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PMP EXAM GUIDE Project Management Professional
PANKAJ SHARMA PMP,PRINCE 2 PRACTIONER
2011
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PMP EXAM GUIDE
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PANKAJ SHARMA
Project Management Body of Knowledge, Fourth Edition (PMBOK Guide) 2008
Project Management Institute, Inc.
PMP
EXAM
GUIDE
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ABOUT THE AUTHOR
Pankaj Holds Master degree in computer engineering from Birla Institute of technology and
Science, Pilani (India) and is a certified PMP, ITIL v3 and a Prince2 practitioner. Enriched with
long industry experience, coupled with excellent professional track record, Pankaj is extremely
passionate about sharing his professional knowledge and experience. He has coached employees
from the companies IBM, Accenture, Deloitte, Birlasoft, HCL, TCS and Indian defense forces
(Army, Navy and Indian Air force). Presently he is Chief Technology Officer for Connoisseur
Consulting Solutions Pvt Ltd and in the current role he is responsible for IT and business
Strategy management.
An energetic and enthusiastic project management consultant and trainer with over 15 years of
practical hands-on project and program management experience in managing and directing mid
and large sized IT program/projects involving distributed teams in Manufacturing, HR and
healthcare verticals across US, Europe and UK geography.
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CONTENTS OVERVIEW
CONTENTS OVERVIEW ______________________________________________________________ 4
Introduction to PMP Examination _______________________________________________ 7
Introduction to PMI _______________________________________________________________ 8
Purpose of PMBOK Guide __________________________________________________________ 8
Why Become a Certified PMP ________________________________________________________ 9
PMP Examination _________________________________________________________________ 9
PMI Principles ___________________________________________________________________ 12
Project Management Framework _______________________________________________ 15
Project __________________________________________________________________________ 16
Why Projects Fail? ________________________________________________________________ 18
Project Management ______________________________________________________________ 18
Organizational Structure ___________________________________________________________ 22
The Project Life Cycle ______________________________________________________________ 24
Project Management Knowledge Areas _______________________________________________ 28
Project Integration Management _______________________________________________ 36
Project Integration Management ____________________________________________________ 37
Develop Project Charter ____________________________________________________________ 38
Develop Project Management Plan ___________________________________________________ 42
Direct and Manage Project Execution _________________________________________________ 43
Monitor and Control Project Work ___________________________________________________ 45
Perform Integrated Change Control __________________________________________________ 46
Close Project or Phase _____________________________________________________________ 48
Project Scope Management ____________________________________________________ 50
Project Scope Management _________________________________________________________ 51
Collect Requirements ______________________________________________________________ 52
Create WBS ______________________________________________________________________ 56
Verify Scope _____________________________________________________________________ 58
Control Scope ____________________________________________________________________ 59
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Project Time Management ____________________________________________________ 61
Project Time Management _________________________________________________________ 62
Define Activities __________________________________________________________________ 63
Sequence Activities _______________________________________________________________ 65
Estimate Activity Resources _________________________________________________________ 68
Estimate Activity Duration __________________________________________________________ 70
Develop Schedule _________________________________________________________________ 72
Control Schedule _________________________________________________________________ 77
Project Cost Management _____________________________________________________ 80
Project Cost Management __________________________________________________________ 81
Estimate Costs ___________________________________________________________________ 82
Determine Budget ________________________________________________________________ 85
Control Costs ____________________________________________________________________ 87
Earned value Management (EVM) ____________________________________________________ 88
Project Quality Management __________________________________________________ 93
Project Quality Management ________________________________________________________ 94
Plan Quality _____________________________________________________________________ 96
Perform Quality Assurance _________________________________________________________ 99
Perform Quality Control ___________________________________________________________ 101
Project Human Resource Management _________________________________________ 106
Project Human Resource Management_______________________________________________ 107
Develop HR Plan _________________________________________________________________ 108
Acquire Project Team _____________________________________________________________ 111
Develop Project Team ____________________________________________________________ 113
Manage Project Team ____________________________________________________________ 115
Organization Theories ____________________________________________________________ 118
Project Communication Management __________________________________________ 122
Project Communication Management _______________________________________________ 123
Identify Stakeholders _____________________________________________________________ 124
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Plan Communication _____________________________________________________________ 126
Distribute Information ____________________________________________________________ 128
Manage Stakeholder Expectations __________________________________________________ 130
Report Performance ______________________________________________________________ 132
Project Risk Management ____________________________________________________ 135
Project Risk Management _________________________________________________________ 136
Plan Risk Management____________________________________________________________ 137
Identify Risks ___________________________________________________________________ 139
Perform Qualitative Risk Analysis ___________________________________________________ 142
Perform Quantitative Risk Analysis __________________________________________________ 145
Plan Risk Responses ______________________________________________________________ 148
Monitor and Control Risks _________________________________________________________ 151
Project Procurement Management _____________________________________________ 154
Project Procurement Management __________________________________________________ 155
Plan Procurements _______________________________________________________________ 156
Conduct Procurements____________________________________________________________ 159
Administer Procurements _________________________________________________________ 161
Close Procurements ______________________________________________________________ 163
Professional Responsibility and Ethics___________________________________________ 166
Introduction ____________________________________________________________________ 167
Ensure Integrity _________________________________________________________________ 167
Contribute to PM Knowledgebase and Community _____________________________________ 167
Respect Diversity ________________________________________________________________ 168
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PMP EXAM GUIDE
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Introduction
Introduction to
PMP Examination
Introduction to PMP Examination
Introduction to
PMP
Examination
Introduction to PMI Purpose of Guide to PMBOK Guide Why Become a Certified PMP PMP Examination PMI Principles
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Introduction to PMI
PMI is headquartered in USA, founded in 1969
Worlds leading not-for-profit project management association
Over 288,000 Members across 170 countries
Advocates Best Practices in Project, Program and Portfolio Management
Credentials
Certified Associate in Project Management (CAPM)
Project Management Professionals (PMP)
Program Management Professional (PgMP)
PMI
Risk Management Professional (PMI-RMP
)
PMI
Scheduling Professional (PMI-SP
)
Purpose of PMBOK Guide
The SUM of knowledge within the profession of project management
Includes widely applied practices and innovations
Constantly evolving
The knowledge and practices are applicable to most projects
PMBOK Guide is used as a reference for professional development programs
Structure of PMBOK Guide
Section I The Project Management Framework
Section II The Standard for Project Management of a Project
Section III The Project Management Knowledge Areas
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Program based on Newly Launched Fourth Edition of PMBOK Guide
Why Become a Certified PMP
Widely recognized Project Management Certification
Worldwide Recognition of your knowledge of Project Management
Demonstrates Proof of Professional Achievement
Improves the way you manage your Projects
Increases your Marketability
Displays your willingness to pursue Growth
Increases Customer Confidence
Valued Globally across Industry Verticals & Companies
PMP Examination
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PMP Examination
Source: PMI Credential Handbook
PMP Examination Type of Questions
Scenario based
Situational
Using attached illustrations such as Network Diagram
Definitions
Fill in the Blanks
Formulas and Computing
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Negative descriptors such as Except
Two likely Answers
Roadmap to Become a PMP
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PMI Principles
A Project does NOT exists without a CHARTER
The Project Scope includes all of the work and ONLY the work
Activities are estimated by the Team
Lessons learnt are collected throughout the Project
Establish the extent of completion if the Project is terminated prematurely
Work Breakdown Structure is the basis for all planning activities
Quality is not an afterthought.it should be BUILT-IN
Project Management Plan drives how the Project work will be carried out
Risks are identified throughout the Project
Identify all Stakeholders to prevent Changes
Use Historical Information for Planning
Project Manager spends most of his/her time Communicating
Save Scope, Schedule and Cost baselines for comparison
Protect the Buyer and the Seller relationship to work as a Team
Set-up formal Change Control System
Prefer Preventive actions over Corrective actions
Project Manager should preserve his integrity
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Chapter 1
Project Management
Framework
Project Management
Framework
Projects and Operations Project Management Organizational Structure Project Life Cycle PMBOK Guide Knowledge Areas
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Project Management
Framework
Project Management Framework
Learning Objectives
After the completion of this chapter, the learner will be
able to:
Explain the PMBOK Guide project management concepts
Explain why projects are undertaken Describe the phases of the project life cycle Describe the five project management process groups Name the nine knowledge management areas Map the process groups and the nine knowledge areas
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Project
Definition
as per
PMBOK
Guide
A project is a temporary endeavor undertaken to create a unique product or
service.
