PMP Cost Management

Project Cost Management
Knowledge Areas covered in Project Cost Management:
7.1 - Plan Cost Management - Planning
7.2 - Estimate Costs - Planning
7.3 - Determine Budget - Planning
7.4 - Control Costs - Monitoring and Control
7. - Project Cost Management - Session Summary
Plan Cost Management
The process that establishes the policies, procedures and documentation for planning, managing, expending
and controlling project costs."

Project Management Institute, A Guide to the Project Management Body of Knowledge, (PMBOK® Guide) –
Fifth Edition, Project Management Institute Inc., 2013 Figure 7-2 Page 195
Planning Cost Management
How are we going to manage costs during the project life?
The Project Charter – Summary Budget – expand
Analytical Techniques
 Funding sources – external/internal; using debt; using equity
 Use of Project assets – buying, leasing, renting, borrowing
 Payback Period / CBA / ROI / IRR / DCF / NPV
Estimate Costs
"The process of developing an approximation of the monetary resources needed to complete project
activities."
The definition shown above in italics is taken from the Glossary of the Project Management Institute, A
Guide to the Project Management Body of Knowledge, (PMBOK® Guide) – Fifth Edition, Project Management
Institute Inc., 2013

 The process of developing an understanding of what resources are needed for the project activities
identified.
 Usually expressed in monetary terms, other units such as person hours or staff days can often be
used.
 Project resources include labor, materials, equipment, meeting rooms, facility fees and services
Tools and Techniques
Analogous Estimating
 Uses historical information, expert judgment.
 Think “analogy” – something similar
 Relatively quick and low cost to produce
Used when:
 Only limited information available.

 Similar project information available
 Estimators have right experience.
Bottom Up Estimating
 Estimates the cost for each work package.
 Estimates are then rolled up (aggregated).
 Same technique as used for resource estimating
Parametric Estimating
 Used to predict total project costs by using project's characteristics in a mathematical model.
 Cost/m2, number of bricks/wall, plumbers/2 storey building.
 Degree of accuracy depends on the integrity of the information used

Other Tools and Techniques in your Toolkit
Three Point Estimating
 Triangular Distribution = (O + M + P) / 3
 Beta Distribution = (O + 4M + P) / 6
Reserve Analysis:
 A cost contingency reserve may be used to account for cost associated risks
Cost of Quality (COQ) PM
Estimating Software
 Simplify cost estimations and allow for rapid review of estimate alternatives
Vendor Bid Analysis
 Responses from bidders will indicate what a project or deliverables should cost
Group Decision Making Techniques

'Soft' Estimating – Analogous Approach
Examples breakdown of a project's stage effort (in a software project):
Stage % of Total
Preliminary Survey 1
Feasibility Study 6
Systems Analysis 14
System Design 16
Programming 27
Systems Testing 13
Acceptance Testing 11
Implementation 12
Uncertainty in Cost Estimates
Rough Order of Magnitude (ROM) Estimate
 Usually made during Initiation
 -25% to +75%
Budget Estimate
 Usually made during the Planning
 -10% to +25%
Definitive Estimate
 Identified when rolling up the WBS

 -5% to +10%
Need to engage team members using group decision making techniques to improve accuracy of estimates
How to Estimate Project Costs
Some simple steps to take:
 Involve work package owners
 Gather relevant information
 Determine which technique to use.
 Identify alternative costing options.
 Determine which measurement units will be used
 Consider possible risks impacting on costs
 Assign all cost estimates to their account
 Add project overheads – 5% for meetings; 15% for management time; contingency (10 – 12%)
 Adding in company overheads (margin for profit, etc…) will be done later
Basis of Estimates
Providing clear details on how we arrived at the costs estimated:
 How we developed it – the method used
 Assumptions made
 Constraints applied and why
 Range of estimates used and the degree of confidence in using them
 Degree of confidence in the final estimate
Determine Budget
"The process of aggregating the estimated costs of individual activities or work packages to establish an
authorised cost baseline."

