PMP Certification Exam Prep – Project Cost Management


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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:

  • all-in-one project management graphic of Project Cost Management, a quick reference guide to its definition, processes, and key terms
  • Project Cost Management basics, must-know tips to avoid common mistakes during your PMP certification exam, and keywords—by Project Cost Management processes

Read on!

Image titled PMP Certification Exam Prep — Project Cost Management

Project Cost Management Processes – Basics, Tips, and Keywords

CLICK on the headers below to expand or collapse each section.

[expand title=”1. Plan Cost Management” tag=”h3″]

Icon titled Project Cost Management Planning Processes Tipsographic

Basics of Plan Cost Management

  • WHAT Plan Cost Management Is. A project manager uses the Plan Cost Management process to create the cost management plan.
  • WHY Plan Cost Management Is Important. The Plan Cost Management process is where a project manager figures out all the work necessary to make sure the project stays within the estimated budget.
  • WHEN Plan Cost Management Is Executed. The Plan Cost Management process is performed after the scope and schedule activities of the Project Scope Management and Project Time Management knowledge areas. Moreover, the inputs, tools, and techniques for the Plan Cost Management process are the very same inputs, tools, and technique for the Plan Schedule Management process. They differ only for the output.
  • HOW Plan Cost Management Operates.
Inputs Tools and techniques Outputs
  • Project management plan
  • Project charter
  • Enterprise environmental factors
  • Organizational process assets
  • Expert judgment
  • Analytical techniques
  • Meetings
  • Cost management plan

Source: PMBOK® Guide, 5th ed., Chapter 7, section 7.1, p. 195.

Tips on Plan Cost Management

  • Cost Vs. Budget. At 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.

Key Terms of Plan Cost Management

  • Cost management plan. A subsidiary of the project management plan that establishes the policies and procedures to plan, execute, and control project costs.
  • Life-cycle costing. A technique which takes account of the total cost of ownership during the whole economic life of a product. It includes initial costs, operating costs, and disposal costs.
  • Value engineering. A project manager’s efforts to get more out of the project by any means available, for instance by decreasing costs or improving quality.

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[expand title=”2. Estimate Costs” tag=”h3″]

Basics of Estimate Costs

  • WHAT Estimate Costs Is. The Estimate Costs process develops an approximation of costs associated with each of the resources (human and material) required for all schedule activities of the project.
  • WHY Estimate Costs Is Important. A process manager estimates how much everything will cost on her/his project using the Estimate Costs process and these estimates will be combined into a spending plan in the following Determine Budget process.
  • WHEN Estimate Costs Is Executed. The Estimate Costs process is a highly iterative process that is repeated throughout the life of the project and each time it is done the activity cost is refined.
  • HOW Estimate Costs Operates.
Inputs Tools and techniques Outputs
  • Cost management plan
  • Human resource management plan
  • Scope baseline
  • Project schedule
  • Risk register
  • Enterprise environmental factors
  • Organizational process assets
  • 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
  • Activity cost estimates
  • Basis of estimates
  • Project documents updates

Source: PMBOK® Guide, 5th ed., Chapter 7, section 7.2, p. 200.

Tips on 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%

Key Terms of Estimate Costs

  • Rough Order of Magnitude Estimation. Estimating with very little accuracy at the beginning of a project and then refining the estimate over time. It’s got a range of –25% to +75%.
  • Vendor Bid Analysis. The technique that gathers information on bids from vendors to help a project manager figure out cost estimates.
  • Cost of Quality. The total cost to produce the product or service of the project according to the quality standards.
  • Activity Cost Estimates. The cost estimates for all activities in the activity list of a project.
  • Basis of Estimates. The backup information to support how the estimates were developed.

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[expand title=”3. Determine Budget” tag=”h3″]

Basics of Determine Budget

  • WHAT Determine Budget Is. The Determine Budget process aggregates the individual activity cost estimates into a total project cost. Then, it applies the project schedule to establish the costs timing. The resulting cost baseline is used to measure the performance of the project throughout the remaining process groups.
  • WHY Determine Budget Is Important. The cost baseline, output of the Determine Budget process, reports a detailed budget that shows costs and timelines for each work package or activity.
  • WHEN Determine Budget Is Executed. A project manager must complete the other Planning processes—such as the Create WBS, Define Activities, Estimate Activity Durations, and Estimate Activity Resources—before working on Determine Budget because some of their outputs become the inputs to this process. On the other hand, he/she can perform the Estimate Costs and Determine Budget processes at the same time.
  • HOW Determine Budget Operates.
Inputs Tools and techniques Outputs
  • Cost management plan
  • Scope baseline
  • Activity cost estimates
  • Basis of estimates
  • Project schedule
  • Resource calendars
  • Risk register
  • Agreements
  • Organizational process assets
  • Cost aggregation
  • Reserve analysis
  • Expert judgment
  • Historical relationships
  • Funding limit reconciliation
  • Cost baseline
  • Project funding requirements
  • Project documents updates

Source: PMBOK® Guide, 5th ed., Chapter 7, section 7.3, p. 208.

Tips on 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.

Key Terms of Determine Budget

  • Cost Aggregation. The technique of summing lower level cost estimates for each work package to arrive at a total cost estimate for higher-level deliverables.
  • Funding Limit Reconciliation. The project must reconcile funding requirements with any funding limitation or constraint originating from the company fiscal calendar.
  • Cost Baseline. The total expected cost for the project. It includes the activity costs plus contingency reserves, the work package costs plus contingency reserves, and the management reserves for the cost baseline. It is time-phased and approved by the project sponsor.
  • Project Funding Requirements. The requirements for funding over the course of the project, derived from the cost baseline.

[/expand]

[expand title=”4. Control Costs” tag=”h3″]

Image titled Project Cost Management Monitoring Controlling Processes Tipsographic

Basics of Control Costs

  • What Control Costs Is. The Control Costs process monitors the project budget and manages variations to the cost baseline included in the project plan.
  • Why Control Costs Is Important. The Control Cost process gives a project manager the tools and techniques to measure the performance of the project at a give point in time and to forecast the future performance of the project.
  • When Control Costs Is Executed. A project manager performs Control Costs process regularly throughout the project. Its iterative nature shows up especially when costs start to increase.
  • How Control Costs Operates.
Inputs Tools and techniques Outputs
  • Project management plan
  • Project funding requirements
  • Work performance data
  • Organizational process assets
  • Earned value management
  • Forecasting
  • To-complete performance index (TCPI)
  • Performance reviews
  • Project management software
  • Reserve analysis
  • Work performance information
  • Cost forecasts
  • Change requests
  • Project management plan updates
  • Project documents updates
  • Organizational process assets updates

Source: PMBOK® Guide, 5th ed., Chapter 7, section 7.4, p. 215.

Tips on Control Costs

Key Terms of Control Costs

  • Earned Value Management. A management methodology for integrating scope, schedule and resources and for objectively measuring project performance and progress.
  • Forecasting. A technique that takes time and cost performance to date and uses this information to estimates the future conditions or future performance of the project based on what a project manager knows when the calculation is performed.
  • To-Complete Performance Index (TCPI). The projected cost performance the remaining work of the project must achieve in order to meet the original budget or a new approved one.[/expand]
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