Project Management Chapter 7

Processes for Cost management

1. planning cost management 2. estimating the cost -includes project document updates 3. determining budget 4. controlling costs

rough order of magnitude (ROM) estimate

A cost estimate prepared very early in the life of a project to provide a rough idea of what a project will cost

definitive estimate

A cost estimate that provides an accurate estimate of project costs

budgetary estimate

A cost estimate used to allocate money into an organization's budget

bottom-up estimates

A cost-estimating technique based on estimating individual work items and summing them to get a project total

parametric estimating

A cost-estimating technique that uses project characteristics (parameters) in a mathematical model to estimate project costs

top-down estimates

A cost-estimating technique that uses the actual cost of a previous, similar project as the basis for estimating the cost of the current project; also called analogous estimates

analogous estimates

A cost-estimating technique that uses the actual cost of a previous, similar project as the basis for estimating the cost of the current project; also called top-down estimates

cash flow analysis

A method for determining the estimated annual costs and benefits for a project

earned value management (EVM)

A project performance measurement technique that integrates scope, time, and cost data

learning curve theory

A theory that when many items are produced repetitively, the unit cost of those items normally decreases in a regular pattern as more units are produced

cost baseline

A time-phased budget that project managers use to measure and monitor cost performance

earned value (EV)

An estimate of the value of the physical work actually completed

estimate at completion (EAC)

An estimate of what it will cost to complete the project based on performance to date

intangible costs or benefits

Costs or benefits that are difficult to measure in monetary terms

tangible costs or benefits

Costs or benefits that can be easily measured in dollars

indirect costs

Costs that are not directly related to the products or services of the project, but are indirectly related to performing the project

direct costs

Costs that can be directly related to creating the products and services of the project

Which of the following is true of analogous estimates? A. They use project characteristics in a mathematical model to estimate project costs. B. They are the only technique which do not require expert judgement. C. Their main disadvantage is that they cost more than other techniques. D. They are most reliable when previous projects are similar in fact with current projects.

D. They are most reliable when previous projects are similar in fact with current projects.

unknown unknowns

Dollar amounts included in a cost estimate to allow for future situations that are unpredictable (sometimes called management reserves)

management reserves

Dollar amounts included in a cost estimate to allow for future situations that are unpredictable (sometimes called unknown unknowns)

known unknowns

Dollar amounts included in a cost estimate to allow for future situations that may be partially planned for (sometimes called contingency reserves) and that are included in the project cost baseline

contingency reserves

Dollar amounts included in a cost estimate to allow for future situations that may be partially planned for (sometimes called known unknowns) and that are included in the project cost baseline

reserves

Dollar amounts included in a cost estimate to mitigate cost risk by allowing for future situations that are difficult to predict

_____ is a project performance measurement technique that integrates scope, time, and cost data.

Earned Value Management

A budgetary estimate is the most accurate of the three types of estimates. (T/F)

False

sunk cost

Money that has been spent in the past

_____ uses project characteristics in a mathematical model to estimate project costs.

Parametric estimating

____________ are revenues minus expenditures

Profits

profits

Revenues minus expenses

overrun

The additional percentage or dollar amount by which actual costs exceed estimates

cost variance (CV)

The earned value minus the actual cost

schedule variance (SV)

The earned value minus the planned value

baseline

The original project plan plus approved changes

budget at completion (BAC)

The original total budget for a project

planned value (PV)

The portion of the approved total cost estimate planned to be spent on an activity during a given period

project cost management

The processes required to ensure that the project is completed within the approved budget

profit margin

The ratio between revenues and profits (losses are negative percentages)

rate of performance (RP)

The ratio of actual work completed to the percentage of work planned to have been completed at any given time during the life of the project or activity

cost performance index (CPI)

The ratio of earned value to actual cost; can be used to estimate the projected cost to complete the project

schedule performance index (SPI)

The ratio of earned value to planned value; can be used to estimate the projected time to complete a project

life cycle costing

The total cost of ownership, or development plus support costs, for a project

actual cost (AC)

The total of direct and indirect costs incurred in accomplishing work on an activity during a given period

If an important supplier goes out of business, management reserves can be set aside to cover the resulting costs. (T/F)

True

In a bottom-up estimate, the size of the individual work items is one of the factors that drives the accuracy of the estimates. (T/F)

True

If a project is halfway completed, it's schedule performance index is 110 percent, and its cost performance index is 95 percent, how is it progressing?"

ahead of schedule and over budget

The main goal of the _____ process is to produce a cost baseline for measuring project performance and project funding requirements

cost budgeting