Cost Management

Question 1

Define:

100-Point Method

Answer 1

A method of prioritization where stakeholders each get 100 points to vote on features.

For example, if there are five possible features, a stakeholder could assign 40 points to Feature A, 25 points to Feature B, 20 points to Feature C, 10 points to Feature D, and 5 points to Feature E. Each stakeholder would assign points to each feature based on their prioritization of the feature.

Points for each feature are summed and this total helps prioritize the features based on the collective scoring of the features by the stakeholders.

Question 2

Define:

Actual Cost

(AC)

Answer 2

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

Question 3

Define:

Analysis

Answer 3

To develop possible solutions by studying the problem and its underlying need and to understand the information provided.

Question 4

Define:

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

Define:

Burn Rate

Answer 5

The rate of resources consumed by the team; also cost per iteration.

Question 6

Define:

Cash-Flow Forecasting

Answer 6

This is the cash availability planning for a project, it details when money would be needed in a project across the entire lifecycle.

Question 7

Define:

Commercial Database

Answer 7

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

Question 8

Define:

Contingency Reserve

Answer 8

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 9

Define:

Cost Aggregation

Answer 9

Costs are parallel to each WBS work package. The costs of each work package are aggregated into their corresponding control accounts.

Each control account is then aggregated to the sum of the project costs.

Question 10

Define:

Cost Budgeting

Answer 10

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 11

Define:

Cost Change Control System

Answer 11

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

It is part of integrated change control.

Question 12

List:

Cost Estimate Content

Answer 12

• Labor
• Materials
• Equipment
• Services
• Facilities
• Information technology
• Special categories, such as inflation and contingency reserve

Question 13

Define:

Cost of Nonconformance to Quality

Answer 13

The cost associated with not satisfying quality expectations.

This is also known as the cost of poor quality.

Question 14

Define:

Cost of Poor Quality

Answer 14

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 15

Define:

Cost of Quality

Answer 15

The monies spent to attain the expected level of quality within a project.

Examples include training, testing, and safety precautions.

Question 16

Define:

Cost Performance Index

(CPI)

Answer 16

To measure the cost spent on a project and its efficiency.

The formula is CPI = Earned Value / Actual Cost

Question 17

Define:

Cost Variance

(CV)

Answer 17

The difference of the earned value amount and the cumulative actual costs of the project.

The formula is CV = EV – AC.

Question 18

Define:

Cost-Estimating Policies

Answer 18

This is an organizational Policy on how the project manager or the cost estimator creates the project cost estimate.

Question 19

Define:

Definitive Estimate

Answer 19

This estimate type is one of the most accurate, it is used late in the planning processes and is associated with bottom-up estimating.

You need the WBS to create the definitive estimate. The range of variance for the estimate can be from –5 percent to +10 percent.

Question 20

Define:

Earned Value

(EV)

Answer 20

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 21

Define:

Earned Value Management

(EVM)

Answer 21

This is the process of measuring the performance of project work against what was planned to identify variances, to note opportunities to improve the project, or just to check the project’s health.

It is a system of mathematical formulas that compares work performed against work planned, and it measures the actual cost of the work your project has performed.

EVM is an important part of cost control because it enables a project manager to predict future variances from the expenses to date within the project.

Question 22

Define:

Estimate at Completion

(EAC)

Answer 22

Forecasting formulas that predict the likely completed costs of the project based on current scenarios within the project.

Question 23

Define:

Estimate To Complete

(ETC)

Answer 23

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 24

List:

Five EVM Formula Rules

Answer 24

• Always start with EV.
• Variance means subtraction.
• Index means division.
• Less than 1 is bad in an index, and greater than 1 is good. Except for TCPI, which is the reverse.
• Negative is bad in a variance.

Question 25

# Define: Fixed Costs

Answer 25

Costs that remain constant throughout the life of the project. ## Footnote Examples are the cost of rented equipment for the project, the cost of a consultant brought on to the project, and so on.