All organizations perform work as projects or as operations. There is a thing line between the
two but still both share the following common characteristics:
Are performed by people Constrained by resources Are planned, executed and managed
Temporary
Temporary means that every project has a definite beginning and end. It does not mean that the
duration is short. Some projects can last for years. The projects end when the objectives of the
project have been achieved or it is clear that the project objectives cannot be met.
Unique
Unique means that the product or service or result is different from other product or service or
result. Projects are unique even if the category of the product it creates is a large domain. For
example, buildings are constructed but every such building that is created is unique because of
the difference in location, raw materials, contractors, and so on.
Progressive Elaboration
You learn about the project as it progresses. The specifications of the product become clear as
you move further and requirements become clearer. This is also called proceeding in steps.
Example of Projects
Building a new office Designing a new product or service Creating an advertisement campaign Creating a new process with a business unit
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Moving from one building to another Designing a space vehicle
Project
A temporary endeavor means that every project has a definite beginning and end.
Unique means that the product or service or result is different from other product or service or result.
Progressively elaborated - proceeding in steps
Projects versus Operations
Operations are ongoing and produce repetitive products, services, or results. Operations work is
ongoing that sustains the organization over time.
Operations and projects differ in the way that operations are ongoing but projects are
temporary.
Operations are repetitive in nature while projects create a unique product or service.
Operations objective is to sustain business while project closes after the objectives are
achieved.
Examples of Operations
Assembly line production
Call center operations Help desk, customer service, and so on
PROJECTS OPERATIONS
Temporary Ongoing
Unique Repetitive
Closes after attaining the objectives Objective is to sustain business
Prototyping the new car model Assembly line production
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Why Projects Fail?
Lack of clearly defined purpose Inexperienced project Managers Poor estimation of duration and cost Cultural and ethical misalignment Poor requirements and scope management Lack of coordination of resources and activities Poor communication Inadequate planning of scope, schedule, resources, cost, risk and quality Lack of progress and quality control
Project Management
Definition
as per
PMBOK
Guide
Project Management is the application of knowledge, skills, tools and
techniques to project activities to meet the project requirements.
The project team carries out the work needed to complete the project, while the project manager
schedules, monitors, and controls the various project tasks. The project manager requires
knowledge, performance, and personal skills to perform better at their jobs.
The typical work of a project manager involves:
Requirements gathering Managing stakeholder expectations Managing project constraints including scope, quality, schedule, resources, budget, and
risk.
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What is the role of a Project Manager?
The role of a Project Manager is to achieve project objectives. It is different from the role of a
functional or operations manager. The functional manager provides management oversight for an
administrative area. The operations managers are accountable for a facet of the core business.
A project manager should have knowledge and skills in the areas of Project Management,
Specific Application Area, and General Management.
For effective project management, the project manager should have:
1. Knowledge: This relates to what the project manager knows about project management.
2. Performance: This relates to what the project manager is able to accomplish by using this knowledge.
3. Personal Skills: This relates how the project manager behaves when managing the
project (attitudes, core personality characteristics, and leadership. To sum up the ability
to guide the project team while achieving project objectives and balancing the project
constraints.
A project manager spends about 90% of time communicating.
Project Stakeholders
Project stakeholders are individuals and organizations involved in the project that will be directly
or indirectly impacted by the project. The stakeholders may have positive or negative influence
on the outcome of the project.
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The stakeholders must be identified early in the project. This is often a difficult task. The project
manager needs to manage the expectations of the key stakeholders to successfully complete the
project.
Key stakeholders include:
Project Manager Customer / User Performing organization Project team members Project management team Sponsor Influencers PMO
Apart from the above, there are other categories of stakeholders such as external and internal
stakeholders, team members and their families, government agencies, and so on.
Project, Portfolio and Program Management
Definition
as per
PMBOK
Guide
Portfolio :
A portfolio refers to a collection of projects or programs and other work that
are grouped together to facilitate effective management of that work to meet
strategic business objectives.
Program:
A program is defined as a group of related projects managed in a coordinated
way to obtain benefits and control not available from managing them
individually.
Programs
Collection of related projects
Controls are implemented and managed in a coordinated way
Collective benefits are realized
Each project has a project manager
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Projects share resources and depends on the outcomes of other projects
Portfolios
Collection of programs and projects
Projects meet a specific business goal or objective
Includes weighing the value of each project against the portfolios strategic objective
Ensures efficient use of resources
Project Management Office (PMO)
Centralized units to oversee project and programs within the organization
Establishes and maintains the standards of project management methodologies
Support managers in planning, estimating, risk management and provide trainings
Project Management Office (PMO)
A project management office (PMO) is an organization body or entity assigned various
responsibilities related to the centralized and coordinated management of those projects
under its domain.
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Organizational Structure
Functional
Organization
Weak Matrix
Organisation
Balanced Matrix
Organisation
Strong Matrix
Organisation
Projectized
Organisation
PMs Title Expediter Expediter/
Coordinator
Project Manager Project
Manager
Project
Manager
Decision
Making
Power
Functional
manager
Functional
manager plays
a major role,
but PM will
make decisions
PM and the
Functional
Manager will
have equal
power
Project
Manager
Project
Manager
Resources From within
a Dept.
Project
members are
from different
departments
Project members
are from
different
departments
Project
members are
from different
departments
Project
based only
Resource
Allocation
As needed Only 25% will
be assigned to
the projects
About 50% will
be assigned to
the projects
About 80%
will be
assigned to the
projects
About
100% will
be assigned
to the
projects
Resources
Reports to
Functional
manager
Functional
manager
Two manager
(FM and PM)
Project
Manager
Project
Manager
PM Reports
to
Functional
manager
Functional
manager
Functional
manager and
his/her senior
manager
Company
Senior manager
Company
senior
manager/
higher
authority
After Project
Completion
Team go
back to their
Dept. (home)
Team go back
to their Dept.
(home)
Team go back to
their Dept.
(home)
Team go back
to their Dept.
(home)
No home
move to
different
project or
get laid off
Source: A Guide to the Project Management Body of Knowledge, Fourth Edition (PMBOK Guide) 2008 Project Management Institute, Inc.
