Pmp-07-Cost Management

Project Management Professional (PMP)®
Jayaraj Peter
Jayaraj Peter ✓ These definitions are taken from the Glossary of the Project Management Institute, A Guide to the Project Management Body of Knowledge, (PMBOK ® Guide) – Sixth Edition 1
Agenda
✓ Project Cost Management
EARNED VALUE METHOD
Project Cost Management
Project Cost Management includes the processes involved in planning,

estimating, budgeting, financing, funding, managing, and controlling
costs so that the project can be completed within the approved budget.
✓ It is primarily concerned with the cost of the

resources needed to complete project activities.
✓ Project Cost Management, trends include the

expansion of earned value management (EVM).
Project Cost Management
Fixed Cost - A cost that does not change with an increase

or decrease in the amount of goods or services produced.
Variable Cost - Costs that vary depending on a company's

production volume; they rise as production increases and
fall as production decreases.
Direct Cost - A price that can be completely attributed to

the production of specific goods or services.
Indirect cost - Costs that are not directly accountable to

a cost object (such as a particular project, facility, function or
product).
Processes
MONITOR & CONTROL
INITIATE CLOSE
Knowledge Process
Area Initiating Planning Executing M&C Closing
7.1 Plan Cost Management

7. Project Cost
7.2 Estimate Costs 7.4 Control Costs
Management
7.3 Determine Budget
Processes
Plan Cost Control Costs

Estimate Costs Determine Budget
Management
Defining how the Developing an Aggregating the Monitoring the status

project costs will be approximation of estimated costs of of the project to update
estimated, budgeted, the monetary individual activities the project costs and
managed, monitored, resources needed to or work packages to manage changes to the
and controlled. complete project establish an cost baseline.
work. authorized cost
baseline.
7.1
Plan Cost Management
The process of defining how the project costs will be estimated,

budgeted, managed, monitored, and controlled.
The key benefits of this process is that it provides guidance and

direction on how the project costs will be managed throughout the
project.
INPUTS
1. Project Charter
2. Project Management Plan
✓ Scope management plan - provides processes and controls that will impact cost estimation
and management.
✓ Risk management plan - approach for identifying, analyzing, and monitoring risks.
3. EEF
✓ Currency exchange rates for project costs

✓ Published commercial information such as resource cost rate information
4. OPA
TOOLS AND TECHNIQUES
1. Expert Judgement
✓ Cost estimating and budgeting

✓ Earned value management
2. Data Analysis
✓ Alternatives analysis - consideration of ways to acquire project resources such as

making, purchasing, renting, or leasing.
3. Meetings
✓ Planning meetings to develop the cost management plan.
Outputs
1. Cost Management Plan
Describes how the project costs will be planned, structured, and

controlled.
• Units of measure - defined for each of the resources (staff hours, staff days, or weeks for
time measures; meters, liters, tons, kilometers, or cubic yards for quantity measures).
• Level of precision - degree to which cost estimates will be rounded up or down
• Level of accuracy - Acceptable range used in determining realistic cost estimates
• Organizational procedures links - unique code or account number(s) that links directly to
the performing organization’s accounting system
• Control thresholds - indicate an agreed-upon amount of variation
• Rules of performance measurement - Earned value management (EVM) rules
• Reporting formats - formats and frequency for the various cost reports
7.2
Estimate Costs
The process of developing an approximation of the cost of resources

needed to complete project work.
The key benefit of this process is that it determines the monetary

resources required for the project.
✓ In addition to estimating the cost of the resources, this process also perform costing
alternatives as well as cost trade-offs and risk analysis.
Estimate Costs
✓ It is a prediction that is based on the information known at a given point in time.
✓ The accuracy of a project estimate will increase as the project progresses through the
project life cycle.
• For example, a project in the initiation phase may have a rough order of magnitude
(ROM) estimate in the range of −25% to +75%.
• Later in the project, as more information is known, definitive estimates could narrow
the range of accuracy to −5% to +10%.
Estimate Costs
Estimate Costs
Estimate Costs
INPUTS
✓ Cost management plan – describes estimating methods that can be used and the level of
precision and accuracy required for the cost estimate.
✓ Scope baseline - includes the project scope statement, WBS, and WBS dictionary.
✓ Quality management plan – activities and resources necessary for the project
management team to achieve the quality objectives set for the project.
2. Project Documents
✓ Project schedule, Resource requirements

