7 - Project Cost Management
Profit
Money made after expenses have been subtracted from revenue
Sunk Cost
Money that has already been spent on a project; should not be considered when selecting or evaluating a project
Cost Variance (CV)
The deficit or surplus of the budget at any specific point in time, calculated by subtracting the actual cost (AC) from the earned value (EV): a value of 0 indicates the project is on budget, a value greater than 0 indicates the project is under budget, and a value less than 0 indicates the project is over budget
Estimate at Completion (EAC)
The expected cost of performing all of the work in the project calculated by adding the actual cost (AC) to the estimate to complete (ETC)
Estimate to Complete (ETC)
The expected monetary resources required to complete the remaining work of the project; calculated by subtracting actual cost (AC) from the estimate at completion (EAC)
Project Funding Requirements
The forecast of project costs based on the cost baseline for the total project plus any anticipated liabilities; the forecast can be applied to specific time periods rather than to the project as a whole
Code of Accounts
The numbering system used to distinguish constituents of the WBS
Funding Limit Reconciliation
The process of comparing planned project expenses to any limitations or constraints in project funding
Control Costs
The process of observing project status in order to revise project costs and administer cost baseline revisions
Determine Budget
The process of totaling the evaluations of individual activities to arrive at an authorized cost baseline
Project Cost Management
The processes required to estimate, budget, disburse, administer, and regulate costs in order to complete the project within the approved budget
Cost Management Plan
The document, part of the project or program management plan, used to describe the framing, forming, observation, and control of project costs
Definitive Estimate
A cost estimate that provides an accurate estimate of the project cost; the final cost estimate used before implementation; typically the range of -10% to +10%
Indirect Cost
Cost that is not directly accrued on the project (Ex: electricity, taxes, rent)
Budget
The total estimate for the project, or any activity, that has been approved
Cost Aggregation
Adding together the work package cost estimates for high-level WBS components, including control accounts, for the purpose of establishing the value of the total project or the control account work
Life Cycle Costing
Consideration of not just project cost, but total ownership (operations and support) cost of the item created by the project
Direct Cost
Cost that is directly applicable to the project; examples include the cost of a test computer for software being created by the project, the cost of IC chips, or the costs of project labor
Tangible Cost/Benefit
Easily measurable cost or benefit of a project; measured in dollars
S-curve
Graphic representation of costs, work, and other quantities over time so that the planned value, earned value, and actual cost of the work can be seen
Profit Margin
Ratio between revenues and profit on a project, product, or initiative
Basis of Estimates
Supporting details associated with an estimate, typically time or cost, that may include assumptions, constraints, level of detail, ranges, and confidence levels
Variance At Completion (VAC)
The projected amount the project will be over or under budget based on the difference between the budget at completion (BAC) and the estimate at completion (EAC)
Cost Performance Index (CPI)
The ratio indicating the cost efficiency of resources, calculated by dividing earned value (EV) by actual cost (AC): a CPI of 1.0 indicates the project is proceeding as planned; a CPI greater than 1.0 more indicates the project is proceeding better than planned; and a CPI less than 1.0 indicates the project is not proceeding as well as planned
To Complete Performance Index (TCPI)
The ratio that represents the cost performance required to complete the work of the project given the remaining resources; calculated by dividing the remaining project work by the remaining budget (BAC - EV/BAC - AC)
Earned Value Technique (EVT)
The technique associated with measuring the amount of completion of a work breakdown structure component, control account or project
Actual Cost (AC)
The total cost accrued for an activity over a designated time period; also known as the actual cost of work performed (ACWP)
Budget at Completion (BAC)
The total project budget derived from incorporating all items from the project's individual budgets; also called the sum of all planned value (PV)
Output of Estimate Cost
1. Activity Cost Estimates: Cost estimate for all activities in your activity list 2. Basis of Cost Estimate: Like WBS has WBS Dictionary, this is where you list out all of the rates and reasoning you have used to come to the numbers you are presenting in your estimates. 3. Updates to Project Documents 4. Request changes
Cost Management Process in 3
1. Estimate costs: This means figuring out exactly how much you expect each work activity you are doing to cost. So each activity is estimated for its time and materials cost, and any other known factors that can be figured in. 2. Determine budget : All of the estimates are added up and baselined. 3. Control costs: Tracking the actual work according to the budget to see if any adjustments need to be made.
Inputs of Determine Budget
1. Organizational Process Assets 2. Activity Cost Estimates 3. Basis of Estimates 4. Contracts 5. Resource Calendars 6. Project Schedule 7. Scope Baseline
Input of Estimate Cost
1. Project schedule 2. Human resource plan 3. Organizational process assets 4. Enterprise environmental factors 5. Risk register updates 6. Scope baseline
How to Build A Budget #5: Build a baseline
A Cost Performance Baseline is a snapshot of the planned budget. Compare your actual performance against the baseline.
