Successful Project Management 7th Edition Gido Solutions Manual

Successful Project Management 7th
Edition Gido Solutions Manual

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Chapter 7: Determining Costs, Budget, and Earned Value
CHAPTER 7: DETERMINING COSTS, BUDGET, AND EARNED VALUE ..............1

Chapter Concepts ................................................................................................................................ 2
Learning Outcomes .............................................................................................................................. 2
Project Management Knowledge Areas from PMBOK® Guide ........................................................... 3
Teaching Strategies ............................................................................................................................. 3
Lecture Notes ....................................................................................................................................... 3
1. Real-World Project Management Examples ................................................................................ 3
Vignette A: Managing Costs of Tidal Feasibility ............................................................................ 3
Vignette B: What Comes First, Schedule Delay or Cost Overrun? ............................................... 4
2. Estimate Activity Costs ................................................................................................................. 4
3. Determine Project Budget ............................................................................................................ 5
A. Aggregate Total Budgeted Cost ............................................................................................... 5
B. Develop Cumulative Budgeted Cost ......................................................................................... 5
4. Determine Actual Cost .................................................................................................................. 6
A. Actual Cost ............................................................................................................................... 6
B. Committed Costs ...................................................................................................................... 6
C. Compare Actual Cost To Budgeted Cost ................................................................................. 6
5. Determine Value of Work Performed ........................................................................................... 6
6. Analyze Cost Performance ........................................................................................................... 7
A. Cost Performance Index ........................................................................................................... 7
B. Cost Variance ........................................................................................................................... 8
7. Estimate Cost at Completion ........................................................................................................ 8
8. Control Costs ................................................................................................................................ 9
9. Manage Cash Flow ....................................................................................................................... 9
10. Cost Estimating for Information Systems Development ........................................................... 10
An IS Example: Internet Applications Development for ABC Office Designs (Continued) ............. 10
11. Project Management Information Systems............................................................................... 11
12. Critical Success Factors ........................................................................................................... 11
13. Summary .................................................................................................................................. 12
Questions........................................................................................................................................ 12
Internet Exercises ........................................................................................................................... 15
Case Study #1 A Not-For-Profit Medical Research Center ............................................................ 16
Answers to Case Questions ........................................................................................................ 16
Group Activity .............................................................................................................................. 16
Case Study #2 The Wedding .......................................................................................................... 16
Answers to Case Questions ........................................................................................................ 16
Group Activity .............................................................................................................................. 17
Optional Supplemental Activities .................................................................................................... 17
Appendix #1 - Time–Cost Trade-Off .................................................................................................. 17
Questions........................................................................................................................................ 18
Appendix #2 - Microsoft Project ......................................................................................................... 18
© 2018 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
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CHAPTER 7: DETERMINING COSTS, BUDGET, AND EARNED VALUE
Chapter Concepts
In addition to establishing a baseline schedule for a project, it is also necessary to develop a
baseline budget. Estimates must be made of the costs for each specific activity. The project budget
is determined by aggregating the estimated costs for all the activities. The budget must then be
spread over the expected time span of the project to create a time-phased baseline budget that is
used to analyze cost performance of the project. Once the project starts, it is important to monitor
actual costs and earned value of the work performed. At regular intervals during the project, the
following cost-related parameters should be monitored:
• Cumulative actual amount spent since the start of the project
• Cumulative earned value of the work performed since the start of the project
• Cumulative budgeted amount planned to be spent, based on the project schedule, from
the start of the project.
Comparisons must be made among these three parameters to evaluate whether the project is being
accomplished within budget and whether the earned value of the work performed is in line with the
actual cost expended.
If at any time during the project it is determined that the project is overrunning the budget or the
value of the work performed is not keeping up with the actual cost expended, corrective action must
be taken immediately. Once project costs get out of control, it will be very difficult to complete the
project within budget. As you will see in this chapter, the key to effective cost control is to analyze
cost performance on a timely and regular basis. Early identification of cost variances allows
corrective action to be taken before the situation gets worse. Based on the actual cost expended and
the earned value of the work performed, you will learn how to regularly forecast whether the entire
project will be completed within budget.
Based upon this chapter, students will become familiar with

• Estimating the costs of activities
• Determining a time-phased baseline budget
• Determining the earned value of the work performed
• Analyzing cost performance
• Forecasting project cost at completion
• Controlling project costs
• Managing cash flow
Learning Outcomes
After studying this chapter, the learner should be able to:
• Estimate the cost of activities
• Aggregate the total budgeted cost
• Develop a time-phased baseline budget
• Describe how to accumulate actual costs
• Determine the earned value of work performed
• Calculate and analyze key project performance measures
• Discuss and apply approaches to control the project budget
• Explain the importance of managing cash flow
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Project Management Knowledge Areas from PMBOK® Guide

Concepts in this chapter support the following Project Management Knowledge Areas of the PMI
Guide to the Project Management Body of Knowledge (PMBOK® Guide):
Project Cost Management
Teaching Strategies
1. The two vignettes reinforce the requirement to use lessons learned to inform the
next project, increase consideration of risk management, have change control
strategies, set appropriate responsibilities, have a communication plan, have
procedures for addressing common issues, organize project sites, and align
stakeholders. The goal is to detect and curb systematic cost underestimation and
manage scope changes to avoid cost and schedule overruns. The first vignette
explores a tidal project that incorporated lessons learned from a demonstration
project and listened to key stakeholders to build trust. The second vignette
reinforces the need to examine the relationships among scheduling, costs, benefits,
and earned value in order to have successful projects.
2. Tell students a story of a project that has spent all its money but hasn't finished all
the tasks. Have students determine what could have been done to avoid the
situation, remedy the situation, or absorb the cost overruns.
3. Have students use a work breakdown structure and network diagram for a project
they will have to complete during the class semester to develop the costs. Have the
students estimate the earned value at different time periods of the project given a
scenario on how far along they have completed their projects.
4. Have students simulate actual completion dates for the consumer market study in
Microsoft Project to see how they accumulated actual costs and earned value
change over time.
Lecture Notes
1. Real-World Project Management Examples

