Project Cost Management

Study Notes

PMBOK® Sixth Edition based, Version 1.0

In Preparation for PMP® Certification Exam

IBM Education and Training

Worldwide Certified Material
Project Cost Management ii

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Initially Prepared By: Daniel P. Bukoskey, PMP, MBA, Senior Certified IT Specialist,
Edited By: Carlos Rodrigues Guerra, Jan Leeuwerink
Publishing: January 2018 Edition

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Project Cost Management iii

Table of Contents

Project Cost Management Study Notes .................................................................................................................. v

Reference Material to Study ....................................................................................................................... v
What to Study? .......................................................................................................................................... vi
Recommended Study Not in PMBOK, 6th Edition, .................................................................................... vi
Key Definitions ........................................................................................................................................... vi
7 Project Cost Management .......................................................................................................................7-1
7.1 Plan Cost Management ...........................................................................................................................7-3
7.1.1 Plan Cost Management – Inputs .............................................................................................................7-4
7.1.2 Plan Cost Management – Tools and Techniques ....................................................................................7-5
7.1.3 Plan Cost Management – Outputs...........................................................................................................7-5
7.2 Estimate Costs .........................................................................................................................................7-6
7.2.1 Estimate Costs – Inputs ...........................................................................................................................7-7
7.2.2 Estimate Costs – Tools and Techniques .................................................................................................7-8
7.2.3 Estimate Costs – Outputs ........................................................................................................................7-9
7.3 Determine Budget ..................................................................................................................................7-10
7.3.1 Determine Budget – Inputs ....................................................................................................................7-11
7.3.2 Determine Budget – Tools and Techniques ..........................................................................................7-11
7.3.3 Determine Budget – Outputs .................................................................................................................7-12
7.4 Control Costs .........................................................................................................................................7-13
7.4.1 Control Costs – Inputs ...........................................................................................................................7-13
7.4.2 Control Costs – Tools and Techniques..................................................................................................7-14
7.4.3 Control Costs – Outputs.........................................................................................................................7-16
Project Cost Management Concepts ..................................................................................................................7-18
Estimate Types ......................................................................................................................................7-18
Cost Types .............................................................................................................................................7-18
Depreciation ...........................................................................................................................................7-19
Profitability Measures for Project Selection ........................................................................................................7-21
Earned Value Analysis........................................................................................................................................7-23
Sample Problems ...............................................................................................................................................7-27
Earned Value Analysis ...........................................................................................................................7-27
Present Value and Net Present Value ...................................................................................................7-28
Sample Problem Answers ..................................................................................................................................7-29
Earned Value Analysis ...........................................................................................................................7-29
Present Value and Net Present Value: ..................................................................................................7-31
Depreciation ........................................................................................................................................................7-33
Sample Questions ..............................................................................................................................................7-34
Answer Sheet .....................................................................................................................................................7-41
Answers ..............................................................................................................................................................7-42
PMP Certification Exam Preparation – What did I do wrong? ............................................................................7-44

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Project Cost Management iv

List of Figures

Figure 7-1. Overview of Project Management Knowledge Areas ........................................................................... ix

Figure 7-2. Index of used colors for Project Management Process Groups ............................................................ x
Figure 7-3. Project Cost Management Knowledge Area Processes .................................................................... 7-1
Figure 7-4. Plan Cost Management Data Flow Diagram ...................................................................................... 7-4
Figure 7-5. Estimate Costs Data Flow Diagram ................................................................................................... 7-6
Figure 7-6. Determine Budget Data Flow Diagram ............................................................................................ 7-10
Figure 7 7. Control Costs Data Flow Diagram .................................................................................................... 7-13
Figure 7-8. Cost Elements for Earned Value Analysis ....................................................................................... 7-23

List of Equations

Equation 7-1. Formula for PERT analysis – Beta Distribution.............................................................................. 7-8

Equation 7-2. Formula for Triangular Distribution ................................................................................................ 7-9
Equation 7-3. Formula of Schedule Variance (SV) ............................................................................................ 7-15
Equation 7-4. Formula of Cost Variance (CV) .................................................................................................... 7-15
Equation 7-6. Formula of Schedule Performance Index (SPI) ........................................................................... 7-15
Equation 7-5. Formula of Cost Performance Index (CPI) ................................................................................... 7-15
Equation 7-7. Formula of To-Complete Performance Index (TCPI) for BAC ..................................................... 7-16
Equation 7-8. Formula of To-Complete Performance Index (TCPI) for EAC ..................................................... 7-16
Equation 7-9. Formula for PERT analysis – Beta Distribution............................................................................ 7-19
Equation 7-10. Formula of Estimate at Completion ETC(ETC) .......................................................................... 7-19
Equation 7-11. Formula of Estimate at Completion ETC(BAC).......................................................................... 7-19
Equation 7-12. Formula of Estimate at Completion ETC(CPI & SPI) ................................................................. 7-19
Equation 7-13 Formula for PERT analysis – Beta Distribution........................................................................... 7-20
Equation 7-14. Formula of Present Value (PV) .................................................................................................. 7-21
Equation 7-15. Formula of Future Value (PV) .................................................................................................... 7-21

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Project Cost Management v

Project Cost Management Study Notes

Reference Material to Study

PMBOK, 6th Edition, 2017
A Guide to the Project Management Body of Knowledge (PMBOK® Guide)
Project Management Institute, Sixth Edition, 2017
ISBN 978-1-628251-84-5 (paperback)
Mulcahy
PMP Exam Prep: Rita's Course in a Book for Passing the PMP Exam
Rita Mulcahy,
RMC Publications, Inc.,
Meredith 2008
Project Management: A Managerial Approach
Jack R. Meredith
Wiley; 7th Edition, 2008
ISBN-13: 978-0-470-22621-6
Lewis 2005
Project Planning, Scheduling & Control: A Hands-On Guide to Bringing Projects in on Time
and on Budget
James P. Lewis, Ph.D.
McGraw-Hill; 4th Edition, 2005
ISBN-13: 978-0-071-46037-8
Frame 2002
The New Project Management: Tools for an Age of Rapid Change, Complexity, and Other
Business Realities (Jossey Bass Business and Management Series)
J. Davidson Frame
Jossey-Bass; 2nd Sub Edition, 2002
ISBN-13: 978-1-880-41041-7
LeRoy 2009
PMP Exam: Practice Test and Study Guide
J. LeRoy Ward
ESI International; 8th Edition, 2009
ISBN-13: 978-1-880-41024-0

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Project Cost Management vi

What to Study?
The PMBOK, 6th Edition, processes of Project Cost Management: Plan Cost Management, Estimate
Costs, Determine Budget, and Control Costs (Be familiar with Inputs, Tools and Techniques, and
Outputs for each process)
Earned Value Analysis: EV (BCWP), PV (BCWS), ACWP, EAC, BAC, ETC, CV, SV, CPI, SPI,
TCPI
Cost Estimating Techniques: analogous, parametric modelling, bottom-up

Recommended Study Not in PMBOK, 6th Edition,

Cost Estimates and Ranges: Order of Magnitude, Budgetary, and Definitive
Present Value and Net Present Value
Straight-Line, Double Declining Depreciation and Sum of Yrs Digits

Key Definitions

Actual Cost (AC) Total actual cost incurred that must relate to whatever cost was
budgeted within the planned value and measured in earned value in
accomplishing work during a given time period. The AC will have
no upper limit; whatever is spent to achieve the EV will be
measured

Actual Cost of Work Replaced with the term  Actual Cost (AC).
Performed (ACWP)

Baseline The approved version of a work product that can be changed only
through formal change control procedures and is used as a basis
for comparison

Budget At The sum of the total budgets for a project.

