorrect response: The SPI is less than 1.0.
The SPI is greater than 1.0. A project that is ahead of schedule will have a SPI value greater than 1.0, since it indicates that more work was completed than was planned. [PMBOK® Guide 6th edition, Page 263]
Project costs are estimated for all project activities and are aggregated to establish a cost baseline. Which of the following statements about the cost baseline is NOT true? The cost baseline includes all authorized budgets, including management reserves. The cost baseline is an output of the determine budget process. The cost baseline is in the form of an 'S' curve. The project cost performance is measured against the cost baseline.
The cost baseline includes all authorized budgets, including management reserves. The project cost baseline includes all authorized budgets excluding management reserves. Management reserves are not included to measure the cost performance of a project. [PMBOK® Guide 6th edition, Page 248]
Variance analysis refers to cost performance measurements used to determine the magnitude of variation in comparison to the original cost baseline. What is the trend on the percentage range of acceptable variances as the project progresses? The percentage range of acceptable variances will tend to decrease as the project progresses. Incorrect response: The percentage range of acceptable variances will tend to decrease first and then increase as the project progresses beyond 50 percent completion. Incorrect response: The percentage range of acceptable variances will tend to increase as the project progresses. Incorrect response: The percentage range of acceptable variances remain the same as the project progresses.
The percentage range of acceptable variances will tend to decrease as the project progresses. At the start of the project, larger percentage variances are acceptable. However, as more work is accomplished, the percentage range of acceptable variances will tend to decrease. [PMBOK® Guide 6th edition, Page 262]
You are a senior project manager working for RETAMART, a retail shopping network that sells various consumer products. As part of the expansion plan approved by the board of directors, you are a project manager for a new plant. Due to transportation problems, the project has experienced delays; the Schedule Performance Index (SPI) is at 0.6 and the Cost Performance Index (CPI) is at 0.7. However, you expect some improvements over the next few weeks, which may increase the SPI to 1.1 and the CPI to 0.9. Which of the following statements is true if your anticipated changes materialize? The project is overspent but ahead of schedule Incorrect response: The project is overspent and behind schedule Incorrect response: The project is on schedule and under budget Incorrect response: The project is under budget but behind schedule
The project is overspent but ahead of schedule The cost performance index below 1 indicates that the project is over budget, and the schedule performance index above 1 indicates that the project is ahead of schedule. If all of your anticipated changes happen to be true, the project will be overspent but ahead of schedule because the schedule performance index will be greater than 1. [PMBOK® Guide 6th edition, Page 263]
Forecasting - ETC
This estimate tells us how much more money will we need to complete the project. 1) ETC - based on a new estimate - current was totally wrong 2) ETC - based on atypical variance what ever cause the problems will not continue -ETC = BAC - EV= remaining work 3) ETC based on typical variance - most common ETC = (BAC-EV)/CPI 4) ETC based on both CPI & SPI - decimal less than one --ETC = (BAC-EV)/(CPI*SPI)=critical ratio project will need this much more money how well or poorly
Time Variance or (TV)
a measure of schedule performance in time units rather than cost units and is defined by the formula: TV = ES - AT
Direct Costs
cost that are directly attributed to project work
fixed cost
cost that do not change with changes in volume produced
variable costs
costs that change as the units produced changes
Time Variance at Completion (TVAC)
estimated amount of time either ahead or behind schedule the project is. It uses the following formula TVAC = SAC - TEAC
Value Analysis/Value Engineering
finding less costly ways to do the same work
Forecasting - EAC
how much in total will the project take 1) Using a new estimate -EAC = AC+ETC 2) Use remaining budget - EAC = AC + (BAC -EV) 3)Using CPI - EAC = AC + ((BAC- EV)/CPI) 4) Using both CPI & SPI -EAC = AC + ((BAC - EV)/(CPI*SPI))
Indirect cost
items that benefit more than one project and are not attributed to a specific activity
Schedule at Completion
original planned completion duration of the project
Cost Management Plan
primarily concerned with cost of resources and also: -life cycle costing -opportunity cost -sunk cost and is part of the overall project management plan -control thresholds -earned value rules -reporting formats
Earned schedule Theory
provides formula for forecasting the project completion date, using the earned schedule, actual time and estimated duration
Funding Limit Reconciliation
reconciling the budget with any funding limits set for the project. In the case of a variance between the funding limits and the planned expenditures you will sometimes need to reschedule work to level out the rate of expenditures.
Earned schedule (ES)
the duration from the beginning of the project to the date the planned value is supposed to equal to the BAC
Time Estimate at Completion (TEAC)
the forecast of time at completion and is similar to EAC. It uses the same basic formulas as EAC but replaces cost with schedule
Actual Time (AT)
this is the duration from the beginning of the project to the status date
Forecasting - TCPI
to complete index the calculated projection of cost performance that must be achieved on the remaining work to meet a specified management goal --what does my productivity need to be if I want to hit my budget 1) Using BAC -TCPI = (BAC - EV) /(BAC - AC) remaining money 2) Using EAC - TCPI = (BAC - EV) /(EAC - AC) VAC = BAC - EAC