Chapter 7 – Project

Cost Management
Direct quotes from source: PMI, 2017, “A guide to the project
management body of knowledge (PMBOK guide),” Sixth edition,
Newtown Square, PA: Project Management Institute, Inc.
 Learning Objectives
 Describe an overall framework for project cost management
 process & practices, inputs, outputs, tools & techniques
 7.1 Plan Cost Management
 7.2 Estimate Costs
 7.3 Determine Budget
 7.4 Control Costs
 (7.1 Plan Cost Management – Output) – Cost management plan
 (7.2 Estimate Costs – Tool) – Analo, Para, 3-point, bottom, data
 (7.3 Determine Budget – Output) – Cost baseline
 (7.4 Control Costs – Tool) – Data analysis (EVA, VA, TA, RA)
 The Project Cost Management
processes
Project Cost Management includes the processes involved in planning, estimating,
budgeting, financing, funding, managing, and controlling costs so that the project can be
completed within the approved budget.
The Project Cost Management processes are:
 7.1 Plan Cost Management—The process of defining how the project costs will be
estimated, budgeted, managed, monitored, and controlled.
 7.2 Estimate Costs—The process of developing an approximation of the monetary
resources needed to complete project work.
 7.3 Determine Budget—The process of aggregating the estimated costs of individual
activities or work packages to establish an authorized cost baseline.
 7.4 Control Costs—The process of monitoring the status of the project to update the
project costs and manage changes to the cost baseline.

Source: PMI, 2017, “A guide to the project management body of knowledge (PMBOK guide),” Sixth edition,
Newtown Square, PA: Project Management Institute, Inc.
Project Cost
Management
Overview

Source: PMI, 2017, “A guide

to the project management
body of knowledge (PMBOK
guide),” Sixth edition,
Newtown Square, PA:
Project Management
Institute, Inc.
7.1 PLAN COST MANAGEMENT (1)
 The key benefit of this process is that it provides guidance and direction on how the
project costs will be managed throughout the project.

Source: PMI, 2017, “A guide to the project management body of knowledge (PMBOK guide),” Sixth edition,
Newtown Square, PA: Project Management Institute, Inc.
7.1 PLAN COST MANAGEMENT (2)

Enterprise environmental factors :

- Organizational culture and structure
- Market conditions
- Currency exchange rates for project costs

Organizational process assets:

- Financial controls procedures
- Historical information and lessons learned repository
- Financial databases; and
- Existing formal and informal cost estimating and budgeting-related
policies, procedures, and guidelines.

Source: PMI, 2017, “A guide to the project management body of knowledge (PMBOK guide),” Sixth edition,
Newtown Square, PA: Project Management Institute, Inc.
7.1 Output - COST MANAGEMENT Plan
Cost management plan can establish the following:
 Units of measure. … such as staff hours, staff days, or weeks for time measures;
 Level of precision. … degree to which cost estimates will be rounded up or down (e.g.,
US$995.59 to US$1,000)
 Level of accuracy. The acceptable range (e.g., ±10%) used in determining realistic cost
estimates
 Organizational procedures links. The work breakdown structure (WBS) (Section 5.4)
provides the framework for the cost management plan,
 Control thresholds. Variance thresholds for monitoring cost performance
 Rules of performance measurement. Earned value management (EVM) rules of
performance measurement
 Reporting formats

Source: PMI, 2017, “A guide to the project management body of knowledge (PMBOK guide),” Sixth edition,
Newtown Square, PA: Project Management Institute, Inc.
7.2 ESTIMATE COSTS (1)
 The key benefit of this process is that it determines the monetary resources required for
the project.

Source: PMI, 2017, “A guide to the project management body of knowledge (PMBOK guide),” Sixth edition,
Newtown Square, PA: Project Management Institute, Inc.
7.2 ESTIMATE COSTS (2)

Enterprise environmental factors :

- Market conditions. … Regional and/or global supply and demand conditions greatly
influence resource costs.
- Published commercial information. Resource cost rate information is often available
Organizational process assets: from commercial databases that track skills and human resource costs, and provide
- Cost estimating policies, standard costs for material and equipment.
- Cost estimating templates, - Exchange rates and inflation.
- Historical information and lessons
learned repository.

Source: PMI, 2017, “A guide to the project management body of knowledge (PMBOK guide),” Sixth edition,
Newtown Square, PA: Project Management Institute, Inc.
7.2 ESTIMATE COSTS (3)
 The accuracy of a project estimate will increase as the project
progresses through the project life cycle. For example,
 A project in the initiation phase may have a rough order of
magnitude (ROM) estimate in the range of −25% to +75%.
 Later in the project, as more information is known, definitive
estimates could narrow the range of accuracy to −5% to
+10%.
 Costs are estimated for all resources that will be charged to the
project. This includes but is not limited to
 labor, materials, equipment, services, and facilities, as well as
 special categories such as an inflation allowance, cost of financing,
or contingency costs.