✓ Risk register, Lessons learned register.
Estimate Costs
INPUTS
3. EEF
✓ Market conditions – Regional and/or global supply and demand conditions greatly
influence resource costs.
✓ Published commercial information - Resource cost rate information that track skills
and human resource costs, and provide standard costs for material and equipment.
✓ Exchange rates and inflation – fluctuations of currencies and inflation.
4. OPA
✓ Cost estimating policies, templates

✓ Historical information and lessons learned repository
Estimate Costs
1. Expert Judgment
2. Analogous Estimating
✓ A technique for estimating the duration or cost of an activity or a project using

historical data from a similar activity or project.
✓ Example: We spent USD 500 for the similar activity in the previous project , so in this project
also it will cost the same.
✓ It is generally less expensive and less time consuming comparing to other

techniques. It is also generally less accurate comparing to others.
Estimate Costs
3. Parametric Estimating
✓ Uses a statistical relationship between

relevant historical data and other variables.
4. Bottom-Up Estimating
✓ A method of estimating project duration or

cost by aggregating the estimates of the
lower-level components of the work
breakdown structure (WBS).
Estimate Costs
5. Three-Point Estimating
✓ A technique used to estimate cost or duration by applying an average of optimistic,

pessimistic, and most likely estimates when there is uncertainty with the individual
activity estimates.
• Most likely (cM) - The cost of the activity, based on realistic effort assessment for the
required work and any predicted expenses.
• Optimistic (cO) - The cost based on analysis of the best-case scenario for the activity.
• Pessimistic (cP) - The cost based on analysis of the worst-case scenario for the activity.
The expected cost, cE, can be calculated using formula,

Triangular distribution. cE = (cO + cM + cP) / 3
Beta distribution. cE = (cO + 4cM + cP) / 6
Estimate Costs
6. Data Analysis
✓ Alternatives analysis - technique used to evaluate identified options in order to

select which options or approaches to perform the project work.
✓ Reserve analysis - Cost estimates may include contingency reserves to account for
cost uncertainty.
• Contingency reserves are the budget within the cost baseline that is allocated for
identified risks, which are accepted and for which contingent or mitigating
responses are developed.
• Contingency reserves are often viewed as the part of the budget intended to
address the “known-unknowns” that can affect a project.
Estimate Costs
• Management reserves are an amount of the project

budget withheld for management control purposes
and are reserved for unforeseen work that is within
scope of the project.
• Management reserves are intended to address the

“unknown unknowns” that can affect a project.
• The management reserve is not included in the cost

baseline but is part of the overall project budget and
funding requirements.
Estimate Costs
✓ Cost of quality - A method of determining the costs incurred to ensure quality.
• Prevention and appraisal costs (cost of conformance) include costs for quality
planning, quality control (QC), and quality assurance to ensure compliance to
requirements (i.e., training, QC systems, etc.).
• Failure costs (cost of non-conformance) include costs to rework products,

components, or processes that are non-compliant, costs of warranty work and waste,
and loss of reputation
Estimate Costs
7. Project Management Information System (PMIS)
✓ Include spreadsheets, simulation software, and statistical analysis tools to assist with
cost estimating.
8. Decision Making
✓ Voting - engaging team members to improve estimate accuracy and commitment to

the emerging estimates.
Estimate Costs
OUTPUTS
1. Cost Estimates
✓ Include quantitative assessments of the probable costs required to complete

project work, as well as contingency amounts to account for identified risks, and
management reserve to cover unplanned work.
• Includes labor, materials, equipment, services, facilities.
2. Basis of Estimates
✓ Supporting documentation outlining the details used in establishing project

estimates such as assumptions, constraints, level of detail, ranges, and confidence
levels.
Estimate Costs
OUTPUTS
3. Project Document updates
✓ Risk register - updated when appropriate risk responses are chosen.
✓ Assumption log - new assumptions or constraints may be made, and existing