Completion (BAC)

Budgeted Cost of Replaced with the term  Earned Value (EV).

Work Performed
(BCWP)

Budgeted Cost of Replaced with the term  Planned Value (PV).

Work Scheduled
(BCWS)

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Project Cost Management vii

Code of Accounts Any numbering system used to uniquely identify each element of
the WBS.

Contingency Reserve The amount of money or time needed above the estimate to reduce
the risk of overruns of project objectives to a level acceptable to the
organization.

Control Account A management control point where the integration of scope and
(Tool) budget and schedule takes place, and compared to earned value
for performance.

Cost Performance The cost efficiency ratio of earned value to actual cost. CPI is often
Index (CPI) used to predict the magnitude of a cost overrun using the following
formula:
BAC
= projected cost at completion, where
CPI
EV
CPI 
AC

Cost Variance (CV) Any difference between the budgeted cost of an activity and the
actual cost of that activity.
In earned value: CV  EV  AC

Earned Value (EV) 1) The physical work accomplished plus the authorized budget for
this work.
2) The sum of the approved cost estimates (may include overhead
allocation) for activities or portions of activities completed during a
given period, usually from the beginning of the project until now.
Previously called the Budgeted Cost of Work Performed (BCWP).

Earned Value A method that combines scope, schedule, and resources

Management (EVM) measurements to assess project performance and progress.

Estimate An assessment of the likely quantitative result. Usually applied to

project cost and durations and should always include some
indication of accuracy (e.g. +/- percent). Usually used with a
modifier (e.g., preliminary, conceptual, feasibility). Some application
areas have specific modifiers that imply particular accuracy ranges
(e.g. order of magnitude, budget estimate, and definitive estimate.)

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Project Cost Management viii

Estimate at The expected total cost of an activity, a group of activities, or of the

Completion (EAC) project when the defined scope of work has been completed. Most
techniques for forecasting EAC include some adjustment of the
original cost estimate based on project performance to date. See
formulas under “Estimate at Completion (EAC) Variations”.

Estimate/Estimated The expected additional cost needed to complete an activity, a

To Complete (ETC) group of activities, or the project. Most techniques for forecasting
ETC include some adjustment to the original cost estimate based
on project performance to date.
ETC  EAC  AC

Parametric Estimating An estimating technique that uses a statistical relationship between

historical data and other variables to calculate an estimate.

Percent Complete An estimate, expressed as a percent, of the amount of work that

(PC) has been completed on an activity or group of activities.

Planned Value (PV) The physical work scheduled plus the authorized budget to
accomplish the scheduled work. Formerly called Budgeted Cost of
Work Scheduled (BCWS).

Project Cost A subset of project management that includes the processes

Management required to ensure that the project is completed within the approved
budget.

Reserve A provision in the project plan to mitigate cost and/or schedule risk.
Often used with a modifier (e.g., management reserve, contingency
reserve) to provide further detail on what types of risk are meant to
be mitigated. The specific definition of the modified term varies by
application area.

S-Curve A graphic display of cumulative cost, labor hours, percentage of

work, or other quantities plotted against time. The name derives
from the S-like curve of a project that starts slowly, accelerates,
and then tails off. Also a term for the cumulative likelihood
distribution that is a result of simulation. (see Risk Management)

Schedule The schedule efficiency ratio of earned value accomplished against

Performance Index the planned value. The SPI describes what portion of the planned
(SPI) schedule was actually accomplished:

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Project Cost Management ix

EV
SPI 
PV

Schedule Variance Any difference between the scheduled completion of an activity and
(SV) the actual completion of that activity.

In earned value: SV  EV  PV

To-Complete Index used to determine how efficient the project team must be to
Performance Index complete the remaining work within the remaining money.
(TCPI)
( BAC  EV )
TCPI 
( BAC  AC )

Value Engineering Value engineering is a creative approach used to optimize life cycle
(VE) cost, save time, increase profits, improve quality, expand market
share, solve problems, and/or use resources more effectively.

Interaction of Project Management Processes

Figure 7-1. Overview of Project Management Knowledge Areas

In this study guide a colored scheme is used for representation of interaction of processes in
the Project Management Knowledge Areas (refer to Figure 7-1) between Project Management
Process Groups based on PMBOK Guide. This scheme is shown in Figure 7-2.

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Project Cost Management x

Project Management Process Groups

Initiating Process Group

Planning Process Group

Executing Process Group
Monitoring and Controlling Process Group
Closing Process Group

Figure 7-2. Index of used colors for Project Management Process Groups

With these colors you can follow the process data flow within this Project Management Knowledge
Area through the process groups.
Arrows have the same color like the process from which the arrow starts. It helps to difference the
processes of a specific Project Management Process Group.

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Project Cost Management 7-1

7 Project Cost Management

Project Cost Management includes the processes involved in planning, estimating, budgeting,
financing, funding, managing, and controlling costs so that the project can be completed within
the approved budget.1

Note: Planning or cost management plan is a component of the project management plan.
This is primarily concerned with the cost of the resources required to complete project
activities.
It should consider the effect of project decisions on the cost of using the project’s product,
services or result. For example: limiting the number of design reviews may reduce the cost of
the project at the expense of an increase in service cost and an increase in the customer’s
operating cost.

Figure 7-3. Project Cost Management Knowledge Area Processes

1
PMBOK, 6th Edition,

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Project Cost Management 7-2

A broader view of project cost management is often referred to as life-cycle costing. It

involves including acquisition, operating, and disposal cost when evaluating various project
alternatives.
A creative approach used to optimize life cycle cost, save time, increase profits, improve
quality, expand market share, use resources more effectively, and solve problems is called
value engineering.
Life cycle costing and value engineering techniques are used together to reduce cost and
time, improve quality and performance, and optimize the decision-making.
In many application areas, predicting and analyzing the prospective financial performance of
the project’s product is done outside the project.
Cost estimating and cost budgeting can be integrated as a single process, particularly on
smaller projects.
In some areas such as capital facilities projects, project cost management includes predicting
and analyzing the prospective financial performance of the project’s product. In these
situations, project cost management will include general management techniques such as:
• Return on investment
• Discounted cash flow
• Payback analysis
Should consider the information needs of the project stakeholders and the different ways and
times stakeholders measure project cost. For example, the acquisition cost of an item may be
measured when committed, ordered, delivered, incurred, or recorded for accounting purposes.
The ability to influence cost is greatest at the early stages of the project. Early scope definition
and requirements identification are critical to reducing cost in a project.
Cost management planning can establish:
• Level of accuracy
• Units of measure
• Organizational procedures links
• Control thresholds
• Rules of performance measurement (Earned Value Management)
• Reporting formats
• Process descriptions
• Project Cost Management Processes

KEY CONCEPTS FOR PROJECT COST MANAGEMENT

Project Cost Management is primarily concerned with the cost of the resources needed to
complete project activities. Project Cost Management should consider the effect of project
decisions on the subsequent recurring cost of using, maintaining, and supporting the product,

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Project Cost Management 7-3

service, or result of the project. For example, limiting the number of design reviews can reduce
the cost of the project but could increase the resulting product's operating costs.
Another aspect of cost management is recognizing that different stakeholders measure project
costs in different ways and at different times. For example, the cost of an acquired item may be
measured when the acquisition decision is made or committed, the order is placed, the item is
delivered, or the actual cost is incurred or recorded for project accounting purposes. In many
organizations, predicting and analyzing the prospective financial performance of the project's
product is performed outside of the project. In others, such as a capital facilities project, Project
Cost Management can include this work. When such predictions and analyses are included,
Project Cost Management may address additional processes and numerous general financial
management techniques such as return on investment, discounted cash flow, and investment
payback analysis.

