What is 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. The Project
Cost Management processes are:
7.1 Plan Cost Management: The process of defining how the project costs will
be estimated, budgeted, managed, monitored, and controlled.
7.2 Estimate Costs: The process of developing an approximation of the
monetary resources needed to complete project work.
7.3 Determine Budget: The process of aggregating the estimated costs of
individual activities or work packages to establish an authorized cost baseline.
7.4 Control Costs: The process of monitoring the status of the project to
update the project costs and manage changes to the cost baseline.
Overview Of
Project Cost
Management
Processes
 Key Concepts For 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, 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.
 Trends and Emerging Practices In
Project Cost Management
• Within the practice of Project Cost Management, trends include the expansion of
earned value management (EVM) to include the concept of earned schedule (ES).
• ES is an extension to the theory and practice of EVM. Earned schedule theory
replaces the schedule variance measures used in traditional EVM (earned value −
planned value) with ES and actual time (AT).
• Using the alternate equation for calculating schedule variance ES − AT, if the
amount of earned schedule is greater than 0, then the project is considered ahead
of schedule. In other words, the project earned more than planned at a given point
in time.
• The schedule performance index (SPI) using earned schedule metrics is ES/AT.
• This indicates the efficiency with which work is being accomplished. Earned
schedule theory also provides formulas for forecasting the project completion date,
using the earned schedule, actual time, and the estimated duration
 Tailoring Considerations
Because each project is unique, the project manager may need to tailor the way Project
Cost Management processes are applied. Considerations for tailoring include but are
not limited to:
• Knowledge Management: Does the organization have 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 earn value management 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?
 CONSIDERATIONS FOR
AGILE/ADAPTIVE ENVIRONMENTS
• The 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.
• Instead, 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.
• 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.
7.1 PLAN COST
MANAGEMENT
Plan Cost Management is the
process of defining how the project
costs will be estimated, budgeted,
managed, monitored, and
controlled. The key benefit of this
process is that it provides guidance
and direction on how the project
costs will be managed throughout
the project. This process is
performed once or at predefined
points in the project
 Inputs
1 The project charter contains the approved initial budget for the project
7.1 Plan Cost Management - Inputs

Project Charter at the time of project initiation. It also contains known constraints,
assumptions, and risks that may affect project costs and their
management.

2 Project management plan components include but are not limited to:
Project
Management 1. Scope Management Plan
Plan
2. Risk Management Plan
 Inputs
3 Organizational culture and structure, any external market conditions that
7.1 Plan Cost Management - Inputs

may affect project costs, and any published commercially available cost
Enterprise
information that you may use to develop and check your cost estimates.
Environmental
Factors

4
Organizational process assets that may play an important part in the
Organizational development of your cost management plan include any historical
Process Assets information, and any established financial control procedures, policies,
and templates for defining and controlling project costs and budget.
 Tools & Techniques
1 As project manager, you are considered to be an expert, your
7.1 Plan Cost Management – T & T

project team members are experts, and any other person with
Expert Judgment
specialist knowledge you choose to consult is also an expert.

2 Alternatives analysis can include reviewing strategic funding options such

Data as: self-funding, funding with equity, or funding with debt. It can also
Analysis include consideration of ways to acquire project resources such as
making, purchasing, renting, or leasing.

3 Detailed Earlier.
Meetings
 Outputs
7.1 Plan Cost Management - Outputs

1 A component of a project or program management plan that describes how

costs will be planned, structured, and controlled.
Cost
Management
The purpose of the cost management plan is to provide guidance to the project
Plan
manager and the project team on how the organization expects costs to be
estimated, budgets to be determined, cost performance to be assessed,
and any potential changes assessed, documented, and reported upon.

It can include:
1. Units of measure
2. Level of precision
3. Level of accuracy
4. Control thresholds
5. Rules of performance measurement
6. Reporting formats
7.2 Estimate Costs

7.2.1 Estimate Costs: Inputs

7.2.2 Estimate Costs: Tools and Techniques
7.2.3 Estimate Costs: Outputs
 7.2 Estimate Costs: The process of developing an
approximation of the monetary resources
needed to complete project work.

© 3FOLD Education Centre . All rights reserved . online@3foldtraining.com . www.3foldtraining.com . CAPM® Exam Review Slide # 13
Estimating Life Cycle Stages

Prepare to Estimate →This stage of the life cycle is the creation of the estimating
1
approach.

