2

1 ESTIMATE
PLAN COST
COST
MGMT

3
CHAPTER 7 DETERMINE
BUDGET

Project Cost Management

4
CONTROL
COSTS
PROJECT COST MANAGEMENT
Project Cost Management includes the processes involved in
Planning, Estimating, Budgeting, Financing, Funding, Managing, and
Controlling costs so that projects can be completed within budget

1. Plan Cost Management (Planning Process Group)

The process that establishes the policies, procedures, and documentation for planning, managing, expending,
and controlling project costs.

2. Estimate Cost (Planning Process Group)

The process of developing an approximation of the monetary resources needed to complete project activities

3. Determine Budget (Planning Process Group)

The process of aggregating the estimated costs of individual activities or work packages to establish an
authorized cost baseline

4. Control Costs (Monitoring & Controlling Process Group)

The process of monitoring the status of the project to update the project costs & managing changes to the
cost baseline.
1. PLAN COST MANAGEMENT

Plan Cost Management: Inputs, Tools & Techniques, & Outputs

TOOLS &
INPUTS OUTPUTS
TECHNIQUES
1. Project Management 1. Expert Judgment 1. Schedule
Plan 2. Analytical Techniques Management Plan
2. Project Charter 3. Meeting
3. Enterprise
Environmental Factors
(EEFs)
4. Organizational
Process Assets (OPAs) Plan Cost Management is the process of establishing the policies,
procedures, and documentations for planning, managing, expending &
controlling project cost.
Its key benefit is it provides guidance & directions on how the project costs
will be managed throughout the project
 1. Org. Culture & Structure that pe Ba seline
33 1 Sco
influences cost ENTERPRISE
ENTERPRISE PROJECT Other Information
2. Market Conditions ENVIRONME
ENVIRONME MANAGEMEN
NT Schedule
3. Currency exchange for NT T Baseline
FACTORS
FACTORS PLAN
international projects (EEF)
(EEF) 44
4. Published & Commercially ORGANIZATION
ORGANIZATION
Available Info AL
AL
22
PROCESS
PROCESS
5. Project Management PROJECT
PROJECT
ASSETS
ASSETS
Information System (OPA)
(OPA)
CHARTER
CHARTER

Financial controls procedures

Historical information & lessons TOOLS &
TECHNIQU
learned ES
1. EXPERT JUDGMENT
Financial databases; and 2. ANALYTICAL
Existing formal & informal cost TECHNIQUES
estimating & budgeting policies OUTPUT 3. MEETINGS
OUTPUT

COST
MANAGEMENT
PLAN

1. PLAN COST MANAGEMENT

OUTPUT: COST MANAGEMENT PLAN
Describes how the project costs will be planned, structured &
controlled.
Cost management plan can establish:

Units of Measure
Level of Precision
Level of Accuracy
Organizational Procedures Links
Control Thresholds
Rules of Performance Measurement
Reporting Formats
Process Descriptions
Additional details such as description of strategic funding choices,
procedure to account for fluctuation in currency exchange & cost reporting
2. ESTIMATE COSTS
Plan Cost Management: Inputs, Tools & Techniques, &
Outputs
INPUTS TOOLS & TECHNIQUES
1. Cost Management Plan
2. Human Resource
Management Plan
3. Scope Baseline
4. Project Schedule
5. Risk Register
6. Enterprise Environmental
Factors
7. Organizational Process
Assets (OPAs)
OUTPUTS
1. Expert Judgment 1. Activity Cost
2. Analogous Estimating Estimates
3. Parametric Estimating 2. Basic of Estimates
4. Bottom-up Estimating 3. Project Documents
5. Three-points Estimating Updates
6. Reserve Analysis
7. Cost of Quality
8. Project Management
Software
9. Vendor Bid Analysis
10. Group Decision Making
Techniques
Estimate Cost is the process of developing an approximation of the
monetary resources needed to complete project activities.
Its key benefit is it determines the amount of cost required to complete
project work.
 1. Market Conditions 33 WBS
66 1
SCOPE
SCOPE WBS Dictionary
2. Published Commercially Info ENTERPRISE
ENTERPRISE COST
44 BASELINE
BASELINE
ENVIRONME
ENVIRONME MANAGEMEN Project
PROJECT
PROJECT Scope
NT
NT T
SCHEDUL Statem
FACTORS
FACTORS PLAN SCHEDUL ent
EE
(EEF)
(EEF) 77
ORGANIZATION
ORGANIZATION
55
AL
AL 22
RISK
RISK PROCESS
PROCESS H.R.
H.R.
REGISTER
REGISTER ASSETS
ASSETS MGMT
MGMT
(OPA)
(OPA) PLAN
PLAN

