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.
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
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
- Calculators. PMI® allows the use of business calculators with standard six-function (+, −, ×, ÷, √,%).
- Earned Value Management Formula. We have designed an easy all-in-one cheat sheet visualizing critical formula and their parent-to-child relationships from the earned value management (EVM) system. Read more here.