Pmp – pmbok 5th edition chapter7 project cost management

CHAPTER 7
Fourth Knowledge Area:
Project Cost Management
1
PLAN
COST
MGMT
2
ESTIMATE
COST
3
DETERMINE
BUDGET
4
CONTROL
COSTS

Project Cost Management includes the processes involved in Planning,
Estimating, Budgeting, Financing, Funding, Managing, and Controlling
costs so that projects can be completed within budget
1. Plan Cost Management (Planning Process Group)
The process that establishes the policies, procedures, and documentation for planning, managing, expending, and
controlling project costs.
2. Estimate Cost (Planning Process Group)
The process of developing an approximation of the monetary resources needed to complete project activities
3. Determine Budget (Planning Process Group)
The process of aggregating the estimated costs of individual activities or work packages to establish an authorized cost
baseline
4. Control Costs (Monitoring & Controlling Process Group)
The process of monitoring the status of the project to update the project costs & managing changes to the cost baseline.

Project Cost Management must consider stakeholder’s requirements for
managing costs – each stakeholder will measure costs differently.
Project Cost Management is primarily concerned with the cost of the
resources needed to complete project activities & the subsequent costs in
using and supporting the deliverables.
The cost management planning effort occurs early in the project & sets the
framework for each of the cost management processes so that
performance will be efficient.

INPUTS TOOLS & TECHNIQUES OUTPUTS
Plan Cost Management: Inputs, Tools & Techniques, & Outputs
1. Project Management
Plan
2. Project Charter
3. Enterprise Environmental
Factors (EEFs)
4. Organizational Process
Assets (OPAs)
1. Expert Judgment
2. Analytical Techniques
3. Meeting
1. Schedule Management
Plan
• Plan Cost Management is the process of establishing the policies, procedures, and
documentations for planning, managing, expending & controlling project cost.
• It’s key benefit is it provides guidance & directions on how the project costs will be
managed throughout the project

OUTPU
T
1
PROJECT
MANAGEMEN
T
PLAN
4
ORGANIZATION
AL
PROCESS
ASSETS
(OPA)
TOOLS &
TECHNIQUE
S
COST
MANAGEMENT
PLAN
3
ENTERPRISE
ENVIRONME
NT
FACTORS
(EEF)
2
PROJECT
CHARTER
OUTPUT
1. EXPERT JUDGMENT
2. ANALYTICAL TECHNIQUES
3. MEETINGS
Other Information
1. Org. Culture & Structure that influences
cost
2. Market Conditions
3. Currency exchange for international
projects
4. Published & Commercially Available Info
5. Project Management Information System
• Financial controls procedures
• Historical information & lessons learned
• Financial databases; and
• Existing formal & informal cost estimating &
budgeting policies

Describes how the project costs will be planned, structured & controlled.
Cost management plan can establish:
• Units of Measure
• Level of Precision
• Level of Accuracy
• Organizational Procedures Links
• Control Thresholds
• Rules of Performance Measurement
• Reporting Formats
• Process Descriptions
• Additional details such as description of strategic funding choices, procedure to
account for fluctuation in currency exchange & cost reporting

Plan Cost Management: Inputs, Tools & Techniques, & Outputs
1. Cost Management Plan
2. Human Resource
Management Plan
3. Scope Baseline
4. Project Schedule
5. Risk Register
6. Enterprise Environmental
Factors
Assets (OPAs)
1. Expert Judgment
2. Analogous Estimating
3. Parametric Estimating
4. Bottom-up Estimating
5. Three-points Estimating
6. Reserve Analysis
7. Cost of Quality
Software
9. Vendor Bid Analysis
10. Group Decision Making
Techniques
1. Activity Cost Estimates
2. Basic of Estimates
3. Project Documents
Updates
• Estimate Cost is the process of developing an approximation of the monetary
resources needed to complete project activities.
• It’s key benefit is it determines the amount of cost required to complete project work.