All Rights Reserved.
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Organization Types Advantages and Disadvantages
Org. Type Advantages Disadvantages
Matrix Highly visible project objectives Not cost effective because of extra administrative
personnel
Better Project Manager control over
resources
More than ONE boss for project teams
Better coordination More complex to monitor and control
Team members maintain a home Higher potential for conflict and duplication of effort
and functional managers have different priorities
Functional Team members report to one supervisor
and clearly defined career paths
No career path in Project Management
Easier management of specialists People place more emphasis on their functional
specialty to the determent of the project
Projectized Efficient project organization No Home when project is completed
More effective communication than
functional
Duplication of facilities and job functions
Loyalty to the project Lack of professionalism in disciplines and less
efficient use of resources
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The Project Life Cycle
All projects, large or small, can be mapped to the following life cycle:
Starting the project
Organizing and preparing
Carrying out the project work
Closing the project
A typical life cycle shows the following characteristics:
Stakeholder influence and risk are more at the start of the project and decrease as project moves
towards closure.
Cost and staffing levels are low at the start, peak as project moves into execution and finally drop
as project inches towards closure.
The cost of changes increases and correcting errors increases as the project moves towards
closure.
Process Management Process Groups
The five process groups include:
1. Initiating - process group authorizes the project
2. Planning - process group plans the course of action to achieve objectives
3. Executing - process group uses the resources to carry out project tasks
4. Monitoring - process group measures progress to identify variances
5. Closing - process group formalizes product acceptance and closure
Though the five project management process groups appear as discrete elements, in
reality they overlap with each other.
The application of project management processes is iterative in nature and is repeated
during the project life cycle.
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Process Management Process Groups
Source: A Guide to the Project Management Body of Knowledge, Fourth Edition (PMBOK Guide) 2008 Project
Management Institute, Inc. All Rights Reserved.
Project Management Process Groups
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Project Management Process Groups Interaction
Source: A Guide to the Project Management Body of Knowledge, Fourth Edition (PMBOK Guide) 2008 Project Management Institute, Inc.
All Rights Reserved.
Initiating Process Group
Conduct cost-benefit analysis Determine and define the business needs and the project scope Know the project boundaries and constraints Identify high level risks Understand the required project organization structure Estimate budget and resource requirements Assign a project manager Obtain the project charter approval Formally authorize to start a new project or phase
Planning Process Group
Determine how you will plan and develop the project management plan Develop the project requirements in detail and agree the final scope Determine the required project activities and their sequencing Develop schedule using estimated resources and costs
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Agree what quality standards will be met by the project and how Define how project staffing will be done Establish the communication requirements and how it will be fulfilled Identify what can go wrong and the plans to deal with them Document what products or services will be acquired from outside the project Gain formal approval and buy-in from everybody involved in the project
Executing Process Group
Execute activities in the project plan Procure required project resources Complete work packages Document lessons learnt Implement approved changes, corrective and preventive actions Ensure processes are followed Hold team building activities and boost morale and efficiency Manage resource allocation and utilization Hold progress review meetings and distribute progress reports Keep everyone focused on the project goals
Monitoring & Control Process Group
Measure project performance using the documented technique in the plan Identify variances and recommend corrective actions to get back on track Approve changes, defect repair, corrective and preventive actions Resolve conflicts and issues Manages changes to scope, time and cost Perform impact analysis to approve or reject changes Obtain formal acceptance of deliverables from the customer Monitor the status of risks and identify new risks have emerged Measure team member performance
Closing Process Group
Confirm all project requirements are met Obtain formal acceptance of product from the customer Hand over the completed deliverables to the operations team Compile lessons learnt Measure customer satisfaction
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Archive project data and information for future reference Release resources
Project Management Knowledge Areas
The 42 Processes within the 5 Process Groups, are mapped into 9 Project Management
Knowledge Areas:
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Processes Initiation Planning Execution Monitoring &
Control
Close Out
Knowledge
Areas
Integration
Management
Develop Project
Charter
Develop Project
Management Plan
Direct and Manage
Project Execution
Monitor and
Control Project
Work
Perform Integrated
Change Control
Close Project or
Phase
Scope Management Scope Planning
Scope Definition
Create WBS
Scope Verification
Scope Control
Time Management Activity Definition
Activity Sequencing
Activity Resource
Estimating
Activity Duration
Estimating
Schedule Development
Schedule Control
Cost
Management
Estimate Costs
Estimate Budgets
Cost Control
Quality Management Quality Planning Perform Quality
Assurance
Perform Quality
Control
Human Resource
Management
Human Resource
Planning
Acquire Project
Team
Develop Project
Team
Manage Project
Team
Manage Project
Team
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Communication
Management
Identify
Stakeholders
Communications
Planning
Information
Distribution
Manage
Stakeholders
Expectation
Report Performance
Risk
Management
Risk Management
Planning
Risk Identification
Qualitative Risk Analysis
Quantitative Risk
Analysis
Risk Response Planning
Monitor & Control
Risk
Procurement
Management
Plan Procurement Conduct
Procurement
Administer
Procurements
Close
Procurement
Source: A Guide to the Project Management Body of Knowledge, Fourth Edition (PMBOK Guide) 2008 Project Management Institute, Inc.
All Rights Reserved.
Project Integration Management
Processes that integrates the different elements of project management Coordinates the project work is done correctly and in the right order Ensures changes are properly controlled and managed
Comprises of the following processes:
Develop Project Charter
Develop Project Management Plan
Direct and Manage Project Execution
Monitor and Control Project Work
Perform Integrated Change Control
Close Project or Phase
Project Scope Management
Ensures project includes all of the work and only the work required Identifies, defines and controls the project work Verifies that the deliverables meet the specified criteria
Comprises of the following five processes:
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Collect Requirements
Define Scope
Create WBS
Verify Scope
Control Scope
Project Time Management
Processes concerning with the timely completion of the project Determines the time and the order in which project work will be done Controlling to ensure everything gets done on time Comprises of the following six processes:
Define Activities
Sequence Activities
Estimate Activity Resources
Estimate Activity Durations
Develop Schedule
Control Schedule
Project Cost Management
Processes to ensure the project stays within the budget Determines the project budget Controls the changes to the project budget Comprises of the following three processes:
Estimate Costs
Determine Budget
Control Costs
Project Quality Management
Processes that ensures the project will satisfy the agreed quality standards Identifies the relevant standards and how they will be met Assurance activities to ensure the agreed processes are followed Monitoring project results to determine compliance Comprises the following three processes:
Plan Quality
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Perform Quality Assurance
Perform Quality Control
Project Human Resource Management
Processes that organize and manage the project team Identifies the required roles on the project Obtains the human resources needed to complete the work Enhance competencies and performance Comprises of the following four processes:
Develop Human Resource Plan
Acquire Project Team
Develop Project Team
Manage Project Team
Project Communication Management
Processes to ensure timely distribution of project information Determines the information needs of the project stakeholders Makes the information available in timely manner Collecting and distributing project performance information Comprises of the following processes:
Identify Stakeholders
Plan Communications
Distribute Information
Manage Stakeholder Expectations
Report Performance
Project Risk Management
Processes to deal with the unexpected when it does happen Identifying events that might affect the project Developing plan and actions to deal with those event
Comprises of the following six processes:
Plan Risk Management
Identify Risks
Perform Qualitative Risk Analysis
Perform Quantitative Risk Analysis
Plan Risk Responses
Monitor and Control Risks
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Project Procurement Management
Processes to purchase or acquire the products and services Selecting who will supply the required products and services Planning and administering the contracts
Comprises of the following processes:
Plan Procurements
Conduct Procurements
Administer Procurements
Close Procurements
Professional Responsibility
A PMP must follow the Project Management Institute Code of Ethics and Professional Conduct
The responsibilities includes:
Doing the right things
Making good choices
Keep learning and getting better
Respecting others culture
Covers legal, ethical and professional behavior of a PMP
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Chapter 2
Project Integration
Management
Project Integration
Framework
Develop Project Charter Develop Project Management Plan Direct and Manage Project Execution Monitor and Control Project Work Perform Integrated Change Control Close Project or Phase
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Project Integration
Management
Project Integration Management
Learning Objectives
After the completion of this chapter, the learner will be
able to:
List the various processes of Project Integration Management
Describe the process of Develop Project Charter Describe the process of Develop project plan Describe the process of Direct and Manage Project
Execution.
