Transcript
Page 1: Pmp Exam Preparation Study Guide - Project Cost Management

PROJECT COST MANAGEMENT

STUDY NOTESPMBOK 2000 based, Version 9

In Preparation ForPMP® Certification Exam

IBM Education and TrainingWorldwide Certified Material

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The following are certification, service, and/or trademarks of the Project Management Institute,Inc. which is registered in the United States and other nations: “PMI” is a service andtrademark, PMI® Logo and "PMBOK", are trademarks, “PMP” and the PMP® logo arecertification marks.

Other company, product, and service names may be trademarks or service marks of others.

DisclaimerPMI makes no warranty, guarantee, or representation, express or implied, that the successfulcompletion of any activity or program, or the use of any product or publication, designed to preparecandidates for the PMP® Certification Examination, will result in the completion or satisfaction of any PMP® Certification eligibility requirement or standard., service, activity, and has not contributed anyfinancial resources.

Initially Prepared By: Kim Ulmer Edited By: Peter Dapremont

April 2002 Edition

The information contained in this document has not been submitted to any formal IBM test and isdistributed on an “as is” basis without any warranty either express or implied. The use of this informationor the implementation of any of these techniques is a customer responsibility and depends on thecustomer’s ability to evaluate and integrate them into the customer’s operational environment. Whileeach item may have been reviewed by IBM for accuracy in a specific situation, there is no guarantee thatthe same or similar results will result elsewhere. Customers attempting to adapt these techniques to theirown environments do so at their own risk.

© Copyright International Business Machines Corporation 2002. All rights reserved. IBM and itslogo are trademarks of IBM Corporation. This document may not be reproduced in whole or inpart without the prior written permission of IBM.Note to U.S. Government Users--Documentation related to restricted rights--Use, duplication ordisclosure is subject to restrictions set forth in GSA ADP Schedule Contract with IBM Corp.

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Project Cost ManagementStudy Notes

Reference Material to study:

ü A Guide to the Project Management Body of Knowledge (PMBOK Guide), Chapter 7(2000 edition)

ü Project Planning, Scheduling & Control, Lewis, James P., 1995, Chapter 10ü Project Management, A Managerial Approach, Meridith, Jack R. 1995, Chapter 7, and

Chapter 10, pgs. 457-459ü The New Project Management, Frame, J. Davidson, 1994, Chapters 8-9, 11ü PMP Exam Practice Test and Study Guide, 4th Edition, by Ward, J. LeRoy, PMP,

2001ü PMP Exam Prep, 3rd Edition, by Mulcahy, Rita, PMP, 2001ü ESI PMP Challenge!, 3rd Edition, Cost Section, Ward, J. LeRoy, 2001

What to Study?

ü The PMBOK processes of Project Cost Management: Resource Planning, CostEstimating, Cost Budgeting, and Cost Control (Be familiar with Inputs, Tools andTechniques, and Outputs for each process)

ü Cost Estimates and Ranges: Order of Magnitude, Budgetary, and Definitiveü Earned Value Analysis: EV (BCWP), PV (BCWS), ACWP, EAC, BAC, ETC, CV, SV,

CPI, SPIü Cost Estimating Techniques: analogous (also called top-down), parametric modeling,

and bottom-upü Present Value and Net Present Valueü Straight-Line, Double Declining Depreciation and Sum of Yrs Digits

"PMBOK" is a trademark of the Project Management Institute, Inc. which is registered in the United States and other nations. “PMI” is a service and trademark of the Project Management Institute, Inc. which is registered in the United States and other nations.“PMP” and the PMP logo are certification marks of the Project Management Institute which are registered in the United States and othernations.

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Key Definitions

1) The physical work accomplished plus the authorized budget forthis work. 2) The sum of the approved cost estimates (mayinclude overhead allocation) for activities or portions of activitiescompleted during a given period, usually from the beginning of theproject until now. Previously called the Budgeted Cost of WorkPerformed (BCWP).