3
SCOPE
BASELINE
5
RISK
REGISTER
4
PROJECT
SCHEDUL
E
OUTPU
T
1
COST
MANAGEMEN
T
PLAN
7
ORGANIZATION
AL
PROCESS
ASSETS
(OPA)
TOOLS &
TECHNIQUE
S
BASIS OF
ESTIMATES
6
ENTERPRISE
ENVIRONME
NT
FACTORS
(EEF)
2
H.R.
MGMT
PLAN
OUTPUT
1. EXPERT JUDGMENT
2. ANALOGOUS ESTIMATING
3. PARAMETRIC ESTIMATING
4. THREE-POINT ESTIMATING
5. BOTTOM-UP ESTIMATING
6. RESERVE ANALYSIS
7. COST OF QUALITY
8. PROJECT MANAGEMENT
SOFTWARE
9. VENDOR BID ANALYSIS
10. GROUP DECISION MAKING
TECHNIQUES
1. Market Conditions
2. Published Commercially Info
• Cost Estimating Policies
• Cost Estimating Templates
• Historical Information, and
• Lessons Learned
PROJECT
DOCUMENTS
UPDATES
ACTIVITY
COST ESTIMATES
WBS Dictionary

1. Expert Judgment
2. Analogous Estimating – compare with similar past projects when limited amount of detailed info
available
3. Parametric Estimating – uses statistical relationship relevant historical data & other variable
(like square footage) to calculate a cost estimate for project work. It provides higher level of accuracy
depending on past data
4. Bottom Up Estimating – cost of individual work packages are estimated to the greatest level for
detail. Its accuracy is influenced by the size & complexity of the individual activity or work package.
5. Three-Point Estimating
• Most Likely (cM) based on realistic effort assessment
• Optimistic (cO) based on best case scenario
• Pessimistic (cP) based on worst case scenario
Depending on the assumed distribution of value within the range, there are 2
formulas:
• Triangular Distribution. cE = (cO + cM + cP) /3
• Beta Distribution (from PERT analysis) cE = (cO + 4cM + cP) / 6

6. Reserve Analysis
Contingency Reserves are the budget within cost baseline that is allocated for identified risks. It is often
viewed as part of the budget to address the “known-unknowns” that can affect a project. It may be a
percentage of the estimated cost, a fixed number, or may be developed by using quantitative analysis
methods.
7. Cost of Quality (COQ) – it cost less to prevent quality issue than to fix it
8. Project Management Software – Computerized spreadsheets, simulation, and statistical
tools are used to assist with cost estimating.
9. Vendor Bid Analysis – Cost estimates can be based on the responsive bids from qualified
vendors
10.Group Decision-Making Techniques
Team based approaches, such as brainstorming, the Delphi or Nominal Group Techniques are useful for
engaging team members to improve estimate accuracy & commitment to the estimates.

BASIS OF
ESTIMATES
PROJECT
DOCUMENTS
UPDATES
ACTIVITY
COST ESTIMATES
Quantitative assessment of the probable costs required to complete project work. It can be
presented in summary form or in detail. Cost are estimated for ALL resources that are applied
to the activity cost estimate
The amount and type of additional details supporting the cost estimates vary by application
area.
Supporting detail may include:
• Documentation of the basis of the estimate (how it was developed),
• Documentation of all assumptions made,
• Documentation of any known constraints,
• Indication of the range of possible estimates (like +/- 10%) to indicate that the item is
expected to cost between a range of values, and
• Indication of the confidence level of the final estimate.
Project Documents that may be updated include, but not limited to, the risk register.

Determine Budget: Inputs, Tools & Techniques, & Outputs
1. Cost Management Plan
2. Scope Baseline
3. Activity Cost Estimates
4. Basis of Estimates
5. Project Schedule
6. Resource Calendars
7. Risk Register
8. Agreements
Assets (OPAs)
1. Cost Aggregation
2. Reserve Analysis
3. Expert Judgment
4. Historical Relationship
5. Funding Limit
Reconciliation
1. Cost Baseline
2. Project Funding
3. Project Documents
Updates
• Determine Budget is the process of aggregating the estimated costs of individual
activities or work packages to establish an authorized cost baseline
• It’s key benefit is it determines the cost baseline against which project performance
can be monitored & controlled.

6
RESOURC
E
CALENDA
RS
2
SCOPE
BASELINE
7
RISK
REGISTER
3
ACTIVITY
COST
ESTIMATE
S
OUTPU
T
1
COST
MANAGEMEN
T
PLAN
9
ORGANIZATION
AL
PROCESS
ASSETS
(OPA)
TOOLS &
TECHNIQUE
S
PROJECT
FUNDING
REQUIREMENTS
5
PROJECT
SCHEDULE
4
BASIS
OF
ESTIMATE
S
OUTPUT
1. COST AGGREGRATION
2. RESERVE ANALYSIS
3. EXPERT JUDGMENT
4. HISTORICAL RELATIONSHIPS
5. FUNDING LIMIT RECONCILIATION
• Existing formal & informal cost budgeting-
related policies, procedures and guidelines;
• Cost budgeting tools; and
• Reporting methods
PROJECT
DOCUMENTS
UPDATES
COST
BASELINE
WBS Dictionary
8
AGREEMEN
TS
Info on which resources are
assigned
and when they are assigned

