Chapter 7: Project Cost Management

Question 1

The Project Cost Management processes are:

Answer 1

Plan Cost Management, Estimate Costs, Determine Budget, and Control Costs

Question 2

Define the process “Plan Cost Management”

Answer 2

The process of defining how the project costs will be estimated, budgeted, managed, monitored, and controlled

Question 3

Define the process “Estimate Costs”

Answer 3

The process of developing an approximation of the monetary resources needed to complete project work

Question 4

Define the process “Determine Budget”

Answer 4

The process of aggregating the estimated costs of individual activities or work packages to establish an authorized cost baseline

Question 5

Define the process “Control Costs”

Answer 5

The process of monitoring the status of the project to update the project costs and manage changes to the cost baseline

Question 6

True or false: On some projects, especially those of smaller scope, cost estimating and cost budgeting are tightly linked and can be viewed as a single process that can be performed by a single person over a relatively short period of time

Answer 6

True

Question 7

True or false: One aspect of cost management is recognizing that different stakeholders measure project costs in different ways and at different times

Answer 7

True

Question 8

Define “earned value management (EVM)”

Answer 8

EVM is a project management technique for measuring project performance and progress in an objective manner. It integrates schedule, costs, and scope to measure project performance. Based on planned and actual values, EVM predicts the future and enables project managers to adjust accordingly

Question 9

Define “earned schedule (ES)”

Answer 9

ES is an extension to the theory and practice of EVM. Earned schedule theory replaces the schedule variance measures used in traditional EVM (earned value − planned value) with ES and actual time (AT). Using the alternate equation for calculating schedule variance ES − AT, if the amount of earned schedule is greater than 0, then the project is considered ahead of schedule

Question 10

The schedule performance index (SPI) using earned schedule metrics is ____. This indicates the efficiency with which work is being accomplished

Answer 10

ES/AT

Question 11

Projects with high degrees of uncertainty or those where the scope is not yet fully defined will always still benefit from detailed cost calculations due to frequent changes

Answer 11

False. They may not benefit from detailed cost calculations due to frequent changes

Question 12

The cost management plan can establish the following:

Answer 12

Units of measurement, Level of precision, Level of accuracy (tolerance), Organizational procedures links, Control thresholds, Rules of performance measurement, Reporting formats, and Additional details

Question 13

A cost ______ is a quantitative assessment of the likely costs for resources required to complete the activity. It is a prediction that is based on the information known at a given point in time

Answer 13

Estimate

Question 14

Considering options like make versus buy, buy versus lease, and the sharing of resources in order to achieve optimal costs for the project, are all part of creating what?

Answer 14

Cost Estimate

Question 15

True or false: Cost estimates should be solidified at the beginning of a project, and then reflected upon and recorded after project completion

Answer 15

False. Cost estimates should be reviewed and refined during the course of the project to reflect additional detail as it becomes available and assumptions are tested

Question 16

Define “Analogous cost estimating”

Answer 16

Analogous cost estimating uses values, or attributes, of a previous project that are similar to the current project

Question 17

Define “Parametric estimating”

Answer 17

Parametric estimating uses a statistical relationship between relevant historical data and other variables (e.g., square footage in construction) to calculate a cost estimate for project work. This technique can produce higher levels of accuracy depending on the sophistication and underlying data built into the model

Question 18

Define “Bottom-up estimating”

Answer 18

Bottom-up estimating is a method of estimating a component of work. The cost of individual work packages or activities is estimated to the greatest level of specified detail. The detailed cost is then summarized or “rolled up” to higher levels for subsequent reporting and tracking purposes

Question 19

Using Triangular Distribution while Three-Point Estimating, what would that formula look like?

Answer 19

cE = (cO + cM + cP) / 3

Question 20

Using Beta Distribution while Three-Point Estimating, what would that formula look like?

Answer 20

cE = (cO + 4cM + cP) / 6

Question 21

Supporting detail for cost estimates may include:

Answer 21

Documentation of the basis of the estimate (i.e., how it was developed), Documentation of all assumptions made, Documentation of any known constraints, Documentation of identified risks included when estimating costs, Indication of the range of possible estimates (e.g., US$10,000 (±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

Question 22

True or false: Cost estimates are aggregated by work packages in accordance with the WBS

Answer 22

True. Cost estimates are aggregated by work packages in accordance with the WBS. The work package cost estimates are then aggregated for the higher component levels of the WBS (such as control accounts) and, ultimately, for the entire project.

