Online PMP Training Material for PMP Exam - Cost Management Knowledge Area

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Cost Management
Chapter 7

Chapter 7
Objectives
Understand the different Cost Management
Processes
Their Inputs, Tools and Techniques,
Outputs
This chapter entails one to
understand the various Cost
Management aspects
required to understand the
customer monetary
dimensions.
What and how the project
will be funded for
expenditure, what will be
needed to complete the
project and finally brought to
the satisfactory need of the
customer within defined
budget – making the project
successful!

Project Cost Management includes
processes to ensure the Cost is defined
(estimated, budgeted), managed, controlled to
arrive on the Cost baseline used for further
reference on the project.
Project Cost Management is largely
associated with establishing the cost to be
incurred on the project and keeping the cost
well within the stipulated cost ranges.
In most organizations, the cost management
is a function performed largely by the finance
or administration team specialized in financial
control.
Knowledge Area: Cost Management

There are 4 Cost Management processes:
1. Plan Cost Management
Establishing Project Policies, procedures and the controls to
ensure the project costs are managed well.
2. Estimate Costs
Identifying the costs associated with the resource needs in
order to accomplish the project activities
3. Determine Budgets
Once the cost estimates are available a planned budget is
authorized as the Cost Baseline to maintain a reference for
the project
4. Control Costs
Process of managing the project activities to control costs
with reference to the Cost baseline
Knowledge Area: Cost Management

7.1 Plan Cost Management
Inputs
• Project Management
Plan
• Project Charter
• Enterprise
Environmental Factors
• Organizational Process
Assets
Tools &
Techniques
• Expert Judgment
• Analytical
Techniques
• Meetings
Outputs
• Cost
Management
Plan
•Integration
•Develop Project Management Plan
•Scope
•Plan Scope Management
•Collect Requirements
•Define Scope
•Create WBS
•Time
•Plan Schedule Management
•Define Activities
•Sequence Activities
•Estimate Activity Resources
•Estimate Activity Duration
•Develop Schedule
•Cost
•Plan Cost Management
•Estimate Costs
•Determine Budget
•Quality
•Plan Quality Management
•Human Resource
•Plan HR Management
•Communications
•Plan Communications Management
•Risk
•Plan Risk Management
•Identify Risks
•Perform Qualitative Risk Analysis
•Perform Quantitative Risk Analysis
•Plan Risk Responses
•Procurement
•Plan Procurement Management
•Stakeholder
•Plan Stakeholder Management
Planning Process
Define and establish policies, procedures and governance
models to ensure the cost of the activities and eventually the
Project are planned, managed, expended and controlled in line
with the expectations defined.
Key benefit of this process is, It provides the guidance and
direction on how the cost need to be managed through out the
project.
This process is detailed from a high-level Project Charter and
the preliminary project management plan.

Cost Management Plan output describes how
project costs will be planned, managed and
controlled. It establishes the following:
Units of Measure → Each resource unit of
measure will be defined. For example: Staff
Hours, Liters, Kilometers..
Level of Precision → The degree to which the
activity cost will be rounded up or down. ( INR 449
to Round up of INR 500 or INR 449 to Round
down to INR 400)
Level of Accuracy → The activity estimate
accuracy level with tolerance range.(+/- 5%)
Organizational Procedure Links → In order to
control costs on the project activities, WBS has
options to include Control account and Control
account codes. These organization procedure
links ensure the continuous cost monitoring.
Control Thresholds → Defined thresholds on each
activity or at project level ensure any variances
beyond the thresholds are acted and informed to
the stakeholders.
Rules of Performance Management.
EVM rules of performance are set.
Suppose for every INR 10 Lakh, the
performance review and the EAC(Estimate
at completion) of the project may be
reviewed.
Suppose for every completion of 10 tasks,
the AC(Actual Cost) may be reviewed and
further actions defined.
Suppose for every CPI variation of more than
20%, a review may be enforced.
Reporting formats → Formats & Frequency of
Cost Reports circulated.
Process Description → Other cost processes
involved in the project are defined and
documented.
Cost Management Plan

7.2 Estimate Costs
Inputs
•Cost Management Plan
•HR Management Plan
•Scope Baseline
•Project Schedule
•Risk Register
•Enterprise Environmental
Factors
•Organizational Process
Assets
Tools & Techniques
•Expert Judgment
•Analogous
•Parametric
•Bottom Up
•3-point
•Reserve Analysis
•Cost Of Quality
•Project Management
Software
•Vendor Bid Analysis
•Group Decision Making
Outputs
•Activity Cost
Estimates
•Basis Of Estimates
•Project Documents
Updates
•Integration
•Scope
•Define Scope
•Create WBS
•Time
•Develop Schedule
•Cost
•Estimate Costs
•Determine Budget
•Quality
•Human Resource
•Communications
•Risk
•Identify Risks
•Procurement
•Stakeholder
Planning Process
It is the process of estimating (approximation) the financial value needed to
ensure the project activities are completed.
Cost estimates also provide the details on alternate options such as make
versus buy, buy versus lease, shared resources and so on.
Cost estimates are generally represented in the format of staff hours, staff
days and/or staff years instead of currencies due to the currency fluctuations.
These estimates evolve over a period from the range of, -25% to
+75%(Rough order of magnitude ROM) to -5% to +10%(definitive
estimate).