Describe the process of Monitor and Control Project Work
Describe the process of Perform Integrated Change Control
Describe the process of Close Project Or Phase Explain the various project selection methods Explain the components of a project management plan
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Project Integration Management
Definition
as per
PMBOK
Guide
Project Integration Management includes the processes and activities needed
to identify, define, combine, unify, and coordinate the various processes and
project management activities within the Project management process Groups.
Project Integration Management: Process Groups
Project Integration
Framework
Develop Project Charter Develop Project Management Plan Direct and Manage Project Execution Monitor and Control Project Work Perform Integrated Change Control Close Project or Phase
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Develop Project Charter
Definition
as per
PMBOK
Guide
The process of developing a document that formally authorizes a project or a
phase and documenting initial requirements that satisfy the stakeholder's
needs and expectations.
Key Points about Project Charter
The approved Project Charter formally initiates a project.
The Project Manager should be preferably assigned during creation of the Project
Charter.
Project Charter gives the project manager authority to spend and commit corporate
resources
It provides high-level requirements for the project.
Inputs: Develop Project Charter
Project statement of work A project statement of work (SOW) is a narrative
description of products, services, or results to be supplied. The SOW is provided by
the sponsor. In case of external customer, the SOW can be part of Request for
Proposal (RFP), Request for Information (RFI) or the contract. The SOW provides
the information on business need, product scope and how the project fits into the
strategic plan.
Business case: The business case document explains the importance of the project from
business standpoint. It involves cost-benefit analysis to find whether the project is worth
doing or not.
Contract: This is the input if project is being done for an external customer.
Enterprise environmental factors: These include organization structure, market
conditions, and so on.
Organization process assets: These include policies and procedures, templates,
historical information, and lessons learned database.
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Tools & Techniques: Develop Project Charter
Expert Judgment: Involves talking to all the experts on the project to identify inputs to
the charter. These can include the subject matter experts, external consultants, PMO and
other important stakeholders.
Outputs: Develop Project Charter
Project Charter: The Project Charter documents the business need and the following
information:
o Project purpose
o Project objectives and success criteria
o High-level requirements, project description, and risks
o Summary milestone schedule
o Summary budget
o Assigned project manager
o Name of the sponsor authorizing the charter
Project Selection Methods
Benefit Measurement Model (also called Comparative approach )
Payback Period Cost Benefit Analysis Scoring Models Net Present Value (NPV) Internal Rate of Return (IRR)
Mathematical Models (also called Constrained Optimization)
Use linear, dynamic, non-linear, multi-objective programming to solve problem
1. Payback period the amount of time to recover your cost. It compares the initial
investment to the cash inflows expected over the life of the product.
o For example, Initial investment on a project is Rs. 4,00,000, Expected cash
inflows: Rs. 50,000 per quarter for first two years, Rs. 100,000 per quarter
thereafter.
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o What is the payback period?
o Cash inflows = Rs. 50,000 x 4 (quarters in a year) = Rs. 2, 00,000 per year for
first two years. Hence, year 1 inflow = Rs. 2, 00,000, year 2 inflow = Rs. 2,
00,000. Total Rs. 4, 00,000 in 2 years
o So payback is reached in 2 years.
2. Benefit Cost Ratio (BCR) or profitability Index: This is the ratio of project benefit and
the project cost.
o BCR = Revenue / Cost
o Select the project with a higher BCR
3. Present Value (PV): is the expected future cash flows expressed in todays monetary
value
o PV = FV / (1+r) n
o For example, Calculate the Present Value of $ 100,000 received three years from
now. The interest rate is 10 percent.
o PV = 100000 / (1+10/100)3 = $ 75,131
4. Net Present value (NPV) is the sum total of the Present Value of Cash Inflows
Present Value of Cash Outflows
o If NPV > 0, accept the project
o Or select the project with the greater NPV
5. Internal Rate of Return: The rate of interest at which the revenues and costs are equal.
o Select the project with a higher IRR.
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6. Return on Investment (ROI): A return ratio that compares the net benefits of a project/
product, verses its total cost.
o ROI = Operating Income / Investments
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Develop Project Management Plan
Definition
as per
PMBOK
Guide
Develop Project Management Plan is the process of documenting the actions
necessary to define, prepare, integrate, and coordinate all subsidiary plans.
Inputs: Develop Project Management Plan
Project charter: explained earlier
Outputs from planning processes: Outputs from other project management planning
areas are used as an input to the project management plan. These include scope, cost,
time, quality, risk, human resource, communication, and procurement plans.
Enterprise environmental factors: explained earlier
Organizational process assets: explained earlier
Tools & Techniques: Develop Project Management Plan
Expert Judgment: explained earlier
Outputs: Develop Project Management Plan
Project management plan: The project management plan is a combination of subsidiary
plans. There is one sub subsidiary plan for each of the knowledge areas. These include
o Project scope management plan
o Schedule management plan
o Cost management plan
o Quality management plan
o Human resource management plan
o Communication management plan
o Risk management plan
o Procurement management plan
Note: The Project Management Plan is not the same thing as a project schedule.
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Direct and Manage Project Execution
Definition
as per
PMBOK
Guide
Direct and manage Project Execution is the process of performing the work
defined in the project management plan to achieve the project's objectives.
Inputs: Direct and Manage Project Execution
Project management plan: The project management plan is a combination of subsidiary
plans.
Approved change requests: These are authorized and documented changes to the
project scope.
Enterprise environmental factors: explained earlier
Organizational process assets: explained earlier
Tools & Techniques: Direct and Manage Project Execution
Expert judgment: explained earlier
Project management information system: An information system consisting of the
tools and techniques used to gather, integrate, and disseminate the outputs of project
management processes. It is used to support all aspects of the project from initiating
through closing, and can include both manual and automated systems.
Outputs: Direct and Manage Project Execution
Deliverables: are anything that you produce during the course of project activities.
Work performance information: refers to the information generated as the project
progresses: These include status reports, progress reports and so on.
Change requests: Change requests are issued when there are issues during project.
These can result in change in scope, time, cost, quality and other factors.
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Project management plan updates: Update to the various subsidiary plans
Project document updates: Update to the various project documents.
