Project Cost Management Flashcards
Cost Aggregation
Summing the lower-level cost estimates associated with the various work packages for a given level within the project’s WBS or for a given cost control account.
Analogous estimating
A technique for estimating the duration or cost of an activity or a project using historical data from a similar activity or project.
Parametric estimating
An estimating technique in which an algorithm is used to calculate cost or duration based on historical data and project parameters.
Bottom-up estimating
A method of estimating project duration or cost by aggregating the estimates of the lower-level components of the work breakdown structure (WBS).
S-curve
A display of cumulative costs, labor hours or other quantities plotted against time. The name derives from the S-like shape of the curve, flatter at the beginning and end and steeper in the middle, which is typical of most projects. The beginning represents a slow, deliberate but accelerating start, while the end represents a deceleration as the work runs out.
Cost baseline
the approved version of the time-phased project budget, excluding any management reserves, which can be changed only through formal change control procedures and is used as a basis for comparison to actual results.
Earned value Management
A methodology that combines scope, schedule, and resource measurements to assess project performance and progress.
Cost Management Processes
includes the processes involved in planning, estimating, budgeting, financing, funding, managing, and controlling costs so that the project can be completed within the approved budget.
primarily concerned with the resources needed to complete the schedule activities, future impacts should also be considered.
The processes:
* Plan Cost Management
* Estimate Costs
* Determine Budget
* Control Costs
Plan Cost Management Process
The process that establishes the policies, procedures, and documentation for planning, managing, expending, and controlling project costs.
The key benefit of this process is in the identification of how project costs will be managed throughout the project.
name inputs, tools & techniques, and outputs of Plan Cost Management Process
Inputs:
* Project management plan
* Project charter
* Enterprise environmental factors
* Organization process assets
Tools and Techniques:
* Expert judgement
* Analytical techniques
* Meetings
Outputs:
* Cost management plan
Cost Management Plan
A component of a project or program management plan that describes how costs will be planned, structured, and controlled.
Some topics that might be included the cost management plan are (but is not limited to):
Units of measure
Control thresholds
Rules for performance measurement
Cost reporting and format
Process management
Estimate Costs Process
the process of developing an approximation of the monetary resources needed to complete project activities.
The key benefit of this process is that it determines the amount of cost required to complete project work.
Estimate Costs Process inputs, tools & techniques, and outputs
Inputs:
* Cost management plan
* Human resource management plan
* Scope baseline
* Project schedule
* Risk register
* Enterprise environmental factors
* Organization process assets
Tools and Techniques:
* Expert judgement
* Analogous estimating
* Parametric estimating
* Bottom-up estimating
* Three-point estimating
* Reserve analysis
* Cost of quality
* Project management software
* Vendor bid analysis
* Group decision making techniques
Outputs:
* Activity cost estimates
* Basis of estimates
* Project document updates
Cost estimating
a series of process interactions resulting in the development of activity cost estimates, along with the basis of those estimates.
the estimator must consider factors that may result in variations of the final estimate, such as positive and negative risk events.
All estimates should be provided with an estimate of variance based on the inherent risks involved.
Types of costs:
Direct costs
Labor
Material
Equipment
Subcontractors
Indirect costs
Supervision
Engineering
Training
Taxes
Temporary facilities
Contingency costs
Inflation allowance
Risk factors
Standard Project Estimating includes:
Analogous Estimates
Three Point Estimates
Parametric Estimates
Expert judgement and bottom-up estimating can also be used to estimate costs.
Analogous Estimates
- Use information from prior, similar projects.
- Are useful in the beginning of the project when there is a minimal amount of information.
- Can be done for the overall project or at the control account or work package level.
usually quick to develop.
usually entails some form of expert judgement to discern the similarities and differences between the projects being compared.
Three Point Estimates
- Are used when there is uncertainty associated with an estimate
- Take the optimistic, pessimistic, and most likely estimate to derive an expected cost.
Parametric Estimates
- Use a mathematical model to develop a cost estimate
- Can have one parameter or multiple parameters
- Are used for work with good historical data
- Are not useful for intellectual or research and development work
used frequently in construction.
can be used early in process to provide a range. As details are known, the parametric model can get more precise.