assumptions or constraints may be revisited.
✓ Lessons learned register - updated with techniques that were efficient and effective
in developing cost estimates.
7.3
Determine Budget
The process of aggregating the estimated costs of individual activities

or work packages to establish an authorized cost baseline.
The key benefit of this process is that it determines the cost baseline
against which project performance can be monitored and controlled.
✓ A project budget includes all the funds authorized to execute the project.
✓ The cost baseline is the approved version of the time-phased project budget that
includes contingency reserves, but excludes management reserves.
Determine Budget
Determine Budget
Determine Budget
INPUTS
✓ Cost management plan – describes how the project costs will be structured into the
project budget.
✓ Resource management plan – provides information on costs that are necessary to
estimate the overall project budget.
✓ Scope baseline.
✓ Cost estimates
✓ Basis of estimates
✓ Project schedule
✓ Risk register
Determine Budget
INPUTS
3. Business Documents
✓ Business case – identifies the critical success factors for the project, including
financial success factors.
✓ Benefits management plan – target benefits, such as net present value calculations,
timeframe for realizing benefits, and the metrics associated with the benefits.
4. Agreements
✓ Includes information and cost purchases when determining the budget.
5. EEF - exchange rates, fluctuations of currencies.
6. OPA - historical information and lessons learned repository.
Determine Budget
1. Expert Judgement
2. Cost Aggregation
✓ Cost estimates are aggregated by work

packages in accordance with the WBS. The
work package cost estimates are then
aggregated for the higher component levels of
the WBS (such as control accounts) and,
ultimately, for the entire project.
Determine Budget
3. Data Analysis
✓ Reserve Analysis - An analytical

technique to determine reserve for the
schedule duration, budget, estimated
cost, or funds for a project.
Determine Budget
4. Historical Information Review
✓ Reviewing historical information assist in developing parametric estimates or

analogous estimates Analysis.
5. Funding Limit Reconciliation
✓ The expenditure of funds should be reconciled

with any funding limits on the commitment of
funds for the project.
6. Financing
✓ Financing entails acquiring funding for projects.
Determine Budget
OUTPUTS
1. Cost Baseline
✓ The cost baseline is the approved version of the time-phased project

budget, excluding any management reserves, which can only be
changed through formal change control procedures and is used as a
basis for comparison to actual results.
Determine Budget
Time-phased view of the cost baseline displayed in the form of an S-curve
Determine Budget
OUTPUTS
2. Project Funding Requirements
✓ Total funding requirements and periodic funding requirements (e.g., quarterly,

annually) are derived from the cost baseline.
3. Project Document updates
✓ Cost estimates - updated to record any additional information.

✓ Project schedule - Estimated costs for each activity recorded.
✓ Risk register - New risks identified during this process.
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.
The key benefit of this process is that the cost baseline is maintained
throughout the project.
✓ Any increase to the authorized budget can only be approved through the Perform
Integrated Change Control process.
Control Costs
Control Costs
Control Costs
INPUTS
✓ Cost management plan – how the project costs will be managed and controlled.
✓ Cost baseline – compared with actual results to determine if a change, corrective
action, or preventive action is necessary.
✓ Lessons learned register.
3. Project Funding Requirements
✓ Include projected expenditures plus anticipated liabilities.
Control Costs
INPUTS
4. Work Performance Data
✓ Data on project status such as which costs have been authorized, incurred,
invoiced, and paid.
5. OPA
✓ Existing formal and informal cost control-related policies, procedures, and

guidelines.
✓ Monitoring and reporting methods.
Control Costs
1. Expert Judgement
2. Data Analysis
✓ Earned value analysis (EVA).