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Monitor and Control Project Work
Definition
as per
PMBOK
Guide
Monitor and Control project Work is the process of tracking, reviewing, and
regulating the progress to meet the performance objectives defined in the
project management plan.
Inputs: Monitor and Control Project Work
Project management plan: explained earlier
Performance reports: explained earlier
Enterprise environmental factors: explained earlier
Organizational process assets: explained earlier
Tools & Techniques: Monitor and Control Project Work
Expert judgment: explained earlier
Outputs: Monitor and Control Project Work
Change requests: explained earlier
Project management plan updates: explained earlier
Project documented updates: explained earlier
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Perform Integrated Change Control
Definition
as per
PMBOK
Guide
Perform Integrated Change Control is the process of reviewing all change
requests, approving changes and managing changes to the deliverables,
organizational assets, project documents, and the project management plan.
Change Control Systems
Every documented change request must be either approved or rejected by an authorized
person.
Some changes require approval by the Change Control Board (CCB).
Any approved changes may required adjusting the scope, time, and resource requirements
Configuration Management
Configuration management system provides a standardized, effective, and efficient way to
centrally manage approved changes and baselines within the project.
Inputs: Perform Integrated Change Control
Project management plan: explained earlier
Work performance information: explained earlier
Change requests: explained earlier
Enterprise environmental factors: explained earlier
Organizational process assets: explained earlier
Tools & Techniques: Perform Integrated Change Control
Expert judgment: explained earlier
Change control meetings: A change control board is responsible for meeting and
reviewing the change requests and approving or rejecting those change requests.
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Outputs: Perform Integrated Change Control
Change request status updates: Change requests, if approved are implemented and the
status is updated in change request log.
Project management plan updates: : explained earlier
Project document updates: : explained earlier
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Close Project or Phase
Definition
as per
PMBOK
Guide
Close Project or Phase is the process of finalizing all activities across all of the
project Management Process Groups to formally complete the project or
phase.
Inputs: Close Project or Phase
Project management plan: explained earlier
Accepted deliverables: The deliverables that have been accepted as part of Verify
Scope.
Organizational process assets: explained earlier
Tools & Techniques: Close Project or Phase
Expert judgment: explained earlier
Outputs: Close Project or Phase
Final product service or results transition: Refers to the final product, service or result
that the project was authorized to produce.
Organizational process assets update: This includes updates to the various
organizational process assets that include the project files, project or phase closure
documents and lessons learned database.
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Chapter 3
Project Scope
Management
Project Scope
Management
Collect Requirements Define Scope Create WBS Verify Scope Control Scope
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Project Scope
Management
Project Scope Management
Learning Objectives
After the completion of this chapter, the learner will be
able to:
List the processes for project scope management Describe the process of requirements gathering Describe the process of defining project scope Decompose project scope into work breakdown structure Describe the process of verify scope Describe how to control the project scope changes
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Project Scope Management
Definition
as per
PMBOK
Guide
Project Scope management includes the processes required to ensure that the
project includes all the work required, and only the work required, to complete
the project successfully.
Project Scope Management: Process Groups
Project Scope
Management
Collect Requirements Define Scope Create WBS Verify Scope Control Scope
The term scope may refer to:
Product Scope: The features and functions in a product, service, or result.
Project Scope: The work that needs to be done in order to deliver a product, service or
result with the specified features and functions.
The product scope is measured against the requirement and project scope is measured against the
project plan.
The success of the project is dependent on how well the requirements are captured. These
requirements include the product requirements as well as the project requirements. Product
requirements include the technical and other specifications of the product whereas project
requirements include the business and project management requirements.
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Collect Requirements
Definition
as per
PMBOK
Guide
Collect Requirements is the process of defining and documenting stakeholders'
needs to meet the project objectives.
Inputs: Collect Requirements
Project charter: The Project Charter is a summary document of what the project is
supposed to accomplish. This serves as key document to create the requirements
document.
Stakeholder register: Is the list of all the stakeholders. You need to gather requirements
from the all the stakeholders using different techniques such as interviews,
questionnaires, surveys and so on.
Tools & Techniques: Collect Requirements
Interviews: This is a one-to-one interaction with the stakeholders to understand the exact
needs.
Focus groups: This involves a group of people to discuss their needs with you.
Facilitated workshops: This is a structured technique where a moderator leads a group
through brainstorming together. The cross-functional teams work together and decide on
a common understanding and goals.
For example, Joint Application Development (JAD) sessions are used in the software
development industry. In manufacturing sector, Quality Function Deployment (QFD) is
used to arrive the critical characteristics of anew product.
Group creativity techniques: Some of the group creativity techniques include:
1. Delphi Technique: In Delphi Technique, a group of anonymous users is asked to
provide answers to specific questions. A moderator shares the ideas with everybody
and the iterations continue to settle down on a list of requirements from all.
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2. Mind maps: This is a excellent technique to visualize how the ideas relate to each
other.
3. Affinity Diagrams: This is a way to group same kind of ideas together in a group.
4. Brainstorming: This is the most common way of collecting the requirements where a
group of people sit down together to think of new ideas.
5. Nominal Group technique: This is a way of brainstorming where you write down
the ideas and then all vote for the best ones.
Group decision making techniques: There are various methods of arriving at a decision.
These include:
1. Unanimity: Everyone agrees in this case.
2. Majority: More than half of the people decide.
3. Plurality: The idea that gets the most votes.
4. Dictatorship: One person decides here.
Questionnaires and surveys: Use this method to elicit response from a larger set of
people.
Observations: Sometimes just observing the users gives an idea of the needs or how to
solve the problem.
Prototypes: Prototypes are scaled down versions of the product.
Outputs: Collect Requirements
Requirements documentation: Requirements documentation includes the business
need, project objectives, functional requirements, non-functional requirements, and
quality and acceptance criteria. It also includes the assumptions and constraints.
Requirements management plan: The requirements management plan describes how
the requirements will be managed through the project.
Requirements traceability matrix: This document describes where the requirements
came from. This document helps in creation of specific test cases.
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Define Scope
Definition
as per
PMBOK
Guide
Define Scope is the process of developing a detailed description of the project
and product.
Inputs: Define Scope
Project charter: explained earlier Requirements documentation: explained earlier Organizational process assets: explained earlier
Tools & Techniques: Define Scope
Expert judgment: explained earlier Product analysis: It involves better understanding the product or the project.
Alternatives identification: This is about exploring different ways to do the project work. This might include licensing some part or outsourcing some part of the project to
external vendors.
Facilitated workshops: explained earlier
Outputs: Define Scope
Project scope statement: The scope statement tells you what to do (and what not to do). The scope statement covers the following important items:
Project Objectives
Product Scope Description
Project Requirements
Exclusions
Deliverables
Acceptance Criteria
Constraints
Assumptions
Project document updates: Any updates to the project documents.
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Progressive Elaboration Versus Scope Creep
Progressive elaboration should not be confused with scope creep.
Progressive elaboration: Adding more details to the already defined scope and
not increasing the project scope.
Scope creep: Adding features and functionality (project scope) without addressing the effects on time, costs, and resources, or without customer
approval.
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Create WBS
Definition
as per
PMBOK
Guide
The process of subdividing project deliverables and project work into smaller,
more manageable components.