Vignette A: Managing Costs of Tidal Feasibility
Projects that have new proof of concept are deemed to be higher risk than projects with proven
processes. Within the project plan for these proof of concept projects are feasibility studies and
budget investments for the research and development. If the proof of concept project is deemed
feasible, then the larger project is developed with its full budget. If it is not feasible, then the next
concept is tested or the project is terminated. These decisions are based on the finances for the
support of the research and development and on a comparison between the budget for actual
costs of project investment and potential benefits.
• Renewable energy projects have experienced increasing investment even though the
prices of oil and gas have declined.
o The types of investments have included projects related solar power, wind
power, hydroelectric, waste-to-energy, and biofuels.
o One source of renewable energy that has captured much new investment has
been energy from the oceans’ tides.
o From a project planning and budgeting standpoint, the ocean’s tides are
relatively consistent whereas the amount of sun or wind for solar and wind
energy projects is variable and, at times, unpredictable.
• Tidal Project
o Include funds for newer technologies, testing in harsh and complicated
environmental conditions, and testing for strength, performance, and durability
of the materials to be used for turbines and their support structures.
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o Smaller demonstration projects related to tidal stream and tidal barrage

technologies have been successful.
o Dam-like structures impact a number of environmental aspects such as water
quality, fish migration, and noise pollution.
o Benefits of the project included a reduction of debris in the bay, reduced carbon
emissions, and increases in employment.
• Other projects
o Scotland
o China
o Netherlands
Vignette B: What Comes First, Schedule Delay or Cost Overrun?
Schedule delays have occurred in many projects that have experienced cost overruns. There
are many projects that have had cost overruns that also have had schedule overruns. One could
think that if a project had a cost overrun, it must have had a schedule overrun, or, the other
order, if a project had a schedule overrun then it must have had a cost overrun.
• Researchers from several institutions examined data from years of complex projects,
their schedules, their costs, and other factors such as unrealistic estimates, supply chain
failures, scope changes, scheduling practices and margins, risk events, and project
manager experience.
• Do schedule delays cause cost overruns? Do cost overruns cause schedule delays? Are
they only related and not causing each other?
o By implementing workarounds and solutions to avoid schedule delays, the costs
of the projects increased.
o The costs associated with labor and rate charges that impacted the cost
overruns had nothing to do with the schedule.
o Projects with sufficient margins of funds and time had experienced schedule
delays but did not experience cost overruns.
o Although there has been a relationship between schedule delays and cost
overruns, there has been no causation.
Even though statistics suggest that cost overruns and schedule delays are directly related to
each other, project managers need to look for the root causes for each and create an
awareness in their organizations of other factors that could lead to either or both overruns. This
effort could help to improve understanding of the relationships among scheduling, costs,
benefits, and earned value.
2. Estimate Activity Costs

The total project cost is often estimated during the initiating phase of the project or when the
project charter or a proposal is prepared
• The estimated cost for each specific activity can include the following elements:
o Labor — estimated costs for the various types or classifications of people who
are expected to work on the project, based on the estimated work time (not
necessarily the same as the activity’s estimated duration) and the dollar labor
rate for each person or classification
o Materials — the estimated costs of materials that the project team or contractor
needs to purchase for the project
o Equipment — equipment that must be purchased as part of the project
o Facilities — special facilities or additional space for the project team, for
security, or for storing materials, or to build, assemble, and test the project end
item (deliverable)
o Subcontractors and consultants — outsourced when project teams or
contractors do not have the expertise or resources to do certain project tasks
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o Travel — travel (other than local travel) required during the project
o Reserve — also referred to as contingency, to cover unexpected situations that
may come up during the project, such as items that may have been overlooked
when the initial project scope was defined, activities that may have to be redone
because they may not work the first time (redesigns), or a high-probability or
high-impact risk that may occur
• Figure 7.1 depicts the estimated costs for each activity in the consumer
market study project.
• It is good practice to have the person who will be responsible for the costs associated
with the work make the cost estimates.
• Historical data can be used as on the current project.
• Cost estimates should be reasonable and realistic.
• At the beginning of the project, it may not be possible to accurately estimate the costs
for all activities. This is especially true for longer-term projects. It may be easier to
estimate the costs for near-term activities, but as the project progresses, the project
team can progressively elaborate the estimated costs as more information is known or
becomes clear to allow for more accurate estimated costs.
3. Determine Project Budget

• The project budgeting process has two steps.
o First, the project cost estimate is allocated to the various work packages in the
project work breakdown structure.
o Second, the budget for each work package is distributed over the duration of the
work package.
A. Aggregate Total Budgeted Cost

• Allocating total project costs for the various elements to the appropriate work packages
will establish a total budgeted cost (TBC) for each work package.
• There are two approaches to establishing the TBC for each work package: top-down
and bottom-up.
• Often, the sum of the initial estimated costs is greater than the amount of funds
budgeted by the sponsor. Several iterations may need to be made to reduce the costs.
• Figure 7.2 illustrates the allocation for a $600,000 project. The costs are
assigned to each work package.
• When the budgets for all the work packages are summed, they cannot
exceed the total project budgeted cost.
• Figure 7.3 and Figure 7.4 depict the network diagram and the work
breakdown structure with costs assigned. This example is used
throughout the remainder of this chapter.
B. Develop Cumulative Budgeted Cost

