07 Project Cost Management-5th Ed

Project Cost Management
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Chicago Management Training Institute LLC. Email: info@chicagomti.com www.chicagomti.com. © 2009 All rights reserved
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Project Cost Management Processes
 7.1 Plan Cost Management – the process that establishes the

policies, procedures and documentation for planning, managing,
expending and controlling project costs
 7.2 Estimate Costs - the process of developing an approximation

or estimate of the costs of the resources needed to complete a
project activities
 7.3 Determine Budget - the process of aggregating the

estimated costs of individual activities or work packages to establish
an authorized cost baseline
 7.4 Control Costs - the process of monitoring the status of the

project budget and managing changes to the cost baseline 3
7.1 Plan Cost Management
 establishing policies, procedures and documentation for

planning, developing, managing, executing and controlling the
project schedule
 guidance and direction on how project cost will be managed
 part of Project Management Plan
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7.1 Plan Cost Management
Inputs Tools & Techniques Outputs
1. Project 1. Expert Judgment 1. Cost Management Plan

Management 2. Analytical Techniques
Plan 3. Meetings
2. Project Charter
3. Enterprise
Environmental
Factors
4. Organizational
Process Assets
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7.1.1 Plan Cost Management – Inputs
1. Project Management Plan
2. Project Charter
3. Enterprise Environmental Factors
4. Organizational Process Assets
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7.1.2 Plan Schedule Management– Tools & Techniques
1. Expert Judgment
2. Analytical Techniques:
strategic options to fund project, obtain project resources and

techniques (pay back period, NPV, IRR, ROI)
3. Meetings
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7.1.3 Plan Cost Management - Outputs
1. Cost Management Plan : criteria for developing, monitoring

and controlling schedule
 Units of Measure – for resources
 Level of precision
 Level of Accuracy - range, contingencies
 Organizational procedures links – WBS
 Control Thresholds – Variance thresholds
 Rules of Performance Measurement – EVM rules, performance measurements
 Reporting formats
 Process Descriptions
 Additional details – strategic funding, currency fluctuation, project cost recording 8

7.2 Estimate Costs
 Estimate Costs is the process of calculating the costs of the

identified resources needed to complete the project work.
 The person or group doing the estimating must consider the

possible fluctuations, conditions, and other causes of
variances that could affect the total cost of the estimate.
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7.2 Estimate Costs
 What will be estimated?
 Generally work packages
cost and activity cost will be
estimated.
Work
Package
Cost
Activity Cost
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7.2 Estimate Costs
 What will be estimated? Project
Cost
 However, for larger projects,
cost might more practical to Control
Account
estimate and control at a Cost
higher level. This is called a
control account and it is one Work
Package
level higher than the work Cost
package in the WBS.
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7.2 Estimate Costs
 All the work needed to complete the project is also estimated, including:
 Quality efforts
 Risk efforts
 The project manager's time
 Cost of project management activities
 Costs directly associated with the project, including training for the project, paper,
pencils, needed labor
 Office expenses for offices used directly for the project
 Profit, when applicable
 Overhead, such as management salaries, general office expenses.
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7.2 Estimate Costs - Types of Cost
 Direct costs - These costs are attributed directly to the project work and
cannot be shared among projects (airfare, hotels, and long distance phone
charges, and so on).
 Indirect costs -These costs are representative of more than one project
(utilities for the performing organization, access to a training room, project
management software license, and so on).
 Variable costs -These costs vary depending on the conditions applied in

the project (the number of meeting participants, the supply and demand of
materials, and so on).
 Fixed costs -These costs remain constant throughout the project (the cost
of a piece of rented equipment for the project, the cost of a consultant
brought onto the project, and so on).
 Sunk cost - Money that has been spent in the past; when deciding what
projects to invest in or continue, you should not include sunk costs
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7.2 Estimate Costs
 Things about Estimating to know for the exam
 Estimating should be based on a WBS to improve accuracy
 Estimating should be done by the person doing the work whenever possible
 Historical information from past projects is a key to improving estimates
 A cost baseline should be kept and not changed except for approved
project changes
 Changes are approved in integrated change controls
 Estimates are more accurate if smaller sized work components are

estimated
 Corrective actions and preventive actions should be recommended when

cost problems occur
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7.2 Estimate Costs
 Things about Estimating to know for the exam
 A project manager should never just accept requirements from
management, but rather analyze the needs of the project, come up with his
own estimates and reconcile any differences to produce realistic objectives.
 A project manager may continually calculate the estimate to complete for
the project in order to make sure there are adequate funds available for the
project
 Padding is not an acceptable project management practice
 The project manager must meet any agreed upon estimates
 Clear procedures should exist to determine what to do with the estimates
when received
 Project Manager should keep the estimates realistic
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Cost Management Plan
 Though it is not an output of any process in Cost

