PMBOK Chapter 7 5th (Project Cost Management) – Flashcards

The process of developing an approximation of the monetary resources needed to complete project activities.

Project cost management is primarily concerned with the cost of the resources needed to complete project activities. Project Cost Management 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. These can also be referred to as operating costs.

Variance thresholds for monitoring schedule 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 parameters established in the baseline plan.

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

1. Scope baseline (output of Create WBS) - includes the project scope statement and WBS details for cost estimation and management. 2. Schedule baseline - (output of Develop Schedule) defines when the project costs will be incurred. 3. Other information - other cost related scheduling, risk, and communications decisions from the project management plan.

The project charter provides the summary budget from which the detailed project costs are developed.

.1 Expert judgment .2 Analytical techniques .3 Meetings

Cost Management Plan

is a component of the project management plan and describes how the project costs will be planned, structured, and controlled. The cost management plan processes and their associated tools and techniques are documented in the cost management plan. For example, the cost management plan can establish the following: 1. Units of measure as defined for each of the resources. 2. Level of precision - the level to which activity cost estimates will be rounded up or down based on the scope of the activities and magnitude of the project. 3. Level of accuracy - the acceptable range used in determining realistic activity cost estimates is specified and may include an amount for contingencies. 4. Organizational procedures links - the 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. Each control account is assigned a unique code or account number(s) that links directly to the performing organization's accounting system. 5. 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. 6. Rules of performance measurement - earned value management (EVM) rules of performance measurement are set. a. Define the points in the WBS at which measurement of control accounts will be performed. b. Establish the earned value measurement techniques to be employed c. Specify tracking methodologies and the earned value management computation equations for calculating projected estimate at completion (EAC) forecasts to provide a validity check on the bottom-up EAC. 7. Reporting formats - the formats and frequency for the various cost reports are defined. 8. Process descriptions - descriptions of each of the other cost management processes are documented. 9. Additional details a. Description of strategic funding choices b. Procedure to account for fluctuations in currency exchange rates c. Procedure for project cost recording

it determines the amount of cost required to complete project work.

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

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

uses the values such as scope, cost, budget, and duration or size, weight, and complexity from a previous, similar project as the basis for estimating the same parameter or measurement for a current project. Analogous cost estimating is frequently used to estimate a value when there is a limited amount of detailed information about the project, for example, in the early phases of a project. Analogous cost estimating uses historical information and expert judgment.

uses a statistical relationship between relevant historical data and other variables (e.g., square footage in construction) to calculate a cost estimate for project work. This technique can produce higher levels of accuracy depending upon the sophistication and underlying data built into the model.

The cost of individual work packages or activities is estimated to 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 are typically influence by the size and complexity of the individual activity or work package.

Triangular and Beta (PERT)

cost estimates may include contingency reserves 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. Contingency reserves are often viewed as the part of the budget intended to address the known unknowns that can affect a project. Contingency reserves may be estimated to account for this unknown amount of rework. Contingency reserves can be provided for a specific activity, for the whole project, or both. 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 become 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 the overall funding requirements for the project.

Output of estimate costs Quantitative assessments of the probable costs required to complete project work. This includes, but is not limited to, direct labor, materials, equipment, services, facilities, information technology, etc

Output of Estimate Costs The amount and type of additional details supporting the cost estimate vary by application area. Supporting detail for activity cost estimates may include: 1. Documentation of the basis of the estimate (how it was developed) 2. Documentation of all assumptions made 3. Documentations of any known constraints 4. Indication of the range of possible estimates to indicate that the item is expected to cost between a range of values 5. Indication of the confidence level of the final estimate

i. Cost management plan ii. Scope baseline iii. Activity cost estimates iv. Basis of estimates. v. Project schedule. vi. Resource calendars vii. Risk register. viii. Agreements. ix. Organizational process assets

The work package cost estimates are then grouped for the higher component levels of the WBS (such as control accounts) and ultimately for the entire project.

i. Cost aggregation. ii. Reserve analysis iii. Expert judgment iv. Historical relationships v. Funding limit reconciliation.

establishes both the contingency reserves and the management reserves for the project. Contingency funds are used to handle cost uncertainty due to unforeseen purchases that may be needed during a project. These funds are generally used for items that are likely to occur but are not certain to occur.

Budget within the cost baseline or performance measurement baseline that is allocated for identified risks that are accepted and for which contingent or mitigating responses are developed.

Overstating the cost estimate

An amount of the project budget withheld for management control purposes. These are budgets reserved for unforeseen work that is within scope of the project. The management reserve is not included in the performance measurement baseline (PMB) or the cost baseline.

The lowest level is Activity Cost Estimate + Activity Contingency Reserve = Work Package Cost Estimates. The next level is the Work Package Cost Estimates + Contingency Reserve = Control Accounts The Control Accounts are equal to the Cost Baseline. The highest level is the Project Budget which is made up of Management Reserve + Cost Baseline = Project Budget

As changes warranting the use of management reserves arise, the change control process is used to obtain approval to move the applicable management reserve funds into the cost baseline.

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 and ultimate for the entire project.