• Once a total budgeted cost has been established for each work package, the second
step in the project budgeting process is to distribute each TBC over the duration of its
work package.
• A cost is determined for each period, based on when the activities that make up the
work package are scheduled to be performed to create the time-phased budget.
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• The cumulative budgeted cost (CBC) is the amount budgeted to accomplish the work
scheduled to be performed up to that point in time.
• Figure 7.5 depicts the budgeted cost by period for the packaging
machine project.
• Figure 7.6 depicts the cumulative budgeted cost curve for the packaging
machine project. The points on the graph correspond to the cumulative
total in Figure 7.5.
• The CBC for the entire project or each work package provides a baseline against which
actual cost and work performance can be compared at any time during the project.
• The cumulative budget is the standard against which actual cost is compared.
4. Determine Actual Cost

• Once the project starts, it’s necessary to keep track of actual cost and committed cost
so they can be compared to the CBC.
A. Actual Cost
• To keep track of actual cost on a project, it’s necessary to set up a system to collect, on
a regular and timely basis, data on funds actually expended.
• Large projects will have charge codes for the work package numbers to determine how
the actual costs compare to the planned costs.
B. Committed Costs
• In many projects, large dollar amounts are expended for materials or services
(subcontractors, consultants) that are used over a period of time longer than one cost
reporting period.
• These committed costs need to be treated in a special way so the system periodically
assigns a portion of their total cost to actual cost.
• Committed costs are also known as commitments or encumbered costs.
• Costs are committed when an item is ordered, even though actual payment may take
place at some later time.
C. Compare Actual Cost To Budgeted Cost

• As data are collected on actual cost, including portions of any committed cost, they need
to be totaled by work package so they can be compared to the cumulative budgeted
cost.
• Cumulative actual cost (CAC) should be calculated.
• Figure 7.7 indicates that at the end of week 8, $68,000 has actually
been expended on this project, although only $64,000 was budgeted as
shown in Figure 7.5.
• With the CAC values, it’s possible to draw a cumulative actual cost curve
as shown in Figure 7.8.
5. Determine Value of Work Performed

• Consider a project for painting ten similar rooms over ten days (one room per day) for a
total budgeted cost of $2,000. The budget is $200 per room.
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• At of the end of day 5, you determine that $1,000 has actually been spent, but what if
only three rooms have been painted?
• Earned value, the value of the work actually performed, is a key parameter that must be
determined throughout the project.
• Determining the earned value includes collecting data on the percent complete for each
work package, and then converting this percentage to a dollar amount by multiplying the
TBC of the work package by the percent complete.
• In many cases, the estimate is subjective.
• It’s important that the person estimating the percent complete not only assess how
much work has been performed but also consider what work remains to be done.
• For example, in the project to paint ten rooms for $2,000, if three rooms have been
completed, it’s safe to say that 30 percent of the work has been performed.
• The earned value is
o 0.30 x $2,000 = $600
• Figure 7.9 depicts the cumulative percent complete by period for the
packaging machine project.
• Figure 7.10 depicts the cumulative earned value by period for the
packaging machine project.
• Figure 7.11 illustrates the CBC, CAC, and CEV for the entire project.
6. Analyze Cost Performance

• The following four cost-related measures are used to analyze project cost performance:
o TBC (total budgeted cost)
o CBC (cumulative budgeted cost)
o CAC (cumulative actual cost)
o CEV (cumulative earned value)
• Plot CBC, CAC, and CEV curves on the same graph to reveal any trends toward
improving or deteriorating cost performance.
• In the packaging machine project we see that:
o $64,000 was budgeted through the end of week 8.
o $68,000 was actually expended by the end of week 8.
o $54,000 was the earned value of work actually performed by the
end of week 8.
• Figure 7.12 depicts the packaging machine project status as of week 8.
A. Cost Performance Index

• The cost performance index (CPI) is a measure of the cost efficiency with which the
project is being performed. The formula for determining the CPI is
• Cost performance index = Cumulative earned value/Cumulative actual cost
o CPI = CEV/CAC
• In the packaging machine project, the CPI as of week 8 is given by
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o CPI = $54,000/$68,000 = 0.79

• This ratio indicates that for every $1.00 actually expended, only $0.79 of earned value
was received.
• When the CPI goes below 1.0 or gradually gets smaller, corrective action should be
taken.
B. Cost Variance
• Another indicator of cost performance is cost variance (CV), which is the difference
between the cumulative earned value of the work performed and the cumulative actual
cost.
• Cost variance = Cumulative earned value – Cumulative actual cost
o CV = CEV – CAC
• In the packaging machine project, the cost variance as of week 8 is given by
o CV = $54,000 – $68,000 = –$14,000
• This calculation indicates that the value of the work performed through week 8 is
$14,000 less than the amount actually expended.
7. Estimate Cost at Completion

• Based on analysis of actual cost, it’s possible to forecast what the total costs will be at
the completion of the project or work package.
• There are three different methods for determining the forecasted cost at completion
(FCAC).
o The first method assumes the remaining work will be done at the same rate of
efficiency as the work performed so far.
 Forecasted cost at completion = Total budgeted cost/Cost performance
index
 For the packaging machine project, the forecasted cost at completion is
given by:
 FCAC = $100,000/0.79 = $126,582
o A second method for determining the forecasted cost at completion assumes
that, regardless of the efficiency rate the project or work package has
experienced in the past, the remaining work will be done according to budget.
 Forecasted cost at completion = Cumulative actual cost+ (Total
budgeted cost – Cumulative earned value)
 For the packaging machine project, the forecasted cost at completion is
given by:
 FCAC = $68,000 + ($100,000 – $54,000)
 = $68,000 + $46,000
 = $114,000
o A third method for determining the forecasted cost at completion is to re-
estimate the costs for all the remaining work to be performed and add this re-
estimate to the cumulative actual cost.
 FCAC = CAC + Re-estimate of remaining work to be performed
o Another measure is the to-complete performance index (TCPI)
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 TCPI = (TBC – CEV)/(TBC – CAC)