Cost Estimating Policies TOOLS &

Cost Estimating Templates TECHNIQU
ES
1. EXPERT JUDGMENT
Historical Information, and 2. ANALOGOUS ESTIMATING
Lessons Learned
3. PARAMETRIC ESTIMATING
OUTPUT 4. THREE-POINT ESTIMATING
OUTPUT 5. BOTTOM-UP ESTIMATING
6. RESERVE ANALYSIS
PROJECT 7. COST OF QUALITY
ACTIVITY BASIS OF
DOCUMENTS 8. PROJECT MANAGEMENT
COST ESTIMATES ESTIMATES
UPDATES SOFTWARE
9. VENDOR BID ANALYSIS
10.GROUP DECISION MAKING
2. ESTIMATE COSTS TECHNIQUES
ESTIMATE COSTS: TOOLS & TECHNIQUES
1. Expert Judgment
2. Analogous Estimating compare with similar past projects when limited amount of
detailed info available

3. Parametric Estimating uses statistical relationship relevant historical data &

other variable (like square footage) to calculate a cost estimate for project work. It provides
higher level of accuracy depending on past data

4. Bottom Up Estimating cost of individual work packages are estimated to the

greatest level for detail. Its accuracy is influenced by the size & complexity of the individual
activity or work package.

5. Three-Point Estimating
Most Likely (cM) based on realistic effort assessment
Optimistic (cO) based on best case scenario
Pessimistic (cP) based on worst case scenario
Depending on the assumed distribution of value within the range, there
are 2 formulas:
Triangular Distribution. cE = (cO + cM + cP) /3
Beta Distribution (from PERT analysis) cE = (cO + 4cM + cP) / 6
ESTIMATE COSTS: TOOLS & TECHNIQUES
6. Reserve Analysis
Contingency Reserves are the budget within cost baseline that is allocated for identified risks.
It is often viewed as part of the budget to address the known-unknowns that can affect a
project. It may be a percentage of the estimated cost, a fixed number, or may be developed
by using quantitative analysis methods.

7. Cost of Quality (COQ) it cost less to prevent quality issue than to fix it
8. Project Management Software Computerized spreadsheets, simulation, and
statistical tools are used to assist with cost estimating.

9. Vendor Bid Analysis Cost estimates can be based on the responsive bids from
qualified vendors

10.Group Decision-Making Techniques

Team based approaches, such as brainstorming, the Delphi or Nominal Group Techniques are
useful for engaging team members to improve estimate accuracy & commitment to the
estimates.
ESTIMATE COSTS: OUTPUTS
Quantitative assessment of the probable costs required to complete project work.
ACTIVITY It can be presented in summary form or in detail. Cost are estimated for ALL
COST ESTIMATES resources that are applied to the activity cost estimate

PROJECT Project Documents that may be updated include, but not limited to, the risk
DOCUMENTS register.
UPDATES

BASIS OF The amount and type of additional details supporting the cost estimates vary by
ESTIMATES application area.
Supporting detail may include:
Documentation of the basis of the estimate (how it was developed),
Documentation of all assumptions made,
Documentation of any known constraints,
Indication of the range of possible estimates (like +/- 10%) to indicate that the
item is expected to cost between a range of values, and
Indication of the confidence level of the final estimate.
3. DETERMINE BUDGET
Determine Budget: Inputs, Tools & Techniques, & Outputs

