Cost Management consists of the following processes.
| 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:
- Bottom-up Estimating – uses detailed activities at lower level to estimate and then adding or summarizing to get total.
- Analogous Estimating (Top Down) – uses historical information and expert judgement to produce an estimate.
- Parametric Estimating – uses statistical information between historical data and variables to produce a more accurate estimate. It identifies the unit cost or duration and the number of units required for the project or activity. For example, past projects used 5 testers to test the application for a project of similar size/cost.
Depreciation is used to calculate the estimated value of a capital asset over time.
Determine Budget
“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
- Planned Value (PV) – How much is the work we scheduled to do worth?
- Actual Cost (AC) – How much did we pay for the work done?
- Earned Value (EV) – How much is the work we have already done worth?
- Cost Variance (CV) – Have we spent what we expected to spend for the work performed?
- Schedule Variance (SV) – Have we accomplished as much work as we planned?
- Budget at Completion (BAC) – What is the total planned budget for the project?
- Cost Performance Index (CPI) – How cost-efficient has the project been?
- Schedule Performance Index (SPI) – How good has our schedule performance been?
- Estimate at Completion (EAC) – How much do we think the total project cost will be?
- Variance at Completion (VAC) – How far off budget will the total project cost be when we’re finished?
- Estimate to Complete (ETC) – How much more must we spend to complete the project?
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.
