Cost Management Plan

DEFINITION
Cost management plan is a component of a
project management plan that describes how
costs will be planned, structured and controlled

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Cost Management Plan Content

Units of measure

Precision and accuracy levels

Organizational procedures links

Control thresholds

Rules of performance measurement (EVM techniques, control accounts, tracking

methodologies)

Reporting formats

Performance measurement guidelines (EVM and control accounts)

Description of strategic funding choices
Additional details Currency exchange rate fluctuations
Project cost reporting
Cost Estimates
Develop an approximation of the cost for
each activity in a project.

Use logical estimates to provide a basis

for making sound decisions and they
establish baselines.

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Common Estimate Types

Accuracy: Rough Accuracy:

(-5% to +10%) Order of (-25% to +75%)
Definitive Magnitude
estimate

Phased
estimate

Project Cost

4
Estimating Techniques –
Advantages and Disadvantages

Analogous Parametric Bottom-up

Estimating Estimating Estimating

Can ensure no work is Is not time consuming Is very accurate and

inadvertently omitted gives lower-level
from work estimates. managers more
responsibility.

Can sometimes be May be inaccurate, May be very time

difficult for lower-level depending on the consuming
managers to apportion integrity of the historical Can be used only after
cost estimates. information. the WBS has been well-
defined.

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Lessons Learned
Register
ü Use during and after projects.

ü Start with budgets from

previous, similar projects.

ü They contain valuable cost-

estimating information - both
successes and shortcomings.

6
Project Budget
Governance

ü Budget management is a critical

project oversight and within the
purview of project governance.
ü Deviations in budget, scope, schedule,
resources or quality, will impact the
project.
ü Project governance tells you whom
these issues would impact and how
to deal with them.
ü Tailor cost estimation approach to
phases of the project life cycle.

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GUIDELINES

Estimate Costs
• Gather estimates for individual work packages.
• Check with the resource supplier to validate assumptions.
• Choose a suitable estimating technique according to context.
• Look for alternative costing options.
• Determine which units of measure to use.
• Consider impact of risks on cost.
• Ensure that cost estimates are assigned to the right account.
• Ensure estimates include resource costs, level of estimate, and a list of
assumptions.

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Cost Baseline

DEFINITION
The cost baseline is the approved version of the
time-phased project budget, excluding any
management reserves.

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Cost Baseline Project Budget

Can be changed only through formal

change control procedures and is the
basis for comparison to actual
results.

Cost baseline:
ü Monitors and measures cost
performance
ü Includes a budget contingency
o n t r o l a cc ounts
ü Is tailored for each project c
activitmanagement
y cont
reserve
Other components of the project ingenc
y rese
budget are depicted at right.
control accounts rve
e s ti m a te
ti v i ty c ost
ac contingency reserve
work package estimates
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GUIDELINES

Estimate Budget

• Aggregate the estimated costs of individual activities or work packages to

establish an authorized cost baseline.
• Ensure budget contains funding needed to complete the project as defined
in the scope baseline and the project schedule.
• Measure project cost performance against this cost baseline

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GUIDELINES

Estimate Cost Baseline

• Gather inputs to establish the baseline e.g. WBS, project schedule, cost
estimates, and risk management plan.
• Assign work to dates on project schedule and allocate funds for each
activity or work package for assigned time period.
• Consider a contingency reserve to cover expenses associated with risks.
• Total the costs for each time period, then plot these on a chart to create an
S-curve of the baseline.
• Publish and distribute the cost baseline to the appropriate project
stakeholders.

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GUIDELINES

Determine a Budget
• Review:
− Cost management plan

− Human resource management plan

− Scope baseline for project scope statement, WBS, and WBS dictionary

− Risk register to consider any risks that may impact cost estimation

− EEFs and OPAs

• Check the project schedule for type, quantity, and duration of resources.
• Use appropriate tools and techniques.
• Document the project budget, creating a cost baseline.
• Understand project funding requirements or cash flow to enable the project.
• Update project documents, as needed.

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Budget Challenges
ü Ideally, budget is set during project
planning and does not change.

ü However, the following changes can

pose a challenge:
− New/changed project requirements.

− New risks, or changes to the

probabilities or impacts of existing
risks.
− Changes to cost estimates resulting
from economic factors, procurement
contract modifications, resource
costs, etc.

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Response to Budget
Challenges
When changes or challenges occur, you
must tailor:
ü Budget or funding

ü Cost

ü Schedule

ü Scope

If the budget remains fixed and

additional funds are not available, then
the project must change.