CC Tools/Techniques: To-Complete Performance Index
A calculation that you can use to help you figure out how well your project needs to perform in the future in order to stay on budget
Rough Order of Magnitude (ROM) Estimate
A cost estimate, performed early in the project, of the completion cost of the project; the tolerance range is -25% to +75%.
Schedule Variance (SV)
A determination of schedule performance calculated by subtracting the planned value (PV) from the earned value (EV): if the result is zero, the project is performing as expected; if the result is positive, the project is ahead of schedule; if the result is negative, the project is behind schedule
Cost-benefit Analysis
A financial analysis method that compares the potential revenue derived from an opportunity to the cost of that opportunity
Schedule Performance Index (SPI)
A measure of project schedule efficiency calculated by dividing the earned value (EV) by the planned value (PV): a value of 1.0 indicates the work is being performed as expected, a value greater than 1.0 means the work is being performed ahead of schedule, and a value of less than 1.0 means the work is being performed behind schedule
Fixed Formula Method
A progress reporting approach, typically applied when an activity is two reporting periods or less in duration, that assigns a percentage to an activity at its start and the remaining percentage at its completion so that the percentage at completion equals 100%; for example, if an activity is assigned 30% at its start, 70% will be added at its completion resulting in a completion percentage of 100%
Internal Rate of Return (IRR)
A project comparison value; represents the discounted rate that zeroes out the net present value (NPV)
Control Account
A specific point in the work breakdown structure (WBS) where the project scope, budget, actual cost, and schedule are combined and then compared to earned value in order to establish performance metrics
Expected Monetary Value (EMV)
A statistical technique, typically applied in decision tree analysis, used to determine the average outcome when contingent scenarios for future project risks must be considered
Chart of Accounts
A structure used to monitor project cost that usually aligns with a company's accounting system and WBS of the project or program
Earned Value Management
A technique, effected by considering actual cost (AC), time (PV) , and what has been accomplished (EV), that is used to determine project progress and performance
Learning Curve Theory
A theory which states that the more of something that is produced, the lower the unit cost of it becomes due to an improvement in efficiency
Net Present Value (NPV)
A value used in capital budgeting, in which the present value of cash inflow is subtracted from the present value of cash outflows; compares the value of a dollar today versus the value of that same dollar in the future, after taking inflation and return into account
12. Which of the following is an example of a parametric estimate? A. Dollars per module B. Learning bend C. Bottom-up D. CPM
Answer A Parametric estimates use a mathematical model to predict project cost or time.
Weighted Milestone Method
An approach to the earned value method in which an activity with a duration exceeding two reporting periods is broken down into smaller activities with durations limited to two reporting periods or less
Budgetary Estimate
An estimate used to put money into a company's (or project's) budget
22. Your project has a medium amount of risk and is not very well defined. The sponsor hands you a project charter and asks you to confirm that the project can be completed within the project cost budget. What is the BEST method to handle this? A. Build the estimate in the form of a range of possible results B. Ask the team members to help estimate the cost based on the project charter C. Based on the information you have, calculate a parametric estimate D. Provide an analogous estimate based on past history.
Answer A Accuracy is always important, but since the project charter has just been received, the project has not yet been planned. Therefore, although some of the choices are not blatantly wrong, it is best to estimate in a range.
15. During which project management process group are budget forecasts created? A. Monitoring and controlling B. Planning C. Initiating D. Executing
Answer A Budget forecasts are an output of Control Costs, which is part of monitoring and controlling.
36. The difference between the cost baseline and the cost budget can be BEST described as: A. The management reserve B. The contingency reserve C. The project cost estimate D. The cost account
Answer A Cost accounts are included in the project cost estimate, and the contingency reserve is added to that to come up with the cost baseline. Thereafter the management reserve is added to come up with the cost budget. Therefore, only choice A is correct.
34. Earned value analysis is an example of: A. Performance reporting B. Planning control C. Ishikawa diagrams D. Integrating the project components into a whole
Answer A Earned value analysis is a great reporting tool. With it, you can show where you stand on budget and schedule as well as provide forecasts for the rest of the project.
20. Which of the following represents the estimated value of the work actually accomplished? A. Earned value (EV) B. Planned value (PV) C. Actual cost (AC) D. Cost variance (CV)
Answer A It can be confusing to differentiate earned value terms from each other. The definition presented here is for EV or earned value, so choice A is the best choice.
