1. Cost Management

2. Cost Management includes processes involving budgeting, estimating, and controlling costs to complete a project within the required budget.
Some important terminology involved in Cost Management includes:
Sunk Cost – Cost that should not be considered anymore because it has been incurred in the past and cannot be recovered.
Opportunity Cost – This is the difference in value between on path versus the alternative.
Value Analysis (Engineering) – A cost reduction that does not affect the scope of the project.
Payback Period – The time period it takes to recover an investment.
Discount Rate – A rate used to calculate the present value of expected yearly benefits and costs.
Net Present Value (NPV) – The difference between the Present Value of cash inflows and the Present Value of cash outflows (cost).
Return on Investment (ROI) – The measurement of the amount of return on an investment in relation to the cost of the investment.

3. The first of four key elements to Cost Management is Planning Cost.
Estimating Project Cost
Determining Project Budgets
Controlling Project Costs

4. Planning Cost involves thoroughly documenting how costs will be planned, structured, and controlled.
To start with, a Planning Cost includes doing research as well as knowing the project overall budget (described in the project charter) and the project scope and schedule baselines (described in the project management plan).
Key concepts of Planning Cost:
Enterprise Environmental Factors (EEF) – The most influential in planning a project cost, the EEF includes all
factors that are not in control of the project team that could influence the project work. Such factors include
legislation, naturally phenomena, and infrastructure. Also included as EEF factors are:
Market Conditions: This can affect the ability to obtain required resources at an affordable rate
Currency Exchange Rates: For international project, the exchange rate can influence the project budget
and resource acquisitions.
Organizational Process Assets (OPA) – The plans, processes, policies, and procedures that are used by an organization to manage a project. OPA can include historical records as well as well as current project related documentation.

5. Information Needed for Plan
By developing a Cost Management
Plan, project cost can establish the estimated costs for every part of a project.
Using expertise from staff, outside estimates, and cost analyses, a PMP can determine
whether to make or buy components, buy or lease equipment, and set a logical financial metrics
to make future cost decisions. With these metrics in place, a Cost Management Plan can be established.
Information Needed for Plan
How will costs be recorded:
A detailed description of what metric will be used to record cost. Common units of measurement include hours, dollars, days, etc.
Precision level of costs:
Define the amount of detail wanted when recording costs (ie. $100, $1000, etc)
Which costs will be tracked:
Define what reporting formats you want on the project (ie. Internal resources, overhead costs, executive salaries, etc)
Systems used to track and report costs:
Define what variances are allowed and how you want cost reported (ie. Work breakdown structure, company’s account codes, etc)

6. Execution of Information
Once information about the Cost
Management Plan is gathered, a PMP needs
to determine how to execute the information.
A PMP must define when during the project the cost management plan should be executed and how often. This schedule should be maintained and updated throughout the project lifecycle.
Execution of Information
How cost is recorded:
Will cost be entered manual into an automated system? Kept in a separate document? Which WBS items do the costs belong to?
When cost is recorded:
Define whether the costs should be entered weekly, monthly, etc.
How to measure scope and budget performance:
Define the measurement methods that will be used throughout the project upfront.
When to record costs or procured items:
Will costs be recorded when the order is place? When the order is received? After the order is invoiced? Refer to the account policies of your organizations and have a consistent method to track and report costs.

7. The second of four key elements to Cost Management is Estimating Project Cost.
Planning Cost
Estimating Project Cost
Determining Project Budgets
Controlling Project Costs

8. Estimating Project Cost is the development of an approximation of the
costs of resources needed to complete a project.
During this phase of the project of PMP should look for ways to reduce cost. There are several different cost types that PMP should be aware of.
Key cost types:
Variable Cost – Cost that should can change with the amount of work. An example of a variable cost would be a consultant paid by the hour.
Fixed Cost – Cost that is constant throughout the life cycle of the project. An example of a fixed cost would be a lease on equipment used.
Direct Cost –Cost that is directly attributed to the project. An example of a direct cost would be the procurement of a required product or service.
Indirect Cost – Cost that is shared such as lighting, AC, etc.

