CHAPTER 7

PROJECT
COST MANAGEMENT
Watching the Bottom Line
 Cost & Project Cost Management?

Cost is a resource value Project cost

sacrificed or foregone to management
achieve a specific includes the
objective, or something processes required to
given up in exchange. ensure that the project
Usually measured in is completed within an
monetary units eg. $, Rs. approved budget.

2
 Drivers of Cost Management

Costing is done on the resources required to accomplish a

project

Identification and planning of resources required for the

project costing are:
• People
• Equipments
• Materials needed to complete the work
• Quantity of the needed resources
• Schedule when the resources are needed

Applying Expert judgment to evaluate and analyze the

resources that the project needs

3
 ABOUT PROJECT COST MANAGEMENT
OVERVIEW
 Project Cost Management includes the processes involved in planning, estimating,
budgeting, financing, funding, managing, and controlling so that the project can be
completed within the approved budget.
 Project Cost Management is primarily concerned with the cost of the resources needed
to complete project activities. In addition, the cost of the equipment and materials
needed to complete the project work must be factored into the project expenses.
 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 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.
 ABOUT PROJECT COST MANAGEMENT

OVERVIEW
 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.
 The relationship between the project cost and the project scope should be direct: You
get what you pay for. 
THE FOUR COST MANAGEMENT PROCESSES
PROCE PROCESS
PROCESS NAME DESCRIPTION
SS # GROUP
Define how the project costs will be
Plan Cost
1 estimated, budgeted, managed, monitored,
Management
and controlled.
Develop an approximation of the monetary
2 Estimate Costs Planning
resources needed to complete project work
Aggregate the estimated costs of individual
3 Determine Budget activities or work packages to establish an
authorized cost baseline.
Monitorin
g
Monitor the status of the project to update the
&
4 Control Costs project costs and manage changes to the cost
Controllin
baseline.
g
 ABOUT PROJECT COST MANAGEMENT
Considering Trends for Project Cost Management
 Earned Value Management is a suite of formulas to show project performance. While
most of EVM deals with the cost of the project in relation to what was created.
 Trends include the expansion of Earned Value Management (EVM) to include the concept
of Earned Schedule.
 Earned schedule looks at the actual time it took to complete a portion (or all) of the
project.
ABOUT PROJECT COST MANAGEMENT
Tailoring Project Cost Management
 Every organization, like every project, is different, and cost management can be managed
any number of different ways.
 Organizations might use a database of past projects’ financial information to guide the
current project’s finances.
 Organizations can also use special estimating and budget approaches they’ve developed
over years of experience.
 Earned value management can be implemented fully, partially, or not all—there’s no
requirement to use it.
 Project and program governance can also affect cost management techniques, financial
audits for projects, and special procedures unique to the organization.
ABOUT PROJECT COST MANAGEMENT

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. 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

Overview
 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 plan is a component of the project management plan.

 (1) – PLAN COST MANAGEMENT
Inputs Tools & Techniques Outputs
1. Project Charter 1. Expert Judgment 1. Cost Management
2. Project Management Plan 2. Data Analysis Plan
 Schedule Management Plan 4. Meetings
 Risk Management Plan
2. Enterprise Environmental
Factors (EEFs)
3. Organizational Process
Assets (OPAs)
 (1) – PLAN COST MANAGEMENT
Inputs Description
1. Project Charter  Provides a high-level summary budget that can help
guide the cost planning process.
2. Project Management  Schedule Management Plan establishes the criteria
Plan and the activities for developing, monitoring, and
controlling the schedule.
 Risk Management Plan provides the approach for
identifying, analyzing, monitoring and controlling
risks.
3. EEFs  Organization culture and structure, market conditions,
currency exchange rates, published commercial
information, published seller price, PMIS, productivity
differences in different parts of the world.
4. OPAs  Financial control procedures (e.g. time reporting, required
expenditure and disbursement reviews, accounting codes, and standard
contract provisions); Historical Information, Lessons
Learned, Financial databases, estimating & budgeting
policies.
 (1) – PLAN COST MANAGEMENT
Tools & Techniques Description
1. Expert Judgment  Expertise should be considered from individuals or
groups with specialized knowledge or training in
previous similar projects; information in the industry,
discipline, and application area; cost estimating and
budgeting; and EVM.
2. Data Analysis  Alternative analysis can include reviewing strategic
funding options such as: self-funding, funding with
equity, or funding with debt. It can also include
consideration of ways to acquire project resources such
as making, purchasing, renting, or leasing.
3. Meetings  Meeting attendees may include the project manager,
the project sponsor, selected project team members,
selected stakeholders, anyone with responsibility for
project costs, and others as needed.
 (1) – PLAN COST MANAGEMENT
Outputs Description
1. Cost Management Plan Cost Management plan can establish Units of measure
(staff hours, metres, liters, lump sum in currency form) , level of
precision (degree to which cost estimates will rounded up or
down), level of accuracy (the acceptable range e.g., 10% used
in determining realistic cost estimates is specified, and may include
an amount for contingencies), Organizational Procedure
links (Control account that links directly to the accounting
system), Control thresholds (an agreed-upon amount of
variation from baseline plan to be allowed before some action
needs to be taken), Rules of performance measurement
(setting up the EVM rules for performance measurement),
Reporting formats (formats and frequency for the various cost
reports), Additional details (strategic funding choices,
procedure to account for fluctuations in currency exchange rates,
and procedure for project cost recording).
 (2) – ESTIMATE COSTS
Overview
 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.