Work Breakdown Structure (WBS): Deliverable-oriented hierarchical decomposition of work.
It organizes and defines the total scope of the project.
Work Package: The lowest level WBS components that contain planned work. A work package
can be schedules, cost estimated, monitored and controlled.
Note: Work outside the WBS is outside the scope of the project.
Figure: Work Breakdown Structure (WBS)
Project
Phase 1 Phase 2 Phase 3
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Inputs: Create WBS
Project scope statement: explained earlier Requirement documentation: explained earlier Organizational process assets: explained earlier
Tools & Techniques: Create WBS
Decomposition: Decomposition is the subdivision of project deliverables into smaller, more manageable components until the work and deliverable are defined at the work
package level.
Outputs: Create WBS
Work breakdown structure: is a deliverable-oriented hierarchical decomposition of work. It organizes and defines the total scope of the project. The WBS is decomposed
into smaller, more manageable components until the work and deliverable are defined at
the work package level. It is the lowest level WBS components that contain planned
work.
Control accounts are established at work package level. Control account is used to
integrate scope, cost and schedule. It is also used for earned value measurement.
Work breakdown structure dictionary: WBS dictionary provides detailed description of each WBS element.
Scope baseline: An approved version of the detailed scope statement, work breakdown structure (WBS), and its associated WBS dictionary.
Project document updates: explained earlier
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Verify Scope
Definition
as per
PMBOK
Guide
The process of formalizing acceptance of the completed project deliverables
Inputs: Verify Scope
Project management plan: explained earlier
Work performance information: explained earlier
Requirements documentation: explained earlier
Requirements traceability matrix: explained earlier
Organizational process assets: explained earlier
Tools & Techniques: Verify Scope
Inspection: Inspection includes measuring and verifying to determine whether work and
deliverables meet requirements and product acceptance criteria.
Outputs: Verify Scope
Accepted deliverables: Deliverables that meet the acceptance criteria are signed-off by
the customer.
Change requests: If the deliverables that are not accepted, a change request is raised.
The change request goes for approvals.
Project document updates
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Control Scope
Definition
as per
PMBOK
Guide
The process of monitoring the status of the project and product scope and
managing changes to the scope baseline.
Inputs: Control Scope
Project management plan: explained earlier Work performance information: explained earlier Requirements documentation: explained earlier Requirements traceability matrix: explained earlier Organizational process assets: explained earlier
Tools & Techniques: Control Scope
Variance Analysis: Variance analysis is used to measure the variation of key parameters
from the original scope baseline.
Outputs: Control Scope
Work performance measurements: explained earlier
Organizational process assets updates: explained earlier
Change requests: explained earlier
Project management plan updates: explained earlier
Project document updates: explained earlier
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Chapter 4
Project Time
Management
Project Time
Management
Define Activities Sequence Activities Estimate Activity Resources Estimate Activity Duration Develop Schedule Control Schedule
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Project Time
Management
Project Time Management
Learning Objectives
After the completion of this chapter, the learner will be able to:
List the various time management process Describe the process of Define Activities Describe the process of Sequence Activities Describe the process of Estimate Activity Resources Describe the process of Estimate Activity Durations Describe the process of Develop Schedule using various tools Describe the process of Control Schedule Apply Critical Path Method to create schedule
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Project Time Management
Definition
as per
PMBOK
Guide
Project Time Management includes the processes required to manage timely
completion of the project.
Project Time Management: Process Groups
Project Time
Management
Define Activities Sequence Activities Estimate Activity Resources Estimate Activity Duration Develop Schedule Control Schedule
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Define Activities
Definition
as per
PMBOK
Guide
Define Activities is the process of identifying the specific actions to be
performed to produce the project deliverables.
Inputs: Define Activities
Scope Baseline: The scope baseline consists of project deliverables, assumptions and
constraints which are important inputs to the activities.
Enterprise Environmental Factors: explained earlier
Organizational Process Assets: It includes various templates and the lessons learned
databases.
Tools & Techniques: Define Activities
Decomposition: Decomposition refers to subdividing the work-packages to activities.
Rolling Wave Planning:
o Rolling wave planning is the process of planning for a project in waves as the
project becomes clearer and unfolds. It is a multi-step, intermittent process,
like waves - because we cannot provide the details very far out in our
planning.
o Work packages that are further in the future are planned at only a high level.
o Work packages that are closer in time are planned in detail.
o We end up saving a lot of planning time by not planning things that have a
relatively high chance of never reaching execution.
o Helpful in large or long-term projects where there is some uncertainty about
continuing with the project beyond a certain point in time.
Templates: Templates refers to using the WBS of the similar projects that are being
used in the organization.
Expert Judgment: using the opinion of the project managers who have done similar
projects earlier.
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Outputs: Define Activities
Activity List: This is the list of activities that need to be done to complete the project.
Activity Attributes: Activity attributes comprise of the information required for each
activity. This includes the description of each activity, predecessor activities, successor
activities, and any constraints.
Milestone List: A milestone is an important event in a project. These are important from
the point of tracking the project.
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Sequence Activities
Definition
as per
PMBOK
Guide
Sequence Activities is the process of identifying and documenting relationships
among the project activities.
Inputs: Sequence Activities
Activity List: explained earlier
Activity Attributes: explained earlier
Milestone List: explained earlier
Project Scope Statement: explained earlier
Organizational Process Assets: explained earlier
Tools & Techniques: Sequence Activities
Precedence Diagramming Method (PDM):
o Also called Activity on Node (AON)
o Uses boxes or rectangles as Nodes to represent Activities
o Connect boxes with Arrows which represent Dependencies
o Does not use dummy activities
o Includes all 4 relationships (FF, FS, SS, & SF)
These four relationships include:
1. Finish-to-Start. The initiation of the successor activity depends upon the completion
of the predecessor activity.
2. Finish-to-Finish. The completion of the successor activity depends upon the
completion of the predecessor activity.
3. Start-to-Start. The initiation of the successor activity depends upon the initiation of
the predecessor activity.
4. Start-to-Finish. The completion of the successor activity depends upon the initiation
of the predecessor activity.
In PDM, finish-to-start is the most commonly used type of precedence relationship. Start-
to-finish relationships are rarely used.
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Task Relationships
Dependency Determination:
1. Mandatory dependencies are those that are inherent in the nature of the work being
done. They often involve physical limitations. For example, Superstructure after the
foundation.
Mandatory dependencies are also called hard logic dependencies.
2. Discretionary dependencies are those that are defined by the project management
team.
Discretionary dependencies are usually defined based on knowledge of:
o Best practices within a particular application area.
o Some unusual aspect of the project where a specific sequence is desired, even
though there are other acceptable sequences.
o Discretionary dependencies may also be called preferred logic, preferential logic,
or soft logic.
3. External dependencies are those that involve a relationship between project
activities and non-project activities.
o For example, Regulatory dependencies
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Applying Leads and Lags: A lead allows acceleration of the successor activity
whereas, lag allows a delay in the successor activity.
Schedule Network Templates: Standard schedule network templates can be used for
expediting the creation of schedule network templates.
Outputs: Sequence Activities
Project Schedule Network Diagrams: Project schedule network diagrams are
schematic displays of the projects schedule activities and the logical relationships
among them, also referred to as dependencies.
o Can be produced manually or by using project management software.
o Can include full project details, or have one or more summary activities.
o Summary narrative accompanies the diagram and describes the basic approach
used to sequence the activities
Project Document Updates: Updates to any project documents.
