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7
Introducing Project Cost Management
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CERTIFICATION OBJECTIVES
Projects cost money. Ever worked with a client who had a huge vision for a project
but little capital to invest in that vision? Or worked with a client who gasped when
you revealed how much it would cost to complete her desired scope of work? Or have
you been fortunate with customers who accepted the costs for the project at face value,
made certain that funds were available, and sent you on your way to complete the work?
As a general rule, management and customers are always concerned with how much a project
is going to cost in relation to how much a project is going to earn.
Most likely, there is more need for negotiating, questioning, and evaluating for larger
projects than for smaller ones. The relationship between the project cost and the
project scope should be direct: You get what you pay for. Think it’s possible to buy
a mansion at ranch home prices? Not likely. Think it’s possible to run a worldwide
marketing campaign at the cost of a postcard mailer? Not likely. A realistic expectation
of what a project will cost will give great weight to the project’s scope.
As the business need undergoes analysis, progressive elaboration and estimates are
completed based on varying levels of detail, and eventually the cost of the project
emerges. Often, however, predicted costs and actual costs vary. Poor planning, skewed
assumptions, and overly optimistic estimates all contribute to this. A successful
project manager must be able to plan, predict, budget, and control the costs of a
project.
Costs associated with projects are not just the costs of goods procured to complete
the project. The cost of the labor may be one of the biggest expenses of a project.
The project manager must rely on time estimates to predict the cost of the labor to
complete the project work. In addition, the cost of the equipment and materials needed
to complete the project work must be factored into the project expenses. This chapter
examines the management of project costs, how to predict them, account for them, and
then, with plan in hand, to control them. We’ll examine exactly how costs are planned
for and taken into consideration by the performing organization and how the size of
the project affects the cost estimating process.
CERTIFICATION OBJECTIVE 7.01
Planning the Project Costs
You need a plan on how you’ll manage the costs of the project. This direct-forward
cost management process is part of the project’s planning process group and defines
how you, the project manager, will manage the costs of the project. Like most of the
subsidiary project management plans, this plan directs the other processes in the
process group, while not actually doing the processes. It serves as a guidebook for
how the process groups should operate within your organization.
If you’re thinking that this cost management plan could be standardized for your organization,
you’re on the right track. Most organizations could create a standard project cost
management plan that serves as a template for all projects. You’d then adapt that
template to all future projects. That’s something important to remember for your PMI:
you don’t have to start from scratch when creating a subsidiary plan, cost management
plan, or others; just take what’s been created in the past and adapt it to the present.
That’s part of utilizing your organizational process assets to make your life easier,
but it also keeps the projects consistent by using what has worked in the past.
You might be wondering whether you need to create a cost management plan for every
project that you’re managing. Let me answer that for you: No, you don’t. Remember
that these processes are not required, but available. You might have a small project,
a project that’s based on previous work, or project for which all of the funds are
controlled and managed by functional management. There’s no need, probably, to create
an in-depth cost management plan in these instances.Considering the Cost Planning Inputs
If you’re tasked with creating the cost management plan, you’ll need several components
to help you do the planning. Bear in mind that this is a planning process, so you
may be returning to this process many times throughout the project. Chances are you
want to have in-depth information for the entire project when you start planning costs,
so you’ll have to revisit the process to complete the planning. Yes, that can be a
pain, but the cyclic nature of project management planning helps you create more accurate
project plans and provide better insight and control to the project’s cost performance.
Here are the four inputs you’ll use for cost management planning:
Project charter The project charter provides a high-level summary budget that can help guide the
cost planning process. Project management plan In particular, you’ll need the scope baseline and schedule baseline, and you’ll
need to reference the project plan for other information such as procurement, scope,
and risk.
Enterprise environmental factors Your organization may have rules and structure that affect how you manage costs.
Enterprise environmental factors also includes things like the market conditions,
exchange rates for international projects, and resource cost rates.
Organizational process assets Historical information, templates, financial controls, and formal and informal
cost management policies can also serve as an input to cost management planning.
Creating the Cost Management Plan
After considering expert judgment, undergoing analysis, and attending lots of meetings,
you and the project team will create the cost management plan. This project management
process is part of the project planning process group. The cost management plan defines
how the project costs will be estimated, how the budget will be created, and how you’ll
control the costs within the project. The plan also defines any analytical tools you’ll
use for performance of the project costs, such as earned value management (EVM).
The cost management plan accomplishes many things for the project manager, but chief
among them is that it defines how costs will be planned, managed, and controlled.
Here are the contents of the cost management plan you’ll create:
Units of measure Currency, staffing time, quantity metrics, and resource utilization costs
Level of precision How precise your measurements need to be: for example, you may be required to list
costs down to two decimal places, or you may round cents to the nearest dollar
Level of accuracy The acceptable range of variance for project costs, such as +/− 10 percent or a
dollar amount
Control thresholds The amount of variance that is allowed before an action must be taken, such as
a variance report or predefined cuts in the project scope to maintain overall costs
Rules of performance measurement The method you’ll use to measure project performance; for your PMP examination
you’ll want to reference earned value management later in this chapter
Organizational procedure links How the project’s costs will be linked to the deliverables in the WBS; the mid-level
components of the WBS that have a dollar amount associated with the deliverables are
called the control account
Reporting formats The expected modality for financial reports and communication
Process descriptions The definition of the cost management processes selected and how they’ll be executed
and controlled throughout the project
Additional planning details Funding information for the project, cash flow expectations, fluctuations in currency
exchanges, inflation, and overall cost recording
CERTIFICATION OBJECTIVE 7.02
Estimating the Project Costs
Cost estimating is the process of calculating the costs of the identified resources
required to complete the project work. The person or group doing the estimating must
consider the possible fluctuations, conditions, and other causes of variances that
could affect the total cost of the estimate.
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. In other words, a company performing projects for other
organizations may do a cost estimate to see how much the project is going to cost
to complete. Then, with this cost information, they’ll factor a profit into the project
work, as shown next.
More and more companies are requiring that the project manager calculate the project
costs and then factor the ROI and other benefit models into the project product. The
goal is to see the value of the project once its deliverables are in operation.
Considering the Cost Estimating Inputs
Cost estimating relies on several project components from the initiation and planning
process groups. This process also relies on enterprise environmental factors, the
processes and procedures unique to your organization, and the organizational process
assets, such as historical information and forms and templates.
Referencing the Cost Management Plan
The primary input to creating the cost estimates is the cost management plan. Recall
that this plan defines the acceptable approach for cost estimating in your organization
and for the project. The cost management plan is based on your company’s enterprise
environmental factors—specifically the rules and procedures for how you may estimate
costs. If you’re doing a project that’s internal to your company, you may have a looser
approach to cost estimating than if you’re doing a project for a client of your company.
The project for your client has a profit margin and cash inflows, while the internal
project, while still important, is funded by existing funds rather than incoming funds.
Referencing the Human Resource Plan
The estimator must know how much each resource costs, and the human resource plan
may include this information, depending on the organizational policies, application
area, and the type of project being completed. The cost should be in some unit of
time or measure—such as cost per hour, cost per metric ton, or cost per use. If the
rates of the resources are not known, the rates themselves may also have to be estimated.
Of course, skewed rates on the estimates will result in a skewed estimate for the
project. There are four categories of cost:
Direct costs These costs are attributed directly to the project work and cannot be shared among
projects (airfare, hotels, long distance phone charges, and so on).
Indirect costs These costs are representative of more than one project (utilities for the performing
organization, access to a training room, project management software license, and
so on).
Variable costs These costs vary, depending on the conditions applied in the project (the number
of meeting participants, the supply and demand of materials, and so on).
Fixed costs These costs remain constant throughout the project (the cost of a piece of rented
equipment for the project, the cost of a consultant brought onto the project, and
so on).
Value engineering is a systematic approach to finding less costly ways to complete
the same work. Project managers do this all the time: choosing the best resource to
complete the work the fastest, with the highest quality, or with the appropriate materials
while still keeping the overall project costs in check.
Using the Scope Baseline
You’ll need the scope baseline, as the goal of the project team and the stakeholders
is to create all of the elements in the project scope to satisfy the requirements
of the project. The project scope statement is with the project manager throughout
the entire project, and it’s useful to ensure that all of the requirements are being
met.
At a deeper level, however, you’ll want to rely on the work breakdown structure (WBS).
Of course, the WBS is included—it’s an input to seven major planning processes, all
of which deal with costs:
Developing the project management plan This is the overarching project management plan that includes not only the cost
management plan but also the information about how the project may be financed and
contracted, and what the expectations in the organization are for cost management.
Defining the project activities In some, but not all, projects, the project includes the cost of labor as part
of its project expenses. Any resources, such as equipment and material, will need
to be paid for as part of the project budget.
Estimating the project costs You’ll use the WBS to help you identify how much each work package will cost, and
this can help you create a definitive estimate (details coming up).
Determining the project budget You can estimate all you want, but you never know how much a project costs until
it’s done. The project budget is the cost aggregation and cost reconciliation for
each thing, service, and expense the project needs.
Planning the project quality A cost is associated with achieving the expected quality in a project. We’ll discuss
that more in Chapter 8.
Identifying the project risks Risks often have a cost element associated with them, and the project manager and
organization may create a contingency reserve to offset the risk exposure.
Planning the project procurement When the project needs to procure materials, labor, or services, the project manager
must follow a cost element and purchasing process.
Along with the WBS, you’ll rely on the WBS dictionary as the third element of the
scope baseline. The WBS dictionary provides information on each deliverable and the
associated work needed to create the WBS component. In addition, the WBS may be referenced
to an organization’s code of accounts. The code of accounts is a coding system used
by the performing organization’s accounting system to account for the project work.