 TCPI = ($100;000 − $54;000)/( $100,000 − $68,000)
 = $46,000/$32,000
 = 1.44
8. Control Costs
• The key to effective cost control is to analyze cost performance on a regular and timely
basis.
• It’s crucial that cost variances and inefficiencies be identified early so that corrective
action can be taken before the situation gets worse.
• Cost control includes the following:
o Analyzing cost performance to determine which work packages may require
corrective action.
o Deciding what specific corrective action should be taken.
o Revising the project plan—including time and cost estimates—to incorporate the
planned corrective action.
• When evaluating work packages that have a negative cost variance, focus on taking
corrective actions to reduce the costs of two types of activities:
o Activities that will be performed in the near term. If you put off corrective actions
until some point in the distant future, the negative cost variance may deteriorate.
o Activities that have a large cost estimate. Taking corrective measures that
reduce the cost of a $20,000 activity by 10 percent will have a larger impact than
totally eliminating a $300 activity.
• There are various ways to reduce the costs of activities.
o Substitute less expensive materials.
o Assign a person with greater expertise or more experience to perform or help
with the activity.
o Reduce the scope or requirements.
o Increase productivity through improved methods or technology.
• In many cases, there will be a tradeoff—reducing cost variances will require a reduction
in project scope or a delay in the project schedule.
• The key to effective cost control is aggressively addressing negative cost variances and
cost inefficiencies as soon as they are identified.
9. Manage Cash Flow

• It is important to manage the cash flow on a project.
• Managing cash flow means making sure sufficient payments are received from the
customer in time so that you have enough money to cover the costs of performing the
project.
• The key to managing cash flow is to ensure that cash comes in faster than it goes out.
• The contractor might try to negotiate payment terms that require the customer to do one
or more of the following:
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o Provide a down payment at the start of the project.

o Make equal monthly payments based on the expected duration of the project.
o Provide frequent payments, such as weekly or monthly payments rather than
quarterly payments.
• The worst scenario from the contractor’s point of view is to have the customer make
only one payment at the end of the project.
• The contractor can control its outflow of cash by delaying payment until it is due.
10. Cost Estimating for Information Systems Development

• Chapter 4 defined the information system (IS) as a computer-based system that accepts
data as input, processes the data, and produces information required by users.
• Chapter 5 revealed that scheduling is often done in a haphazard manner, resulting in a
large number of IS projects not finishing on time.
• Chapter 6 reinforced the resource requirements planning necessary for people,
hardware, software, data, and network resources.
• This chapter addresses cost estimating in an IS project. Accurately estimating costs and
including a reserve are essential in creating a realistic budget to complete the work
without cost overruns. Having a good plan and schedule helps to develop cost estimates
and a baseline budget.
• Common errors in estimating costs include:
o Underestimating the work time necessary to complete an activity.
o Requiring rework to meet the user requirements.
o Underestimating growth in the project scope.
o Not anticipating new hardware purchases.
o Correcting flaws in excess of the reserve plan.
o Changing the design strategy.
o Increasing resources to fast-track phases of the SDLC.
An IS Example: Internet Applications Development for ABC Office Designs
(Continued)
• Recall from Chapters 4, 5, and 6 that Beth Smith was assigned to be the project
manager by the IS Department of ABC Office Designs.
• Chapter 5 described how Beth had scheduled the ES, EF, LS, and LF times for the
activities necessary to complete the Web-based reporting system development project
for ABC Office Designs.
• Chapter 6 described how Beth and the project team planned the resources for the 60-
day schedule they have to complete the project. Management approved a budget of
$125,000 to complete the project and train the sales staff.
• After confirming with the primary responsible resources that the tasks could be
completed with the estimated level of effort on each task,
o Beth worked with the human resources team to use the hourly wage for each of
the employees to determine the labor costs for each of the Web-based
Reporting System project activities.
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o Beth and the project team estimated the costs associated with traveling to
complete the interviews with users ($3,000), the price of the packaged software
($500), and the costs of the training materials ($1,300).
o The budgeted costs of the work to complete the project were near the $125,000
limit without training the sales staff.
• Figure 7.13 depicts the estimated activity costs for the Web-Based
Reporting Development project with a 5% reserve for cost overruns, fast-
tracking of the project, or increased costs of materials or travel for the
interviews.
11. Project Management Information Systems

• All costs associated with each resource in a project can be stored, and the software will
calculate the budget for each work package and for the entire project.
• Project management software usually allows the user to define different rate structures
for each resource and when charges for those resources will actually be accrued.
• Cost tables and graphs are often available to help analyze cost performance.
• See Appendix A for a thorough discussion of Project Management Software.
12. Critical Success Factors