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Estimate Activity Resources
Definition
as per
PMBOK
Guide
Estimate Activity Resources is the process of estimating the type and quantities
of material, people, equipment or supplies required to perform each activity.
Inputs: Estimate Activity Resources
Activity List: explained earlier
Activity Attributes: explained earlier
Resource Calendars: It includes the availability of the resources during various time
periods of the project.
Enterprise Environmental Factors: explained earlier
Organizational Process Assets: explained earlier
Tools & Techniques: Estimate Activity Resources
Expert Judgment: explained earlier
Alternatives Analysis: Alternatives analysis refers to the evaluation of various
alternatives available of estimating activity resources. These can include skill and
experience of the resources and also the different tools available for project execution.
Published Estimating Data: This includes published data for estimation available for
different industries.
Bottom-up Estimating: Involves subdividing large subset into smaller activities and ity
estimating each activity. Aggregation of all the activity estimates leads to the final
estimate.
Project Management Software: Involves estimating using software tools such as
spreadsheets and other automated tools.
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Outputs: Estimate Activity Resources
Activity Resource Requirements: It is the type and number of resources required for
each activity.
Resource Breakdown Structure: It is the hierarchical structure of resource category and
resource type. For example for labour category, high-skilled and medium-skilled.
Project document Updates: Updates to various related project documents.
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Estimate Activity Duration
Definition
as per
PMBOK
Guide
Estimate Activity Durations is the process of approximating the number of
work periods needed to complete individual activities with estimated resources.
Inputs: Estimate Activity Duration
Activity List: explained earlier
Activity Attributes: explained earlier
Activity Resource Requirements: explained earlier
Resource Calendars: explained earlier
Project Scope Statement: explained earlier
Enterprise Environmental Factors: explained earlier
Organizational Pocess Assets: explained earlier
Tools & Techniques: Estimate Activity Duration
Expert Judgment: explained earlier
Analogous Estimating: explained earlier
Parametric Estimating: Parametric modeling involves using project characteristics in a
mathematical model to calculate project costs. These models can be simple or complex
depending on the project.
Three - point Estimates: Also called Program Evaluation and Review Technique
(PERT). PERT uses three estimates to arrive at a range for activity time.
o Most Likely - The activity duration based on the realistic effort assessment.
o Optimistic - The activity duration based on the best-case scenario for the
activity.
o Pessimistic - The activity duration based on the worst-case scenario for the
activity.
Expected Time = (Optimistic + 4 * Most Likely + Pessimistic) / 6
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Reserve Analysis: Reserve analysis means keeping some reserve time or buffer for time overruns. This duration is the percentage of overall duration and called contingency
reserve.
Outputs: Estimate Activity Duration
Activity Duration Estimates: are the quantitative assessments of the likely number of
work periods that will be required to complete an activity.
Project Document Updates: Updates to various related project documents.
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Develop Schedule
Definition
as per
PMBOK
Guide
Develop Schedule is the process of analyzing activity sequences, durations,
resource requirements, and schedule constraints to create the project schedule
Inputs: Develop Schedule
Activity List: explained earlier
Activity Attributes: explained earlier
Project Schedule Network Diagrams: explained earlier
Activity Resource Requirements: explained earlier
Resource Calendars: explained earlier
Activity Duration Estimates: explained earlier
Project Scope Statement: explained earlier
Enterprise Environmental Factors: explained earlier
Organizational Process Assets : explained earlier
Tools & Techniques: Develop Schedule
Schedule Network Analysis: It is a analytical technique that uses critical path method,
critical chain method, what-if analysis, and resources leveling to calculate the early and
late start and finish dates for the uncompleted portions of project activities.
Critical Path Method: Critical Path is the path with the longest duration. A delay in any
one of the activities on the critical path activities leads to the delay in the entire project.
Float: The float for an activity is the amount that its duration can slip without causing the
project to be delayed. The float for any activity on the critical path is zero.
Calculate the early start, early finish, late start, and late finish using forward pass and
backward pass.
When two paths intersect, for the forward pass use the larger value, and for the
backward pass use the smaller value.
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Critical Chain Method: Critical chain is a schedule network analysis technique that
modifies the project schedule to account for limited resources.
Resource Leveling: Resource leveling is necessary when resources have been over-
allocated, has been assigned two activities at the same time, or a critical resource is
available only during certain times.
Resource leveling causes the critical path to change in most cases.
What-if Scenario Analysis: What-if analysis involves using various scenarios and
finding their impact on the schedule.
Applying Leads and Lags: explained earlier
Schedule Compression: Schedule compression involves shortening the project schedule
without affecting the project scope. The techniques are:
1. Crashing: This is done by adding more resources along the critical path. Crashing
does not always produce a viable alternative and often results in increased cost.
2. Fast-tracking: It involves doing activities in parallel that would normally be done in
sequence. Fast tracking often results in re-work and increase risk.
Scheduling Tool: Using scheduling tools and software programs to create network
diagrams.
Outputs: Develop Schedule
Project Schedule: It includes the project start and end dates and provides the prediction
of duration of the entire project. Project schedule can be represented in tabular form or
the following graphical formats:
o Milestone Chart
o Bar Chart
o Schedule Network Diagram
Schedule Baseline: It is an approved version of the schedule that is used to compare the
planned and actual progress.
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Schedule Data: Schedule data includes the supporting data apart from the milestones,
activities, assumptions and constraints.
Project Document Updates: Updates to the various project documents.
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Network Diagram Development
Critical Path Method
Forward Pass Early Start, Early Finish
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Backward Pass Late Start, Late Finish
Critical Path Longest Path, Zero Float
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Control Schedule
Definition
as per
PMBOK
Guide
Control Schedule is the process of monitoring the status of the project to
update project progress and managing changes to the schedule baseline.
Inputs: Control Schedule
Project Management Plan: explained earlier
Project Schedule: explained earlier
Work Performance Information: This includes the project status and progress reports.
Organizational Process Assets: explained earlier
Tools & Techniques: Control Schedule
Performance Reviews: Performance reviews involve measuring the Earned Value
Calculations Schedule Variance (SV) and the Schedule Performance Index (SPI).
These values provide valuable information on the performance of the project.
Variance Analysis: This involves comparing the planned versus actual dates. This is
very important. In case of any problems, corrective action can be taken.
Project Management Software: explained earlier
Resource Leveling: explained earlier
What-if Scenario Analysis: explained earlier
Adjusting Leads and Lags: explained earlier
Schedule Compression: explained earlier
Scheduling Tools: explained earlier
Outputs: Control Schedule
Work Performance Measurements: explained earlier
Organizational Process Assets Updates: explained earlier
Change Requests: explained earlier
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Project Management Plan Updates: explained earlier
Project Document Updates: explained earlier
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Chapter 5
Project Cost
Management
Project Cost
Management
Estimate Costs Determine Budget Control Costs
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Project Cost
Management
Project Cost Management
Learning Objectives
After the completion of this chapter, the learner will be able to:
List the various cost management process Describe the process of Estimate Costs Describe the process of Determine Budget Describe the process of Control Costs Apply the concept of Earned Value Management in given scenarios
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Project Cost Management
Definition
as per
PMBOK
Guide
Project Cost Management includes the processes involved in estimating,
budgeting, and controlling costs so that the project can be completed within the
approved budget.