 There is a distinct difference between cost estimating and pricing. A cost estimate is the
cost of the resources required to complete the project work. Pricing, however, includes a
profit margin.

 Cost estimates include the identification and consideration of costing alternatives to

initiate and complete the project. Cost trade-offs and risks should be considered, such as
make versus buy, buy versus lease, and the sharing of resources in order to achieve
optimal costs for the project.
 ESTIMATE COSTS
Process of developing an approximation of the monetary resources needed to
complete project activities.

Cost estimates are a prediction that is based on the information known at a

given point in time.

Identification and consideration of costing alternatives to initiate and complete

the project.
Cost trade-offs and risks must be considered, such as make versus buy, buy
versus lease, and the sharing of resources.
Costs for all resources that will be charged to the project include labor, materials,
equipment, services, and facilities, as well as special categories such as an inflation
allowance or contingency costs.
 (2) – ESTIMATE COSTS
Overview
 Cost estimates should be reviewed and refined during the course of the project to reflect
additional detail as it becomes available and assumptions are tested.
 The accuracy of a project estimate will increase as the project progresses through the
project life cycle. For example, a project in the initiation phase may have a rough order
of magnitude (ROM) estimate in the range of −25% to +75%.
 Later in the early planning processes, Budget estimates could narrow the range from
−10% to +25%.

 And Later in the late planning processes, definitive estimates could narrow the range of
accuracy to −5% to +10%.
 Costs are estimated for all resources that will be charged to the project. This includes
labor, materials, equipment, services, and facilities, as well as special categories such as
an inflation allowance, cost of financing, or contingency costs. Cost estimates may be
presented at the activity level or in summary form.
 (2) – ESTIMATE COSTS
Inputs Tools & Techniques Outputs
1. Project Management Plan 1. Expert Judgment 1. Cost Estimates
 Cost Management Plan 2. Analogous Estimating 2. Basis of Estimates
 Quality Management Plan 3. Parametric 3. Project Documents
 Scope Baseline Estimating Updates
2. Project Documents 4. Bottom-up  Assumption Log
 Lessons Learned Register Estimating  Lessons Learned
 Project Schedule 5. Three-Point Register
 Resource Requirements Estimating  Risk Register
 Risk Register 6. Data Analysis
3. Enterprise Environmental  Alternatives Analysis
Factor (EEFs)  Reserve Analysis
4. Organizational Process  Cost of Quality
Assets (OPAs) 7. PMIS
8. Decision Making
 Voting
 (2) – ESTIMATE COSTS
Inputs Description
1. Project Management  Cost Management Plan describes estimating methods
Plan that can be used and the level of precision and accuracy
required for the cost estimate.
 Quality Management Plan describes the activities and
resources necessary for the project management team
to achieve the quality objectives set for the project.
 Scope Baseline includes the project scope statement,
WBS, and WBS dictionary:
2. Project Documents  Lessons learned earlier in the project with regard to
developing cost estimates.
 Project schedule includes the type, quantity, and
amount of time that team and physical resources will
be active on the project.
 (2) – ESTIMATE COSTS
Inputs Description
2. Project Documents (cont.)  Resource requirements identify the types and
quantities of resources required for each work package
or activity.
 Risk register contains details of individual project
risks that have been identified and prioritized, and for
which risk responses are required.
3. EEFs  Market conditions, published commercial information,
exchange rates and inflation.
4. OPAs  Cost estimating policies, cost estimating templates,
historical information and lessons learned repository.
 (2) – ESTIMATE COSTS
Tools & Techniques Description
1. Expert Judgment  Expertise should be considered from individuals or
groups with specialized knowledge or training in
previous similar projects; information in the
industry, discipline, and application area; and cost
estimating methods.
2. Analogous Estimating  Analogous estimating relies on historical information
to predict the cost of the current project.
 It is also known as top-down estimating.
 This estimating approach takes less time to complete
than other estimating models, but it is also less
accurate.
 (2) – ESTIMATE COSTS
Tools & Techniques Description
3. Parametric Estimating  Parametric estimating uses a statistical relationship
between relevant historical data and other variables
(e.g., square footage in construction) to calculate a cost
estimate for project work.
 This technique can produce higher levels of accuracy
depending on the sophistication and underlying data
built into the model.
 Parametric cost estimates can be applied to a total
project or to segments of a project, in conjunction with
other estimating methods.
 For example, parametric estimating could say that the
cost per square foot of construction is $28 using
standard materials, and could then charge additional
fees if the client varies the materials.
 To use parametric modeling, the factors upon which the
model is based must be accurate. 
 (2) – ESTIMATE COSTS
Tools & Techniques Description
4. Bottom-up Estimating  Bottom-up estimating is a method of estimating a
component of work. It is one of the most time-
consuming and most-accurate methods used to predict
project costs.
 The cost of individual work packages or activities is
estimated to the greatest level of specified detail.
 The detailed cost is then summarized or “rolled up” to
higher levels for subsequent reporting and tracking
purposes.
 The cost and accuracy of bottom-up cost estimating are
typically influenced by the size or other attributes of
the individual activity or work package.
 A fringe benefit of completing a bottom-up estimate is
that the project team may buy into the project work
since they see the cost and value of each activity in the
project.
 (2) – ESTIMATE COSTS
Tools & Techniques Description
5. Three-Point Estimating  Optimistic cost estimate (based on analysis of the best-
case scenario for the activity.)
 It’s sometimes risky to use  Most likely cost estimate (based on realistic effort
just one cost estimate for a assessment for the required work and any predicted expenses.)
project’s activity, especially  Pessimistic cost estimate (based on analysis of the worst-
when the work hasn’t been case scenario for the activity.)
completed before. Issues,
errors, delays, and cE = (cO + cM + cP) / 3
unknown risks can affect
the project cost.  Or you can use the program evaluation and review
 Three-point estimates are technique (PERT) approach, which is slightly different.
also known as simple PERT is a weighted average to the most likely cost
averaging estimates. It estimate value. The PERT formula is
attempts to find the average
of the cost of an activity cE = (cO + 4cM + cP) / 6
using three factors:
 (2) – ESTIMATE COSTS
Tools &
Description
Techniques
6. Data Analysis  Alternatives analysis: Examines the different approaches to the
project work, materials, equipment, and supplies. This will
expose not only possible cost differences, but also tradeoffs
between the alternatives identified.
 Reserve analysis: Management and contingency reserves are
amounts of monies set aside for risk events related to unknown
and known risks in the project, respectively. When risks enter
your project and it takes time to deal with the risk events, the
project is consuming these reserves. The quicker the project
spends the reserves, the more likely the project is going to be
over budget.
 Costs of quality: The cost of quality describes the monies you’ll
have to spend to achieve the quality expectations within the
project. Cost of quality can be training, purchasing the right tools
and equipment, and other factors that drive costs to achieve
quality.
 (2) – ESTIMATE COSTS
Tools & Techniques Description
7. Project Management  The project management information system can
Information System include spreadsheets, simulation software, and
(PMIS) statistical analysis tools to assist with cost
estimating. Such tools simplify the use of some cost-
estimating techniques and thereby facilitate rapid
consideration of cost estimate alternatives.
8. Decision Making  The decision-making technique that can be used in the
Estimate Costs process include but are not limited to
voting. Voting is an assessment process having
multiple alternatives with an expected outcome in the
form of future actions. These techniques are useful for
engaging team members to improve estimate accuracy
and commitment to the emerging estimates.
 (2) – ESTIMATE COSTS
Outputs Description
1. Cost Estimates  Cost estimates include quantitative assessments of the
probable costs required to complete project work, as
well as contingency amounts to account for identified
risks, and management reserve to cover unplanned
work.
 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) – ESTIMATE COSTS
Outputs Description
2. Basis of Estimating The supporting documentation should provide a clear and
complete understanding of how the cost estimate was
derived.
Supporting detail for cost estimates may include:
 Documentation of the basis of the estimate (i.e., how it
was developed),
 Documentation of all assumptions made,
 Documentation of any known constraints,
 Documentation of identified risks included when
estimating costs,
 Indication of the range of possible estimates (e.g.,
US$10,000 (±10%) to indicate that the item is expected to
cost between a range of values), and
 Indication of the confidence level of the final estimate.
 (2) – ESTIMATE COSTS
Outputs Description
3. Project Documents Assumption log. During the Cost Estimates process, new
Updates assumptions may be made, new constraints may be
identified, and existing assumptions or constraints may be
revisited and changed.

