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Project Cost Management

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

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Project Cost Management Processes (4)

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

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Characteristics of Project Cost Management

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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.

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Process: Plan Cost Management

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- 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.

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Input (4) of Plan Cost Management

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

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Project management plan

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

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Scope baseline

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

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Schedule baseline.

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

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Other information.

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

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Project Charter

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- 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.

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Enterprise Environmental Factors

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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.

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Organizational Process Assets

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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.

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Tools & Techniques (3) of Plan Cost Management

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1 Expert judgment 2 Analytical techniques 3 Meetings

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Expert Judgment

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- 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.

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Analytical Techniques

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- 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.

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Meetings

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- 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.

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Output (1) of Plan Cost Management

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1 Cost management plan

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Cost Management Plan

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

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The cost management plan can establish

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

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Units of Measure

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

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Level of precision

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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.

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Level of Accuracy

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

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Organizational Procedures Links

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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.

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Control Thresholds

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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.

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Rules of Performance Measurement

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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

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Reporting Formats

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

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Process Descriptions

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

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Additional details

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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.

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Process: Estimate Costs

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- 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.

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Characteristics of Cost Estimates

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• 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

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Accuracy of Cost Estimates

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

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Activity Cost Estimate

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

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Input (7) of Estimate Costs

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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

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Cost Management Plan

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

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Human Resource Management Plan

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

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Scope Baseline

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

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Scope Statement

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

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Indirect Costs

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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

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Direct Costs

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Those costs that can be directly traced to a specific project

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Estimate Costs Constraints

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

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Work Breakdown Structure

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

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WBS Dictionary

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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

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Examples of requirements with contractual and legal implications

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

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Project Schedule

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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

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Estimate Activity Resources Impact on Estimate Costs

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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

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Estimate Activity Duration Impact on Estimate Costs

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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

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Risk Register

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• 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

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Enterprise Environmental Factors

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

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Market Conditions Impact on Estimate Costs

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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

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Published Commercial Information

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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.

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Organizational Process Assets

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

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Tools & Techniques (10) of Estimate Costs

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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

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Expert Judgement

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• 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

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Analogous Estimating

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• 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

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Parametric Estimating

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• 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.

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Bottom-up Estimating

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• 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.

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Three-Point Estimates

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• 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.

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

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• 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.

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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:

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

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Reserve Analysis

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• 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.

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Cost of Quality (COQ)

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

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Project Management Software

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• 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.

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Vendor Bid Analysis

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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.

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Group Decision-Making Techniques

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- 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.

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Outputs (3) of Estimate Costs

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

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Activity Cost Estimates

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- 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.

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Basis of Estimates

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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

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Project Document Updates

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• The risk register

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Process: Determine Budget

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- 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.

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Project Budgets

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Constitute the funds authorized to execute the project.

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Cost Baseline

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Includes all authorized budgets, but excludes management reserves.

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Inputs (9) of Determine Budget

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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

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Cost Management Plan

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Describes how the project costs will be managed and controlled.

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Scope Baseline

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

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Scope Statement

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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.

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Work breakdown structure

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

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WBS Dictionary

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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.

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Activity Cost Estimates

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

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Basis of Estimates

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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.

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Project Schedule

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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.

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Resource Calendars

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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.

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Risk register

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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.

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Agreements

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

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Organizational Process Assets

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

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Tools &Techniques (5) of Determine Budget

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

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Cost Aggregation

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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.

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Reserve Analysis

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

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Expert Judgement Sources

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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

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Historical relationships

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• 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).

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Cost and accuracy of parametric models are more reliable when

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• 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

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Funding Limit Reconciliation

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• 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

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Outputs (3) of Determine Budget

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1 Cost baseline 2 Project funding requirements 3 Project documents updates

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Cost baseline

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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.

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Management Reserves

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Budgets reserved for unplanned changes to project scope and cost

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Characteristics of Management Reserves

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• 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.

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Contingency Reserves

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

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Project Funding Requirements

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• 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.

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Project Document Updates

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• Risk register, • Cost estimates, • Project schedule

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Process: Control Costs

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- 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.

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Characteristics of Control Costs

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• 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.

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The key effective cost control

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Is the management of the approved cost performance baseline and the changes to that baseline.