Earned Value (EV)

Any difference between the budgeted cost of an activity and theactual cost of that activity. In earned value, CV = EV-AC.

Cost Variance (CV)

The cost efficiency ratio of earned value to actual costs. CPI isoften used to predict the magnitude of a cost overrun using thefollowing formula: BAC/CPI = projected cost at completion, whereCPI = EV/AC.

Cost PerformanceIndex (CPI)

A management control point where the integration of scope andbudget and schedule takes place, and where the measurement ofperformance will happen. CAPs are placed at selectedmanagement points of the work breakdown structure. Previouslyreferred to as a Cost Account Plan.

Control Account Plan(CAP)

The amount of money or time needed above the estimate toreduce the risk of overruns of project objectives to a levelacceptable to the organization.

Contingency Reserve

The development of a management plan that identifies alternativestrategies to be used to ensure project success if specified riskevents occur. (used in Risk Management)

ContingencyPlanning

Any numbering system used to uniquely identify each element ofthe WBS.

Code of Accounts

Any numbering system used to monitor project costs by category(e.g., labor, supplies, materials). The project chart of accounts isusually based upon the corporate chart of accounts of the primaryperforming organization.

Chart of Accounts

Replaced with the term planned value.Budgeted Cost ofWork Scheduled(BCWS)

Replaced with the term earned value.Budgeted Cost ofWork Performed(BCWP)

The sum of the total budgets for a project.Budget At Completion(BAC)

The original approved plan plus or minus approved scopechanges.

Baseline

Total actual costs incurred that must relate to whatever cost wasbudgeted within the planned value and earned value inaccomplishing work during a given time period. Formerly calledActual Cost of Work Performed (ACWP), this is now referred to asActual Cost (AC).

Actual Cost (AC) /Actual Cost of WorkPerformed (ACWP)

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Key Definitions, cont.

A provision in the project plan to mitigate cost and/or schedule risk.Often used with a modifier (e.g., management reserve,contingency reserve) to provide further detail on what types of riskare meant to be mitigated. The specific definition of the modifiedterm varies by application area.

Reserve

A subset of project management that includes the processesrequired to ensure that the project is completed within theapproved budget.

Project CostManagement

The physical work scheduled plus the authorized budget toaccomplish the scheduled work. Formerly called Budgeted Cost ofWork Scheduled (BCWS).

Planned Value (PV)

An estimate, expressed as a percent, of the amount of work thathas been completed on an activity or group of activities.

Percent Complete(PC)

The number of time periods up to the point at which cumulativerevenues exceed cumulative costs and, therefore, the project hasturned a profit.

Payback Period

An estimating technique that uses a statistical relationship betweenhistorical data and other variables to calculate an estimate.

ParametricEstimating

The concept of including acquisition, operating, and disposal costswhen evaluating various alternatives. Also known as the total costof ownership.

Life Cycle Costing

Costs incurred by an organization irrespective of the project suchas security, personnel and payroll. Costs not directly tied to theproject.

Indirect Costs

Costs that do not change based on the number of units. Thesecosts are nonrecurring.

Fixed Costs

The expected additional cost needed to complete an activity, agroup of activities, or the project. Most techniques for forecastingETC include some adjustment to the original cost estimate basedon project performance to date. ETC = EAC - AC.

Estimate/EstimatedTo Complete (ETC)

The expected total cost of an activity, a group of activities, or of theproject when the defined scope of work has been completed. Mosttechniques for forecasting EAC include some adjustment of theoriginal cost estimate based on project performance to date. EAC= Actuals-to-date + ETC. (Also known as forecast final cost)

Estimate atCompletion (EAC)

An assessment of the likely quantitative result. Usually applied toproject costs and durations and should always include someindication of accuracy. (e.g. +/- percent) Usually used with amodifier (e.g., preliminary, conceptual, feasibility) Some applicationareas have specific modifiers that imply particular accuracy ranges(e.g., order of magnitude, budget estimate, and definitiveestimate.)