The assumption log should be updated with this new

information.
Lessons learned register. The lessons learned register can
be updated with techniques that were efficient and effective
in developing cost estimates.
Risk register. The risk register may be updated when
appropriate risk responses are chosen and agreed upon
during the Estimate Cost process.
Project Cost Management Processes

30
31
 Determine Budget
Aggregating the estimated costs of individual schedule activities or
work packages to establish an authorized cost baseline for measuring
project performance

Cost baseline depends on:

• Project decisions with respect to maintenance of product, support of
product, services offered etc

This baseline includes all authorized budgets, but excludes

management reserves

• funds authorized to execute the project

• Project cost performance is measured against the authorized budget
 Determine Budget: ITTOs
The process of aggregating estimated costs of individual activities or work
packages to establish an authorized cost baseline, it determines the cost baseline
against which project performance can be monitored, controlled

Input Tools & Techniques Output

1. Project Management
Plan( Cost & Resource 1. Cost aggregation 1. Cost Baseline
mgmt plan, Scope 2. Data Analysis 2. Project Funding
Baseline) (Reserve Analysis) Requirements
2. Project 3. Expert Judgment 3. Project Docs
documents( cost 4. Historical update ( Cost
estimates, Basis of Information Review estimate, Project
estimates, Risk register) 5. Funding limit schedule, Risk
3. Business documents Reconciliations register)
4. Agreements 6. Financing
4. EEF/OPA
 Determine Budget: Inputs

1. Project Management Plan

Cost management plan. describes the project costs will be
structured into the project budget
Resource management plan. provides information on
rates, estimation of travel costs, and other foreseen costs
Scope baseline. includes the project scope statement,
WBS, and WBS dictionary details for cost estimation and management

2. Project Documents

Cost Estimates
• Giving us the cost estimates about each activity which will
be aggregated to calculate estimated cost for each work
package
Bases for estimation
• Assumptions for including or excluding the indirect or any
other costs for a given activity
 Determine Budget: T&Ts
1. Cost Aggregation
• Costs are first aggregated by work packages and then higher
components of the WBS. The estimates are ultimately aggregated for
the whole project
2. Data Analysis (Reserve Analysis)
• establish both contingency reserves and the management reserves
related to project budget
3. Historical Information Review
• Using historical information to establish a mathematical model through
analogous or parametric estimation to determine budget for the whole
project
4. Funding limit reconciliation
• The project expenditure should be reconciled with the funding limits.
• If the planned expenditure is above the funding limits at any time,
project work should be rescheduled
5. Financing entails acquiring funding for project
 Determine Budget: Outputs

1. Cost Baseline
• Cost Baseline is the approved time-phased project budget
• The cost baseline can only be changed through proper change control
system & it does not include management reserve

2. Project Documents Updates

• Risk Register, Activity Cost Estimates, and Project Schedule may be
updated

3. Project Funding Requirements

• Funding requirements are derived from the cost baseline
• Funding requirements also include the management reserves
Project Cost Management Processes

37
 Control Costs
In this process we monitor the status of the project to update the project
costs plus we manage changes to cost baseline.
Here we mainly compare the expenditure and the physical work completed.

