BSBPMG533 – Manage project cost

Task 2 – Knowledge Questions

Student ID Student Name

First Name:
Antonella
Last Name:
Alvarez

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Greystone College Australia BSBPMG533 Task 2 Knowledge Questions V2.0523 Page 1 of 6

 1. Identify at least four (4) key steps in the budgeting process for a project (about 40 words)?
.-Estimate Costs: Determine the costs of resources, labour, materials, and any other project charges.
.-Budget Allocation: Using cost estimates, divide the overall budget among project activities and
phases.
.-Expense Monitoring: Throughout the project, keep track of actual expenses against the budgeted
amount.
.-Analyse Variances: Compare actual expenditures to budgeted amounts, discovering and resolving
any differences.

2. Describe the ‘Estimated Costs’ process and the key benefit of the process (about 40 words).
The 'Estimated Costs' method entails forecasting and estimating the expected costs
for resources, labour, materials, and other project requirements. This aids in the
creation of an accurate budget, laying the groundwork for cost control throughout
the project's lifecycle, assuring financial feasibility, and avoiding unanticipated cost
overruns.

3. Describe the ‘Determine Budget’ process and the key benefit of the process (about 40-50
words).
The 'Determine Budget' process assigns the whole project budget to specified activities, phases, or
work packages based on cost estimates. This precise allocation ensures that financial resources are
distributed properly, offering a clear path for spending. The primary benefit is good financial planning,
which allows for control over project expenditures and alignment with available resources to meet
project objectives within budget restrictions.

4. List at least three (3) organisational process assets that can influence the cost management
plan of a project (about 30-40 words).
.-Organisational Policies and Procedures: These rules govern how expenses are evaluated, budgeted,
and controlled inside the organisation, hence influencing the cost management strategy.
.-Historical Cost Data: Past project records provide insights into similar project expenses, allowing for
more accurate cost estimation and budgeting.
.-Financial Control Procedures: Organisational frameworks for financial control, such as approval
processes, budget limits, and reporting requirements, have an impact on how project expenses are
controlled and monitored.

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 5. Briefly outline (4) four tools and techniques used in the process of estimating costs (about 40
words each).
.-Analogous Estimating is a top-down approach that uses historical data from similar previous projects
to estimate expenses for the present one. This technique is quick and straightforward, relying on the
similarities between previous and current projects to generate a preliminary estimate. While less
accurate than other methods, it can be beneficial in the early stages of a project where detailed
information is scarce. It works particularly well when projects have comparable scope, scale, and
qualities.

.-Parametric Estimating is more precise than Analogous Estimating, but less detailed than Bottom-Up
Estimating. It works well for recurrent tasks with stable specifications, allowing for quick and accurate
cost estimations. To achieve relevant results, it is necessary to have a solid database of historical data
and correct cost factors. Parametric estimate, as a quantitative method, is especially useful when
there is a strong statistical association between project factors and costs, as it provides a structured
approach to estimate costs using measurable parameters.

.-Bottom-Up calculating is a detailed approach that involves calculating the cost of individual work
items or jobs before combining them to provide a logical project estimate. This strategy ensures great
accuracy, particularly for big projects with numerous jobs. Project managers begin by calculating the
expenses of each task, subtask, or work package, taking into account all relevant variables such as
labour, materials, equipment, and overhead. These precise estimates are then combined to generate
a full project budget. While Bottom-Up Estimating is time-consuming and necessitates a thorough
understanding of project components, it provides a more detailed perspective of expenses, allowing
for better cost control and management.

.-Three-Point Estimating is a technique that assigns three estimates to each task: optimistic,
pessimistic, and most likely. These estimates are then used to compute a weighted average, which
provides a range of potential costs with varied levels of uncertainty. The optimistic estimate
represents the best-case scenario, which assumes that everything goes well. The pessimistic estimate
evaluates the worst-case situation, taking into account potential risks and concerns. The most likely
estimate is a credible judgement based on existing data and assumptions. Project managers can
compute the projected cost of each work by aggregating these estimates and applying a formula such
as the Programme Evaluation and Review Technique (PERT).

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 6. (a) In about 50 words, explain the term Earned Value Management (EVM).
(EVM) is a project management approach that considers project scope, schedule, and cost
performance. To analyse project progress, compare the value of completed work (earned value) to
the actual and budgeted costs. EVM gives insights into project health, forecasts future performance,
and identifies variations to enable proactive decision-making.

(b) A project has an Earned Value (EV) of $10 000, Actual Cost (AC) of $8000 and Planned
Value (PV) of $8000. Using the correct formula, what is the Schedule Variance (SV)?
Earned Value (EV) = $10,000
Planned Value (PV) = $8,000
SV=EV−PV
SV = $10,000 - $8,000
SV = $2,000
7. What is Cost Performance Index (CPI) and the formula used to calculate it (about 80 words)?
The Cost Performance Index (CPI) is a critical performance statistic in Earned Value Management
(EVM) that assesses the effectiveness of cost performance on a project. It is the ratio of earned value
(EV) to actual cost (AC), which indicates how much value (in terms of work completed) is obtained for
each dollar spent.
The formula is
CPI= EV/AC
EV (Earned Value) is the value of the work actually accomplished
AC (Actual Cost) is the total actual cost incurred to achieve the work done
A CPI greater than 1.0 implies that the project is under budget, since more value is being generated
for each dollar spent. A CPI less than 1.0 shows that the project is over budget, resulting in less value
for each dollar spent. A CPI of 1.0 indicates that the project is perfectly on budget.