25. Your cost forecast shows that you will have a cost overrun at the end of the project. Which of the following should you do? A. Eliminate risks in estimates and reestimate B. Meet with the sponsor to find out what work can be done sooner C. Cut quality D. Decrease scope
Answer A Look for the choice that would have the least negative impact in this situation. You would not need to meet with the sponsor to do choice B. Choices C and D always have negative effects. The choice with the least negative impact is Choice A.
27. Early in the life of your project, you are having a discussion with the sponsor about what estimating techniques should be used. You want a form of expert judgment, but the sponsor argues for analogous estimating. It would be BEST to: A. Agree to analogous estimating, as it is a form of expert judgment B. Suggest life cyde costing as a compromise C. Determine why the sponsor wants such an accurate estimate D. Try to convince the sponsor to allow expert judgment because it is typically more accurate
Answer A This is a tricky question. In order to pick the best answer, you need to realize that analogous estimating is a form of expert judgment. Notice choice C, "determnine why;" sounds like a good idea, but look at the rest of the senten ce. Analogous estimates are not accurate. Reading every word of this choice helps eliminate it.
35. You are about to take over a project from another project manager and find out the following information about the project. Activity Z has an early start (ES) of day 15 and a late start (LS) of day 20. Activity Z is a difficult activity. The cost performance index (CPI) is 1.1. The schedule performance index (SPI) is 0.8. There are 11 stakeholders on the project. Based on this information, which of the following would you be the MOST concerned about? A. Schedule B. Float C. Cost D. The number of available resources
Answer A This is one of those questions that combines topics from various knowledge areas. Did you fall into the trap of calculating the float for Z? The amount of float for one activity and the number of stakeholders does not tell you anything in this case, so choices Band D cannot be the best answers. The CPI is greater than one and the SPI is less than one. Therefore, the thing to be most worried about would be schedule.
16. Which type of cost is team training? A. Direct B. NPV C. Indirect D. Fixed
Answer A You are training the team on skills required for the project. The cost is directly related to the project and thus a direct cost.
8. Cost performance measurement is BEST done through which of the following? A. Asking for a percent complete from each team member and reporting that in the monthly progress report B. Calculating earned value and using the indexes and other calculations to report past performance and forecast future performance C. Using the 50/50 rule and making sure the life cyde cost is less than the project cost D. Focusing on the amount expended last month and what will be expended the following month
Answer B Asking percent complete (choice A) is not a best practice since it is usually a guess. Often the easiest work is done first on a project, throwing off any percentage calculations of work remaining. It may be a good thing to use the 50/50 rule, as in choice C. However, the 50/50 rule is not necessarily induded in the progress report, and the second part of the sentence is incorrect. The life cyde cost cannot be lower than the project cost, as the life cyde cost indudes the project cost. Choice D is often done by inexperienced project managers who know of nothing else. Not only does it provide little information, but also it cannot be used to predict the future. Choice B is the best answer since it looks at the past and uses this information to estimate future costs.
21. Which of the following are ALL items included in the cost management plan? A. The level of accuracy needed for estimates, rules for measuring cost performance, specifications for how duration estimates should be stated B. Specifications for how estimates should be stated, rules for measuring cost performance, the level of accuracy needed for estimates C. Rules for measuring team performance, the level of accuracy needed for estimates, specifications for how estimates should be stated D. Specifications for how estimates should be stated, the level of risk needed for estimates, rules for measuring cost performance
Answer B Every item in choice B accurately describes apart of the cost management plan. Notice how one word in each of the other options makes the entire choice incorrect. Choice A refers to duration estimates, which are created during the time management process, choice C includes measuring team performance, apart of human resource management, and choice D includes risk.
17. Project setup costs are an example of: A. Variable costs B. Fixed costs C. Overhead costs D. Opportunity costs
Answer B Setup costs do not change as production on the project changes. Therefore, they are fixed costs.
28. You have just completed the initiating processes of a small project and are moving into the planning processes when a project stakeholder asks you for the projects budget and cost baseline. What should you tell her? A. The project budget can be found in the project's charter, which has just been completed B. The project budget and baseline will not be finalized and accepted until the planning processes are completed C. The project management plan will not contain the project's budget and baseline; this is a small project D. It is impossible to complete an estimate before the project management plan is created
Answer B The overall project budget (choice A) may be included in the project charter but not the detailed costs. Even small projects (choice C) should have a budget and schedule. It is not impossible to create a project budget before the project management plan is created (choice D). It is just not wise, as the budget will not be accurate.
6. All of the following are outputs of the Estimate Costs process EXCEPT: A. An understanding of the cost risk in the work that has been estimated B. The prevention of inappropriate changes from being induded in the cost baseline C. An indication of the range of possible costs for the project D. Documentation of any assumptions made during the Estimate Costs process
Answer B This question is asking, "When you finish estimating costs, what do you have?" Many people who do not realize that estimates should be in a range pick choice C. Choice B is more correctly part of the cost management plan and the change control system.
