Project Cost Management - PMP preparation course

2. • Presenter • Participants: profile, background, expectations • Session: structure, approach and benefits Introduction to the session

3. 1. Integration management 2. Scope management 3. Time management 4. Cost management 5. Quality management 6. Human resources management 7. Communications management 8. Risk management 9. Procurement management 10. Stakeholder management Project Management Knowledge Areas PMI PMBOK 5th edition

4. 1. Plan Cost Management 2. Estimate Costs 3. Determine Budget 4. Control Costs Project Cost Management Processes:

5. Plan Cost Management Inputs • Project management plan • Project charter • Enterprise environmental factors • Organizational process assets Tools and Techniques • Expert judgment • Analytical techniques • Meetings Outputs • Cost management plan

6. Plan Cost Management: Data Flow Plan Cost Management Estimate Costs Perform Quantitative Risk Analysis Identify Risks Enterprise / Organization Project Cost Management • Cost management plan • Project charter • OPA • EEF Determine Budget Develop Project Management Plan Develop Project Charter • Project management plan

7. • Units of measure • Level of precision • Level of accuracy • Control thresholds • Rules of performance measurement • Reporting formats Cost management plan

8. Estimate Costs Inputs • Cost management plan • Human resource management plan • Scope baseline • Project schedule • Risk register • Enterprise environmental factors • Organizational process assets Tools and Techniques • Expert judgment • Analogous estimating • Parametric estimating • Bottom-up estimating • Three-point estimating • Reserve analysis • Cost of quality • Project management software • Vendor bid analysis • Group decision-making techniques Outputs • Activity cost estimates • Basis of estimates • Project documents updates

9. Estimate Costs: Data Flow Estimate Costs Plan Cost Management Plan Procurement Management Estimate Activity Resources Enterprise / Organization Project Cost Management • Cost management plan • Human resource management plan • OPA • EEF Determine Budget Identify Risks Plan Human Resource Management • Risk register Develop Schedule Create WBS Identify Risks Project documents • Project schedule • Scope baseline • Basis of estimates • Activity cost estimates • Project documents updates

10. • Analogous estimating • Parametric estimating • Bottom up estimating • Three-point estimating: ▫ Most likely (cM) ▫ Optimistic (cO) ▫ Pessimistic (cP) ▫ Triangular distribution: cE = ( cO + cM + cP ) / 3 ▫ Beta distribution: cE = ( cO + 4cM + cP ) / 6 Estimate costs

11. Determine Budget Inputs • Cost management plan • Scope baseline • Activity cost estimates • Basis of estimates • Project schedule • Resource calendars • Risk register • Agreements • Organizational process assets Tools and Techniques • Cost aggregation • Reserve analysis • Expert judgment • Historical relationships • Funding limit reconciliation Outputs • Cost baseline • Project funding requirements • Project documents updates

12. Determine Budget: Data Flow Determine Budget Plan Cost Management Develop Project Management Plan Enterprise / Organization Project Cost Management • Cost management plan • Risk register • OPA Control Costs Identify Risks Acquire Project Team • Agreements • Resource calendars Develop Schedule Create WBS Project documents • Project schedule • Scope baseline • Project Funding Requirements • Cost baseline • Project documents updates Estimate Costs • Activity cost estimates • Basis of estimates Conduct Procurements • Resource calendars

13. Cost Baseline

14. Control Costs Inputs • Project management plan • Project funding requirements • Work performance data • Organizational process assets Tools and Techniques • Earned value management • Forecasting • To-complete performance index (TCPI) • Performance reviews • Project management software • Reserve analysis Outputs • Work performance information • Cost forecasts • Change requests • Project management plan updates • Project documents updates • Organizational process assets updates

15. Control Costs: Data Flow Control Costs Determine Budget Develop Project Management Plan Enterprise / Organization Project Cost Management • OPA Perform Integrated Change Control Direct and Manage Project Work Develop Project Management Plan Project documents • Project management plan • Change requests • Project management plan updates • Project funding requirements Monitor and Control Project Work • Work performance data • OPA updates • Work performance information • Cost forecasts • Project documents updates

16. Earned Value Calculation (PMBOK 5, page 224) !!! Abbreviation Name Lexicon Definition How Used Equation Interpretation of Result PV Planned Value The authorized budget assigned to scheduled work. The value of the work planned to be completed to a point in time, usually the data date, or project completion. EV Earned Value The measure of work performed expressed in terms of the budget authorized for that work. The planned value of all the work completed (earned) to a point in time, usually the data date, without reference to actual costs. EV = sum of the planned value of completed work. AC Actual Cost The realized cost incurred for the work performed on an activity during a specific time period. The actual cost of all the work completed to a point in time, usually the data date. BAC Budget at Completion The sum of all budgets established for the work to be performed. The value of total planned work, the project cost baseline.

