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PMP® Certification Training

Lesson 09: Project Cost Management

This course is based on the Project Management Institute, A Guide to the Project
Management Body of Knowledge (PMBOK® Guide)—Sixth Edition.
PMP, PMI, and PMBOK are registered marks of the Project Management Institute, Inc.
 Objectives

Define Project Cost Management

Differentiate between cost estimation and cost budgeting

Explain control accounts

Describe the Project Cost Management processes

Apply earned value management technique to track project

performance

Identify key terminologies used in Project Cost Management

 Project Cost Management

The definition of *Project Cost Management is as follows:

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

*Definition taken from the Glossary of the Project Management Institute, A Guide to the Project Management Body of Knowledge, (PMBOK® Guide) – Sixth Edition, Project Management
Institute, Inc., 2017, Page 231
 Cost Management Plan

• The Cost Management Plan is concerned with the costs of the resources
needed to complete project activities.
• It provides details on how to plan, manage, and control the project cost in
relation to the cost baseline and manage the cost variances.
• The project cost management plan is a subsidiary of the project
management plan.
• The techniques involved in estimating the cost of each project activity is
similar to the ones used in estimating project time.
• Expert judgment, analogous estimating, bottom-up estimating, and reserve
analysis are some of the techniques used in cost management.
 Key Concepts

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

• Another aspect involves recognizing that different stakeholders measure project

costs in different ways and at different times.

Project Management Institute, A Guide to the Project Management Body of Knowledge, (PMBOK® Guide) – Sixth Edition, Project Management Institute, Inc., 2017, Page 233
 Trends and Emerging Practices in Project Cost Management

• Within the practice of project cost management, trends include

expansion of earned value management (EVM) to include the concept of
earned schedule (ES).
• ES theory replaces the schedule variance measures used in traditional
EVM (Earned value - Planned value) with ES and Actual Time (AT).
• Schedule Variance (SV) is ES-AT.
• Schedule performance index (SPI) using earned schedule metrics is
ES/AT.

Project Management Institute, A Guide to the Project Management Body of Knowledge, (PMBOK® Guide) – Sixth Edition, Project Management Institute, Inc., 2017, Page 233
 Tailoring Considerations
Knowledge Management
Does the organization have a formal knowledge management and financial database repository that a
project manager is required to use and that is readily accessible?

Estimating and Budgeting

Does the organization have existing formal or informal cost estimating and budgeting-related policies,
procedures, and guidelines?

Earned Value Management

Does the organization use EVM in managing projects?

Use of Agile Approach

Does the organization use agile methodologies in managing projects? How does this impact cost
estimating?

Governance

Does the organization have formal or informal audit and governance policies, procedures, and guidelines?

Project Management Institute, A Guide to the Project Management Body of Knowledge, (PMBOK® Guide) – Sixth Edition, Project Management Institute, Inc., 2017, Page 234
 Considerations for Agile/Adaptive Environments

• Projects with high degrees of uncertainty or those where the scope is not
yet fully defined 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.
• In cases where high-variability projects are also subject to strict budgets,
the scope and schedule are more often adjusted to stay within cost
constraints.

Project Management Institute, A Guide to the Project Management Body of Knowledge, (PMBOK® Guide) – Sixth Edition, Project Management Institute, Inc., 2017, Page 234
 Control Account
In larger projects, costs are managed at a higher level rather than at an individual activity level. Under
control account technique, related activities are grouped and their costs are managed as one unit.

Another Deliverable in
Deliverable in WBS
WBS

The scope of a project is decomposed

through a Work Breakdown Structure Control Account

(WBS). The lowest level deliverable in the

Work Work Work
WBS is called a work package.
Package Package Package

Activity Activity Activity

 Project Cost Management Processes
Knowledge Areas Project Integration Project Scope Project Schedule Project Cost Project Quality Project Resource Project Project Risk Project Project
Management Management Management Management Management Management Communications Management Procurement Stakeholder
Management Management Management

Initiating 4.1 Develop Project Charter 13.1 Identify

Stakeholders

Planning 4.2 Develop Project 5.1 Plan Scope 6.1 Plan Schedule 7.1 Plan Cost 8.1 Plan Quality 9.1 Plan Resource 10.1 Plan 11.1 Plan Risk 12.1 Plan 13.2 Plan
Management Plan 5.2 Collect Management Management Management Management Communications Management Procurement Stakeholder
Requirements 6.2 Define Activities 7.2 Estimate Costs 9.2 Estimate Management 11.2 Identify Risks Management Engagement
5.3 Define Scope 6.3 Sequence 7.3 Determine Activity Resources 11.3 Perform
5.4 Create WBS Activities Budget Qualitative Risk
6.4 Estimate Analysis
Activity Durations 11.4 Perform
6.5 Develop Quantitative Risk
Schedule Analysis
11.5 Plan Risk
Response
Proj
ect
Man
age Executing 4.3 Direct and Manage 8.2 Manage Quality 9.3 Acquire 10.2 Manage 11.6 Implement 12.2 Conduct 13.3 Manage
men Project Work Resources Communications Risk Response Procurements Stakeholder
t 4.4 Manage Project 9.4 Develop Team Engagement
Proc Knowledge 9.5 Manage Team
ess
Grou
ps

