PMP Certification Study Notes 7 – Project Cost Management
UPDATED for the new PMP® Exam in 2021. Happy learning!
Introduction: This part of the PMP® exam study notes (already updated/will be updated for new PMP® Exam in 2021) is based on Section 7 of new PMBOK® Guide 6th Edition. The study notes have been rewritten to reflect the latest changes in the PMBOK® Guide for the new PMP® Exam. More information on my PMP® certification exam preparation can be found at my PMP® exam and certification journey (with free PMP® study resources and tips) here.
Please note that the study notes below is intended to include only the most important or esaily confused PMP® concepts. It is by no means complete in the sense that one can rely on it to be fully prepared for the PMP® Exam. Aspirants are advised to make use of this piece of study notes for revision purposes. Wish you PMP® success!
Article Highlights
Project Cost Management
- important cost management/calculation terms mentioned in PMBOK® Guide:
- sunk cost (or, sunken cost) – cost already incurred in the past (i.e. already paid/marked) that cannot be recovered, though counter-intuitive project managers should not consider this in future decisions any more
- opportunity cost – the value that is given up when not choosing the next best alternative (= 100% of the 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 the project: self-fund, funding with equity, funding with debts
- discount rate – rate used to calculate the present value of expected yearly benefits and costs
Plan Cost Management
- Inputs: Project Charter, Project Management Plan, EEF, OPA
- Tools & Techniques: Expert Judgement, Data Analysis, Meetings
- Outputs: Cost Management Plan
- The Cost Management Plan establishes
- level of accuracy and level of precision (accuracy vs precision)
- unit of measurement
- WBS procedure links (to control account (CA))
- control threshold
- rules of earned value performance, reporting, funding and processes
- Life cycle costing = total cost of ownership: production cost, running and maintenance cost, etc.
- Data analysis techniques include:
- alternatives analysis — strategic funding options, ways to acquire project resources
Estimate Costs
- Inputs: Project Management Plan, Project Documents, EEF, OPA
- Tools & Techniques: Expert Judgement, Analogous Estimating, Parametric Estimating, Bottom-up Estimating, Three-point Estimating, Data Analysis, Project Management Information System, Decision Making
- Outputs: Cost Estimates, Basis of Estimates, Project Document Updates
- primary aims: looking for ways to reduce cost
- ask the subject matter experts (SME) (rather than the project manager) to deliver the estimates (which is much more accurate)
- cost estimate to be 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.
- Data Analysis Techniques
- Alternatives analysis
- Reserve analysis
- Cost of quality – cost of conformance and non-conformance
- 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
- Three-point Estimating — taking into accounts of the pessimistic, optimistic and most likely estimates
- Activity Cost Estimates may include indirect cost and contingency reserves
- usually to be expressed 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
- Inputs: Project Management Plan, Project Documents, Business Documents (business case, benefits management plan), Agreements, EEF, OPA
- Tools & Techniques: Expert Judgement, Cost Aggregation, Data Analysis, Historical Relationships, Funding Limit Reconciliation, Financing
- Outputs: Cost Baseline, Project Funding Requirements, Project Document Updates
- Budget is about when to spend money (than how many money to spend)
- Historical Relationships – analogous/parametric estimation
- Data Analysis => 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
- Financing: acquiring funding for projects, may source from internal and/or external sources
Control Costs
- Inputs: Project Management Plan, Project Documents, Project Funding Requirements, Work Performance Data, OPA
- Tools & Techniques: Expert Judgement, Data Analysis, To-complete Performance Index, Project Management Information System
- Outputs: Work Performance Information, Cost Forecasts, Change Requests, Project Management Plan Updates, Project Document Updates
- Check against the Project Funding Requirements
- controlling costs including informing stakeholders of all approved changes and their costs
- perform Control Cost more often during execution where money is spent fastest
- Data analysis techniques:
- Earned value analysis
- Variance analysis — including schedule variance (SV), cost variance (CV), schedule performance index (SPI), and cost performance index (CPI) to check against the baseline for any variance
- Trend analysis
- Reserve analysis
- Earned Value Calculation
- Estimate at Complete:
- new estimate required (original flawed)
- no BAC variance
- CPI will continue
- sub-standard cost/schedule will continue
- TCPI (To-complete Performance Index):
- >1 not enough funding remain (over budget)
- <1 more fund available than needed (under budget)
- Estimate at Complete:
- 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
- SPI at end of project must be 1
- SPI is NOT telling much information about whether the project is on schedule as the Critical Path must also be investigated to get a meaningful picture
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Please check the Time value formulas.
I think that the term (1+interest rate) shall be to the power of years and NOT to multiplied by the years
i.e. PV = Value / (1+interest Rate)^Years, and FV = Value * (1+interest Rate)^Years
Yes, you are right. I have just corrected it. Thanks!
Hi Edward,
thank you for your materials. Using it in reviewing my own studies and finding points I have not considered in my own preparation.
I have one remark:
“opportunity cost – difference in value between one path vs alternative (= 100% of the value of next best alternative)”
I find it a little bit missleading that you write about the difference in value between alternatives. If I have two projects, one with a value of 10.000 and another one with 7.000, the difference would be 10.000-7.000=3.000. But in fact the opportunity costs are 7.000, because it is just the value of the second best alternative (like you write in the second part with the 100%).
Hi Christian,
Yes, you are right! Thanks for pointing out my mistake.
Wish you PMP success!
Are we able to print out these notes ?
Sure, just highlight the parts you would like to be printed and click the print icon/menu item, be sure to set “selection only” as the print area.
Wish you PMP success!
what is the difference between Parametric Estimate vs. Bottom-Up Estimate? Can you please provide real life examples to clearly differentiate the two? They sound the same to me. Thanks
Parametric Estimate is to estimate the work based on unit time/cost while bottom-up estimate is to ask the people who will eventually handle the work to give a more accurate estimate of the time/cost involved.
Of all estimation methods, the bottom-up estimate is the most time consuming but most accurate. Hope this helps.
Wish you PMP success!
Excellent !!… You just made it like a cake walk for me……
Thanks for your encouragement. Wish you PMP success!
I need PMI Equations questions( a lot of them) not just the formulas, do you have anything like that so that I can practice practice and practice some more on the equations or cost section. Thanks!
Hi Marguerite,
Have you tried this one:
https://edward-designer.com/web/pmp-evm-sample-questions/
Hope this will be useful for you. Wish you PMP success!
Hi Edward,
Thanks for your website. It’s very convenient. How many hours have you spent studying in total ? split between reading the book and also doing your mock test.. how many questions you say in total you did and how many hours ?
Thanks.
I spent around 180 hours in total for my PMP Exam preparation. About 1/2 of it for reading / going through PM PrepCast and the other half for attempting mock exams.
Hi,
Edward , I found your site very useful….please can you explain me LOE, discrete and apportioned efforts – not able to understand the concept.
Hope my other article will be useful to you:
https://edward-designer.com/web/discrete-effort-vs-apportioned-effort-vs-level-of-effort-for-pmp-exam/