Estimates within the project must be mapped to the correct code of accounts so that
the organization’s ledger reflects the actual work performed, the cost of the work
performed, and any billing (internal or external) that was charged to the customer
for the completed work.
Referencing the Project Schedule
Resources are more than just people—though people are a primary expense on most projects.
The schedule management plan identifies what resources are needed, when they’re needed,
and the frequency at which they’re needed. Essentially, the schedule management plan
allows the project manager and the project team to estimate how much the resources
will cost the project, when the funds will be used to employ or consume the resources,
and the cost impact should the identified resources miss deadlines within the project.
Estimates of the duration of the activities, which predict the length of the project,
are required for decisions on financing the project. The length of the activities
will help the performing organization calculate what the total cost of the project
will be, including the finance charges. Recall the formula for present value? It’s
PV = FV / (1 + i)n; PV is the present value, FV is the future value, i is the interest rate, and n is the number of time periods. The future value of the monies the project will earn
may need to be measured against the present value to determine whether the project
is worth financing, as shown next.
Calculations of the duration of activities are needed to extrapolate the total cost
of the work packages. For example, if an activity is estimated to last 14 hours and
Suzanne’s cost per hour is $80, then the cost of the work package is $1120 (14 × $80).
The duration shows management how long the project is expected to last and which activities
will cost the most. It also provides the opportunity to re-sequence activities to
shorten the project duration—which consequently shortens the finance period for the
project.
Straight-line depreciation allows the organization to write off the same amount each
year. The formula for straight-line depreciation is
(purchase value – salvage value) / number of years in use
For example, if the purchase price of a photocopier is $7000 and the salvage value
of the photocopier in five years is $2000, the formula would read ($7000 – $2000)
/ 5 = $1000.
Resources can also cost the project if they miss deadlines with penalties, such as
a schedule change in a union’s contract, the cost of materials based on seasonal demand,
and fines and penalties for failing to adhere to scheduled regulations.
Using the Risk Register
We’ve not said much about the risk register in the project, and it’s discussed in
detail in Chapter 11 on project risk management. However, due to the integrated nature of projects, this
is one of those examples where we’ll need to jump ahead just a bit. Risks, as you
probably know from your project management experience, can have a positive or negative
effect on the outcome of a project. All identified risks, their characteristics, status,
and relevant notes are recorded in the risk register.
Most risks, especially the probable, high-impact, negative ones, need to pass through
quantitative analysis to determine how much the risk may cost the project in time
and money. Based on risk analysis, the project manager creates a special budget just
for the impact of project risks: this is called the risk contingency reserve. You
need the risk register here in cost estimating to determine how much cash you’ll need
to offset the risk events as part of your cost estimates.
Contingency reserves can also be created to deal with those pesky “unknown unknowns”
that practically every project has to deal with. The “unknown unknowns” are essentially
risks that are lurking within the project but that haven’t been specifically identified
by name, source, or probability.
Contingency reserves can be managed in a number of different ways. The most common
is to set aside an allotment of funds for the identified risks within the project.
Another approach is to create a slush fund for the entire project for identified risks
and “known unknowns.” The final approach is an allotment of funds for categories of
components based on the WBS and the project schedule. You’ll see this again in much
more detail later in this book. (We hope you’ll be able to sleep between now and Chapter 11.)
Referencing Enterprise Environmental Factors
Enterprise environmental factors are an input to the cost estimating process because
these are the processes and rules regarding how the project manager will estimate
the costs within the organization. Enterprise environmental factors also include the
market conditions that can affect the procurement process and the costs vendors provide.
You’ll also want to consider any commercially available databases for pricing information.
Commercial databases for pricing include industry-standard rates for different types
of labor, cost per unit of materials, average costs based on geographical conditions,
and other factors depending on the industry.
All of the inputs mentioned for estimating the project costs are logical; however,
your company may have its own approach to cost estimating. That’s fine—the enterprise
environmental factors are also an input to cost estimating. Enterprise environmental
factors describe the processes and rules that are unique to your organization that
you are required to follow.
Using Organizational Process Assets
One of the preferred organizational process assets is historical information. After
all, if the project’s been done before, why reinvent the wheel? Historical information
is proven information and can come from several places:
Project files Past projects within the performing organization can be used as a reference to
predict current costs and time. Ensure that the records referenced are accurate, somewhat
current, and reflective of what was actually experienced in the historical project.
Commercial cost-estimating databases These databases provide estimates of what the project should cost based on the
variables of the project, resources, and other conditions.
The project team members’ recollections of what things cost should not be trusted
as fact, but as advice and input. Documented information is always better.
Team members Team members may have specific experience with the project costs or estimates.
Recollections may be useful but are highly unreliable when compared to documented
results.
Lessons learned Lessons-learned documentation can help the project team estimate the current project
if the lessons are from a project with a similar scope.
There are commercial estimating publications for different industries. These references
can help the project estimator confirm and predict the accuracy of estimates. If a
project manager elects to use one of these commercial databases, the estimate should
include a pointer to this database for future reference and verification.
Estimating Project Costs
Management, customers, and certain stakeholders are all going to be interested in
what the project is going to cost to complete. Several approaches to cost estimating
exist, which we’ll discuss in a moment. First, however, understand that cost estimates
have a way of following the project manager around—especially the lowest initial cost
estimate.
The estimates you’ll want to know for the PMP exam, and for your career, are reflective
of the accuracy of the information the estimate is based upon. The more accurate the
information, the better the cost estimate will be. If you’re steeped in experience
in a particular industry, you’ll probably have a good idea of what a project should
cost based on your experience. Sometimes you may hire a consultant or rely on experts
within your organization to help you predict the cost of a project. That’s great!
That’s an example of expert judgment.
Using Analogous Estimating
Analogous estimating relies on historical information to predict the cost of the current
project. It is also known as top-down estimating. The analogous estimating process
considers the actual cost of a historical project as a basis for the current project.
The cost of the historical project is applied to the cost of the current project,
taking into account the scope and size of the current project as well as other known
variables.
Analogous estimating is a form of expert judgment. This estimating approach takes
less time to complete than other estimating models, but it is also less accurate.
This top-down approach is good for fast estimates to get a general idea of what the
project may cost.
The following is an example of analogous estimating: The Carlton Park Project was
to grade and pave a sidewalk around a pond in the community park. The sidewalk of
Carlton Park was 1048 feet-by-6 feet, had a textured surface, had some curves around
trees, and cost $25,287 to complete. The current project, King Park, will have a similar
surface and will cover 4500 feet-by-6 feet. The analogous estimate for this project,
based on the work in Carlton Park, is $108,500. This is based on the price per foot
of material at $4.02.
As part of the planning process, the project manager must determine what resources
are needed to complete the project. Resources include the people, equipment, and materials
that will be utilized to complete the work. In addition, the project manager must
identify the quantity of the needed resources and when the resources are needed for
the project. The identification of the resources, the needed quantity, and the schedule
of the resources are directly linked to the expected cost of the project work.
Using Parametric Estimating
Parametric modeling uses a mathematical model based on known parameters to predict
the cost of a project. The parameters in the model can vary based on the type of work
being completed and can be measured by cost per cubic yard, cost per unit, and so
on. A complex parameter can be cost per unit, with adjustment factors based on the
conditions of the project. The adjustment factors may have additional modifying factors,
depending on additional conditions. 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.
The factors within the model are quantifiable and don’t vary much based on the effort
applied to the activity. And, finally, the model must be scalable between project
sizes. The parametric model using a scalable cost-per-unit approach is depicted next.
There are two types of parametric estimating:
Regression analysis This statistical approach predicts what future values may be, based on historical
values. Regression analysis creates quantitative predictions based on variables within
one value to predict variables in another. This form of estimating relies solely on
pure statistical math to reveal relationships between variables and predict future
values.
Learning curve This approach is simple: The cost per unit decreases the more units workers complete,
because workers learn as they complete the required work and perform the tasks more
quickly and efficiently. The estimate is considered parametric, since the formula
is based on repetitive activities, such as wiring telephone jacks, painting hotel
rooms, or performing other activities that are completed over and over within a project.
The cost per unit decreases as the experience increases, because the time to complete
the work becomes shorter. Of course, there will always be some cost associated with
the work, but there is a reduction in costs as the workers become more experienced
in completing the activities.
Don’t worry too much about regression analysis for the exam. You’re more likely to
have questions on the learning curve topic.
Using Bottom-Up Estimating
Bottom-up estimating starts from zero, accounts for each component of the WBS, and
arrives at a sum for the project. It is completed with the project team and can be
one of the most time-consuming methods used to predict project costs. Although this
method is more expensive because of the time invested to create the estimate, it is
also one of the most accurate methods. 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 cost within the project.
Creating a Three-Point Cost Estimate
It’s sometimes risky to use just one cost estimate for a project’s activity, especially
when the work hasn’t been completed before. And like any project work, you don’t know
how much it’s really going to cost until you pay for it. Issues, errors, delays, and
unknown risks can affect the project cost. Three-point estimates are also known as
simple averaging estimates. A three-point cost estimate attempts to find the average
of the cost of an activity using three factors:
Optimistic cost estimate
Most likely cost estimate
Pessimistic cost estimate
You can then simply sum up the three cost estimate values and divide by 3. Or you
can use the program evaluation and review technique (PERT) approach, which is slightly
different. PERT is a weighted average to the most likely cost estimate value. The
PERT formula is
(optimistic cost estimate + (4 × most likely cost estimate) + pessimistic cost estimate) / 6
Figure 7-1 shows the slight difference between a true average of the costs and the PERT approach.
FIGURE 7-1 Costs can be averaged with PERT or three-point estimates.
In either approach, simple averaging or PERT, you have to create three cost estimates
for each activity. This can get tiresome and overwhelming, especially on a larger
project. And if you elect to use an average estimate, be certain to document the approach
you took and record the actual costs of the project activities for future historical
information.