Monitoring and 4.5 Monitor and Control 5.5 Validate Scope 6.6 Control 7.4 Control Costs 8.3 Control Quality 9.6 Control 10.3 Monitor 11.7 Monitor Risks 12.3 Control 13.4 Monitor
Controlling Project Work 5.6 Control Scope Schedulel Resource Communications Procurements Stakeholder
4.6 Perform Integrated Engagements
Change Control

Closing 4.7 Close Poject or Phase

Project Management Institute, A Guide to the Project Management Body of Knowledge, (PMBOK® Guide) – Sixth Edition, Project Management Institute, Inc., 2017, Page 25
 Plan Cost Management

“Plan Cost Management is the process of defining how the project costs will be estimated,
budgeted, managed, monitored, and controlled.” It is part of the Planning Process Group.

PROJECT COST
MANAGEMENT
Project Charter

Project Management
Plan
Plan Cost Management Cost management
Enterprise plan
environmental factors
Organizational
Legend
process assets Input
Expert judgment Data Analysis Meetings Output
Tools & Techniques
Planning Process
Figure 7-2. Plan Cost Management: Inputs, Tools & Techniques, and Outputs

Project Management Institute, A Guide to the Project Management Body of Knowledge, (PMBOK® Guide) – Sixth Edition, Project Management Institute, Inc., 2017, Page 235
 Estimate Costs
“Estimate Costs is the process of developing an approximation of the cost of resources needed to
complete project work.” It belongs to the Planning Process Group.

Project Management
PROJECT COST MANAGEMENT
Plan
Cost estimates
Project Documents
Estimate Cost Basis of estimates
Enterprise environmental
factors
Project document
Organizational Parametric Three-point updates
Expert judgment
process assets estimating estimating

Legend
Analogous Project management Input
estimating information system Output
Tools & Techniques
Planning Process
Bottom-up Decision
Data analysis
estimating Making

Figure 7-4. Estimate Costs: Inputs, Tools & Techniques, and Outputs

Project Management Institute, A Guide to the Project Management Body of Knowledge, (PMBOK® Guide) – Sixth Edition, Project Management Institute, Inc., 2017, Page 240
 Determine Budget
“Determine Budget is the process of aggregating the estimated costs of individual activities or work
packages to establish an authorized cost baseline.” It is part of the Planning Process Group.
The cost baseline includes all authorized budgets but excludes management reserves.

Project Management Plan

PROJECT COST MANAGEMENT
Project Documents Cost baseline

Business Documents
Determine Budget Project funding
Agreements requirements
Enterprise Environmental
Factors Project document
Organizational process Expert Judgment Cost Aggregation Data Analysis updates
assets
Legend
Historical Funding Limit Input
Financing
Information Review reconciliation Output
Figure 7-6. Determine Budget: Inputs, Tools & Techniques, and Outputs Tools & Techniques
Planning Process

An understanding of how to determine a project budget is important for the PMP exam.
Project Management Institute, A Guide to the Project Management Body of Knowledge, (PMBOK® Guide) – Sixth Edition, Project Management Institute, Inc., 2017, Page 248
 Control Costs

“Control Costs is the process of monitoring the status of the project to update the project costs and
managing changes to the cost baseline.” It belongs to the Monitoring and Controlling Process Group.

Project management plan

Work performance
PROJECT COST MANAGEMENT information
Project Documents
Cost forecasts
Project Funding
Requirements Change requests
Control Costs
Work Performance Data Project document
updates
Organizational Process To-Complete
Assets Expert judgment Data analysis Performance Index Project management
(TCPI) plan updates
Legend Project management
Input information system
Output
Tools & Techniques Figure 7-10. Control Costs: Inputs, Tools & Techniques, and Outputs

Planning Process

Business scenario based questions on project cost control can be expected in the exam.
Project Management Institute, A Guide to the Project Management Body of Knowledge, (PMBOK® Guide) – Sixth Edition, Project Management Institute, Inc., 2017, Page 257
 Difference Between Planned Value and Earned Value

• Earned value is the total of budget allocated to each of the activities

that have been completed at that point of time.