14. A cost baseline is an output of which cost management process? A. Estimate Activity Resources B. Estimate Costs C. Determine Budget D. Control Costs
Answer C A cost baseline is an output of the Determine Budget process.
3. If earned value (EV) = 350, actual cost (AC) = 400, planned value (PV) = 325, what is cost variance (CV)? A. 350 B. -75 C. 400 D. -50
Answer D CV = EV - AC
23. The cost contingency reserve should be: A. Hidden to prevent management from disallowing the reserve B. Added to each activity to provide the customer with a shorter critical path C. Maintained by management to cover cost overruns D. Added to the base costs of the project to account for risks
Answer D Choice A is an inappropriate action. Choice B is an incorrect statement. Choice C describes management reserves. During the risk management process, you determine appropriate cost contingency reserves for risk events. The sum of these reserves should be added to the total project estimate to cover the cost of risk events happening.
33. Although the stakeholders thought there was enough money in the budget, halfway through the project the cost performance index (CPI) is 0.7. To determine the root cause, several stakeholders audit the project and discover the project cost budget was estimated analogously. Although the activity estimates add up to the project estimate, the stakeholders think something was missing in how the estimate was campleted. Which of the following describes what was missing? A. Estimated costs should be used to measure CPI B. SPI should be used, not CPI C. Bottom-up estimating should have been used D. Past history was not taken into account
Answer C Actual costs are used to measure CPI, and there is no reason to use SPI in this situation, so choices A and B are not correct. Using past history (choice D) is another way of saying "analogous," The best way to estimate is bottom-up (choice C). Such estimating would have improved the overall quality of the estimate.
5. Analogous estimating: A. Uses bottom-up estimating techniques B. Is used most frequently during the executing processes of the project C. Uses top-down estimating techniques D. Uses actual detailed historical costs
Answer C Analogous estimating is used most frequently during the planning processes, not the executing processes (choice B). You do not need to use historical costs (choice D) for an analogous estimate. Therefore, choice C is the correct answer.
38. Cost risk means: A. There are risks that will cost the project money B. The project is too risky from a cost aspect C. There is a risk that project costs could go higher than planned D. There is a risk that the cost of the project will be lower than planned
Answer C Choice A is a correct statement but it is not the definition of cost risk. Choice B refers to the overall cost risk on the project, and assumes that the risk is too great to do the project. The opposite of choice D is correct.
29. The project manager is allocating overall cost estimates to individual activities to establish a baseline for measuring project performance. What process is this? A. Cost Management B. Estimate Costs C. Determine Budget D. Control Costs
Answer C Choice A is too general. The estimates are already created in this example, so the answer is not choice B. The answer is not D, Control Costs, because the baseline has not yet been created. The correct answer is choice C.
39. A project manager needs to analyze the project costs to find ways to decrease costs. It would be BEST if the project manager looks at: A. Variable costs and fixed costs B. Fixed costs and indirect costs C. Direct costs and variable costs D. Indirect costs and direct costs
Answer C Choice C describes costs that are directly attributable to the project or that vary with the amount of work accomplished.
10. A schedule performance index (SPI) of 0.76 means: A. You are over budget B. You are ahead of schedule C. You are only progressing at 76 percent of the rate originally planned D. You are only progressing at 24 percent of the rate originally planned
Answer C Earned value questions ask for a calculation or an interpretation of the results. See the tricks under this topic in this book.
19. Who has the cost risk in a fixed price (FP) contract? A. The team B. The buyer C. The seller D. Management
Answer C If the costs are more than expected under a fixed price contract, the seller must pay those costs. As explained in the Procurement Management chapter, "cost risk" refers to the person who will have to pay for the added cost if costs escalate. Because the price is fixed, the seller will have to pay any increased costs out of their profit. Naturally, this does not include increased PRICE due to change orders. A fixed price contract and the PRICE could be changed with change orders.
24. The seller tells you that your activities have resulted in an increase in their costs. You should: A. Recommend a change to the project costs B. Have a meeting with management to find out what to do C. Ask the seller for supporting information D. Deny any wrongdoing
Answer C This is a professional and social responsibility/procurement/cost question. The situation described involves a claim. The best thing to do would be to get supporting information to find out what happened and take corrective action for the future. After choice C and negotiation, choice A would most likely occur. Choice D is unethical. Choice B is a meeting with YOUR management and should not occur until you have all the information.