Estimate

A method for integrating scope, schedule, and resources and formeasuring project performance. It compares the amount of workthat was planned with what was actually earned with what wasactually spent to determine if cost and schedule performance areas expected.

Earned ValueManagement (EVM)

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Key Definitions, cont.

Current assets minus current liabilities.Working Capital

Value engineering is a creative approach used to optimize lifecycle costs, save time, increase profits, improve quality, expandmarket share, solve problems, and/or use resources moreeffectively.

Value Engineering(VE)

Index used to determine how efficient the project team must be tocomplete the remaining work within the remaining money.TCPI = (BAC-EV)/(BAC-AC)

To-CompletePerformance Index(TCPI)

Any difference between the scheduled completion of an activityand the actual completion of that activity. In earned value, SV = EV - PV.

Schedule Variance(SV)

The schedule efficiency ratio of earned value accomplishedagainst the planned value. The SPI describes what portion of theplanned schedule was actually accomplished. The SPI = EV/PV.

SchedulePerformance Index(SPI)

A graphic display of cumulative costs, labor hours, percentage ofwork, or other quantities plotted against time. The name derivesfrom the S-like curve of a project that starts slowly, accelerates,then tails off. Also a term for the cumulative likelihood distributionthat is a result of simulation. (see Risk Management)

S-Curve

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Project Cost Management Introduction

Project Cost Management:

� Includes the processes required to ensure that the project is completed within theapproved budget.

� Is primarily concerned with the cost of the resources required to complete projectactivities.

� Should consider the effect of project decisions on the cost of using the project’sproduct. For example: limiting the number of design reviews may reduce the cost ofthe project at the expense of an increase in service costs and an increase in thecustomer’s operating costs.

� A broader view of project cost management is often referred to as life-cycle costing.It involves including acquisition, operating, and disposal costs when evaluating various project alternatives.

� A creative approach used to optimize life cycle costs, save time, increase profits,improve quality, expand market share, use resources more effectively, and solveproblems is called value engineering.

� Life cycle costing and value engineering techniques are used together to reducecost and time, improve quality and performance, and optimize the decision-making.

� In many application areas, predicting and analyzing the prospective financialperformance of the project’s product is done outside the project.

� In some areas such as capital facilities projects, project cost management includespredicting and analyzing the prospective financial performance of the project’s product.In these situations, project cost management will include general managementtechniques such as:� Return on investment� Discounted cash flow� Payback analysis

� Should consider the information needs of the project stakeholders and the differentways and times stakeholders measure project cost. For example, the cost of aprocurement item may be measured when committed, ordered, delivered, incurred, orrecorded for accounting purposes.

� When project costs are used as a component of a reward and recognition system,controllable and uncontrollable costs should be estimated and budgeted separately toensure that rewards reflect actual performance.

� The ability to influence cost is greatest at the early stages of the project. Early scopedefinition and requirements identification are critical to reducing costs in a project.

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Project Cost Management Processes

Resource Planning (7.1): (Process Group: Planning)

� The process of determining what resources (people, equipment, materials) and whatquantities of each (and when) should be used to perform project activities.

� Inputs include: WBS, historical information, scope statement, resource pool description,organizational policies, and activity duration estimates.

� Methods used during resource planning:� Expert judgment: consultants, professional and technical associations, industry

groups, other units within the performing organization.� Alternatives identification: Any technique such as brainstorming and lateral

thinking used to generate different approaches to the project.� Project management software

� Outputs include: Resource requirements - a description of what types of resources arerequired and in what quantities for each element at the lowest level of the WBS.(Resource requirements for higher levels in the WBS can be calculated based on thelower-level values.)

Cost Estimating (7.2): (Process Group: Planning)

� The process of developing an approximation (estimate) of the costs of the resourcesneeded to complete project activities.