1. Cost Management Plan – describes how project costs are managed & controlled
2. Scope Baseline:
Project Scope Statement; WBS; & WBS Dictionary.
3. Activity Cost Estimates – each activity in a work package are aggregated to get the cost estimate
4. Basis of Estimates – must specify basic assumptions related to inclusion, exclusion of indirect or other costs
5. Project Schedule – planned start & finish dates of activities, milestones, work packages & control accounts
6. Resource Calendars * – provide info on which resources are assigned and when they are assigned
7. Risk Register * – must be reviewed to consider how to aggregate the risk response cost.
8. Agreements *
Applicable agreement information and cost relating to products, services, or results that have been or will be purchased are
included when determining the budget.
9. Organizational Process Assets
such as Existing formal/informal cost-budgeting policies, procedures & guidelines; Cost budgeting tools; and Reporting
methods.

1. Cost Aggregation *
costs are aggregated by work packages rolling up to the entire project
2. Reserve Analysis
can establish both contingency reserves & management reserves for the project
3. Expert Judgment
such as from Other departments, consultants, stakeholders (including the customers), professional & technical associations;
and industry groups.
4. Historical Relationships *
that result in parametric or analogous estimates to develop mathematical model to predict total project cost. The accuracy
depends on if the:
• Historical information used to develop the model is accurate.
• Parameters used are readily quantifiable; and
• Models are scalable
5. Funding Limit Reconciliation
Expenditures must be reconciled with any funding limit. A variance may necessitate a rescheduling to level out the rate of
expenditures by placing date constraints on the schedule.

PROJECT
DOCUMENTS
UPDATES
PROJECT
FUNDING
REQUIREMENTS
COST
BASELINE
Approved version of the time-phased project budget (excluding any management reserves)
that can only be changed via formal change control procedures. It is used as a basis for
comparison to actual results.
Project Documents that may be updated include, but not limited to:
Risk Register, Activity Cost Estimate, and Project Schedule
Derived from the cost baseline that include projected expenditures plus anticipated liabilities.
Funding are incremental, not continuous and may not be distributed evenly
Project
Budget
Cost
Baselin
e
Control
Accounts
WorkPackage
CostEstimates
Activity
Cost
Estimates
Manage
ment
Reserve
s
Contingen
cy
Reserves
Activity
Contingency
Reserves
TotalAmount
Project Budget Component

Control Costs: Inputs, Tools & Techniques, & Outputs
1. Project Management Plan
2. Project Funding
Requirements
3. Work Performance Data
4. Organization Process Assets
(OPAs)
1. Earned Value
Management
2. Forecasting
3. To Complete Performance
Index (TCPI)
4. Performance Reviews
Software
6. Reserve Analysis
1. Work Performance Info
2. Cost Forecasts
3. Change Requests
Plan Updates
5. Projects Documents
Updates
Assets Updates
• Control Costs is the process of monitoring the status of the project to update the project
costs and managing changes to the cost baseline.
• It’s key benefit is it provides means to recognize variance from the plan in order to take
corrective action & minimize risk.

Much of the effort of cost control involves analyzing the relationship between the consumption of
project funds to the physical work being accomplish for such expenditures that includes:
• Influencing the factors that created changes to the authorized cost baseline;
• Ensuring that all change requests are acted on a timely manner;
• Managing the actual changes when they occur;
• Ensuring that cost expenditures do not exceed the authorized funding by period, by WBS
component, by activity, and in total for the project;
• Monitoring cost performance to isolate and understand variances from the approved cost
baseline;
• Monitoring work performance against funds expended;
• Preventing unapproved changes from being included in the reported cost of resource usage;
• Informing appropriate stakeholders of all approved changes and associated costs; and
• Bringing expected cost overruns within acceptable limits.