Question 26

# Define: Funding Limit

Answer 26

Most projects have a determined budget in relation to the project scope. There may be a qualifier on this budget, such as plus or minus 10 percent based on the type of cost estimate created.

Question 27

# Define: Funding Limit Reconciliation

Answer 27

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

Question 28

# Define: Funding with Debt

Answer 28

This indicates when the company pays for the project through a line of credit or bank loan.

Question 29

# Define: Funding with Equity

Answer 29

This refers to when an organization balances the project expenses with equity they have in their assets.

Question 30

# Define: Gold Plating

Answer 30

This occurs when the project manager, the project sponsor, or even a stakeholder adds in project extras to consume the entire project budget. ## Footnote It’s essentially adding unneeded features to the product to use up all the funds allocated to the project. Gold plating delivers more than what’s needed and can create new risks and work, and it can contribute to a decline in team morale.

Question 31

# Define: Indirect Costs

Answer 31

These are costs attributed to the cost of doing business. ## Footnote For example, utilities for the performing organization, access to a training room, project management software license, and so on.

Question 32

# Define: Known Unknown

Answer 32

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

Question 33

# Define: Learning Curve

Answer 33

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

Question 34

# Define: Management Contingency Reserve

Answer 34

This is the “filler” between the cost baseline and the maximum funding. It bridges the gap between the project cost baseline and the maximum funding to complete the project. ## Footnote Contingency reserve is often allotted to risks, specifically "unknown unknowns" that happen in the project.

Question 35

# Define: Monopoly Money

Answer 35

To give fake money to business features in order to compare the relative priority of those features.

Question 36

# Define: Oligopoly

Answer 36

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

Question 37

# Define: Opportunity Cost

Answer 37

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

Question 38

# Define: Parametric Estimating

Answer 38

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

Question 39

# Define: Planned Value | (PV)

Answer 39

The work scheduled and the budget authorized to accomplish that work. ## Footnote It is the percentage of the BAC that reflects where the project should be at a particular point in time.

Question 40

# Define: Positive Value

Answer 40

To maximize value through incremental work in order to gain competitive advantage.

Question 41

# Define: Project Variance

Answer 41

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

Question 42

# Define: Reserve Analysis

Answer 42

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 43

# Define: Rough Order of Magnitude

Answer 43

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

Question 44

# Define: Schedule Performance Index | (SPI)

Answer 44

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

Question 45

# Define: Schedule Variance | (SV)

Answer 45

The comparison of what was planned and what was experienced about a project’s schedule. The formula is SV = EV – PV. ## Footnote The difference between the earned value and the planned value.

Question 46

# Define: Self-Funding

Answer 46

This is when an organization pays for the project expenses from their cash flow.

Question 47

# Define: Single Source

Answer 47

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

Question 48

# Define: Sole Source

Answer 48

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

Question 49

# Define: Sunk Costs

Answer 49

Monies that have already been invested in a project.

Question 50

# Define: To-Complete Performance Index | (TCPI)

Answer 50

A formula to forecast the likelihood of a project to achieve its goals based on what’s happening in the project right now. ## Footnote To determine whether your project will meet the budget at completion, you’ll use this formula: TCPI = (BAC—EV)/(BAC—AC). To determine whether your project will meet the newly created estimate at completion, you’ll use this version of the formula: TCPI = (BAC—EV)/(EAC—AC).

Question 51

# Define: Value Stream

Answer 51

A Lean principle that includes all of the actions needed to create value for the project customer from the very start. ## Footnote It’s about maximizing value and eliminating waste in the project.

Question 52

# Define: Variable Costs

Answer 52

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 53

# Define: Variance

Answer 53

The difference between what was expected and what was experienced. ## Footnote Cost variances are usually cost overruns and have to be explained, typically in an exceptions report because it is an exception to the baseline. Cost variances can create project risks, cuts to the project scope, and other measures to accommodate the overrage in expenses.

Question 54

# Define: Variance At Completion | (VAC)

Answer 54

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