Human Resource Management Plan
HR Management Plan defines allocation,
engagement and finally release of resources for
project. This plan may include following:
Roles and Responsibilities
Role – function of job role has to be defined
with clear boundaries.
Authority – In the function of job, Authority
resource exercises
Responsibility – nature of responsibilities
resource perform
Competency – level of skill the resource
has. For any gaps identified, proactive
planning to up skill competency.
Project Organization Charts
Each staff member of the project has to
report their duties to the respective function
or authority for the defined project. This
being represented in graphical tree structure
is known as Project organization chart.
Example: Imagine a Satellite Development
Project with Thousands of Staff.
As a component of HR Management plan, it has
to be defined when and how the resources will
be allocated, engaged for how long and when will
be finally released. Such plan may include:
Staff Acquisition
Resource Calendars – use visual tools
Resource Histogram
Staff Release Plan – Smooth transition of
resources during the release to another project
increases Morale of the staff
Training Needs
Recognition and Rewards – Key aspect of
motivating staff. Definite plan should exist to
ensure the performing resources achieve their
project objectives.
Staffing Management Plan

Cost of quality includes all costs
incurred over the life of product
by investment in preventing non-
conformance to requirements,
appraising the product or service
for conformance to
requirements, and failing to meet
requirements.
Failure to meet requirements is
known as Rework. Any rework
has to be completely eliminated
with refinements in the process
or avoided in the first place.
Failure costs are also called
Cost of Poor Quality and are
categorized into:
Internally found by Staff
Externally found by
Customers
Cost of Quality - COQ
Cost of
Conformance
•Prevention Costs
(build Quality product)
•Training
•Document Processes
•Equipment
•Time to do it right
•Appraisal Costs
(assess the Quality)
•Testing
•Destructive testing loss
•Inspections
Cost of Non-
Conformance
•Internal Failure Cost
•Rework
•Scrap
•External Failure Cost
•Liabilities
•Warranty Work
•Lost Business
MoneySpenttoAvoidFailures
MoneySpentduring&afterduetoFailures

For Large Projects, it is very fruitful to
have bidding mechanisms wherein the
qualified vendors engage and define the
cost of such a work at hand.
This largely saves huge upfront
estimation costs for performing
organization and also gain advantage of
multiple competing bids.
At the same time, wherever the
performing organization intends to have
better control on the overall cost
incurred, the organization performs due
diligence to award such work to
contractors. This may result in additional
overhead of detailing project with due-
diligence.
Vendor Bid Analysis

Arriving at Cost Estimates should also detail the
approach and the mechanisms adopted to
arrive at the cost in a clear and complete
manner.
Based on the nature of the projects, the basis of
estimation for such industry or function may
completely alter.
Such cost estimates may include the :
Basis of estimation
Risks & Assumptions
Constraints & Boundaries
Range of possible estimates
Indication of confidence level of the final
estimate
Basis of Estimates

7.3 Determine Budget
Inputs
•Cost Management Plan
•Scope Baseline
•Activity Cost Estimate
•Basis Of Estimate
•Project Schedule
•Resource Calendars
•Risk Register
•Agreements
•Organizational Process
Assets
Tools & Techniques
•Cost Aggregation
•Reserve Analysis
•Expert Judgment
•Historical Relationships
•Funding Limit
Reconciliation
Outputs
•Cost Baseline
•Project Funding
Requirements
•Project
Documents
Updates
•Integration
•Scope
•Define Scope
•Create WBS
•Time
•Develop Schedule
•Cost
•Estimate Costs
•Determine Budget
•Quality
•Human Resource
•Communications
•Risk
•Identify Risks
•Procurement
•Stakeholder
Planning Process
It is the process of aggregating the estimated costs and to
establish an authorized budget for the project + define the cost
baseline.
Key benefit is a ready cost baseline reference for monitoring and
controlling the costs on the project duration.
Cost baseline includes all the funds required to execute the project
till completion. Management reserves are beyond the Cost baseline
and are not part of the funds for execution of the project.