Question 23

True or false: The management reserve is not included in the cost baseline

Answer 23

True. The management reserve is not included in the cost baseline but is part of the overall project budget and funding requirements

Question 24

Define “cost baseline”

Answer 24

The cost baseline is the approved version of the time-phased project budget, excluding any management reserves, which can only be changed through formal change control procedures. It is used as a basis for comparison to actual results

Question 25

Management reserves are added to the cost baseline to produce the _______

Answer 25

project budget

Question 26

True or false: Total funding requirements and periodic funding requirements (e.g., quarterly, annually) are derived from the cost baseline

Answer 26

True. The cost baseline will include projected expenditures plus anticipated liabilities

Question 27

True or false: The key to effective cost control is the management of the risks associated with costs and funding

Answer 27

False. The key to effective cost control is the management of the approved cost baseline

Question 28

Define “Earned value analysis (EVA)”

Answer 28

Earned value analysis compares the performance measurement baseline to the actual schedule and cost performance. EVM develops and monitors three key dimensions for each work package and control account: Planned value, Earned value, and Actual cost

Question 29

Define “Planned value (PV)”

Answer 29

Planned value (PV) is the authorized budget assigned to scheduled work. It is the authorized budget planned for the work to be accomplished for an activity or work breakdown structure (WBS) component, not including management reserve. This budget is allocated by phase over the life of the project, but at a given point in time, planned value defines the physical work that should have been accomplished. The total of the PV is sometimes referred to as the performance measurement baseline (PMB). The total planned value for the project is also known as budget at completion (BAC)

Question 30

Define “Earned value (EV)”

Answer 30

Earned value (EV) is a measure of work performed expressed in terms of the budget authorized for that work. It is the budget associated with the authorized work that has been completed. The EV being measured needs to be related to the PMB, and the EV measured cannot be greater than the authorized PV budget for a component. The EV is often used to calculate the percent complete of a project. Progress measurement criteria should be established for each WBS component to measure work in progress. Project managers monitor EV, both incrementally to determine current status and cumulatively to determine the long- term performance trends

Question 31

Define “Actual cost (AC)”

Answer 31

Actual cost (AC) is the realized cost incurred for the 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 (e.g., direct hours only, direct costs only, or all costs including indirect costs). The AC will have no upper limit; whatever is spent to achieve the EV will be measured

Question 32

How could you use variance analysis to calculate cause, impact, and corrective actions for cost vs. schedule variances?

Answer 32

(CV = EV – AC), (SV = EV – PV)

Question 33

Define “Schedule variance (SV)”

Answer 33

Schedule variance (SV) is a measure of schedule performance expressed as the difference between the earned value and the planned value. It is the amount by which the project is ahead or behind the planned delivery date, at a given point in time

Question 34

Define “Cost variance (CV)”

Answer 34

Cost variance (CV) is the amount of budget deficit or surplus at a given point in time, expressed as the difference between earned value and the actual cost. It is a measure of cost performance on a project. It is equal to the earned value (EV) minus the actual cost (AC)

Question 35

Define “schedule performance index (SPI)”

Answer 35

It is a measure of schedule efficiency expressed as the ratio of earned value to planned value. It measures how efficiently the project team is accomplishing the work. An SPI value less than 1.0 indicates less work was completed than was planned. An SPI greater than 1.0 indicates that more work was completed than was planned. Since the SPI measures all project work, the performance on the critical path also needs to be analyzed to determine whether the project will finish ahead of or behind its planned finish date. The SPI is equal to the ratio of the EV to the PV. Equation: SPI = EV/PV

Question 36

Define “cost performance index (CPI)”

Answer 36

is a measure of the cost efficiency of budgeted resources, expressed as a ratio of earned value to actual cost. It is considered the most critical EVA metric and measures the cost efficiency for the work completed. A CPI value of less than 1.0 indicates a cost overrun for work completed. A CPI value greater than 1.0 indicates a cost underrun of performance to date. The CPI is equal to the ratio of the EV to the AC. Equation: CPI = EV/AC

Question 37

True or false: If it becomes obvious that the BAC (Budget at Completion) is no longer viable, the project manager should consider the forecasted EAC (Estimate at Completion)

Answer 37

True

Question 38

[in the context of forecasting budget] While EVM data quickly provide many statistical EACs, only three of the more common methods are described as follows

Answer 38

EAC forecast for ETC work performed at the budgeted rate, EAC forecast for ETC work performed at the present CPI, and EAC forecast for ETC work considering both SPI and CPI factors

Question 39

Define “to-complete performance index (TCPI)”

Answer 39

It is a measure of the cost performance that is required to be achieved with the remaining resources in order to meet a specified management goal, expressed as the ratio of the cost to finish the outstanding work to the remaining budget

Question 40

The equation for the TCPI based on the BAC:

Answer 40

(BAC – EV) / (BAC – AC)

Question 41

Quiz yourself on the Earned Value Analysis table on page 267

Answer 41

You did good job

Question 42

Either a calculated EAC value or a bottom-up EAC value is documented and communicated to _____

Answer 42

stakeholders