Project Cost Management: Process Groups
Project Cost
Management
Estimate Costs Determine Budget Control Costs
Project Cost Management Plan
Subsidiary plan of the Project Management Plan
Produced during Develop Project Management Process
Defines how the project costs will be planned, managed and controlled
Documents how the cost management processes will be planned
Provides guidance on how the cost estimates should be developed
Determines how cost performance will be measured
Defines how cost variances will be determined and managed
Identifies how costs progress reporting will be done
Documents cost change control procedure
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Estimate Costs
Definition
as per
PMBOK
Guide
Estimate Costs is the process of developing an approximation of the monetary
resources needed to complete project activities.
Inputs: Estimate Costs
Scope baseline: The scope statement lists the project objectives and deliverables along
with other information required for the project. The information is required in creating
the cost estimate.
Project schedule: The project schedule provides the information on the duration of the
project, which is another input for cost estimate.
Human resource plan: Information about the cost of various resources adds to the cost
estimate.
Risk register: Keeping track of the risks and hence the costs required to tackling them.
Enterprise environmental factors: Published commercial information, supplier
databases help in the costing for various material and resource costs.
Organizational process assets: Historical information about projects and company
costing policies are used in estimating the project costs.
Tools & Techniques: Estimate Costs
Expert judgment: Expert judgment involves using historical information as well as
talking to experts on the subject matter.
Analogous estimating: Also called Top-down Estimating. In bottom-up estimating,
first you break down the project into activities and then add them up. Top-down is the
opposite of this. You compare the project as a whole with a similar project and arrive at a
cost estimate. This is less accurate than bottom-up estimation.
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Parametric estimating: Parametric modeling involves using project characteristics in a
mathematical model to calculate project costs. These models can be simple or complex
depending on the project.
Bottom-up estimating: This involves adding up the cost of individual activities or work
packages and rolling up to get the total costs. This is a much more accurate estimating
method than analogous estimating.
Three - point estimates: Also called Program Evaluation and Review Technique
(PERT). PERT uses three estimates to arrive at a range for activity cost.
o Most Likely - The cost of activity based on the realistic effort assessment.
o Optimistic - The cost of activity based on the best-case scenario for the activity.
o Pessimistic - The cost of activity based on the worst-case scenario for the activity.
Reserve Analysis: Reserve analysis means keeping some reserve cash for cost overruns.
These costs that are the percentage of overall costs are also called contingency costs.
Cost of Quality: Cost of quality refers to the costs associated with quality related
activities.
PM Estimating Software: Project Mangers also use specialized estimating software like
spreadsheets to calculate costs.
Vendor Bid Analysis: Vendor bid analysis is required when projects are awarded based
on bids under competitive processes. Arriving at a cost estimate for individual modules /
sub-projects becomes important if part of the project is being outsourced to a vendor.
Outputs: Estimate Costs
Activity Cost Estimates: This is the cost of all the activities in the project. It includes the
cost of labor as well as the material costs.
Basis Of Estimates: This lists the rates and reasoning for arriving at various cost
estimates for the resources.
Expected Cost = (Optimistic + 4 * Most Likely + Pessimistic) / 6
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Project Document Updates: The project plan documents are updated with the cost
estimates.
Some Important Cost Definitions
1. Benefit Cost Ratio: This is the ratio of project benefit and the project cost.
2. Net Present Value (NPV): NPV takes the time value of money into account and is
used to decide if it is worth doing the project.
3. Opportunity Cost: When there is a decision to be made between two opportunities, the
opportunity cost is the value / money forgone for the not doing the project.
4. Internal Rate of Return: The amount of money the project will return to the company
funding it.
5. Depreciation: This is the rate at which the project loses value over time.
6. Lifecycle Costing: Life Cycle Costing takes into account not just the cost of
development of a project but also the cost of supporting during the lifecycle.
Rough Order of Magnitude (ROM) The cost estimation with an accuracy of + 50 %, -50 %.
Types of Cost
Direct Cost- any cost that is identified specifically with a particular final cost objective.
Indirect Cost: any cost not directly identified with a single, final cost objective (more
than one project).
Fixed Cost: A periodic charge that does not vary with business volume.
Variable Cost : Cost that fluctuates based on the business volume
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Determine Budget
Definition
as per
PMBOK
Guide
Determine Budget is the process of aggregating the estimated costs of
individual activities or work packages to establish an authorized cost baseline.
Inputs: Determine Budget
Activity Cost Estimates: explained earlier
Basis Of Estimates: explained earlier
Scope Baseline: explained earlier
Project Schedule: explained earlier
Resource Calendars: Resource calendars provide information on the resources
availability. This is also used to arrive at project duration.
Contracts: If the project work is contracted, then contract is an important input to the
budget.
Organizational Process Assets: explained earlier
Tools & Techniques: Determine Budget
Cost aggregation: The individual activity estimates are rolled up into work package
levels which are further rolled till the project level. This is used to arrive at the project
budget.
Reserve analysis: Budget reserve analysis can help in arriving at both the management
and the contingency reserve.
Expert judgment: explained earlier
Historical relationships: Historical relationships (for example used in Parametric
Modeling and Analogous Estimates) are also used in budget estimates.
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Funding limit reconciliation: Since the funds are limited, the project manager needs to
complete the project within the budget. If this cannot be achieved, a scope change might
be required or funding limit increased.
Outputs: Determine Budget
Cost performance baseline: This is a snapshot of the planned budget. The cost
performance baseline is used to compare the actual performance against the baseline.
Project funding requirements: The total funding requirements are the baseline cost and
the management reserve. It is important for the project manager to understand the funding
requirements during different phases of the project and how to secure them as well.
Project document updates: The various documents such as the cost management plan
need to be updated.
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Control Costs
Definition
as per
PMBOK
Guide
Control Cost is the process of monitoring the status of the project to update
project budget and managing changes to the cost baseline.
Inputs: Control Costs
Project management plan: explained earlier
Project funding requirements: explained earlier
Work performance information: explained earlier
Organizational process assets: explained earlier
Tools & Techniques: Control Costs
Earned value management: EVM is used to measure the performance of the project
against the plan. (explained under the section EVM)
Forecasting: Forecasting uses the EVM numbers to decide on preventive or corrective
actions.
To-complete performance index (TCPI): TCPI calculation is used to figure out how
well the project needs to perform in future to stay within the planned budget.
Performance reviews: These are project team meetings where the various variances are
analyzed. EVM is used to calculate the variances.
Variance analysis: The variance between the planned the actual project performance.
Project management software: There are software available that help the project
manager to keep track of their budgets.
Outputs: Control Costs
Work performance measurements: These include the CV, SV, SPI, and CPI.
Budget forecasts: Estimate at Completion (EAC) value is calculated for budget forecast.
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Organizational process assets updates: explained earlier
Change requests: explained earlier
Project management plan updates: explained earlier
Project document updates: explained earlier
Earned value Management (EVM)
EVM is used to measure the performance of the project against the plan.
Important Terms
Planned Value (PV) also called Budgeted Cost of Work Scheduled (BCWS)
Earned Value (EV) also called Budgeted Cost of Work Performed (BCWP)