Both the three-point estimate and PERT expressed expected costs as cE. You might also
see cM, cO, and cP to represent most-likely costs, optimistic costs, and pessimistic
costs, respectively. Triangular distribution means it’s a three-point estimate, while
a beta distribution means it’s the traditional PERT formula.
Using Computer Software
Although the PMP examination is vendor-neutral, having a general knowledge of how
computer software can assist the project manager is necessary. Several computer programs
are available that can streamline project work estimates and increase their accuracy.
These tools can include project management software, spreadsheet programs, and simulations.
Analyzing Vendor Bids
Sometimes it’s just more cost-effective to hire someone else to do the work. Other
times, the project manager has no choice because no one within the organization has
the required skill set. In either condition, the vendors’ bids need to be analyzed
to determine which vendor should be selected based on their ability to satisfy the
project scope, the expected quality, and the cost of their services. We’ll talk all
about procurement in Chapter 12.
CERTIFICATION OBJECTIVE 7.03
Analyzing Cost Estimating Results
The output of cost estimating is the actual cost estimates of the resources required
to complete the project work. The estimate is typically quantitative and can be presented
in detail against the WBS components or summarized in terms of a grand total according
to various phases of the project or its major deliverables. Each resource in the project
must be accounted for and assigned to a cost category. Categories include the following:
Labor costs
Material costs
Travel costs
Supplies costs
Hardware costs
Software costs
Special categories (inflation, cost reserve, and so on)
The cost of the project is expressed in monetary terms, such as dollars, euros, or
yen, so management can compare projects based on costs. It may be acceptable, depending
on the demands of the performing organization, to provide estimates in staffing hours
or days of work to complete the project along with the estimated costs.
As projects have risks, the cost of the risks should be identified along with the
cost of the risk responses. The project manager should list the risks, their expected
risk event value, and the response to the risk should it come into play. We’ll cover
risk management in detail in Chapter 11.
The project manager also has to consider changes to the project scope. Chances are
that if the project scope increases in size, the project budget should reflect these
changes. A failure to offset approved changes with an appropriate dollar amount will
skew the project’s cost baselines and show a false variance.
Refining the Cost Estimates
Cost estimates can also pass through progressive elaboration. As more details are
acquired as the project progresses, the estimates are refined. Industry guidelines
and organizational policies may define how the estimates are refined, but there are
three generally accepted categories of estimating accuracy:
Rough order of magnitude This estimate is “rough” and is used during the initiating processes and in top-down
estimates. The range of variance for the estimate can be from –25 percent to +75 percent.
Budget estimate This estimate is also somewhat broad and is used early in the planning processes
and also in top-down estimates. The range of variance for the estimate can be from
–10 percent to +25 percent.
Definitive estimates This estimate type is one of the most accurate. It’s used late in the planning
processes and is associated with bottom-up estimating. The range of variance for the
estimate can be from –5 percent to +10 percent.
Considering the Supporting Detail
Once the estimates have been completed, the basis of the estimates must be organized
and documented to show how they were created. This material, even the notes that contributed
to the estimates, may provide valuable information later in the project. Specifically,
the supporting detail includes the following:
Information on the project scope work This may be provided by referencing the WBS.
Information on the approach used in developing the cost estimates This can include how the estimate was accomplished and the parties involved with
creating the estimate.
Information on the assumptions and constraints made while developing the cost estimates Assumptions and constraints can be wrong and can change the entire cost estimate.
The project manager must list what assumptions and constraints were made during the
cost estimate in order to communicate with stakeholders how she arrived at the estimate.
Information on the range of variance in the estimate For example, based on the estimating method used, the project cost may be $220,000
± $15,000. This project cost may be as low as $205,000 or as high as $235,000.
CERTIFICATION OBJECTIVE 7.04
Creating a Project Budget
Cost budgeting is the process of assigning a cost to an individual work package. The
sum of the costs of the individual work packages contribute to the predicted cost
for the entire project. The goal of this process is to assign costs to the work in
the project so it can be measured for performance. This is the creation of the cost
baseline, as shown here:
Cost budgeting and cost estimates may go hand in hand, but estimating should be completed
before a budget is requested—or assigned. Cost budgeting applies the cost estimates
over time. This results in a time-phased estimate for cost, allowing an organization
to predict cash flow needs. Cost estimates show costs by category, whereas a cost
budget shows costs across time.
Developing the Project Budget
Many of the tools and techniques used to create the project cost estimates are also
used to create the project budget. The following is a quick listing of the tools you
can expect to see on the PMP exam:
Cost aggregation Costs are parallel to each WBS work package. The costs of each work package are
aggregated to their corresponding control accounts. Each control account is then aggregated
to the sum of the project costs.
Reserve analysis You should be familiar with two reserves for your PMP exam. The first you’ve already
learned about: the risk contingency reserve. The second cost reserve is for management
reserve, and this chunk of cash is for unplanned changes to the project scope and
cost. It’s a buffer of cash for fluctuations for cost, errors, or other increases
in project cost. These reserves are not part of the cost baseline but are part of
the project budget. In other words, you don’t use these funds unless there’s a problem
in the project.
Expert judgment Subject matter experts can be consultants, vendors, internal stakeholders, project
team members, and other stakeholders that can help budget the project work. You might
also rely on trade groups and other entities within your organization.
Historical relationships This approach uses a parametric model to extrapolate what costs will be for a project
(for example, cost per hour and cost per unit). It can include variables and points
based on conditions. This approach might also use a top-down estimate type based on
historical information. A top-down estimate is also known as an analogous estimate
type.
Funding limit reconciliation Organizations have only so much cash to allot to projects—and no, you can’t have
all the monies right now. Funding limit reconciliation is an organization’s approach
to managing cash flow against the project deliverables based on a schedule, milestone
accomplishments, or data constraints. This helps an organization plan when monies
will be devoted to a project rather than using all of the funds available at the start
of a project. In other words, the monies for a project budget will become available
based on dates and/or deliverables. If the project doesn’t hit predetermined dates
and products that were set as milestones, the additional funding becomes questionable.
Creating the Cost Baseline
A project’s cost baseline measures performance and predicts the expenses over the
life of the project. It’s usually shown as an S-curve, as in Figure 7-2. The cost baseline allows the project manager and management to predict when the
project will be spending monies and over what time period. Any discrepancies early
on between the predicted baseline and the actual costs serve as a signal that the
project is slipping.
FIGURE 7-2 Cost baselines show predicted project and phase performance.
Large projects that have multiple deliverables may use multiple cost baselines to
illustrate the costs within each phase. In addition, larger projects may use cost
baselines to predict spending plans, cash flows of the project, and overall project
performance.
Establishing Project Funding Requirements
The project’s cost baseline can help the project manager and the organization determine
when the project will need cash infusions. Based on phases, milestones, and capital
expenses, the project funding requirements can be mapped to the project schedule and
the organization can plan accordingly. This is where the concept of project step funding
originates. The curve of the project’s timeline is funded in steps, where “step” is
an amount of funds allotted to the project to reach the next milestone in the project.
Recall from the project life cycle that milestones are usually tied to the completion
of project phases. Each phase creates a deliverable and usually allows the project
to move on to the next phase of project execution. The pause for review and determination
of additional funds for the project is called a phase gate.
CERTIFICATION OBJECTIVE 7.05
Implementing Cost Control
Cost control focuses on the ability of costs to change and on the ways of allowing
or preventing cost changes from happening. When a change does occur, the project manager
must document the change and the reason why the change occurred, and, if necessary,
she will create a variance report. Cost control is concerned with understanding why
the cost variances, both good and bad, have occurred. The “why” behind the variances
allows the project manager to make appropriate decisions on future project actions.
Ignoring the project cost variances may cause the project to suffer from budget shortages,
additional risks, or scheduling problems. When cost variances happen, they must be
examined, recorded, and investigated. Cost control allows the project manager to confront
the problem, find a solution, and then act accordingly. Specifically, cost control
focuses on the following activities:
Controlling causes of change to ensure the changes are actually needed
Controlling and documenting changes to the cost baseline as they happen
Controlling changes in the project and their influence on cost
Performing cost monitoring to recognize and understand cost variances
Recording appropriate cost changes in the cost baseline
Preventing unauthorized changes to the cost baseline
Communicating the cost changes to the proper stakeholders
Working to bring and maintain costs within an acceptable range
Considering Cost Control Inputs
To implement cost control, the project manager must rely on several documents and
processes.
Cost performance baseline The cost performance baseline is the expected cost the project will incur. This
time-phased budget reflects the amount that will be spent throughout the project.
Recall that the cost performance baseline is a tool used to measure project performance.
And, yes, it’s the same thing as the cost baseline.
Cost management plan The cost management plan dictates how cost variances will be managed.
Project funding requirements The funds for a project are not allotted all at once, but stair-stepped in alignment
with project deliverables. Thus, as the project moves toward completion, additional
funding is allotted. This allows for cash-flow forecasting. In other words, an organization
doesn’t need to have all of the project’s budget allotted at the start of the project,
but it can predict, based on expected income, that all of the project’s budget will
be available in incremental steps.
Work performance data Reports on project progress, status of project activities, status of project deliverables,
and information about the project costs and the cost of the balance of the project
work.
Organizational process assets One category of inputs for cost control are the existing methods, forms, templates,
and guidelines in the organization’s organizational process assets.
Creating a Cost Change Control System
Sometimes a project manager must add or remove costs from a project. The cost change
control system is part of the integrated change control system and documents the procedures
to request, approve, and incorporate changes to project costs.
When a cost change enters the system, the project manager must create the appropriate
paperwork and follow a tracking system and procedures to obtain approval on the proposed
change. Figure 7-3 demonstrates a typical workflow for cost change approval. If a change gets approved,
the cost baseline is updated to reflect the approved changes. If a request gets denied,
the denial must be documented for future potential reference.