TRENDS AND EMERGING PRACTICES IN PROJECT COST MANAGEMENT

Expansion of earned value management (EVM) to include the concept of earned schedule
(ES).

TAILORING CONSIDERATIONS
• Knowledge management.
• Estimating and budgeting.
• Earned value management.
• Use of agile approach.
• Governance.

CONSIDERATIONS FOR AGILE/ADAPTIVE ENVIRONMENTS

Projects with high degrees of uncertainty or with undefined scope:
• May not benefit from detailed cost calculations due to frequent changes.
• Lightweight estimation methods can be used to generate a fast, high-level forecast of
project labor costs, which can then be easily adjusted as changes arise.
• Detailed estimates are reserved for short-term planning horizons in a just-in-time
fashion.
High-variability projects subject to strict budgets:
• Scope and schedule are more often adjusted to stay within cost constraints.

7.1 Plan Cost Management

Plan Cost Management is the process that establishes the policies, procedures, and
documentation for planning, managing, expending, and controlling project costs

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Project Cost Management 7-4

The key benefit of this process is that it provides guidance and direction on how the project
costs will be managed throughout the project.

Figure 7-4. Plan Cost Management Data Flow Diagram

7.1.1 Plan Cost Management – Inputs

.1 Project Charter
Provides summary budget

.2 Project Management Plan

• Schedule management plan. Provides processes and controls that will impact cost
estimation and management
• Risk management plan. Provides processes and controls that will impact cost estimation
and management.

.3 Enterprise Environmental Factors

• Organization culture & structure
• Market conditions
• Currency exchange rates
• Published commercial information / databases
• Project management information system
• Productivity differences

.4 Organizational Process Assets

• Financial controls procedures
• Historical information and Lessons learned
• Financial databases

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Project Cost Management 7-5

• Existing formal & informal cost estimating and budgeting-related policies, procedures, and
guidelines

7.1.2 Plan Cost Management – Tools and Techniques

.1 Expert Judgment
• Previous similar projects
• Information in the industry, discipline, and application area
• Cost estimating and budgeting
• Earned value management

.2 Data Analysis
• Payback period
• Return on investment (ROI)
• Internal rate of return
• Discounted cash flow
• Net present value

.3 Meetings
Planning meetings to develop the cost management plan

7.1.3 Plan Cost Management – Outputs

.1 Cost Management Plan

• Units of measure
• Level of precision
• Level of accuracy
• Organizational procedures links
• Control thresholds
• Rules of performance measurement
• Define points in the WBS
• Establish earned value management (EVM) techniques
• Specify tracking methodologies
• Reporting formats
• Additional details
• Description of strategic funding choices
• Procedure to account for fluctuations in currency exchange rates
• Procedures for project cost recordings

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Project Cost Management 7-6

7.2 Estimate Costs

Estimate Costs is the process of developing an approximation of the monetary resources

needed to complete project activities.1

In approximating cost, the estimator considers the causes of variation of the final estimate for
purposes of better project management.
It includes identifying and considering various costing alternatives.
Where possible, estimates should be done prior to budget request rather than after budgetary
approval is provided.
Cost estimates should be refined during the project or reflect additional detail.
Cost estimates may increase or decrease as the project progresses and additional details are
known.
The accuracy of a cost estimate of a project will improve as the project progresses through its
life cycle.
Estimated costs can include labor, materials, equipment, services, facilities, inflation allowance
or contingency costs.

Figure 7-5. Estimate Costs Data Flow Diagram

1
PMBOK, 6th Edition,

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Project Cost Management 7-7

7.2.1 Estimate Costs – Inputs

.1 Project management plan

• Cost management plan. Describes methods that can be used and the level of precision
and accuracy required for the cost estimate.
• Quality management plan. Describes activities and resources necessary for the project
management team to achieve the quality objectives set for the project.
• Scope baseline
• Scope statement
Describes the project’s business need, justification, requirements and boundaries
Includes constraints, assumptions and requirements.
Provides a list of deliverables and acceptance criteria. Needs to include whether
project costs will be limited to direct costs or contain indirect costs.
• Work Breakdown Structure
Provides relationships between project components and deliverables
• WBS Dictionary
Provides identification of the deliverables and a description of the work in each
WBS component.

.2 Project documents
• Lessons learned register
• Project schedule. Resource type, quantity and duration are major factors
• Resource requirements. Identifies the types and quantities of resources required for
each work package or activity.
• Risk register. For risk mitigation costs

.3 Enterprise Environmental Factors

• Marketplace Conditions. The products, services and results and terms and conditions
under which they are available.
• Published commercial information. Provides resource cost rate information.
• Exchange rates and inflation.

.4 Organizational Process Assets

• Cost estimating policies. Predefined approaches to cost estimating
• Cost estimating templates. Standard templates developed by organizations
• Historical information. Provides information about a project’s product or service.
• Lessons learned

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Project Cost Management 7-8

7.2.2 Estimate Costs – Tools and Techniques

.1 Expert Judgment
Considers environmental information
Used with historical information

.2 Analogous Estimating
The actual cost of a previous similar project is used as the basis for estimating the cost of the
current project.
Is frequently used to estimate total project cost when there is a limited amount of detailed
information about the project. (e.g., in the early project phases)
Generally less costly than other estimating techniques, but it is also generally less accurate.
Most reliable when 1) the previous projects are similar in fact and not just in appearance, 2) the
individuals or groups preparing estimates have the needed expertise.
Uses expert judgment

.3 Parametric Estimating
Uses statistical relationship between historical data and other variables
Can produce higher levels of accuracy

.4 Bottom-up Estimating
It involves estimating the cost of individual activities or work packages, then summarizing or
rolling-up the individual estimates to get a project total.
The cost and accuracy is driven by the size and complexity of the individual activity or work
package: smaller items increase both cost and accuracy of the estimating process.
The project management team must weigh the additional accuracy against the additional cost.

.5 Three-Point Estimates
Considers estimation uncertainty and risk by incorporating Most Likely (cM), Optimistic (cO)
and Pessimistic (cP) estimates to define a range
Cost estimate based upon two (2) commonly used formulas: Triangular and Beta distribution
(from a traditional PERT analysis)
cO  4 * cM  cP
cE 
6
Equation 7-1. Formula for PERT analysis – Beta Distribution

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Project Cost Management 7-9

cE = (cO + cM + cP) / 3

Equation 7-2. Formula for Triangular Distribution

.6 Data Analysis
• Alternatives analysis. Used to evaluate identified options in order to select which options
or approaches to use to execute and perform the work of the project.
• Reserve Analysis. Also called contingency allowances.
Overstating the cost estimate is a potential problem.
Contingency should be clearly identified
• Cost of quality (COQ). Includes evaluating the cost impact of additional investment in
conformance versus the cost of non-conformance.

.7 Project Management Information System (PMIS)

Can include spreadsheets, simulation software, and statistical analysis tools to assist with cost
estimating.
Can simplify the use of the techniques described earlier and facilitate more rapid consideration
of costing alternatives.

.8 Decision Making
Useful for engaging team members to improve estimate accuracy and commitment to the
emerging estimates.

7.2.3 Estimate Costs – Outputs

.1 Cost Estimates
Quantitative assessments of the likely cost of the resources required to complete project
activities. (May be presented in summary or detail)
It must be estimated for all resources that will be charged to the project. This includes but is
not limited to direct labor, materials, equipment, services, facilities, information technology, and
special categories such as cost of financing (including interest charges), an inflation allowance,
exchange rates, or a cost contingency reserve. Indirect costs, if they are included in the project
estimate, can be included at the activity level or at higher levels.