9. There are several tools a PMP can use to estimate cost.
Common Cost Estimate Tools:
Analogous Estimating – This is a Top Down Estimate. This tool is used to compare the current project to a similar project that was successfully completed in the past. This estimation based on historical information gives the PMP an idea of what the actual cost of an activity or task should be.
Parametric Estimating – This tool uses a calculates the cost by using parameters and repetitive units of identical work. This is a quick method, useful if the historical information is accurate.
Bottom-Up Estimating – This tool decomposes an identified task or activity and estimates the subtask from historical data. Then when each subtask cost is calculated, the subtasks can be summed to give the whole activity cost. This method is more accurate but time-consuming. An example is shown below.
Subtask Estimates
Activity Estimates
Project Activity Package Expenses
Inspect Unit = $70
Lease Requirements = $770
Sign Lease = $700
Project Cost = $890
Software Design= $40
Design Requirements = $120
Unit Design = $70

10. Once the cost is derived, the PMP must explain how the cost was calculated.
Ways to explain the cost calculation:
Activity Cost Estimates. These estimates may include indirect costs and reserves. This should be a quantitative assessment of the likely costs need to acquire the project resources in order to complete the project per the schedule.
Activity Cost Estimates Supporting Detail. The activities usually range in cost value, so for each activity, the PMP must clearly describe how the cost was derived and the reasoning behind the cost. This detail should include the reasoning for the cost, why the activity is required, the constraints, and the basic values and information. This can also be called the Basis of Estimates.
Note: Draw from experience of your team, use technology, and always analyze the risk when predicting and explain the costs of a project.

11. The third of four key elements to Cost Management is Determining Project Budgets.
Planning Cost
Estimating Project Cost
Determining Project Budgets
Controlling Project Costs

12. Unlike Cost Estimating, which is mostly how money is spent, a Project
Budget is mostly about when to spend money.
Expert judgement, whether it be from team member or a financial advisor, should be used when building a budget. One of the most common techniques used when developing a budget is cost aggregation.
Cost Aggregation – summing the costs per week of project work until the project is completed. This sum up will be at the total project level and will measure all costs from the beginning of the project to the end.
Estimate
Week 1
Week 2
Week 3
Week 4
Total Project Cost
Sign the Lease
$3,000
Remodel the Kitchen
$500
$1000
Insult the House
$100
Redo Roofing
Weekly Total
$3,500
$1600
Cumulative Cost
$3500
$5100
$5200
$5700

13. As part of estimating the budget,
a PMP must do a reserve analysis in addition to the cost aggregation.
The budget calculated for the reserve is preformed during the project execution phase. The total amount calculated is then added to the project baseline. This is for identified risk and meant to reduce risk by having some fund already allocated in the event of a risk occurring.
The reserve analysis, including a contingency or management reserve, is calculated to provide a provision should a project risk occur during the project lifecycle. This is used to mitigate cost and schedule risk.
Contingency Reserve – part of the budget that is set aside for identified risks within the scope of the project. Mitigating responses should be developed along with the contingency reserve. This is include as part of the baseline.
Management Reserve – part of the budget that is set aside for unplanned, in-scope work. This is not included as part of the baseline but is part of funding requirements.

14. Since budgeting costs are normally estimates, a PMP should double check the calculated budget.
Key ways to review budget:
Expert Judgement. Use the expertise on your team to help review the budget and bring up any
concerns or questions. The knowledge skills and experience on the team will very and discussing the budget before finalization can lead to more accurate time and cost estimates.
Historical Relationships. Another technique is to compare the project budget to successful project budgets from the past. Industry data is also a good source to compare project budgets and different phases of the project lifecycle.
Fund Limit Relationships. When graphing your costs over time and adding all the funds required, the results should be compared to the defined project scope and limitations. Realizations that can arise from this activity could be that an activity needs to be scheduled for a different week or funds need to be spent by a certain date.

15. When finally plotted, the total project budget should form an S-curve over the project lifecycle.
800
600
400
200
Budgeted Cost
Actual Cost
The budget cost plot should form an S Curve when funding requirements are plotted versus over the length of the project, which can then be used as the cost baseline and plotted with the actual cost as the project progresses to provide a performance measure.

16. The first of four key elements to Cost Management is Planning Cost.
Estimating Project Cost
Determining Project Budgets
Controlling Project Costs

17. Controlling costs involves
managing factors that can cause changes to the project budget and influence cost variations.
To be sure to control cost correctly, several sources of information must be looked over.
Key informational sources:
Cost Baseline. This information should be used to compare costs that were planned to actual costs.
Cost Management Plan. This document should inform the PMP as to what the acceptable variance for cost performance are.
Work Performance Data. This information includes what phase each activity is in, which costs have been approved, and were additional costs have been accrued.
Project Funding Requirements. This information explains which funs are required for expenditures and reserves.
Organizational Process Assets (OPA). These documents include policies and procedures that inform the PMP how to manage and report project costs.