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Project cost control includes

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• Influencing the factors that create changes to the authorized cost baseline; • Ensuring that all change requests are acted on in a timely manner; • Managing the actual changes when and as they occur; • Ensuring that cost expenditures do not exceed the authorized funding by period, by WBS component, by activity, and in total for the project; • Monitoring cost performance to isolate and understand variances from the approved cost baseline; • Monitoring work performance against funds expended; • Preventing unapproved changes from being included in the reported cost or resource usage; • Informing appropriate stakeholders of all approved changes and associated cost; and • Bringing expected cost overruns within acceptable limits.

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Inputs (4) of Control Costs

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1 Project management plan 2 Project funding requirements 3 Work performance data 4 Organizational process assets

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Project management plan

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The project management plan contains the following information that is used to control cost: • Cost Performance Baseline • Cost Management Plan

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Cost Performance Baseline

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The cost performance baseline is compared with actual results to determine if a change, corrective action or preventive action is necessary.

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Cost Management Plan

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The cost management plan describes how the project costs will be managed and controlled.

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Project funding requirements

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Include projected expenditures plus anticipated liabilities.

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Work performance data

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Work performance data includes information about project progress, such as which deliverables have started, their progress and which deliverables have finished. Information also includes costs that have been authorized and incurred, and estimates for completing project work.

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Organizational Process Assets

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• Existing formal and informal cost control-related policies, procedures, and guidelines; • Cost control tools; and • Monitoring and reporting methods to be used

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Tools & Techniques (6) of Control Costs

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1 Earned value management 2 Forecasting 3 To-complete performance index (TCPI) 4 Performance reviews 5 Project management software 6 Reserve analysis

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Earned Value Management

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A commonly used method of performance measurement. It integrates project scope, cost, and schedule measures to help the project management team assess and measure project performance and progress. It is a project management technique that requires the formation of an integrated baseline against which performance can be measured for the duration of the project.

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EVM

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Earned Value Management

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Three Key Dimensions of EVM

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• Planned value • Earned value • Actual cost

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PV

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Planned Value

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Planned Value

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Is the authorized budget assigned to the work to be accomplished for an activity or work breakdown structure component. It includes the detailed authorized work, plus the budget for such authorized work, allocated by phase over the life of the project.

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PMB

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Performance Measurement Baseline

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Performance Measurement Baseline

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The total of Planned Value

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In the earned value management technique, the cost performance baseline is referred to as

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the performance measurement baseline (PMB)

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BAC

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Budget At Completion

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Budget At Completion

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The total planned value for the project.

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EV

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Earned Value

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Earned Value

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Is the value of work performed expressed in terms of the approved budget assigned to that work for an activity or work breakdown structure component. It is the authorized work that has been completed, plus the authorized budget for such completed work.

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Characteristics of EV

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• The EV being measured must be related to the PV baseline (PMB) • The EV measured cannot be greater than the authorized PV budget for a component • The term EV is often used to describe the percentage completion of a project • A progress measurement criteria should be established for each WBS component to measure work in progress • Project managers monitor EV, both incrementally to determine current status and cumulatively to determine the long-term performance trends.

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EV monitored incrementally to

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determine current status

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EV monitored cumulatively to

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determine the long-term performance trends

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AC

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Actual Cost

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Actual Cost

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Is the total cost actually incurred and recorded in accomplishing work performed for an activity or work breakdown structure component. It is the total cost incurred in accomplishing the work that the EV measured.

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Characteristics of Actual Cost

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• The AC has to correspond in definition to whatever was budgeted for in the PV and measured in the EV (e.g., direct hours only, direct costs only, or all costs including indirect costs). • The AC will have no upper limit; whatever is spent to achieve the EV will be measured

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Variances monitored as part of Control Costs

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• Schedule variance • Cost variance

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SV

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Schedule Variance

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Schedule Variance

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Is a measure of schedule performance on a project. It is equal to the earned value (EV) minus the planned value (PV)

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Schedule Variance indicates

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if a project is falling behind its baseline schedule

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Schedule Variance when project is completed

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Zero, because all planned values will have been earned

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SV best used in conjunction with

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critical path methodology (CPM) scheduling and risk management

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Cost Variance

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Is a measure of cost performance on a project. It is equal to the earned value (EV) minus the actual costs (AC). The cost variance at the end of the project will be the difference between the budget at completion (BAC) and the actual amount spent

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Cost Variance indicates

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The relationship of physical performance to the costs spent.