FIGURE 7-3 A cost change control system tracks and documents cost changes.
CERTIFICATION OBJECTIVE 7.06
Measuring Project Performance
Earned value management (EVM) is the process of measuring the performance of project
work against a plan to identify variances. It can also be useful in predicting future
variances and the final costs at completion. EVM is a system of mathematical formulas
that compares work performed against work planned and measures the actual cost of
the work performed. It’s an important part of cost control because it allows a project
manager to predict future variances from the expenses to date within the project.
See the video “Earned Value Management.”In regard to cost management, EVM is concerned with the relationships between three
formulas that reflect project performance. Figure 7-4 demonstrates the connection between the following EVM values:
FIGURE 7-4 Earned value management measures project performance.
Planned value (PV) Planned value is the work scheduled and the budget authorized to accomplish that
work. For example, if a project has a budget of $100,000 and month six represents
50 percent of the project work, the PV for month six is $50,000. The entire project’s
planned value—that is, what the project should be worth at completion—is known as
the budget at completion. You might also see the sum of the planned value called the
performance measurement baseline.
Earned value (EV) Earned value is the physical work completed to date and the authorized budget for
that work. For example, if a project has a budget of $100,000 and the work completed
to date represents 25 percent of the entire project work, its EV is $25,000.
Actual cost (AC) Actual cost is the actual amount of monies the project has required to date. For
example, if a project has a budget of $100,000 and $35,000 has been spent on the project
to date, the AC of the project would be $35,000.
These three values offer key information about the worth of the project to date (EV),
the cost of the project work to date (AC), and the planned value of the work to date
(PV).
Finding the Variances
At the end of the project, will there be a budget variance (VAR)? Any variance at
the end of the project is calculated by subtracting the actual costs (ACs) of the
project work from the budget at completion (BAC). The term BAC refers to the estimated
budget at completion—what you and the project customer agree the project will likely
cost. Of course, you don’t actually know how much the project will cost until it’s
completely finished. So throughout the project, a variance is any result that is different
from what is planned or expected.
Cost Variances
The cost variance (CV) is the difference between the earned value and the actual costs
(AC). For example, for a project that has a budget of $200,000 and has earned or completed
10 percent of the project value, the EV is $20,000. However, due to some unforeseen
incidents, the project manager had to spend $25,000 to complete that $20,000 worth
of work. The AC of the project, at this point, is $25,000 and the cost variance is
–$5000. Thus, the equation for cost variance is CV = EV – AC.
Schedule Variances
A schedule variance (SV) is the value that represents the difference between where
the project was planned to be at a certain point in time and where the project actually
is. For example, consider a project with a budget of $200,000 that’s expected to last
two years. At the end of year one, the project team has planned that the project be
60-percent complete. Thus, the planned value (PV) for 60-percent completion equates
to $120,000—the expected worth of the project work at the end of year one. But let’s
say that at the end of year one the project is only 40-percent complete. The EV at
the end of year one is, therefore, $80,000. The difference between the PV and the
EV is the SV: –$40,000. The equation for schedule variance is SV = EV – PV.
When it comes to variances, don’t forget the negative signs.
Calculating the Cost Performance Index
The cost performance index (CPI) shows the amount of work the project is completing
per dollar spent on the project. In other words, a CPI of 0.93 means it is costing
$1.00 for every 93 cents’ worth of work. Or you could say the project is losing 7
cents on every dollar spent on the project. Let’s say a project has an EV of $25,000
and an AC of $27,000. The CPI for this project is thus 0.93. The closer the number
is to 1, the better the project is doing. The equation for cost performance index
is CPI = EV / AC.
CPI is a value that shows how the project costs are performing to plan. It relates
the work you’ve accomplished to the amount you’ve spent to accomplish it. A CPI under
1.00 means the project is performing poorly against the plan. However, a CPI over
1.00 does not necessarily mean that the project is performing well. It could mean
that estimates were inflated or that an expenditure for equipment is late or sitting
in accounts payable and has not yet been entered into the project accounting cycle.
Finding the Schedule Performance Index
The schedule performance index (SPI) is similar to the CPI. The SPI, however, reveals
how closely the project is on schedule. Again, as with the CPI, the closer the quotient
is to 1, the better. The formula for schedule performance index is SPI = EV / PV.
In our example, the EV is $20,000, and let’s say the PV, where the project is supposed
to be, is calculated as $30,000. The SPI for this project is then 0.67—way off target!
Preparing for the Estimate at Completion
The estimate at completion (EAC) is a hypothesis of what the total cost of the project
will be. Before the project begins, the project manager completes an estimate for
the project deliverables based on the scope baseline. As the project progresses, in
most projects there will be some variances between the cost estimate and the actual
cost. The difference between these is the variance for the deliverable.
Know this formula for calculating the EAC: EAC = BAC / CPI. It’s the most common of
the formulas presented.
The EAC is based on experiences in the project so far. There are several different
formulas for calculating the EAC, as Figure 7-5 demonstrates. For now, and for the exam, here’s the EAC formula you’ll need to know:
EAC = BAC / CPI. In our project, the BAC is $200,000. The CPI was calculated to be
0.80. The EAC for this project, then, is $250,000.
FIGURE 7-5 There are many approaches to calculating the EAC.
Considering Project Performance
Another variation of the EAC is to consider the project performance beyond just the
CPI. This approach looks at the project performance, good or bad, and considers the
actual costs of the project to date, the budget at completion, and the project’s earned
value. This EAC formula is EAC = AC + BAC – EV.
For example, consider a project with a BAC of $350,000 that’s 45-percent complete,
though it’s supposed to be 60-percent complete at this point. The earned value for
this project is 45 percent of the $350,000, which is $157,500. In this scenario, the
project has actually spent $185,000—considerably more than what the project should
have spent. Let’s plug in this EAC formula. EAC = $185,000 + $350,000 – $157,500.
The EAC for this project using this formula would be $377,500.
Consider Project Variances
Sometimes a project may have some wild swings on the project cost variances and the
project schedule variances, and you want to take these variances into consideration
when predicting the project’s estimate at completion. Usually, it’s the project schedule
that’s affecting the project’s ability to meet its cost obligations because the planned
value continues to slip, which wrecks the SPI. Add to that the concept that the longer
a project takes to complete, the more likely that the project costs will increase.
Here’s this windy formula (get your slide rule out): EAC = AC + [(BAC – EV) / (CPI
× SPI)]. Let’s try this one using the same values as the last example. Consider a
project with a BAC of $350,000 that’s 45-percent complete, though it’s supposed to
be 60-percent complete. The earned value for this project is 45 percent of $350,000,
which is $157,500. In this scenario, the project has actually spent $185,000—considerably
more than what the project should have. Here are the parts of our formula:
Actual cost = $185,000
Planned value = $210,000
Budget at completion = $350,000
Earned value = $157,500
Cost performance index = 0.85
Schedule performance index = 0.75
Let’s plug these values into the formula EAC = AC + [(BAC – EV) / (CPI × SPI)]:
EAC = $185,000 + [($350,000 – $157,500) / (0.85 × 0.75)]
EAC = $185,000 + (192,500 / 0.64)
EAC = $185,000 + 300,781.25
EAC = $485,781.25
Finding the Estimate to Complete
The estimate to complete (ETC) shows how much more money will be needed to complete
the project. To calculate the ETC, you need to know another formula: the estimate
at completion (EAC). Remember that the EAC is what you predict the project will cost
based on current conditions. The EAC is a pretty straightforward formula: EAC – AC.
Let’s say our EAC was calculated to be $250,000 and that our AC is currently $25,000;
our ETC would then be $225,000.
Accounting for Flawed Estimates
Imagine a project to install a new operating system on 1000 workstations. One of the
assumptions the project team made was that each workstation had the correct hardware
to install the operating system automatically. As it turns out, this assumption was
wrong, and now the project team must change their approach to installing the system.
Because the assumption to install the operating system was flawed, a new estimate
to complete the project is needed. This is the most accurate approach in estimating
how much more the project will cost, but it’s the hardest to do. This new estimate
to complete the work is the ETC, which represents how much more money is needed to
complete the project work, and its formula is simply a revised estimate of how much
more the remaining work will cost to complete. Nothing tricky here.
Accounting for Anomalies
During a project, sometimes weird stuff happens. These anomalies, or weird stuff,
can cause project costs to be skewed. For example, consider a project with a $10,000
budget to construct a wooden fence around a property line. One of the project team
members makes a mistake while installing the wooden fence and reverses the face of
the fencing material. In other words, the material for the outside of the fence faces
the wrong direction.
The project now has to invest additional time to remove the fence material, correct
the problem, and replace any wood that may have been damaged in the incorrect installation.
The project, mistakes and all, is thus considered 20 percent done, so the earned value
is $2000. This anomaly likely won’t happen again, but it will add costs to the project.
For these instances, when events happen but the project manager doesn’t expect similar
events to happen again, the following ETC formula should be used: ETC = (BAC – EV).
Let’s try this out with our fencing project. The project’s EV is only $2000 since
the project has barely started. The formula would read ETC = $10,000 – $2,000.
Monies that have been spent on a project are called sunk costs. In evaluating whether
a project should continue or not, the sunk costs should not be considered—they are
gone forever.
Accounting for Typical Variances
This last ETC formula is used when existing variances in the project are expected
to be typical of the remaining variances in the project. For example, a project manager
has overestimated the competence of the workers to complete the project work. Because
the project team is not performing at the level the project manager expected, work
is completed late and in a faulty manner. Rework has been a common theme for this
project.
