PMP 5th - Chapter 7 - Project Cost Management

Cost Management Plan

- Defines how project costs will be managed and controlled. - It includes the method used and the level of accuracy required to estimate activity cost.

Expert Judgment

- Guided by historical information, provides valuable insight about the environment and information from prior similar projects. - combine methods and how to reconcile differences between them.

Analytical Techniques

- Involve choosing strategic options to fund the project such as: self-funding, funding with equity, or funding with debt. - Detail ways to finance project resources such as making, purchasing, renting, or leasing; other financial decisions and may affect project schedule and/or risks.

Meetings

- Project teams may hold planning meetings to develop the cost management plan. - People involve: project manager, the project sponsor, selected project team members, selected stakeholders, anyone with responsibility for project costs, and others as needed.

Human Resource Management Plan

- Provide project staffing attributes, personnel rates, and related rewards/recognition, which are necessary components for developing the project cost estimates.

Project Charter

- Provide the summary budget from which the detailed project costs are developed. - Define the project approval requirements that will influence the management of the project costs.

Activity Cost Estimates

- Quantitative assessments of the probable costs required to complete project work. Cost estimates can be presented in summary form or in detail. Costs are estimated for all resources that are applied to the activity cost estimate.

Group Decision-Making Techniques

- Team-based approaches, such as brainstorming, the Delphi or nominal group techniques, are useful for engaging team members to improve estimate accuracy and commitment to the emerging estimates. - Involving a structured group of people who are close to the technical execution of work in the estimation process, additional information is gained and more accurate estimates are obtained. - People involve in the estimation process, their commitment towards meeting the resulting estimates increases.

Process: Determine Budget

- The process of aggregating the estimated costs of individual activities or work packages to establish an authorized cost baseline. - The key benefit of this process is that it determines the cost baseline against which project performance can be monitored and controlled.

Process: Estimate Costs

- The process of developing an approximation of the monetary resources needed to complete project activities. - The key benefit of this process is that it determines the amount of cost required to complete project work.

Process: Control Costs

- The process of monitoring the status of the project to update the project budget and managing changes to the cost baseline. - The key benefit of this process is that it provides the means to recognize variance from the plan in order to take corrective action and minimize risk.

Process: Plan Cost Management

- The process that establishes the policies, procedures, and documentation for planning, managing, expending, and controlling project costs. - The key benefit of this process is that it provides guidance and direction on how the project costs will be managed throughout the project.

Tools &Techniques (5) of Determine Budget

1 Cost aggregation 2 Reserve analysis 3 Expert judgment 4 Historical relationships 5 Funding limit reconciliation

Outputs (3) of Determine Budget

1 Cost baseline 2 Project funding requirements 3 Project documents updates

Output (1) of Plan Cost Management

1 Cost management plan

Input (7) of Estimate Costs

1 Cost management plan 2 Human resource management plan 3 Scope baseline 4 Project schedule 5 Risk register 6 Enterprise environmental factors 7 Organizational process assets

Inputs (9) of Determine Budget

1 Cost management plan 2 Scope baseline 3 Activity cost estimates 4 Basis of estimates 5 Project schedule 6 Resource calendars 7 Risk register 8 Agreements 9 Organizational process assets

Tools & Techniques (10) of Estimate Costs

1 Expert judgment 2 Analogous estimating 3 Parametric estimating 4 Bottom-up estimating 5 Three-point estimating 6 Reserve analysis 7 Cost of quality 8 Project management software 9 Vendor bid analysis 10 Group decision-making techniques

Tools & Techniques (3) of Plan Cost Management

1 Expert judgment 2 Analytical techniques 3 Meetings

Input (4) of Plan Cost Management

1 Project management plan 2 Project charter 3 Enterprise environmental factors 4 Organizational process assets

Outputs (3) of Estimate Costs

1. Activity Cost Estimates 2. Basis of Estimates 3. Project Document Updates

Project Cost Management Processes (4)

1. Plan Cost Management 2. Estimate Costs 3. Determine Budget 4. Control Costs

Activity Cost Estimate

A quantitative assessment of the likely costs for resources required to complete the activity

Estimate Activity Duration Impact on Estimate Costs

Activity duration estimates will affect cost estimates on any project where the project budget includes an allowance for the cost of financing (including interest charges) and where resources are applied per unit of time for the duration of the activity. Activity duration estimates can also affect cost estimates that have time-sensitive costs included in them

Additional details

Additional details about cost management activities: ○ Description of strategic funding choices, ○ Procedure to account for fluctuations in currency exchange rates, and ○ Procedure for project cost recording.