8. What is Schedule Performance Index (SPI) and the formula used to calculate it (about 50
words)?
Schedule Performance Index (SPI) is measures timetable efficiency in Earned Value Management
(EVM). It compares the earned value (EV) to the planned value (PV), demonstrating how quickly the
project team is moving relative to the intended schedule.
The formula is
SPI=EV/PV
EV (Earned Value) is the value of work actually accomplished
PV (Planned Value) is the value of work planned to be accomplished
An SPI larger than 1.0 implies that the project is ahead of schedule, with more work completed per
unit of time. An SPI less than 1.0 implies that the project is behind schedule, with less work completed
per unit of time. An SPI of 1.0 indicates that the project is exactly on schedule.

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 9. If a cost estimate is $50 000 +/- 20%, what is the range?
Lower Range:
20%/ $50,000 = 0.20 \times $50,000 = $10,000
LR = $50,000 - $10,000 = $40,000
Upper Range:
20%/$50,000 = 0.20 \times $50,000 = $10,000
UR = $50,000 + $10,000 = $60,000
So, the range for the cost estimate of $50,000 +/- 20% is $40,000 to $60,000.
10. You are working on a project to be completed in 14 months. The cost of the project is
$1,000,000. After 7 months, $620,000 has been spent and only 40% of the work has been
completed.
a. Using the correct formula, find the Cost Performance Index (CPI).
b. Is the project currently over or under budget?
The formula is
CPI= EV/AC
EV = 0.40 * $1,000,000 = $400,000
AC = $620,000
CPI=400,000/620,000=0.645
In this case, the CPI is 0.645, which is less than 1. Therefore, the project is currently over budget. The
project has spent more than the value of work completed, indicating cost inefficiency.

11. You discover you cannot meet your current project cost baseline due to fluctuating
international exchange rates. You calculate a bottom-up estimate of remaining work at $2.5
million. The project’s current actual cost (AC) is $3.5 million. Using the correct forecasting
formula, calculate the project estimate at completion. (You must show formula and
breakdown).
The formula is
EAC=AC+( BAC-EV/CPI )

EV=BAC−AC
EV = BAC - $3.5 million
EV=2.5−3.5=-1

CPI=EV/AC
CPI=-1/3.5 million (over budget)

EAC=3.5+(2.5-(-1)/-1/3.5)
EAC=3.5+(3.5/-1/3.5)
EAC=3.5+(-12.25)
EAC=-8.75
A negative EAC indicates that the project is likely to exceed its budget by the amount of the negative
value. In this case, a negative EAC of approximately -$8.8 million suggests that the project is
forecasted to be over budget if it continues at the same cost efficiency rate.

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 12. Imagine you need to make changes to existing time frames in order for project tasks to be
completed by a specific time and to maintain financial objectives. Outline how you would
implement an agreed action and provide timely financial reporting (about 80 words).
First, call a meeting with key stakeholders to go over the suggested changes, explaining why they are
necessary and how they will affect project schedules and costs. Once agreed upon, amend the project
schedule to reflect the revised time periods and clearly convey these modifications to the project
team. Simultaneously, maintain timely financial reporting by incorporating amended schedules into
cost tracking systems, tracking expenditures against the new plan, and producing updated financial
reports. This ensures that project schedules and budgetary objectives are aligned, while also keeping
stakeholders informed.

13. In the role of project manager, what five (5) key procedures would you follow to manage a
cost change process for a project (about 80 words)?
.-Document Change Request: Make sure that all cost change requests are clearly documented,
including the justification for the change, the impact on the project budget, and any supporting
material.
.-Impact Analysis: Conduct a thorough analysis to determine the impact of the cost change on project
scope, schedule, and resource allocation.
.-Approval Process: Create a clear approval process that involves all essential stakeholders, assuring
adequate assessment and authorisation before implementing any cost modifications.
.-Create a communication plan to educate all stakeholders about the approved cost modifications,
ensuring openness and managing expectations.
.-Update Project Baseline: Once approved, update the project baseline to reflect the new budget,
guaranteeing accurate cost monitoring and reporting.

14. Outline the process of reviewing cost management issues and documenting improvements
(about 80 words).
.-Identify Issues: Examine project expenses, budget variations, and cost performance metrics to find
areas of concern or inefficiency.
.-Root Cause Analysis: Determine the underlying causes of cost overruns or budget deviations, taking
into account factors like as scope modifications, resource utilisation, and unanticipated expenses.
.-Develop Improvement plans: Using the analysis, devise plans to solve identified difficulties, such as
improving cost controls, optimising resource allocation, or renegotiating contracts.
.-Document Solutions: Clearly describe recommended improvements, including specific actions to be
implemented, responsible parties, and dates.
.-Implementation and Monitoring: Carry out the documented improvements while continuously
monitoring their effectiveness. Regularly evaluate cost management methods to ensure continuous
improvement and alignment with project goals.

End of questions.

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