Source: PMI, 2017, “A guide to the project management body of knowledge (PMBOK guide),” Sixth edition,
Newtown Square, PA: Project Management Institute, Inc.
7.2 TOOLS AND TECHNIQUES (1)
(1) ANALOGOUS ESTIMATING:
 Analogous estimating is a technique for estimating the duration or cost of an activity or
a project using historical data from a similar activity or project.
 Analogous duration estimating is frequently used to estimate project cost when there is
a limited amount of detailed information about the project.
 Analogous estimating is generally less costly and less time-consuming than other
techniques, but it is also less accurate.
(2) PARAMETRIC ESTIMATING:
 Parametric estimating is an estimating technique in which an algorithm is used to
calculate cost or duration based on historical data and project parameters.
 This technique can produce higher levels of accuracy depending on the sophistication
and underlying data built into the model.
 Parametric schedule estimates can be applied to a total project or to segments of a
project, in conjunction with other estimating methods.

Source: PMI, 2017, “A guide to the project management body of knowledge (PMBOK guide),” Sixth edition,
Newtown Square, PA: Project Management Institute, Inc.
7.2 TOOLS AND TECHNIQUES (2)
(3) THREE-POINT ESTIMATING:
 The accuracy of single-point cost estimates may be improved by considering estimation
uncertainty and risk.
 Using three-point estimates helps define an approximate range for an activity’s cost:
 Most likely (cM). The cost of the activity, based on realistic effort assessment for the
required work and an predicted expenses.
 Optimistic (cO). The cost based on analysis of the best-case scenario for the activity.
 Pessimistic (cP). The cost based on analysis of the worst-case scenario for the activity.
 Depending on the assumed distribution of values within the range of the three
estimates, the expected cost, cE, can be calculated. One commonly used formula is
triangular distribution:
 cE = (cO + cM + cP) / 3.
 Triangular distribution is used when there is insufficient historical data or when using
judgmental data. Cost estimates based on three points with an assumed distribution
provide an expected cost and clarify the range of uncertainty around the expected cost.

Source: PMI, 2017, “A guide to the project management body of knowledge (PMBOK guide),” Sixth edition,
Newtown Square, PA: Project Management Institute, Inc.
7.2 TOOLS AND TECHNIQUES (3)
(4) BOTTOM-UP ESTIMATING:
 Bottom-up estimating is a method of estimating project duration or cost by aggregating
the estimates of the lower level components of the WBS
(5) DATA ANALYSIS - Reserve analysis
 Cost estimates may include contingency reserves (sometimes called contingency
allowances) to account for cost uncertainty. Contingency reserves are the budget within
the cost baseline that is allocated for identified risks.
 Contingency reserves are often viewed as the part of the budget intended to address the
known unknowns that can affect a project.
 For example, rework for some project deliverables could be anticipated, while the amount of
this rework is unknown.
 Contingency reserves may be estimated to account for this unknown amount of rework.

Source: PMI, 2017, “A guide to the project management body of knowledge (PMBOK guide),” Sixth edition,
Newtown Square, PA: Project Management Institute, Inc.
7.3 DETERMINE BUDGET (1)
 The key benefit of this process is that it determines the cost baseline against which
project performance can be monitored and controlled.

Source: PMI, 2017, “A guide to the project management body of knowledge (PMBOK guide),” Sixth edition,
Newtown Square, PA: Project Management Institute, Inc.
7.3
DETERMIN
E BUDGET
(2)

Source: PMI, 2017, “A guide to the

project management body of knowledge
(PMBOK guide),” Sixth edition,
Newtown Square, PA: Project
Management Institute, Inc.
7.3 Output – cost baseline
 Cost estimates for the various project activities, along with any contingency reserves
(see Section 7.2.2.6) for these activities, are aggregated into their associated
 work package costs. The work package cost estimates, along with any contingency reserves
estimated for the work packages, are aggregated into
 control accounts. The summation of the control accounts make up the
 cost baseline.

Source: PMI, 2017, “A guide to the project management body of knowledge (PMBOK guide),” Sixth edition,
Newtown Square, PA: Project Management Institute, Inc.
7.4 CONTROL COSTS (1)
 The key benefit of this process is that the cost baseline is maintained throughout the
project.