Contingency Reserves

Allowances for unplanned but potentially required changes that can result from realized risks identifi ed in the risk register

Agreements

Applicable contract information and costs relating to products, services, or results that have been purchased are included when determining the budget.

Cost of Quality (COQ)

Assumptions about costs of quality may be used to prepare the activity cost estimate

Reserve Analysis

Budget reserve analysis can establish both the contingency reserves and the management reserves for the project.

Management Reserves

Budgets reserved for unplanned changes to project scope and cost

Scope Baseline

Components of the scope baseline: • Scope Statement • Work Breakdown Structure • WBS Dictionary • Requirements with contractual and legal implications

Project Budgets

Constitute the funds authorized to execute the project.

Project management plan

Contains information used to develop the cost management plan: • Scope baseline. • Schedule baseline. • Other information.

Cost Aggregation

Cost estimates are aggregated by work packages in accordance with the WBS. The work package cost estimates are then aggregated for the higher component levels of the WBS (such as control accounts) and ultimately for the entire project.

Activity Cost Estimates

Cost estimates for each activity within a work package are aggregated to obtain a cost estimate for each work package.

Vendor Bid Analysis

Cost estimating methods may include analysis of what the project should cost, based on the responsive bids from qualified vendors. Where projects are awarded to a vendor under competitive processes, additional cost estimating work can be required of the project team to examine the price of individual deliverables and to derive a cost that supports the final total project cost.

Market Conditions Impact on Estimate Costs

Describe what products, services, and results are available in the market, from whom, and under what terms and conditions. Regional and/or global supply and demand conditions greatly influence resource costs

Cost Management Plan

Describes how the project costs will be managed and controlled.

Process Descriptions

Descriptions of each of the three cost management processes are documented.

Units of Measure

Each unit used in measurements (such as staff hours, staff days, weeks, or lump sum) is defined for each of the resources

Rules of Performance Measurement

Earned value management (EVM) rules of performance measurement are set. Examples the cost management plan could: • Define the WBS and points at which measurement of control accounts will be performed, • Establish the earned value measurement techniques (e.g., weighted milestones, fixed formula, percent complete, etc.) to be employed • Specify the earned value management computation equations for determining the project estimate at completion (EAC) forecasts and other tracking methodologies

Estimate Activity Resources Impact on Estimate Costs

Estimate Activity Resources involves determining the availability and quantities required of staff and material needed to perform schedule activities. It is closely coordinated with cost estimating

Organizational Process Assets

Factors can be influence: • Cost estimating policies • Cost estimating templates • Historical information • Lessons learned

Organizational Process Assets

Factors can be influence: • Financial controls procedures (e.g., time reporting, required expenditure and disbursement reviews, accounting codes, and standard contract provisions); • Historical information and lessons learned knowledge bases; • Financial databases; • Existing formal and informal cost estimating and budgeting-related policies, procedures, and guidelines.

Enterprise Environmental Factors

Factors can be influence: • Market Conditions. • Published commercial information.

Enterprise Environmental Factors

Factors can be influence: • Organizational culture and structure can all influence cost management; • Market conditions describe what products, services, and results are available in the regional and global market; • Currency exchange rates for project costs sourced from more than one country; • Published commercial information such as resource cost rate information is often available from commercial databases that track skills and human resource costs, and provide standard costs for material and equipment. Published seller price lists are another source of information; • Project management information system, which provides alternative possibilities for managing cost.