Bottom Up Cost Aggregation

 A calenderised budget allows measurement of cost performance throughout the project life cycle.
 Created by adding the estimated costs of project elements by time period.
 Frequently shown as an S-curve
Estimating Effort
Physical Resources
 Hiring costs per time period (JCB digger for 3 months)
 Buying costs if cheaper to buy, then sell at the end
 Meeting rooms
 Work from home – provision of infrastructure / risks assessments
People Resources
 Outsourced – external consultants/specialists
 Day rate / per hour rate / job lot fixed rate
 Overheads – support staff
Funding Limit Reconciliation
 Stating the funding required at particular times

 Adjusting spending, scheduling, and resource allocation - to bring expenditures into line with budget
constraints
 Living within your budget for each time period of the project
Example: A customer wants to spread project costs of £1,600,000 over two half years. This is one way how it
could be done:
 £550,000 during HY1
 £1,050,000 during HY2
Contingency Reserves
Guidelines:
 Avoid contingency on contingency.
 Inform the project team that the project will be managed against a point estimate without
contingency.
 Release contingency funds only through a closely controlled and well-documented process.
Example:
Contingency allowances for the 2012 Olympics, hosted by London, could have included funds for an
unforeseen problem, such as extra number of large beds required in the athletes village due to an
unexpected number of tall athletes arriving.

Building a Cost Budget
Put Slightly Differently
Output: Project Cost Baseline (PCB)

Control Costs
"The process of monitoring the status of the project to update project costs and managing changes to he
cost baseline."
Cost Control
Change Control System for Cost
 Integrated with the Integrated Change Control Process
 Documented in the Cost Management Plan
 Any increase in the authorised budget can only be approved through 4.5 Perform Integrated Change
Control process
Project cost control requires:

 Monitoring cost performance
 Ensuring that only appropriate project changes are included in a revised cost baseline
 Informing project stakeholders of authorized changes to the project that will affect costs
Earned Value Analysis (or Earned Value Management (EVM) is an important way to control costs
Earned Value Management (EVM)
 Measures project progress as well as forecast cost at completion
 Compares actuals for schedule and cost performance against planned performance
 Quite important to understand the monetary value of work completed
Questions from the Sponsor:
 What percentage of the work is complete?
 Where is my money going?
 How much did we spend so far compared with what we budgeted (the forecast)?
 What percentage of the work is complete?
 Why are we behind schedule?
 What is your estimate at completion?

Earned Value concepts
Planned Value = the estimated cost of what we planned to do at report point
Total PV = BAC = PMB (Performance Measurement Baseline)
Earned Value = the estimated cost of the work that was done at report point = PV x progress
Actual Costs = Realised costs incurred for the work performed
Example:
If we were to look at the EV at point of measurement in the image below, this shows we are behind
schedule.
EVM measurements
EVM Measures Equation
Schedule variance SV = EV - PV
Cost variance CV = EV - AC
Schedule performance index SPI = EV / PV
Cost performance index CPI = EV / AC
Cost variance - The difference between earned value and actual costs incurred.
 CV = EV – AC.
 - CV = The project is performing over budget.
 + CV = The project is performing below budget.
 0 CV = The project is running on track
Example: Calculating schedule variance for a University Campus Build project.
 Total project budget is £425,800.
 £325,500 has to be spent by end of phase 3.
 Only £319,425 worth of work is completed.
 £319,425 (EV) - £325,500 (PV) = -£6,075 (SV) - project is behind schedule.
What does this signify?
Example 1
Nothing, there is no earned value line and we cannot determine the project status
Example 2
 Time CV = -
 SV = +
 Over-achieving, but overspent for the achievement
 Money being wasted, e.g. unnecessary overtime
Example 3
 CV = +
 SV = +
 Over-achieving, and underspending
 No action needed (unless there is an issue with NOT spending the customers money)
Example 4
 CV = +
 SV = -
 Under-achieving on the project, but overachieving for the spend
 Team performing well but under-resourced
Example 5
 CV = -
 SV = -
 Under-achieving on the project & overspending for the work done
 Team under-resourced and under-performing
Lets Have Some Fun
Our Project has:
 PV = £290,000
 EV = £260,000
 AC = £140,000
Formulae:
 SV = EV – PV
 CV = EV – AC
 SPI = EV/PV
 CPI = EV/AC
Work out:
 what this means for the project
 the SV
 the CV
 the SPI
 the CPI
Visualizing EAC, ETC and VAC
EAC = as of today, how much do we expect the project to cost?
ETC = how much more do we estimate the project to cost from today?
VAC = the difference between original total costs and new forecast total costs
Estimate At Completion
What do we currently forecast the total project to cost
4 formulae for different situations:
1. If we are 80% efficient and we don't know what the problem is, then we use this formula i.e. will carry on
at 80% efficiency:
EAC = BAC / cumulative CPI = BAC/CPI
The word cumulative is used to denote the value at this point in time i.e. cumulative up to now.
2. If we are 80% efficient and we know what the problem is then we return to the budgeted rate and use this
formula
EAC = AC + (BAC – EV)
3. If past assumptions are faulty then the PM or project team have no confidence in the original estimate for
remaining work
EAC = AC + new bottom up estimate
4. This is used in special cases; considers both SPI and CPI.
There is an assumption that the project is over budget (negative cost performance) and the schedule has a
completion deadline
ETC - Estimate to Complete is
Based on actual costs of work performed to date, need to calculate cost of work remaining
If things have not been going to plan (behind schedule and over budget) will/should the actual costs be used?
This formula covers all of the 4 EAC situations:
 ETC = EAC-AC
VAC - Variance at Completion is:
How different will the outturn budget be from the original forecast
 VAC = BAC - EAC