17. Earned Value Calculation (PMBOK 5, page 224) !!! Abbreviation Name Lexicon Definition How Used Equation Interpretation of Result CV Cost Variance The amount of budget deficit or surplus at a givent point in time, expressed as the difference between the earned value and the actual cost. The difference between the value of work completed to a point in time, usually the data date, and the actual costs to the same point in time. CV = EV – AC Positive = Under planned cost Neutral = On planned cost Negative = Over planned cost SV Schedule Variance The amount by which the project is ahead or behind the planned delivery date, at a given point in time, expressed as the difference between the earned value and the planned value. The difference between the work completed to a pint in time, usually the data date, and the work planned to be completed to the same point in time. SV = EV – PV Positive = Ahead of Schedule Neutral = On Schedule Negative = Behind Schedule VAC Variance at Completion A projection of the amount of budget deficit or surplus, expressed as the difference between the budget at completion and the estimate at completion. The estimated difference in cost at the completion of the project. VAC = BAC – EAC Positive = Under planned cost Neutral = On planned cost Negative = Over planned cost

18. Earned Value Calculation (PMBOK 5, page 224) !!! Abbreviation Name Lexicon Definition How Used Equation Interpretation of Result CPI Cost Performance Index A measure of the cost efficiency of budgeted resources expressed as the ratio of earned value to actual cost. A CPI of 1.0 means the project is exactly on budget, that the work actually done so far is exactly the same as the cost so far. Other values show the percentage of how much costs are over or under the budgeted amount for work accomplished. CPI = EV / AC Greater than 1.0 = Under planned cost Exactly 1.0 = On planned cost Less than 1.0 = Over planned cost SPI Schedule Performance Index A measure of schedule efficiency expressed as the ratio of earned value to planned value. An SPI of 1.0 means that the project is exactly on schedule, that the work actually done so far is exactly the same as the work planned to be done so far. Other values show the percentage of how much costs are over or under the budgeted amount for work planned. SPI = EV / PV Greater than 1.0 = Ahead of Schedule Exactly 1.0 = On Schedule Less than 1.0 = Behind schedule EAC Estimate at Completion The expected total cost of completing all work expressed as the sum of the actual cost to date and the estimate to complete. If the CPI is expected to be the same for the remainder of the project, EAC can be calculated using: If future work will be accomplished at the planned rate, use: If the initial plan is no longer valid, use: If both the CPI and SPI influence the remaining work, use: EAC = BAC / CPI EAC = AC + BAC – EV EAC = AC + Bottom-up ETC EAC = AC + [(BAC – EV)/(CPI x SPI)]

19. Earned Value Calculation (PMBOK 5, page 224) !!! Abbreviation Name Lexicon Definition How Used Equation Interpretation of Result ETC Extimate to Complete The expected cost to finish all the remaining project work. Assuming work is proceeding on plan, the cost of completing the remaining authorized work can be calculated using: Reestimate the remaining work from the bottom up: ETC = EAC – AC ETC = Reestimate TCPI To Complete Performance Index A measure of the cost performance that must be achieved with the remaining resources in order to meet a specified management goal, expressed as the ratio of the cost to finish the outstanding work to the budget available. The efficiency that must be maintained in order to complete on plan. The efficiency that must be maintained in order to complete the current EAC. TCPI = (BAC-EV)/(BAC-AC) TCPI = (BAC-EV)/(EAC-AC) Greater than 1.0 = Harder to complete Exactly 1.0 = Same to complete Less than 1.0 = Easier to complete Greater than 1.0 = Harder to complete Exactly 1.0 = Same to complete Less than 1.0 = Easier to complete

20. • Analogous estimating: A. Uses bottom-up estimating techniques. B. Is used most frequently during the executing processes of the project. C. Uses top-down estimating techniques. D. Uses actual detailed historical costs. Sample question #1

21. • Analogous estimating: A. Uses bottom-up estimating techniques. B. Is used most frequently during the executing processes of the project. C. Uses top-down estimating techniques. D. Uses actual detailed historical costs. Sample question #1

22. • The main focus of life cycle costing is to: A. Estimate installation costs B. Estimate the cost of operations and maintenance C. Consider installation costs when planning the project costs D. Consider operations and maintenance costs in making project decisions Sample question #2