Scope Statement

Formal limitations by period for the expenditure of project funds can be mandated by the organization, by contract or by other entities such as government agencies. These funding constraints are reflected in the project scope statement.

Cost Baseline

Includes all authorized budgets, but excludes management reserves.

Project Cost Management

Includes the processes involved in estimating, budgeting, and controlling costs so that the project can be completed within the approved budget

Expert Judgement Sources

Judgment provided based upon expertise in an application area, Knowledge Area, discipline, industry, etc., as appropriate for the activity being performed should be used in determining the budget. Expert judgment is available from many sources, including, but not limited to: • Other units within the performing organization, • Consultants, • Stakeholders, including customers, • Professional and technical associations, and • Industry groups

Other information.

Other cost-related scheduling, risk, and communications decisions from the project management plan.

Scope Statement

Provides the product description, acceptance criteria, key deliverables, project boundaries, assumptions, and constraints about the project

Work Breakdown Structure

Provides the relationships among all the components of the project and the project deliverables

Resource Calendars

Resource calendars provide information on which resources are assigned to the project and when they are assigned. This information can be used to indicate resource costs over the duration of the project.

Published Commercial Information

Resource cost rate information is often available from commercial databases that track skills and human resource costs, and provide standard costs for material and equipment. Published seller price lists are another source of information.

Cost Management Plan

Sets out the format and establishes the criteria for planning, structuring, estimating, budgeting, and controlling project costs

Basis of Estimates

Supporting detail for cost estimates should be specified. Any basic assumptions dealing with the inclusion or exclusion of indirect costs in the project budget are specified in the basis of estimates.

WBS Dictionary

The WBS dictionary and related detailed statements of work provide an identification of the deliverables and a description of the work in each WBS component required to produce each deliverable.

Characteristics of Project Cost Management

The ability to influence cost is greatest at the early stages of the project, making early scope definition critical • Should consider the stakeholder requirements for capturing costs. Different stakeholders will measure project costs in different ways and at different times. • Is primarily concerned with the cost of the resources needed to complete project activities. • Should also consider the effect of project decisions on the subsequent recurring cost of using, maintaining, and supporting the product, service, or result of the project. For example, limiting the number of design reviews can reduce the cost of the project but could do so by increasing the customer's operating costs. • The cost management planning effort occurs early in project planning and sets the framework for each of the cost management processes so that performance of the processes will be efficient and coordinated.

Level of Accuracy

The acceptable range (e.g., ±10%) used in determining realistic activity cost estimates is specified, and may include an amount for contingencies;

Cost baseline

The cost baseline is 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. It is developed as a summation of the approved budgets for the different schedule activities.

Level of precision

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.

Reporting Formats

The formats and frequency for the various cost reports are defined.

Work breakdown structure

The project WBS provides the relationships among all the project deliverables and their various components.

Project Schedule

The project schedule, as part of the project management plan, includes planned start and finish dates for the project's activities, milestones, work packages, planning packages, and control accounts. This information can be used to aggregate costs to the calendar periods in which the costs are planned to be incurred.

Risk register

The risk register should be reviewed to consider how to aggregate the risk response costs. Updates to the risk register are included with project document updates.

Schedule baseline.

The schedule baseline defines when the project costs will be incurred.

Scope baseline

The scope baseline includes the project scope statement and WBS detail for cost estimation and management.

Basis of Estimates

The supporting documentation should provide a clear and complete understanding of how the cost estimate was derived. Supporting detail for activity cost estimates may include: • Documentation of the basis of the estimate (i.e., how it was developed), • Documentation of all assumptions made, • Documentation of any known constraints, • Indication of the range of possible estimates (e.g., $10,000 (±10%) to indicate that the item is expected to cost between a range of values), and • Indication of the confidence level of the final estimate

Project Schedule

The type and quantity of resources and the amount of time which those resources are applied to complete the work of the project are major factors in determining the project cost. Schedule activity resources and their respective durations are used as key inputs to this process

Organizational Procedures Links

The work breakdown structure (WBS) provides the framework for the cost management plan, allowing for consistency with the estimates, budgets, and control of costs. The WBS component used for the project cost accounting is called the control account (CA). Each control account is assigned a unique code or account number(s) that links directly to the performing organization's accounting system.