INPUTS TOOLS & TECHNIQUES OUTPUTS

1. Cost Management Plan 1. Cost Aggregation 1. Cost Baseline

2. Scope Baseline 2. Reserve Analysis 2. Project Funding
3. Activity Cost Estimates 3. Expert Judgment 3. Project Documents
4. Basis of Estimates 4. Historical Relationship Updates
5. Project Schedule 5. Funding Limit
6. Resource Calendars Reconciliation
7. Risk Register
8. Agreements
9. Organizational Process
Assets (OPAs)

Determine Budget is the process of aggregating the estimated costs of

individual activities or work packages to establish an authorized cost
baseline
Its key benefit is it determines the cost baseline against which project
performance can be monitored & controlled.
 22 WBS
66 1
33 SCOPE
SCOPE WBS Dictionary
Info on which resources are RESOURC 55 COST
RESOURC ACTIVITY BASELINE
BASELINE Pr
assigned PROJECT MANAGEMEN ACTIVITY oject S
EE PROJECT COST cope S
and when they are assigned SCHEDULE T COST tatem
CALENDA
CALENDA SCHEDULE ESTIMATE ent
PLAN ESTIMATE
RS
RS SS
99
ORGANIZATION
ORGANIZATION
88 77
AL
AL 44
AGREEMEN
AGREEMEN RISK
RISK PROCESS
PROCESS BASIS
BASIS
TS
TS REGISTER
REGISTER ASSETS
ASSETS OF
OF
(OPA)
(OPA) ESTIMATE
ESTIMATE
SS

Existing formal & informal cost TOOLS &

budgeting-related policies, TECHNIQU
procedures and guidelines; 1. COST AGGREGRATION
ES
Cost budgeting tools; and 2. RESERVE ANALYSIS
Reporting methods 3. EXPERT JUDGMENT
4. HISTORICAL RELATIONSHIPS
OUTPUT 5. FUNDING LIMIT RECONCILIATION
OUTPUT

PROJECT PROJECT
COST
FUNDING DOCUMENTS
BASELINE
REQUIREMENTS UPDATES

3. DETERMINE BUDGET
DETERMINE BUDGET: INPUTS
1. Cost Management Plan describes how project costs are managed & controlled

2. Scope Baseline:
Project Scope Statement; WBS; & WBS Dictionary.

3. Activity Cost Estimates each activity in a work package are aggregated to get the cost
estimate

4. Basis of Estimates must specify basic assumptions related to inclusion, exclusion of indirect
or other costs

5. Project Schedule planned start & finish dates of activities, milestones, work packages &
control accounts

6. Resource Calendars * provide info on which resources are assigned and when they are
assigned

7. Risk Register * must be reviewed to consider how to aggregate the risk response cost.

8. Agreements *
Applicable agreement information and cost relating to products, services, or results that have been or will
be purchased are included when determining the budget.

9. Organizational Process Assets

such as Existing formal/informal cost-budgeting policies, procedures & guidelines; Cost budgeting tools; and
DETERMINE BUDGET: TOOLS & TECHNIQUES
1. Cost Aggregation *
costs are aggregated by work packages rolling up to the entire project

2. Reserve Analysis
can establish both contingency reserves & management reserves for the project

3. Expert Judgment
such as from Other departments, consultants, stakeholders (including the customers), professional &
technical associations; and industry groups.

4. Historical Relationships *
that result in parametric or analogous estimates to develop mathematical model to predict total project
cost. The accuracy depends on if the:
Historical information used to develop the model is accurate.
Parameters used are readily quantifiable; and
Models are scalable

5. Funding Limit Reconciliation

Expenditures must be reconciled with any funding limit. A variance may necessitate a rescheduling to level
out the rate of expenditures by placing date constraints on the schedule.
DETERMINE BUDGET: OUTPUTS
Approved version of the time-phased project budget (excluding any management
COST reserves) that can only be changed via formal change control procedures. It is
BASELINE used as a basis for comparison to actual results.
Manag
ement
Reserv
es
Continge