Input Tools & Techniques Output

1. Expert Judgment 1. Work Performance

1. Project 2. Data Analysis Information
Management Plan . Earned Value Analysis 2. Cost forecasts
2. Project . Variance Analysis 3. Change requests
documents . Trend Analysis 4. Project
3. Project Funding . Reserve Analysis management plan
Requirement 3. To complete updates
4. Work Performance Index 5. Project Docs
Performance Data (TCPI) update
5. OPA 4. Project Management
Information System
 Control Costs: Inputs

1. Project Management Plan

• Project Cost Mgmt Plan: Specifying how to manage & control the costs
• Cost Baseline: The baseline is compared with the actual results

2. Project Documents

2. Project Funding Requirements

• It specifies the project cost plus the liabilities associated with securing the
funds

3. Work Performance Data

• It includes all the information about work progress, e. g which activities
have completed and which have started and the cost authorized or spent
for these activities
 7.4. CONTROL COSTS: TOOLS &
TECHNIQUES
Earned Value Management
“Earned Value Management (EVM) is a commonly used method of
performance measurements.
It integrates project scope, cost, and schedule measures to help the project
management team assess and measure the project performance and progress.”
• Integrates technical performance requirements, resource planning, and
cost accounting with schedule

• Provides insight into project status

• Provides “EARLY WARNING SIGNALS” for problems

Provides a disciplined means of

Measuring Project Performance
12/29/2020 40
 EARNED VALUE MANAGEMENT BASICS
Earned Value Management has three essential elements:

 Planned Value (PV) is the scheduled cost of work planned in a given time. It is also called Budgeted
Cost of Work Scheduled (BCWS).
 OR PV is the value of physical work that should have been accomplished against the planned cost.
 E.g. you planned that for Rs. 10,000 you will complete 5% work

 Earned Value (EV) is the amount of money earned from completed work in a given time. It is also
called Budgeted Cost of Work Performed (BCWP).
 OR EV is the value of physical work that is actually completed against the planned cost.
 e. g you have actually completed 4% of the work after spending the Rs. 10,000 that were planned to be
spent for completing 5% work

 Actual Cost (AC) is the actual amount of money spent to date. It is also called Actual Cost of Work
Performed (ACWP).
 OR AC is the amount of expenditure spent on completing a work during specific time period or
percentage of work.
 E. g to complete 5% of the planned work you spent Rs. 12,000 The 12K spent is the AC
 PLANNED VALUE (PV) IN DETAIL
Planned Value (PV) Planned Value is the approved value of the work to be
completed in a given time. It is the value that you should have earned as per the
schedule.
According to the PMBOK Guide, “Planned Value (PV) is the authorized budget
assigned to work to be accomplished for an activity or WBS component.”
The Formula for Planned Value (PV) to calculate Planned Value is simple.
Multiply the planned percentage of the completed work by the project budget; it
will give you the Planned Value.
Planned Value = (Planned % Complete) X (BAC)
 Control Costs: T&Ts

Schedule Variance (SV)

SV is a measure of schedule performance
• SV is measured by subtracting the PV from EV or SV= EV-PV

Cost Variance (CV)

• CV is a measure of cost performance for a project
• CV is measured by subtracting the AC from EV or CV = EV – AC

Cost Performance Index (CPI)

• CPI measure the budget efficiency in a project
• CPI is measured as the EV to AC or CPI = EV/AC
• CPI greater than 1 indicates we are under budget
• CPI less than 1 indicate we are over budget
 EARNED VALUE TECHNIQUE
PERFORMANCE MEASUREMENT
CPI (Cost Performance Index) = EV/AC
 Measures Cost Efficiency
 CPI > 1 indicates cost under-run; CPI < 1 indicates cost overrun
 Cumulative CPI is used to forecast project cost at completion
CV (Cost Variance) = EV – AC
 If Positive, work is under budget
 If Negative, work is over budget

SPI (Schedule Performance Index) = EV/PV (measures Schedule Efficiency)

 SPI > 1 indicates time under-run SPI < 1 indicates time overrun
 Used to predict completion date, and in conjunction with CPI to predict project
completion estimates
SV (Schedule Variance) = EV – PV
 If Positive, work is ahead of schedule
 If Negative, work is behind Schedule

12/29/2020 44
 Control Costs: T&Ts

BAC (Budget at Completion)

 Control Costs: T&Ts

To Complete Performance Index (TCPI)

• TCPI is used to calculate future Performance Index if we want to
achieve some specific managerial goals, e. g completing the project
within the planned budget (BAC) or within our new estimation (EAC).
 Control Costs: Outputs

1. Work Performance Information

• Calculated CV, SV, CPI, SPI, VAC, and TCPI for each control account and work
package are documented and communicated to the stakeholders
2. Forecasts
• EAC is documented and communicated to the stakeholders
3. Change Requests
• As with most of Monitoring and Controlling process change request is made
• Change request can be preventive or corrective action or changes into one of
the three baselines
4. Project Management Plan Updates
• Cost Baseline: Changes to cost baseline is made due to variances
estimates
• Cost Management Plan: Some of the stakeholders may request
Earned Value Concepts (cont.)
EARNED VALUE CONCEPTS
(CONT.)
CONTROL COSTS - EXAMPLE
Exercise from Rita Mulcahy, Page 271.
You have a project to build a new fence. The fence is four sided. Each side is to
take one day to build and is budgeted for $1,000 per side. The sides are planned to
be completed one after the other. Today is the end of day three.
Using the project status chart on the next slide, calculate EV,
etc. Make sure you can interpret what each answer means.