WBS Dictionary

This and related detailed statements of work provide an identification of the deliverables and a description of the work in each WBS component required to produce each deliverable

Direct Costs

Those costs that can be directly traced to a specific project

Indirect Costs

Those costs that cannot be directly traced to a specific project and therefore will be accumulated and allocated equitably over multiple projects by some approved and documented accounting procedure

Control Thresholds

Variance thresholds for monitoring cost performance may be specified to indicate an agreed-upon amount of variation to be allowed before some action needs to be taken. Thresholds are typically expressed as percentage deviations from the baseline plan.

Accuracy of Cost Estimates

Will increase as the project progresses through the project life cycle. Hence cost estimating is an iterative process from phase to phase

Analogous Estimating

• Analogous cost estimating uses the values of parameters, such as scope, cost, budget, and duration or measures of scale such as size, weight, and complexity, from a previous, similar project as the basis for estimating the same parameter or measure for a current project. • When estimating costs, this technique relies on the actual cost of previous, similar projects as the basis for estimating the cost of the current project. • It is a gross value estimating approach, sometimes adjusted for known differences in project complexity. • Is frequently used to estimate a parameter when there is a limited amount of detailed information about the project, for example, in the early phases of a project. • Uses historical information and expert judgment. • Is generally less costly and time consuming than other techniques, but it is also generally less accurate. • Can be applied to a total project or to segments of a project, used in conjunction with other estimating methods. • Is most reliable when the previous projects are similar in fact and not just in appearance, and the project team members preparing the estimates have the needed expertise

Historical relationships

• Any historical relationships that result in parametric estimates or analogous estimates involve the use of project characteristics (parameters) to develop mathematical models to predict total project costs. • Such models can be simple (e.g., residential home construction is based on a certain cost per square foot of space) or complex (e.g., one model of software development costing uses multiple separate adjustment factors, each of which has numerous points within it).

Characteristics of Cost Estimates

• Are generally expressed in units of some currency (i.e., dollars, euro, yen, etc.), although in some instances other units of measure, such as staff hours or staff days, are used to facilitate comparisons by eliminating the effects of currency fluctuations • Sources of input information are derived from the outputs of project processes in other Knowledge Areas • Estimated for all resources that will be charged to the project. This includes, but is not limited to, labor, materials, equipment, services, and facilities, as well as special categories such as an inflation allowance or contingency costs • Can be presented in summary form or in detail. • Indirect costs, if they are included in the project estimate, can be included at the activity level or at higher levels

Estimate Costs Constraints

• Budget • Required delivery dates • Available skilled resources • Organizational policies

Expert Judgement

• Cost estimates are influenced by numerous variables such as labor rates, material costs, inflation, risk factors, and other variables. • Provides valuable insight about the environment and information from prior similar projects. • Can also be used to determine whether to combine methods of estimating and how to reconcile differences between them

Reserve Analysis

• Cost estimates may include contingency reserves (sometimes called contingency allowances) to account for cost uncertainty. • Contingency reserves are the budget within the cost baseline that is allocated for identified risks, which are accepted and for which contingent or mitigating responses are developed. • The contingency reserve may be a percentage of the estimated cost, a fixed number, or may be developed by using quantitative analysis methods. • As more precise information about the project becomes available, the contingency reserve may be used, reduced or eliminated. • Contingency should be clearly identified in cost documentation. • Contingency reserves are part of the cost baseline and funding requirements.

