Pmi Cost Notes

PMI PMP Exam Prep PMI Mile High Chapter North Area Study GroupCost PresentationPrepared by Denise Robertson8 March 2003

Information quoted or derived from PMI, Mulcahy, and Looking Glass Development's PMP exam prep materials

Cost EstimatingConcepts for working with cost estimates:Estimates are resource driven and based on the WBSEstimates should be made by person responsible for the workEstimate accuracy is improved by historical information


Cost EstimatingConcepts for working with cost estimates (continued):Costs should be managed to cost estimates (toe the line)A cost baseline should be kept and not changed except for project changesPlans should be revised as necessary during work


Cost EstimatingConcepts for working with cost estimates (continued):Corrective action should be taken when (cost) problems occurManagement estimates should not be taken at face value; the PM is responsible for performing his own estimates and reconciling any differences


Earned Value AnalysisMeasures scope, time project performanceIntegrates cost, time, scopeCan be used to forecast future performance and project completion dateEV charts are in texts. You may want to substitute them for old terminology placemat features or use the following to match the placement format.


Cost Estimating Terms


New Placemat EV Chart


New Placemat Cost Analysis


New Placemat Schedule Analysis


New Terminology Formulae(table slightly expanded)


Types of Cost Estimating


Analogous EstimatingAdvantagesQuickLess CostlyTasks need not be identifiedCauses overall project costs to be cappedDisadvantagesLeast accurateDifficult to use for projects with uncertaintyRisks management politicking


Bottom-up Cost EstimatingAdvantagesMost accurateGains buy-in from teamProvides basis for monitoring and controlDisadvantagesTime intensiveEncourages paddingRisks team politicking


Earned Value AssociationsPer Mulcahy, the PMP exam associatesMeasure project performance continually.Refine control limits.Evaluate the effectiveness of corrective action.with the controlling process group so consider thinking of them with EV.


Resource Planning Activities Pertaining to Cost EstimationConstruct responsibility assignment matrixIntersection of WBS and OBS (Organization Breakdown Structure)Identification of management leads and WBS resourcesCalculate staff availabilityCalculate amount of work that can be completed within a given period of timeWork = (total hrs. * availability) * efficiency where efficiency is .70


Resources and Cost EstimatingCost estimating involves developing an approximation of the cost of resources needed to complete project activitiesCost estimating is resource drivenResource requirements are based on quantities of each element at the lowest level of the WBS.


Estimating Accuracy


Forecasting ConceptsLearning Curve: Over time the total cost will rise, but the cost per unit will drop because repetition increases efficiency.Law of Diminishing Returns: Over time, adding more resources may increase overall output, but will eventually decrease individual productivity.Adding twice as many people to the same task may not cause the task to be finished twice as fast.


Project Selection ToolsProject Selection Tools are used to evaluate whether to go forward on Cost Estimating Phase. Tools include:Payback Period (PBP)Cost Benefit AnalysisPresent Value/Future Value (PV/FV)Net Present Value (NPV)Internal Rate of Return (IRR)Return on Investment (ROI)


Payback Period (PBP)PBP is speed of financial return expressed as number of time periods required to recover investments before profit starts to accumulate.If NPV > PBP then ignore PBP


Cost Benefit AnalysisCost Benefit Analysis determines the Benefit to Cost Ratio (BCR) in which benefits are revenue or paybackIf BCR > 1 then Benefits > CostsIf BCR = 1 then Costs = BenefitsIf BCR < 1 then Costs > Benefits


Present Value and Net Present ValuePresent Value (PV) is the value today of future cash flows.Net Present Value (NPV) is the present value of the total benefits (income or revenue) minus the costs.NPV is normally used to evaluate project candidacy.A higher NPV is the better choice between projects because it means a better return.On exam questions, the time factor of the NPV is already calculated into the NPV, so choose higher NPV and ignore additional time data in question.If the Payback Period (PBP) is less, the NPV takes precedence in evaluation.