• Estimated activity costs must be based on the estimated activity resources.
• The person who will be responsible for performing the activity should estimate the costs
for that activity. This generates commitment from the person.
• Cost estimates should be reasonable and realistic.
• Once the project starts, it is important to monitor actual costs and work performance to
ensure that everything is within budget.
• A system should be established to collect, on a regular and timely basis, data on costs
actually expended and committed, and the earned value (percent complete) of the work
performed, so they can be compared to the cumulative budgeted cost (CBC).
• If at any time during the project it is determined that the project is overrunning the
budget, or the value of the work performed is not keeping up with the actual amount of
costs expended, corrective action must be taken immediately.
• It is important to use the time-phased cumulative budgeted cost (CBC), rather than the
total budgeted cost (TBC), as the baseline against which cumulative actual cost (CAC)
is compared. It would be misleading to compare the actual costs expended to the total
budgeted cost, because cost performance will always look good as long as actual costs
are below the TBC.
• To permit a realistic comparison of cumulative actual cost to cumulative budgeted cost,
assign portions of the committed costs to actual costs while the associated work is in
progress.
• The earned value of the work actually performed is a key parameter that must be
determined and reported throughout the project.
• For each reporting period, the percent complete data should be obtained from the
person responsible for the work. It is important that the person make an honest
assessment of the work performed relative to the entire work scope.
• One way to prevent inflated percent complete estimates is to keep the work packages or
activities small in terms of scope and duration. The person estimating the percent
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complete should assess not only how much work has been performed but also what
work remains to be done.
• The key to effective cost control is to analyze cost performance on a timely and regular
basis. Early identification of cost variances (CV) allows corrective actions to be taken
immediately, before the situation gets worse.
• For analyzing cost performance, all the data collected should be as current as possible
and be based on the same reporting period.
• Trends in the cost performance index (CPI) should be monitored carefully. If the CPI
goes below 1.0 or gradually decreases, corrective action should be taken.
• As part of the regular cost performance analysis, the estimated or forecasted cost at
completion (FCAC) should be calculated.
• The key to effective cost control is to aggressively address work packages or activities
with negative cost variances and cost inefficiencies as soon as they are identified. A
concentrated effort must be applied to these areas. The amount of negative cost
variance should determine the priority for applying these concentrated efforts.
• When attempting to reduce negative cost variances, focus on activities that will be
performed in the near term and on activities that have large estimated costs.
• Addressing cost problems early will minimize the negative impact on scope and
schedule. Once costs get out of control, getting back within budget becomes more
difficult and is likely to require reducing the project scope or quality or extending the
project schedule.
• The key to managing cash flow is to ensure that cash comes in faster than it goes out.
• It is desirable to receive payments from the customer (cash inflow) as early as possible,
and to delay making payments to suppliers or subcontractors (cash outflow) as long as
possible.
13. Summary
• The total project cost is often estimated during the initiating phase of the project when
the project charter or a proposal is prepared, but detailed plans are not usually prepared
at that time.
• The project budgeting process has two steps: the budget for each work package is
determined, and the budget for each work package is then distributed over the expected
time.
• Aggregating the estimated costs of the specific activities for the appropriate work
packages in the work breakdown structure will establish a total budgeted cost (TBC).
• The cumulative budgeted cost (CBC) is the time-phased baseline budget that will be
used to analyze the cost performance of the project.
• At any time during the project, it is possible to forecast what the total costs will be at the
completion of the project or work package based on analysis of actual cost expended
and the earned value of work performed.
• The key to effective cost control is to analyze cost performance on a regular and timely
basis.
• It is important to manage the cash flow on a project.
Questions
1. Describe why it is necessary to develop a baseline budget for a project.
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It is necessary to prepare a budget, or plan, for how and when funds will be spent over the
duration of the project to ensure that everything is within budget.
2. List and describe items that should be included when estimating activity costs.
The cost section of a proposal may consist of elements such as the following:
• Labor. The estimated hours and hourly rate for each person or classification.
• Materials. The materials that need to be purchased for the project.
• Subcontractors and consultants (if used). People who have the resources or experience
to perform certain tasks that the project team cannot.
• Equipment and facilities rental. Special equipment, tools, or facilities the contractor
needs for the project.
• Travel.
• Reserves. An amount to cover unexpected situations that may come up during the
project.
3. What does the term reserve mean? Should a reserve amount be included in a project
proposal? Explain your answer.
Reserves are funds to cover unexpected situations that may occur during the project. The
contractor or project team may include an amount for reserve to cover unexpected situations
that may come up during the project within the estimated budget in the proposal. For example,
items may have been overlooked when the project cost estimates were prepared, tasks may
have to be redone because they did not work the first time, or the costs of labor (wages,
salaries) or materials may escalate during a multi-year project.
4. What is the problem with making cost estimates too conservative or too aggressive?
Cost estimates should be aggressive yet realistic. If cost estimates are overly conservative, the
total estimated cost for the project is likely to be more than the customer is willing to pay—and
higher than that of competing contractors. On the other hand, if cost estimates are overly
optimistic and some unexpected expenditures need to be made, the contractor is likely to either
lose money or suffer the embarrassment of going back to the customer to request additional
funds to cover cost overruns.
5. Describe the project budgeting process.
The project budgeting process has two steps. First, the project cost estimate is allocated to the
various work packages in the project work breakdown structure. Second, the budget for each
work package is distributed over the duration of the work package.
6. Define the following: TBC, CBC, CAC, CEV, CPI, CV, FCAC and TCPI. How is each
calculated?
• TBC: total budgeted cost

o a) top-down = a portion of the total project cost is allocated to each work
package.
o b) bottom-up = the sum of the costs of all the activities that make up that work
package.
• CBC: cumulative budgeted cost = the amount budgeted to accomplish the work
• CAC: cumulative actual cost = the amount actually spent to accomplish the work
• CEV: cumulative earned value = % complete X TBC (for the work package)
• CPI: cost performance index = CEV/CAC
13
• CV: cost variance = CEV – CAC

• FCAC: forecasted cost at completion
o a) FCAC = TBC/CPI
o b) FCAC = CAC + (TBC – CEV)
o c) FCAC = CAC + Re-estimate of remaining work to do
• TCPI: to-complete performance index = (TBC – CEV) / (TBC – CAC)
7. Why is it necessary to track actual and committed costs once a project starts?
It is necessary to tract actual and committed costs so they can be compared to the CBC, in
order for the team to take corrective action before it’s too late.
8. Why is it necessary to calculate the earned value of work performed? How is this done?
It is important to calculate the earned value of work performed so that if the work performed isn’t
keeping up with the actual cost, corrective action can be taken, even if the actual cost is in line
with the CBC. Determining the earned value includes collecting data on the percent complete for
each work package and then converting this percentage to a dollar amount by multiplying the
TBC of the work package by the percent complete.
9. Give an example of calculating a cost performance index. What does it mean when the
CPI is below 1.0? What does it mean when the CPI is above 1.0?
Cost performance index = CEV/CAC
If CPI is less than 1.0, it means that for every dollar expended, less than one dollar of earned
value was received. If CPI is greater than 1.0, it means that for every dollar expended, more
than one dollar of earned value was received.
10. What does it mean when cost variance is negative? What does it mean when cost
variance is positive? When evaluating a work package with a negative cost variance, on
what two types of activities should you focus? Why?
Cost variance = Cumulative earned value – Cumulative actual cost
If the CV is negative, it means the value of the work performed is less than the amount actually
expended. If the CV is positive, it means the value of the work performed is more than the
amount expended.
Project managers should focus on:

