PMBOK Chapter 7 5th (Project Cost Management)

Estimate Costs
The process of developing an approximation of the monetary resources needed to complete project activities.
Are the costs of the project the only concern of Project Cost Management?
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.
Control Thresholds
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.
Plan Cost Management Inputs
.1 Project management plan
.2 Project charter
.3 Enterprise environmental factors
.4 Organizational process assets
What information from the Project Management Plan is used for Plan Cost Management?
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.
What information from the Project Charter is used for Plan Cost Management?
The project charter provides the summary budget from which the detailed project costs are developed.
Plan Cost Management Tools and Techniques
.1 Expert judgment
.2 Analytical techniques
.3 Meetings
Plan Cost Management Outputs
Cost Management Plan
What is included in the 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
key benefit of Estimate Costs
it determines the amount of cost required to complete project work.
Inputs for Estimate Costs
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
Tools and Techniques for Estimate Costs
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
Analogous cost estimating
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.

Parametric estimating
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.

Bottom-up estimating
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.
What are the two types of Three Point Estimating?
Triangular and Beta (PERT)
What is reserve analysis?
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.
Activity cost estimates
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
Basis of Estimates
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

Input for Determine Budget
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
Cost Aggregation
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.
Tools and Techniques for Determine Budget
i. Cost aggregation.
ii. Reserve analysis
iii. Expert judgment
iv. Historical relationships
v. Funding limit reconciliation.
Reserve Analysis
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.

What is a contingency reserve?
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.
What is the primary risk when including reserves or contingency allowances in your cost estimate?
Overstating the cost estimate
What is management reserve?
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.
What are the various components of the project budget and 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

How do management reserves move into the cost baseline?
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.
What is cost aggregation?
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.
What are Project Funding Requirements?
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.
Cost Baseline
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

Control Costs
the process of monitoring the status of the project to update the project costs and managing changes to the cost baseline.
What is an S base curve and how is it associated with the project budget and 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.
What are historical relationships?
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.
What is the purpose of the Control Costs process?
The process of monitoring the status of the project to update the project costs and managing changes to the cost baseline.
What parts of the Project Management Plan are used as inputs to Control Costs?
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.
Inputs for Control Costs
i. Project management plan.
ii. Project funding requirements.
iii. Work performance data.
iv. Organizational process assets.
Tools and Techniques for Control Costs
i. Earned value management.
ii. Forecasting
iii. To Complete Performance Index (TCPI)
iv. Performance Reviews
v. Project management software
vi. Reserve analysis
Outputs for Control Costs
i. Work performance information
ii. Cost forecasts
iii. Change requests
iv. Project management plan updates
v. Project document updates
vi. Organizational process assets updates
What work performance information is output from Control Costs?
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.
What cost forecast information is output from Control Costs?
either a calculated EAC value or a bottom-up EAC value is documented and communicated to stakeholders.
Earned value management (EVM)
methodology that combines scope, schedule, and resource
measurements to assess project performance and progress.
What is Funding Limit Reconciliation?
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.
EVM develops and monitors three key areas:
Planned value, earned value and actual cost
EVM Variances
Schedule variance, cost variance, schedule performance index, and cost performance index
Planned value (PV)
as of today, what is the estimated value of the work planned to be done?
Earned value (EV)
as of today, what is the estimated value of the work actually accomplished. Cannot be greater than the PV.
Actual cost (AC)
as of today, what is the actual cost of the work accomplished?
Schedule variance (SV)
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 equation
SV = EV – PV

interpretation: negative is behind schedule, positive is ahead

Cost variance (CV)
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 equation
CV = EV – AC

interpretation: negative is over budget, positive is under

schedule performance index (SPI)
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 equation
SPI = EV/PV

we are progressing at __% of the rate originally planned.

SPI value less than 1.0 indicates what?
less work was completed than was planned.
SPI greater than 1.0 indicates what?
that more work was completed than was planned.
cost performance index (CPI)
measure of the cost efficiency of budgeted resources, expressed as a ratio of earned value to actual cost.
whats the most critical EVM metric for work completed?
CPI
CPI equation
CPI = EV/AC

We are getting $__ amount of work out of every $1 spent.

CPI value of less than 1.0 indicates?
a cost overrun for work completed.
CPI value greater than 1.0 indicates?
a cost underrun of performance to date.
Three-Point Estimating
using three estimates to define an approximate range for an activity’s cost: cM (most likely), cO (Optomistic). cP (pessimistic)
Two formulas Three-Point Estimating are
triangular and beta distributions.
Triangular Distribution. cE = ( cO + cM + cP ) / 3
Beta Distribution (from a traditional PERT analysis). cE = ( cO + 4cM + cP ) / 6
estimate at completion (EAC)
what do we currently expect the total project to cost (a forecast)?
bottom-up EAC method
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.

estimate at completion (EAC) formula when CPI is expected to remain the same for the remainder of the project.
EAC = BAC/CPI
estimate at completion (EAC) formula when future work will be accomplished at the planned rate.
EAC = AC + BAC – EV
estimate at completion (EAC) formula when future work will be influenced by both CPI and SPI
EAC = AC + [(BAC – EV)/(CPI*SPI)]
to-complete performance index (TCPI)
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.
to-complete performance index (TCPI) based on BAC
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.

to-complete performance index (TCPI) based on EAC
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.

Variance analysis
the explanation (cause, impact, and corrective actions) for cost, schedule, and variance at completion.
Trend analysis
examines project performance over time to determine if performance is improving or deteriorating.
Earned value performance.
compares the performance measurement baseline to actual schedule and cost performance.
value analysis
finding a less costly way to perform the same work
direct cost
costs directly attributable to the work on a project
Ex: team wages, travel, material, etc
indirect costs
overhead items or costs incurred for the benefit of more than one project
Rough Order of Magnitude (ROM)
type of estimate made during project initiating. typical range for estimates are -25 to +75 percent from actual.
Budget estimate
Type of estimate usually made during project planning, and ranges from -10 to +25 percent from actual
definitive estimate
An estimate that occurs are the project progresses and becomes more defined. Ranges from -/+10 percent from actual
Budget at completion (BAC)
how much did we budget for the total project effort?
Estimate to Complete (ETC)
from this point on, how much more do we expect it to cost to finish the project? (a forecast)
Estimate to Complete (ETC) formula
ETC = EAC – AC
Use this formula when work is proceeding on plan.

ETC = reestimate
Use this formula to estimate work from the bottom up

Variance at completion (VAC)
as of today, how much over or under budget do we expect to be at the end of the project?
Variance at complete (VAC) formula
VAC = BAC – EAC
positive = under planned cost