Create Estimates →This is the stage when estimating activity resources, activity
2
durations, and costs are performed for a project.

Manage Estimates → This stage of project estimating includes many activities

3 that are used to manage the estimate, including change controls, calibrating
the forecast, and comparing actuals to the baseline estimate.

Improve Estimating Process → As projects progress, lessons learned are

4 applied to the estimating life cycle, including calibrating the models based on
actual values and maintaining checklists of components to include in future
estimates.
5 Important Things To Know About Estimation

1 All project estimates involve assumptions, uncertainty, and risk perceptions.

The confidence level of estimates is directly related to the activity definition and
2
available information.
Project estimates should be refined as information becomes available, making
3 project estimating an iterative and evolving process, aligned with the concepts
of progressive elaboration.
Project managers should help customers and stakeholders to understand the
4
concepts of evolving estimates and the associated risks, assumptions, and ranges.

The estimator should ensure that economic changes, such as inflation, are
5
properly and realistically reflected in the life cycle estimate.
7.2 Estimate Costs
 Inputs
1 Project management plan components include but are not limited to:
Project 1. Cost Management Plan
7.2 Estimate Costs - Inputs

Management 2. Quality Management Plan

Plan
3. Scope Baseline
2
Project Key project documents: Lessons learned register, Project
Documents
schedule, Resources requirements, and Risk register

3&4 Detailed Earlier

EEFs and OPAs

 Tools & Techniques
In addition to project team members with expert judgment on the work
1
Expert Judgment to be done, you may also choose to consult external experts, such as
7.2 Estimate Costs – T & T

those involved in the quantity surveying profession, who can provide

expert advice on the expected costs of materials and resources to be
used.
 Tools & Techniques
2 Analogous techniques, also known as top-down estimating, are used when very
Analogous little information is available about the project, or the new project is very similar
7.2 Estimate Costs – T & T

Estimating
to a previous project, or the estimators have great experience with what is going
to be estimated.
• This category of technique results in a total project estimate and is the
technique of choice for early estimates where detailed information is not
available.
• Analogous techniques are usually used to develop early and rough estimates
of the projects. Rough estimates are commonly known as order of
magnitude, conceptual, or preliminary estimates.
 Tools & Techniques
2
An example of an analogous technique is a facility that is in the planning stages,
7.2 Estimate Costs – T & T

Analogous
Estimating - which is identical to an existing senior care facility that was built with a final cost of
EXAMPLE
US$4.5 million. For the purposes of the initial planning, a total project cost was

determined to be between US$4 million and US$5 million.

 Tools & Techniques
3 Parametric Estimating → An estimating technique in which an algorithm
Parametric
is used to calculate cost or duration based on historical data and project
7.2 Estimate costs: T & T

Estimating
parameters.

• Parametric techniques are useful as additional information becomes

available, and the details of level one and level two of the project WBS
can be estimated.
• Parametric techniques use statistical relationships between historical
data and other variables (e.g., square meters in construction) to
calculate an estimate for an activity cost, duration, or resource.
 Tools & Techniques
3
A laborer may take 4 hours to dig a 3-ft deep ditch that is 10 ft long.
7.2 Estimate Costs – T & T

Parametric Using that same resource, it will take 8 hours to dig a 20-ft long ditch
Estimating - of the same depth.
EXAMPLE
To apply that to cost estimates, if the labor rate for that resource is
US$30 per hour, the labor cost for the 20-ft ditch is US$240.00.
 Tools & Techniques
Bottom-Up Estimating → A method of estimating project duration or cost by
4 aggregating the estimates of the lower-level components of the work
breakdown structure (WBS).
7.2 Estimate Costs – T & T

Bottom-up
Estimating
• Bottom-up estimating is generally considered to be quite an accurate form
of estimating, because what you are doing is taking cost estimates from
lower-level information—for example, the bottom level of the WBS—and
then adding up, or rolling up, to higher levels and aggregating those costs to
report a total cost.
• Using the list of resources, the estimator assigns the needed resources to
each work package. For each resource, the estimator provides the optimum
crew size for a particular function and the amount of time required by the
optimum crew to craft that specific work package (intensity).
 Tools & Techniques
4 A work package requires 3 programmers for 5 days, and 7 electrical
Bottom-up engineers for 1 day. Programmers cost USD 200 per day and electrical
7.2 Estimate Costs – T & T

Estimating - engineers cost USD 150 per day. Material cost is USD 75 per unit with a
EXAMPLE total of 20 units to be installed.