45
 CALCULATIONS…..
What Is: Calculation Answer
PV
EV
AC
BAC
CV
CPI
SV
SPI
EAC
ETC
VAC

51
ANSWER…..
What Is: Calculation Answer
PV 1000+1000+1000 3000
EV 1000+1000+500 2500
AC 1000+1200+600 2800
BAC 1000+1000+1000+1000 4000
CV 2500-2800 -300
CPI 2500/2800 0.893
SV 2500-3000 -500
SPI 2500/3000 0.833
EAC 4000/8.98 4479
ETC 4479-2800 1679
VAC 4000-4479 -479

52
COST-BENEFITS EVALUATION
TECHNIQUE

Payback
Net Profit
Period

Net
Return on
Presen
Investmen
t Value
t

53
PROJECT SELECTION

54
PROJECT SELECTION

55
 EXERCISE # 1 - FIND THE PLANNED VALUE (PV)

You have a project to be completed in 12 months. The budget of the project is

100,000 PKR. Six months have passed, and the schedule says that 50% of the work
should be completed. What is the project’s Planned Value (PV)?
 SOLUTION OF EXERCISE # 1 - FIND THE PLANNED
VALUE (PV)
Given in the question.
Project duration: 12 months, Project cost (BAC): 100,000 PKR, Time elapsed: 6
months Percent complete: 50% (as per the schedule), Planned Value is the value of
the work that should have been completed so far (as per the schedule). We should
have completed 50% of the total work in this scenario.
Planned Value = 50% of the value of the total work
= 50% of BAC
= 50% of 100,000
= (50/100) X 100,000
= 50,000 PKR
Therefore, the project’s Planned Value (PV) is 50,000 PKR.
 ACTUAL COST IN DETAIL
This is the second element of earned value management. Actual Cost is the total
cost incurred for the actual work completed to date. In other words, it is the
amount of money you have spent to date.
According to the PMBOK Guide, “Actual Cost (AC) is the total cost actually
incurred in accomplishing work performed for an activity or WBS component.”
The formula for Actual Cost (AC)
Finding Actual Cost is the simplest of all.
There is no unique formula to calculate Actual Cost. It is an amount that has been
spent, and you can find it easily in the question.
 EXERCISE # 2 - FIND THE ACTUAL COST
You have a project to be completed in 12 months. The budget of the project is
100,000 PKR. Six months have passed, and the schedule says that 50% of the work
should be completed. What is the project’s Planned Value (PV)?
 SOLUTION OF EXERCISE # 2- FIND THE ACTUAL
COST
Actual Cost is the amount of money that you have spent so far. In the question, you
have spent 60,000 PKR on the project so far. Hence, the project’s Actual Cost is
60,000 PKR.
 EARNED VALUE (EV) IN DETAIL
Earned Value is the value of the work actually completed to date. Earned Value will
show you the value that the project has produced if the project is terminated today.
According to the PMBOK Guide, “Earned Value (EV) is the value of work
performed expressed in terms of the approved budget assigned to that work for an
activity or WBS component.”
Although all three elements have their significance, Earned Value is more useful
because it shows you how much value you have earned from the money you have
spent to date.
Formula for Earned Value (EV)
Earned Value = % of completed work X BAC (Budget at Completion).
 EXERCISE # 3 - FIND THE EARNED VALUE
You have a project to be completed in 12 months. The budget of the project is
100,000 PKR. Six months have passed, and the schedule says that 50% of the work
should be completed. What is the project’s Planned Value (PV)?
 SOLUTION OF EXERCISE # 3- FIND THE EARNED
VALUE (EV)
you can see that only 40% of the work is completed, and the definition of Earned
Value states that it is the value of the project that has been earned.
Earned Value = 40% of the value of total work
= 40% of BAC
= 40% of 100,000
= 0.4 X 100,000
= 40,000 PKR
Therefore, the project’s Earned Value (EV) is 40,000 PKR.
 VARIANCES
You can calculate the following variances with the help of PV, AC and EV
elements:
Schedule Variance
SV = EV – PV
Cost Variance
CV = EV – AC
 EXERCISE # 4 - FIND THE SCHEDULE VARIANCE
You have a project to be completed in 12 months and the budget of the project is
100,000 PKR. Six months have passed and 60,000 PKR has been spent, but on
closer review you find that only 40% of the work has been completed so far.
Find the project’s Schedule Variance (SV), and determine if you are ahead of
schedule or behind schedule.
SOLUTION OF EXERCISE # 4 - FIND THE SCHEDULE
VARIANCE
Given in the question: Actual Cost (AC) = 60,000PKR
Planned Value (PV) = 50%of 100,000 
= 50,000 PKR
Earned Value (EV) = 40%of 100,000
= 40,000 PKR Now, 
Schedule Variance =Earned Value – Planned Value
= 40,000 – 50,000
= – 10,000 PKR 
The project’s Schedule Variance is -10,000 PKR. You are behind schedule since it
is negative.
 EXERCISE # 5 - FIND THE COST VARIANCE