• Activities that will be performed in the near term. If you put off corrective actions until
some point in the distant future, the negative cost variance may deteriorate.
• Activities that have a large cost estimate. Usually, the larger the estimated cost for an
activity, the greater the opportunity for a large cost reduction.
11. What is the key to managing cash flow? How can this goal be accomplished?
The key to managing cash flow is to ensure that cash comes in faster than it goes out. This can
be accomplished by asking the customer to:
• provide a down payment at the start of the project.
• make equal monthly payments based on the expected duration of the project.
• provide frequent payments, such as weekly or monthly payments rather than quarterly
payments.
12. a. Refer to the table below. What is the cumulative budgeted
cost at the end of week 6? Amounts are in thousands of
dollars.
The cumulative budgeted cost at the end of week 6 is $100,000.
14
b. Below is a table of actual costs. What is the cumulative actual cost at the
end of week 6? Determine whether there is a cost overrun or underrun.
What is causing it? Amounts are in thousands of dollars.
Week
1 2 3 4 5 6
Cumulative 10 36 54 66 95 112
There is a cost overrun of $12,000. The actual cost of Task 1 was $34,000 while only $30,000
was budgeted for it. The actual cost so far of Task 2 is $68,000, while
only $60,000 had been budgeted up to week 6. The actual cost of Task 3
is $10,000 which equals its budgeted amount at week 6.
c. Below is a table of the cumulative percentages of work completed by
the end of week 6. What is the cumulative earned value of the
project at the end of week 6? Is it good?
Cumulative Earned Value by Week
TBC 1 2 3 4 5 6
Task 1 30 9 24 30 30 30 30
Task 2 70 7 17.5 24.5 38.5 45.5
Task 3 40 4 8
Task 4 30
Total 170 9 31 47.5 54.5 72.5 83.5
The cumulative earned value at the end of week 6 is only $83,500; however, $112,000 has
already been spent.
d. What is the CPI at the end of week 6? What is the CV?
CPI = 83,500 / 112,000 = .7455
CV = 83,500 – 112,000 = -28,500
e. Calculate the FCAC using the first two methods described.
Method 1 – Assuming the same rate of efficiency.
FCAC = TBC / CPI
FCAC = $170,000 / .7455 = $228,034.87
Method 2 – Perform the remainder of the work according to budget.

FCAC = CAC + (TBC – CEV)
FCAC = $112,000 + ($170,000 - $83,500)
FCAC = $112,000 + $86,500
FCAC = $198,500
Internet Exercises
Assign the Internet Exercises to your students as homework or complete them together in a
computer lab.
A number of cost analysis tools are found on the Internet. Adding the term "project
management" to the search will yield results focused on cost benefit analysis for projects.
Results of the cost forecasting search are centered on management in general cost forecasting.
Adding the term "project management" changes the sites found to those focused on cost
forecasting in project management.
ProjectSmart provides project management resources for project managers at all levels. The
site features articles, presentations, and other information of interest around the world. The
White Papers link contains to a number of papers on topics to help improve project
15
management performance. The site’s articles, books, presentations, and case studies that help
reinforce the project management concepts.
Case Study #1 A Not-For-Profit Medical Research Center

This case continues through to chapter 8. Each chapter has questions to reinforce the concepts
presented. Have students save their work for this case study for the work they will do in chapter
8. This is an open-ended case study. The students have the opportunity to be very creative on
this one. Encourage that creativity.
Answers to Case Questions
Answers will vary from student to student for each question.
1. Using the schedule from Chapter 5, estimate the cost for each activity.
If using Microsoft Project, enter the rates of the work and material resources on the Resource
Sheet. Assign the cost resource amount on the Task Information window for the task where the
resource is assigned. Any resources that are not assigned for the duration of a work package
should have a percent of effort assigned. Or the task should be changed to a fixed duration and
the amount of work changed.
2. Determine the total budgeted cost for the project.
The determination of the TBC for the project is completed using the top-down or bottom-up
approach. If using Microsoft Project and assigning the costs to the work packages, the approach
is bottom-up.
• a) top-down = allocates a portion of the total project cost to each work package.
• b) bottom-up = sums the costs of all the activities that make up that work package.
3. Prepare a budgeted cost by period table (similar to Figure 7.5) and a cumulative budgeted
cost (CBC) curve (similar to Figure 7.6) for the project.
In Microsoft Project, the visual report, Cash Flow report, depicts the amount of cost per quarter,
week, or day and the cumulative budgeted cost curve. The Cash Flow report provides a table of
the costs and the total costs per week for the project.
Group Activity
Divide the course participants into the same groups as for the previous chapter’s group activity.
Then address each of the steps listed above.
Case Study #2 The Wedding
This case continues through to chapter 8. Each chapter has questions to reinforce the concepts
presented. Have students save their work for this case study for the work they will do in chapter
8. This is an open-ended case study. The students have the opportunity to be very creative on
this one. Encourage that creativity.
Answers to Case Questions
1. Using the schedule from Chapter 5, estimate the cost for each activity.
If using Microsoft Project, enter the rates of the work and material resources on the Resource
Sheet. Assign the cost resource amount on the Task Information window for the task where the
resource is assigned. Any resources that are not assigned to work the duration of a work
package should have a percent of effort assigned, or the task should be changed to a fixed
duration and the amount of work changed.
2. Determine the total budgeted cost for the project.
Determine the TBC for the project using the top-down or the bottom-up approach. If using
Microsoft Project and assigning the costs to the work packages, the approach is bottom-up.
16
• a) top-down = allocates a portion of the total project cost to each work package.
• b) bottom-up = sums the costs of all the activities that make up that work package.
3. Prepare a budgeted cost by period table (similar to Figure 7.5) and a cumulative budgeted
cost (CBC) curve (similar to Figure 7.6) for the project.
If using Microsoft Project, the visual report, Cash Flow report, depicts the amount of cost per
quarter, week, or day and the cumulative budgeted cost curve. The Cash Flow report provides a
table of the costs and the total costs per week for the project.
Group Activity
Divide the course participants into the same groups as for the previous chapter’s group activity.
Then address each of the steps listed above.
Optional Supplemental Activities