Expert Judgement
Judgment provided based upon expertise in an application area, knowledge area, discipline, industry, etc., as appropriate for the activity being performed. Such expertise may be provided by any group or person with specialized education, knowledge, skill, experience, or training.
Determine Budget Process
The process of aggregating the estimated costs of individual activities or work packages to establish an authorized cost baseline.
The key benefit is in having identified all the costs needed to complete the project.
Determine Budget Process inputs, tools & techniques, and outputs
Inputs:
* Cost management plan
* Scope baseline
* Activity cost estimates
* Basis of estimates
* Project schedule
* Resource calendars
* Risk register
* Agreements
* Organization process assets
Tools and Techniques:
* Cost aggregation
* Reserve analysis
* Expert judgement
* Historical relationships
* Funding limit reconciliation
Outputs:
* Cost baseline
* Project funding requirements
* Project document updates
Reserve
A provision in the project management plan to mitigate cost and/or schedule risk. Often used with a modifier(e.g., management reserve, contingency reserve) to provide further detail on what types of risks are meant to be mitigated.
Historical relationships “use project parameters to predict total project cost.”
Funding limit reconciliation is when “funds spent are reconciled against customer limits for funds”.
Contingency Reserve
Budget within the cost baseline or performance measurement baseline that is allocated for identified risks that are accepted and for which contingent or mitigated responses are developed.
Management Reserve
An amount of project budget withheld for management control purposes. These are budgets reserved for unforeseen work that is within scope of the project. The management reserve is not included in the performance measurement baseline.
Reserve Analysis
An analytical technique to determine the essential features and relationships of components in the project management plan to establish a reserve for the schedule duration, budget, estimated cost, or funds for a project.
Risk reserves are determined by:
- Rules of thumb (heuristics)
- Risk analysis
- Lessons learned
- Historical information
difference between Contingency and Management Reserves
Contingency Reserves are reserves that you put in place for things that the team knows might happen. These risks are often called “known unknowns” because the teams has identified the risk, but cannot fully understand at present the impact or outcome of the risk.
Management Reserves are the reserves that you put in place for things that might come up that the team hasn’t thought of. These risks are often call “unknown unknowns”. This is also sometimes called “padding”, but PMI does not like the term padding and does not consider them to be the same thing. PMI considers padding to be simply adding a reserve with no justification whatsoever.
Determine Budget Process - Outputs
Project funding requirements
* Total
* Periodic (e.g., annual or quarterly)
Project document updates
* Risk updates
* Cost estimates
* Schedule updates
Project funding requirements
Forecast project costs to be paid that are derived from the cost baseline for total or periodic requirements, including projected expenditures plus anticipated liabilities.
outline the amount of total funding needed for the project. Although project expenditures usually occur relatively smoothly, funding often occurs in chunks. This is why funding requirements appears as a step function onto the graph above.
cost baseline
the total estimated cost of the project and is developed by summing estimated costs by period. During project execution the budget is displayed graphically using an S-curve that indicates the accumulated AC (Actual Cost) of the project over a period of time compared with the budgeted costs for that time period. The S-curve provides a time-phased view of the project costs and budget. The S- curve graphics will display a progressive summary of costs over the life cycle of the project.
As the cost baseline is being established, the cost estimates are rolled up from the work package cost estimates. Needed reserves are established to account for unplanned events.
Each of the inputs to determine budget contributes to the cost baseline. Through cost aggregation and alignment with the project schedule, the cost baseline provides a method for measuring project performance.
The difference between the cost baseline and the project budget:
management reserves. You will measure performance against the baseline; however, as discussed you will need the management reserve as part of the project budget to address unforeseen risks.
Actual Cost (AC)
The realized cost incurred for the work performed on an activity during a specific time period.
Budget at Completion (BAC)
The sum of all budgets established for the work to be performed. This is the total budget for the project.
Product Life-Cycle Costs vs Project Life-Cycle Costs
Projects and operations differ primarily in that operations are ongoing and repetitive, while projects are temporary and unique.
Project life-cycle costs consider all costs of the temporary endeavor (the project), whereas Product life-cycle costs consider all projects supporting the product and may include operational expenses as well.
Product life-cycle cost analysis
is an integral part of strategic planning. What are the downstream implications for maintaining the project’s product in production or operation? Attempting to reduce the temporary effort or project budget by using shortcuts now may have significant impacts later.