Cost Aggregation
Costs are aggregated (summed up) at above
levels. Usually the costs are attached to each
work package, which are then aggregated at
Control Accounts and then aggregated at the
entire Project level.
Total Project Costs can be arrived using the
historical relationships of using the parametric or
analogous estimates.
This depends on the actual costs of the previous
projects. Helpful in the early phase of the project
when limited information is known.
Historical Relationships
Expenditure of funds should be reconciled based on the funding limits on the commitment of funds for the
project by the customer or the organization.
This may necessitate and/or trigger changes to the schedule and cost expenditure patterns as the project
would progress.
In order to ensure the expenditures are inline with the funds by necessitating constraint dates into project
schedule.
As the project progresses, all expenditures are supposed to be accounted and readjusted as per the
reconciliation of the project expenses in to project schedule.
Funding Limit Reconciliation

Project Budget
Let us take a sample example to understand what and how Project Budgets are arrived at and what
are the Funding Limits.
For a New Wooden House Construction Project in an Amazon forest of 4 Months.
Vendor is charging the Project USD 3,50,000. Based on the agreement, Vendor has agreed to
start work immediately upon 10% received funds in 1st Month, 30% in 2nd Month and rest in
subsequent 2 months.
Project staff working on the Project would need an upfront USD 45,000 for their travel
expenditure. During the 3rd Month staff needs USD 20,000 for the final travel settlements.
Project also needs Machines which is estimated to be USD 30,000 in 1st Month and thereafter
every month USD 10,000 till Project completion.
What will be Total Project Budget and how is it reconciled for every month? Also draw an S-
Curve for the Project.
Category Sum 1st Month 2nd Month 3rd Month 4th Month
Vendor 350000 10% 30% 30% 30%
Staff Travel 45000 20000
Machines 30000 10000 10000 10000
Total Budget
Cumulative Cost

Category Sum 1st Month 2nd Month 3rd Month 4th Month
Vendor 350000 35000 105000 105000 105000
Staff Travel 65000 45000 - 20000 -
Machines 60000 30000 10000 10000 10000
Total Budget 475000 110000 115000 135000 115000
Cumulative Cost 110000 225000 360000 475000
0
110000
225000
360000
475000
0
100000
200000
300000
400000
500000
M1 M2 M3 M4
CumulativeCostofProject
Cost Baseline (S-Curve)

Cost baseline is the approved time-
phased project budget, excluding any
management reserves.
In order to use the management reserve,
the change control board has to approve
the required funds.
Project Funding Requirements are periodic
funding requirements derived from the cost
baseline.
Activity
Cost
Estimates
Work
Package
Cost
Estimates
Control
Accounts
Cost
Baseline
Project
Budget
TotalAmount
Time 
CumulativeValues


Management Reserve
Project Budget
expenditures
Cost Baseline
(S-Curve)
Funding
Requirements
Cost Baseline(S-Curve) Project Funding Requirements
Activity
Contingency
Reserve
Contingency
Reserve
Management
Reserve

7.4 Control Costs
Inputs
•Project Management Plan
•Project Funding
Requirements
•Work Performance Data
•Organizational Process Assets
Tools & Techniques
•Earned Value Management
•Forecasting
•TCPI (To-complete
Performance Index)
•Performance Reviews
•Project Management
Software
•Reserve Analysis
Outputs
•Work Performance
Information
•Cost Forecasts
•Change Requests
•Project Management Plan
Updates
•Project Document Updates
•Organizational Process Assets
Updates
•Integration
•Monitor and Control Project Work
•Perform Integrated Change Control
•Scope
•Validate Scope
•Control Scope
•Time
•Control Schedule
•Cost
•Control Costs
•Quality
•Control Quality
•Human Resource
•Communications
•Control Communications
•Risk
•Monitor & Control Risks
•Procurement
•Control Procurements
•Stakeholder
•Control Stakeholder Management
Monitoring & Controlling
Process
It is the process of managing project cost and controlling project
costs to ensure, “project is delivered” with in planned cost baseline.
Key benefit includes the project cost is well within the planned cost
baseline and minimize the project risks.
Using “control costs” the project can be put back in to track by
corrective and preventive actions.
Effective management of Control costs is performed by ensuring
the Projects Costs are controlled with Control Accounts and
approved by the Authorized Personnel along with the reviews.