Management - "Cost Management Plan" is developed as a
part of the Develop Project Management Plan process.
 The Cost Management Plan sets out the format and

establishes the criteria for planning, structuring, estimating,
budgeting and controlling project costs.
 The Cost Management Plan outlines the following:

 Level of Accuracy, Units of measure, Organizational procedures
links, Control Thresholds; Performance Measurement rules,
Reporting formats, Process descriptions
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 The cost management plan will help make the cost estimating
process faster by specifying how estimates should be stated:
 In hours or days, be rounded to the second decimal point
 It will help determine to what level of the WBS estimates will be

made
 The control accounts
 During direct and manage project execution, the cost management

plan can help determine if a variance is over the allowable threshold
and therefore must be acted upon, the ways earned value can be
calculated, and the types of reports required on the project relating
to cost.
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 The Cost Management Plan may be formal or informal, highly

detailed or broadly framed based upon the needs of the
project
 Other Key Concepts

 Life Cycle Costing
 Value Analysis / Value Engineering
 Cost Risk
 Who has the cost risk in a fixed price contract, the buyer or the seller?
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7.2 Estimate Costs
1. Cost Management 1. Expert Judgement 1. Activity Cost Estimates
Plan 2. Analogous estimating 2. Basis of Estimates
2. Human Resource 3. Parametric estimating 3. Project document updates
Management Plan 4. Bottom-up estimating
3. Scope Baseline 5. Three-point estimates
4. Project Schedule 6. Reserve Analysis
5. Risk Register 7. Cost of Quality
6. Enterprise 8. Project Management
Environmental Estimating Software
Factors 9. Vendor Bid Analysis
7. Organizational 10. Group Decision Making
Process Assets Techniques
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7.2.1 Estimate Costs - Inputs
1. Cost Management Plan
2. Human Resource Management Plan
3. Scope Baseline
 Project Scope Statement
 Including any Cost Constraint
 Work Breakdown Structure

 Remember this is an input to five major planning processes:
 Activity Definition, Cost Estimating, Cost Budgeting, Resource Planning,
Risk Management Planning
 WBS Dictionary - A clear description of the work in each

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component which is required to produce the deliverables.
4. Project Schedule
 The schedule management plan identifies what resources are needed, when they’re
needed , and the frequency of the need.
 The schedule management plan is needed so that the project manager and the
project team can estimate how much the resources will cost the project, when the
funds will be used to employ or consume the resources, and the cost impact should
the identified resources miss deadlines within the project.
5. Risk register
 The risk register should be reviewed to consider risk mitigation costs .
 As a general rule , when the project experiences a negative risk event , the near
term cost of the project will usually increase , and there will sometimes be a
delay in the project schedule
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5. Enterprise Environmental Factors
 Company culture and existing systems that the project will have to deal
with or can make use of. For cost, this includes marketplace conditions
and commercial cost databases

 Cost Estimating Policies
 Cost Estimating Templates
 Historical Information
 Project Files
 Project Team Knowledge
 Lessons Learned
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7.2 Estimate Costs
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7.2.2 Estimate Costs – Tools & Techniques
1. Expert Judgement
2. Analogous Estimating
 Analogous estimating relies on historical information to predict the
cost of the current project. It is also known as top-down estimating.
 The process of analogous estimating takes the actual cost of a

historical project as a basis for the current project.
 The cost of the historical project is applied to the cost of the current
project, taking into account the scope and size of the current
project as well as other known variables.
 Analogous estimating is a form of expert judgement.

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 Analogous Estimating – Example
 The Lagoon Park Project was to grade and pave a sidewalk around
a pond in the community park. The sidewalk of Lagoon Park was
1,048 feet by 6 feet, used a textured surface, had some curves
around trees, and cost Dhs. 75,287 to complete.
 The current project, King Park, will have a similar surface and will
cover 4,500 feet by 6 feet. The analogous estimate for this project,
based on the work in Lagoon Park, is Dhs. 323,190.
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3. Parametric Estimating
 Parametric estimating uses a mathematical model based on known
parameters to predict the cost of a project.
 A complex parameters can be cost per unit with adjustment factors

based on the conditions of the project like Rate of inflation,
expected duration, budget etc.
 The model must be scalable between project sizes.
 This technique can produce higher levels of accuracy depending