• We can compare the earned value (budget allocated for a specific

period of time) to the planned value (the total of all work planned) to
determine if the project is on track.

• If the planned value of a project is $340, then the total of all the work packages planned for
the project is $340.
 Earned Value Management
Earned Value Management (EVM) is a method to measure project performance against the project
baselines. It results from an earned value analysis and indicates potential deviation of the project from
the cost and/or schedule baselines.

The various terms used in earned value are as follows:

Acronym Term Explanation

PV Planned Value Authorized budget assigned to scheduled work

EV Earned Value Work performed in terms of budget authorized for that work

AC Actual Cost Actual cost incurred in work performed

BAC Budget at Completion Budgeted amount for the total work

EAC Estimate at Completion Expected total cost for the project

ETC Estimate to Complete Expected cost to finish all the remaining project work

VAC Variance at Completion Projected budget surplus or deficit at the end of the project

Questions based on earned value management can be expected in the exam.

 Earned Value Formulae
The following table gives the formulae used in EVM and their interpretations:
Term Formula Interpretation

Cost Variance (CV) EV – AC Negative is over budget; positive is under budget

Schedule Variance (SV) EV – PV Negative is behind schedule; positive is ahead of schedule

Cost Performance Index (CPI) EV / AC Worth of work got out of every $1 spent

Schedule Performance Index (SPI) EV / PV Percentage progress made against the planned rate

BAC / CPI
Work performed at current CPI
AC + (BAC – EV)
Rest of the project at budgeted rate
Estimate at Completion (EAC) AC + [(BAC – EV)/(CPI
Factoring in both CPI and SPI
* SPI)]
Reevaluated based on forecast value for ETC
AC + ETC
Amount that the project would cost from the current date
Estimate to complete (ETC) EAC – AC
to the end of the project
Amount the project would exceed or fall short of the
Variance at Completion BAC – EAC planned budget by the end of the project (over budget or
under budget)
To-Complete Performance Index (BAC – EV)/(BAC – AC) For managing to budget
(TCPI) (BAC – EV)/(EAC – AC) For managing to a specified value (EAC)
 Business Scenario: Problem Statement

• Cynthia is a subject matter expert and Director of the Store Renovation Department.
Because of her expertise and experience in managing store remodels for the corporation,
she and her team are the ‘go to’ people for many project managers.
• Donnell is the Project Manager for one of the stores in the southeast region. Because of the
age of the store, it has been classified as a Tier 1 Remodel, meaning it requires more work
and a higher budget allocation.
• Donnell has a budget of $850K to complete the entire schedule that has been defined for
the project.
• At the 30% mark of work completed on the project, Donnell’s team has spent $310K.
• What does this tell Donnell about the status of his project? What should he do?
 Business Scenario: Solution
• Donnell’s project is 30% complete, and has a total budget of $850K. The earned value at
this point is $255K; however, the actual costs of the project is $310K. The Cost
Performance Index (CPI), EV/AC, is at .82. This means that the project is spending only 82
cents of every dollar productively.
• Donnell is concerned especially as the project has not yet made it to the halfway mark. His
previous Tier 1 remodels had a better CPI at this point in the project.
• The project has faced some unexpected events (unknown unknowns), which the team had
neither planned for nor anticipated based on past performance. The money allocated in
the management reserve is able to cover most of the expenses, but not all.
• After evaluating the root cause of these risk factors, Donnell is able to link the problems to
the age of the store and the fact that none of the previous stores completed in the remodel
initiative were as old.
• Donnell is asked to reassess the risk and collaborate with their structural engineer to
re-evaluate the remaining activities so he can determine a revised budget and an estimate
of what is needed to complete remaining activities based on new information.
 Earned Value Management: Example 1

A software development project has four phases. Each phase takes a month to complete and is
estimated to cost $10,000 per phase. The phases are planned to be completed one after the other.
Given the project status at the end of three months, calculate the CV, SV, CPI, and SPI.

Project Phases Month 1 Month 2 Month 3 Month 4 Status at the End of Month 3

Requirement Definition S---------F Complete, spent $10,000

Architecture & Design S-------PF ---F Complete, spent $12,000

Development & Unit Testing S----PF 50% done, spent $9,000

System Testing & Go Live Not yet started

Legend
S – Start time F – Finish time PF – Partly finished
 Earned Value Management: Example 1

Calculation of project cost related attributes are as follows:

Term Calculation Value Interpretation of the Answer

$10,000+$10,000+ By third month, $30,000 worth of work should
Planned Value (PV) $30,000
$10,000 have been completed.
$10,000+$10,000+
Earned Value (EV) $25,000 The accomplished work is worth $25,000.
$5,000
$10,000+$12,000+
Actual Cost (AC) $31,000 The amount actually spent is $31,000.
$9,000

Cost Variance (CV) $25,000-$31,000 -$6,000 The project is over budget by $6,000.