.2 Basis of Estimates
A description of how the estimate was developed.
• Documentation of all assumptions made.
• Documentation of any known constraints.
• Documentation of identified risks included when estimating costs,

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Project Cost Management 7-10

• An indication of the range of possible results. For example, $30,000 ± $5,000 indicates that
the cost is somewhere between $25,000 and $35,000
• An indication of the confidence level

.3 Project Document Updates

Project documents that may be updated as a result of carrying out this process include but are
not limited to:
• Assumption log
• Lessons learned register
• Risk register

7.3 Determine Budget

Determine Budget is the process of aggregating the estimated costs of individual activities or
work packages to establish an authorized cost baseline. This baseline includes all authorized
budgets, but excludes management reserves.1

Figure 7-6. Determine Budget Data Flow Diagram

1
PMBOK, 6th Edition,

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Project Cost Management 7-11

7.3.1 Determine Budget – Inputs

.1 Project Management Plan

• Cost Management Plan
• Resource Management Plan
• Scope Baseline

.2 Project Documents
• Basis of Estimates (additional details supporting the cost estimate)
• Cost Estimates (quantitative assessments of probably costs)
• Project Schedule
• Risk Register

.3 Business Documents
• Business Case
• Benefits Management Plan

.4 Agreements
Applicable agreement information and costs relating to products, services, or results that have
been or will be purchased are included when determining the budget.

.5 Enterprise Environmental Factors (e.g. exchange rates)

.6 Organizational Process Assets

• Existing formal and informal cost budgeting-related policies, procedures, and guidelines.
• Historical information and lessons learned repository.
• Cost budgeting tools.
• Reporting methods.

7.3.2 Determine Budget – Tools and Techniques

.1 Expert Judgment
Based upon expertise in an area related to the activity
Sources include other organization resources, consultants, stakeholders, professional
associations and industry groups

.2 Cost Aggregation
Aggregates work packages per the WBS.
Work package cost estimates are aggregated for the higher component levels in the WBS
(control accounts and the entire project).

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Project Cost Management 7-12

.3 Data Analysis
• Reserve Analysis. Establishes contingency reserves and management reserves
Management contingency reserves are budgets reserved for “unknown
unknowns” (potentially required changes to project scope and cost).
Approval may be required before the PM can spend this reserve.
Reserves are not part of the project cost baseline nor the earned value
calculation.

.4 Historical Information Review

Parametric or analogous estimates
It involves using project characteristics in a math model to predict total costs.
Models can be simple or complex.
Accuracy is reliable when historical information is used, the parameters are readily
quantifiable, or the model is scalable.
Funding limit reconciliation:
Necessitates that scheduled work be adjusted to regulated expenditures by imposing
constraint dates.

.5 Funding Limit Reconciliation

Fund expenditures should be reconciled with funding limits on the commitment of funds to the
project.

.6 Financing
Acquiring funding for projects.

7.3.3 Determine Budget – Outputs

.1 Cost Baseline
A time-phased budget used to measure and monitor project cost performance.
Developed by summing estimated cost by period and is usually displayed in the form of an S-
curve.

.2 Project Funding Requirements

Derives total and periodic funding requirements from the cost baseline

.3 Project Document Updates

• Cost estimates. Updated to record any additional information.
• Project schedule.
• Risk register. New risks identified during this process are recorded.

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Project Cost Management 7-13

7.4 Control Costs

Control Costs is the process of monitoring the status of the project to update the project budget
and managing changes to the cost baseline.1

Cost control includes:

• Influencing factors that create changes to cost baseline
• Ensuring changes are acted on timely
• Monitor cost performance to detect and understand variances from plan.
• Monitoring work performed against funds expended
• Preventing unauthorized changes from being included
• Informing appropriate stakeholders of authorized changes.
• Acting to bring expected cost within acceptable limits.
• Managing the actual changes when and as they occur.

Figure 7 7. Control Costs Data Flow Diagram

7.4.1 Control Costs – Inputs

.1 Project Management Plan

• Cost Management Plan. Describes how the project costs will be managed and controlled.
• Cost Baseline. Compare with actual results to determine if a change, corrective action, or
preventive action is necessary

1
PMBOK, 6th Edition,

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Project Cost Management 7-14

• Performance Measurement Baseline. Combined with EVA to compare with actual results to
determine if a change, corrective action, or preventive action is necessary

.2 Project Documents
• Lessons Learned Register. Can be applied to later phases in the project to improve cost
control.

.3 Project Funding Requirements

Include projected expenditures plus anticipated liabilities.

.4 Work Performance Data

• Status and cost of the project activities being performed.
• Includes completed and not yet completed deliverables, authorized and incurred costs,
estimates to completion for schedule activities and percent complete of schedule activities.

.5 Organization Process Assets

• Existing formal and informal cost control-related policies, procedures, and guidelines.
• Cost control tools.
• Monitoring and reporting methods to be used.

7.4.2 Control Costs – Tools and Techniques

.1 Expert judgment
• Variance analysis.
• Earned value analysis.
• Forecasting.
• Financial analysis.

.2 Data Analysis
• Earned Value Analysis (EVA).
Performance measurement which integrates project scope, cost and schedule
Requires an integrated baseline to measure against.
Useful for cost control, resource management and production.
Includes the following key values for each work package and control account:
• Planned value (PV): Budgeted cost for scheduled work on an activity or WBS
component. Total of the PV is the performance measurement baseline (PMB). The
total planned value for the project is also known as budget at completion (BAC)
• Earned value (EV): Budgeted amount for completed work on the schedule
activity or WBS component.

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Project Cost Management 7-15

• Actual cost (AC): Total cost incurred in accomplishing work on the schedule
activity or WBS component.
• Variance analysis.
Compares actual project performance to planned or expected value
• Schedule variance (SV): Project is completed because all of the planned values
are earned. Formula:
SV  EV  PV
Equation 7-3. Formula of Schedule Variance (SV)

• Cost variance (CV): The difference between the budget at completion and the
amount spent. Formula:
CV  EV  AC
Equation 7-4. Formula of Cost Variance (CV)

• Schedule performance index (SPI): Measure of progress achieved compared to

progress planned on a project. Formula:
EV
SPI  .
PV
Equation 7-5. Formula of Schedule Performance Index (SPI)

• Cost Performance index (CPI): Measure of the value of work completed

compared to the actual cost of the project. Less than 1.0 indicates a cost of overrun
of the estimates. Greater than 1.0 indicates of cost under run of the estimates.
Formula:
EV
CPI  .
AC
Equation 7-6. Formula of Cost Performance Index (CPI)

• Trend analysis
Examines project performance over time to determine if performance is improving.
• Forecasting
Includes making predictions regarding the project’s future based on available
information
Helps assess the cost or amount of work to complete scheduled activities
Estimate at Completion (EAC). EAC uses a new estimate: Equals the actual costs to
date plus a new ETC. EAC may differ from budget at completion.
Estimate to Complete (ETC). ETC = EAC - AC
Three of the most common EAC methods are:
EAC for ETC work performed at the budgeted rate.
Equation: EAC = AC + (BAC – EV)

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Project Cost Management 7-16

EAC forecast for ETC work performed at the present CPI

Equation: EAC = BAC / CPI.
EAC forecast for ETC work considering both SPI and CPI factors.
Equation: EAC = AC + [(BAC – EV) / (CPI × SPI)].
• Reserve Analysis
Used to monitor the status of contingency and management reserves. If the identified risks
do not occur, the unused contingency reserves may be removed from the project budget to
free up resources for other projects or operations.