upon the sophistication and underlying data built into the model.
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 The parametric cost model using a scalable cost-per unit
approach is depicted below:
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 There are two types of Parametric
Estimating:
3.a) Regression analysis
 This is a statistical approach to predict what

future values may be, based on historical
values.
 Regression analysis creates quantitative

predictions based on variables within one
value to predict variables in another.
 This form of estimating relies solely on pure

statistical math to reveal relationships
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between variables and predict future values.
3.b) Learning Curve
 The cost per unit decreases the more units workers complete—this
is because workers learn as they complete the required work.
 The more an individual completes an activity, the easier it is to
complete. The estimate is considered parametric since the formula
is based on repetitive activities, such as wiring telephone jacks,
painting hotel rooms, or other activities that are completed over and
over within a project.
 The cost per unit decreases as the experience increases because
the time to complete the work is shortened.
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4. Bottom-up Estimating
 Bottom-up estimating starts from zero, accounts for each individual
component of the WBS, and arrives at a sum for the project.
 It is completed with the project team and can be one of the most
time-consuming methods used to predict project costs.
 While this method is more expensive, because of the time invested

to create the estimate, it is also one of the most accurate.
 A fringe benefit of completing a bottom-up estimate is that the

project team may buy into the project work since they see the cost
and value of each cost within the project.
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 5. Three-Point Estimates
 Originated with PERT
 Uses 3 estimates to define range for an activity’s cost
 Optimistic(CO)
 Most likely (CM)
 Pessimistic (CP)
 Expected activity cost (CE) = (CO + 4CM + CP)
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6. Reserve Analysis
 Estimators generally include cost reserves called Contingency Reserve.
This is traditionally set aside for cost overruns to deal with anticipated but
not certain, risk events.
 These events are “known unknowns” and are part of the project scope and
cost baselines.
 An option to manage cost contingency is to aggregate each schedule

activity’s cost contingency reserve for a group of related activities into a
single contingency reserve assigned to a schedule activity. This could be a
dummy zero-duration activity placed across the network path for that group
of schedule activities and is used to hold the cost contingency reserve. As
the schedule activity progresses, the contingency reserves can be adjusted.
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7. Cost of Quality (COQ)

 Cost of Conformance & Cost of Non-Conformance
8. Project Management Estimating Software

 While the PMP examination is vendor-neutral, a general knowledge
of how computer software can assist the project manager is
needed.
 Several different computer programs are available that can

streamline project work estimates and increase their accuracy.
These tools can include project management software, spreadsheet
programs, and simulations.
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9. Vendor Bid Analysis
 Sometimes it’s just more cost effective to hire someone else to do
the work. Other times, the project manager has no choice because
the needed skill set doesn’t exist within the organization.
 In either condition, the vendors’ bids need to be analyzed to

determine which vendor should be selected based on their ability to
satisfy the project scope, the expected quality, and the cost of their
services.
10. Group Decision Making Techniques
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7.2 Estimate Costs
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7.2.3 Estimate Costs - Outputs
1. Activity Cost Estimates
 The output of cost estimating is the actual cost estimates of the resources
required to complete the project work.
 Each resource in the project must be accounted for and assigned to a cost
category. Categories include the following:
 Labor costs
 Material costs
 Travel costs
 Supplies
 Hardware costs
 Software costs
 Special categories (inflation, cost contingency reserve, and so on)

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 Refining Cost Estimates
 Cost estimates can also pass through progress elaboration.
 As more details are acquired as the project progresses, the

estimates are refined.
 Industry guidelines and organizational policies may define how the

estimates are refined, but there are three generally accepted
categories of estimating accuracy:
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7.2.3 Estimate Costs - Estimating Accuracy
 Rough order of magnitude This estimate is “rough” and is used
during the initiating processes and in top-down estimates. The range
of variance for the estimate can be from −25 percent to +75 percent.
 Budget estimate This estimate is also somewhat broad and is used
early in the planning processes and also in top-down estimates. The
range of variance for the estimate can be from −10 percent to +25
percent.
 Definitive estimates This estimate type is one of the most
accurate. It’s used late in the planning processes and is associated
with bottom-up estimating. The range of variance for the estimate
can be from −5 percent to +10 percent.
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2. Basis of Estimates
Once the estimates have been completed, supporting detail must be organized
and documented to show how the estimates were created.
 Specifically, the supporting detail includes the following:

 Information on the project scope work
 Information on the approach used in developing the cost estimates
 Information on the assumptions and constraints made while developing the

cost estimates.
 Information on the range of variance in the estimate For example, based on

the estimating method used, the project cost may be $220,000 ± $15,000. Thus
project cost may be as low as $205,000 or as high as $235,000.
 Indication of the confidence level of the final estimate

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3. Project Document Updates

 Risk Register
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7.2 Estimate Costs
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7.3 Determine Budget

1. Cost Management 1. Cost Aggregation 1. Cost baseline
Plan 2. Reserve Analysis 2. Project Funding
2. Scope Baseline 3. Expert Judgement Requirements
3. Activity Cost 4. Historical Relationships 3. Project document updates
Estimates 5. Funding Limit
4. Basis of Estimates Reconciliation
5. Project Schedule
6. Resource
Calendars
7. Risk Register
8. Agreements
9. Organizational
Process Assets 43
 Determine Budget is the process of assigning a cost to an

individual work package or activity and aggregating them to
establish an authorized cost baseline.
 The goal of this process is to assign costs to the work in the

project so it can be measured for performance.
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 Cost budgeting and cost estimates may go hand-in-hand, but
estimating should be completed before a budget is
requested—or assigned.
 Cost budgeting applies the cost estimates over time. This

results in a time-phased estimate for cost, allowing an
organization to predict cash flow needs.
 The difference between cost estimates and cost budgeting is

that cost estimates show costs by category, whereas a cost
budget shows costs across time.
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 The cost baseline is the expected cost for the project.
 Remember that costs are tied to the financial system through

the chart of accounts—or code of accounts—and are
assigned to project activities at the work package level of the
WBS.
 The budget will be used as a plan for allocating costs to

project activities.
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7.3.1 Determine Budget - Inputs
1. Cost management Plan
2. Scope Baseline
3. Activity Cost Estimates
4. Basis of Estimates
5. Project Schedule
 Used to aggregate costs to the calendar periods
6. Resource Calendars
 Used to indicate resource costs over the duration of the project
7. Risk Register
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7.3.1 Determine Budget - Inputs
8. Contracts
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7.3.2 Determine Budget – Tools & Techniques
1. Cost Aggregation
2. Reserve Analysis
3. Expert Judgement
4. Historical Relationships
5. Funding Limit Reconciliation
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1. Cost Aggregation
Project Cost
 Activity costs are

rolled up to work
Control
package costs. Account
Cost
Work package costs
are rolled up to
Work
control account Package
Cost
costs and finally into
project costs.
Activity Cost
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2. Reserve Analysis
 There can two types of reserves to be considered;
1. Management Contingency reserve (or just Management Reserve)
2. Contingency reserve.
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 Management Contingency Cost reserves are generally to deal
with “unknown unknowns” within a project. The Management
Contingency Reserve is NOT part of the project’s cost baseline,
but is included as part of the project budget. Project Manager
has to obtain approval before spending this reserve for
unplanned changes to Project Scope and Cost.
 Contingency reserve is for the risks remaining after risk
response planning. It is reserve for anticipated but not certain
risk events.
 The cost baseline will contain the contingency reserve and the cost
budget will include the management reserve. (Refer next slide
diagram)
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COSTING
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3. Expert Judgement
 Judgement provided based upon expertise in an application area,
Knowledge Area, discipline, industry etc as appropriate for the
activity being performed should be used in determining the budget.
 Expert judgement may be available from many sources such as:
 Other units within the performing organization
 Consultants
 Stakeholders, including customers
 Professional and technical associations
 Industry groups
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4. Historical Relationships
 It involves using project characteristics (parameters) in a
mathematical model to predict total project costs. Models can be as
simple ( e.g., residential home construction will cost a certain
amount per square foot of living space) or complex.
 Both the cost and accuracy of parametric models may vary widely.
They are most likely to be reliable when:
 The historical information used to develop the model is accurate
 The parameters used in the models are readily quantifiable
 The model is scalable, such that it works for a large project as well as a
small one.
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5. Funding Limit Reconciliation
 Funding limit reconciliation is an organization’s approach to
managing cash flow against the project deliverables based on a
schedule, milestone accomplishment, or data constraints.
 This helps an organization plan when monies will be devoted to a
project rather than using all of the funds available at the start of a
project.
 If the project doesn’t hit predetermined dates and products that
were set as milestones, the additional funding becomes
questionable.
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7.3.3 Determine Budget – Outputs
1. Cost baseline
2. Project Funding Requirements
3. Project document updates
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1. Cost Management 1. Cost Aggregation 1. Cost baseline
Plan 2. Reserve Analysis 2. Project Funding
2. Scope Baseline 3. Expert Judgement Requirements
3. Activity Cost 4. Historical Relationships 3. Project document updates
Estimates 5. Funding Limit
4. Basis of Estimates Reconciliation
5. Project Schedule
6. Resource
Calendars
7. Risk Register
8. Agreements
9. Organizational
Process Assets 59
1. Cost baseline
 A project’s cost baseline shows what is expected to be spent on
the project. It’s usually shown in an S-curve.
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7.3.3 Determine Budget – Cost Baseline
 The idea of the cost baseline allows the project manager and
management to predict when the project will be spending
monies and over what time period.
 Large projects that have multiple deliverables may have

