PMP Certification Study Notes 7 – Project Cost Management

Introduction: This part of the PMP® exam study notes is based on chapter 7 of PMBOK® Guide 5th Edition. More information on my PMP® certification exam preparation can be found at my PMP® exam and certification journey here.

• sunk cost – cost already incurred in the past and cannot be recovered, do not consider anymore
• opportunity cost – difference in value between one path vs alternative (= 100% of value of next best alternative)
• value analysis/ engineering – cost reduction without affecting the scope
• Benefit Cost Analysis (BCA) / Cost Benefit Analysis (CBA) – determine feasibility, bigger benefit/cost ratio (BCR)
• Payback Period – the length of time to recover the investment
• Return on Investment (ROI) – the efficiency of investment = (Gain-Cost)/Cost
• Time Value of Money – Present Value (PV) = value / (1+interest rate)*year, Future Value (FV) = value * (1+interest rate)*year
• Net Present Value (NPV) = PV of cash inflows – PV of cash outflows (cost)
• funding for project: self-fund, funding with equity, funding with debts
• discount rate – rate used to calculate present value of expected yearly benefits and costs

Plan Cost Management

• The Cost Management Plan establishes: i) level of accuracy and level of precision, ii) unit of measurement, iii) WBS procedure links (to control account (CA)), iv) control threshold, v) earned value rules of performance, reporting, funding and processes
• Life cycle costing = total cost of ownership : production cost, running and maintenance cost, etc.

Estimate Costs

• similar to Estimate Activity Resources
• look for ways to reduce cost
• ensure the SME to deliver the estimates (more accurate)
• based on WBS
• Cost Types
  • Variable costs – costs change with the amount of work, e.g. hourly consultants
  • Fixed costs – costs that are constant, e.g. equipment leases
  • Direct costs – directly attributed to the project
  • Indirect costs – shared costs like AC, lighting, etc.
• Cost Estimate Tools
  • Analogous Estimating (Top Down Estimate) – compare to a similar project in the past (an estimating heuristic/rule of thumb)
  • Parametric Estimating – use a parameter and repetitive units of identical work
  • Bottom-up Estimating – detailed estimates of each individual activity from historical data, more accurate and time-consuming
• Activity Cost Estimates may include indirect cost and contingency reserves
• usually in a range of values
• Basis of Estimates – detailed analysis on how the cost estimate was derived (assumptions, constraints, possible range (+/-15%), confidence level of final estimate)

Determine Budget

• Budget is more about when to spend money
• Historical Relationships – analogous/parametric estimation
• Reserve Analysis – addresses Management Reserve (unknown unknowns) and Contingency Reserve (known risks) [not included in calculation of earned value managment]
• Funding Limit Reconciliation – addresses variance between funding limit (e.g. monthly or yearly limit) and planned expenditure, may require rescheduling of work to level of the rate of expenditure
• Value Engineering – to improve quality/shorten schedule without affecting the scope
• Project Budget = Cost baseline (the approved time-phased budget) + Management Reserve
• when management reserve is used during project execution, the amount is added to the cost baseline
• S-curve : total project expenditure over project lifecycle

Control Costs

• Check against the Project Funding Requirements
• including informing stakeholders of all approved changes and their costs
• Earned Value Calculation
  • Index > 1: under budget/ahead of schedule
  • Index < 1: over budget/behind schedule
• Estimate at Complete: 1) new estimate required (original flawed), 2) no BAC variance, 3) CPI will continue, 4) sub-standard cost/schedule will continue
• TCPI: >1 not enough funding remain (over budget), <1 more fund available than needed (under budget)

• Earned Value Accrual
  • Discrete Efforts – describes activities that can be planned/measured for output, including Fixed Formula (activity given a % of budget of work package at start and earn the remaining when completed, e.g. 50/50, 20/80 or 0/100), Weighted Milestone (earn value for milestones of deliverables of the work package), Percentage Complete, Physical Measurement 
  • Apportioned Efforts – describes work that has a direct/supporting relationship to discrete work, e.g. testing, pm activities, calculated as % of the discrete work
  • Level of Efforts (LOE) – describes activities without deliverables, e.g. troubleshooting, assigned the earned value as scheduled, without schedule variance but may have cost variance
• e.g. perform Control Cost weekly during execution where money is spent fastest
• Variance Analysis – to check against the baseline for any variance
• SPI at end of project must be 1
• SPI is NOT telling much information to whether the project is on schedule as the Critical Path must also be investigated to get a meaningful picture