The formula for these instances is ETC = (BAC – EV) / CPI. In our example, let’s say
the AC is $45,000, the BAC is $250,000, the EV is $37,500, and our CPI is calculated
to be 0.83. The ETC formula for this project is ETC = ($250,000 – $37,500) / 0.83.
The result of the formula (following the order of operations) is thus $256,024.
Calculating the To-Complete Performance Index
Imagine a formula that would tell you if the project can meet the budget at completion
based on current conditions. Or imagine a formula that can predict whether the project
can even achieve your new estimate at completion. Well, forget your imagination and
just use the to-complete performance index (TCPI). This formula can forecast the likelihood
of a project to achieve its goals based on what’s happening in the project right now.
There are two different flavors for the TCPI, depending on what you want to accomplish:
If you want to see if your project can meet the budget at completion, you’ll use
this formula: TCPI = (BAC – EV) / (BAC – AC).
If you want to see if your project can meet the newly created estimate at completion,
you’ll use this version of the formula: TCPI = (BAC – EV) / (EAC – AC).
Any result greater than 1 in either formula means that you’ll have to be more efficient
than you planned to achieve the BAC or the EAC, depending on whichever formula you’ve
used. Basically, the greater the number is over 1, the less likely it is that you’ll
be able to meet your BAC or EAC. The lower the number is from 1, the more likely you
are to reach your BAC or EAC (again, depending on which formula you’ve used).
Finding the Variance at Completion
Whenever you talk about variances, it’s the difference between what was expected and
what was experienced. The formula for the variance at completion (VAC) is VAC = BAC
– EAC. In our example, the BAC was $200,000 and the EAC was $250,000, so the VAC is
predicted to be $50,000.
The Five EVM Formula Rules
For EVM formulas, the following five rules should be remembered:
1. Always start with EV.
2. Variance means subtraction.
3. Index means division.
4. Less than 1 is bad in an index.
5. Negative is bad in a variance.
The formulas for earned value analysis can be completed manually or through project
management software. For the exam, you’ll want to memorize these formulas. Table 7-1 shows a summary of all the formulas, as well as a sample, albeit goofy, mnemonic
device.
TABLE 7-1 A Summary of EVM Formulas
These aren’t much to memorize, I know, but you should. Although you won’t have an
overwhelming amount of EVM questions on your exam, these are free points if you know
the formulas and can do the math.
I have a present for you. It’s a Microsoft Excel spreadsheet called “EV Worksheet.”
It has all of these formulas in action. I recommend you make up some numbers to test
your ability to complete these formulas and then plug your values into Excel to confirm
your math. Enjoy!Additional Planning
Planning is an iterative process. Throughout the project, there will be demands for
additional planning—and an output of cost control is one of those demands. Consider
a project that must complete by a given date and that also has a set budget. The balance
between the schedule and the cost must be maintained. The project manager can’t assign
a large crew to complete the project work if the budget won’t allow it. The project
manager must, through planning, get as creative as possible to figure out an approach
to accomplish the project without exceeding the budget.
The balance between cost and schedule is an ongoing battle. Although it’s usually
easier to get more time than money, this isn’t always the case. Consider, for example,
deadlines that can’t be moved; or perhaps the company faces fines and penalties; or
a deadline that centers on a tradeshow, an expo, or the start of the school year.
Using Computers
It’s hard to imagine a project, especially a large project, moving forward without
the use of computers. Project managers can rely on project management software and
spreadsheet programs to assist them in calculating actual costs, earned value, and
planned value.
It’s not difficult to create a spreadsheet with the appropriate earned value formulas.
After you’ve created the spreadsheet, you can save it as a template and use it on
multiple projects. If you want, and if your software allows it, you can tie in multiple
earned value spreadsheets to a master file to track all of your projects at a glance.
CERTIFICATION OBJECTIVE 7.07
Considering the Cost Control Results
Cost control is an ongoing process throughout the project. The project manager must
actively monitor the project for variances to costs. Specifically, the project manager
should always do the following:
Monitor cost variances and then understand why variances have occurred.
Update the cost baseline as needed based on approved changes.
Work with the conditions and stakeholders to prevent unnecessary changes to the
cost baseline.
Communicate to the appropriate stakeholders cost changes as they occur.
Maintain costs within an acceptable and agreed-upon range.
Revising the Cost Estimates
As the project progresses and more detail becomes available, there may be a need to
update the cost estimates. A revision to the cost estimates requires communication
with the key stakeholders to share why the costs were revised. A revision to the cost
estimates may have a ripple effect: Other parts of the project may need to be adjusted
to account for the changes in cost, the sequence of events may need to be reordered,
and resources may have to be changed. In some instances, the revision of the estimates
may be expected, as with phased-gate estimating in a lengthy project.
Updating the Budget
Updating the budget is slightly different from revising a cost estimate. Budget updates
allow the cost baseline to be changed. The cost baseline is the “before project snapshot”
of what the total project scope and the individual WBS components should cost. Should
the project scope grow, as shown next, the cost will also likely change to be able
to fulfill the new scope.
If a project undergoes drastic changes—due to large changes to the project scope,
false assumptions, or new demands from the customer—it may be necessary to rebaseline
the project cost. Rebaselining is done only in drastic changes, because it essentially
resets the project.
Applying Corrective Actions
Throughout a project, the project manager will apply corrective actions. Corrective
actions are any actions applied to project performance to bring the project back into
alignment with the project plan. Corrective actions can be scheduling changes, a shift
in resources, or a different approach to completing the project work—essentially any
action, even nudges or shoves, designed to bring the project back to its expected
level of performance.
Updating Lessons Learned
As part of cost control, the project manager should update the lessons-learned document
to reflect the decisions behind the actions taken. For example, the project manager
should identify the following:
Any changes to the cost baseline and why they were approved
Corrective actions and why they were implemented
Cost control challenges and issues, and how they were resolved
Other cost control information that may be beneficial for other projects
CERTIFICATION SUMMARY
There are several contributing factors to cost on any project: the expense of the
labor to complete the project, the expense of materials needed to complete the project,
and the expense of the equipment needed to complete a project. These expenses must
be estimated, planned for, and monitored for a project to finish on budget.
Management and customers will want to know how much a project is going to cost so
that they can determine whether the project is worth doing, whether the project deliverable
will be worth the cost, and if the project will be profitable. The estimates for project
costs can come in several forms:
Analogous estimating Uses similar historical information to predict the cost of the current project.
Top-down estimating Uses a similar project as a cost baseline and factors in current project conditions
to predict costs. Note that analogous estimating is also top-down estimating.
Parametric estimating Uses a parameter, such as cost per metric ton, to predict project costs.
Bottom-up estimating Starts at zero and adds expenses from the bottom up.
The resources needed to complete a project may be one of the biggest expenses in the
project’s budget. The activities the resources complete must be worthy of the resources’
time. In other words, the project manager does not want to assign a $125-per-hour
engineer to perform filing that a $15-per-hour administrative assistant is qualified
to do. Accurate assignment of project resources to project activities helps prevent
waste.
Projects also involve four different kinds of cost:
Direct costs These costs are attributed directly to the project and cannot be shared with operations
or other projects.
Indirect costs These costs can be shared across multiple projects that use the same resources—such
as for a training room or piece of equipment.
Variable costs These costs vary depending on the conditions within the project.
Fixed costs These costs remain the same throughout the project.
There is one last cost, called opportunity cost. This is a special cost because it
really doesn’t cost the organization anything out of pocket but represents the cost
of a lost opportunity. Opportunity costs are an expense that companies that complete
projects for other organizations should realize. When an organization that completes
projects for others must forgo one project in order to complete the other, the value
of the forgone project is the opportunity cost. For example, let’s say a company has
two projects it can complete, but it must choose only one of them. Project A is worth
$75,000, while Project B is worth $50,000. If the company chooses Project A, the opportunity
cost is thus $50,000 because the company misses out on the opportunity.
Key Terms
If you’re serious about passing the PMP exam, memorize these terms and their definitions.
For maximum value, create your own flashcards based on these definitions and review
them daily.
actual costs The amount of funds the project has spent to date. The difference between actual
costs and the earned value will reveal the cost variance.
analogous estimating This relies on historical information to predict estimates for current projects.
Analogous estimating is also known as top-down estimating and is a form of expert
judgment.
bottom-up estimating A technique by which an estimate for each component in the WBS is developed and
then totaled for an overall project budget. This is the longest method to complete,
but it provides the most accurate estimate.
budget at completion The predicted budget for the project; what the project should cost when it is completed.
Budget at completion represents 100 percent of the planned value for the project’s
completion.
chart of accounts A coding system used by the performing organization’s accounting system to account
for the project work.
cost baseline Usually shown in an S-curve, the cost baseline indicates what the project is expected
to spend. It allows the project manager and management to predict when the project
will be spending monies and over what duration. The purpose of the cost baseline is
to measure and predict project performance.
cost budgeting A process of assigning a cost to an individual work package. This process shows
costs over time. The cost budget results in an S-curve that becomes the cost baseline
for the project.
cost change control This is part of the integrated change control system and documents the procedures
to request, approve, and incorporate changes to project costs.
cost control An active process to control causes of cost change, to document cost changes, and
to monitor cost fluctuations within the project. When changes occur, the cost baseline
must be updated.
cost estimating The process of calculating the costs, by category, of the identified resources
to complete the project work.
cost management plan A subsidiary plan of the overall project management plan that defines how costs
will be estimated, budgeted, and controlled.
cost performance index The process of calculating the costs, by category, of the identified resources
to complete the project work.
cost variance The difference between the earned value and the actual costs.
direct costs These costs are attributed directly to the project and cannot be shared with operations
or other projects.
earned value The value of the work that has been completed and the budget for that work: EV
= % Complete × BAC.
earned value management EVM integrates scope, schedule, and cost to provide an objective, scalable, point-in-time
assessment of the project. EVM calculates the performance of the project and compares
current performance against plan. EVM can also be a harbinger of things to come. Results
early in the project can predict the likelihood of the project’s success or failure.
estimate at completion A hypothesis of what the total cost of the project will be. Before the project
begins, the project manager completes an estimate for the project deliverables based
on the WBS. As the project progresses, there will likely be some variances between
what the cost estimate was and what the actual cost is. The EAC is calculated to predict
what the new estimate at completion will be.
estimate to complete Represents how much more money is needed to complete the project work: ETC = EAC
– AC.
estimating publications Typically, a commercial reference to help the project estimator confirm and predict
the accuracy of estimates. If a project manager elects to use one of these commercial
databases, the estimate should include a pointer to this document for future reference
and verification.
fixed costs Costs that remain the same throughout the project.
indirect costs These costs can be shared across multiple projects that use the same resources—such
as for a training room or piece of equipment.
parametric modeling A mathematical model based on known parameters to predict the cost of a project.
