CAPM Certification

Lesson 07Project Cost Management

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Objectives
After completing this
lesson, you will be able
to:

Define Project Cost Management

Differentiate between cost estimation and cost budgeting

Explain control accounts

Describe the Project Cost Management processes

Apply earned value management technique to track project performance

Identify key terminologies used in Project Cost Management

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Project Management Process Map

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Project Cost Management

The definition of Project Cost Management is as follows:

Project cost management includes the processes involved in estimating, budgeting, and controlling costs so that
the project can be completed within the approved budget.

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Cost Management Plan

Cost management plan contains details about managing costs on a project. It provides details on how to plan, manage
and control the project cost in relation to the cost baseline, and manage the cost variances.

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

The techniques involved in estimating the cost of each project activity is similar to the ones used in estimating
project time.

Expert judgment, analogous estimating, bottom-up estimating, and reserve analysis are some of the techniques
used in cost management.

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Control Account
In larger projects, costs are managed at a higher level rather than at an individual activity level. Under control account
technique, related activities are clubbed and their costs are managed as one unit.

Deliverable in WBS
The scope of a project is decomposed through a Work

Another
Deliverable in WBS

...

Breakdown Structure (WBS). The lowest level

Control Account

deliverable in the WBS is called a work package.

Work
Package

Work
Package

Work
Package

Activity

Activity

Activity

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Project Cost Management Processes

Given below are the Project Cost Management processes:

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Plan Cost Management

Plan Cost Management is the process of establishing the policies, procedures, and documentation for planning,
managing, expending, and controlling the project costs.[1] It is part of the Planning Process Group.

PROJECT COST MANAGEMENT

Project management plan

Project charter

Cost management plan

Plan Cost Management

Enterprise environmental
factors
Organizational process
assets

Legend
Input
Output
Tools & Techniques
Planning Process

Cost management plan

Expert judgment

Meetings

Analytical techniques

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Estimate Costs
Estimate Costs is the process of developing an approximation of the monetary resources needed to complete project
activities.[2] It belongs to the Planning Process Group.

PROJECT COST MANAGEMENT

Scope baseline

Cost management plan

Project schedule

Activity cost estimates

Human resource
management plan

Estimate Costs

Risk register
Enterprise environmental
factors

Activity cost estimates

Project documents
updates

Basis of estimates

Organizational process
assets
Legend
Input
Output
Tools & Techniques
Planning Process

Expert judgment

Analogous estimating

Parametric estimating

Bottom-up estimating

Vendor bid analysis

Reserve analysis

Cost of quality

Project management
software

Three-point estimating

Group decision making

techniques

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Determine Budget
Determine Budget is the process of aggregating the estimated costs of individual activities or work packages to
establish an authorized cost baseline.[3] It is part of the Planning Process Group.
The cost baseline includes all authorized budgets, but excludes management reserves.

An understanding of determining budget may be useful while answering the exam.

Exam Tips
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Control Costs
Control Costs is the process of monitoring the status of the project to update the project budget and manage changes
to the cost baseline.[4] It belongs to the Monitoring And Controlling Process Group.

Business scenario based questions on project cost control can be expected in the exam.
Exam Tips
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Earned Value Management

Earned Value Management (EVM) is a method to measure project performance against the project baselines. It results
from an earned value analysis indicating potential deviation of the project from the cost and/or schedule baselines.
The various terms used in earned value are as follows:

Business scenario based questions on earned value management can be expected in the exam.
Exam Tips
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Planned ValueExample

Q
A

Calculate the earned value, if the planned value is $340.

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If the planned value is $340, then the work planned is worth $340.
Earned value is the total of budget allocated to each of the activities that have been completed at that
point of time.
The resulting value is the earned value at that point of time.

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Earned Value Formulae

The following table gives the formulae used in EVM and their interpretations:

Before the start of exam, please make a note of the formulas of earned value technique.
Exam Tips
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Business ScenarioProblem Statement

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Cynthia is a subject matter expert and Director of the Store Renovation Department. Because of her expertise and
experience in managing store remodels for the corporation, she and her team are the go to people for many
project managers. Donnell is the Project Manager for one of the stores in the southeast region. Because of the age
of the store, it has been classified as a Tier 1 Remodel, meaning it requires more work and a higher budget
allocation. Donnell has a budget of $850K to complete the entire schedule that has been defined for the project.
At the 30% mark of work completed on the project, Donnells team has spent $310K. What is a possible outcome
for Donnell?

