Professional Diploma in

Project Management
Unit 6

Cost Management
 In This Unit
• Understand the relationship between
Cost and Schedule Management.
• Cost estimation tools.
• Define Contingency and Management
Reserves.
• Define and graph earned value, planned
value and cost forecasting.
• Measuring cost variance, and
identifying corrective and preventative
measures.

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Planning Performance Domain
Planning organises, elaborates and coordinates the project
work throughout the project
The Planning Performance Domain addresses activities and
functions associated with the initial, ongoing and evolving
organisation and coordination necessary for delivering project
deliverables and outcomes.

Cost Management is part of the Planning Performance

Domain

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Cost Management
• Cost aggregation is rolling up costs from the work package level to the control account level so that the
numbers can be followed down through the WBS hierarchy.

• Control accounts are high-level WBS items that are used to track cost estimates. They do not represent
activities or work packages. They represent the cost of the work packages and activities that appear
under them in the WBS.

• The main outputs of Estimate Costs are the activity cost estimate and the basis of estimates. The main
outputs of Determine Budget are the cost baseline and project funding requirements.

• You will get questions on the exam asking you to select between projects using net present value (NPV)
or benefit-cost ratio (BCR). Always choose the project with the biggest NPV or BCR!

• Lifecycle costing means estimating the money it will take to support your product or service when it has
been released.

• Rough order of magnitude estimation is estimating with very little accuracy at the beginning of a
project and then refining the estimate over time. It’s got a range of –25% to +75%.

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 Schedule v. Cost Mgt
Recurring themes from last class.
1. The Inputs, Tools & Techniques and Outputs of the first process are very similar.
2. Many of the entries in the Schedule Management Plan are the same as the Cost Management
Plan.
3. Many of the Scheduling Outputs are needed as inputs for Cost Management.
4. We updated the Cost Baseline as part of the Schedule Management Processes.
5. We introduced a number of types of Data Analysis that are common to both Schedule and
Cost Mgt.
i. Earned value analysis.
ii. Performance reviews
iii. Trend analysis
iv. Variance analysis
6. Estimating techniques are the same (Analogous, Parametric, Bottom-Up, Three-Point).

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Cost Tailoring

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.
● Estimating and budgeting.
● Earned value management.
● Use of agile approach.
● Governance.

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Cost and the Process Groups
Planning
Performance PROCESS GROUPS
Domain

Monitoring &
Initiating Planning Executing
Controlling

Plan Cost
Management

Estimate
Cost Costs
Control Costs

Determine
Budget
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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.

The cost management planning effort occurs early in project planning and sets the
framework for each of the cost management processes so that performance of the
processes will be efficient and coordinated.

The cost management processes and their associated tools and techniques are
documented in the cost management plan.

The cost management plan is a component of the project management plan.

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Plan Cost Management

Inputs T&Ts Outputs

- Project Charter
- Project - Expert - Cost
Management Judgement Management
Plan Plan
- Data Analytics
· Schedule MP
- Meetings
· Risk MP
- EEFs
- OPAs

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Cost Management Plan
The cost management plan can establish the following:
● Units of measure.
● Level of precision.
● Level of accuracy.
● Organizational procedures links.
● Control accounts.
● Control thresholds.
● Rules of performance measurement.
● Define the points in the WBS at which measurement of control accounts will be performed;
● Establish the EVM techniques to be employed.
● Specify tracking methodologies and the EVM computation equations for calculating
projected estimate at completion (EAC) forecasts.
● Reporting formats.
● Funding choices,
● Procedure to account for fluctuations in currency exchange rates,
● Procedure for project cost recording.
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Estimate Costs

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

needed to complete project work. The key benefit of this process is that it determines
the monetary resources required for the project.

This process is performed periodically throughout the project as needed.