23. • The main focus of life cycle costing is to: A. Estimate installation costs B. Estimate the cost of operations and maintenance C. Consider installation costs when planning the project costs D. Consider operations and maintenance costs in making project decisions Sample question #2

24. • Cost performance measurement is BEST done through which of the following: A. Asking for a percent complete from each team member and reporting that in the monthly progress report B. Calculating earned value and using the indexes and other calculations to report past performance and forecast future performance C. Using the 50/50 rule and making sure the life cyde cost is less than the project cost D. Focusing on the amount expended last month and what will be expended the following month Sample question #3

25. • Cost performance measurement is BEST done through which of the following: A. Asking for a percent complete from each team member and reporting that in the monthly progress report B. Calculating earned value and using the indexes and other calculations to report past performance and forecast future performance C. Using the 50/50 rule and making sure the life cyde cost is less than the project cost D. Focusing on the amount expended last month and what will be expended the following month Sample question #3

26. • A cost performance index (CPI) of 0.89 means: A. At this time, we expect the total project to cost 89 percent more than planned B. When the project is completed we will have spent 89 percent more than planned C. The project is only progressing at 89 percent of the rate planned D. The project is only getting 89 cents out of every dollar invested Sample question #4

27. • A cost performance index (CPI) of 0.89 means: A. At this time, we expect the total project to cost 89 percent more than planned B. When the project is completed we will have spent 89 percent more than planned C. The project is only progressing at 89 percent of the rate planned D. The project is only getting 89 cents out of every dollar invested Sample question #4

28. • A schedule performance index (SPI) of 0.76 means: A. You are over budget B. You are ahead of schedule C. You are only progressing at 76 percent of the rate originally planned D. You are only progressing at 24 percent of the rate originally planned Sample question #5

29. • A schedule performance index (SPI) of 0.76 means: A. You are over budget B. You are ahead of schedule C. You are only progressing at 76 percent of the rate originally planned D. You are only progressing at 24 percent of the rate originally planned Sample question #5

30. • A cost baseline is an output of which cost management process? A. Estimate Activity Resources B. Estimate Costs C. Determine Budget D. Control Costs Sample question #6

31. • A cost baseline is an output of which cost management process? A. Estimate Activity Resources B. Estimate Costs C. Determine Budget D. Control Costs Sample question #6

32. • During which project management process group are budget forecasts created? A. Monitoring and controlling B. Planning C. Initiating D. Executing Sample question #7

33. • During which project management process group are budget forecasts created? A. Monitoring and controlling B. Planning C. Initiating D. Executing Sample question #7

34. • Which of the following represents the estimated value of the work actually accomplished? A. Earned value (EV) B. Planned value (PV) C. Actual cost (AC) D. Cost variance (CV) Sample question #8

35. • Which of the following represents the estimated value of the work actually accomplished? A. Earned value (EV) B. Planned value (PV) C. Actual cost (AC) D. Cost variance (CV) Sample question #8

36. • The cost contingency reserve should be: A. Hidden to prevent management from disallowing the reserve B. Added to each activity to provide the customer with a shorter critical path C. Maintained by management to cover cost overruns D. Added to the base costs of the project to account for risks Sample question #9

37. • The cost contingency reserve should be: A. Hidden to prevent management from disallowing the reserve B. Added to each activity to provide the customer with a shorter critical path C. Maintained by management to cover cost overruns D. Added to the base costs of the project to account for risks Sample question #9

38. • You are the project manager for a railroad construction project. Your Sponsor has asked you for a forecast for the cost of project completion. The project has a total budget of $80,000 and CPI of .95 . The project has spent $25,000 of its budget so far. How much more money do you plan to spend on the project? A. $59,210 B. $80,000 C. $84,210 D. $109,210 Sample question #10

39. • You are the project manager for a railroad construction project. Your Sponsor has asked you for a forecast for the cost of project completion. The project has a total budget of $80,000 and CPI of .95 . The project has spent $25,000 of its budget so far. How much more money do you plan to spend on the project? A. $59,210 B. $80,000 C. $84,210 D. $109,210 Sample question #10 EAC = BAC/CPI. ETC = EAC - AC = BAC/CPI - AC = $80,000/0.95 - $25,000 = $59,210 (A)

40. Vladimir VUJOVIĆ, PMP E-mail: vladimir.vujovic@gmail.com PMO and BCM Manager Delhaize Serbia Sources used: PMBOK Guide, 5th Edition Rita Mulcahy’s PMP Exam Prep, 8th Edition Good Luck!

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