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Business ScenarioSolution

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Donnell is concerned about the spending trend of his project being at .82, especially when they have not yet
made it to the halfway mark for the project. His previous Tier 1 remodels had a better CPI at this point in the
project. The project has faced some unexpected events, which the team had neither planed for nor
anticipated based on past performance. The Money allocated in the management reserve is able to cover
most of the expense, but not all. After evaluating the root cause of these risk factors, Donnell is able to link the
problems to the age of the store and the fact that none of the previous stores completed in the remodel
initiative are as old. The Project Sponsor is concerned about their ability to complete the project with the
remaining budget. Donnell is asked to re-assess the risk, collaborate with their structural engineer to
reevaluate the remaining activities so he can determine a revised budget and an estimate of what is needed to
complete remaining activities based on new information.

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Earned Value ManagementExample

A software development project has four phases. Each phase takes a month to complete and is estimated
to cost $10,000 per phase. The phases are planned to be completed one after the other. Given the project
status at the end of three months, calculate the CV, SV, CPI, and SPI.

Project Phases

Month 1

Requirement Definition

S---------F

Architecture & Design

Month 2

Month 3

Month 4

Status at the End of Month 3

Complete, spent $10,000

S-------PF

Development & Unit Testing

System Testing & Go Live

---F

Complete, spent $12,000

S----PF

50% done, spent $9,000

Not yet started

Legend
S Start time
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F Finish time

PF Partly finished

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Earned Value ManagementExample (contd.)

Calculation of project cost related attributes are as follows:

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Term

Calculation

Value

Interpretation of the Answer

Planned Value (PV)

$10,000+$10,000+$10,000

$30,000

By third month, the project should have been completed

$30,000 worth of work.

Earned Value (EV)

$10,000+$10,000+$5,000

$25,000

The accomplished work is worth $25,000.

Actual Cost (AC)

$10,000+$12,000+$9,000

$31,000

The amount actually spent is $31,000.

Cost Variance (CV)

$25,000-$31,000

-$6,000

The project is over budget by $6,000.

Schedule Variance (SV)

$25,000-$30,000

-$5,000

The project is behind schedule.

Cost Performance Index

(CPI)

$25,000/$31,000

0.80

$0.80 worth is got out of every dollar spent.

Schedule Performance
Index (SPI)

$25,000/$30,000

0.83

The project is progressing at 83% of the originally planned

rate.

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Earned Value ManagementFormulae

The formula for the calculation is given below:

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Term

Formula

Cost Variance (CV)

EV AC

Schedule Variance (SV)

EV PV

Cost Performance Index (CPI)

EV / AC

Schedule Performance Index (SPI)

EV / PV

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Key Terms
Given below are the key terms related to the cost concept:
Law of diminishing return

The more you put into something, the less you get out of it.
E.g., doubling the number of resources working on a project will not necessarily halve the time.
Working capital
The amount of money the company has to invest on the project and the day-to-day company operations.

Funding limit reconciliation

The process of comparing the planned expenditure in a given period with the available funding for that period.
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Key Terms (contd.)

Given below are the key terms related to the cost concept:
Depreciation

Large assets purchased by the company lose value over time. The two forms of depreciation are straight line
depreciation and accelerated depreciation.
Straight line depreciation
The same amount of depreciation is provided for every year for the asset.
E.g., a car with a price tag of $10,000 and a useful life of 10 years, is depreciated by $1,000 every year.
Accelerated depreciation

The asset depreciates faster than the straight line depreciation.

E.g., a car with a price tag of $10,000 depreciates $3,000 the first year, $1,500 the second year, $1,000 the third
year, and so on.
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Quiz

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QUIZ
1

If earned value (EV) is $550, actual cost (AC) is $650, and planned value (PV) is $600, what is the cost
variance (CV)?

a.

-100

b. +50

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c.

-50

d.

+100

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QUIZ
1

If earned value (EV) is $550, actual cost (AC) is $650, and planned value (PV) is $600, what is the cost
variance (CV)?

a.

-100

b. +50
c.

-50

d.

+100

Answer: a.
Explanation: Apply the formula CV = EV AC to get the answer. Note that although PV is provided, it is not
used in solving this problem.

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QUIZ
2

You, as a project manager, are in the process of midway review at the end of the first year of a $50K
project. The earned value analysis shows that the PV is $25K, the EV is $20K, and the AC is $15K. What
can be determined from these figures?

a.

The project is behind schedule and over budget.

b. The project is ahead of schedule and under budget.

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c.

The project is ahead of schedule and over budget

d.

The project is behind schedule and under budget.

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QUIZ
2

You, as a project manager, are in the process of midway review at the end of the first year of a $50K
project. The earned value analysis shows that the PV is $25K, the EV is $20K, and the AC is $15K. What
can be determined from these figures?

a.

The project is behind schedule and over budget.

b. The project is ahead of schedule and under budget.

c.

The project is ahead of schedule and over budget

d.

The project is behind schedule and under budget.