.3 To-Complete Performance Index (TCPI)

The future cost performance that needs to be achieved in order to meet the goal, such as BAC
or EAC.
Calculation of the work remaining divided by the funds remaining Funds remaining can be BAC
minus AC or EAC minus AC
Formula: TCPI = BAC – EV / (BAC-AC) or (EAC-AC)
Once it is determined that the BAC is no longer achievable, a new EAC will be used

To-Complete Performance Index (TCPI): Cost performance needed on remaining work to meet
goal (such as for BAC). Formula: TCPI (for BAC)
( BAC  EV )
TCPI ( BAC ) 
( BAC  AC )
Equation 7-7. Formula of To-Complete Performance Index (TCPI) for BAC

Formula: TCPI (for EAC)

( BAC  EV )
TCPI ( EAC ) 
( EAC  AC )
Equation 7-8. Formula of To-Complete Performance Index (TCPI) for EAC

.4 Project Management Information System

Used to track planned cost versus actual cost and to forecast the effects of cost changes
Variance Analysis: Describes how cost variances are managed. The acceptable range of
variance decreases as the project progresses.

7.4.3 Control Costs – Outputs

.1 Work Performance Measurements

The calculated CV, SV, CPI and SPI values for WBS components, in particular work packages
and control accounts, are documented and communicated.

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Project Cost Management 7-17

.2 Cost Forecasts
Either a calculated EAC value or a performing organization-reported EAC value is documented
and the value communicated to stakeholders.

.3 Change Requests

.4 Project Management Plan Updates

• Cost management plan.
• Cost baseline.
• Performance measurement baseline

.5 Project Document Updates

• Assumption log.
• Basis of estimates.
• Cost estimates.
• Lessons learned register.
• Risk register.

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Project Cost Management 7-18

Project Cost Management Concepts

Note: Recommended study, not all are included in PMBOK, 6th Edition,

Estimate Types
.1 Rough Order of Magnitude (ROM)
Range: -50% + 50%
Typical method of estimating used: Analogous (top down)
An approximate estimate made without detailed data
Used during the initial evaluation of the project (Concept)
Other terms: feasibility, conceptual, Ball Park

.2 Budget
Range: -10% + 25%
Typical method of estimating used: parametric (accuracy may vary)
Used to establish the funds required for the project (Development)
Also used to obtain approval for the project
Other terms: appropriations

.3 Definitive
Range: -5% + 10%
Typical method of estimating used: bottom up (WBS)
Prepared from well-defined specifications, data, drawings, etc.
Used for bid proposals, bid evaluations, contract changes, extra work, legal claims, and permit
and government approvals.

Cost Types
Sunk Cost: A historical or expended cost. Since the cost has been expended, we no longer
have control over the cost. Sunk costs are not included when considering alternative courses
of action.
Fixed Cost: Nonrecurring costs that do not change based on the number of units, like
expenses related to equipment required completing a project.
Variable Cost: Cost that rise directly with the size of the project, like expenses related to
consumable materials used to accomplish the project.
Indirect Cost: Costs that are part of the overall organization’s cost of doing business and are
shared among all the current projects. These include salaries of corporate executives,

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Project Cost Management 7-19

administrative expenses, and any cost that would be considered part of overhead. Cannot be
directly attributable to a specific project and are usually allocated over multiple projects.
Opportunity Cost: The cost of choosing one alternative and, therefore, giving up the potential
benefits of another alternative.
Direct Cost: Cost incurred directly by a specific project. These include cost for materials
associated with the project, salary of the project staff, expenses associated with
subcontractors.

Depreciation
Straight-line Method: Takes an equal credit during each year of the useful life of an asset.
Accelerated Method: Writes off the expense even faster than straight-line. Examples are
double-declining balance and sum-of-the-years digits.
Equation 7-9. Formula for PERT analysis – Beta Distribution

Estimate at Completion (EAC) Variations

EAC = Actual costs to date plus a new estimate for all remaining work. (Estimate To Complete:
ETC)
Most often used when past performance shows that the original estimating assumptions were
fundamentally flawed or no longer relevant to a change in conditions. Formula:
EAC ( ETC )  AC  ETC
Equation 7-10. Formula of Estimate at Completion EAC (ETC)

EAC = Actual costs to date plus remaining budget. The remaining budget can be obtained by
subtracting the earned value from the Budget at Completion (BAC).
Most often used when any current variances are seen as atypical and the project management
team expectations are that similar variances will not occur in the future. Formula:
EAC ( BAC )  AC  ( BAC  EV )
Equation 7-11. Formula of Estimate at Completion EAC (BAC)

EAC = Actual costs to date plus the remaining project budget modified by a performance
factor, often the cumulative cost performance index (CPI) or schedule performance index
(SPI).
Most often used when current variances are seen as typical of future variances. Formula:
EAC  AC  [( BAC  EV ) /(CPI * SPI )]
Equation 7-12. Formula of Estimate at Completion EAC (CPI & SPI)

EAC = Actual cost forecasted for ETC work performed at present CPI.
Most often used when the project experienced to date can be expected to continue in the
future. The ETC work is assumed to be performed at the same cumulative cost performance
index (CPI) as that incurred by the project to date.

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Project Cost Management 7-20

EAC  BAC / CPI

Equation 7-13 Formula for PERT analysis – Beta Distribution

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Project Cost Management 7-21

Profitability Measures for Project Selection

.1 Return on Sales (ROS)
• ROS = NEBT/Total Sales
• NEBT=net earnings before taxes
• ROS = NEAT/Total Sales
• NEAT=net earnings after taxes

.2 Return on Assets or Return on Investment

• ROA = NEAT/Total Assets
• ROI = NEAT/Total Investment

.3 Present Value (PV)

A financial decision tool for accessing the value today of future cash flows based on the
concept that payment today is worth more than payment tomorrow. Formula:
FV
PV 
(1  i ) n
Equation 7-14. Formula of Present Value (PV)

PV = present value of future money

FV = future value of today’s money
i = interest rate (also called discount rate)
n = no. of periods over which interest is compounded

.4 Future Value (FV)

How much today's money will grow when compounded at a given rate? FV of money is
calculated by compounding the present value with the prevailing interest rates. Formula:
FV  PV * (1  i) n
Equation 7-15. Formula of Future Value (PV)

PV = Present Value
i = interest rate (also called discount rate)
n = no. of periods over which interest is compounded

.5 Net Present Value (NPV) Method

It is a discounted cash flow (DCF) method of ranking investment proposals.
The NPV is equal to the present value of future returns, discounted at the marginal cost of
capital, minus the present value of the cost of the investment.

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Project Cost Management 7-22

If NPV of an investment is negative or is Zero, there is no real profit coming out of the
investment
If NPV is positive, it means that the rate of return from the project more than offsets reduction
in the value of money over a period of time
NPV = Sum of Present value of future Cash flows - Sum of Present Value of the
Expenditures

.6 Benefit Cost Ratio (BCR)

Benefit cost ratio (BCR) provides a measure of the expected profitability of a project by dividing
the expected revenues by the expected cost:
• BCR of 1.0 indicates that the project is break-even, expected benefits equal expected cost
• BCR of less than 1.0 indicates that the project is not financially attractive, expected cost
exceed expected benefits
• BCR of greater than 1.0 indicates that project is profitable, expected benefits exceed
expected cost
Does not indicate when you make a profit or loss.
Benefit-cost ratio (BCR) = PV of revenue / PV of cost

.7 Internal Rate of Return (IRR)

Average rate of return earned over the life of the project, expressed as a percentage
The discount rate that equates the present value of the expected future cash flows to the
present value of the cost of the project.