18. There are different tools that PMPs can use to control cost
There are different tools that PMPs can use to control cost. The first of three tools to be discussed is the cost change control system.
Cost Change Control System. A system following approved procedures that outline how changes to the cost base line can be introduced to the project.
Note: Procedures should also include how to inform stakeholders of all approved changes and the costs associated with each change.
Identify Change
Submit Change Request
Change Approved
Inform Stakeholders
Implement Changes

19. Another tool that can be used is the performance measurement analysis.
Performance Management Analysis is a method for comparing the costs that are recorded
to the predetermined cost baseline. In order to perform this analysis several factors are needed.
Key components:
Planned Value (PV). The budgeted cost for scheduled work for a specific time frame. For example, if an activity should cost $50 when completed and grows linearly over the course of the activity, the PV for the activity when is half-way completed is 50% of the total cost ($25).
Earned Value (EV). The budgeted cost for completed work for a specific time frame. For example, the maximum earnable value for an activity is its total cost. If an activity is completed for 20% of the budgeted cost, the EV is 20% of the total cost (earnable value).
Actual Cost (AC). Total cost accrued according to the schedule over a specific time frame.
Cost Variance (CV). EV –AC. This is used to determine if money has been lost during an activity. (CV < 1, money has been lost. CV > 1 activity cost less then planned, excess funds)
Schedule Performance Index (SPI). SPI = EV/PV . The SPI does not give much information about whether the project is on time, but it must be 1 at the end of the project.

20. Forecasting is tool used to control future costs.
Forecasting is used to determine future cost values based on lesson learned during the project life.
Key components:
Estimate to Complete (ETC). Costs needed to complete a task. Based on how the project has been going this value could be a new estimate or recalculated based on similar tasks that cost more than expected.
Estimate at Completion (EAC). Based on project costs after a certain time period, this is a new estimate of the total costs. This is calculated by taking the accumulation of costs already spent and the accumulation of the ETCs for each activity yet to be completed.
Variance at Completion (VAC). The difference between the estimated cost at completion (EAC) and the actual budget when the project is completed.

21. Once the cost is analyzed, several
pieces of valuable information can be
used to update the project schedule or budget.
Outcomes of Cost Management:
Typical outcome of cost management include a list of changes that need to be requested and a list of corrective actions that could be accomplished to keep project cost down.
Updates that could be made from information gathered:
Cost Management Plan – Depending on how severe the cost variances are, the cost management plan may need to be reevaluated.
Cost Estimates – As the project develops, cost estimates should be revisited and updated based on newly completed activity costs. Also, if costs are updated, a basis for the update must be explained.
Cost Baseline – As cost estimates get updated or new risks are recognized, the baseline may need to be updated by going through a formal change control process.
Note: A document should be maintain of lessons learned throughout the project to better manage and estimate costs later in the project or for similar projects in the future.

22. Knowledge Check
Start

23. 1. If the Earned Value is equal to Actual Cost, it means:
A. Project is on budget and on schedule
B. Schedule Variance Index is 1
C. There is no schedule variance
D. There is no cost variance

24. 2. _____________ is not part of the Earned Value calculations.
A. Known Unknowns
B. Unknown Unknowns
C. Project Budget
D. Amount of work completed

25. 3. A Project with a total funding of $100,000 finished with a BAC value of $95,000. What term can BEST describe the difference of $5,000?
A. Cost Variance
B. Management Overhead
C. Management Contingency Reserve
D. Schedule Variance

26. 4. Reserve Analysis a technique NOT used in:
A. Estimate Costs
B. Determine Budget
C. Control Costs
D. Estimate Activity Duration

27. 5. Project Cost Management Plan is created as a part of:
A. Develop Project Management Plan process
B. Estimate Costs process
C. Determine Budget process
D. Control Costs process

28. 6. A particular project in the domain of civil construction requires that every on-site worker be insured. Which of the following inputs BEST conveys this requirement to the Estimate Costs process so that the insurance cost is estimated and subsequently budgeted:
A. Enterprise Environmental Factor
B. Organizational Process Assets
C. Project Scope Statement
D. Project Management Plan

29. 7. ____________ is not a part of the project cost baseline but is included in the project budget:
Activity Cost Contingency Reserve
B. Management Contingency Reserve
C. Management Overheads
D. Project Management Planning

30. 8. What is the BEST way to make an accurate forecasting of ETC?
A) Manual Forecasting of cost of remaining work.
B) BAC – EV
C) (BAC – EV)/CPI
D) EAC - AC

31. 9. If the Earned Value is equal to Actual Cost, it means:
A. Project is on budget and on schedule
B. Schedule Variance Index is 1
C. There is no schedule variance
D. There is no cost variance

32. 10. Trend Analysis is BEST described as:
A. Analyzing performance of similar projects over time
B. Examining project performance over time
C. Calculating Earned Value
D. Calculating Cost Variance

33. The Results