Earned Value Management Technique is
a Performance Measurement and Project
health status check technique with visual
& statistical representation on Scope,
Cost, Schedule, Resources.
EVM combines an integrated view of both
Scope Baseline and Cost Baseline based
on which the Performance Baseline is
established.
Time 
CumulativeCost


Management Reserve
Project Budget
Planned Value(PV)
Earned Value(EV)
Present Day
Actual Cost (AC)
Estimate to
Complete(ETC)
BudgetAtCompletion(BAC)
EstimateAtCompletion(EAC)
Project Start
Earned Value Management

Planned Value (PV)
The charted out planned value for the
project is referred to as the PV and is
commonly thought as Authorized budget
for the Scheduled Work.
At any given point in time, it is supposed to
be the accomplished value which can be
treated as the baseline.
This baseline may be used to make
comparisons against the actual values
either cost or schedule.
This baseline is also referred to as the
Performance Measurement Baseline.
The total planned value of the project is
also known as BAC(Budget at
Completion), which does not include the
Management Reserve.
Earned Value (EV)
The charted out actual value for the project
at that given point in time is known as EV
and is commonly thought as the Actual
Work Performed measured against the
Authorized Budget value.
EV actually shows the Project percentage
completion.
EV is the real time performance data of the
project and based on which suitable
measures may be adopted incase of
deviations of the project parameters.

Actual Cost (AC)
AC is the total cost incurred on project till date.
Based on past performance, it is possible to estimate future predicted values
and arrive at the final actual cost = EAC (Estimate at Completion) giving
insights to project management team for appropriate funding on future course
of project.
AC is the realized cost for the work performed on the project till that point in
time.
Schedule Variance (SV) = EV - PV
SV is the difference between the Earned value and the Planned value.
SV helps to identify whether the project is ahead on the schedule or behind the
schedule in comparison to PV.
Cost Variance (CV) = EV - AC
CV is the difference between the Earned value and the Actual cost.
CV helps to identify whether project is cost overrun or under control.
Variance at Completion (VAC) = BAC – EAC
Estimated variance cost to completion of the project.

Schedule Performance Index (SPI) = EV / PV
SPI is measure of schedule efficiency of project.
SPI Value = 1
Project is trending as per expectation and expected
to finish as planned.
SPI Value > 1 (Means Better)
Project is ahead of schedule and all work planned
has been achieved along with some future work
accomplished earlier.
SPI Value < 1
Project is behind schedule and not all work planned
has been achieved as of date and need to recover
lost time.

Cost Performance Index (CPI) = EV / AC
CPI is the measure of cost efficiency of project.
CPI Value = 1
Project is spending as per expectation and expected
to meet cost objectives as planned.
CPI Value > 1 ( Means Better)
Project is spent less than planned and is efficient in
terms of cost expended.
CPI Value < 1
Project is spent more than planned and needs to
control cost expenditure to be back on track for cost
objectives.
Estimate To Complete (ETC) = EAC – AC
It is the expected cost to complete remaining work.

Project Metrics in EVM
For any project these all constitute a part of the metrics
which the project management team may be interested to
act and report on frequently.
PV, EV, AC, SV, CV, SPI, CPI, ETC, BAC, EAC and so on..
Forecasting
Estimating BAC & EAC are very helpful for the management
to get an overview of the funds required for the project to
start and bring it to closure.
Based on the AC, the EAC may vary significantly than the
planned BAC. This helps the project management team to
regularly monitor and ensure the values are continuously
monitored for better control during the entire project
duration based on the forecasts.

EAC may be forecasted in various manners.
Simplest Way: EAC = AC + Bottom up of
ETC
EAC forecast for ETC work performed at
budgeted rate:
EAC = AC + (BAC – EV)
EAC forecast for ETC work performed at
present CPI:
EAC = BAC / CPI
EAC forecast for ETC work considering
both SPI & CPI:
EAC = AC + [(BAC – EV) / (CPI × SPI)]
In the last forecast method both SPI & CPI
are considered at the ratio based on the
project managers confidence level of
future SPI & CPI levels.
To-Complete Performance Index (TCPI)
TCPI is the cost performance index which
is to be achieved on the remaining work to
meet the specified management goal like
BAC or EAC.
TCPI = (BAC – EV) / (BAC – AC) or (EAC
– AC)
TCPI = Work Remaining / Funds Left Over

Cost Forecast is the new cost estimated at the completion of the project while the
project is in progress.
The new cost is a result of the cost variances(CV) to the original planned value(PV)
and is also represented as EAC(Estimate at Completion) value.
Cost Variance may be a result of various actions which has caused either the cost
to fluctuate on the upper or lower side of the planned value.
Cost Forecasts

Chapter 7 - Debrief

THIS BRINGS TO “COST MANAGEMENT” COMPLETION.
From what we have understood so far is:
 4 Cost Management Knowledge Area Processes
 Identified their Inputs, Tools & Techniques, Outputs
Chapter 7

Acknowledgements & Disclaimer
PMI, PMBOK, PMP, CAPM, PgMP, PMI-
ACP, PMI-RMP, PMI-SP are registered
marks of Project Management Institute,
Inc.
All registered trademarks, symbols, names
are marks of their respective owners and
acknowledged.

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