multiple cost baselines to illustrate the costs within each
phase.
 The purpose of a cost baseline is to measure performance,

and a baseline will predict the expenses over the life of the
project.
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2. Project Funding Requirements
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3. Project Document Updates

 Risk Register
 Cost Estimates
 Project Schedule
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7.4 Control Costs
1. Project 1. Earned Value Management 1. Work Performance
Management Plan 2. Forecasting Information
2. Project Funding 3. To-complete Performance 2. Cost Forecasts
Requirements Index (TCPI) 3. Change Requests
3. Work Performance 4. Performance Reviews 4. Project Management Plan
Data 5. Project Management updates
4. Organizational Software 5. Project document updates
Process Assets 6. Reserve Analysis 6. Organizational Process
Assets updates
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7.4 Control Costs
 The Control Costs process manages changes to project costs

as outlined in the cost management plan.
 It’s concerned with monitoring project costs to prevent

unauthorized or incorrect costs from getting included in the
cost baseline.
 An important part of control is to measure, see if there are any

variances, and then decide if those variances require the
recommendation of corrective actions.
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7.4 Control Costs
 Specifically, cost control focuses on the following activities:
 Controlling causes of change to ensure the changes are actually needed
 Controlling and documenting changes to the cost baseline as they happen
 Ensuring all change requests are acted upon in a timely manner
 Performing cost monitoring to recognize and understand cost variances
 Recording appropriate cost changes in the cost baseline
 Preventing unauthorized changes to the cost baseline
 Communicating the cost changes to the proper stakeholders
 Working to bring and maintain costs within an acceptable range
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7.4 Control Costs
Assets updates
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7.4.1 Control Costs - Inputs
1. Project Management Plan

1. Cost baseline - The cost baseline is the expected cost the project
will incur. This time-phased budget reflects the amount that will be
spent throughout the project. Recall that the cost baseline is a tool
used to measure project performance.
2. Cost Management Plan

2. Project funding requirements The funds for a project are
not allotted all at once, but stair-stepped in alignment with
project deliverables. Thus, as the project moves towards
completion, additional funding is allotted.
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7.4.1 Control Costs - Inputs
3. Work Performance Data
 Project progress
 Costs authorized and costs incurred
 Estimates for completing project work

 Existing formal and informal cost control-related policies, procedures and
guidelines
 Cost control tools and
 Monitoring and reporting methods to be used
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7.4 Control Costs
Assets updates
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7.4.2 Control Costs – Tools & Techniques
1. Earned Value Management
2. Forecasting
3. To-complete Performance Index (TCPI)
4. Performance Reviews
5. Project Management Software
6. Reserve Analysis
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1. Earned Value Management

 It is a commonly used method of performance measurement. It
integrates Project Scope, Cost and Schedule measures to help monitor
project performance and progress
 Results from am earned value analysis indicate potential deviation of
the project from cost and schedule baselines.
 Many project managers manage their project performance by

comparing planned to actual results. With this method, you could easily
be on time but overspend according to your plan
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Acronym Term Interpretation
PV Planned Value What is the estimated value of the work planned to be done ?
EV Earned Value What is the estimated value of the work actually

accomplished?
AC Actual Cost What is the actual cost incurred for the work accomplished?
BAC Budget At Completion How much did we BUDGET for the TOTAL project effort?
EAC Estimate At Completion What do we currently expect the TOTAL project to cost?
ETC Estimate to Complete From this point on, how much MORE do we expect it to cost
to finish the project?
VAC Variation at Completion How much over or under budget do we expect to be at the
end of the project?
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 EVM, in regard to cost management, is concerned with the
relationship between three formulas that reflect project
performance.
 Planned value (PV) Planned value is the work scheduled and the
budget authorized to accomplish that work.
 For example, if a project has a budget of $100,000 and month six

represents 50 percent of the project work, the PV for month six is
$50,000.
 The total Planned Value for the project is also called Budget At
Completion (BAC).
 The BAC is also the Performance Measurement Baseline (PMB)

