PROJECT MANAGEMENT

Cost Management

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

Cost management

7.1 Plan Cost Management

Is the process that establishes the policies,

procedures, and documentation for planning,
managing, expending, and controlling project costs

Provides guidance and direction on how the project

costs will be managed throughout the project

7.1 Plan Cost Management

Analytical Techniques

Financial techniques are employed in these

decisions.
Techniques may include:
payback

period
return on investment
internal rate of return
discounted cash flow
net present value

Cost Management Plan

Is a component of the project management plan

and describes how the project costs will be planned,
structured, and controlled

7.2 Estimate Costs

Is the process of developing an approximation of

the monetary resources needed to complete project
activities

Determines the amount of cost required to complete

project work

7.2 Estimate Costs

Reserve Analysis

Cost estimates may include contingency reserves

(sometimes called contingency allowances) to
account for cost uncertainty

Contingency reserves are often viewed as the part

of the budget intended to address the knownunknowns that can affect a project

Cost of Quality (COQ)

Assumptions about costs of quality may be used to

prepare the activity cost estimate.

7.3 Determine Budget

Is the process of aggregating the estimated costs of

individual activities or work packages to establish
an authorized cost baseline

Determines the cost baseline against which project

performance can be monitored and controlled

7.3 Determine Budget

Cost Aggregation

Cost estimates are aggregated by work packages

in accordance with the WBS
The work package cost estimates are then
aggregated for the higher component levels of the
WBS (such as control accounts) and ultimately for
the entire project

Funding Limit Reconciliation

The expenditure of funds should be reconciled with

any funding limits on the commitment of funds for
the project

A variance between the funding limits and the

planned expenditures will sometimes necessitate the
rescheduling of work to level out the rate of
expenditures

Cost Baseline

Is the approved version of the time-phased project

budget, excluding any management reserves
Can only be changed through formal change control
procedures
Is used as a basis for comparison to actual results

Project Budget Components

Project Funding Requirements

Total funding requirements and periodic funding

requirements are derived from the cost baseline
The cost baseline will include projected
expenditures plus anticipated liabilities
Funding often occurs in incremental amounts that are
not continuous

7.4 Control Costs

Is the process of monitoring the status of the project

to update the project costs and managing changes
to the cost baseline

Provides the means to recognize variance from the

plan in order to take corrective action and minimize
risk

7.4 Control Costs

Earned Value Management

Is a methodology that combines scope, schedule, and

resource measurements to assess project performance
and progress
EVM develops and monitors three key dimensions for
each work package
Planned value (PV) is the authorized budget assigned to
scheduled work
Earned value (EV) is a measure of work performed
expressed in terms of the budget authorized for that work
Actual cost (AC) is the realized cost incurred for the work
performed on an activity during a specific time period

Baseline Variances

Schedule variance (SV) is a measure of schedule

performance
SV

= EV PV

Cost variance (CV) is the amount of budget deficit

or surplus at a given point in time
CV=

EV AC

Efficiency indicators

Schedule performance index (SPI) is a measure of

schedule efficiency
SPI

= EV/PV

Cost performance index (CPI) is a measure of the

cost efficiency of budgeted resources
CPI

= EV/AC

Earned Value, Planned Value, and

Actual Costs

Forecasting

Budget at completion (BAC)

Estimate to complete (ETC)
Estimate At Completion (EAC)
= AC + (BAC EV) performed at budget rate
EAC = BAC / CPI performed at cost index
EAC = AC + [(BAC EV) / (CPI SPI)] performed
at cost and schedule index
EAC

To-Complete Performance Index (TCPI)

Performance Reviews

Performance reviews compare cost performance

over time, schedule activities or work packages
overrunning and underrunning the budget, and
estimated funds needed to complete work in
progress
Variance

analysis VAC = BAC EAC