verview of Cost Management

Cost Management is split up into the following 6 Process Groups:

1) Plan Cost Management (PL)
2) Estimate Costs (PL)
3) Determine Budget (PL)
4) Control Costs (M&C)
Purpose:
– This is the process for determining, managing, and tracking the project’s costs so that the
project can be completed within the planned budget.
Process #1: Plan Cost Management
1.1 Cost Management: Plan Cost Management (PL)
– Pg. 235, PMBOK 6th Edition

Purpose: Developing the Costs Management Plan that outlines our strategy for

managing and controlling our project’s costs. How will we manage our costs throughout our
entire project’s lifecycle?
ITTO Analysis: Plan Cost Management
1) What do You Need? (Input) 
– Project Charter, Project Management Plan, EEF/OPA
>> Project Management Plan: *Schedule Management Plan, *Risk Management
Plan

2) What is the Result? (Output)

– *Cost Management Plan

3) How Do You Accomplish It? (Tool/Technique)

-Expert Judgment, Meetings, Data Analysis
>> Data Analysis: Alternatives Analysis
Key Concepts:
1. What is contained inside the Cost Management Plan?
– In what format and how frequently will cost reports be sent to the Team and/or
Management?

– What guidelines do we follow for using Earned Value Analysis? (e.g. Earned Value
Techniques, measuring the Control Accounts)

– How far above or below the Planned Approved Project Budget is

acceptable? Cost Thresholds are established – what is acceptable and not acceptable in the
form as a % deviation.

– If applicable, the Cost Management Plan links to other procedures & documents (e.g. WBS)
– Units, used for reporting: hours, days, weeks, etc

2) Level of Precision & Accuracy

Precision: How do we round our Cost Estimates?
Accuracy: What is the tolerance range that we will use for our cost estimates? (e.g. +/- 5%)
Key Terms to Remember:
1. Cost Management Plan – This Plan contains information for how to develop and
manage your project’s costs

2. Direct
Costs – Costs which can be ‘directly’ associated with the project (Example:
Labor, Equipment, Material)

3. Indirect
Costs – Costs which are not directly tied to a specific project. (Example:
overhead costs)

4. ControlAccount – Level at which cost accounting is performed

Process #2: Estimate Costs
1.2 Cost Management: Estimate Costs (PL)
– Pg. 240, PMBOK 6th Edition

Purpose: Estimating how much it costs for each resource used in the project
ITTO Analysis: Estimate Costs
1) What do You Need? (Input) 
– Project Management Plan, Project Documents, EEF/OPA
>> Project Management Plan: Cost and Quality Mgmt Plan, Scope
Baseline
>> Project Documents:  Lessons Learned & Risk Register, Schedule, Resource
Requirements

2) What is the Result? (Output)

– Estimates (*Cost Estimates and *Basis of Estimates), Updates to Project
Documents

3) How Do You Accomplish It? (Tool/Technique)

–*Estimation Techniques, Expert Judgment, Data Analysis, PMIS, Decision Making
(Voting)
>> Estimation Techniques: Analogous, Parametric, Bottom-up, and Three-
Point
>> Data Analysis: Alternatives &* Reserve Analysis, *Cost of Quality
Key Concepts:
While managing your project, you need to evaluate cost trade-offs and risks.

1. Cost Estimation Techniques – Refer to the Formula Guide for detail on the

Formulas used for Triangular Distribution and Beta Distribution

2. As you progress throughout the stages of a project, your estimates will become MORE
ACCURATE. At the beginning, estimates will have a wide tolerance range, and will follow
a very high-level ‘top down’ approach.

As you progress through the project and you gain more knowledge, this estimate will become
more accurate into a ‘bottom-up’ estimate

3. At the very beginning, your estimates will not be as accurate and therefore, have a Rough
Order of Magnitude (ROM Estimate, typically with a range of -25% to +75%. (meaning
25% less to more than 75% over the estimate).

4. At later stages of the project, your estimates will tighten down to an accuracy of -5% to
+10%.
Key Terms to Remember:
1. Rough Order of Magnitude (ROM) Estimate- A rough, high-level estimate that
typically has a range of -25% to +75% over the estimate.

2. Definitive Estimate – A more accurate estimate than the ROM Estimate, and is
typically between -5% to +10% over the Estimate.

3. Contingency Reserve – Are a part of the cost baseline & budget; May account for a
certain % of the activity’s estimated cost (Example: Rework costs for a project
deliverable)

4. Management Reserves – These reserves are allocated for the “Unknown unknowns”
and unplanned work.

5. Cost Estimates – Estimates for the costs required for physical labor, materials,
equipment, services, etc
Process #3: Determine Budget
1.3 Cost Management: Determine Budget (PL)
– Pg. 248, PMBOK 6th Edition

Purpose: Now that you’ve estimated the costs for each project activity from the WBS, it’s
time to determine the overall Project Cost Baseline.
This baseline will ultimately be what you measure your Team’s performance against throughout
the lifecycle of the project.
ITTO Analysis: Determine Budget
1) What do You Need? (Input) 
– Agreements, Business Documents, Project Management Plan, Project Documents, EEF/OPA
>> Project Management Plan: *Cost Management Plan, Resource
Management Plan, *Scope Baseline
>> Project Documents: Estimates (Basis and Cost Estimates), Project
Schedule, Risk Register
>> Business Documents: Business Case, Benefits Mgmt Plan

2) What is the Result? (Output)

– *Cost Baseline, *Funding Requirements, Updates to Project Documents

3) How Do You Accomplish It? (Tool/Technique)

– *Cost Aggregation, *Funding Limit Reconciliation, *Financing,
*Historical information review, Expert Judgment, Data Analysis (Reserve Analysis)
Key Concepts:
1. Cost Aggregation – Technique to estimate costs by “summing” and rolling-up the costs
from the work packages up to the higher-level substituents of the WBS

2. Management Reserves – This is a portion of the budget which is allocated specifically

for dealing with “unforeseen work” which is INSIDE the scope of your project. Essentially,
addressing “unknown unknowns”.