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Funding Limit Reconciliation

DEFINITION
The process of comparing the planned
expenditure of project funds against any limits
on the commitment of funds for the project to
identify any variances between the funding limits
and the planned expenditures.

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Funding Limit Reconciliation

Keep in mind:
• Most budgets assume
steady incoming and
outgoing flows.
• Large, sporadic
expenditures are usually
incompatible with
organizational operations.
• Funding limits help regulate
A Guide to the Project Management Body of Knowledge
the outgoing capital flow to
(PMBOK® Guide) – Sixth Edition, Project Management Institute,
Inc., 2017, Page 255.
protect against
overspending.
Ongoing Progress Based on Methodology
Traditional - Measure project progress
according to schedule by:
• Monitoring project status to update the schedule.
• Managing changes to schedule baseline.

Agile - Evaluate progress by:

• Comparing the total amount of work delivered and accepted

to the amount estimated for the current time period.
• Reviewing completed work in regular Sprint demos.
• Conducting scheduled reviews to record lessons learned (or
retrospectives).
• Determining the rate at which deliverables are produced,
validated, and accepted.

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Performance Tracking Techniques
Tool
Based on the Japanese management method of pulling cards to
*Scrum/Agile/Kanban
various stages as they are worked on, physical or electronic boards
boards
can track work as it progresses across various stages or categories.
Measurement of the team’s work that has moved from one stage to
*Throughput Metrics
another stage over a certain time.
Measurement of work that has progressed all the way from plan to
*Cycle Time
completed or delivered.
Various measurements to track quality deliverables, defects, and
Quality Metrics
acceptable output.
Earned Value Tracking cost and effort performance against a planned value.
Bar Charts (Gantt) Using the project schedule to track performance over time.
Measurement of total output from an iteration to attempt to predict
*Velocity
future iteration outputs.

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Variance Analysis – WHY?

Project managers create regular reports on

project variances and any actions taken to
control the project to keep it on track.

Variances related to compliance are critical

because of potential impact on usability of the
deliverable.

The variance identified

Variance analysis Plans for bringing the project or
deliverable back into compliance
should detail: Any proposed changes required to
meet compliance requirements
The monetary value
of the work contribution is another way of
supporting and measuring performance.
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Earned Value Management (EVM)

DEFINITION
A methodology that combines scope, schedule,
and resource measurements to assess project
performance and progress.

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Earned Value Management (EVM)
In projects that use earned value management, the cost baseline is referred
to as the performance measurement baseline.

Planned Value
PV • The authorized budget assigned
to scheduled work.
PV
AC
EV
Earned Value
• The measure of work performed
expressed in terms of the
EV
budget authorized for that work.

Actual Cost
AC • The realized cost incurred for
the work performed on an
activity during a specific time
period.
Schedule
And
Cost Variance
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Earned Value Management (EVM)

Planned Value
PV The authorized budget
EV = % work complete to date x budgeted cost
assigned to scheduled work.

400
Earned Value
EV The measure of work
performed expressed in
terms of the budget 300
authorized for that work.
$ (K)

Actual Cost 200

AC The realized cost incurred for
the work performed on an
activity during a specific time
period. 100

Planned Value (PV) 0

Earned Value (EV) 1 2 3 4 5 6 7 8 9 10 11 12
Actual Cost (AC)
Time (months)

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Estimate to Complete Analysis
Estimate To Complete (ETC) - The amount of money needed to
complete the project.

Based on the current

Calculated using the
spending efficiency of the
formula below:
project.
EVM Measures for Schedule Control

Schedule Variance - a measure of Schedule Performance Index - a

schedule performance expressed as measure of schedule efficiency
the difference between the EV and expressed as the ratio of EV to PV.
the PV.

§ A positive SV indicates a project is § An SPI number greater than 1.0

ahead of schedule. indicates a project is ahead of
§ A zero SV indicates a project is on schedule.
schedule. § An SPI of 1.0 means the project is
§ A negative SV indicates a project is on schedule.
behind schedule. § An SPI number less than 1.0
indicates a project is behind
schedule.

(SV = EV - PV) (SPI = EV / PV)

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EVM Measures for Cost Control

Cost Variance - the amount of Cost Performance Index - a

budget deficit/surplus at a given measure of the cost efficiency of
point in time, expressed as the budgeted resources expressed as
difference between EV and AC. the ratio of EV to AC.

§ A positive CV indicates a project is § An CPI number greater than 1.0

below budget. indicates a project is under budget.
§ A zero CV indicates a project is on § An CPI of 1.0 means the project is
budget on budget.
§ A negative CV indicates a project is § An CPI number less than 1.0
over budget. indicates a project is over budget..