PV and NPV FormulaeYou will probably not be expected to calculate according PV and NPV formulae on the exam.PV = FV / (1 + r)n or PV = CF / (1 + r)nNPV = CF0 + CF1/(1 + r)1 + CF2/(1 + r)2 + CF3/(1 + r)3 CFn/(1 + r)nWhere FV is future value, CF is future Cash Flow, r interest Rate, and n is number of time periods


Internal Rate of Return (IRR)IRR is the rate of interest at which revenues and costs are equal.NPV = 0Higher IRR is better than lower IRRUsed to compare multiple projectsIn good investments:IRR > Business Cost of Capital or Discount Rate


Return on Investment (ROI)ROI = Income / Invested CapitalMeasures overall effectiveness of generating profits with available assets.Higher ROI is better than lower ROI


Cost Considerations3 types of project costs to consider: Life Cycle Costing (cradle-to-grave)Opportunity Cost (cost of next best project)Sunk Costs (monies already spent)


Life Cycle Costing(cradle-to-grave)Concept that PMs should not manage project costs to the exclusion of overall costs for Operations and Maintenance Phases.Project costs may be low at the expense of costs for the rest of the life of the project.


Opportunity Cost(cost of next best project)Impacts cost estimating by reducing options to perform other projects.Value of the project that was not selected or the cost of the lost opportunity.


Sunk Costs (monies already spent)Sunk costs should not be considered in the estimating process.Never use them. Bad Project Manager, bad, bad!


Cost Budgeting DefinitionCost Budgeting is allocating the overall project cost estimates to the individual work packages and activities to establish a Cost Baseline for measuring project performance.


Cost Budgeting ConceptsAn estimate is an approximationA budget is what youre allowed to spendWBS must be deliverable basedAssign costs to deliverablesCost budget may be described by a cumulative S curve mapping cost of deliverables against time period


Cost Budgeting ActivitiesEstablish control accountsDelineate accounting categoriesEstablish management reservesForecast cash flowsCreate cost baseline


Control AccountsUsed in Cost Budgeting to divide WBS into cost packages to facilitate one or more cost baselines through:cost assignmentschedule trackingcost controlreporting


Accounting CategoriesThe following Accounting Categories are delineated during Cost Budgeting for consideration by PMs:variable vs. fixeddirect vs. indirectrecurring vs. non-recurringcapital vs. expense, (I.e., durable vs. consumable)


Managerial ReservesProvided for risks outside defined project scope (Unknown-Unknowns)Not controlled by PMGranted through Change Control


Cash Flow ForecastingForecasting cash flows that can be demonstrated as a cumulative S curve of cost vs. time for deliverables on a time based budget is a Cost Budgeting activity.


Cost BaselineThe Cost Baseline is an output of the Cost Budgeting process that can be represented as a performance measurement baseline cumulative S curve showing budgeted cost of work scheduled and cumulative planned value.


Depreciation DefinitionDepreciation is the indirect cost of an assets (piece of capital equipments) value over time.The most common form of depreciation is Straight Line Depreciation (SL) in which the same amount is taken each year.


Forms of Depreciation


Cost Control and FirefightingFire prevention by influencing the factors which create changes to the cost baseline to ensure that the changes are beneficial.Fire detection by determining that a cost baseline has changed andFire fighting by managing actual changes when and if they occurCost Budget := Cost Plan


Cost Flow AnalysisProjects cash flow in and out of a project on a monthly basisUses 2 types of cost accounting systems:Cash basedAccrual basedIs a method of measuring project progress


Cost Accounting MethodsCash Based Cost AccountingCan have its own baselineAccounts for cash when it leaves handUsed by Finance DepartmentAccrual Based Cost AccountingCan have its own baselineCheck based accounting for cost at time liability is incurredUsed by Project Management


Paretos Principle20% of the work packages account for 80% of the cost variances.


Measuring Progress of Individual Tasks


RisksUnknown-Unknowns: unknown risks outside the defined Project ScopeKnown-Unknowns: known risks See Risk sections of study guides for complete discussion and be aware unknown-unknowns and known-unknowns are sometimes referred to in Cost section of PMP exam.


Managing ChangeCrashing: adding more resources to critical path tasks while maintaining scope. Usually results in increased costs. If a project is already late, do not crash.Fast Tracking: doing critical path tasks in parallel that were originally planned to be performed in series. Usually results in increased risk.


Managing TasksLeveling: Resource leveling is using network analysis in which schedule decisions are driven by resource management concerns. Leveling lets schedule and cost slip in favor of having a stable number of resources each month.Floating is delaying a task without delaying the project completion.


Information in these PMI PMP exam study group notes is quoted or derived from the PMI PMBOK Study Guide, PMP Exam Prep, A Course in a Book by Rita Mulcahy, and Looking Glass Development's PMP Exam Prep Course Study Guide

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