7 Cost Management Terms

Question 1

Actual cost (AC)

Answer 1

The actual amount of monies the project
has spent to date.

Question 2

Analogous estimating

Answer 2

An approach that relies on historical
information to predict the cost of the
current project. It is also known as topdown estimating and is the least reliable of all the cost-estimating approaches.

Question 3

Bottom-up estimating

Answer 3

An estimating approach that starts from
zero, accounts for each component of the
WBS, and arrives at a sum for the
project. It is completed with the project
team and can be one of the most timeconsuming and most reliable methods to
predict project costs.

Question 4

Budget estimate

Answer 4

This estimate is also somewhat broad
and is used early in the planning
processes and also in top-down
estimates. The range of variance for the
estimate can be from –10 percent to +25
percent.

Question 5

Commercial database

Answer 5

A cost-estimating approach that uses a
database, typically software-driven, to
create the cost estimate for a project.

Question 6

Contingency reserve

Answer 6

A contingency allowance to account for
overruns in costs. Contingency
allowances are used at the project
manager’s discretion and with
management’s approval to counteract
cost overruns for scheduled activities and
risk events.

Question 7

Cost aggregation

Answer 7

Costs are parallel to each WBS work
package. The costs of each work
package are aggregated to their
corresponding control accounts. Each
control account then is aggregated to the
sum of the project costs.

Question 8

Cost baseline

Answer 8

A time-lapse exposure of when the
project monies are to be spent in relation
to cumulative values of the work
completed in the project.

Question 9

Cost budgeting

Answer 9

The cost aggregation achieved by
assigning specific dollar amounts for
each of the scheduled activities or, more
likely, for each of the work packages in
the WBS. Cost budgeting applies the cost
estimates over time.

Question 10

Cost change control system

Answer 10

A system that examines any changes
associated with scope changes, the cost
of materials, and the cost of any other
resources, and the associated impact on
the overall project cost.

Question 11

Cost management plan

Answer 11

The cost management plan dictates how
cost variances will be managed.

Question 12

Cost of poor quality

Answer 12

The monies spent to recover from not
adhering to the expected level of quality.
Examples may include rework, defect
repair, loss of life or limb because safety
precautions were not taken, loss of sales,
and loss of customers. This is also known
as the cost of nonconformance to quality.

Question 13

Cost of quality

Answer 13

The monies spent to attain the expected
level of quality within a project. Examples
include training, testing, and safety
precautions.

Question 14

Cost performance index (CPI)

Answer 14

Measures the project based on its
financial performance. The formula is CPI = EV/AC.

Question 15

Cost variance (CV)

Answer 15

The difference of the earned value
amount and the cumulative actual costs
of the project. The formula is CV = EV – AC.

Question 16

Definitive estimate

Answer 16

This estimate type is one of the most
accurate. It’s used late in the planning
processes and is associated with bottomup estimating. You need the WBS in order to create the definitive estimate.
The range of variance for the estimate
can be from –5 percent to +10 percent.

Question 17

Direct costs

Answer 17

Costs are attributed directly to the project
work and cannot be shared among
projects (for example, airfare, hotels,
long-distance phone charges, and so on).

Question 18

Earned value (EV)

Answer 18

Earned value is the physical work
completed to date and the authorized
budget for that work. It is the percentage
of the BAC that represents the actual
work completed in the project.

Question 19

Estimate at completion (EAC)

Answer 19

These forecasting formulas predict the
likely completed costs of the project
based on current scenarios within the
project.

Question 20

Estimate to complete (ETC)

Answer 20

An earned value management formula
that predicts how much funding the
project will require to be completed.
Three variations of this formula are based
on conditions the project may be
experiencing.

Question 21

Fixed costs

Answer 21

Costs that remain constant throughout
the life of the project (the cost of a piece
of rented equipment for the project, the
cost of a consultant brought on to the
project, and so on).

Question 22

Funding limit reconciliation

Answer 22

An organization’s approach to managing
cash flow against the project deliverables
based on a schedule, milestone
accomplishment, or data constraints.

Question 23

Indirect costs

Answer 23

Costs that are representative of more
than one project (for example, utilities for
the performing organization, access to a
training room, project management
software license, and so on).

Question 24

Known unknown

Answer 24

An event that will likely happen within the
project, but when it will happen and to
what degree is unknown. These events,
such as delays, are usually risk-related.

Question 25

Learning curve

Answer 25

An approach that assumes the cost per
unit decreases the more units workers
complete, because workers learn as they
complete the required work.

Question 26

Oligopoly

Answer 26

A market condition where the market is
so tight that the actions of one vendor
affect the actions of all the others.

Question 27

Opportunity cost

Answer 27

The total cost of the opportunity that is
refused to realize an opposing
opportunity.

Question 28

Parametric estimating

Answer 28

An approach using a parametric model to
extrapolate what costs will be needed for
a project (for example, cost per hour and
cost per unit). It can include variables and
points based on conditions.

Question 29

Planned value (PV)

Answer 29

Planned value is the work scheduled and
the budget authorized to accomplish that
work. It is the percentage of the BAC that
reflects where the project should be at
this point in time.

Question 30

Project variance

Answer 30

The final variance, which is discovered
only at the project’s completion. The
formula is VAR = BAC – AC.

Question 31

Regression analysis

Answer 31

This is a statistical approach to predicting
what future values may be, based on
historical values. Regression analysis
creates quantitative predictions based on
variables within one value to predict
variables in another. This form of
estimating relies solely on pure statistical
math to reveal relationships between
variables and to predict future values.

Question 32

Reserve analysis

Answer 32

Cost reserves are for unknown unknowns
within a project. The management
reserve is not part of the project cost
baseline, but is included as part of the
project budget.

Question 33

Rough order of magnitude

Answer 33

This rough estimate is used during the
initiating processes and in top-down
estimates. The range of variance for the
estimate can be from –25 percent to +75
percent.

Question 34

Schedule performance index (SPI)

Answer 34

Measures the project based on its
schedule performance. The formula is
SPI = EV/PV.

Question 35

Schedule variance (SV)

Answer 35

The difference between the earned value
and the planned value. The formulas is
SV = EV – PV.

Question 36

Single source

Answer 36

Many vendors can provide what your
project needs to purchase, but you prefer
to work with a specific vendor.

Question 37

Sole source

Answer 37

Only one vendor can provide what your
project needs to purchase. Examples
include a specific consultant, specialized
service, or unique type of material.

Question 38

Sunk costs

Answer 38

Monies that have already been invested
in a project.

Question 39

To-Complete Performance Index

Answer 39

A formula to forecast the likelihood of a
project to achieve its goals based on
what’s happening in the project right now.
There are two different flavors for the
TCPI, depending on what you want to
accomplish. If you want to see if your
project can meet the budget at
completion, you’ll use this formula: TCPI
= (BAC – EV)/(BAC – AC). If you want to
see if your project can meet the newly
created estimate at completion, you’ll use
this version of the formula: TCPI = (BAC – EV)/(EAC – AC).

Question 40

Variable costs

Answer 40

Costs that change based on the
conditions applied in the project (the
number of meeting participants, the
supply of and demand for materials, and
so on).

Question 41

Variance

Answer 41

The difference between what was
expected and what was experienced.

Question 42

Variance at completion (VAC)

Answer 42

A forecasting formula that predicts how
much of a variance the project will likely
have based on current conditions within
the project. The formula is VAC = BAC – EAC.