• Cost estimates are a prediction that is based on the information known at a given
point in time
• Should consider costing alternatives
• Should consider cost trade-offs and risks
• Costs are expressed in a currency, or can be a different unit of measurement
• Costs should be reviewed during the project (accuracy)
• Costs are estimated for all resources that will be charged to the project
• Cost estimates can be presented at activity level or in summary form

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Estimate Cost
Inputs T&Ts Outputs
- Project Management
Plan
- Expert Judgement
· Cost Management Plan - Analogous Estimating - Cost Estimates
· Quality Management - Parametric Estimating - Basis of
Plan - Three-point Estimates
· Scope Baseline Estimating - Project
- Project Documents - Bottom-up Estimating Documents
· Lesson Learned - Data Analysis Updates
Register - Project Management
Software
· Project Schedule
- Decision Making
· Resource
Requirements
· Risk Register
- EEFs
- OPAs

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 Estimating
ANALOGOUS ESTIMATING
• Using historical data from a similar activity or project
• Used to estimate project cost when there is a limited amount of detailed information about the
project
• Generally less costly and less time-consuming than other techniques, but it is also less accurate
PARAMETRIC ESTIMATING
• An algorithm is used to calculate cost based on historical data and project parameters e.g., square
footage in construction
• Can produce higher levels of accuracy depending on the sophistication and underlying data built into
the model
THREE-POINT ESTIMATING
• Most likely (tM). Optimistic (tO). Pessimistic (tP).
• Triangular distribution. cE = (cO + cM + cP) / 3
• Beta distribution. cE = (cO + 4cM + cP) / 6
• Used when there is insufficient historical data or when using judgmental data
BOTTOM-UP ESTIMATING
• Aggregating the estimates of the lower-level components of the WBS
• This is considered to be the most accurate methodology (but also the most time consuming)

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Reserves
Contingency Reserves
• For Known-Unknowns
• The part of the project budget within the cost baseline that is
allocated for identified risks.
• Included in the baseline.
Management Reserves
• For Unknown-Unknowns
• The part of project budget withheld for unforeseen work that is
within scope of the project.
• Not included in the cost baseline but is part of the overall project
budget and funding requirements.
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Reserve Analysis
Refers to Contingency or Management Reserves

During cost control, reserve analysis is used to monitor the status of

contingency and management reserves for the project to determine if
these reserves are still needed or if additional reserves need to be
requested.

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Cost of Quality
The cost of quality (COQ) associated with a project consists of one or more of the
following costs :
• Prevention costs. Costs related to the prevention of poor quality in the products,
deliverables, or services of the specific project.
• Appraisal costs. Costs related to evaluating, measuring, auditing, and testing the
products, deliverables, or services of the specific project.
• Failure costs (internal/external). Costs related to nonconformance of the products,
deliverables, or services to the needs or expectations of the stakeholders.
• The optimal COQ is one that reflects the appropriate balance for investing in the
cost of prevention and appraisal to avoid failure costs. Models show that there is
an optimal quality cost for projects, where investing in additional
prevention/appraisal costs is neither beneficial nor cost effective.

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Determine Budget

Determine Budget is the process of aggregating the estimated costs of individual

activities or work packages to establish an authorized cost baseline.

The key benefit of this process is that it determines the cost baseline against which
project performance can be monitored and controlled.

This process is performed once or at predefined points in the project.

A project budget includes all the funds authorized to execute the project. The cost
baseline is the approved version of the time-phased project budget that includes
contingency reserves, but excludes management reserves.

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Determine Budget
Inputs T&Ts Outputs
- Project Management - Cost Baseline
Plan
- Project Funding
· Cost Management Plan - Expert Judgement Requirements
· Resource Management - Cost Aggregation - Project
Plan
- Data Analysis Documents
· Scope Baseline Updates:
- Historical
- Project Documents • Cost Estimates
Information Review
· Basis of Estimates • Project Schedule
- Funding Limit
· Cost Estimates • Risk Register
Reconciliation
· Project Schedule
- Financing
· Risk Register
- Business Documents
· Business Case
· Benefits Management
Plan
- Agreements

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Project Budget Components

PMBOK 6th Ed, P255 19

The Budget as a Graph:
Drawing an S-Curve
Cost Baseline is a key output of this process. The cost baseline can be
represented by a graph which maps the accumulated cost against project
time. This curve is typically a broad s-shape. This curve can be used to
understand issues such as cost variance and cash flow on a project.

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21
How to Draw and Activity

S-Curve
• There is an example sheet in the
Unit 6 Materials to practice this in
Excel in your own time
4. 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. The key benefit of this
process is that the cost baseline is maintained throughout the project. This process is
performed throughout the project.

The key to effective cost control is the management of the approved cost baseline.

