Project Cost Management

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Project Cost Management

PREV: Schedule       UP NEXT: Risk

This chapter covers key concepts related to Project Cost Management.

  1. The knowledge area of Project Cost Management consists of the following processes -

    Project Cost Processes

    Process Project Phase Key Deliverables
    Plan Cost Management Planning
    Estimate Costs Planning Activity Cost Estimates,Basis of estimates
    Determine Budget Planning Cost performance baseline
    Control Costs Monitoring and Controlling Work performance measurements
  2. Alternative identification process identifies other solutions to an identified problem.
  3. Value Analysis approach is used to find more affordable, less costly methods for accomplishing the same task.
  4. The Estimate Costs process takes the following inputs -
    • Scope baseline
    • Project schedule
    • Human resource plan
    • Risk register
    • Enterprise environmental factors
    • Organizational process assets
  5. Depreciation is technique used to compute the estimated value of any object after few years. There are three type of depreciation techniques. These are
    • Straight line depreciation The same amount is deprecated (reduced) from the cost each year.
    • Double-declining balance - In the first year there is a higher deduction in the value - twice the amount of straight line. Each year after that the deduction is 40% less than the previous year.
    • Sum of year depreciation - Lets say the life of an object is five years. The total of one to five is fifteen. In first year we deduce 5/15 from the cost, in second year we deduce 4/15, and so on.
  6. Analogous Estimating is an estimating technique with the following characteristics -
    • Estimates are based on past projects (historical information)
    • It is less accurate when compared to bottom-up estimation
    • It is a top-down approach
    • It takes less time when compared to bottom-up estimation
    • It is a form of an expert judgment
  7. In Parametric Modeling Estimation, you use a mathematical model to make an estimate. It is of two types.
    • Regression Analysis
    • is a mathematical model based upon historical information.
    • Learning Curve model is based upon the principal that the cost per unit decreases as more work gets completed.
  8. Bottom up estimation is same as WBS estimation. It involves estimating each work item and adding the estimates to get the total project estimate.
  9. You can expect five to ten questions related to Earned Value Management. These are generally pretty simple once you have good understanding of the concepts, and remember the formulae. These formulae are explained below.

  10. Planned Value (PV) refers to what the project should be worth at this point in the schedule. It is also referred as BCWS (Budgeted Cost of Work Scheduled).
  11. Earned Value (EV) is the physical work completed to date and the authorized budget for that. It is also referred as BCWP (Budgeted Cost of Work Performed).
  12. Actual Cost (AC) is the actual amount of money spent so far. It is also referred as ACWP (Actual Cost of Work Performed).
  13. Estimate At Completion (EAC) refers to the estimated total cost of the project at completion.
  14. CPI refers to Cost Performance Index. It is defined as
      CPI = EV/AC
    If CPI is less than 1, this means that the project is over budget.
  15. BAC refers to Budget at Completion. It is related to EAC.
      EAC = BAC/CPI
  16. ETC refers to Estimate to Completion. It is defined as
      ETC = EAC - AC
  17. CV refers to Cost Variance. It is defined as
      CV = EV - AC
  18. SV refers to Schedule Variance. It is defined as
      SV = EV - PV
    Negative cost or schedule variance means that project is behind in cost or schedule.
  19. SPI refers to Schedule Performance Index. It is defined as
      SPI = EV/PV
  20. VAC refers to Variance At Completion. It is defined as
      VAC = BAC - EAC
  21. The process of Cost budgeting defines time phased cost estimates for the project. For example, in the first month the project will require $10,000. Cost estimating involves defining cost estimates for tasks. Cost budgeting defines cost estimates across time.
  22. The tools and techniques used for Estimate Costs are -
    • Expert judgment
    • Analogous estimating
    • Parametric estimating
    • Bottom-up estimating
    • Three-point estimates
    • Reserve analysis
    • Cost of quality
    • Project Management estimating software
    • Vendor bid analysis
  23. Cost baseline refers to what is expected to be spent on the project. It is usually an S-curve. That is the expenditure is less in the beginning, and the end. The expenditure is maximum during the middle of the project.
  24. The after project costs are called life cycle costs.

Questions on Project Cost Knowledge area are available in Cost Questions.


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