37. You provide a project cost estimate for the project to the project sponsor. He is unhappy with the estimate, because he thinks the price should be lower. He asks you to cut 15 percent off the project estimate. What should you do? A. Start the project and constantly look for cost savings B. Tell all the team members to cut 15 percent from their estimates C. Inform the sponsor of the activities to be cut D. Add additional resources with low hourly rates
Answer C This question is full of choices that are not correct project management actions. If you picked the wrong answer, look again at the choices and try to determine what you are missing. Whatever it is, it will show up more than once on the real exam! To answer the question, you must first realize that it is never appropriate for a project manager to just cut estimates across the board (choice B). The project manager should have created an estimate with realistic work package estimates that do not include padding. Then, if costs must be decreased, the project manager can look to cut quality, decrease risk, cut scape, or use cheaper resources (and at the same time closely monitor the impact of changes on the project schedule). One of the worst things a project manager can do is to start a project while knowing that the time or cost for the project is unrealistic. Therefore, choice A cannot be best. Notice that choice D suggests adding resources. That would cost more. Choice C involves evaluating, looking for alternatives, and then going to the sponsor to tell him the impact of the cost cutting.
2. Estimate at completion (EAC) is a periodic evaluation of: A. The cost of work completed B. The value of work performed C. The anticipated total cost at project completion D. What it will cost to finish the job
Answer C When you look at earned value, many of the terms have similar definitions. This could get you into trouble. Since the EAC means the estimate at completion, choice C is the best answer. Choice D is the definition of ETC, estimate to complete.
11. Which of the following is NOT needed in order to come up with a project estimate? A. A WBS B. A network diagram C. Risks D. A change control system
Answer D A change control system is not required to obtain estimates, but without the other three choices, you cannot develop the estimates. You need the WBS to define the activities, the network diagram to see the dependencies, and the risks to determine contingencies. NOTE: These are high-level risks, not the detailed risks we identify later in the planning process group.
7. The main focus of life cycle costing is to: A. Estimate installation costs B. Estimate the cost of operations and maintenance C. Consider installation costs when planning the project costs D. Consider operations and maintenance costs in making project decisions
Answer D Life cycle costing looks at operations and maintenance costs and balances them with the project costs to try to reduce the cost across the entire life of the project.
18. Value analysis is performed to get: A. More value from the cost analysis B. Management to buy into the project C. The team to buy into the project D. A less costly way of doing the same work
Answer D Notice that you need to know the definition of value analysis to answer this question. Also notice that the other choices could be considered correct by someone who does not know the definition.
4. The customer responsible for overseeing your project asks you to provide a written cost estimate that is 30 percent higher than your estimate of the project's cost. He explains that the budgeting process requires managers to estimate pessimistically to ensure enough money is allocated for projects. What is the BEST way to handle this? A. Add the 30 percent as a lump sum contingency fund to handle project risks B. Add the 30 percent to your cost estimate by spreading it evenly across all project activities C. Create one cost baseline for budget allocation and a second one for the actual project management plan D. Ask for information on risks that would cause your estimate to be too low
Answer D Presenting anything besides your original estimate (allocating more to the budget) is inaccurate and calls into question your competence and integrity as a project manager. The customer should list potential changes and risks to your estimate. If the costs and risks are justified, you can increase the budget.
26. A new store development project requires the purchase of various equipment, machinery, and furniture. The department responsible for the development recently centralized its external purchasing process and standardized its new order system. In which document can these new procedures be found? A. Project scope statement B. WBS C. Staffing management plan D. Organizational policies
Answer D Procedures for the rental and purchase of supplies and equipment are found in the organizational policies, part of organizational process assets.
30. Monitoring cost expended to date in order to detect variances from the plan occurs during: A. The creation of the cost change management plan B. Recommending corrective actions C. Updating the cost baseline D. Product performance reviews
Answer D Recommending corrective actions (choice B) and possible updates to the cost baseline(choice C) result from the activity described; they are not concurrent with it. Monitoring costs are part of change control, but not part of creating the change control system (choice A).
9. A cost performance index (CPI) of 0.89 means: A. At this time, we expect the total project to cost 89 percent more than planned B. When the project is completed we will have spent 89 percent more than planned C. The project is only progressing at 89 percent of the rate planned D. The project is only getting 89 cents out of every dollar invested
Answer D The CPI is less than one, so the situation is bad. Choice D is the best answer.
31. A cost management plan contains a description of: A. The project costs B. How resources are allocated C. The budgets and how they were calculated D. The WBS level at which earned value will be calculated
Answer D The exam will ask you what the tools of project management cantain in order to test whether you really understand them. This question is almost impossible to guess correctly.
13. A rough order of magnitude estimate is made during which project management process group? A. Planning B. Closing C. Executing D. Initiating
Answer D This estimate has a wide range. It is done during project initiating, when very little is known about the project.