Refer Slide : PMP-07-EARNED VALUE MANAGEMENT
❖ Planned Value Forecasting

❖ Earned Value ❖ EAC
❖ Actual Cost ❖ ETC
❖ Schedule Variance ❖ VAC
❖ Cost Variance
❖ Schedule Performance Index Trend Analysis
❖ Cost Performance Index ❖ S Curve
Control Costs
✓ Reserve Analysis
• used to monitor the status of contingency

and management reserves for the project.
• If the identified risks do not occur, the unused

contingency reserves may be removed from
the project budget to free up resources for
other projects or operations.
Control Costs
3. To-complete Performance Index
✓ The to-complete performance

index (TCPI) is a measure of the
cost performance that is required
to be achieved with the remaining
resources in order to meet a
specified management goal.
✓ It is expressed as the ratio of the

cost to finish the outstanding work
to the remaining budget.
Control Costs
OUTPUTS
1. Work Performance Information
✓ The calculated CV, SV, CPI, SPI, TCPI, and VAC values for WBS components, in
particular the work packages and control accounts, are documented and
communicated to stakeholders.
2. Cost Forecasts
✓ Either a calculated EAC value or a bottom-up EAC value is documented and

communicated to stakeholders.
3. Change Requests
✓ Analysis of project performance may result in a change request.
Control Costs
OUTPUTS
4. PMP updates
✓ Cost management plan – changes to control thresholds or specified levels of

accuracy.
✓ Cost baseline - are incorporated in response to approved changes in scope,

resources, or cost estimates.
RECAP
Q&A
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Jayaraj Peter

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Project Management Professional (PMP)®

✓ Project Cost Management

EARNED VALUE METHOD

Project Cost Management includes the processes involved in planning,

✓ It is primarily concerned with the cost of the

✓ Project Cost Management, trends include the

Fixed Cost - A cost that does not change with an increase

Variable Cost - Costs that vary depending on a company's

Direct Cost - A price that can be completely attributed to

Indirect cost - Costs that are not directly accountable to

MONITOR & CONTROL

7.1 Plan Cost Management

Plan Cost Control Costs

Defining how the Developing an Aggregating the Monitoring the status

The process of defining how the project costs will be estimated,

The key benefits of this process is that it provides guidance and

2. Project Management Plan

✓ Currency exchange rates for project costs

TOOLS AND TECHNIQUES

✓ Cost estimating and budgeting

✓ Alternatives analysis - consideration of ways to acquire project resources such as

✓ Planning meetings to develop the cost management plan.

1. Cost Management Plan

Describes how the project costs will be planned, structured, and

The process of developing an approximation of the cost of resources

The key benefit of this process is that it determines the monetary

✓ It is a prediction that is based on the information known at a given point in time.

1. Project Management Plan

✓ Project schedule, Resource requirements

✓ Exchange rates and inflation – fluctuations of currencies and inflation.

✓ Cost estimating policies, templates

TOOLS AND TECHNIQUES

✓ A technique for estimating the duration or cost of an activity or a project using

✓ It is generally less expensive and less time consuming comparing to other

TOOLS AND TECHNIQUES

✓ Uses a statistical relationship between

✓ A method of estimating project duration or

TOOLS AND TECHNIQUES

✓ A technique used to estimate cost or duration by applying an average of optimistic,

The expected cost, cE, can be calculated using formula,

TOOLS AND TECHNIQUES

✓ Alternatives analysis - technique used to evaluate identified options in order to

TOOLS AND TECHNIQUES

• Management reserves are an amount of the project

• Management reserves are intended to address the

• The management reserve is not included in the cost

TOOLS AND TECHNIQUES

✓ Cost of quality - A method of determining the costs incurred to ensure quality.

• Failure costs (cost of non-conformance) include costs to rework products,

TOOLS AND TECHNIQUES

7. Project Management Information System (PMIS)

✓ Voting - engaging team members to improve estimate accuracy and commitment to

✓ Include quantitative assessments of the probable costs required to complete

• Includes labor, materials, equipment, services, facilities.

✓ Supporting documentation outlining the details used in establishing project

3. Project Document updates

✓ Risk register - updated when appropriate risk responses are chosen.

✓ Assumption log - new assumptions or constraints may be made, and existing

The process of aggregating the estimated costs of individual activities

1. Project Management Plan

✓ Includes information and cost purchases when determining the budget.

5. EEF - exchange rates, fluctuations of currencies.

6. OPA - historical information and lessons learned repository.