PMP Certification Study Notes 7 – Project Cost Management


PMP Cost Management

Newly UPDATED for the new PMP® Exam 2018. Happy learning!

Introduction: This part of the PMP® exam study notes (updated for new PMP® Exam 2018) 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!

Project Cost Management

  • important cost management/calculation terms:
    • sunk cost – cost already incurred in the past and cannot be recovered, do not consider any more
    • opportunity cost – difference in value between one path vs 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
    • unit of measurement
    • WBS procedure links (to control account (CA))
    • control threshold
    • earned value rules of 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

  • look for ways to reduce cost
  • ensure the subject matter experts (SME) 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 more about when to spend money
  • 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)
  • 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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Edward Chung

Edward Chung aspires to become a full-stack web developer and project manager. In the quest to become a more competent professional, Edward studied for and passed the PMP Certification, ITIL v3 Foundation Certification, PMI-ACP Certification and Zend PHP Certification. Edward shares his certification experience and resources here in the hope of helping others who are pursuing these certification exams to achieve exam success.

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12 Responses

  1. MEHMET BACIOĞLU says:

    Are we able to print out these notes ?

    • Edward Chung says:

      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!

  2. jane says:

    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

    • Edward Chung says:

      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!

  3. vivek says:

    Excellent !!… You just made it like a cake walk for me……

  4. Marguerite says:

    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!

  5. Marc G says:

    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.

    • Edward Chung says:

      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.

  6. Dipti says:

    Hi,

    Edward , I found your site very useful….please can you explain me LOE, discrete and apportioned efforts – not able to understand the concept.