OUTPU
T
1
PROJECT
MANAGEMEN
T
PLAN
4
ORGANIZATION
AL
PROCESS
ASSETS
(OPA)
TOOLS &
TECHNIQUE
S
COST
FORECASTS
3
WORK
PERFORMAN
CE
DATA
2
PROJECT
FUNDING
REQUIREMEN
TS
OUTPUT
1. EARNED VALUE MANAGEMENT
2. FORECASTING
3. TO COMPLETE PERFORMANCE
INDEX (TCPI)
4. PERFORMANCE REVIEWS
5. PROJECT MANAGEMENT
SOFTWARE
6. RESERVE ANALYIS
• Existing formal & informal cost budgeting-
related policies, procedures and guidelines;
• Cost control tools; and
• Monitoring & Reporting methods to be used
CHANGE
REQUESTS
WORK
PERFORMANCE
INFORMATION
PROJECT
DOCUMENT
UPDATES
ORGANIZATIONAL
PROCESS ASSETS
UPDATES
PROJECT
MANAGEMENT PLAN
UPDATES

1. Earned Value Management (EVM)
A methodology that combines scope, schedule, and resource measurements to asses project performance & progress to
form performance baseline. It is a technique that requires the formation of an integrated baseline to measure performance
of the project.
EVM develops and monitor three key dimensions for each work package & control account:
• Planned Value (PV). Authorized budget assigned to scheduled work for an activity or WBS component (not
including management reserve). It is allocated by phase over the life of the project, but at a given moment, PV
defines the physical work that should have been accomplished. The total of the PV is sometimes referred to as the
Performance Measurement Baseline (PMB). Total PV for the project is also known at Budget At Completion (BAC)
• Earned Value (EV). A measure of work performed expressed in terms on the budget authorized for that work. EV
measured needs to be related to the PMB and it cannot be greater than the authorized PV budget for a component.
It’s often used to calculate the percent complete of a project.
• Actual Cost (AC). The realized cost incurred for work performed on an activity during a specific time period. It is
the total cost incurred in accomplishing the work that the EV measured. The AC needs to correspond in definition to
what was budgeted in the PV and measured in the EV. AC has no upper limit; whatever spent to achieve EV will be
measured.

Variances from the approved baseline will also be monitored:
• Schedule Variance (SV). – SV = EV – PV
A measure of schedule performance expressed as the difference between the Earned Value (EV) and the Planned
Value (PV)
EVM (Earned Value Methodology) is a useful metric that can indicate when a project is falling behind or is ahead of
its baseline schedule. The EVM schedule variance will ultimately equal zero when the project is completed because
ALL the Planned Value will have been Earned. It is best used in conjunction with Critical Path Methodology (CPM)
• Cost Variance (CV). – CV = EV – AC
The amount of budget deficit or surplus at a given point in time, expressed as the difference between Earned Value
(EV) and the Actual Cost (AC)
The cost variance at the end of the project will be the difference between the Budget At Completion (BAC) and the
Actual amount spent. The CV is very critical because it indicates the relationship of physical performance to the cost
spent. A Negative CV is often difficult for the project to recover.
• Schedule Performance Index (SPI) – SPI = EV/PV
A measure of efficiency expressed as the ratio on Earned Value to Planned Value. An SPI value of LESS than 1.0
means that it is behind schedule and GREATER than 1.0 means that it’s ahead of the schedule
• Cost Performance Index (CPI) – CPI = EV/AC
A measure of cost efficiency of budgeted resources, expressed as ratio between Earned Value to Actual Cost. A CPI
value of LESS than 1.0 means that it is Over Budget and GREATER than 1.0 means that it’s Under Budget

2. Forecasting
As the project progresses, the PM may develop a forecast for the Estimate At Completion (EAC) that may differ from the
Budget At Completion (BAC) based on performance. If the BAC is deemed no longer viable, the forecasted EAC will be
used.
EACs are typically based on actual cost incurred, plus an Estimate to Complete (ETC) the remaining work.
The most common EAC forecasting approach is a manual bottom-up summation by the PM & the project team.
EAC = AC + Bottom-Up ETC
Three common methods of calculating EAC are:
• EAC forecast for ETC work performed at the budgeted rate: Accepts the actual project performance to date as
represented by the actual costs & predicts that ALL future ETC work will be accomplished at the budgeted rate.
When actual performance is unfavorable, the assumption that future performance will improve should be accepted
only when supported by risk analysis.
EAC = AC + (BAC – EV)
• EAC forecast for ETC work performed at the present CPI: Assumes what the project has experienced to date can be
expected to continue in the future.
EAC = BAC / CPI

2. Forecasting
3. To Complete Performance Index (TCPI)
4. Performance Reviews
5. Project Management Software
6. Reserve Analysis

Pmp – pmbok 5th edition chapter7 project cost management

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