Project cost control includes:

• Influencing the factors that create changes to the authorized cost baseline;
• Ensuring that all change requests are acted on in a timely manner;
• Managing the actual changes when and as they occur;
• Ensuring that cost expenditures do not exceed the authorized funding by period, by WBS
component, by activity, and in total for the project;
• Monitoring cost performance to isolate and understand variances from the approved cost
baseline;
• Monitoring work performance against funds expended;
• Preventing unapproved changes from being included in the reported cost or resource usage;
• Informing appropriate stakeholders of all approved changes and associated cost; and
• Bringing expected cost overruns within acceptable limits.

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Control Cost

Inputs T&Ts - Expert Judgement

Outputs
- Project
Management Plan - Data Analysis - Work Performance
• Earned Value Analysis Information
• Cost Management • Variance Analysis
Plan • Trend Analysis - Cost Forecasts
• Cost Baseline • Reserve Analysis
• Performance
- Change Requests
Measurement Baseline - To-Complete - Project
Performance Index Management Plan
- Project Documents - Project Management Updates
Software - Project
- Project Funding
Requirements Documents
Updates
- Work Performance
Data
- OPAs

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Measurement Performance
Domain
The Measurement Performance Domain addresses activities
and functions associated with assessing project performance
and taking appropriate actions to maintain acceptable
performance.

Earned Value Management is part of the Measurement

Performance Domain

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Measurement Performance
Domain
Leading Indicators
• Predict changes or trends on the project. If unfavourable the
team evaluates the root case and takes actions to reverse the
trend. This can reduce the performance risk and by identifying
the potential variances before they cross the tolerance
threshold.
Lagging Indicators
• Measure project deliverables or events after the fact. Examples
include the number of deliverables completed, schedule or cost
variance, the amount of resources consumed

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 Earned Value Management
Earned value management (EVM) combines scope, schedule, and
resource measurements to assess project performance and
progress.
It is a commonly used method of performance measurement for
projects.
It integrates the scope baseline with the cost baseline, along with
the schedule baseline, to form the performance baseline, which
helps the project management team assess and measure project
performance and progress.
It is a project management technique that requires the formation of
an integrated baseline against which performance can be measured
for the duration of the project.

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Earned Value Management

EVM develops and monitors three key dimensions for

each work package and control account:

• Planned Value (PV)

• Earned value (EV)
• Actual Costs (AC)

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EVM - Planned Value
● Planned value (PV) is the authorized budget assigned to scheduled
work.
● Assigned at activity level or WBS component level.
● This budget is allocated by phase over the life of the project.
● The total planned value for the project is also known as budget at
completion (BAC).

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EVM - Earned Value
• The EV is often used to calculate the percent complete of a project.

• You can do this by comparing the value of what your schedule says you
should have delivered against the value of what you actually delivered.

• Earned value (EV) is a measure of work performed expressed in terms

of the budget authorized for that work.

• It is the budget associated with the authorized work that has been
completed.

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EVM - Actual Cost

● Actual cost (AC) is the realized cost incurred for the work performed on
an activity during a specific time period.
● It is the total cost incurred in accomplishing the work that the EV
measured.

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32
 Measuring Variances

Variances from the approved baseline need to be monitored:

●Schedule Variance (SV = EV – PV)
●Schedule Performance Index (SPI = EV/PV)
●Cost Variance (CV= EV − AC)
●Cost Performance Index (CPI = EV/AC)

●If the SPI is below 1, then your project is behind schedule.

●If the CPI under 1, your project is over budget!

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Interpreting Variances
The biggest thing to remember about all of these numbers is that the
lower they are, the worse your project is doing

● If you’ve got an SPI of 1.1 and a CPI of 1.15, then you’re within your
budget and ahead of schedule
● But if you calculate a SPI of 0.6 and a CPI of 0.45, then you’re behind
schedule and you’ve blown your budget
● And when these ratios are below 1, then you’ll see a negative variance!

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Variance

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Forecasting

● As the project progresses, the project team may develop a forecast for
the estimate at completion (EAC) that may differ from the budget at
completion (BAC) based on the project performance.

● If it becomes obvious that the BAC is no longer viable, the project

manager should consider the forecasted EAC.

● Forecasting the EAC involves making projections of conditions and

events in the project’s future based on current performance
information and other knowledge available at the time of the forecast.