.8 Payback Period
Number of time periods required to return the original investment.
Calculates the duration taken to recover the investment by using predicted future cash flows
Does not take into account factors like inflation and rate of interest, ignores the time value of
money
Payback period = Net Investment / Average Annual Cash Flow

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Project Cost Management 7-23

Earned Value Analysis

The problem of reporting work completed without the associated cost is resolved by Earned
Value (EV). EV combines effort and time into a single dollar schedule. Financial data is
important to a project manager because it can help manage a project to a successful
completion.

Cost Elements for Earned Value Analysis

CV = EV - AC
PV

BAC

AC

EV
EAC = Forecast
SV = EV - PV

ETC = Forecast

Project Start Today Project End

Figure 7-8. Cost Elements for Earned Value Analysis

PV (BCWS) Planned value or budgeted cost of work scheduled. Equates to the

physical work scheduled and the associated budget for the scheduled work.
What was the planned spending for a given period of time?

EV (BCWP) Earned value or budgeted cost of work performed. Equates to the physical
work accomplished and the associated budget for this accomplished work.
What work has been completed and what measurement is used to
establish the accomplished value of these items? EV is the bridge between
PV and AC. It is the key to relating three independent variables which can
be used to measure the performance of the project and obtain a forecast
for the future.

AC (ACWP) Actual Cost or Actual Cost of Work Performed. Equates to the physical
work accomplished and the actual cost of this accomplished work.
What has been completed and what is the actual cost of these items?

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Project Cost Management 7-24

EAC Estimate at Completion (Estimated Cost at Completion)

Depending on the situation, EAC may be calculated by different means:
1) EAC  AC  ETC
when original assumptions are flawed
2) EAC  AC  ( BAC  EV )

when variances are considered to be atypical and not expected to occur

again
3) EAC  AC  [( BAC  EV ) /(CPI * SPI )]

Where ETC work is performed at efficiency rates that consider both CPI
and SPI factors.
BAC
4) EAC  1
CPI
Used when variances are considered typical. CPI will be consistent.
What is the total project expected to cost? How much will the project cost at
completion?

BAC Budget at Completion = Total Budgeted Cost.

What is the project’s budget?

ETC Estimate to Complete (Estimate of the additional funds needed to complete

the project)
ETC  EAC  AC
What is the estimate of additional funds needed to complete the project?

VAC Variance at Completion. The difference between the total amount the
project was supposed to cost (BAC) and the amount the project is now
expected to cost (EAC).
VAC  BAC  EAC
“How much over / under budget we will be at the end of a project?”

1
Author’s note: This is the old formula used by PMI ®. Know this one and use it if the only information you have is BAC and CPI and you are
asked to calculate EAC.

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Project Cost Management 7-25

CPI Cost Performance Index (cost performance factor, measures efficiency)

EV
CPI  ,
AC
A value of less than 1.0 indicates less productivity than expected. This is a
measure of the financial well-being of the project.
How efficient is the project? How fast are things getting done from a
financial point of view?

CV Cost Variance (valued in dollars). This is a measure of the financial well-

being of the project.
CV  EV  AC ,
A value of zero indicates that the project is on budget.
How far off are the scheduled costs of things to be completed from the
actual amount spent?
SPI Schedule Performance Index (schedule performance factor, measures
effectiveness). Indicates which portion of the planned schedule was
actually accomplished.
EV
SPI  ,
PV
A value of less than 1.0 indicates less has been completed than was
scheduled. A value greater than 1.0 indicates project is ahead of schedule.
How well is the project progressing in comparison to the expected
progression?
SV Schedule Variance (valued in dollars).
SV  EV  PV ,
A value of zero indicates that the project is on schedule.
How far off schedule is the project from a financial point of view?
PC Percent Complete (real value of work accomplished). Tells the PM how
much of the project has been completed.
EV
PC 
BAC
How much of the project has been completed?
PS Percent Spent. Tells the PM how much of the BAC has been used to date.
AC
PS 
BAC
How much of the budget at completion has been used to date?

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Project Cost Management 7-26

TCPI To-Complete Performance Index (verification factor)

( BAC  EV )
TCPI  (cost index).
( BAC  AC )
Values for the TCPI index of less than 1.0 is good because it indicates the
efficiency to complete is less than planned.
How efficient must the project team be to complete the remaining work with
the remaining money?
Rule of You can use indexes (CPI or SPI) to determine efficiency if you’ve
Thumb: completed at least 20% of the project. Researchers have found that the
20-80 Rule cumulative CPI doesn’t change by more than 10% when 20% of a project is
done.
50-50 Rule of 50% credit of the PV is charged to the activity’s account; when the task
Progress completes, the remaining 50% is charged to the account. Assumes all
Reporting tasks generally are of the same size.
0-100 Rule of 0% credit is taken when activity starts and 100% of the PV is credited when
Progress activity completes. Used for activities that are started and completed within
Reporting 1 accounting period.
100-0 Rule of 100% credit is assumed when the activity starts. Used for activities that are
Progress generally small and do not take much time to complete.
Reporting
Milestone A percentage (%) of the value is assumed when a definitive milestone is
Rule of reached.
Progress
Reporting

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Project Cost Management 7-27

Sample Problems

Earned Value Analysis

Given the following problem:

Work Unit Completion Date Budget Work Performed Actual Cost

(in $M) (in $M) (in $M)
A Jan. 31 10 10 12
B Feb. 28 5 4 5
C Mar. 31 6 8 8
D May 12 15 13 12
E June 30 20 20 30
F July 18 3 0 0
G Aug. 30 35 0 0
H Sept. 22 22 0 0
I Oct. 29 12 0 0
J Nov. 30 9 0 0

Today is June 30th.

1. What is the Cost Variance?

2. What is the Schedule Variance?
3. What is the CPI?
4. What is the SPI?
5. What is the EAC?
6. What is the ETC?
7. What is the Percent Complete?
8. What is the Percent Spent?
9. What is the TCPI?
10. What can be said about this project?

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Project Cost Management 7-28

Present Value and Net Present Value

1. What is the present value of $1000 at 12% at the end of 5 years?

2. What is the present value of an annual income flow of $1600 at 10% over the next 3
years?

3. Management is considering buying a machine for $10,000 which is expected to save

$4,000 per year over the next 3 years. If the desired rate of return is 15% per annum,
should the machine be bought? The following table to simplify the calculations may
be used.

Year 1/(1+0.15)**t
1 0.870
2 0.756
3 0.658

4. For problem in Question 3 above make the assumption that the company didn’t
have to pay for the machine until the third year. Compute the net present value and
determine if the company should buy the machine.

5. Given the following:

Years Revenue PV(R) Cost PV(C)

0 0 50,000
1 3,000 35,000
2 13,500 15,000
3 30,000 5,000
4 40,000 5,000
5 50,000 5,000
6 50,000 10,000
7 50,000 15,000

5.1 Calculate the present value of both revenue and cost assuming a 10% interest rate.
5.2 Calculate the benefit-cost ratio.
5.3 Based on the BCR and profitability alone, would you do this project?

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Project Cost Management 7-29

Sample Problem Answers

Earned Value Analysis

Given the following problem:
Work Unit Completion Date Budget Work Performed Actual Cost
(in $M) (in $M) (in $M)
A Jan. 31 10 10 12
B Feb. 28 5 4 5
C Mar. 31 6 8 8
D May 12 15 13 12
E June 30 20 20 30
F July 18 3 0 0
G Aug. 30 35 0 0
H Sept. 22 22 0 0
I Oct. 29 12 0 0
J Nov. 30 9 0 0

Today is June 30th.

