Pmp cost chapter 7

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Project Cost ManagementChapter 7

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Project Cost Management

Why do we need to manage our project cost ?

Sponsor Project manager

I need fund for the

project

You didn’t tell

before. I don’t have

now

No

money……No

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Why do we need to manage our project cost ?

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Definitions

7.1 Plan Cost Management

7.2 Estimate Costs

7.3 Determine Budget

7.4 Control Costs

Earned Value Management

KEY TERMS


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Knowledge

Area

Process

Initiating Planning ExecutingMonitoring &

ControlClosing

Cost

7.1 Plan Cost Management

7.2 Estimate Costs

7.3 Determine Budget

7.4 Control

Costs

Enter phase/

Start project

Exit phase/

End project

Initiating

Processes

Closing

Processes

Planning

Processes

Executing

Processes

Monitoring &

Controlling Processes


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7.1 Plan Cost Management—The process that establishes

the policies, procedures, and documentation for planning,

managing, expending, and controlling project costs.

7.2 Estimate Costs—The process of developing an

approximation of the monetary resources needed to

complete project activities.

7.3 Determine Budget—The process of aggregating the

estimated costs of individual activities or work

packages to establish an authorized cost baseline.

7.4 Control Costs—The process of monitoring the status of

the project to update the project costs and managing

changes to the cost baseline.

Definitions

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Profit = Revenue – Costs

Direct costs are costs that can be directly related

to producing the deliverable of the project: Salaries, cost

of hardware & software purchased specifically for the

project

Indirect costs are costs that are not directly related to

the deliverable of the project, but are indirectly related

to performing the project, e.g. cost of electricity,

Internet, rent and office supplies.

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Variable Costs: change with the amount of production

(cost of material).

Fixed Costs: do not change with production (rent,

setup costs, … etc.).

BUS IS

Fixed cost

Variable

cost

Variable

cost

Variable

cost

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Contingency reserves: Cost Baseline : the cost

impacts of the remaining risk ( known-unknown )

Management reserves: Cost Budget : extra fund

to cover unforeseen risk or changes to the project

( unknown-unknown )

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• Cost Of Quality

Refers to the total cost of the conformance work and the

nonconformance work

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**** Life Cycle Costing

• Costs over the entire life of the product.

• You plan the project to produce the product at a lower

level of quality and save $9,000.

• Project is completed. Maintenance costs are $100,000

over the product's life.

• Maintenance cost could be $20,000 if higher quality was

applied.

• Your $9,000 project "savings" cost the company $80,000.

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• Level of precision. ( measure of exactness )

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.

• Level of accuracy. ( assessment of correctness )

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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**** Analogous Estimate ( Top Down )

• Use actual values of a similar in fact project.

• Is used in project initiation when no details.

• Quick, less costly but less accurate.

• Difficult for projects with uncertainty.

• ( Rough Order Of Magnitude ) Accuracy of estimate

- 50 % to + 75 % or -25 % to +75 %

**** Parametric Estimate ( Budgetary)

• Is used in project Planning when more details are available.

• ( Budgetary estimate ) Accuracy of estimate is

-10 % to +25 % or -25% to +25%

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**** Bottom-Up Estimating

• Creating detailed estimates for each part of an activity (if

available) or work package (if activities are not defined).

• Accurate WBS is needed.

• Applied before project execution.

• ( Definitive estimate ) Accuracy of estimate is

-5 % to +10 % or -10 % to +10 %

• Takes time and more costly.

• Based on details

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GANTT Chart tells the progress of each activity

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Acronym Term Interpretation

PV Planed Value Authorized budget for work scheduled

EV Earned Value Budget cost for work done.

AC Actual Cost Actual cost incurred for the work accomplished.

BACBudget At

CompletionBudget for the total project effort.

EACEstimate At

CompletionExpectation of the total project to cost (a forecast).

ETCEstimate To

Complete

How much more do we expect it to cost to finish the

project (a forecast) ?

VACVariance At

Completion

How much over or under budget do we expect to be at

the end of the project?

**** Earned Value Management

• EVM is a Project Performance Measurement technique that

integrates scope, time, & cost data.

