Project Cost Management
Project Cost Management is the PMP Knowledge Area. Purpose of Project Cost Management:
- To complete the project within Budget.
Processes & Outputs
Process | Output |
Plan Cost Management [Planning] | Cost Management Plan |
Estimate Costs [Planning] | Activity Cost Estimates, Basis of Estimates |
Determine Budget [Planning] | Project Budget, Cost Baseline (Approved time phased project budget) |
Control Costs [Monitoring and Controlling] | We check cost performance and manage changes to the cost |
Process Description
1. Plan Cost Management [Process / Planning] – We develop cost management plan in which we describe procedures for cost estimation, budgeting and controlling costs.
a. Activity Cost Estimates
b. Basis of Estimates
a. Bottom-up Estimation – Best and very reliable. It is highly detailed estimation and provides definitive estimate. Its accuracy is -5% to 10%. It takes time and is expensive.
b. Analogous Estimation – It is quick, in-expensive but inaccurate.
c. Parametric Estimation – It is unit based estimation.
d. Expert Judgement
e. Three-Point Estimation
f. Reserve Analysis – Add cost contingency to manage identified risks.
g. Vendor bid analysis – For doing the cost estimation, we will outsource. We will invite the quotation or bids and analyse them.
h. Cost of Quality – It means cost incurred on conformance to the requirements and non-conformance to the requirements.
i. Cost of Conformance – Cost of Prevention [Preventing defects. Example: Money spent on getting the right process, right equipment, right people, training, etc.] and Cost of Appraisal [Example: Testing, Inspection, Review, Audit]
ii. Cost of non-conformance – Cost of Failure (or Cost of Poor Quality) [Example: Re-work, repair, replacement, scrap, warranty cost]
3. Determine Budget [Process / Planning] – We add up cost estimates to prepare Project Budget. We time-phase project budget with the help of the schedule to prepare Cost Baseline. Shape of Cost Baseline is ‘S’ curve. Also, we add “Management Reserve” in the Project Budget for managing unidentified risks which is also known as Unknown Unknowns. Therefore, Project Budget = Cost Baseline + Management Reserve.
Money from the Management Reserve is allowed only when the unidentified risk occur. For getting money from the management reserve, we are required to raise the change request and get it approved by the change control board.
We reconcile fund requirements with the fund limits, if any. It leads to re-scheduling.
Duration | Fund Requirements | Fund Limits | Reconcile |
1m | $10M | $8M | In the first month, plan work for $8M only and not for $10M |
2m | $20M | $15M | ….. |
3m | $65M | $65M | ….. |
4m | $5M | $12M | ….. |
4. Control Costs [Process / Monitoring and Controlling] – We check cost performance by conducting variance analysis and manage changes to the costs by following change control procedure.
In case of variance:
a. Variance Analysis
b. Earned Value Management – Cost Variance and Cost Performance Index
c. To-Complete Performance Index (TCPI)
Value | Schedule Variance | Cost Variance |
> 0 | Ahead of Schedule | Under Budget |
= 0 | On time | Within Budget |
< 0 | Behind Schedule | Over Budget |
Value | Schedule Performance Index | Cost Performance Index |
> 1 | Ahead of Schedule | Under Budget |
= 1 | On time | Within Budget |
< 1 | Behind Schedule | Over Budget |
TCPI < 1 is preferred situation.
Exercise: Answer at-least 80% of the questions correctly in order to master the topic.
20 Questions Challenge
50 Questions Challenge