� In approximating cost, the estimator considers the causes of variation of the finalestimate for purposes of better project management.

� Includes identifying and considering various costing alternatives. � Where possible, estimates should be done prior to budget request rather than after

budgetary approval is provided.� Care must be taken to distinguish between cost estimating and pricing, especially for

projects performed under contract.� Cost estimating: involves developing an assessment of the likely quantitative

result thus determining how much will it cost the performing organization toprovide the product/service.

� Pricing: is a business decision which determines how much the performingorganization will charge for the product or service. The cost is taken intoconsideration along with other factors.

� Inputs include: WBS, resource requirements, resource rates, activity durationestimates, estimating publications, historical information, chart of accounts, and risks.� Estimating publications: commercially available data on cost estimating.� Chart of accounts: describes the coding structure used by the performing

organization to report financial information in its general ledger. Project costestimates must be assigned to the correct accounting category.

� Risks: Risks (either as threats or opportunities) have a significant impact on cost.The project team considers the extent to which the effect of risk is included in thecost estimates for each activity.

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Project Cost Management Processes, cont.

� Methods used during cost estimating are: � Analogous estimating: (top down estimating)

- Uses the actual cost of a previous similar project as the basis forestimating the cost of the current project.

- Is frequently used to estimate total project costs when there is a limitedamount of detailed information about the project. (e.g., in the early projectphases)

- Generally less costly than other estimating techniques, but it is alsogenerally less accurate. Most reliable when 1) the previous projects aresimilar in fact and not just in appearance, 2) the individuals or groupspreparing estimates have the needed expertise.

- Considered a form of expert judgment.� Parametric modeling:

- Uses project characteristics (parameters) in a mathematical model topredict project costs.

- Models may be simple or complex. Simple example: Model the cost ofconstructing a residential home based on square footage of living space.Complex example: Model software development costs using thirteenadjustment factors, each of which has five to seven points.

- Most reliable when 1) the historical information used to develop the modelwas accurate, 2) the parameters used in the model are readilyquantifiable, and 3) the model is scaleable.

� Bottom-up estimating:

- Involves estimating the cost of individual activities or work packages, thensummarizing or rolling-up the individual estimates to get a project total.

- The cost and accuracy is driven by the size and complexity of theindividual activity or work package: smaller items increase both cost andaccuracy of the estimating process.

- The project management team must weigh the additional accuracy againstthe additional cost.

� Computerized tools:

- Project management software spreadsheets and simulation/statisticaltools are widely used to assist with cost estimating.

- Can simplify the use of the techniques described earlier and facilitatemore rapid consideration of costing alternatives.

� Other cost estimating methods such as vendor bid analysis.

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Project Cost Management Processes, cont.

� Outputs include: � Cost estimates:

- Quantitative assessments of the likely costs of the resources required tocomplete project activities. (may be presented in summary or detail)

- Must be estimated for all resources that will be charged to the project.This includes, but is not limited to: labor, materials, supplies, and specialcategories such as inflation allowance or cost reserve.

- Generally are expressed in units of currency to facilitate comparisons bothwithin and across projects; however, units of measure such as staff hoursor staff days may be used in addition to units of currency to facilitateappropriate project management control.

- May benefit from being refined during the course of the project to reflectthe additional detail now available. In some application areas, guidelinesexist for the timing of refinements and the expected degree of accuracy.Example: The progressive five types of estimates of construction costsfor engineering as defined by the Association for the Advancement ofCost Engineering (AACE) are: order of magnitude, conceptual,preliminary, definitive, and control.

� Supporting detail:

- A description of the scope of work estimated. (usually by a reference tothe WBS)

- A description of how the estimate was developed.

- Documentation of assumptions.

- An indication of the range of possible results. For example, $30,000 ± $5,000 indicates that the cost is somewherebetween $25,000 and $35,000.