Total Amount
ncy
Reserves
Activity

Work Package
Contingenc
y

Account
Reserves

Estimates
Budget

Control

Estimate
Project

Baseli

Activity
Cost

Cost
Cost
ne

s
s
Project Budget
Component
PROJECT Derived from the cost baseline that include projected expenditures plus anticipated
FUNDING liabilities. Funding are incremental, not continuous and may not be distributed
REQUIREMENTS evenly

PROJECT Project Documents that may be updated include, but not limited to:
DOCUMENTS Risk Register, Activity Cost Estimate, and Project Schedule
UPDATES
4. CONTROL COSTS
Control Costs: Inputs, Tools & Techniques, & Outputs

INPUTS TOOLS & TECHNIQUES OUTPUTS

1. Project Management 1. Earned Value 1. Work Performance

Plan Management Info
2. Project Funding 2. Forecasting 2. Cost Forecasts
Requirements 3. To Complete 3. Change Requests
3. Work Performance Data Performance Index 4. Project Management
4. Organization Process (TCPI) Plan Updates
Assets (OPAs) 4. Performance Reviews 5. Projects Documents
5. Project Management Updates
Software 6. Organizational
6. Reserve Analysis Process Assets
Updates

Control Costs is the process of monitoring the status of the project to

update the project costs and managing changes to the cost baseline.
Its key benefit is it provides means to recognize variance from the plan in
order to take corrective action & minimize risk.
CONTROL COSTS
Much of the effort of cost control involves analyzing the relationship between the
consumption of project funds to the physical work being accomplish for such
expenditures that includes:

Influencing the factors that created changes to the authorized cost baseline;
Ensuring that all change requests are acted on a timely manner;
Managing the actual changes when they occur;
Ensuring that cost expenditures do not exceed the authorized funding by period, by
WBS component, by activity, and in total for the project;
Monitoring cost performance to isolate and understand variances from the approved
cost baseline;
Monitoring work performance against funds expended;
Preventing unapproved changes from being included in the reported cost of resource
usage;
Informing appropriate stakeholders of all approved changes and associated costs; and
Bringing expected cost overruns within acceptable limits.
 e n
1
s t B a se l i
33
PROJECT Co
WORK
WORK MANAGEMEN Cost Management Plan
PERFORMAN
PERFORMAN T
CE
CE PLAN
DATA
DATA
44
ORGANIZATION
ORGANIZATION
AL
AL 22
PROCESS
PROCESS PROJECT
PROJECT
ASSETS
ASSETS FUNDING
FUNDING
(OPA)
(OPA) REQUIREMEN
REQUIREMEN
TS
TS

Existing formal & informal cost TOOLS &

budgeting-related policies, TECHNIQU
procedures and guidelines; 1. EARNED VALUE MANAGEMENT
ES
Cost control tools; and 2. FORECASTING
Monitoring & Reporting methods to be 3. TO COMPLETE PERFORMANCE
used INDEX (TCPI)
OUTPUT 4. PERFORMANCE REVIEWS
OUTPUT
5. PROJECT MANAGEMENT SOFTWARE
6. RESERVE ANALYIS
WORK PROJECT PROJECT ORGANIZATIONAL
COST CHANGE
PERFORMANCE MANAGEMENT PLAN DOCUMENT PROCESS ASSETS
FORECASTS REQUESTS
INFORMATION UPDATES UPDATES UPDATES

4. CONTROL COSTS
CONTROL COSTS: TOOLS & TECHNIQUES
1. Earned Value Management (EVM)
A methodology that combines scope, schedule, and resource measurements to asses project performance &
progress to form performance baseline. It is a technique that requires the formation of an integrated
baseline to measure performance of the project.
EVM develops and monitor three key dimensions for each work package & control account:

Planned Value (PV). Authorized budget assigned to scheduled work for an activity or WBS
component (not including management reserve). It is allocated by phase over the life of the project,
but at a given moment, PV defines the physical work that should have been accomplished. The total
of the PV is sometimes referred to as the Performance Measurement Baseline (PMB). Total PV for the
project is also known at Budget At Completion (BAC)

Earned Value (EV). A measure of work performed expressed in terms on the budget authorized for
that work. EV measured needs to be related to the PMB and it cannot be greater than the authorized
PV budget for a component. Its often used to calculate the percent complete of a project.