(CV = EV - AC) (CPI = EV / AC)

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Estimate at Completion Analysis
Estimate At Completion (EAC) - The current projected final cost of the project.

Calculated from the following

Based on the current spending formula, where BAC is the
efficiency (the CPI). projected budget at
completion:
 Earned Value Formulas

Planned Value (PV) Earned Value (EV) Actual Cost(AC)

Schedule Cost

Schedule Variance (SV) Cost Variance (CV)

SV=EV-PV CV=EV-AC
Variance
Minus Minus
=
Divided Divided
Performance By By
Index
Schedule Performance Index (SPI) Cost Performance Index (CPI)
SPI=EV/PV CPI=EV/AC

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Performance Report Types
Type Description

*Information Radiators Big visual boards to display in high traffic public locations about the project and the
advancement of the project. The aim is to radiate information to all about the project
work.
*Burndown Chart A graph to show the progress by plotting the burning down of work during an iteration or
other time period.
*Burnup Chart A graph to show the progress and gains made by the project team over time.

Earned Value Management Graphs and values based on the earned value management (EVM) equations.
Reports
Variance Analysis Reports Graphs and their analysis comparing actual results to planned or expected results.

Work performance The physical or electronic representation of work performance information compiled in
reports project documents, intended to generate decisions, actions, or awareness.

Quality Reports Charts and reports based on the quality metrics collected.

**Dashboards Physical or electronic summaries of the progress, usually with visuals or graphics to
represent the larger data set
*Task Boards Physical or electronic depictions of the work that must be done and their current state.

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Iteration Burndown Chart
Tracks the work to be completed in the iteration backlog
Used to analyze variance to ideal burndown of work committed to during planning
Diagonal line is ideal burndown against which daily actual remaining is charted

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(Release) Burnup Chart
Visually shows accumulated progress of work completed against plan
Updated after each iteration
Known as ‘Feature Complete Graph’ in Feature Driven Development (FDD)

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GUIDELINES

Anticipate Future Budget Challenges

• Keep the stakeholder register current and be aware of changes to project

requirements if new stakeholders are added to the project.
• Monitor risks frequently to look for new risks and changes to existing ones.
• Monitor the performance of suppliers and vendors.
• Monitor all changes to the project and follow the Change Management
System to try to keep them within budget.

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34
Cost

• Explain in simple terms explain what the

main difference is between the Project
Baseline and the Project Budget. (hint: what
is in each?)
• List the four estimating techniques that are
used in the 7.2 Estimate Costs and describe
when each would be most optimally be
used?
• What is the purpose of the management
reserve and is it included in the project
baseline or budget (or both)? 35
 Question No: 01 COST MANAGEMENT

You are a project manager on a large project that would involve work being
performed across multiple continents. Which of the following factors are most likely
to be the greatest cost risk to the project?

A. Exchange rates and inflation

B. Poor product quality
C. Global demand fluctuations
D. Communication issues due to different languages
 Question No: 02 COST MANAGEMENT

A project manager was successful in his ability to obtain the three most skilled craftsmen within his company
to join the project team in completion of a large industrial turbine overhaul project. The skill and experience
of the craftsmen have manifested positive results. The team has been able to complete the project work faster
than defined in the schedule and at a better cost efficiency rate. The project manager expects the current
conditions to continue throughout the remainder of the project. Which equation should the project manager
use to calculate the estimate at completion value?

A. EAC=AC +[(BAC - EV) / (CPI x SPI)]

B. EAC = BAC / CPI
C. EAC= AC + (BAC - EV)
D. EAC = AC + (BAC + EV)
 Question No: 03 COST MANAGEMENT

Analogous estimating relies on which of the following cost

techniques?

A. Vendor bid analysis

B. Reserve analysis
C. Project management software
D. Expert judgement
 Question No: 04 COST MANAGEMENT

Your project sponsor has sent you an email questioning why the project budget and cost baseline
are different. He insists that you have made a mistake in your calculations and that you promptly
adjust the two numbers so that they match. What action should you take?

A. Politely inform the Sponsor that the numbers are correct and that it is normal for the budget and
baseline to be different
B. Increase the cost baseline to match the project budget
C. Compare the project budget and project baseline to determine where the error in calculation was
made
D. Decrease the budget to match the project baseline
 Question No: 05 COST MANAGEMENT

Which process involves developing an approximation of the monetary

resources needed to complete project activities?

A. Estimate Costs
B. Control Costs
C. Plan Cost Management
D. Determine Budget
41
 End of
Module 3

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