Total funding requirements and period funding requirements 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, and may not even be evenly distributed, which appear as steps as should in figure 7-9 (page 214). The total funds required are those included in the cost baseline, plus management reserves, if any. Funding requirements may include the sources of the funding.

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. Project budget = cost baseline + management reserve

the process of monitoring the status of the project to update the project costs and managing changes to the cost baseline.

Since the cost estimates that make up the cost baseline are directly tied to the schedule activities, this enables a time phased view of the cost baseline, which is typically display in the form of an s-curve. Time is the x-axis and the cumulative values are the y-axis. Funding of a project often occurs in incremental amounts that are not continuous, and may not be evenly distributed, which appear as steps on the s-curve.

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 may be simple or complex. Both the cost and accuracy of analogous and parametric models can vary widely. They are most likely to be reliable when: • Historical information used to develop the model is accurate • Parameters used in the model are readily quantifiable • Models are scalable, such that they work for large projects, small project, and phases of a project.

The process of monitoring the status of the project to update the project costs and managing changes to the cost baseline.

1. Cost baseline. The cost baseline is compared with actual results to determine if a change, corrective action, or preventative action is necessary. 2. Cost management plan. The cost management plan describes how the project costs will be managed and controlled.

i. Project management plan. ii. Project funding requirements. iii. Work performance data. iv. Organizational process assets.

i. Earned value management. ii. Forecasting iii. To Complete Performance Index (TCPI) iv. Performance Reviews v. Project management software vi. Reserve analysis

i. Work performance information ii. Cost forecasts iii. Change requests iv. Project management plan updates v. Project document updates vi. Organizational process assets updates

the calculated CV, SV, CPI, SPI, TCPI, and VAC values for WBS components, in particular the work packages and control accounts, are documented and communicated to stakeholders.

either a calculated EAC value or a bottom-up EAC value is documented and communicated to stakeholders.

methodology that combines scope, schedule, and resource measurements to assess project performance and progress.

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 is accomplished by placing imposed date constraints for work into the project schedule.

Planned value, earned value and actual cost

Schedule variance, cost variance, schedule performance index, and cost performance index

as of today, what is the estimated value of the work planned to be done?

as of today, what is the estimated value of the work actually accomplished. Cannot be greater than the PV.

as of today, what is the actual cost of the work accomplished?

measure of schedule performance expressed as the difference between the earned value and the planned value. It is the amount by which the project is ahead or behind the planned delivery date, at a given point in time.

SV = EV - PV interpretation: negative is behind schedule, positive is ahead

the amount of budget deficit or surplus at a given point in time. as of today, how much far over or under budget are we?

CV = EV - AC interpretation: negative is over budget, positive is under

measure of schedule efficiency expressed as the ratio of earned value to planned value. It measures how efficiently the project team is using its time.

SPI = EV/PV we are progressing at __% of the rate originally planned.

less work was completed than was planned.

that more work was completed than was planned.

measure of the cost efficiency of budgeted resources, expressed as a ratio of earned value to actual cost.

CPI

CPI = EV/AC We are getting $__ amount of work out of every $1 spent.

a cost overrun for work completed.

a cost underrun of performance to date.

using three estimates to define an approximate range for an activity's cost: cM (most likely), cO (Optomistic). cP (pessimistic)

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

what do we currently expect the total project to cost (a forecast)?

Equation: EAC = AC + Bottom-up ETC. use this equation when the initial plan is no longer valid. This formula will give you the most accurate EAC.

EAC = BAC/CPI

EAC = AC + BAC - EV

EAC = AC + [(BAC - EV)/(CPI*SPI)]

measure of the cost performance that is required to be achieved with the remaining resources in order to meet a specified management goal, expressed as the ratio of the cost to finish the outstanding work to the remaining budget.

TCPI = (BAC - EV) / (BAC - AC) Greater than 1.0 than harder to complete This formula is used when the efficiency that must be maintained in order to complete on plan.

TCPI = (BAC - EV) / (EAC - AC) Greater than 1.0 than harder to complete This formula is used when the efficiency that must be maintained in order to complete the current EAC.

the explanation (cause, impact, and corrective actions) for cost, schedule, and variance at completion.

examines project performance over time to determine if performance is improving or deteriorating.

compares the performance measurement baseline to actual schedule and cost performance.

finding a less costly way to perform the same work

costs directly attributable to the work on a project Ex: team wages, travel, material, etc

overhead items or costs incurred for the benefit of more than one project

type of estimate made during project initiating. typical range for estimates are -25 to +75 percent from actual.

Type of estimate usually made during project planning, and ranges from -10 to +25 percent from actual

An estimate that occurs are the project progresses and becomes more defined. Ranges from -/+10 percent from actual

how much did we budget for the total project effort?

from this point on, how much more do we expect it to cost to finish the project? (a forecast)

ETC = EAC - AC Use this formula when work is proceeding on plan. ETC = reestimate Use this formula to estimate work from the bottom up

as of today, how much over or under budget do we expect to be at the end of the project?

VAC = BAC - EAC positive = under planned cost