Answer: d.
Explanation: SV = (EV-PV)=$20K-$25K= -$5K. CV = (EV-AC)=$20K-$15K = $5K. Looking at the data, it is
evident that the project is behind schedule and is also under budget.

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QUIZ
3

What does a cost performance index (CPI) of 0.73 mean?

a.

The project would cost 73% more than originally planned.

b. The project would cost 27% more than originally planned.

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c.

The project would cost 73% less than originally planned.

d.

The project is only getting $0.73 for every $1 spent.

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QUIZ
3

What does a cost performance index (CPI) of 0.73 mean?

a.

The project would cost 73% more than originally planned.

b. The project would cost 27% more than originally planned.

c.

The project would cost 73% less than originally planned.

d.

The project is only getting $0.73 for every $1 spent.

Answer: d.
Explanation: CPI = EV/AC, therefore if the CPI is 0.73, it means that the EV is less than the AC.

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QUIZ
4

What does a schedule performance index (SPI) of 0.67 mean?

a.

You are ahead of schedule by 33%.

b. You are behind schedule by 67%.

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c.

You are progressing at only 67% of the rate originally planned.

d.

You are progressing at only 33% of the rate originally planned.

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QUIZ
4

What does a schedule performance index (SPI) of 0.67 mean?

a.

You are ahead of schedule by 33%.

b. You are behind schedule by 67%.

c.

You are progressing at only 67% of the rate originally planned.

d.

You are progressing at only 33% of the rate originally planned.

Answer: c.
Explanation: Since the SPI (SPI = EV/PV) measures all project work, the critical path must also be analyzed
to determine whether the project will finish ahead or behind schedule.

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QUIZ
5

As a project manager, when you present your initial cost estimate to the project sponsor for approval,
you are asked to cut the cost of the project by 10%. What would you do?

a.

Replace the originally planned resources with lesser skilled resources at lower rates.

b. Cut specific project activities and obtain the sponsors approval.

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c.

Strongly say no to the sponsor and walk away from the project.

d.

Ask all the team members to reduce the cost of their activities by 10%.

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QUIZ
5

As a project manager, when you present your initial cost estimate to the project sponsor for approval,
you are asked to cut the cost of the project by 10%. What would you do?

a.

Replace the originally planned resources with lesser skilled resources at lower rates.

b. Cut specific project activities and obtain the sponsors approval.

c.

Strongly say no to the sponsor and walk away from the project.

d.

Ask all the team members to reduce the cost of their activities by 10%.

Answer: b.
Explanation: A project manager is responsible for managing cost overruns. If you have estimated it in a
certain way and its required to be reduced, you should determine the impact of any cost reduction actions.
Replacing the originally planned resources with lesser skilled resources is also an option, but the risks
associated with this action should be carefully investigated.
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QUIZ
6

Which of the following is not a tool or technique used in the process of determine budget?

a.

Cost aggregation

b. Reserve analysis

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c.

Funding limit reconciliation

d.

Resource calendars

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QUIZ
6

Which of the following is not a tool or technique used in the process of determine budget?

a.

Cost aggregation

b. Reserve analysis
c.

Funding limit reconciliation

d.

Resource calendars

Answer: d.
Explanation: All the above tools and techniques are used for the determine budget process except resource
calendars, which is an input to this process.

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Summary
Here is a quick recap of
what was covered in
this lesson:

Project cost management includes the processes involved in estimating, budgeting, and
controlling costs so that the project can be completed within the approved budget.

Cost management plan contains details on how to plan, manage and control the project
cost in relation to the cost baseline, and manage the cost variances.

Cost estimate is an educated guess of how much an activity or a project will cost.
Budget considers the cost estimate and accordingly sets aside funds for the completion
of the project.

Under control account technique, related activities are clubbed and their costs are
managed as one unit.

The four Project Cost Management processes are Plan Cost Management, Estimate

Costs, Determine Budget, Control Costs.

Earned Value Management technique indicates potential deviation of the project from
the cost and/or schedule baselines.

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Thank You

CAPM & PMBOK are registered trademarks of the Project Management Institute, Inc.

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References
[1] Project Management Institute, A Guide to the Project Management Body of Knowledge, (PMBOK Guide) Fifth
Edition, Project Management Institute, Inc., 2013, Page 195.
[2] Project Management Institute, A Guide to the Project Management Body of Knowledge, (PMBOK Guide) Fifth
Edition, Project Management Institute, Inc., 2013, Page 200.
[3] Project Management Institute, A Guide to the Project Management Body of Knowledge, (PMBOK Guide) Fifth
Edition, Project Management Institute, Inc., 2013, Page 208.
[4] Project Management Institute, A Guide to the Project Management Body of Knowledge, (PMBOK Guide) Fifth
Edition, Project Management Institute, Inc., 2013, Page 215.

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