The parameters in the model can vary based on the type of work being done. A parameter
can be cost per cubic yard, cost per unit, and so on.
planned value The worth of the work that should be completed by a specific time in the project
schedule.
risk An uncertain event that can have a positive or negative influence on the project’s
success. It can affect the project costs, project schedule, and often both. All risks
and their status should be recorded in the risk register.
schedule performance index This reveals the efficiency of work. The closer the quotient is to 1, the better:
SPI = EV / PV.
schedule variance The difference between the planned work and the earned work.
to-complete performance index An EVM formula that can forecast the likelihood of a project to achieve its goals
based on what’s currently happening in the project.
top-down estimating A technique that bases the current project’s estimate on the total of a similar
project. A percentage of the similar project’s total cost may be added to or subtracted
from the total, depending on the size of the current project.
variable costs Costs that vary, depending on the conditions within the project.
variance The time or cost difference between what was planned and what was actually experienced.
INSIDE THE EXAM
The PMP examination requires that the exam candidate know how to estimate, budget,
and manage costs. The WBS is an input to estimating costs because it reflects the
whole of the project. When creating the estimates, rely on documented historical information
over team members’ recollections. There are three estimating approaches:
Analogous A top-down approach that is less costly and less accurate than others and that
offers an idea of what the project will cost.
Bottom-up Starts with zero and adds up all the expenses. This is more costly and takes longer
but gains team buy-in to the project.
Parametric modeling Uses a parameter for labor and goods to calculate the cost of the project.
The accuracy of the estimates is based on available information. As the project manager
and the project team progressively elaborate on the project plan, more details become
available. The more details a project has, the more accurate the estimate. Know the
following facts on estimating:
Rough order of magnitude The accuracy of the estimate ranges from –25 percent to +75 percent and is used
in both the initiation process and in top-down estimating.
Budget estimate The accuracy of the estimate ranges from –10 percent to +25 percent. This is used
early in the planning process and also in top-down estimating.
Definitive estimate The accuracy of the estimate ranges from –5 percent to +10 percent. This is used
late in the planning process and in bottom-up estimating.
The resources on a project can include people, materials, and equipment. If the people
working on a project do not have the necessary skill set to complete the work, hire
an SME to guide the project implementation, outsource the project work, or train the
current people in the needed skills.
EVM is a tool to measure project performance. It is the budget at completion multiplied
by the percentage of the project work that has been completed. The cost performance
index shows how well the project is performing financially, and is calculated by dividing
EV by the actual costs spent on the project. Use the most common formula for finding
the estimate at completion: EAC = BAC / CPI.
TWO-MINUTE DRILLPlanning the Project Costs
Planning the project costs is the first process you’ll encounter in the project
cost management knowledge area. This process creates the cost management plan, which
defines how the project costs will be estimated, spent, managed, and controlled throughout
all of the project activities. In order to plan the project costs you’ll need the project management plan, the
project charter, the rules of the enterprise environmental factors, and any organizational
process assets. Organizational process assets can help with planning if you’ve done
similar projects in the past and can use the historical information as a template
for the current project.
The cost management plan also defines the earned value management formulas your
project will utilize if appropriate. Recall that the purpose of earned value management
is to show performance in the project and allow for forecasting of the project’s overall
performance based on current information.
Estimating the Project Costs
The project manager must know what resources are needed to complete the project
work. How will the project be completed without the resources? The project manager
must know the people, the equipment, materials, and other resources needed to make
the vision of the project a reality. Once the resources are identified, the costs
of the resources can be calculated.
The resources also must be known so the project manager can predict, monitor, and
control what the project costs are expected to be. The relationship between the project
vision and the needed resources can help the project manager work within the predicted
costs.
Resources to complete a project also include services, leases, real estate, and
other components that contribute to the project work being completed.
Analyzing Cost Estimating Results
The rough order of magnitude estimate is used during the initiating processes and
in top-down estimates. The range of variance for the estimate can be from –25 percent
to +75 percent.
Budget estimate is also somewhat broad and is used early in the planning processes
and in top-down estimates. The range of variance for the estimate can be from –10
percent to +25 percent.
Definitive estimate is one of the most accurate. It’s used late in the planning
processes and is associated with bottom-up estimating. The range of variance for the
estimate can be from –5 percent to +10 percent.
Analogous estimating uses a similar project to predict what the costs of the current
project should be. It is less accurate but easier and faster to complete than other
methods.
Parametric estimating uses a parameter for units of goods and time to calculate
what the project will cost—for example, cost per hour, cost per metric ton, or cost
per cubic yard.
Creating a Project Budget
Cost aggregation maps the overall costs to each WBS work package. The costs of each
work package are aggregated to their corresponding control accounts. Each control
account then is aggregated to the sum of the project costs.
Funding limit reconciliation is an organization’s approach to managing cash flow
against the project deliverables based on a schedule, milestone accomplishment, or
data constraints. This helps an organization plan when monies will be devoted to a
project rather than using all of the funds available at the start of a project. In
other words, the monies for a project budget will become available based on dates
and/or deliverables.
Implementing Cost Control
The cost management plan documents how the project manager will react to cost variances
within the project. The performing organization will likely have policies and procedures
on unacceptable variances.
Variances that cross a given threshold may require the project manager to create
a variance report to explain the variance, why it has happened, and what corrective
action has been applied to prevent the variance from recurring.
Cost control is the process of monitoring and documenting cost changes, whether
they are allowed to occur or are prevented from occurring. The project manager studies
the cost changes to understand why the change has happened and then makes corrective
actions to the project if needed.
Measuring Project Performance
Planned value is the work scheduled and the budget authorized to accomplish that
work. The entire project’s planned value—that is, what the project should be worth
at completion—is known as the budget at completion. You might also see the sum of
the planned value called the performance measurement baseline.
Earned value is the physical work completed to date and the authorized budget for
that work.
Actual cost is the actual amount of monies the project has required to date.
The cost variance is the difference between the earned value and the actual costs.
A schedule variance (SV) is the value that represents the difference between where
the project was planned to be at a certain point in time and where the project actually
is.
The cost performance index (CPI) shows the amount of work the project is completing
per dollar spent on the project.
The schedule performance index (SPI) reveals how closely the project is on schedule.
The estimate at completion (EAC) is a hypothesis of what the total cost of the project
will be.
The estimate to complete (ETC) shows how much more money will be needed to complete
the project.
The to-complete performance index (TCPI) can forecast the likelihood of a project
to achieve its goals based on what’s happening in the project right now.
Considering the Cost Control Results
Cost control can cause changes and updates within the project for the project scope,
schedule, or overall costs. If the cost of material increases, there may be tradeoffs
in the project scope to afford the existing materials. For example, the stakeholders
or project manager could elect to use a lower grade of material or remove the deliverable
from scope, if that’s feasible, to keep the costs in check. Either way, if the cost
of materials increases, there will be ripples throughout the project.
Updating the budget is slightly different from revising a cost estimate. Budget
updates allow the cost baseline to be changed. The cost baseline is the “before project
snapshot” of what the total project scope and the individual WBS components should
cost.
Errors in the project can cause costs to increase. Corrective actions are an effort,
technically a change request, to bring the project back into alignment with the cost
baseline and what was planned.
SELF TEST
1. You are the project manager for your organization and you need to create a cost
estimate for your current project. This project is similar to the ABG Project you
completed a few months ago, so you report to your program manager that you’ll be using
analogous estimating. Which of the following best describes analogous estimating?
A. Regression analysis
B. Bottom-up estimating
C. Less accurate
D. More accurate
2. You are the project manager for the GHG Project. You are about to create the cost
estimates for the project. Which input to this process will help you the most?
A. Parametric modeling
B. WBS
C. Project scope
D. Requirements document
3. You are the project manager for the JKH Project. You have elected to use parametric
estimating in your cost estimating for the project. Which of the following is an example
of parametric estimating?
A. $750 per ton
B. Historical information from a similar project
C. Estimates built bottom-up based on the WBS
D. Estimates based on top-down budgeting
4. You are the project manager for a new technology implementation project. Management
has requested that your estimates be as exact as possible. Which one of the following
methods of estimating will provide the most accurate estimate?
A. Top-down estimating
B. Top-down budgeting
C. Bottom-up estimating
D. Parametric estimating
5. Your company has been hired to install the tile in 1000 hotel rooms. All rooms
will be identical in nature and will require the same amount of materials. Your project
team has completed the first three hotel rooms that took an average of six hours each
to complete. You calculate the time to install the tile in each hotel room at six
hours. The cost for the labor for your new project team is calculated at $700 per
room. Your project sponsor disagrees with your labor estimate. Why?
A. You haven’t completed one hotel room yet, so you don’t know how long the work
will actually take.