CV ( Cost Variance )

The difference between Earned Value and Actual Cost

Negative value = Cost Overrun or over budget

Positive value = on or under cost or under budget

Are we under or over budget 1.0 or greater is good

EV = Earned Value

AC = Actual Costs

CV = EV – AC

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SV ( Schedule Variance )

The difference between Earned Value and Planned Value

Negative value = behind schedule

Positive value = on or ahead of schedule

Are we ahead or behind schedule 1.0 or greater is good

EV = Earned Value

PV = Planned Value

SV = EV – PV

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CPI - Cost Performance Index

The ratio of Earned Value to Actual Cost

Value < 1 = Cost over budget

Value > 1 = Cost below budget

How efficiently are we using our resources

Ex: We are only getting about 89 cents out of every dollar we put into the project – THIS IS BAD

EV = Earned Value

AC = Actual Costs

CPI = EV / AC

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SPI - Schedule Performance Index

The ratio of Earned Value to Planned Value

Value < 1 = behind schedule

Value > 1 = on or ahead of schedule

How efficiently are we using time

Ex: We are only progressing at about 83 percent of the rate planned – THIS IS BAD

EV = Earned Value

PV = Planned Value

SPI = EV / PV

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Estimate At Completion

Budget At Completion

Variance At

Completion

EAC – Estimate At Completion

The ratio of Budget at Completion to Cost Performance Index

This formula is used if no variances from the BAC have occurred

This formula is used if you will continue typically at the same rate of spending ( same performance ).

Default way if exam mentioned nothing.

Past performance will be typically in future.

EAC = BAC / CPI

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This formula calculates actual costs to date + a new estimate for the remaining work.

It is used when the original estimate was fundamentally flawed.

It is used when your plan is no longer valid

EAC = AC+ ETC (bottom-up)

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This formula calculates Actual Costs + Remaining Budget.

It is used when current variances are thought to be atypicalof the future.

It is used if you will follow plan.

It accepts the actual project performance to date (whether favorable or unfavorable)

EAC = AC+ (BAC ـــ EV)

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ETC work will be performed at an efficiency rate that

considers both the cost and schedule performance.

It is used when current variances are thought to be typicalof the future and when project schedule constraints will influence the completion of the remaining effort.

example, it might be used when the cumulative CPI is less than one and a firm completion date must be met.

EAC = AC+ BAC - EV

CPI X SPI

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To-Complete Performance Index (TCPI)

If CPI > 1

If CPI < 1

This formula divides the work remaining to be done by the money remaining to do it.

It answers the question "In order to stay within budget, what rate must we meet for the remaining work?"

Greater than one is bad and less than 1 is good.

TCPI = BAC - EV

BAC - AC

TCPI = BAC - EV

EAC - AC

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VAC -Variance at Completion

The difference between the Budget at Completion and the Estimate at Completion ratio.

This is a variance formula.

Ex : As of today will we be under or over budget at the end of the project

VAC = BAC ـــ EAC

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QUIZ

A project is estimated to cost $ 50,000 with a timeline of 50

days. After 25 days, the project manager finds that 50% of

the project is complete and Actual costs are $ 50,000. What

is the Cost Performance Index (CPI) ?

A. The CPI is 1

B. The CPI is 2

C. The CPI is 0.5

D. The CPI is 1.5

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QUIZ

A project is estimated to cost $ 50,000 with a timeline of 50

days. After 25 days, the project manager finds that 50% of

the project is complete and Actual costs are $ 50,000. What

is the Cost Performance Index (CPI) ?

A. The CPI is 1

B. The CPI is 2

C. The CPI is 0.5

D. The CPI is 1.5

Answer : C

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Task Progress Cost spent

Side 1 ||||||||||||||||||||||||||||||||||||||||100% $1,200

Side 2 ||||||||||||||||||||||||||||||||||||||||100% $1,000

Side 3 ||||||||||||||||||||||||||||||75% $750

Side 4 ||||||||||||||||||||50% $500

Side 5 0% $0

Side 6 0% $0

Question

You have a project to build a box. The box is six sided. Each side is to take

one day to build and is budgeted for $1000 per side. The sides are

planned to be completed one after the other. Today is the end of day

three.

• Using the following project status chart, calculate PV, EV, AC, BAC,

CV, CPI, SV, SPI, EAC, ETC, VAC.

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Parameter Calculation Result

PV 1000 + 1000 + 1000 3000

EV (100% x 1000) + (100% x 1000) + (75% x 1000) + (50% x 1000) 3250

AC 1200 + 1000 + 750 + 500 3450

BAC 6 x 1000 6000

CV EV – AC = 3250 - 3450 -200

CPI EV / AC = 3250 / 3450 0.942

SV EV – PV = 3250 - 3000 250

SPI EV / PV = 3250/ 3000 1.08

EAC BAC / CPI = 6000 / 0.942 6369.42

ETC EAC – AC = 6369.42 - 3450 2919.42

VAC BAC – EAC = 6000 – 6369.42 -369.42

• Over budget, getting 0.94 dollar for every dollar we spent,

• Ahead schedule, progressing 108% of the rate planned,

• Probably will spend $6369.42 at the end (estimation),

• Need $2919.42 to complete,

• Over budget at the end for about $369.42 (estimation)

7.1- Plan Cost Management

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7.1- Plan Cost Management.