Organizational Process Assets

• Existing formal and informal cost budgeting-related policies, procedures, and guidelines, • Cost budgeting tools, and • Reporting methods

Examples of requirements with contractual and legal implications

• Health • Safety • Security • Performance • Environmental • Insurance • Intellectual Property Rights • Licenses • Permits

Cost and accuracy of parametric models are more reliable when

• Historical information used to develop the model is accurate, • Parameters used in the model are readily quantifi able, and • Models are scalable, such that they work for a large project, a small project, and phases of a project

Bottom-up Estimating

• Is a method of estimating a component of work • The cost of individual work packages or activities is estimated with the greatest level of specified detail. • The detailed cost is then summarized or "rolled up" to higher levels for subsequent reporting and tracking purposes. • The cost and accuracy of bottom-up cost estimating is typically influenced by the size and complexity of the individual activity or work package.

Three estimates to define an approximate range for an activity's cost:

• Most likely (cM). The cost of the activity, based on realistic effort assessment for the required work and any predicted expenses. • Optimistic (cO). The activity cost based on analysis of the best-case scenario for the activity. • Pessimistic (cP). The activity cost based on analysis of the worst-case scenario for the activity.

Project Management Software

• Project management cost estimating software applications, computerized spreadsheets, simulation, and statistical tools are becoming more widely accepted to assist with cost estimating. • Such tools can simplify the use of some cost estimating techniques and thereby facilitate rapid consideration of cost estimate alternatives.

Project Document Updates

• Risk register, • Cost estimates, • Project schedule

Scope Baseline

• Scope Statement. • Work Breakdown Structure. • WBS Dictionary

Risk Register

• Should be reviewed to consider risk mitigation costs • Risks, which can be either threats or opportunities, typically have an impact on both activity and overall project costs. • As a general rule, when the project experiences a negative risk event, the near-term cost of the project will usually increase, and there will sometimes be a delay in the project schedule

Three-Point Estimates

• The accuracy of single-point activity cost estimates can be improved by considering estimation uncertainty and risk. • Cost estimates based on this equation (or even on a simple average of the three points) may provide more accuracy, and the three points clarify the range of uncertainty of the cost estimates.

Funding Limit Reconciliation

• The expenditure of funds should be reconciled with any funding limits on the commitment of funds for the project. • A variance between the funding limits and the planned expenditures will sometimes necessitate the rescheduling of work to level out the rate of expenditures. • This can be accomplished by placing imposed date constraints for work into the project schedule

Characteristics of Management Reserves

• The project manager may be required to obtain approval before obligating or spending management reserve. • Are not a part of the project cost baseline, but may be included in the total budget for the project. • They are not included as a part of the earned value measurement calculations.

Project Document Updates

• The risk register

Project Funding Requirements

• Total funding requirements and periodic funding requirements (e.g., quarterly, annually) are derived from the cost baseline. • The cost baseline will include projected expenditures plus anticipated liabilities. • Funding often occurs in incremental amounts that are not continuous, which appear as steps • The total funds required are those included in the cost baseline, plus management reserves, if any.

Depending on the assumed distribution of values within the range of the three estimates the expected cost, cE, can be calculated using a formula. Two commonly used formulas are triangular and beta distributions. The formulas are:

• Triangular Distribution. cE = (cO + cM + cP) / 3 • Beta Distribution (from a traditional PERT analysis). cE = (cO + 4cM + cP) / 6

The cost management plan can establish

• Units of measure • Level of precision • Level of accuracy • Organizational procedures links • Control thresholds • Rules of performance management • Reporting formats • Process descriptions • Additional details

Characteristics of Control Costs

• Updating the budget involves recording actual costs spent to date. • Any increase to the authorized budget can only be approved through the Perform Integrated Change Control process • Monitoring the expenditure of funds without regard to the value of work being accomplished for such expenditures has little value to the project other than to allow the project team to stay within the authorized funding. • Thus much of the effort of cost control involves analyzing the relationship between the consumption of project funds to the physical work being accomplished for such expenditures.

Parametric Estimating

• Use a statistical relationship between historical data and other variables (e.g., square footage in construction) to calculate an estimate for activity parameters, such as cost, budget, and duration. • This technique can produce higher levels of accuracy depending upon the sophistication and underlying data built into the model. • Can be applied to a total project or to segments of a project, in conjunction with other estimating methods. • Unit cost rates in calculations, but doesn't determine those rates.