PMP Certification: Project Cost Management Tips

Note if you are taking the PMP® exam from 26 March 2018 onwards: click here to read the updated PMP® study material based on PMBOK® Guide 6th Edition.

Cheers, Stefania

Project Cost Management is the fourth knowledge area of project management.

It starts with a process of planning that produces a cost management plan. Then there is an iterative process that develops and updates the cost estimates and cost baseline. After these have been produced, a monitoring and controlling process is used to measure project performance and to manage any change requests to the project scope, schedule, and costs.

Based on chapter 7 of PMBOK® Guide 5th Edition, here you will find:

  • project management graphic of Project Cost Management, a usefull reference guide with the best tips to master its core concepts
  • Project Cost Management tips — by Project Cost Management processes

Read on!

Project Cost Management Tips

by Project Management Process Group

1. Plan Cost Management

  • Cost Vs. Budget. On the exam, the terms cost and budget have distinct meanings. Cost designates the actual costs of each activity or work package; budget refers to costs over time.

2. Estimate Costs

  • Type of Costs. A project manager may estimate the following type of costs for each activity and work packages defined for the project:
    • Fixed costs. Costs that don’t change based on volume (e.g., office rent, independent from employees),
    • Variable costs. Costs that adjust based on volume (e.g., office chairs, dependent on employees),
    • Direct costs. Costs directly attributable to project (e.g., labor),
    • Indirect costs. Costs not directly attributable to project (e.g., legal department),
    • Sunk costs. Costs spent on the project to date that cannot be recovered if the project was to stop.
  • Accuracy of Estimates. Keeping in mind that the more the project progresses, the more precise an activity’s estimate, the range of uncertainty inherent in any estimate typically varies as follow:
    • Order of Magnitude Estimate.-50% to +100%
    • Rough Order of Magnitude Estimate.-25% to +75%
    • Conceptual Estimate.-30% to +50%
    • Preliminary Estimate. -20% to +30%
    • Definitive Estimate. -15% to +20%
    • Control Estimate. -10% to +15%

3. Determine Budget

  • Large Projects. Large projects might have more than one cost baseline. For example, you might be required to track human resources costs, material costs, and contractor costs separately.
  • Funding Release. Usually, the project’s funds are released incrementally over the life of the project; monthly, quarterly, or annually but not all at once.
  • Cost Baseline Vs. Funding Requirements. At the end of the project, the difference between cost baseline and funding requirements is the management reserve. Funding requirements = cost baseline + management reserve.

4. Control Costs

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Hi, I am Stefania, hearth and keyboard behind Tipsographic, a free online resource for everybody interested in project management and agile. I specialize in project management tips, tools, and tricks. When I'm not writing, you can find me road cycling around Tuscany or spending time with friends and family.

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