BAC = Sum of the Budgets for all of the work units = $137

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Project Cost Management 7-30

1. What is the Cost Variance?

CV  EV  AC  $55  $67  $12

2. What is the Schedule Variance?

SV  EV  PV  $55  $56  $1

3. What is the CPI?

EV $55
CPI    0.82
AC $67

4. What is the SPI?

EV $55
SPI    0.98
PV $56

5. What is the EAC?

BAC $137
EAC    $167
CPI 0.82

What is the ETC?

ETC  EAC  AC  $167  $67  $100

7. What is the Percent Complete?

EV $55
PC    40%
BAC $137

8. What is the Percent Spent?

AC $67
PS    49%
BAC $137

9. What is the TCPI?

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Project Cost Management 7-31

( BAC  EV ) ($137  $55)

TCPI    1.17
( BAC  AC ) ($137  $67)

10. What can be said about this project?

Project is over cost and a little behind schedule.

Present Value and Net Present Value:

1. What is the present value of $1000 at 12% at the end of 5 years?

PV(5) = $1000/(1.12)**5 = $567.44

So, if $567.44 is invested at a rate of 12%/year for 5 years, we will have $1000 at the end of
the fifth year.

2. What is the present value of an annual income flow of $1600 at 10% over the next 3
years?

Year 1/(1+.10)**t PV
1 0.909 $1600*.909 = $1454.55
2 0.826 $1600*.826 = $1322.31
3 0.751 $1600*.751 = $1202.10

PV = $1454.55 + $1322.31 + $1202.10 = $3978.96

3. Management is considering buying a machine for $10,000 which is expected to save

$4,000 over the next 3 years. If the desired rate of return is 15% per annum, should
the machine be bought? The following table may be used to simply the calculations.

Year 1/(1+0.15)**t
1 0.870
2 0.756
3 0.658

NPV = PV(1) + PV(2) + PV(3) - Sum of Investment Cost

NPV = $4000(0.87) + $4000(0.756) + $4000(0.658) - $10,000
NPV = $3480 + $3024 + $2632 - $10,000 = -$864
NPV is negative; therefore, this is not considered a good investment.

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Project Cost Management 7-32

4. for problem Question 3 above make the assumption that the company didn’t have to
pay for the machine until the third year. Compute the net present value and
determine if the company should buy the machine.

NPV = PV(1) + PV(2) + PV(3) - Sum of Investment Cost

NPV = $4000(0.87) + $4000(0.756) + $4000(0.658) - $10,000(0.658)
NPV = $3480 + $3024 + $2632 - $6,580 = $2,556
NPV is positive; therefore, this is considered a good investment.

5. Given the following:

Years Revenue PV(r) Cost PV(c)

0 0 0 50,000 50,000
1 3,000 2,727 35,000 31,818
2 13,500 11,157 15,000 12,397
3 30,000 22,539 5,000 3,757
4 40,000 27,321 5,000 3,415
5 50,000 31,046 5,000 3,105
6 50,000 28,224 10,000 5,644
7 50,000 25,658 15,000 7,697
148,672 117,833

5.1 Calculate the present value of both revenue and cost assuming a 10% interest rate.

5.2 Calculate the benefit-cost ratio.

PV (r ) 148,672
BCR    1.26
PV (c) 117,833

5.3 Based on the BCR and profitability alone, would you do this project?

Depends on who you ask. Should be 1.3 x cost before considering.

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Project Cost Management 7-33

Depreciation

Given $100,000 depreciated over 4 years, what would be the depreciation per year for
the straight-line, double-declining, and sum-of-the-years-digits methods?

Year SL DDB SYD

1 $25,000 $50,000 $40,000
2 $25,000 $25,000 $30,000
3 $25,000 $12,500 (Note) $20,000
4 $25,000 $6,250 (Note) $10,000

SL: Same amount depreciated each year / period.

Accelerated

DDB: The depreciation rate is 2*(1/n) where n is the life of the asset. This gives a depreciation
rate of 2*(1/4) = 0.5. Thus the asset depreciates 50% during the first year. Apply the same rate
every year to the remaining balance. Thus, in year two the depreciation is 0.5*$50,000 =
$25,000, etc.
Note: Once the value of depreciation under the double-declining balance method becomes
lower than the value of depreciation under the straight-line method, the double-declining
method is abandoned and the straight line is used. In this example, the depreciation under the
DDB column becomes $25,000 in year 3 and $0 in year 4.

SYD: No. of years left / Sum of the years.

Year 1: 4/10 or 40%

Year 2: 3/10 or 30%
Year 3: 2/10 or 20%
Year 4: 1/10 or 10%

Sum of the Years is arrived at in this example by adding the years, for 4 years you add 4 + 3 +
2 + 1 to get the 10. You then take for the first year 4/10, the second year 3/10, the third year
2/10, and the fourth year 1/10. If this was being depreciated over 5 years, you would add 5 + 4
+ 3 + 2 + 1 and get 15. You would then take for the first year 5/15, the second year 4/15, the
third year 3/15, the fourth year 2/15, and the fifth year 1/15.

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Project Cost Management 7-34

Sample Questions

1. Which of the following are all considered processes of Project Cost Management?

A. Resource Leveling, Resource Planning, Estimate Costs, Determine Budget, Control Costs
B. Resource Planning, Schedule Development, Estimate Costs, Control Costs
C. Resource Planning, Estimate Costs, Schedule Control, Determine Budget
D. Estimate Costs, Determine Budget, Control Costs, Plan Cost Management

2. Which of the following can be inputs to a Cost Management Plan?

A. Project Scope
B. Project Schedule
C. Project Charter
D. All of the above

3. The inputs to Determine Budget includes all of the following except:

A. Activity cost estimates

B. Cost baseline
C. WBS
D. Project schedule

4. During the six month update on a 1 year, $50,000 project, the analysis shows that
the PV is $25,000; the EV is $20,000 and the AC is $15,000. What can be determined
from these figures?

A. The project is behind schedule and over cost.

B. The project is ahead of schedule and under cost.
C. The project is ahead of schedule and over cost.
D. The project is behind schedule and under cost.

5. Earned value is:

A. Actual cost of work performed.

B. Budgeted cost of work scheduled.
C. Budgeted cost of work performed.
D. Budget at completion.

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Project Cost Management 7-35

6. Which of the following Cost Management processes are concerned with cost
performance baseline?

A. Plan Budget Management

B. Determine Budget
C. Control Costs
D. B and C

7. Control costs are concerned with:

A. Allocating the overall estimates to individual work packages in order to establish a cost
baseline.
B. Influencing the factors which create changes to the cost baseline.
C. Managing changes to the cost baseline
D. B and C

8. Which of the following statements concerning bottom-up estimating is true?

A. The cost and accuracy of bottom-up estimating is driven by the size of the individual
activity or work package.
B. This technique can produce higher levels of accuracy depending upon the underlying data
built into the model.
C. This technique is less costly and time consuming than other techniques.
D. This technique is not used in cost estimation activities

9. Percent complete is calculated by:

A. AC / BAC
B. EV - AC
C. EV / BAC
D. EAC / BAC

10. Expert Judgment is a tool and technique for:

A. Estimating Costs
B. Determining Pricing
C. Controlling Costs
D. Monitoring Costs

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Project Cost Management 7-36

11. Analogous estimating:

A. Uses bottom-up estimating techniques.

B. Uses the actual cost from a previous, similar project.
C. Uses expert judgment
D. B and C

12. For a project with original assumptions that are no longer relevant due to a change
in conditions, Estimated at Completion is most likely determined by which
technique?

