PMP COST FormulaE

Introduction:
o Project Cost Management is the knowledge use for managing
costs. It helps to ensure a project is completed within the
approved budget
o It includes the processes involving in estimating, budgeting and
controlling costs
o These processes interact with each other and with processes in
the other nine knowledge areas as well

Developing a Cost/Schedule System:
Define
work
using a
WBS
Create
work and
resource
schedules
Develop
a time-
phased
budget
Collect
Cost
Data (at
the work
package
level)
Compute
variances
o Scope
o Work packages
o Deliverables
o Organization units
o Resources
o Budgets
o Schedule
resources
to activities
o Time-phase
work
packages into
a network
o Use work
packages
included in
an activity.
Accumulate
budgets (PV).
o Use work
packages
included in
an activity.
Accumulate
budgets
(PV)
o Compute the
schedule variance
(EV-PV) and the
cost variance (EV-
AC)

Cost Relationships Overview:

Development of Project Baselines:
Purposes of a Baseline
o It is an anchor point for measuring performance
o A planned cost and expected schedule against which actual cost and schedule are measured
o A summation of time-phased budgets (cost accounts as summed work packages) along a
project timeline
What Costs Are Included in Baselines?
o Labor, equipment, materials, project direct overhead costs (DOC)
Rules for Placing Costs in Baselines
o Costs are placed exactly as they are expected to be “earned” in order to track
them to their point of origin
o Percent Complete Rule
o Costs are periodically assigned to a baseline as units of work are completed over the duration
of a work package

o Project Manager can use the information about the
project progress to help control the schedule and
cost to assess whether the project is on track
through earned value management (EVM)
o EVM uses Variance Analysis methodology
o Other alternative methods are:
o Ask team members for a % of the work completed in each
work package or activity
o Team member provides a simple “guess” of work
performed
Earned Value Management (EVM):

Methods of Variance Analysis in EVM:
Comparing Earned Value
oWith the expected schedule value
oWith the actual costs
Assessing Status of a Project
oRequired data elements
o Budgeted cost of the work scheduled (PV)
o Budgeted cost of the work completed (EV)
o Actual cost of the work completed (AC)
oCalculate cost and schedule variances
o A positive variance indicates a desirable condition,
while a negative variance suggests problems or
changes that have taken place

oCost Variance (CV)
oIndicates if the work accomplished using labor
and materials costs more or less than was
planned at any point in the project
oSchedule Variance (SV)
oPresents an overall assessment in dollar terms
of the progress of all work packages in the
project scheduled to date
Methods of Variance Analysis in EVM:

Project Cost Management:
ESTIMATE
COST
DETERMIN
E
COST
CONTROL
COST
The process involved in planning, estimating, budgeting, and controlling costs so that the
budget can be completed within the approved budget
Developing an
estimate of costs of
the resources
needed to
complete a project
Allocating overall
cost estimate to
individual work
items “cost
baseline”
Controlling change
to project budget
PLANNING MONITOR & CONTROL

Monitor & Control Costs : CONTROL
COST
Cost Baseline
Project Funding Requirements
Performance Reports
Work Performance
Information
Approved Change Requests
Project Management Plan
Cost Change Control System
Performance Measurement
Analysis
Forecasting
Project Performance
Reviews
Project Performance
Software
Variance Management
Inputs Tools & Techniques Outputs
Cost Estimate Updates
Cost Baseline Updates
Performance
Measurements
Forecasted Completion
Recommended Corrective
Action
Organizational Process
Assets Updates
Project Management Plan
Updates
o Monitor Cost Performance
o Ensure that changes are included in cost baseline
o Inform stakeholders of authorized changes which impact
cost

Cost Budget Breakdown:
Project
ReservesNot Used in Earned Value
Calculations
Used in Earned Value Calculations
Cost Budget
Management
Reserve
Cost Baseline
Contingency
Reserve
Project
Control Account
Work Package
Activity
Tasks
Project
WBS
Schedule
Work Breakdown Structure Schedule Information
Budget Breakdown

Cost Budget Components:

Terms:
EV Earned value for a task is simply the percent complete times its original budget. Stated differently, EV is the percent of the original
budget that has been earned by actual work completed.
PV The planned time-phased baseline of the value of the work scheduled. An approved cost estimate of the resources scheduled in a
time-phased cumulative baseline [BCWS—budgeted cost of the work scheduled].
AC Actual cost of the work completed. The sum of the costs incurred in accomplishing work. [ACWP—actual cost of the work
performed].
CV Cost variance is the difference between the earned value and the actual costs for the work completed to date where CV = EV – AC
SV Schedule variance is the difference between the earned value and the baseline line to date where SV = EV – PV
BAC Budgeted cost at completion. Total budgeted cost of the baseline or project cost accounts.
EAC Estimated costs at completion.
ETC Estimated costs to complete remaining work.
VAC Cost variance at completion. VAC indicates expected actual over- or under-run cost at completion.

Terms:
Performance Indexes:
• Cost Performance Index (CPI)
• Measures the cost efficiency of work accomplished to
date.
• CPI = EV/AC
• Scheduling Performance Index (SPI)
• Measures scheduling efficiency
• SPI = EV/PV
• Percent Complete Indexes
• Indicates how much of the work accomplished represents
of the total budgeted (BAC) and actual (AC) dollars to
date.
• PCIB = EV/BAC
• PCIC = AC/EAC

Terms:
Index Cost (CPI) Schedule (SPI)
>1.00 Under cost Ahead of schedule
=1.00 On cost On schedule
<1.00 Over cost Behind schedule

Cost /Schedule Graph:

Cost /Schedule Graphs: SV = EV -
PVCV = EV - AC

EV
Earned Value = EV
The value of the work
accomplished until this point
in time. Cost is as per the
original budget.
“ As of today, what is the
estimated value of the work
actually accomplished? “

PV
Planned Value = PV
Planned cost or value of the
work to be done until this
point in time.
“ As of today, what is the
estimated value of the work
planned to be done? “

AC
Actual Costs = AC
The costs actually incurred to
complete the work until this
point in time.
“ As of today, what is the
actual costs incurred for the
work accomplished? “

BAC
Budget At Completion =
BAC
The total planned value or
budget for completing the
entire project.
“ How much did we budget
for the total project? “

CV
Cost Variance = CV
CV = EV - AC
o Positive is Under Budget
o Negative is Over budget

SV
Schedule Variance = SV
SV = EV - PV
o Positive is ahead of
schedule
o Negative is behind
schedule

CPI
Cost Performance Index =
CPI
CPI =
o We are getting $___
worth out of every $1
spent.
o Greater than 1 is good;
less than 1 is bad
EV
AC

SPI
Schedule Performance
Index = SPI
SPI =
o We are progressing at
___% of the rate
originally planned.
o Greater than 1 is good;
less than 1 is bad
EV
PV

EAC
Estimate At Completion = EAC
Prediction of what project will
cost when completed..
“ What do we currently expect the
total project to cost (a forecast)?
“
There are 4 types:EAC = AC + Bottom up
ETC
BAC
CPI
EAC = AC + (BAC – EV)
EAC =
EAC =
(BAC – EV)
(CPI x SPI)
Used when the
original estimate
was flawed
Used when there are no variances
from BAC. Most common one for
exam
Used when the current
variances are “atypical” of
the future
Used when the current
variances are “typical” of the
future

ETC
Estimate To Complete = ETC
From this point on, How much
More do we expect it to cost to
finish the project ? (a Forecast)
How much more will the project
cost?
ETC = EAC - AC

VAC
Variance At Completion = VAC
As of today, how much over or
under budget will we be at the
end of the project ?
VAC = BAC -
EAC

TCPI
To Complete Performance
Index = TCPI
In order to stay within budget,
what rate must we meet for the
remaining work?
TCPI
=
(BAC – EV)
(BAC - AC)
o It divides the work remaining to be done
by the money remaining to do it
o Greater than 1 is bad; less than 1 is good

Thank You
Connect with me @
@