The process that establishes the policies, procedures, and

documentation for planning, managing, expending, and

controlling project costs.

7.1- Plan Cost Management INPUTS

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1. Project

Management Plan

Scope Baseline

Schedule Baseline

2. Project Charter

3- EEF

4- OPA

7.1- Plan Cost Management T & T

1. Expert Judgment

1. Analytical Techniques

1. Meetings

7.1- Plan Cost Management OUTPUTS

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Co

st

Man

ag

em

en

tP

lan

• Units of Measure staff hours, staff days, meters, liters,

tons, kilometers

• Level of Precision (measure of exactness)

• Level of Accuracy (assessment of correctness)

• Control Accounts

• Control Thresholds (Percentage deviations from the

baseline plan.)

• Rules for Performance Measurement

Specify tracking methodologies

Earned value measurement techniques

Earned value management computation equations

• Reporting Formats (cost reports)

• Process Description

• Additional Details

7.2- Estimate Cost

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7.2 Estimate Costs

The process of developing an approximation of the

monetary resources needed to complete project activities.

7.2- Estimate Cost INPUTS

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1. Cost Management Plan

2. Human Resource Management Plan

3. Scope BaselinesScope Statement / WBS /

WBS Dictionary

4. Project Schedule

5. Risk Register (Risk mitigation costs)

6. EEF Market Conditions

Published Commercial Data

7- OPA

Cost Estimating Policies

Cost Estimating Templates

Historical Information

Lessons Learned

7.2- Estimate Cost T & T

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1. Expert Judgment

2. Analogous Estimating (Top down)

3. Parametric Estimating

4. Bottom-up estimating

5. Three-point

Estimation

(Beta Distribution) Weighted Average (P+4M+O) / 6

(Triangular Distribution) ( P+M+O ) / 3

6. Reserve

Analysis

• Contingency Reserve ( Known Unknown ) by project

manager for activities

• Management Reserve ( Unknown Unknown ) by

management for whole project

7. Cost Of

Quality

• Cost Of Conformance

• Cost Of Non Conformance

8. PMIS

9. Group Decision making techniques: Unanimity, Majority (>50%),

Plurality, Dictatorship

10. Vendor Bid analysis

7.2- Estimate Cost Outputs

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1. Activity Cost Estimates

2. Basis of Estimates

• how the cost estimate was derived

• Documentation of :

Assumptions

Known constraints

Range of possible estimates

3. Project Documents Updates

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7.3- Determine Budget

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7.3- Determine Budget

The process of aggregating the estimated costs of individual

activities or work packages to establish an authorized cost

baseline

7.3- Determine Budget INPUTS

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1. Cost Management Plan

2. Scope Baseline

3. Activity Costs Estimates

4. Basis of Estimates

5. Project Schedule

6. Resource

Calendars

which resources are assigned to the project and

when they are assigned

7. Risk Register

8. Agreements

9. OPA

• Existing formal and informal cost budgeting-

related policies, procedures, and guidelines.

• Cost budgeting tools.

• Reporting methods.

7.3- Determine Budget T & T

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1. Cost Aggregation

2. Reserve Analysis

3. Expert Judgment

4. Historical

Relationships

• Historical information used to develop the model.

• Parameters used in the model are readily quantifiable.

5. Funding

Limit

Reconciliation

When to supply the fund needed on time along with the

work being done

7.3- Determine Budget Outputs

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1. Cost Baselinethe approved version of the time-phased project

budget

Known UnknownUnknown Unknown

This is the level of divisions to track measurement

7.3- Determine Budget Outputs

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2. Project

Funding

Requirements

When I will provide fund supply to work being done

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7.4- Control Cost

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7.4- Control Cost.

The process of monitoring the status of the project to

update the project costs and managing changes to the cost

baseline

7.4- Control Cost INPUTS

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1. Project Management

Plan

• Cost Baseline

• Cost Management Plan

2. Project Funding Requirements

3. Work Performance Data

4. OPA

1. Earned Value Management

2. Forecasting

3. To-Complete Performance Index

4. Performance Reviews

• Variance Analysis

• Trend Analysis

• Earned Value Performance

5. Reserve Analysis

6. PMIS

7.4- Control Cost T & T

7.4- Control Cost Outputs

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1. Work Performance Measurements

2. Budget Forecasts ( EAC / ETC )

3. Change Requests

4. Project Management Plan

Updates

• Cost baseline.