A. ETC + AC
B. AC + BAC – EV
C. AC + (BAC - EV) / CPI
D. ETC + EV

13. Parametric cost estimating involves:

A. Calculating individual cost estimates for each work package.

B. Using rates and factors based on historical experience to estimate cost.
C. Using the actual cost of a similar project to estimate total project cost.
D. Is not used in cost planning

14. A cost management plan is:

A. A plan for describing how cost variances will be managed.

B. A subsidiary element of the project charter.
C. An input to the Schedule Estimating process.
D. A budgeting tool and technique

15. Estimate Costs:

A. Involves developing an estimate of the cost of the resources needed to complete project
activities.
B. Does not include identifying and considering various costing alternatives.
C. Involves allocating the overall estimates to individual work items.
D. Produces a cost management plan

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Project Cost Management 7-37

16. Which of the following is not established by the cost management plan?

A. Control thresholds
B. Units of measure
C. Organizational procedures links
D. Assumptions

Input for Questions: 17 – 20

Task PV AC EV
1 9,500 10,000 9,500
2 15,000 13,000 11,000
3 13,000 13,000 13,000
4 8,000 8,000 9,000

17. Which task is MOST over budget?

A. Task 1
B. Task 2
C. Task 3
D. Task 4

18. Which task is ahead of schedule and under cost?

A. Task 1
B. Task 2
C. Task 3
D. Task 4

19. Which task is on schedule with a cost variance of $0?

A. Task 1
B. Task 2
C. Task 3
D. Task 4

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Project Cost Management 7-38

20. Which task has the greatest schedule variance?

A. Task 1
B. Task 2
C. Task 3
D. Task 4

21. A Reserve is GENERALLY intended to be used for:

A. Rework activities.
B. Compensate for inaccurate project cost estimates.
C. Reducing the risk of missing the cost or schedule objectives.
D. Compensate for inaccurate project schedule estimates.

22. Which of the following statements is true about the code of accounts?

A. It is a numbering system used to monitor project cost by category.

B. It is based on the accounts of the performing organization.
C. It is a numbering system used to uniquely identify each element in the WBS.
D. It is synonymous with chart of accounts.

23. Present Value measures:

A. The value today of future cash flows.

B. The rate of return on an investment.
C. The current estimate of our project budget.
D. The value of work completed.

24. If the schedule variance is negative, then:

A. We have shortened the critical path.

B. We are running the project in "fast track" mode.
C. The cost has increased for critical path elements.
D. We need more information to determine the cause of the variance.

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Project Cost Management 7-39

25. You have calculated both the cost variance and schedule variance on your project
and have found that they are exactly the same; -$200. This indicates that:

A. The value of the work completed is equal to the value of the work scheduled.
B. The actual cost of work completed is $200 less than the value of the work scheduled.
C. The value of the work scheduled is equal to the actual cost of the work completed.
D. The value of the work scheduled is equal to the value of the work completed.

26. Which of the following is NOT a key input to Determine Budget?

A. Activity cost estimates

B. Project schedule
C. WBS
D. Project funding requirements

27. Which of the following is NOT an output of Control Costs:

A. Change requests
B. Cost variance
C. Project funding requirements
D. Budget forecast

28. When using Earned Value Management, the difference between what has been
accomplished and what was scheduled is called the:

A. Cost Variance
B. Schedule Variance
C. Projected Variance at completion
D. Labor Variance

29. Which of the following is used to determine how efficient the project team must be
to complete the remaining work within the remaining money?

A. Schedule Performance Index (SPI)

B. Percent Complete (PC)
C. To-Complete Performance Index (TCPI)
D. Cost Performance Index (CPI)

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Project Cost Management 7-40

30. The formula for Beta distribution is:

A. cE = (cO + cM + cP) / 3
B. cE = (cO + 4* cM + cP)/ 3
C. cE = (cO + 4cM + cP) / 6
D. cE = (cO + 4cM + cP) / 3

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Project Cost Management 7-41

Answer Sheet

1. A B C D 16. A B C D

2. A B C D 17. A B C D

3. A B C D 18. A B C D

4. A B C D 19. A B C D

5. A B C D 20. A B C D

6. A B C D 21. A B C D

7. A B C D 22. A B C D

8. A B C D 23. A B C D

9. A B C D 24. A B C D

10. A B C D 25. A B C D

11. A B C D 26. A B C D

12. A B C D 27. A B C D

13. A B C D 28. A B C D

14. A B C D 29. A B C D

15. A B C D 30. A B C D

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Project Cost Management 7-42

Answers

1 D PMBOK, 6th Edition, Chapter 7 p. 232

2 D PMBOK, 6th Edition, Section 7.1.1, pp. 236-237

3 B PMBOK, 6th Edition, Section 7.3.1, pp. 209 -211

4 D Can verify through CV and SV or CPI and SPI.

5 C PMBOK, 6th Edition, Section 7.4.2.2, pp. 261

6 D PMBOK, 6th Edition, Sections 7.1, 7.2 and 7.4, pp. 235-270

7 D PMBOK, 6th Edition, Section 7.4, pp. 257-259

8 A PMBOK, 6th Edition, Section 7.2.2.4, p. 244

9 C (Option A is percent spent), This Study Guide, pg. 7-29, example 7

10 A PMBOK, 6th Edition, Section 7.2.2.1, p. 243

11 D PMBOK, 6th Edition, Section 7.2.2.2, pp. 244

12 A PMBOK, 6th Edition, Section 7.4.2.3, Table 7.1 p. 267

13 B PMBOK, 6th Edition, Section 7.2.2.3, p. 244

14 A PMBOK, 6th Edition, Section 7.1.3.1, p. 238

15 A PMBOK, 6th Edition, Section 7.2, p. 240

16 D PMBOK, 6th Edition, Section 7.1.3.1 p. 238-239

17 B Check the cost variance. CV = EV – AC: A negative number means over budget.

18 D Check the schedule and the cost variance. CV = EV - AC; SV = EV - PV

19 C Check cost and schedule variances.

20 B Check the schedule variances.

21 C PMBOK, 6th Edition, glossary, p. 719, section 7.2.2.6, p. 245 and section 7.3.2.2, p.
252, section 7.3.3.1 p 254

22 C PMBOK, 6th Edition, glossary, p. 701

23 A Definition of Present Value, This Study Guide pg. 7-20

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Project Cost Management 7-43

24 D Schedule variance = EV - PV. If the variance is negative then PV > EV. This just tells
us that the project is behind schedule, but not the reason for the delay.

25 C SV = EV - PV and CV = EV – AC
If SV = CV, then PV = AC since EV is the common variable in both equations.

26 D PMBOK, 6th Edition, Section 73.1, pp. 250-251

27 C PMBOK, 6th Edition, Section 7.4.3 pp. 268-270

28 B PMBOK, 6th Edition, Section 7.4.2.2, p. 262 and table 7.1 p. 267

29 C PMBOK, 6th Edition, Section 7.4.2.3 pp. 266-268 and glossary, p. 724

30 C PMBOK, 6th Edition, Section 7.2.2.5 p. 244 - 245

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Project Cost Management 7-44

PMP Certification Exam Preparation – What did I do wrong?

I would have answered a larger number of questions Number

correctly if I had ___________.

1. Read the question properly and identified the keywords

2. Read the answer properly and identified the keywords

3. Read ALL the answers before answering the question

4. Used a strategy of elimination

5. Known the formula

6. Known the PMBOK® definition

7. Checked the mathematics

8 Used the PMI® rather than my own perspective

9. Reviewed my answer after reading the other questions

10. NOT rushed to finish

Total

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