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Cost Management

Cost Management consists of the following processes. See also Knowledge Areas - Cost.

Process Project Phase
  Plan cost management   Planning
  Estimate costs   Planning
  Determine budget   Planning
  Control costs   Monitoring & Controlling  

"Anyone who lives within their means suffers from a lack of imagination." Oscar Wilde

And thus, cost is always a challenge on projects as everyone suddenly develops an overactive imagination and wish list.

And let's face it. You should strive to deliver the best solution at the best cost. Your job is to focus on the impacts to the triple constraint, recommend viable options and alternatives, and "deliver the reality check" when necessary. Budgets must be realistic and bought into. For the exam, realize that an important PMI concept is that the project manager is accountable for delivering the project within the agreed upon budget.

Estimate Costs

Cost estimation refers to determining the approximate cost of all resources (including human, capital, fixed, and variable) needed to complete the project.

Some terms to know about estimating costs:

Depreciation is used to calculate the estimated value of a capital asset over time.

      Depreciation

Determine Budget

George Bush

"It's clearly a budget. It's got a lot of numbers in it."   George W. Bush

Budget refers to the overall project costs which represent the cost baseline. It is the total sum of funds, time, etc., allocated for a project for a given period.

Contingency Reserve is the buffer to accomodate unknown and known risks and costs which were not in the initial cost baseline.


Control Costs

Controlling costs involves monitoring the project and measuring variances, and recommending corrective actions to ensure the project is delivered within budget.

"My problem lies in reconciling my gross habits with my net income."   Errol Flynn

It's just like in real life. The "wish list" many times exceeds the budget or something ends up costing more than expected. Cost overruns can occur if change requests are not managed and controlled or if variances are not monitored and corrected. Discussions tend to get heated where money is involved. Don't get caught up in the emotion. It's only math - logical, analytical, & objective. As the project manager, just stick to the facts. Continuosly monitor the project cost to find any variances and make adjustments as necessary to ensure that cost expenditures do not exceed authorized funding. For any requested changes, determine impacts by evaluating all the componenet of the trip constraint. Focus on the numerical details and what REALISTICALLY can be delivered within the parameters. Anything else requires a change control and rebaseline to increase the budget.

Cost Terms & Formulas

You will need to memorize the cost formulas for the PMP exam.

The math is pretty straight forward. However, you may need to solve the problem in steps (ie, solve for a variable to plug into your formula). But as you can see, none of the formulas are too complex. Memorize the formulas (and pay attention to detail) and you will be fine.

See also Cost Reference Sheets.

Project Selection Methods

Cost plays an important factor in determining which projects should be pursued as adding value. The following describes project selection methods and criteria to aid in the selection process.

      Project Selection Methods

Additional Information

      Visit the Project Cost & Financial Management Bookshelf to search for books available for purchase.

      Cost Management on Wikipedia

      Cost Management Sample Questions


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