You have a project to be completed in 12 months, and the budget of the project is
100,000 PKR. Six months have passed, and 60,000 PKR has been spent, but on
closer review you find that only 40% of the work has been completed so far.
  Find the project’s Cost Variance (CV), and determine if you are under budget or
over budget.
 SOLUTION OF EXERCISE # 5 - FIND THE COST
VARIANCE

Given in the question: Actual Cost (AC) = 60,000PKR

Earned Value (EV) = 40%of 100,000 PKR  
= 40,000 PKR
Now, 
Cost Variance = Earned Value – Actual Cost
CV = EV – AC
= 40,000 – 60,000
= –20,000 PKR

Hence, the project’s Cost Variance is -20,000 PKR, and you are over budget since
it is negative.
 PERFORMANCE INDEX
You can calculate the following performance indexes with the help of PV, AC and
EV elements:

Schedule Performance Index

SPI=(EV) / (PV)
Cost Performance Index
CPI=(EV) / (AC)
EXERCISE # 6- FIND THE SCHEDULE PERFORMANCE
INDEX
You have a project to be completed in 12 months, and the budget of the project is
100,000 PKR. Six months have passed, and 60,000 PKR has been spent, but on
closer review, you find that only 40% of the work has been completed so far.
Find the Schedule Performance Index and deduce whether the project is behind or
ahead of schedule.
SOLUTION OF EXERCISE # 6- FIND THE SCHEDULE
PERFORMANCE INDEX
Given in the question: Actual Cost (AC) = 60,000PKR
Planned Value (PV) = 50%of 100,000 PKR  
=50,000 PKR
Earned Value (EV) = 40%of 100,000 PKR
= 40,000 PKR
Now, 
Schedule Performance Index (SPI) = EV / PV
= 40,000 / 50,000 = 0.8
You are behind schedule since the Schedule Performance Index is less than one.
 EXERCISE # 7- FIND THE COST PERFORMANCE
INDEX
You have a project to be completed in 12 months, and the budget of the project is
100,000 PKR. Six months have passed, and 60,000 PKR has been spent, but on
closer review, you find that only 40% of the work has been completed to date.
Find the Cost Performance Index for this project and deduce whether you are
under budget or over budget.
 SOLUTION OF EXERCISE # 7- FIND THE COST
PERFORMANCE INDEX
Given in the question: Actual Cost (AC) = 60,000PKR
Planned Value (PV) = 50%of 100,000 PKR
= 50,000 PKR
Earned Value (EV) = 40%of 100,000 PKR
= 40,000 PKR
Now, 
Cost Performance Index(CPI) = EV / AC
= 40,000 / 60,000 = 0.67
This means you are earning0.67 PKR for every 1 PKR spent since the Cost
Performance Index is less than one. In other words, you are over budget.
 EARNED VALUE MANAGEMENT IN FORECASTING
Earned Value Management helps you in forecasting as well. With the help of
Earned Value Management you can forecast the following:
Estimate at Completion - the total expected budget for the project.
Estimate to Complete -the amount of money from a given point which tells you
how much it will cost you complete the rest of the work.
Variance at Completion tells you how much you are under budget or over budget
when the project completes. It is the difference between the Budget at Completion
and the Estimate at Completion.
Variance at Completion = Budget at Completion – Estimate at Completion
VAC = BAC – EAC
EARNED VALUE MANAGEMENT IN FORECASTING
To Complete Performance Index the estimate of the cost performance required
by the project to meet the project’s budget goal.

TCPI can be calculated by dividing the remaining work by the remaining funds.
TCPI = (Remaining Work) / (Remaining Funds)

There are two cases in which you can calculate the TCPI.
Case I: If you are under budget
TCPI = (BAC–EV) / (BAC–AC)
Case II: If you are over budget
TCPI = (BAC–EV) / (EAC–AC)


 ESTIMATE AT COMPETITION (EAC) IN DETAIL
You can calculate the Estimate at Completion in four different situations.
Case 1: EAC = BAC / CPI
You assume that the project will continue to perform to the end as it was
performing till date in this scenario. In other words, your future performance will
be the same as past performance; i.e., the CPI will remain the same for the rest of
the project.
Formula for the Estimate at Completion
In this case, the Estimate at Completion can be calculated by dividing the budget at
completion by cost performance index.
Estimate at Completion = (Budget at Completion) / (Cost Performance Index)
Or,
EAC = BAC / CPI
 ESTIMATE AT COMPETITION IN DETAIL
You can conclude that from the above formula:
If the CPI = 1, then EAC = BAC. This means you can complete your project with
your approved budget, and there is no need to use forecasting analysis.
The Estimate at Completion will be equal to the budget at completion at the start of
the project, i.e., EAC = BAC.
Case 2: EAC = AC + (BAC – EV)
In Case 2, you have deviated from your budget estimate; however, from now on
you can complete the remaining work as planned.
Usually, this happens due to some unforeseen, or one time conditions costs
increased. However, you are sure this will not happen again, and you can continue
with the planned cost estimate. That is why, you will add the money spent to date
(i.e., AC) to the budgeted cost for the remaining work in this formula.
 ESTIMATE AT COMPETITION IN DETAIL
The formula for the Estimate at Completion
The formula to calculate the Estimate at Completion in case-II is as follows:
Estimate at Completion = Money spent to date + Budgeted cost for the remaining
work
EAC= AC + (BAC – EV)
Case 3: EAC = AC + (BAC – EV) / (CPI * SPI)
You are over budget, behind schedule, and the client is insisting you complete the
project on time. Both the cost and the schedule need to be taken into consideration
in this situation.
 ESTIMATE AT COMPLETION IN DETAIL
The following formula can be used to calculate the Estimate at Completion in
case-III:
Estimate at Completion = Money spent to date + (Budgeted cost for the remaining
work – Earned Value) / (Cost Performance Index * Schedule Performance Index)
EAC = AC + (BAC – EV) / (CPI * SPI)
Case 4: EAC = AC + Bottom-up Estimate to Complete
This is the situation when you find out that your cost estimate was flawed and you
need to calculate the new cost estimate for the remaining project work.
Here, you will go to the activity level, find the cost of each activity, and sum them
to get the total cost of the remaining work.
 EXERCISE # 8- FIND THE EAC (CASE 1)