1. One common way to compute estimate at completion (EAC) is to take the budget at completion (BAC) and: A. Divide by SPI B. Multiply by SPI C. Multiply by CPI D. Divide by CPI
Answer D This question is asking for the formula for EAC, which is BAC/CPI. Notice how you will have to remember the formula to get the answer correct.
32. A manufacturing project has a schedule performance index (SPI) of 0.89 and a cost performance index (CPI) of 0.91. Generally, what is the BEST explanation for why this occurred? A. The scope was changed B. A supplier went out of business and a new one needed to be found C. Additional equipment needed to be purchased D. A critical path activity took longer and needed more labor hours to complete
Answer D To answer this question, you must look for a choice that would take longer and cost more. If you picked choice A, reread it. It says scope was changed, not necessarily added to. If the change was to reduce the scope, it might also have reduced cost. Though it would take time to handle the event described in choice B, the impacted activity might not be on the critical path and thus might not affect time. Choice C would definitely add cost, but not necessarily time. Only choice D would negatively affect both time and cast.
47. You are the project manager for a railroad construction project. Your sponsor has asked you for a forecast for the cost of project completion. Which of the following is the BEST metric to use for forecasting? A. EV and AC B. SV and CV C. ETC and VAC D. SPI and CPI
Answer: EV, AC, SV, CV, SPI, AND CPI are all measures of PAST performance. ETC and VAC predict future values. Forecasting is future. (C)
49. You've been hired by a large consulting firm to evaluate a software project for them. You have access to the CPI and EV for the project, but not the AC. The CPI is .92 and the EV is $172,500. How much money has actually been spent for the project? A. $158,700 B. $172,500 C. $187,500 D. There is not enough information to calculate the actual cost.
Answer: From the equations, we have CPI = EV/AC. Solving for AC, gives us AC = EV/CPI = 172,500/0.92 = $187,500 (C)
42. You are managing a construction project that is currently being initiated. You met with the sponsors and several important stakeholders, and have started to work on the preliminary scope statement. You've documented several key assumptions that have been made, and identified project constraints and initial risks. Before you can finish the preliminary scope statement, you must make a rough order of magnitude estimate of both time and cost so that the sponsor can allocate the final budget. What is the range of a rough order of magnitude (ROM) estimate? A. -10% to +10% B. -50% to +50% C. -50% to +100% D. -100% to +200%
Answer: Just answer the question. A ROM estimate is defined as -50% to +100%. The rest is unnecessary information.
41. You are managing a project with a total budget of $450,000. According to the schedule, your team should have completed 45% of the work by now. But at the latest status meeting, the team only reported that 40% of the work has actually been completed. The team has spent $165,000 so far on the project. How would you best describe this project? A. The project is ahead of schedule and within its budget. B. The project is behind schedule and within its budget. C. The project is ahead of schedule and over its budget. D. The project is behind schedule and over its budget.
Answer: Let's look at the schedule. Should be 45% complete, we are 40% complete. SPI = EV/PV = 40% / 45% = 0.89 < 1. We are behind schedule. Now to budget. CPI = EV/AC = (40% x $450,000) / $165,000 = 1.09. We are within budget.
40. You are the project manager for a railroad construction project. Your Sponsor has asked you for a forecast for the cost of project completion. The project has a total budget of $80,000 abd CPI of .95 . The project has spent $25,000 of its budget so far. How much more money do you plan to spend on the project? A. $59,210 B. $80,000 C $84,210 D $109,210
Answer: Really asking for ETC. ETC = EAC - AC. We have AC. Can we get EAC? EAC = BAC/CPI. Now we have everything we need. ETC = EAC - AC = BAC/CPI -AC = $ 80,000/0.95 - $25,000 = $59,210 (A)
44. You are managing a project with an EV of $15,000, PV of $12,000, and AC of $11,000. How would you BEST describe this project? A. The project is ahead of schedule and within its budget. B. The project is behind schedule and within its budget. C. The project is ahead of schedule and over its budget. D. The project is behind schedule and over is budget.
Answer: SPI = EV/PV = 15000/12000 = 1.25 > 1 so we're ahead of schedule. CPI = EV/AC = 15000/11000 = 1.36 > 1 ($1.36 in value for every dollar spend) so we're within our budget. (A)
46. You are managing a project with a schedule performance index (SPI) of 1.07 and a cost performance index (CPI) of .94. How would you BEST describe this project? A. The project is ahead of scheule and within its budget. B. The project is behind schedule and within its budget. C. The project is ahead of schedule and over its budget. D. The project is behind schedule and over its budget.
