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Project Cost Management Knowledge Area


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This presentation covers processes and concepts from Project Cost management knowledge area. This is part of the series of presentations based on PMBOK book's coverage, and is helpful in your …

This presentation covers processes and concepts from Project Cost management knowledge area. This is part of the series of presentations based on PMBOK book's coverage, and is helpful in your preparation for PMP or CAPM certification exams. Or you can use this to understand more about project management.
For more detailed study notes visit
Thank you and good luck!

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  • 1. A guide to passing PMP® exam! series.. Project Cost Management Knowledge Area Based on the PMBOK® bookBrought to you For a free eBook on Project Management, and brain-friendly notes for PMP® and CAPM® certification exams visit the blog!
  • 2. Download this poster by clicking here.
  • 3. “Money often costs too much.” - Ralph Waldo Emerson
  • 4. Cost overrun can be detrimental to project success!Sydney Opera House is built on 4.5 acres of land, is183 m long, 120 m wide and is supported on 588concrete piers sunk as much as 25 m below sealevel. Project cost was estimated at $7 million.When the project was completed, it had cost $103million and 10 years of delay.A budget overrun of 14 times the original estimate!
  • 5. Cost Management PlanDuring project management planning stagecertain amount of planning is done tocome up with a Cost Management Plan.See this mind map to understand whatgoes into a Cost Management Plan…
  • 6. Estimate Costs process
  • 7. Estimate Costs processEstimate Costs is a process that helpsyou figure out an approximation ofcosts associated with all the activitiesplanned on the project.Click here for detailed lesson on Estimate Costsprocess.
  • 8. ITTOs
  • 9. Analogous EstimatingHelps you consider previous similarprojects, look at their costs andprepare estimates.This is a quick tool, less accurate anduseful only when you are comparingprojects of pretty similar size and type.
  • 10. Parametric Estimating…is where you use one of formulaedriven spreadsheets, software, ortool to put in parameters specificto your project and let it derivecost numbers.
  • 11. Bottom-up EstimatingThis is like Divide and Rule approach.Helps you in estimating tasks that are bigand complex.Break them down into simpler, smallerpieces and put cost estimates for thesepieces.Then roll up the cost numbers and get thefinal cost for the original task.
  • 12. Three-point EstimatesQuite simply this PERT tool is a weightedaverage of worst case, most-likely and bestcase estimates to have realistic numbers.Expected Cost = [Optimistic Cost + (4 xMost likely Cost ) + Pessimistic Cost] / 6 Ce = [Co + 4Cm + Cp]/6
  • 13. Reserve AnalysisAlso called Contingency Allowances.This is about adding some amount ofbudget to address uncertainty in theproject.This reserve could be applied atactivity level, WBS component level, oreven milestone level.
  • 14. Cost of Quality (CoQ)This includes cost of activities performedto ensure that good quality product isproduced (training, testing, equipment) ANDthe cost of activities performed as aresult of producing bad quality product(rework, scrap).
  • 15. Determine Budget process
  • 16. "Never base your budgetrequests on realisticassumptions, as this couldlead to a decrease in yourfunding." — Scott Adams, Dilbert
  • 17. Determine Budget processIn this process you put together estimatedcosts of all of the individual activities on theproject – and term it as Cost Baseline.Click here for detailed lesson on Determine Budget process.This baseline consists of all authorized budgetsbut excludes Management Reserves.
  • 18. Management ReserveAlthough you identify all possible activities onthe project, estimate their costs and preparea budget for them - it does not mean thatthings cannot go wrong afterwards!Things can go wrong, and in many cases theywill. That is why management keeps a reserveamount for unforeseen situations. This iscalled Management Reserve.
