Chapter 7 - Managing Project Costs

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 a top-down 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 time-consuming 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 is then 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 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 change, 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.

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 process and is associated with bottom-up 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. EV = % complete * BAC

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.

EAC(if everything goes to plan) = BAC/CPI

EAC(problematic start, remaining to go as planned) = BAC + AC - EV

EAC(the whole project is problematic) =AC + [ (BAC-EV) / (CPI*SPI) ]

EAC(project so bad a new estimate is required) = AC + ETC; ,

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. ETC = EAC - AC

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 completed, 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 costs

Answer 27

The total cost of the opportunity that is refused to realize an opposing opportunity. The cost of passing up the next best choice when making a decision.

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 BAC that reflects where the project should be at this point in time. PV = % complete of where project should be.

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 variances for the estimate can be from -25 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 formula 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.