To-Complete Performance Index (TCPI)
What level of efficiency is required to be obtained, from the resources, for the remainder of the project
The performance level we should use from this point to get the project back to BAC (or EAC):
 TCPI = Remaining work / Remaining project budget.
 TCPI (BAC) =
 TCPI (EAC) = (BAC – EV) / (EAC – AC).
 TCPI value can either be >1 or <1
Don't forget that on completion:
VAC = BAC – AC
 This formula for VAC is when the project has finished “normally” according to its original forecast
 If it did not finish “normally” then VAC = BAC - EAC
SV= Zero
EV = BAC
Project Cost Management - Session Summary
In this section we have covered the following:
7.1 - Plan Cost Management - Planning

 The process that establishes the policies, procedures and documentation for planning, managing,
expending and controlling project costs.
7.2 - Estimate Costs - Planning
 The process of aggregating the estimated costs of individual activities or work packages to
establish an authorised cost baseline.
7.3 - Determine Budget - Planning
 The process of aggregating the estimated costs of individual activities or work packages to
establish an authorised cost baseline.
7.4 - Control Costs - Monitoring and Control
 The process of monitoring the status of the project to update project costs and managing changes
to he cost baseline.
The definitions shown above in italics is taken from the Glossary of the Project Management Institute, A
Guide to the Project Management Body of Knowledge, (PMBOK® Guide) – Fifth Edition,

PMP Cost Management

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Project Cost Management

Knowledge Areas covered in Project Cost Management:

7.1 - Plan Cost Management - Planning

7.2 - Estimate Costs - Planning

7.3 - Determine Budget - Planning

7.4 - Control Costs - Monitoring and Control

7. - Project Cost Management - Session Summary

Plan Cost Management

and controlling project costs."

Planning Cost Management

How are we going to manage costs during the project life?

The Project Charter – Summary Budget – expand

 Funding sources – external/internal; using debt; using equity

 Use of Project assets – buying, leasing, renting, borrowing

 Payback Period / CBA / ROI / IRR / DCF / NPV

Institute Inc., 2013

Tools and Techniques

 Uses historical information, expert judgment.

 Think “analogy” – something similar

 Relatively quick and low cost to produce

 Only limited information available.

 Estimators have right experience.

 Estimates the cost for each work package.

 Estimates are then rolled up (aggregated).

 Same technique as used for resource estimating

 Cost/m2, number of bricks/wall, plumbers/2 storey building.

 Degree of accuracy depends on the integrity of the information used

Three Point Estimating

Cost of Quality (COQ) PM

Vendor Bid Analysis

Group Decision Making Techniques

Examples breakdown of a project's stage effort (in a software project):

Uncertainty in Cost Estimates

Rough Order of Magnitude (ROM) Estimate

 Usually made during Initiation

 Usually made during the Planning

 Identified when rolling up the WBS

How to Estimate Project Costs

Some simple steps to take:

 Involve work package owners

 Gather relevant information

 Determine which technique to use.

 Identify alternative costing options.

 Determine which measurement units will be used

 Consider possible risks impacting on costs

 Assign all cost estimates to their account

Providing clear details on how we arrived at the costs estimated:

 How we developed it – the method used

 Constraints applied and why

 Range of estimates used and the degree of confidence in using them

 Degree of confidence in the final estimate

authorised cost baseline."

Institute Inc., 2013

Bottom Up Cost Aggregation

 Created by adding the estimated costs of project elements by time period.

 Frequently shown as an S-curve

 Hiring costs per time period (JCB digger for 3 months)

 Buying costs if cheaper to buy, then sell at the end

 Work from home – provision of infrastructure / risks assessments

 Outsourced – external consultants/specialists

 Day rate / per hour rate / job lot fixed rate

 Overheads – support staff

Funding Limit Reconciliation

 Stating the funding required at particular times