Answer: SPI is greater than 1, you are ahead of schedule. CPI is less than 1, you are over budget. (C)
48. You have been asked to select between three projects. Project A has a net present value of $54,750 and will take six months to complete. Project B has a net present value of $85,100 and will take two years to complete. Project C has a net present value or $15,000 and a benefit-cost ratio of 5:2. Which project should you choose? A. Project A B. Project B C. Project C D. There is not enough information to decide.
Answer: The important information in this question are the NPV values. The given times and BCR are unnecessary information. Choose the greatest NPV. (B)
43. You are managing a construction project to install new door frames in an office building. You planned on spending $12,500 on the project, but your costs are higher than expected, and now you're afraid that your project is spending too much money. What number tells you the difference between the amount of money you planned on spending and what you've actually spent so far on the project? A. AC B. SV C. CV D. VAC
Answer: The question is asking for the difference between planned and actual spending. This is Cost Variance, so CV.
45. You are managing a project with AC = $25,100 , ETC = $45,600 , VAC = -$2,600, BAC = $90,000, and EAC = $92,100. Your sponsor asks you to forecast how much money you expect to spend on the remainder of the project. Which is the BEST estimate to use for this forecast? A. $45,600 B. $87,400 C. $90,000 D. $92,100
Answer: The question is asking how much MORE money will be spent to complete the project. This is the Estimate to Completion, or ETC, which is given to you. $45,600 (A)
Parametric Modeling
Application of a mathematical model used to estimate project components (time, cost, scope) by having other variables entered into the application
Lifecycle costing
Before you get started on a project, it's really useful to figure out how much you expect it to cost - not just to develop but to support the product once it's in the place and being used by the customer.
How to Build A Budget #3: Use your expert judgment
Compare your project to historical data that has been collected on other projects to give your budget some grounding in real-world experience and you use your own expertise and the expertise of others to come up with realistic budget to cover project costs.
CC Tools/Techniques: EVM
Earned Value Management is where you measure how your project is doing compared to the plan. This involves using the earn valued formulas to access your project.
Variance
Estimate to Complete (ETC): How much more money you'll probably spend on your project. ETC = EAC - AC Variance at Completion (VAC): What your variance will be when the project is done. VAC = BAC - EAC You can use EAC, ETC, and VAC to predict what your Earned Value numbers will look like when your proejct is complete.
Bottom-up Estimating
First you break it down into pieces, estimate each piece, and add them up.
CPI - Cost Performance Index
Formula: CPI - EV / AC What It Says: Whether you're within your budget or not Why You Use It: Your sponsor is always most interested in the bottom line
CV - Cost Variance
Formula: CV = EV - AC What It Says: How much above or below your budget you are Why You Use It: Your sponsor needs to know how much it costs to get him the value you deliver
EV - Earned Value
Formula: EV - BAC * Actual % Complete What It Says: How much of the project's value you've really earned Why You Use It: EV lets you translate how much work the team's finished into a dollar value
BAC - Budget at Completion
Formula: None; project budget What It Says: How much money you'll spend on the project Why You Use It: To tell the sponsor the total amount of value that he's getting for the project
PV - Planned Value
Formula: PV = BAC * Planned % Complete What It Says: What your schedule says you should have spent Why You Use It: To figure out what value your plan says you should have delivered so far
SPI - Schedule Performance Index
Formula: SPI = EV / PV What It Says: Whether you're behind or ahead of schedule Why You Use It: To figure out whether you've delivered the value your schedule said you would
TCPI - To Complete Performance Index
Formula: TCPI = (BAC - EV) / (BAC - AC) What It Says: How well your project must perform to stay on budget Why You Use It: This will let you forecast whether or not you can stick to your budget
Cost of Quality
How much money it takes to do the project right.
CPI and SPI
If the SPI is below 1, then your project is behind schedule. But if the CPI is under 1, your project is over budget.
EAC (Estimate At Completion)
If you know your CPI now, you can use it to predict what your project will actually cost when it's complete. Formula: EAC = BAC / CPI If your CPI is below 1, that means you are running over budget which will give you an EAC that's larger than your current budget. If your CPI is above 1, you're running under budget so the estimate will end up smaller than your BAC.
Control Costs process
Knowing how you are doing compared to your plan and making adjustments when necessary
Management Reserve
Money set aside to cover unplanned, unexpected costs. Your project's funding requirements need to cover both the budget in the Cost Performance baseline and the management reserve.
Project Management Estimating Software
PMs will often use specialized estimating software to help come up with cost estimates
To-Complete Performance Index (TCPI)
Represents target that your CPI would have to hit in order to hit your forecasted completion cost. If you're performing within your budgeted cost, it'll be based on your BAC: TCPI = (BAC - EV)/ (BAC - AC) If you're running over your budget, you'll have to estimate a new EAC and base your TCPI on that: TCPI = (BAC-EV)/(EAC-AC) A higher TCPI means that your budget is too tight. This means stricter cost management approach.