• Cost management plan.

5. OPA Updates

6. Project Document Updates • Cost estimates, and

• Basis of estimates.

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Questions

l. One common way to compute estimate at completion

(EAC) is to take the budget at completion BAC

and:

• A. Divide by SPI.

• B. Multiply by SPI.

• C. Multiply by CPI.

• D. Divide by CPI.

• Answer : D

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Questions

2. Estimate at completion (EAC) is a periodic evaluation of:

A. The cost of work completed.

B. The value of work performed.

C. The anticipated total cost at project completion.

D. What it will cost to finish the project.

• Answer : C

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Questions

3. If earned value (EV) = 350, actual cost (AC) = 400, and

planned value (PV) = 325,

what is cost variance (CV)?

A. 350

B. -75

c. 400

D. -50

• Answer : D

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Questions

4. Analogous estimating:

A. Uses bottom-up estimating techniques.

B. Is used most frequently during project executing.

C. Uses top-down estimating techniques.

D. Calculates estimates using actual detailed historical

costs.

• Answer : C

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Questions

5. A cost performance index (CPI) of 0.89 means:

A. At this time, we expect the total project to cost 89

percent more than planned.

B. When the project is completed, we will have spent 89

percent more than planned.

C. The project is progressing at 89 percent of the rate

planned.

D. The project is getting 89 cents out of every dollar

invested.

• Answer : D

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Questions

6. A schedule performance index (SPI) of 0.76 means:

A. You are over budget.

B. You are ahead of schedule.

C. You are progressing at 76 percent of the rate originally

planned.

D. You are progressing at 24 percent of the rate originally

planned.

• Answer : C

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Questions

7. Which type of cost is team training?

A. Direct

B. NPV

C. Indirect

D. Fixed

• Answer : A

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Questions

8. Project setup costs are an example of:

A. Variable costs.

B. Fixed costs.

C. Overhead costs.

D. Opportunity costs.

• Answer : B

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Questions

9. The project manager is allocating overall cost estimates

to individual activities to establish a baseline for measuring

project performance. What process is this?

A. Cost Management

B. Estimate Costs

C. Determine Budget

D. Control Costs

• Answer : C

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Questions

10. You provide a project cost estimate for the project to the

project sponsor. He is unhappy with the estimate, because

he thinks the price should be lower. He asks you to cut 15

percent off the project estimate. What should you do?

A. Start the project and constantly look for cost savings.

B. Tell all the team members to cut 15 percent from their

estimates.

C. Inform the sponsor of the activities to be cut.

D. Add additional resources with low hourly rates.

• Answer : C

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11. Lucy is currently preparing a high-level cost estimate for

her project in the initiation phase. Given the limited detail

available to her, what would you expect the range of her

estimate to be and what would you call such an estimate?

A. -25 to +75 %, Rough Order of Magnitude.

B. -5 to +10 %, Narrow.

C. 25 to +25 %, Rough Order of Magnitude.

D. -1 to +1 %, Definitive.

Questions

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11. Lucy is currently preparing a high-level cost estimate for

her project in the initiation phase. Given the limited detail

available to her, what would you expect the range of her

estimate to be and what would you call such an estimate?

A. -25 to +75 %, Rough Order of Magnitude.

B. -5 to +10 %, Narrow.

C. 25 to +25 %, Rough Order of Magnitude.

D. -1 to +1 %, Definitive.

Answer : A

Questions

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12. The Cost Performance Baseline is a time-phased

budget and is used as a basis to measure, monitor, and

control overall cost performance of the project. It is usually

displayed in the form of:

A. Pie-chart

B. An inverted S curve.

C. A Z curve

D. An S-curve

Questions

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12. The Cost Performance Baseline is a time-phased

budget and is used as a basis to measure, monitor, and

control overall cost performance of the project. It is usually

displayed in the form of:

A. Pie-chart

B. An inverted S curve.

C. A Z curve

D. An S-curve

Answer : D

Questions

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13. Contingency Reserves are estimated costs to be used

at the discretion of the project manager to deal with:

A. Anticipated but not certain events.

B. Scope creep

C. Anticipated and certain events

D. Unanticipated events

Questions

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13. Contingency Reserves are estimated costs to be used

at the discretion of the project manager to deal with:

A. Anticipated but not certain events.

B. Scope creep

C. Anticipated and certain events

D. Unanticipated events

Answer : A

Questions

Pmp cost chapter 7

Leadership & Management

Transcript of Pmp cost chapter 7