Control Costs Process
The process of monitoring the status of the project to update the project costs and managing changes to the cost baseline.
The key benefit is that it provides the means to recognize variance from the plan.
part of Project Cost Management and should be completely integrated with other control processes, such as scope change control, schedule change control, and quality control.
Cost Control Basics:
- Establish cost performance thresholds.
- Monitor cost performance for variances.
- Bring expected costs within acceptable limits.
- Accurately record changes to the baseline.
- Guard against improper changes to the baseline.
- Inform stakeholders of changes.
Control Costs Process inputs, tools & techniques, and outputs
Inputs:
* Project management plan
* Project funding requirements
* Work performance data
* Organizational process assets
Tools and Techniques:
* EVM
* Forecasting
* TCPI
* Performance reviews
* Project management software
* Reserve analysis
Outputs:
* Work performance information
* Costs forecasts
* Change requests
* Project management plan updates
* Project documents updates
* Organizational process assets updates
TCPI (To-Complete Performance Index )
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.
Variance Management
If the variance is outside an acceptable threshold, the team needs to implement a problem-solving process to determine how to resolve the issue.
- Describe the problem and it’s setting.
- Set objectives.
- Identify the root cause.
- Identify potential solutions.
- Decide on the solution.
- Implement the solution.
- Monitor and adjust.
This process will keep the team focused on the issues and drive the team to identify solutions.
CV thresholds
should be agreed upon when planning the project by the project manager and the sponsor.
A common threshold is 0-5% variance is acceptable, 5-10% variance is a warning, and greater than 10% is unacceptable. The project manager should monitor planned vs. actual expenditures for the work that was accomplished.
To effectively control project costs
the project manager and the team should have a method in place to prevent unauthorized changes to the project budget and to manage changes that are determined to be necessary. This is accomplished through a cost change control system. Cost control is a subsidiary of the integrated change control system.
Earned Value Management (EVM)
a technique used to integrate, measure, and report project performance for the project’s scope, schedule, and resources.
- EVM involves three major factors:
- PV (Planned Value)
- AC (Actual Cost)
- EV (Earned Value)
Schedule Variance: SV = EV - PV
Cost Variance: CV = EV - AC
Schedule Performance Index: SPI = EV/PV
Cost Performance Index: CPI = EV/AC
This technique allows the project manager to relate schedule cost, and scope using specific mathematical formulas that, when used in calculations, will indicate where variances to the plan exist and where corrective action may be required.
attempts to answer two questions: 1) Where are we today, and 2) where will we end up? The more frequently you address these two questions, the easier it will be to take the necessary corrective actions. Variances from a baseline are easier to manage when the variances are small and are detected early.
compares work that has been planned (what has been scheduled to be completed within the measurement period) with the actual work that has been done (work performed within the measurement period). It also compares the planned cost of the work completed (what we had planned to pay) with the AC of the work (what we actually paid).
PV (Planned Value)
The authorized budget assigned to scheduled work.
Forecasting
An estimate or prediction of conditions and events in the project’s future based on information and knowledge available at the time of the forecast. The information is based on the project’s past performance and expected future performance, and includes information that could impact the project in the future, such as estimate at completion and estimate to complete.
EV (Earned Value)
The measure of work performed expressed in terms of the budget authorized for that work.
BAC (Budget at Completion)
The sum of all budgets established for the work to be performed. This is the total budget for the project.
EAC (Estimate at Completion)
The expected total cost of completing all project work.
forecasts the remaining work: Performed at the budgeted rate Performed at the present CPI
When considering both SPI and CPI factors
The EAC is compared with the project’s BAC to determine how well the project is expected to perform against the plan. The effectiveness of the original estimating process used in project planning will be a major factor in the degree of variance.
There are many different ways to compute the EAC. The most accurate way is to develop a new bottom-up estimate while taking into account all current available information. However, developing a new bottom-up estimate takes time; therefore, many project managers will calculate an EAC using mathematical formulas. There are multiple versions of EAC formulas. The project manager would choose the appropriate formula based on the performance of the project to date and their expectation of future performance.
ETC (Estimate to Complete)
The expected cost to finish all the remaining project work.
VAC (Variance at Completion)
A projection of the amount of budget deficit or surplus, expressed as the difference between the budget at completion and the estimate at completion