You have a project to be completed in 12 months, and the cost of the project is
100,000 PKR. Six months have passed, and 60,000 PKR has been spent, but on
closer review, you find that only 40% of the work has been completed so far.
Find the Estimate at Completion (EAC) for this project.
SOLUTION OF EXERCISE # 8- FIND THE EAC (CASE 1)
Given in the question: Budget at Completion(BAC) = 100,000 PKR
Actual Cost (AC) = 60,000PKR
Planned Value (PV) = 50%of 100,000= 50,000 PKR
Earned Value (EV) = 40%of 100,000 = 40,000 PKR
First, you have to calculate the Cost Performance Index to calculate the EAC,:
Cost Performance Index(CPI) = EV / AC = 40,000 / 60,000 = 0.67
Now, 
Estimate at Completion(EAC) = BAC / CPI = 100,000 / 0.67 = 149,253.73
Hence, the Estimate at Completion (EAC) is 149,253.73 PKR.
In other words, if the project continues to progress with CPI = 0.67 until the end,
you will have to spend 149,253.73 PKR to complete the project.
 EXERCISE # 9- FIND THE EAC (CASE 2)

You have a project with a budget of 500,000 PKR. An incident happens during the
execution phase, which costs you a lot of money. However, you are sure that this
will not happen again, and you can continue with your calculated performance for
the rest of the project.
To date, you have spent200,000 PKR, and the value of the completed work is
175,000 PKR.
Calculate the Estimate at Completion (EAC).
SOLUTION OF EXERCISE # 9- FIND THE EAC (CASE 2)
You will use the formula since the cost increase is temporary and the rest of the
project can be completed as planned:
  Estimate at Completion =Money spent to date + (Budgeted cost for the remaining
work – Earned Value)
EAC = AC + (BAC – EV)
Given in the question: Actual Cost (AC) =200,000PKR
Budget at Completion (BAC) = 500,000
Earned Value (EV) =175,000
Hence,
EAC = 200,000 + (500,000– 175,000) = 525,000 PKR
Hence, the Estimate at Completion is 525,000 PKR.
 EXERCISE # 10- FIND THE EAC (CASE 3)

You have a fixed deadline project with a budgeted cost of 500,000 PKR. To date,
you have spent 200,000 PKR, and the value of the completed work is 175,000
PKR. However, according to the schedule, you should have earned 225,000 PKR
to date.
Calculate the Estimate at Completion (EAC).
SOLUTION OF EXERCISE # 10- FIND THE EAC (CASE
3)
Given in the question: Budget at Completion(BAC) =500,000 PKR
Actual Cost (AC) =200,000 PKR
Earned Value (EV) =175,000 PKR
Planned Value (PV) =225,000 PKR
To calculate the EAC, first you have to calculate the CPI and SPI:
SPI = EV / PV = 175,000 / 225,000 = 0.78

CPI = EV / AC = 175,000 / 200,000 = 0.88

Now, you can use the formula:

EAC = AC + (BAC – EV) /(CPI * SPI)
= 200,000 + (500,000 –175,000) / (0.88 * 0.78)
= 200,000 + 325,000 / 0.69
= 200,000 + 471,000 = 671,000 PKR
Hence, the Estimate at Completion is 671,000 PKR.
 EXERCISE # 11- FIND THE EAC (CASE 4)

You have a project to construct a government’s department building for 500,000

PKR. To date, you have spent 200,000 PKR, and the value of the completed work
is 175,000 PKR. However, during your project execution, you noticed your cost
estimation was flawed, and you need to calculate your budget again for the
remaining part of the project.

You gather your team members and re-estimate the cost of the remaining work.
Your new estimate shows that it will take 400,000 PKR to complete the remaining
part of the project.
 