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 Earned value (EV) Earned value is the physical work
completed to date and the authorized budget for that work.
 For example, if a project has a budget of $100,000 and the work
completed to date represents 25 percent of the entire project work,
its EV is $25,000.
 Actual cost (AC) Actual cost is the actual amount of monies
the project has required to date. It is the total cost incurred in
accomplishing the work the EV measured.
 For example, if a project has a budget of $100,000 and $27,000
has been spent on the project to date, the AC of the project would
be $27,000.
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CV and SV are known as efficiency indicator
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 Cost Variance
 The cost variance (CV) is the difference between the earned value and
the actual costs (ACs).
 For example, for a project that has a budget of $200,000 and has
earned or completed ten percent of the project value, the EV is
$20,000.
 However, due to some unforeseen incidents, the project manager had
to spend $25,000 to complete that $20,000 worth of work.
 The AC of the project, at this point, is $25,000, and the cost variance is
–$5,000.
 Thus, the equation for cost variance is CV = EV − AC.
 The CV is critical as it indicates physical performance to costs spent.
Negative CV is non-recoverable to the project generally. 79
 Schedule Variance
 A schedule variance (SV) is the value that indicates whether a project is
falling behind it’s baseline schedule
 For example, consider a project with a budget of $200,000 that’s expected
to last two years. At the end of year one, the project team has planned that
the project be 60-percent complete. Thus, the planned value (PV) for 60-
percent completion equates to $120,000—the expected worth of the
project work at the end of year one.
 But let’s say that at the end of year one the project is only 40-percent
complete. The EV at the end of year one is, therefore, $80,000. The
difference between the PV and the EV is the SV: –$40,000.
 The equation for schedule variance is SV = EV − PV.
 SV will be Zero when project is completed since all the PV values
have become EV values.
 SV is used in conjunction with the Critical Path Methodology 80
Calculating the Cost Performance Index
 The cost performance index (CPI) shows the amount of work
the project is completing per dollar spent on the project.
 In other words, a CPI of .93 means it is costing $1.00 for every 93
cent’s worth of work. Or you could say the project is losing seven
cents on every dollar spent on the project.
 The cost performance index (CPI) is calculated this way:
 CPI = EV ÷ AC
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 Let’s say a project has an EV of $25,000 and an AC of $27,000. The CPI
for this project is thus .93. The closer the number is to 1, the better the
project is doing. The equation for cost performance index is CPI = EV/AC.
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 Cumulative CPI (CPIC) is a commonly used calculation to
predict project costs at the completion of the project. It also
represents the cumulative CPI of the project at the point the
measurement is taken.
 First, you need to sum the earned value calculations taken to

date (EVC) and the actual costs to date (ACC).
 The formula looks just like the CPI formula only it uses the
sums as follows:
 CPIC = EVC ÷ ACC
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 The difference between this and the CPI formula earlier is that the
CPI formula is used for a single work component whereas the CPIC
is calculated using the sum of all the costs of all the work
components.
 Additionally, you may also use CPI to calculate the total cost of a
work component like a deliverable for example.
 Let’s say you have a deliverable with 75 schedule activities that

need to be completed. You would total the EV and AC at the
measurement date for all 75 schedule activities to determine the
cost performance index for the deliverable.
84
Finding the Schedule Performance Index
 The schedule performance index (SPI) is very similar to the CPI.
The SPI, however, reveals how closely the project is on schedule.
 Again, as with the CPI, the closer the quotient is to 1 the better.
 The formula is EV divided by the PV.
 In our example, the EV is $20,000, and let’s say the PV, where the
project is supposed to be, is calculated as $30,000. The SPI for
this project is then .67—way off target!
 The equation for schedule performance index is SPI = EV/PV.
85
2. Forecasting
 Forecasting uses the information you’ve gathered to date and

estimates the future conditions or performance of the project based
on what you know when the calculation is performed.
 Forecasts are based on work performance information (an output

from the Executing process group).
 There are two types of forecasting techniques:

1. Estimate To Complete
2. Estimate At Completion
86
1. Forecasting Technique - Estimate to Complete
 Estimate to complete (ETC) tells you how much it will cost to

complete all the work remaining for a schedule activity or WBS
component or the project.
 There is one variation of ETC that doesn’t require a formula. It’s

called ETC based on a new estimate.
 This ETC, according to A Guide to the PMBOK, is the most

accurate and comprehensive ETC calculation.
87
 The two remaining ETC calculations use earned value data.