1. Have the students read the real-world vignettes for the chapter and create plans for
managing the costs of the projects.
2. Assign the student to read the chapter and answer all the Reinforce Your Learning
questions and the questions at the end of the chapter.
3. Have students read the Plan of Attack vignette from Chapter 4. The project
manager worked through the project plan to keep the cost within the sponsor's
budget by deleting any "nice to have" features and keeping the essential features.
4. Explore the articles on the PMFORUM site and in the PWWorldToday website.
Have the students contact an author of an article to ask questions about how the
author manages costs associated with a project.
Appendix #1 - Time–Cost Trade-Off

• The time–cost trade-off methodology is used to incrementally reduce the project
duration with the smallest associated increase in incremental cost.
• It is based on the following assumptions:
o Each activity has two pairs of duration and cost estimates: normal and crash.
o The normal time is the estimated length of time required to perform the activity
under normal conditions.
o The normal cost is the estimated cost to complete the activity in the normal
time.
o The crash time is the shortest estimated length of time in which the activity can
be completed.
o The crash cost is the estimated cost to complete the activity in the crash time.
• We can incrementally accelerate an activity’s durationfrom its normal time to its crash
time by applying more resources.
• An activity cannot be completed in less than its crash time.
• The resources necessary to reduce an activity’s estimated duration from its normal time
to its crash time will be available when needed.
• Within the range between an activity’s normal and crash points, the relationship between
time and cost is linear. This acceleration cost per time period is calculated as follows:
o (Crash Cost – Normal Cost)/(Normal Time – Crash Time)
17
• Figure 7.14 depicts a network diagram for a project with

normal and crash costs.
• Table 7.1 depicts the costs associated with the Time-Cost
Trade-off for the project.
• The objective of the time–cost trade-off method is to determine
the shortest project completion time based on crashing those
activities that result in the smallest increase in total project cost.
• To accomplish this, it’s necessary to shorten the total project duration, one time period
at a time, crashing only those activities that are on the critical path(s) and have the
lowest acceleration cost per time period.
Questions
1. What is the time–cost trade-off methodology, and when is it used?
The time–cost trade-off methodology is a way to incrementally reduce the project duration with
the smallest associated increase in incremental cost. It is used when the project’s schedule
needs to be accelerated.
2. Why do you need both normal and crash times and costs for this procedure?
You need normal and crash times and costs in order to determine the cost associated with
accelerating the project from a normal timeframe to a crash timeframe.
3. Assume that an activity has a normal time of 20 weeks, a normal cost of $72,000, a crash
time of 16 weeks, and a crash cost of $100,000. By how many weeks, at most, can this
activity’s duration be reduced? What is the cost per week to accelerate this activity?
The activity’s duration can be reduced by 4 weeks at most. This will result in an increased cost
of $7,000/week.
4. Why isn’t it appropriate to crash all of the activities in a project to achieve the shortest
project schedule?
It is not appropriate to crash all the activities because expediting activities not on the critical path
will not reduce the project completion time but will increase total project cost.
Appendix #2 - Microsoft Project

The Appendix in this chapter continues discussing Microsoft Project. Have the students produce
the displays that are shown in the chapter. The images and text give direction on how to enter
costs for resources, produce cost reports, and examine cash flow and earned value.
Figure 7A.1 depicts the Resource Sheet with Work

and Material Rates. Material and work resource
rates are entered on the Resource Sheet. Cost
resource names can be entered on the Resource
Sheet. The cost associated with a cost resource is
added in the Task Information window for the specific task. Resources are assigned either in the
entry table or in the Task Information window. The Accrue At column states where they cost will
accrue.
Figure 7A.2 depicts the Cost Resource Entry for Task. The cost of a cost
resource is entered as a cost on the Resource tab in the Task Information
window. To open the Task Information window, double-click on the task's
name in the Task Name column and click on the Resource tab. Choose
the name of the cost resource using the drop-down arrow in the Resource Name
column for the next open row of Resources. There is no entry for a cost resource in the
Unit column. Only the amount of the cost is entered in the Cost column.
18
Figure 7A.3 depicts the Work Overview Report. The reports in Microsoft Project 2013 are in the
Reports ribbon. If the task resource information is updated, then this report will show the actual
versus baseline for work resources. The Work Overview report provides a quick report for
stakeholders about the key performance information for the project.
Figure 7A.4 depicts the Cash Flow Report. During the planning phase, the cash flow
report communicates the amount expected to be expended during each week of the
project. The cash flow report helps inform the plan for payments from the sponsor.
The dates printed in the report can be selected on the print menu to communicate
costs to the stakeholders.
Figure 7A.5 depicts the Tracking Gantt to Display Actual Finish Dates.
The tracking Gantt chart has two bars for each task. One bar depicts the
planned time duration for the task. The second bar depicts the actual time
duration for the task that has been recorded for the task. As the project
moves forward and the project manager enters actual information for
each task, the tracking Gantt chart displays the project progress as the graphical comparison
display.
Figure 7A.6 depicts the Task Usage Sheet Assignment