B. You have not factored in all of the effort applied to the work.
C. You have not considered the law of diminishing returns.
D. You have not considered the learning curve.
6. You are the project manager for a construction project to build 17 cabins. All
of the cabins will be identical in nature. The contract for the project is set at
a fixed cost, the incentive being that the faster the project work is completed, the
more profitable the job. Management has requested that you study the work method to
determine a faster, less costly, and better method of completing the project. This
is an example of which one of the following?
A. Time constraint
B. Schedule constraint
C. Value engineering
D. Learning curve
7. You are the project manager for a technical implementation project. The customer
has requested that you factor in the after-the-project costs, such as maintenance
and service. This is an example of which one of the following?
A. Life-cycle costs
B. Scope creep
C. Project spin-off
D. Operations
8. You are the project manager for your organization and you need to create a cost
estimate for your current project. Your manager informs you that this project requires
a precise cost estimate so you need to choose the most accurate estimating approach
possible. Which one of the following provides the least accuracy in estimating?
A. Rough order of magnitude
B. Budget estimate
C. Definitive estimate
D. WBS estimate
9. As a PMP candidate, you need to be able to compare and contrast project plans,
their components, and how the plans are used within a live project. Based on this
information, which one of the following is true?
A. The cost management plan controls how change management affects the BAC.
B. The cost management plan controls how cost variances will be managed.
C. The cost management plan controls how the project manager may update the cost
estimates.
D. The cost management plan controls how the BAC may be adjusted.
10. You have just started a project for a manufacturer. Project team members report
they are 30 percent complete with the project. You have spent $25,000 out of the project’s
$250,000 budget. What is the earned value for this project?
A. 10 percent
B. $75,000
C. $25,000
D. Not enough information to know
11. You and your project team are about to enter a meeting to determine project costs.
You have elected to use bottom-up estimating and will base your estimates on the WBS.
Which one of the following is not an attribute of bottom-up estimating?
A. People doing the work create the estimates.
B. It creates a more accurate estimate.
C. It’s more expensive to do than other methods.
D. It’s less expensive to do than other methods.
12. What is the present value if an organization expects to make $100,000 four years
from now and the annual interest rate is 6 percent?
A. $100,000
B. $79,000
C. $25,000
D. Zero
13. You are the project manager for the construction of a new hotel. Before you begin
the cost budgeting process, what is needed?
A. Cost estimates and project schedule
B. Cost estimates and supporting detail
C. EAC and BAC
D. A parametric model to arrive at the costs submitted
14. You are the project manager of the MNJ Project. Your project is falling behind
schedule, and you have already spent $130,000 of your $150,000 budget. What do you
call the $130,000?
A. Planned value
B. Present value
C. Sunk costs
D. Capital expenditure
15. You are the project manager of the JHD Project. Your project will cost your organization
$250,000 to complete over the next eight months. Once the project is completed, the
deliverables will begin earning the company $3500 per month. Which of the following
represents the time to recover the costs of the project?
A. Not enough information to know
B. 8 months
C. 72 months
D. 5 years
16. You are the project manager for a consulting company. Your company has two possible
projects to manage, but they can choose only one. Project KJH is worth $17,000, while
Project ADS is worth $22,000. Management elects to choose Project ADS. The opportunity
cost of this choice is which one of the following?
A. $5000
B. $17,000
C. $22,000
D. Zero, because project ADS is worth more than Project KJH
17. You are the project manager for the CSR Training Project, and 21,000 customer service
reps are invited to attend the training session. Attendance is optional. You have
calculated the costs of the training facility, but the workbook expense depends on
how many students register for the class. For every 5000 workbooks created, the cost
is reduced by a percentage of the original printing cost. The workbook expense is
an example of which one of the following?
A. Fixed costs
B. Parametric costs
C. Variable costs
D. Indirect costs
18. You are the project manager of a construction project scheduled to last 24 months.
You have elected to rent a piece of equipment for the duration of a project, even
though you will need the equipment only periodically throughout the project. The costs
of the equipment rental per month are $890. This is an example of which of the following?
A. Fixed costs
B. Parametric costs
C. Variable costs
D. Indirect costs
19. You are the project manager for the Hardware Inventory Project. You have a piece
of equipment that was purchased recently for $10,000 and is expected to last five
years in production. At the end of the five years, the expected worth of the equipment
will be $1000. Using straight-line depreciation, what is the amount that can be written
off each year?
A. Zero
B. $1000
C. $1800
D. $2000
20. You are the project manager of the LKG Project. The project has a budget of $290,000
and is expected to last three years. The project is now 10 percent complete and is
on schedule. What is the BAC?
A. $29,000
B. $290,000
C. $96,666
D. $9,666
21. Your project has a budget of $130,000 and is expected to last ten months, with
the work and budget spread evenly across all months. The project is now in month three,
the work is on schedule, but you have spent $65,000 of the project budget. What is
your variance?
A. $65,000
B. $39,000
C. $26,000
D. $64,999
22. You are the project manager of the Carpet Installation Project for a new building.
Your BAC is $600,000. You are now 40 percent complete with the project, though your
plan called for you to be 45 percent complete with the work by this time. What is
your earned value?
A. $240,000
B. $270,000
C. $30,000
D. –$30,000
23. You are the project manager of the Carpet Installation Project for a new building.
Your BAC is $600,000. You have spent $270,000 of your budget. You are now 40 percent
done with the project, though your plan called for you to be 45 percent done with
the work by this time. What is your CPI?
A. 100
B. 89
C. 0.89
D. 0.79
24. You are the project manager for the Facility Installation Project. The project
calls for 1500 units to be installed in a new baseball stadium. Your team wants to
know why you have not assigned the same amount of time for the last 800 units as you
assigned for the first 500 units. You tell them it is because of the learning curve.
Which one of the following best describes this theory?
A. Production increases as workers become more efficient with the installation procedure.
B. Efficiency increases as workers become more familiar with the installation procedure.
C. Costs decrease as workers complete more of the installation procedure.
D. Time decreases as workers complete more of the installation procedure in the final
phases of a project.
25. Beth is a project manager for her company and she has been assigned a new project.
During project planning, Beth needs to create a cost estimate for her project. Of
the following, which one is the most reliable source of information for estimating
project costs that Beth may use?
A. Historical information from a recently completed project
B. An SME’s opinion
C. Recollections of team members that have worked on similar projects
D. Vendors’ whitepapers
SELF TEST ANSWERS
1. You are the project manager for your organization and you need to create a cost
estimate for your current project. This project is similar to the ABG Project you
completed a few months ago, so you report to your program manager that you’ll be using
analogous estimating. Which of the following best describes analogous estimating?
A. Regression analysis
B. Bottom-up estimating
C. Less accurate
D. More accurate
C. Analogous estimating is less accurate than other estimating methods.
A is incorrect because regression analysis is a type of parametric modeling. B is incorrect because bottom-up estimating starts with zero and adds up the project
costs. D is incorrect because analogous estimating is not more accurate.
2. You are the project manager for the GHG Project. You are about to create the cost
estimates for the project. Which input to this process will help you the most?
A. Parametric modeling
B. WBS
C. Project scope
D. Requirements document
B. The WBS is the input that can help you the most with the cost estimates.
A is incorrect because parametric modeling is a form of estimating, not an input. C is incorrect because the project scope is not an input to the estimating process.
D is incorrect because the requirements document is also not an input to the estimating
process.
3. You are the project manager for the JKH Project. You have elected to use parametric
estimating in your cost estimating for the project. Which of the following is an example
of parametric estimating?
A. $750 per ton
B. Historical information from a similar project
C. Estimates built bottom-up based on the WBS
D. Estimates based on top-down budgeting
A is correct because $750 per ton is an example of parametric estimating.
B is incorrect because historical information is analogous, not parametric. C and D are incorrect because these do not describe parametric modeling.
4. You are the project manager for a new technology implementation project. Management
has requested that your estimates be as exact as possible. Which one of the following
methods of estimating will provide the most accurate estimate?
A. Top-down estimating
B. Top-down budgeting
C. Bottom-up estimating
D. Parametric estimating
C. Bottom-up estimating provides the most accurate estimates. The project manager starts
at zero, the bottom, and accounts for each cost within the project.
A, B, and D are all incorrect because they do not reflect the most accurate method to create
an estimate.
5. Your company has been hired to install the tile in 1000 hotel rooms. All rooms
will be identical in nature and will require the same amount of materials. Your project
team has completed the first three hotel rooms that took an average of six hours each
to complete. You calculate the time to install the tile in each hotel room at six
hours. The cost for the labor for your new project team is calculated at $700 per
room. Your project sponsor disagrees with your labor estimate. Why?
A. You haven’t completed one hotel room yet, so you don’t know how long the work
will actually take.
B. You have not factored in all of the effort applied to the work.
C. You have not considered the law of diminishing returns.
D. You have not considered the learning curve.
D is the best choice. As the project team completes more and more units, the time to
complete a hotel room should take less and less time.
A, B, and C are incorrect because they do not answer the question as fully as answer D.
6. You are the project manager for a construction project to build 17 cabins. All
of the cabins will be identical in nature. The contract for the project is set at
a fixed cost, the incentive being that the faster the project work is completed, the
more profitable the job. Management has requested that you study the work method to
determine a faster, less costly, and better method of completing the project. This
is an example of which one of the following?
A. Time constraint
B. Schedule constraint
C. Value engineering
D. Learning curve
C. Value engineering is a systematic approach to finding less costly ways to complete
the same work.
A and B are incorrect because this situation does not describe a specific time or cost constraint.
D is incorrect because the learning curve happens as the project team completes the
work. Value analysis is the study of a process in order to complete the work faster
and more affordably.
7. You are the project manager for a technical implementation project. The customer
has requested that you factor in the after-the-project costs, such as maintenance
and service. This is an example of which one of the following?