Calculate the Estimate at Completion (EAC).
SOLUTION OF EXERCISE # 11 FIND THE EAC (CASE 4)
Given in the question:
Budget at Completion (BAC) = 500,000 PKR
Actual Cost (AC) =200,000 PKR
Earned Value (EV) =175,000 PKR
Bottom-up Estimate to Complete = 400,000 PKR
In this case, you will use the formula:
EAC = AC + Bottom-up Estimate to Complete
= 200,000 + 400,000
= 600,000 PKR
Hence, the Estimate at Completion is 600,000 PKR.
 ESTIMATE TO COMPLETE (ETC) IN DETAIL
This technique gives you an approximate idea of how much money will be
required to complete the remaining balance of work.
Example I
You are constructing your home with a target budget of 100,000 PKR. You are
halfway to completion, and you feel that you may have to spend more than what
you had planned. Therefore, you ask your contractor to give you a fresh estimate
for the remaining work.
Your contractor calculates the cost of the remaining work and tells you that from
now it will take 70,000 PKR to finish building your home.
This 70,000 PKR is the Estimate to Complete.
 ESTIMATE TO COMPLETE (ETC) IN DETAIL
Example II
You are working on a project that is 30% completed, and 70% remains unfinished.
In this case, the Estimate to Complete is the expected amount of money to
complete this 70% of remaining work.
Example III
There is another scenario in which you may want to calculate the Estimate to
Complete.
Suppose that you’re building a five-story building and, due to a financial crisis,
you cannot complete the project. Therefore, you decide to cut your building to
three stories from five stories to save some money.
In this case, the Estimate to Complete will help you calculate your savings.
 ESTIMATE TO COMPLETE (ETC) IN DETAIL
How to Calculate the Estimate to Complete
There are two methods to calculate the Estimate to Complete.
1. Bottom up Cost Estimation
2. ETC = Estimate at Completion – Actual Cost
Case I: Bottom up Cost Estimation: In this case, you go to the activity level, find
the cost of each activity for the remaining work, and add them to get the total cost
of the remaining work. There is no formula for the bottom up cost estimation
technique.
Case II: ETC = EAC – AC: In this case, calculating the Estimate to Complete is
very straightforward. First, you will calculate the estimate at completion, and then
you will subtract the actual cost spent from it.
Estimate to Complete = Estimate at Completion – Actual Cost (ETC = EAC – AC)
 EXERCISE # 12- FIND THE ETC (CASE 1)

You have a project to build a government department’s building for 500,000 PKR.
To date, you have spent 200,000 PKR. However, during your project execution
you noticed that your cost estimation was flawed and you need to re-calculate your
budget for the remaining part of the project.

You sit down with your team members and re-estimate the cost of the remaining
work. Your new estimate says that it will take 125,000 PKR for construction,
75,000 PKR for plumbing, 150,000 PKR for painting, and 50,000 PKR for other
expenditures.

Calculate the Estimate to Complete (ETC).

SOLUTION OF EXERCISE # 12 FIND THE ETC (CASE 1)
Given in the question: BAC = 500,000 PKR AC = 200,000 PKR
Cost of construction = 125,000 PKR Cost of plumbing = 75,000 PKR

Cost of painting = 150,000 PKR Other expenditures = 50,000 PKR

Since you are using Bottom Up Cost Estimation, you will calculate the cost of each
activity/work-package and then you will add them to get the final figure.

Hence, Estimate to Completion = Cost of construction + Cost of plumbing + Cost of

painting + Other expenditures

= 125,000 + 75,000 + 150,000 + 50,000 = 400,000 PKR

Hence, the Estimate to Complete is 400,000 PKR.

 EXERCISE # 13- FIND THE ETC (CASE 2)

You have a project to be completed in 12 months, and the budget at completion of

the project is 100,000 PKR. Six months have passed and 60,000 PKR has been
spent, but on closer review you find that only 40% of the work has been completed
so far. Your project is expected to perform with the same cost performance.

Find the Estimate to Complete (ETC) for this project.

SOLUTION OF EXERCISE # 13 FIND THE ETC (CASE 2)
Given in the question: Budget at Completion (BAC) = 100,000 PKR
Actual Cost (AC) = 60,000 PKR
Planned Value (PV) = 50% of 100,000 PKR = 50,000 PKR
Earned Value (EV) = 40% of 100,000 PKR = 40,000 PKR
To determine ETC, first we have to find the EAC.
And, EAC = BAC / CPI
Hence, Cost Performance Index (CPI) = EV / AC = 40,000 / 60,000 = 0.67
Now, Estimate at Completion (EAC) = BAC / CPI
= 100,000 / 0.67 = 149,253
Now, Estimate to Complete (ETC) = EAC – AC
= 149,253 – 60,000 = 89,253 PKR
Hence the Estimate to Complete (ETC) for this project is 89,253 PKR.
 Project
Cost Management

Exam Cram Session

Estimate at completion (EAC) is periodic evaluation of;

A. The cost of work completed

B. The value of work performed
C. The anticipated total cost at project completion
D. What it will cost to finish the project
Which of the following is not needed in order to come up with a
project estimate?

A. A WBS
B. A network diagram
C. risks
D. A change control system
A rough order of magnitude estimate is made during which project
management process group?

A. Planning
B. Closing
C. Executing
D. Initiating
10. A cost baseline is an output of which cost management process?

A. Estimate activity resource

B. Estimate costs
C. Determine Budget
D. Control costs
11. During which project management process group are budget
forecast created?

A. Monitoring and controlling

B. Planning
C. Initiating
D. Executing
15. Which estimating METHOD tends to be more costly for
creating a project cost estimate?

A. Bottom up
B. Analogous
C. Parametric
D. 50/50
18. Which of the following represents the estimated value of the
work actually accomplished
A. Earned Value (EV)
B. Planned Value (PV)
C. Actual Cost (AC)
D. Cost Variance (CV)
19. The difference between cost baseline and cost budget could be
BEST describe as;
A. The management reserve
B. The contingency reserve
C. The project cost estimate
D. The cost account
22. The project manager is allocating the overall cost estimates to
individual activities to establish a baseline for measuring project
performance. What PROCESS is this?

A. Cost management
B. Estimate costs
C. Determine budgets
D. Control costs
23. Your cost forecast shows that you will have a cost overrun at the
end of the project. Which of the following should you do?

A. Eliminate risks in estimate and reestimate

B. Meet with sponsor to find out what work can be done sooner
C. Cut quality
D. Decrease scope
 Q&A

• What did I forget to tell you ?

• What is still on your mind about PMP Exam Cram Program?

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