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Estimates at Completion
• EACs are typically based on the actual costs incurred for work completed,
plus an estimate to complete (ETC) the remaining work.
• Rely on Work Performance Data.
• EACs are typically based on the actual costs incurred for work completed,
plus an estimate to complete (ETC) the remaining work.
• The most common EAC forecasting approach is a manual, bottom-up
summation by the project manager and project team.
• Three common EACs
• EAC forecast for ETC work performed at the budgeted rate
• EAC forecast for ETC work performed at the present CPI
• EAC forecast for ETC work considering both SPI and CPI factors

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Formulas
EAC forecast for ETC work performed at the budgeted rate.
EAC = AC + (BAC – EV)

EAC forecast for ETC work performed at the present CPI.

EAC = BAC/CPI

EAC forecast for ETC work considering both SPI and CPI factors.
EAC = AC + [(BAC – EV)/(CPI × SPI)]

Variance at Completion.
VAC = BAC – EAC

Estimate to Compete.
ETC = EAC – AC

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Earned Value Activity

Management
• Find the Excel worksheet in Unit 6
Materials on the LMS

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To-Complete Performance Index (TCPI)
This tells you how well your project will need to perform to stay on budget.

The to-complete performance index (TCPI) is a measure of the cost

performance that is required to be achieved with the remaining resources
in order to meet a specified management goal.

It is expressed as the ratio of the cost to finish the outstanding work to

the remaining budget.

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To-Complete Performance Index (TCPI)
TCPI= (Remaining Work) / (Remaining Funds)

The equation for the TCPI based on the BAC:

(BAC – EV) / (BAC – AC)
The equation for the TCPI based on the EAC:
(BAC – EV) / (EAC – AC)

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Forecasting

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 EVM Definitions
Terms and Formulas Definitions Example
Earned Value (EV) As of today, what is the estimated value of the work €100K
actually accomplished?
Actual Cost (AC) As of today, what is the actual cost of the work €200K
actually accomplished?
Planned Value (PV) As of today, what is the estimated value of work €300K
planned to be done.
Cost Variance (CV) Negative is over budget. €100K - €200K = -€100K
Positive is under budget
Schedule Variance (SV) Negative is behind schedule. €100K - €300K = -€200K
Positive is ahead of schedule.
Cost Performance Index We are getting $X worth or work out of every $1 €100K / €200K = 0.5
(CPI) = EV/AC spent. Are funds being used efficiently.

Schedule Performance We are progressing at X% of the rate originally €100 / €300K = 0.33
Index (SPI) = EV/PV planned.
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Formulas for on your Desk
• Cost Performance Index. CPI = EV/AC
• Cost variance. CV = EV – AC
• Schedule Performance Index. SPI = EV / PV
• Schedule variance. SV = EV – PV
• EAC forecast for ETC work performed at the budgeted rate.
EAC = AC + (BAC – EV)
• EAC forecast for ETC work performed at the present CPI.
EAC = BAC/CPI
• EAC forecast for ETC work considering both SPI and CPI factors.
EAC = AC + [(BAC – EV)/(CPI × SPI)]
• Variance at Completion. VAC = BAC – EAC
• Estimate to Compete. ETC = EAC – AC
• TCPI based on the BAC: (BAC – EV) / (BAC – AC)
• TCPI based on the EAC: (BAC – EV) / (EAC – AC)

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Measurement Pitfalls
● Hawthorn Effect
● The very act of measuring something affect the behaviour. Therefore, care must be
taken when establishing metrics.
● Vanity Metric
● A metric that shows data but does not provide useful information for making decisions
● Demoralisation
● Setting unachievable goals can demotivate the team.
● Mis-using Metrics
● Distorting metrics or focusing on the wrong things
● Confirmation Bias
● Looking for or seeing information that supports out preexisting point of view
● Correlation vs Causation
● Confusing the correlation between two variables with the idea that one causes the
other

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 Activity
Cost Control
• Find the Excel Spreadsheet on the
LMS

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 Summary
• Understand the relationship between
Cost and Schedule Management.
• Cost estimation tools.
• Define Contingency and Management
Reserves.
• Define and graph earned value, planned
value and cost forecasting.
• Measuring cost variance, and
identifying corrective and preventative
measures.

47