Schedule Variance (SV) $25,000-$30,000 -$5,000 The project is behind schedule.

Cost Performance Index

$25,000/$31,000 0.80 $0.80 worth is got out of every dollar spent.
(CPI)

Schedule Performance The project is progressing at 83% of the

$25,000/$30,000 0.83
Index (SPI) originally planned rate.
 Earned Value Management: Example 2

John is managing a three month project to enhance a financial system. He is working on his EVM
analysis to report to management on status of project. Calculate the following based on the
information given below:

Q1. John is comparing his actuals to the Earned Value of his project. He has finished the first
month of his project schedule, and the earned value for his project is $65,000. The actuals from
the financial system are $57,850. What is the CPI for his project?

CPI is calculated as EV/AC. CPI = $65,000/$57,850 = 1.12

 Earned Value Management: Example 2

John is managing a three month project to enhance a financial system. He is working on his EVM
analysis to report to management on status of project. Calculate the following based on the
information given below:

Q2. Based on the CPI and a Budget at Completion (BAC) of $200,000, what is the Estimate at
Completion (EAC)?

EAC is calculated as BAC/CPI. EAC = $200,000/1.12 = $178,571

 Earned Value Management: Example 2

John is managing a three month project to enhance a financial system. He is working on his EVM
analysis to report to management on status of project. Calculate the following based on the
information given below:

Q3. John’s management is interested in understanding how much more money is required for the
project to be completed. What is the Estimate To Complete (ETC)?

ETC is calculated as EAC - AC. ETC = $178,571 – $57,850 = $120,721

 Earned Value Management: Example 2

John is managing a three month project to enhance a financial system. He is working on his EVM
analysis to report to management on status of project. Calculate the following based on the
information given below:

Q4. John also needs to understand how his project is tracking against its schedule. After the first
month of work effort, his Planned Value (PV) was $60,000. What is the SPI for his project?

SPI is calculated as EV/PV. From our previous calculations, EV was $65,000.

SPI = $65,000/$60,000 = 1.08
 Earned Value Management: Example 2

John is managing a three month project to enhance a financial system. He is working on his EVM
analysis to report to management on status of project. Calculate the following based on the
information given below:

Q5. John wants to see if the positive SPI of the project will offset the CPI. He decides to rerun his
EAC calculations. How can he incorporate both CPI and SPI?

EAC can also be calculated as AC + [(BAC – EV)/(CPI * SPI)]. Based on our previous answers we can
determine: $57,850 + ($200,000 - $65,000)/(1.12 * 1.08) = $169,457.14
 Key Terms

Given below are the key terms related to the cost concept:

Law of diminishing returns

The more you put into something, the less you get out of it
For example: doubling the number of resources working on a project will not necessarily halve the time

Working Capital

The amount of money the company has to invest on the project and the day-to-day company operations

Funding limit reconciliation

The process of comparing the planned expenditure in a given period with the available funding for that
period
 Key Terms

Given below are the key terms related to the cost concept:

Depreciation
Large assets purchased by the company lose value over time. The two forms of depreciation are
straight line depreciation and accelerated depreciation.

Straight line depreciation

The same amount of depreciation is provided for every year for the asset.
For example, a car with a price tag of $10,000 and a useful life of 10 years is depreciated
by $1,000 every year.

Accelerated depreciation
The asset depreciates faster than the straight line depreciation.
For example, a car with a price tag of $10,000 depreciates $3,000 the first year, $1,500
the second year, $1,000 the third year, and so on.
 Key Takeaways
Project cost management includes the processes involved in
estimating, budgeting, and controlling costs so that the
project can be completed within the approved budget.

Cost management plan contains details on how to plan,

manage, and control the project cost in relation to the cost
baseline and manage the cost variances.

Cost estimate is an educated guess of how much an activity or

a project will cost. Budget considers the cost estimate and
accordingly sets aside funds for the completion of the project.

Under control account technique, related activities are

clubbed and their costs are managed as one unit.

The four Project Cost Management processes are Plan Cost

Management, Estimate Costs, Determine Budget, and Control
Costs.

Earned Value Management technique indicates potential

deviation of the project from the cost and/or schedule
baselines.
 Additional Reading

(Refer to the exercises provided in the PMP Classroom Exercises)

• Exercise 12

• Exercise 13