These are quick to perform but not as accurate as the project
team manually examining the remaining work and making a
new estimate based on past performance.
 When you believe that future cost variances will be similar to

the types of variances you’ve seen to date, you’ll use this
formula to calculate ETC:
 ETC = (BAC – EVC) ÷ CPIC
88
 CASE 1 Example
 Assuming our EVC value is 725, CPIC value is 1.12, and BAC is
1000, let’s plug in the numbers:
 245.5 = (1000 – 725) ÷ 1.12
 Therefore, at the measurement date (July 1), we need $245.50 to

complete all the remaining work of this work component (or project
if you’re using project totals) assuming variances in the future will
be the same as they have been to date.
89
 When you believe that future cost variances will not be
similar to the types of variances you’ve seen to date, you’ll
use this formula to calculate ETC:
 ETC = (BAC – EVC)
 Let’s calculate our value:

 275 = (1000 – 725)
 In this case, we need $275 to complete all the remaining

work of this work component assuming variances in the
future are different than they have been to date.
90
2. Forecasting Technique - Estimate at Completion

 The estimate at completion (EAC) is a hypothesis of what the total
cost of the project will be.
 The Estimate at Completion (EAC) is a prediction of what the final
project cost will be based on experiences in the project so far.
There are several different formulas for calculating the EAC.
 EAC = BAC / CPI.
 In our project, the BAC is $200,000. The CPI was calculated to be .80.
The EAC for this project is $250,000. Applicable when Project is
experiencing Expected Conditions.
91
EAC Calculations
 Common EAC Approach
EAC = AC + bottom-up ETC
 EAC forecast for ETC work performed at the budgeted rate

EAC = AC + BAC - EV
 Accounting for Anomalies – Deviations NOT likely to repeat. But

since effort required to correct the anomaly, costs will increase.
 EAC forecast for ETC Work performed at present CPI

EAC = BAC / (cumulative CPI)
 EAC forecast for ETC work considering both SPI and CPI
EAC = AC + [(BAC – EV) / (cumulative CPI x cumulative SPI)] 92
Many approaches to Calculating EAC.
1st formula - Applicable when Project is experiencing Expected Conditions.

2nd Formula - Accounting for Flawed Estimates – Original assumptions turned out to be wrong.
So new ETC required.
3rd Formula - Forecast for ETC work performed at budgeted rate
4th Formula – Accounting for Permanent Variances – Existing variances likely to continue in
project
93
 3. To-complete Performance Index (TCPI)
 It is the calculated projection of cost performance that must be
achieved on the remaining work of the project to meet the BAC or
the EAC
 If the BAC is no longer viable, then we have to develop a forecasted

estimate at completion (EAC). Once approved, EAC effectively
supersedes BAC as the cost performance goal.
 Based on BAC,
TCPI = (BAC – EV)
(BAC – AC)
94
3. To-complete Performance Index (TCPI) (Contd…)
 Based on EAC,
TCPI = (BAC – EV)
(EAC – AC)
95
4. Project Performance Reviews

 Project performance reviews are similar to status reviews. They
examine milestones due and those that have been met. They also
look at the costs associated with performance and schedule
activities that are over and under budget.
 There are three types of analyses associated with performance

reviews:
 variance analysis,
 trend analysis, and
 earned value technique.
96
4.1 Performance Review - Variance Analysis
 Variance at completion (VAC) calculates the difference between
the budget at completion and the estimate at completion.
 It looks like this:

 VAC = BAC – EAC
 Use the most optimistic EAC number:

 –171.43 = 925 – 1096.43
 The negative number means you’re not doing as well with costs as
you anticipated and that variance exists. As the project progresses,
variances will become smaller.
97
4.2 Performance Review - Trend Analysis
 According to A Guide to the PMBOK, trend analysis determines if
project performance is improving or worsening over time by
periodically analyzing project results.
 These results are measured with mathematical formulas that

attempt to forecast project outcomes based on historical
information and results.
 There are several formulas you can use to predict project trends,
but it’s outside the scope of this book to go into them.
98
4.3 Performance Review – Earned Value Performance

Earned Value management compares baseline plan to the
actual schedule and cost performance
99
5. Project Management Software
 Project managers can rely on project management software and
spreadsheet programs to assist them in calculating actual costs,
earned value, and planned value. It may also assist in forecasting
6. Reserve Analysis
Status of Management and Contingency Reserves
100
7.4.3 Control Costs – Outputs
1. Work Performance Information
2. Cost Forecasts
3. Change Requests
4. Project Management Plan updates
6. Organizational Process Assets updates
101
1. Work Performance Information - The calculated CV,SV,CPI,SPI
values for WBS components, are documented and communicated
to the stakeholders
2. Cost Forecasts – EAC values are documented and

communicated to stakeholders
3. Change Requests
 Analysis of project performance can result in a change request to the cost
performance baseline or the Project Management Plan.
 Can include preventive or corrective actions.
 Processed through the Perform Integrated Change Control Process.