Actual Cost (AC). The realized cost incurred for work performed on an activity during a specific
time period. It is the total cost incurred in accomplishing the work that the EV measured. The AC
needs to correspond in definition to what was budgeted in the PV and measured in the EV. AC has no
upper limit; whatever spent to achieve EV will be measured.
CONTROL COSTS: TOOLS & TECHNIQUES
Variances from the approved baseline will also be monitored:

Schedule Variance (SV). SV = EV PV

A measure of schedule performance expressed as the difference between the Earned Value (EV) and
the Planned Value (PV)
EVM (Earned Value Methodology) is a useful metric that can indicate when a project is falling behind
or is ahead of its baseline schedule. The EVM schedule variance will ultimately equal zero when the
project is completed because ALL the Planned Value will have been Earned. It is best used in
conjunction with Critical Path Methodology (CPM)

Cost Variance (CV). CV = EV AC

The amount of budget deficit or surplus at a given point in time, expressed as the difference between
Earned Value (EV) and the Actual Cost (AC)
The cost variance at the end of the project will be the difference between the Budget At Completion
(BAC) and the Actual amount spent. The CV is very critical because it indicates the relationship of
physical performance to the cost spent. A Negative CV is often difficult for the project to recover.

Schedule Performance Index (SPI) SPI = EV/PV

A measure of efficiency expressed as the ratio on Earned Value to Planned Value. An SPI value of LESS
than 1.0 means that it is behind schedule and GREATER than 1.0 means that its ahead of the schedule

Cost Performance Index (CPI) CPI = EV/AC

A measure of cost efficiency of budgeted resources, expressed as ratio between Earned Value to Actual
Cost. A CPI value of LESS than 1.0 means that it is Over Budget and GREATER than 1.0 means that its
Under Budget
CONTROL COSTS: TOOLS & TECHNIQUES
2. Forecasting
As the project progresses, the PM may develop a forecast for the Estimate At Completion (EAC) that may
differ from the Budget At Completion (BAC) based on performance. If the BAC is deemed no longer viable,
the forecasted EAC will be used.

EACs are typically based on actual cost incurred, plus an Estimate to Complete (ETC) the remaining work.

The most common EAC forecasting approach is a manual bottom-up summation by the PM & the project
team.

EAC = AC + Bottom-Up ETC

Three common methods of calculating EAC are:

EAC forecast for ETC work performed at the budgeted rate: Accepts the actual project performance to
date as represented by the actual costs & predicts that ALL future ETC work will be accomplished at
the budgeted rate.
When actual performance is unfavorable, the assumption that future performance will improve should
be accepted only when supported by risk analysis.
EAC = AC + (BAC EV)
EAC forecast for ETC work performed at the present CPI: Assumes what the project has experienced to
date can be expected to continue in the future.
EAC = BAC / CPI
CONTROL COSTS: TOOLS & TECHNIQUES
2. Forecasting
3. To Complete Performance Index (TCPI)
4. Performance Reviews
5. Project Management Software
6. Reserve Analysis
DETERMINE BUDGET: OUTPUTS
Approved version of the time-phased project budget (excluding any management
COST reserves) that can only be changed via formal change control procedures. It is
BASELINE used as a basis for comparison to actual results.
Manag
ement
Reserv
es
Continge

Total Amount
ncy
Reserves
Activity

Work Package
Contingenc
y

Account
Reserves

Estimates
Budget

Control

Estimate
Project

Baseli

Activity
Cost

Cost
Cost
ne

s
s
Project Budget
Component
PROJECT Derived from the cost baseline that include projected expenditures plus anticipated
FUNDING liabilities. Funding are incremental, not continuous and may not be distributed
REQUIREMENTS evenly

PROJECT Project Documents that may be updated include, but not limited to:
DOCUMENTS Risk Register, Activity Cost Estimate, and Project Schedule
UPDATES