PMP Certification Study Notes 7 – Project Cost Management

Introduction: This part of the PMP® exam study notes (updated for new PMP® Exam thru 2020) 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 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)
• 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