102
4. Project Management Plan updates
 Cost Performance Baseline updates
 Cost Management Plan

 Cost estimates and Basis of estimates
6. Organizational Process Assets updates

Causes of variances
 Corrective Actions
 Lessons Learned
103
 Considering the Cost Control Results
 Cost control is an ongoing process throughout the project. The project

manager must actively monitor the project for variances to costs.
Specifically, the project manager should always do the following:
 Monitor cost variances and then understand why variances have occurred
 Update the cost baseline as needed based on approved changes
 Work with the conditions and stakeholders to prevent unnecessary

changes to the cost baseline
 Communicate to the appropriate stakeholders cost changes as they occur
 Maintain costs within an acceptable and agreed range
104
Rules of Thumb for Earned Value Numbers
 Negative numbers for cost and schedule variance indicate
problems in those areas
 CPI and SPI less than 100% indicate problems
 Problems mean the project is costing more than planned

(over budget) or taking longer than planned (behind schedule)
 The CPI can be used to calculate the estimate at completion

(EAC)—an estimate of what it will cost to complete the project
based on performance to date; the budget at completion
(BAC) is the original total budget for the project
105

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Project Cost Management

 7.1 Plan Cost Management – the process that establishes the

 7.2 Estimate Costs - the process of developing an approximation

 7.3 Determine Budget - the process of aggregating the

 7.4 Control Costs - the process of monitoring the status of the

 establishing policies, procedures and documentation for

 guidance and direction on how project cost will be managed

 part of Project Management Plan

1. Project 1. Expert Judgment 1. Cost Management Plan

1. Project Management Plan

3. Enterprise Environmental Factors

4. Organizational Process Assets

strategic options to fund project, obtain project resources and

1. Cost Management Plan : criteria for developing, monitoring

 Level of Accuracy - range, contingencies

 Organizational procedures links – WBS

 Control Thresholds – Variance thresholds

 Rules of Performance Measurement – EVM rules, performance measurements

 Additional details – strategic funding, currency fluctuation, project cost recording 8

 Estimate Costs is the process of calculating the costs of the

 The person or group doing the estimating must consider the

package in the WBS.

 The project manager's time

 Cost of project management activities

 Office expenses for offices used directly for the project

 Profit, when applicable

 Overhead, such as management salaries, general office expenses.

 Variable costs -These costs vary depending on the conditions applied in

 Historical information from past projects is a key to improving estimates

 Changes are approved in integrated change controls

 Estimates are more accurate if smaller sized work components are

 Corrective actions and preventive actions should be recommended when

 Though it is not an output of any process in Cost

 The Cost Management Plan sets out the format and

 The Cost Management Plan outlines the following:

 It will help determine to what level of the WBS estimates will be

 During direct and manage project execution, the cost management

 The Cost Management Plan may be formal or informal, highly

 Other Key Concepts

 Value Analysis / Value Engineering

1. Cost Management Plan

2. Human Resource Management Plan

 Work Breakdown Structure

 WBS Dictionary - A clear description of the work in each

6. Organizational Process Assets

 The process of analogous estimating takes the actual cost of a

 Analogous estimating is a form of expert judgement.

 A complex parameters can be cost per unit with adjustment factors

 The model must be scalable between project sizes.

 This technique can produce higher levels of accuracy depending

 This is a statistical approach to predict what

 Regression analysis creates quantitative

 This form of estimating relies solely on pure

 While this method is more expensive, because of the time invested

 A fringe benefit of completing a bottom-up estimate is that the

 Uses 3 estimates to define range for an activity’s cost

 Most likely (CM)

 Expected activity cost (CE) = (CO + 4CM + CP)

 An option to manage cost contingency is to aggregate each schedule

7. Cost of Quality (COQ)

8. Project Management Estimating Software

 Several different computer programs are available that can

 In either condition, the vendors’ bids need to be analyzed to