**Remember: Management Reserves are NOT initially part of your Cost Baseline. If you

need to use Management Reserves, then and only then, would it be added to your project’s Cost
Baseline, which would then require an update to the initially planned Cost Baseline.
Key Terms to Remember:
1. Cost Baseline – Also known as Performance Measurement Baseline. The Cost Baseline is
equivalent to the Control Accounts, and is the summation of all budgets for different activities.
**Just remember that this EXCLUDES Management Reserves. It instead includes the
Contingency Reserves!
>> The Control Accounts is equal to the sum of Contingency Reserves and Work Package
Cost Estimates.
>> And lastly, the Work Package Cost Estimates is equal to the sum of Activity
Contingency Reserves and Activity Cost Estimates.
2. Funding Limit Reconciliation – This is a technique in which you determine… is
there any variance between your Planned Costs and your Actual Spending Limits?

**Reference page 255 of PMBOK Guide 6th Edition showing that Funding
Requirements is not typically uniformly distributed, and instead, occurs in a
step-like manner.
Process #4: Control Costs
1.4 Cost Management: Control Costs (M&C)
– Pg. 257, PMBOK 6th Edition

Purpose: Tracking the project’s status with regards to costs and ensuring that the cost baseline
is maintained throughout all stages of the project. You will be comparing all expenses spent to
the Planned Project Cost Baseline.
ITTO Analysis: Control Costs
1) What do You Need? (Input) 
– *Project Funding Requirements, *Work Performance Data, Project
Management Plan, Project Documents, OPA
>> Project Management Plan: *Cost Mgmt Plan, Cost Baseline,
Performance Measurement Baseline
>> Project Documents: Lessons Learned Register

2) What is the Result? (Output)

– *Cost Forecasts, *Work Performance Information, *Change
Requests, Updates to Project Management Plan and Project Documents

3) How Do You Accomplish It? (Tool/Technique)

– To-Complete Performance Index, Expert Judgment, Data Analysis, PMIS
>> Data Analysis: Earned Value, Variance, Trend, and Reserve Analysis
Key Concepts:
Ability to influence cost is the HIGHEST at the beginning stages of a project.

Earned Value Analysis

Refer to the “Earned Value Analysis” section in the Formula Guide  for
detail on each formula and equation used in Earned Value Analysis.

Technique that analyzes three core metrics of your project, for each work package and
control account:
(1) Planned Value, PV
– This corresponds to the monetary value associated with the work which has been “planned” to
be completed by a certain date/time
– A project’s Total
Planned Value = its Budget At Completion (BAC) Refer
to the Formula Guide for detail.

(2) Earned Value, EV
What is the ‘budgeted’ value for the work which has been completed so far? In other words, how
much have we ‘earned’ so far, for the work we’ve performed? Refer to the Formula
Guide for detail.

(3) Actual Cost, AC
For the work performed, how much did the work ‘actually’ cost? Refer to the Formula
Guide for detail.

Variance Analysis: Technique that analyzes four metrics.

(1) Schedule Variance, SV
Are we ahead of, behind, or on schedule? Refer to the Formula Guide for detail.

(2) Cost Variance, CV
Are we over budget? Under budget? Or, on budget? Refer to the Formula Guide for
detail.

(3) Schedule Performance Index, SPI

SPI Index is a ratio of Earned to Planned Value, and helps us understand – how
efficient has our schedule performance been? How effective have we been at performing our
work on time? Refer to the Formula Guide for detail on interpreting the
formula and equation

(4) Cost Performance Index, CPI

CPI Index is a ratio of Earned Value to Actual Cost. This represents the project’s performance,
with respect to cost, and provides insight into whether the project is currently over or under
budget. Refer to the Formula Guide for detail.

Cost Forecasts
(1) Estimate At Completion, EAC
EAC is an Estimate for the Project’s Total Cost, given the current work which has already been
performed. Refer to the Formula Guide for detail.

Other Variables
(1) Budget At Completion, BAC
– This can be thought of as the planned Overall Project Budget – how much we are planning to
spend to complete the project.
– Think of this as the Project’s Cost Baseline

(2) Variance At Completion, VAC

– This calculates the difference between our Project’s Planned Cost at Completion and our New
Cost Estimate. Refer to the Formula Guide for detail.
– What is our Variance when we complete our project?
Key Terms to Remember:
Trend Analysis – Evaluates how our project is performing with respect to time – are we
getting better or worse?

To perform Trend Analysis, you can:

(1) Graph S-Curves showing EV, PV, and AC plotted against time (Refer to pg 264 of
PMBOK 6th Edition for S-Curve Example).
(2) Calculate future Cost Forecasts for the Estimate At Completion (EAC)

Conclusion
Earned Value Analysis was one of the more trickier and challenging sections for me to
understand and fully master, and I hope this helps demystify and explain some of the key
elements that you might see on your CAPM Exam and PMP Exam.

I hope you found the above information helpful with your Project Management Exam Prep
Journey! If you found this useful, please feel free to SHARE and RECOMMEND this
website with a friend. My goal is to help other Project Managers pass their own CAPM and PMP
Exam, and become Certified in Project Management.

Cheers, Alvin

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