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Negative CV is often

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non-recoverable to the project

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Efficiency Indicators

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Reflect the cost and schedule performance of any project for comparison against all other projects or within a portfolio of projects. The variances and indices are useful for determining project status and providing a basis for estimating project cost and schedule outcome

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Efficiency Indicators monitored as part of Control Costs

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• Schedule Performance Index • Cost Performance Index

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SPI

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Schedule Performance Index

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Schedule Performance Index

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Is a measure of progress achieved compared to progress planned on a project. It is sometimes used in conjunction with the cost performance index (CPI) to forecast the final project completion estimates. The SPI is equal to the ratio of the EV to the PV.

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SPI < 1

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Indicates less work was completed than was planned.

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SPI > 1

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Indicates that more work was completed than was planned.

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SPI

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Determine whether the project will finish ahead of or behind its planned finish date.

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CPI

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Cost Performance Index

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Cost Performance Index

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Is a measure of the value of work completed compared to the actual cost or progress made on the project. It is considered the most critical EVM metric and measures the cost efficiency for the work completed. The CPI is equal to the ratio of the EV to the AC

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CPI < 1

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Indicates a cost overrun for work completed.

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CPI > 1

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Indicates a cost under run of performance to date.

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Recommendation when CPI > 1 and SPI < 1

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Since SPI is less than 1, this means that project is behind schedule; hence it is recommended to crash the project to bring it on schedule. Please note that crashing may increase costs. Since your project has CPI greater than 1, cost will not be a concern.

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Crashing of a project results in

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decreased duration and increased costs. This is reflected with CPI is less than 1 and SPI is greater than 1

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Forecasting

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• As the project progresses, the project team can develop a forecast for the estimate at completion(EAC) that may differ from the budget at completion (BAC) based on the project performance. • If it becomes obvious that the BAC is no longer viable, the project manager should develop a forecasted EAC. • Forecasting the EAC involves making estimates or predictions of conditions and events in the project's future based on information and knowledge available at the time of the forecast. • Forecasts are generated, updated, and reissued based on work performance information provided as the project is executed • The work performance information covers the project's past performance and any information that could impact the project in the future. • EACs are typically based on the actual costs incurred for work completed, plus an estimate to complete (ETC) the remaining work. • It is incumbent on the project team to predict what it may encounter to perform the ETC, based on its experience to date. • The EVM method works well in conjunction with manual forecasts of the required EAC costs.

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Most common EAC forecasting approach

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a manual, bottom-up summation by the project manager and project team

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Bottum Up EAC Method

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• method builds upon the actual costs and experience incurred for the work completed, and requires a new estimate to complete the remaining project work. • This method may be problematic in that it interferes with the conduct of project work. • The personnel who are performing the project work have to stop working to provide a detailed bottom-up ETC of the remaining work. • Typically there is no separate budget to perform the ETC, so additional costs are incurred for the project to conduct the ETC • The project manager's manual EAC can be quickly compared with a range of calculated EACs representing various risk scenarios.

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Three most common methods for EAC forecast of ETC

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• Work performed at the budgeted rate • Work performed at the present CPI • Work considering both SPI and CPI factors Each of these approaches can be correct for any given project and will provide the project management team with an "early warning" signal if the EAC forecasts are not within acceptable tolerances

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EAC forecast for ETC work performed at the budgeted rate

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• This EAC method accepts the actual project performance to date (whether favorable or unfavorable) as represented by the actual costs, and predicts that all future ETC work will be accomplished at the budgeted rate. • When actual performance is unfavorable, the assumption that future performance will improve should be accepted only when supported by project risk analysis.

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EAC forecast for ETC work performed at the budgeted rate: Equation

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EAC = AC + BAC - EV

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EAC forecast for ETC work performed at the present CPI

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• This method assumes what the project has experienced to date can be expected to continue in the future. • The ETC work is assumed to be performed at the same cumulative cost performance index (CPI) as that incurred by the project to date.

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EAC forecast for ETC work performed at the present CPI: Equation

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EAC = BAC / cumulative CPI or EAC = BAC / CPI

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EAC forecast for ETC work considering both SPI and CPI factors

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• In this forecast, the ETC work will be performed at an efficiency rate that considers both the cost and schedule performance indices. • It assumes both a negative cost performance to date, and a requirement to meet a firm schedule commitment by the project. • This method is most useful when the project schedule is a factor impacting the ETC effort. • Variations of this method weigh the CPI and SPI at different values (e.g., 80/20, 50/50, or some other ratio) according to the project manager's judgment.