CC Tools/Techniques: Performance Reviews
Reviews are meetings where the project team reviews performance data to examine the variance between actual performance and the baseline. EVM is used to calculate and track the variance.
Vendor Bid Analysis
Sometimes you will need to work with an external contractor to get your project done. You might even have more than one contractor bid on the job. This tool is all about evaluating those bids and choosing the one you will go with.
Analogous Estimating
Start with whole project, find other projects that were like it, and use those projects to come up with a new estimate.
Opportunity Cost
The amount associated with bypassing one opportunity in favor of another; as an example, if the pursuit of project B with a value of $75K is elected over the pursuit of project A with a value of $50K, $50k value of project A will not be realized
Cost Baseline
The authorized project budget version, exclusive of management reserves, that requires a formal control process to effect changes and is used as the basis of comparison to actual costs
Performance Measurement Baseline (PMB)
The comparison of project execution to the approved and integrated scope, schedule, and budget (exclusive of management reserves, but inclusive of contingency reserves) for the purpose of gauging and administering performance
Estimate Costs
The process of approximating the monetary resources required to complete the work of the project
Plan Cost Management
The process of establishing policies, procedures, and documentation for the planning, execution, and monitoring and controlling of cost-related project items
Cost of Quality
The total cost of achieving or failing to achieve desired quality: specifically the costs of achievement are those associated with planning, controlling, and assuring quality and the costs of failure are those associated with reworking, warranty, waste, and negative reputation
Planned Value (PV)
The total value of the work scheduled as of a certain point in time; also known as the budgeted cost of work scheduled (BCWS)
Earned Value (EV)
The value of the work that has been completed as of a specific point in time calculated by multiplying the completion percent of activity by its planned value, then adding the results; also known as the budgeted cost of work performed (BCWP)
Net Present Value (NPV)
This is the actual value at a given time of the project minus all of the costs associated with it. This includes the time it takes to build it and labor as well as materials. People calculate this number to see if it's worth doing a project.
Benefit Cost Ratio (BCR)
This is the amount of money a project is going to make versus how much it will cost to build it. Generally, if the benefit is higher than the cost, the project is a good investment.
Internal Rate of Return
This is the amount of money the project will return to the company that is funding it. It's how much money a project is making the company. It's usually expressed as a percentage of the funding that has been allocated to it.
Depreciation
This is the rate at which your project loses value over time. So, if you are building a project that will only be marketable at a high price for a short period of time, the product loses value as time goes on.
How to Build A Budget #4: Make sure you haven't blown your limits
This tool is Funding Limit Reconciliation. You need to be sure that you can do the project within the amount that your company is willing to spend.
How to Build A Budget #1: Roll up your estimates into control accounts
This tool is called cost aggregation. It is rolling up costs from work package level to the control account level so that the numbers can be followed down through the WBS hierarchy. Control accounts are high level WBS items that are used to track cost estimates. They do not represent activities or work packages. They represent the cost of the work packages and activities that appear under them in the WBS.
How to Build A Budget #7: Update your project documents
Update cost management plan with anything you learned along the way.
CC Tools/Techniques: Forecasting
Use info you have about project right now to predict how close it will come to its goals if it keeps going the way it has been.
CC Tools/Techniques: PM Software
Use software packages to track your budget and make it easier to know where you might run into trouble
CC Tools/Techniques: Variance Analysis
Variance between planned and actual performance needs to be carefully analyzed so you can head off problems before they make your project go over budget.
AC - Actual Cost
What It Says: How much you've actually spent so far Why You Use It: The amount of money you spend doesn't always match the value you get
Opportunity Cost
When an organization has to choose between 2 projects, they are always giving up the money they would have made on the one they don't do. That's called opportunity cost. It's the money you don't get because you chose not to do a project.
How to Build A Budget #2: Come up with your reserves
When you evaluate the risks to your project, you will set aside some cash reserves to deal with any issues that might come your way.
Rough Order of Magnitude (ROM) Estimate
When you make an estimate early in the project and you don't know much about it.
How to Build A Budget #6: Figure out funding requirements
You need to plan out how and when you will spend it and document those plans in the project funding requirements. It is about figuring how you will make sure your project has money when it's needed and that you have enough to cover unexpected risks as well as known cost increases that change with time.
Reserve Analysis
You need to set aside some money for cost overruns. If you know that your project has a risk of something expensive happening, better to have some cash laying around to deal with it. Reserve analysis means putting some cash away just in case.