  • 19. Contingency Reserve versus Management ReserveContingency reserve is for situations whereidentified risks materialize and you wouldneed money to manage those risks.Management reserve is for situationswhere unplanned events may occur thatimpact project constraints, and you wouldneed money to fill those gaps.
  • 20. ITTOs
  • 21. Funding Limit ReconciliationThis is a check and balance step youcan take regularly to figure outwhether you are spending more thanthe budget limits.If for some reason spending goesbeyond, then you will need to go backto sponsors and ask for more budget,or reduction of scope.
  • 22. Output – Cost Performance BaselineCost performance baseline is, in simpleterms, approved budget. It is also calledBudget At Completion (BAC).This is the baseline against which projectexpenditure is measured, and controllingmeasures are put in place.
  • 23. Cost baseline =projected expenditures + anticipatedliabilitiesTotal project funds =cost baseline + management reserve
  • 24. Control Costs process
  • 25. Control Costs process
  • 26. Control Costs processIn this process you look at the costs beingincurred, compare them against cost baselineand take measures to bring the expenditure ontrack when they go out of order, or increaseauthorized budget by going back tostakeholders.When there is an increase in budget it should gothrough Perform Integrated Change Controlprocess.
  • 27. Earned Value ManagementEVM is about the triple constraints – Time(Schedule), Cost and Scope.EVM is a technique to monitor these threeparameters on the project at workpackage, control unit, or activity level – 1. Planned Value (PV) 2. Earned Value (EV) 3. Actual Cost (EC)
  • 28. Planned Value (PV)This is the authorized budget allocated atactivity or WBS level to be used over thelife of the project.PV is also called Budgeted Cost of WorkScheduled (BCWS).The total planned value for the entireproject is known as Budget AtCompletion (BAC).
  • 29. Calculate Planned Value (PV) multiplying total planned value forthe project (called Budget AtCompletion) by the % of work plannedto have completed at any given pointin time. PV = Planned % Complete x BAC
  • 30. Earned Value (EV)This is the amount of work done ascompared to what was expected in thebudget, at activity or WBS level, to beused over the life of the project.EV is a measure of how much of value youhave realized any point in time.
  • 31. Calculate Earned Value (EV) multiplying total planned value forthe project (called Budget AtCompletion) by the % of work actuallycompleted at any given point in time. EV = Actual % Complete x BAC
  • 32. VariancesSchedule Variance - is the differencebetween work performed and plannedwork. SV = EV - PVCost Variance - is the difference betweenthe earned value from work performed andactual cost incurred for this workperformed. CV = EV - AC
  • 33. Schedule Performance Index (SPI)Use SPI to find out how the project isdoing against the schedule. SPI = EV/PVIf SPI is => 1, your earned value is morethan planned value and you are ahead ofschedule!
  • 34. Cost Performance Index (CPI)Use CPI to find out how the project isdoing against the budget. CPI = EV/ACIf CPI is => 1, your earned value is morethan actual cost (AC) spent on doing theproject work, and you are within thebudget!
  • 35. To-Complete Performance IndexThe calculated projection of costperformance that must be achieved onthe remaining work to meet a specifiedmanagement goal, such as BAC or EAC. TCPI = (BAC-EV)/(BAC-AC) Or TCPI = (BAC-EV)/(EAC-AC)
  • 36. Forecasts - Estimate At Completion (EAC)• Considering work performed at budgeted rate EAC = AC + (BAC – EV)• Considering work performed at present CPI EAC = BAC / Cumulative CPI• Considering SPI and CPI indicators EAC = AC + [(BAC-EV) / (Cumulative CPI x Cumulative SPI)]
  • 37. Variance from EACEstimate To Complete (ETC) - ETC = EAC – ACVariance At Completion (VAC) - VAC = BAC - EAC
  • 38. References• Project Cost Management Knowledge Area• Estimate Costs process• Determine Budget process• Control Costs process• Guide to Earned Value Management Method
  • 39. Thank you! Click here for detailed study notes of Project Cost Management knowledge area. For these revision notes and more, visit http://www.PMExamSmartNotes.comPMI is a registered trademark and service mark of the Project Management Institute, Inc.PMP is a registered certification mark of the Project Management Institute, Inc.PMBOK is a registered trademark of the Project Management Institute, Inc.