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EAC forecast for ETC work considering both SPI and CPI factors: Equation

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AC + [(BAC - EV) / (cumulative CPIx cumulative SPI)] or EAC = AC + [(BAC - EV) / (CPI × SPI)]

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To-complete performance index (TCPI)

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Is the calculated projection of cost performance that must be achieved on the remaining work to meet a specified management goal, such as the BAC or the EAC

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TCPI

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To Complete Performance Index

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TCPI Based on BAC

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• If it becomes obvious that the BAC is no longer viable, the project manager develops a forecasted estimate at completion (EAC). • Once approved, the EAC effectively supersedes the BAC as the cost performance goal.

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TCPI Based on BAC: Equation

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(BAC - EV) / (BAC - AC)

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TCPI Based on EAC

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• If the cumulative CPI falls below the baseline plan, all future work of the project will need to immediately be performed in the range of the TCPI (BAC) to stay within the authorized BAC. • Whether this level of performance is achievable is a judgment call based on a number of considerations, including risks, schedule, and technical performance. • Once management acknowledges that the BAC is no longer attainable, the project manager will prepare a new estimate at completion (EAC) for the work, and once approved, the project will work to the new EAC value. • This level of performance is displayed as the TCPI (EAC)

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TCPI Based on EAC: Equation

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(BAC - EV) / (EAC - AC)

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Performance Reviews

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Compare cost performance over time, schedule activities or work packages overrunning and under running the budget, and estimated funds needed to complete work in progress

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Performance Review: Variance Analysis

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As used in EVM compares actual project performance to planned or expected performance. Cost and schedule variances are the most frequently analyzed

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Performance Review Information when using EVM

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• Variance analysis • Trend analysis • Earned value performance

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Variance Analysis

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• Cost performance measurements (CV, CPI) are used to assess the magnitude of variation to the original cost baseline. • Important aspects of project cost control include determining the cause and degree of variance relative to the cost performance baseline and deciding whether corrective or preventive action is required. •The percentage range of acceptable variances will tend to decrease as more work is accomplished. • The larger percentage variances allowed at the start of the project can decrease as the project nears completion-

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Trend Analysis

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Examines project performance over time to determine if performance is improving or deteriorating. Graphical analysis techniques are valuable for understanding performance to date and for comparison to future performance goals in the form of BAC versus EAC and completion dates-

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Earned Value Performance

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

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Project Management Software

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Used to monitor the three EVM dimensions (PV, EV, and AC), to display graphical trends, and to forecast a range of possible final project results.

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Reserve analysis

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• During cost control, reserve analysis is used to monitor the status of contingency and management reserves for the project to determine if these reserves are still needed or if additional reserves need to be requested. • As work on the project progresses, these reserves may be used as planned to cover the cost of risk mitigation events or other contingencies. • Additional risk analysis during the project may reveal a need to request that additional reserves be added to the project budget. (Management and contingency reserves)

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Outputs (6) of Control Costs

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1 Work performance information 2 Cost forecasts 3 Change requests 4 Project management plan updates 5 Project documents updates 6 Organizational process assets updates

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Work Performance Information

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

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Cost forecasts

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

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Change Requests

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• Analysis of project performance can result in a change request to the cost performance baseline or other components of the project management plan. • Change requests can include preventive or corrective actions and are processed for review and disposition through the Perform Integrated Change Control process

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Project Management Plan Updates

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• Cost performance baseline. • Cost management plan

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Cost performance baseline

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Changes to the cost performance baseline are incorporated in response to approved changes in scope, activity resources, or cost estimates. In some cases, cost variances can be so severe that a revised cost baseline is needed to provide a realistic basis for performance measurement.

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Cost management plan

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Changes to the cost management plan, such as changes to control thresholds or specified levels of accuracy required in managing the project's cost, are incorporated in response to feedback from relevant stakeholders.

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Project Document Updates

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• Cost estimates • Basis of estimates

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Organizational Process Assets Updates

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• Causes of variances, • Corrective action chosen and the reasons, • Financial databases, and • Other types of lessons learned from project cost control.

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Plan Cost Management Estimate Costs Determine Budget

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Planning Process Group

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Control Costs

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Monitoring and Controlling Process Group

PMP 5th – Chapter 7 – Project Cost Management – Flashcards

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