A. Life-cycle costs
B. Scope creep
C. Project spin-off
D. Operations
A. The after-project costs are known as the life-cycle costs.
B and C, though tempting, are incorrect because they do not describe the process of calculating
the ongoing expenses of the product the project is creating. D is incorrect because operations do not fully describe the expenses unique to the
product.
8. You are the project manager for your organization and you need to create a cost
estimate for your current project. Your manager informs you that this project requires
a precise cost estimate so you need to choose the most accurate estimating approach
possible. Which one of the following provides the least accuracy in estimating?
A. Rough order of magnitude
B. Budget estimate
C. Definitive estimate
D. WBS estimate
A. The rough order of magnitude is the least accurate approach, since it may vary from
–25 percent to +75 percent.
B and C are incorrect because they are more accurate estimates than the rough order of magnitude.
D is not a valid answer for this question.
9. As a PMP candidate, you need to be able to compare and contrast project plans,
their components, and how the plans are used within a live project. Based on this
information, which one of the following is true?
A. The cost management plan controls how change management affects the BAC.
B. The cost management plan controls how cost variances will be managed.
C. The cost management plan controls how the project manager may update the cost
estimates.
D. The cost management plan controls how the BAC may be adjusted.
B. The cost management plan controls how cost variances will be managed.
A, C, and D are incorrect descriptions of the cost management plan.
10. You have just started a project for a manufacturer. Project team members report
they are 30 percent complete with the project. You have spent $25,000 out of the project’s
$250,000 budget. What is the earned value for this project?
A. 10 percent
B. $75,000
C. $25,000
D. Not enough information to know
B. The earned value is 30 percent of the project’s budget.
A is incorrect because it is not a valid answer for the question. C and D are incorrect responses.
11. You and your project team are about to enter a meeting to determine project costs.
You have elected to use bottom-up estimating and will base your estimates on the WBS.
Which one of the following is not an attribute of bottom-up estimating?
A. People doing the work create the estimates.
B. It creates a more accurate estimate.
C. It’s more expensive to do than other methods.
D. It’s less expensive to do than other methods.
D. Using bottom-up estimating is not less expensive to do.
A, B, and C are not correct choices because these are attributes of a bottom-up estimating process.
12. What is the present value if an organization expects to make $100,000 four years
from now and the annual interest rate is 6 percent?
A. $100,000
B. $79,000
C. $25,000
D. Zero
B. The present value of $100,000 four years from now can be calculated by using this
formula: present value = FV / (1 + i)n. FV is the future value, i is the interest rate, and n is the number of time periods.
A, C, and D are all incorrect answers because they don’t reflect the present value.
13. You are the project manager for the construction of a new hotel. Before you begin
the cost budgeting process, what is needed?
A. Cost estimates and project schedule
B. Cost estimates and supporting detail
C. EAC and BAC
D. A parametric model used to arrive at the costs submitted
A. Cost estimates and the project schedule are inputs to the cost budgeting process.
B, C, and D are all incorrect because they are not inputs to cost budgeting.
14. You are the project manager of the MNJ Project. Your project is falling behind
schedule, and you have already spent $130,000 of your $150,000 budget. What do you
call the $130,000?
A. Planned value
B. Present value
C. Sunk costs
D. Capital expenditure
C. Sunk costs are monies that have been spent.
A is incorrect because planned value is the amount the project should be worth at this
point in the schedule. B is also incorrect; present value is the current value of future monies. D is incorrect because a capital expenditure is money spent to purchase a long-term
asset, such as a building.
15. You are the project manager of the JHD Project. Your project will cost your organization
$250,000 to complete over the next eight months. Once the project is completed, the
deliverables will begin earning the company $3500 per month. Which of the following
represents the time to recover the costs of the project?
A. Not enough information to know
B. 8 months
C. 72 months
D. 5 years
C. The time to recoup the monies from the project is 72 months. This is calculated by
dividing the ROI of $3500 per month into the project cost.
A is an incorrect answer. B is incorrect; 8 months is the amount of time left in the project schedule. D, 5 years, is also incorrect.
16. You are the project manager for a consulting company. Your company has two possible
projects to manage, but they can choose only one. Project KJH is worth $17,000, while
Project ADS is worth $22,000. Management elects to choose Project ADS. The opportunity
cost of this choice is which one of the following?
A. $5000
B. $17,000
C. $22,000
D. Zero, because project ADS is worth more than Project KJH
B. The opportunity cost is the amount of the project that was not chosen.
A is incorrect. $5000 is the difference between the two projects. It is not the opportunity
cost. C is incorrect because $22,000 is the amount of the project that was selected. D is also an incorrect answer.
17. You are the project manager for the CSR Training Project, and 21,000 customer service
reps are invited to attend the training session. Attendance is optional. You have
calculated the costs of the training facility, but the workbook expense depends on
how many students register for the class. For every 5000 workbooks created, the cost
is reduced by a percentage of the original printing cost. The workbook expense is
an example of which one of the following?
A. Fixed costs
B. Parametric costs
C. Variable costs
D. Indirect costs
C. This is an example of variable costs. The more students who register to take the
class, the more the cost of the books will be.
A is incorrect because the cost of the book varies, depending on the number of students
who register for the class. B is incorrect because the cost of each book diminishes as more books are created.
A parametric cost would remain the same, regardless of how many books were created.
D is not correct because this is not an example of an indirect cost.
18. You are the project manager of a construction project scheduled to last 24 months.
You have elected to rent a piece of equipment for the duration of a project, even
though you will need the equipment only periodically throughout the project. The costs
of the equipment rental per month are $890. This is an example of which of the following?
A. Fixed costs
B. Parametric costs
C. Variable costs
D. Indirect costs
A. This is a fixed-cost expense of $890 per month—regardless of how often the piece
of equipment is used.
B is incorrect because a parametric cost is a value used to calculate cost per use,
cost per metric ton, or cost per unit. While it may at first appear that B is the correct choice, there is no historical information mentioned upon which to
base the parametric model. C is incorrect because the cost does not vary within the project. D is also incorrect; this is a cost attributed directly to the project work.
19. You are the project manager for the Hardware Inventory Project. You have a piece
of equipment that was purchased recently for $10,000 and is expected to last five
years in production. At the end of the five years, the expected worth of the equipment
will be $1000. Using straight-line depreciation, what is the amount that can be written
off each year?
A. Zero
B. $1000
C. $1800
D. $2000
C. The straight-line depreciation takes the purchase value of the item, minus the salvage
price of the item, divided by the number of time periods. In this instance, it would
be $10,000 minus $1000, or $9000. The $9000 is divided by five years and equates to
$1800 per year.
A, B, and D are all incorrect because they do not reflect the correct calculation.
20. You are the project manager of the LKG Project. The project has a budget of $290,000
and is expected to last three years. The project is now 10 percent complete and is
on schedule. What is the BAC?
A. $29,000
B. $290,000
C. $96,666
D. $9,666
B. The BAC is the budget at completion, which is $290,000.
A is incorrect because it describes the earned value for the project. C and D are both incorrect values.
21. Your project has a budget of $130,000 and is expected to last 10 months, with the
work and budget spread evenly across all months. The project is now in month three,
the work is on schedule, but you have spent $65,000 of the project budget. What is
your variance?
A. $65,000
B. $39,000
C. $26,000
D. $64,999
C. $26,000 is the variance. This is calculated by subtracting the actual costs of $65,000
from the earned value of $39,000. EV is calculated by taking the 30 percent completion
of the project against the BAC. The project is considered to be 30 percent complete
because it’s slated for 10 months, is currently in month three, and is on schedule.
A, B, and D are all incorrect calculations for the problem.
22. You are the project manager of the Carpet Installation Project for a new building.
Your BAC is $600,000. You are now 40 percent complete with the project, though your
plan called for you to be 45 percent complete with the work by this time. What is
your earned value?
A. $240,000
B. $270,000
C. $30,000
D. –$30,000
A. The earned value is calculated by multiplying the percentage of completion, 40 percent,
by the BAC, which is $600,000, for a value of $240,000.
B, C, and D are incorrect calculations of the earned value formula.
23. You are the project manager of the Carpet Installation Project for a new building.
Your BAC is $600,000. You have spent $270,000 of your budget. You are now 40 percent
done with the project, though your plan called for you to be 45 percent done with
the work by this time. What is your CPI?
A. 100
B. 89
C. 0.89
D. 0.79
C is the correct answer. The EV of $240,000 is divided by the AC of $270,000 for a
value of 0.89.
A and D are incorrect calculations. B is incorrect because the value needs a decimal.
24. You are the project manager for the Facility Installation Project. The project
calls for 1500 units to be installed in a new baseball stadium. Your team wants to
know why you have not assigned the same amount of time for the last 800 units as you
assigned for the first 500 units. You tell them it is because of the learning curve.
Which one of the following best describes this theory?
A. Production increases as workers become more efficient with the installation procedure.
B. Efficiency increases as workers become more familiar with the installation procedure.
C. Costs decrease as workers complete more of the installation procedure.
D. Time decreases as workers complete more of the installation procedure in the final
phases of a project.
B. The learning curve allows the cost to decrease as a result of decreased installation
time, because workers will complete more of the installation procedure.
A, C, and D are all incorrect choices as they do not correctly describe the learning curve in
relation to time and cost.
25. Beth is a project manager for her company and she has been assigned a new project.
During project planning, Beth needs to create a cost estimate for her project. Of
the following, which one is the most reliable source of information for estimating
project costs that Beth may use?
A. Historical information from a recently completed project
B. An SME’s opinion
C. Recollections of team members that have worked on similar projects
D. Vendors’ whitepapers
A. Of the choices presented, historical information from a recently completed project
is the most reliable source of information.
B, while valuable, is not as proven as historical information. C is incorrect because recollections are the least reliable source of information.
D is also incorrect, although it may prove valuable in the planning process.