Source: PMI, 2017, “A guide to the project management body of knowledge (PMBOK guide),” Sixth edition,
Newtown Square, PA: Project Management Institute, Inc.
7.4
CONTRO
L COSTS
(2)

Source: PMI, 2017, “A guide to

the project management body of
knowledge (PMBOK guide),”
Sixth edition, Newtown Square,
PA: Project Management
Institute, Inc.
7.4 TOOLS AND TECHNIQUES – EVA
 Earned value analysis (EVA). Earned value analysis compares the performance
measurement baseline to the actual schedule and cost performance.
 EVM develops and monitors three key dimensions for each work package and control
account:
 Planned value (PV)- is the authorized budget assigned to scheduled work. It is the authorized budget
planned for the work to be accomplished for an activity or work breakdown structure (WBS) component, not
including management reserve. The total of the PV is sometimes referred to as the performance measurement
baseline (PMB). The total planned value for the project is also known as budget at completion (BAC).
 Earned value (EV) is a measure of work performed expressed in terms of the budget authorized
for that work. It is the budget associated with the authorized work that has been completed. The
EV is often used to calculate the percent complete of a project.
 Actual cost (AC) is the realized cost incurred for the work performed on an activity during a
specific time period. It is the total cost incurred in accomplishing the work that the EV
measured.

Source: PMI, 2017, “A guide to the project management body of knowledge (PMBOK guide),” Sixth edition,
Newtown Square, PA: Project Management Institute, Inc.
 7.4 TOOLS AND TECHNIQUES – VA (1)

 Variance analysis, as used in EVM, is the explanation for cost (CV = EV – AC), schedule
(SV = EV – PV), and variance at completion (VAC = BAC – EAC) variances.
 Schedule variance (SV) is a measure of schedule performance expressed as the difference
between the earned value and the planned value. It is the amount by which the project is ahead
or behind the planned delivery date, at a given point in time. It is a measure of schedule
performance on a project. Equation: SV = EV – PV
 Cost variance (CV) is the amount of budget deficit or surplus at a given point in time,
expressed as the difference between earned value and the actual cost. It is a measure of cost
performance on a project. It is equal to the earned value (EV) minus the actual cost (AC).
 The CV is particularly critical because it indicates the relationship of physical performance to
the costs spent. Negative CV is often difficult for the project to recover. Equation: CV = EV –
AC.

Source: PMI, 2017, “A guide to the project management body of knowledge (PMBOK guide),” Sixth edition,
Newtown Square, PA: Project Management Institute, Inc.
 7.4 TOOLS AND TECHNIQUES – VA (2)

 Variance analysis, as used in EVM, is the explanation for cost (CV = EV – AC), schedule
(SV = EV – PV), and variance at completion (VAC = BAC – EAC) variances.
 Schedule performance index (SPI) is a measure of schedule efficiency expressed as the ratio
of earned value to planned value. It measures how efficiently the project team is
accomplishing the work.
 An SPI value less than 1.0 indicates less work was completed than was planned. An SPI
greater than 1.0 indicates that more work was completed than was planned. Since the SPI
measures all project work, the performance on the critical path also needs to be analyzed to
determine whether the project will finish ahead of or behind its planned finish date. The SPI is
equal to the ratio of the EV to the PV. Equation: SPI = EV/PV.
 Cost performance index (CPI) is a measure of the cost efficiency of budgeted resources,
expressed as a ratio of earned value to actual cost.
 A CPI value of less than 1.0 indicates a cost overrun for work completed. A CPI value greater
than 1.0 indicates a cost underrun of performance to date. The CPI is equal to the ratio of the
EV to the AC. Equation: CPI = EV/AC

Source: PMI, 2017, “A guide to the project management body of knowledge (PMBOK guide),” Sixth edition,
Newtown Square, PA: Project Management Institute, Inc.
 7.4 TOOLS AND TECHNIQUES – TA
 Trend analysis examines project performance over time to determine if performance is improving or
deteriorating.
 Graphical analysis techniques are valuable for understanding performance to date and for comparison
to future performance goals in the form of BAC versus estimate at completion (EAC) and completion
dates.
 Examples of the trend analysis techniques include but are not limited to: Charts, forecasting

Source: PMI, 2017, “A guide

to the project management
body of knowledge (PMBOK
guide),” Sixth edition,
Newtown Square, PA: Project
Management Institute, Inc.
 Summary
 Describe an overall framework for project cost management
 process & practices, inputs, outputs, tools & techniques
 7.1 Plan Cost Management
 7.2 Estimate Costs
 7.3 Determine Budget
 7.4 Control Costs
 (7.1 Plan Cost Management – Output) – Cost management plan
 (7.2 Estimate Costs – Tool) – Analo, Para, 3-point, bottom, data
 (7.3 Determine Budget – Output) – Cost baseline
 (7.4 Control Costs – Tool) – Data analysis (EVA, VA, TA, RA)