Resource Cost Duration Total Cost

3 Programmers 200 USD / Day 5 Days USD 3000

7 Electrical 150 USD / Day 1 Day USD 1050
Engineer
20 Units of 75 USD / Unit USD 1500
Material
Total USD 5550
 Tools & Techniques
5
Three-point A technique used to estimate cost or duration by applying an average or
7.2 Estimate Costs – T & T

Estimating weighted average of optimistic, pessimistic, and most likely estimates

when there is uncertainty with the individual activity estimates.

• Most likely (cM): The cost of the activity, based on realistic effort
assessment for the required work and any predicted expenses.
• Optimistic (cO): The cost based on analysis of the best-case scenario
for the activity.
• Pessimistic (cP): The cost based on analysis of the worst-case
scenario for the activity.
• Depending on the assumed distribution of values within the range of the
three estimates, the expected cost, cE, can be calculated using a formula.
Two commonly used formulas are triangular and beta distributions. The
formulas are:
• Triangular Distribution → cE = (cO + cM + cP) / 3
• Beta Distribution → cE = (cO + 4cM + cP) / 6
Cost estimates based on three points with an assumed distribution provide
an expected cost and clarify the range of uncertainty around the expected
cost.
 Tools & Techniques
5 A project manager offers a most likely estimate of US$50,000 for
Three-point developing a new speed control radar device. To put the estimate in
Estimating - perspective, the project manager will highlight that, depending upon the
EXAMPLE materialization of identified project risks, the final cost could be
anywhere between US$36,000 and US$71,000.
Distributio Formula Calculation Total Cost
n
Triangular cE = (cO + cM + cP) / 3 (36000+50000+71000)/3 US$52,333

Beta cE = (cO + 4cM + cP) / 6 (36000+(50000x4)+71000)/6 US$51,167

One Standard Deviation = (cP – cO)/6 = (71000-36000)/6 = US$5833

EXAM TIP: Unless otherwise stated, always use Beta distribution.

 Tools & Techniques
6
1. Alternative Analysis → Alternatives analysis is a technique used to evaluate
Data Analysis
7.2 Estimate Costs – T & T

identified options in order to select which options or approaches to use to

execute and perform the work of the project. An example would be evaluating
the cost, schedule, resource, and quality impacts of buying versus making a
deliverable.
2. Cost of Quality (CoQ) → All costs incurred over the life of the product by
investment in preventing nonconformance to requirements, appraisal of the
product or service for conformance to requirements, and failure to meet
requirements. (more about this in next chapter)
 Tools & Techniques
6 Contingency reserves are the budget within the cost baseline that is allocated for
Data Analysis identified risks.
7.2 Estimate Costs – T & T

(Reserve
Analysis) • Contingency reserves are often viewed as the part of the budget intended to
address the known-unknowns that can affect a project. For example, rework
for some project deliverables could be anticipated, while the amount of this
rework is unknown. Contingency reserves may be estimated to account for
this unknown amount of rework.
• Contingency reserves can be provided at any level from the specific activity to
the entire project. The contingency reserve may be a percentage of the
estimated cost, a fixed number, or may be developed by using quantitative
analysis methods.
 Tools & Techniques
Project management software should be considered essential for any
7
PMIS large and complex projects because trying to collect and aggregate many
7.2 Estimate Costs – T & T

cost estimates manually is simply not possible.

8
Cost of Quality Assumptions about costs of quality may be used to prepare the estimates.
This includes evaluating the cost impact of additional investment in
conformance (standardization) versus the cost of nonconformance. It can
also include looking at short-term cost reductions versus the implication
of more frequent problems later on in the product life cycle
 Outputs
1 Cost estimates include quantitative assessments of the probable costs required to
7.2 Estimate Costs – Outputs

Cost complete project work, as well as contingency amounts to account for identified risks,
Estimates
and management reserve to cover unplanned work.
• Cost estimates can be presented in summary form or in detail.
• Costs are estimated for all resources that are applied to the cost estimate.
• 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 The amount and type of supporting details for the estimate vary by application
Basis of Estimate
7.2 Estimate Costs – Outputs

area. Whatever the level of detail, the supporting documentation provides a clear
and complete understanding of how the estimate was derived.
This can include assumptions made, factors or units used, or comparative
information. Identification of risks should also be included.

3 Project documents that may be updated as a result of carrying out this process
Project
Document include but are not limited to:
Updates
1. Assumption log
2. Lessons learned register
3. Risk register