Information for Cost Resource window. The expenses of a cost
resource is recorded in this assignment window and the percent
complete. Entry of costs in this manner will have the costs
accumulate in the costs reports but do not add to the earned
value calculations.
Figure 7A.7 depicts the depicts the Change in Status Date. To

calculate the Earned Value of a project, the status date must be
set to the current or a prior date. If you are practicing with the
project, be sure to change the Current Date setting to a date
equal to or after the desired status before setting the status date
for the project
Figure 7A.8 depicts the Cash Flow Report. During the planning phase, the cash
flow report communicates the amount expected to be expended during each
week of the project. The cash flow report helps inform the plan for payments
from the sponsor. The dates printed in the report can be selected on the print
menu to communicate costs to the stakeholders. Because the status date has
been updated, the actual costs will be reflected on this report for the status
date if the actual work has been recorded for the activities and resources.
Figure 7A.9 depicts the Task Cost Overview Report. The budget report displays
the total cost, baseline cost, and variance for each activity. Be sure to save the
project baseline when planning is complete in order to populate a report like the
budget report and track the actual costs versus the planned costs. As with other
reports, you can select the number of pages and the dates for the report on the
print menu for the budget report.
Figure 7A.10 depicts the Cost Variance Table for Tasks. This cost table
is one of the table views available in Microsoft Project. Entry, Schedule,
and cost are table types. If you view the Resource Sheet and choose the
cost table view, you can see the costs for the resources by resource. To
make sure that you view the costs for the tasks, be sure to have the Gantt chart entry table
visible before choosing to view the cost table. The Tracking Gantt is visible in the Gantt chart
window by selecting Tracking Gantt in the Task Views group.
19
Figure 7A.11 depicts the Cost Variance Table for Resources. To view the costs for resources,
first view the Resources Sheet in the Resource Views group. Choose the Cost table view in the
Data group on the View ribbon. As with viewing the cost of the tasks, the baseline for the project
must have been created for the comparison to be made to the actual progress of the project. If
tasks finish early, the variance will indicate that the project is operating under budget.
Figure 7A.12 depicts the Earned Value Table. The table depicts the
budgeted cost of work scheduled, earned value of work performed, actual
cost of work performed, budgeted cost at completion, estimated cost at
completion, and any variances. Tracking actual progress and setting the
baseline are required to populate this table. Like the Cost, Schedule, and Entry tables, the
Earned Value table is another view in the Data group on the View ribbon. Note that MS Project
2016 includes the cost resource within the Earned Value (BCWP) column for the project and
does not include the value of the cost resource in its calculations for Planned Value (BCWS) and
for AC (ACWP) on the Earned Value table.
Figure 7A.13 depicts the Resource Sheet with

the change for Travel Expense from a cost
resource to a material resource. If you are
producing reports that require you to have all
costs included in the Planned Value (BCWS) and the AC (ACWP), all resources for your project
should be entered as work or material resources.
Figure 7A.14 depicts Change of Percent Complete for Material

Resource on the Task Usage Sheet Assignment Information
window to update the material resource to is actual costs and
completion.
Figure 7A.15 depicts the update of the actual costs of the

resource that was changed from a cost resource to a
material resource. This change was made to have the costs
of the resource in the totals for in PV (BCWS) and AC
(ACWP).
Figure 7A.16 depicts the Earned Value Table on the Tracking Gantt chart
that now updated to include the cost of the travel expense in PV (BCWS)
and AC (ACWP).
Figure 7A.17 depicts the Visual Reports–Create Report Window to

indicate the choices for creating the Earned Value Over Time visual
report. Visual reports are generated and open in Microsoft Excel and
Microsoft Visio. The icon next to the name indicates whether the report
will open in Excel or Visio. You can set visual cash flow reports to display
quarters, weeks, or days by clicking on the plus or minus next to the data
label on the data worksheet in Microsoft Excel.
Figure 7A.18 depicts the Visual Earned Value Over Time Report, Displayed in
Microsoft Excel. The graph displays the earned value, the planned value, and
the actual costs for the project. Setting a baseline and entering the project
progress are necessary to provide the data to generate this report.
20

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CHAPTER 7: DETERMINING COSTS, BUDGET, AND EARNED VALUE ..............1

Based upon this chapter, students will become familiar with

Project Management Knowledge Areas from PMBOK® Guide

1. Real-World Project Management Examples

o Smaller demonstration projects related to tidal stream and tidal barrage

2. Estimate Activity Costs

3. Determine Project Budget

A. Aggregate Total Budgeted Cost

B. Develop Cumulative Budgeted Cost

4. Determine Actual Cost

C. Compare Actual Cost To Budgeted Cost

5. Determine Value of Work Performed

6. Analyze Cost Performance

A. Cost Performance Index

o CPI = $54,000/$68,000 = 0.79

7. Estimate Cost at Completion

 TCPI = (TBC – CEV)/(TBC – CAC)

9. Manage Cash Flow

o Provide a down payment at the start of the project.

10. Cost Estimating for Information Systems Development

An IS Example: Internet Applications Development for ABC Office Designs

11. Project Management Information Systems

12. Critical Success Factors

• TBC: total budgeted cost

• CV: cost variance = CEV – CAC

Project managers should focus on:

Method 2 – Perform the remainder of the work according to budget.

Case Study #1 A Not-For-Profit Medical Research Center

Case Study #2 The Wedding

Optional Supplemental Activities

Appendix #1 - Time–Cost Trade-Off

• Figure 7.14 depicts a network diagram for a project with

Appendix #2 - Microsoft Project

Figure 7A.1 depicts the Resource Sheet with Work

Figure 7A.6 depicts the Task Usage Sheet Assignment

Figure 7A.7 depicts the depicts the Change in Status Date. To

Figure 7A.13 depicts the Resource Sheet with

Figure 7A.14 depicts Change of Percent Complete for Material

Figure 7A.15 depicts the update of the actual costs of the

Figure 7A.17 depicts the Visual Reports–Create Report Window to

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