� Cost management plan:

- Describes how cost variances will be managed.

- May be formal or informal, highly detailed or broadly framed depending onthe needs of the project stakeholders.

- Is a subsidiary element of the overall project plan.

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Project Cost Management Processes, continued

Cost Budgeting (7.3): (Process Group: Planning)

� The process of allocating the overall cost estimates to individual activities or workpackages to establish a cost baseline for measuring project performance.

� Inputs include: cost estimates, WBS, project schedule, and risk management plan. � Methods used during cost budgeting include: cost budgeting tools and techniques

which are the same tools used for cost estimating.� Outputs include: Cost baseline

� A time-phased budget used to measure and monitor project cost performance. � It is developed by summing estimated costs by period and is usually displayed in

the form of an S-curve.� Many projects, especially larger ones, may have multiple cost baselines to

measure different aspects of cost performance. For example, a spending planor cash-flow forecast is a cost baseline for measuring disbursements.

Cost Control (7.4): (Process Group: Controlling)

� The process of:� Influencing the factors that create changes to the cost baseline to ensure that

changes are beneficial� Determining that the cost baseline has changed� Managing the actual changes when and as they occur.

� Cost control includes:� Monitoring cost performance to detect and understand variances from plan.� Ensuring that all appropriate changes are recorded accurately in the cost

baseline.� Preventing incorrect, inappropriate, or unauthorized changes from being

included in the cost baseline.� Informing appropriate stakeholders of authorized changes.� Acting to bring expected costs within acceptable limits.

� Inputs include: cost baseline, performance reports, change requests, and costmanagement plan � Performance reports:

- Provide information on project scope and cost performance such as whichbudgets have been met and which have not.

- May also alert the project team to issues that may cause problems in thefuture.

� The methods used in cost control include: � Cost change control system:

- Defines the procedures by which the cost baseline may be changed.

- Includes the paperwork, tracking system and approval levels necessaryfor authorizing changes.

- Should be integrated with the integrated change control system.

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Project Cost Management Processes, continued

� Performance measurements: Used to access the magnitude of any variations whichdo occur.

� Earned value management (EVM): All EVM Control Account Plans (CAPs) mustcontinuously measure project performance by relating and comparing three independentvariables:

- Planned Value (PV): the physical work scheduled to be performed including theestimated value of this work (previously, BCWS).

- Earned Value (EV): the physical work actually accomplished including theestimated value of this work (previously, BCWP),

- Actual Cost (AC): the costs incurred to accomplish the earned value. � Additional planning: Prospective changes may require new or revised cost estimates

or analysis of alternative approaches.� Computerized tools: project management software and spreadsheets are often used to

track planned costs versus actual costs and to forecast the effects of cost changes. � Outputs from cost control: revised cost estimates, budget updates, corrective action,

estimate at completion (EAC), project closeout, and lessons learned.� Revised cost estimates:

- Modifications to the cost information used to manage the project.

- Appropriate stakeholders must be notified as needed.

- Revised cost estimates may or may not require adjustments to otheraspects of the project plan.

� Budget updates:

- A special category of revised cost estimates.

- Involve changes to an approved cost baseline. � Estimate at completion (EAC): A forecast of the most likely total project costs

based on project performance and risk quantification. (See below for details.)� Project closeout:

- Processes and procedures should be developed for the closing orcanceling of projects.

- Example: Statement of Position (SOP 98-1 issued by the AmericanInstitute of Certified Public Accountants) requires that all the costs for afailed information technology project be written off in the quarter that theproject is canceled.

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Project Cost Management Concepts

Estimate Types:

� Order of Magnitude:� Range: -25% + 75%� Typical method of estimating used: Analogous (top down)� An approximate estimate made without detailed data� Used during the initial evaluation of the project (Concept)� Other terms: feasibility, conceptual, ball park

� Budget:� Range: -10% + 25%� Typical method of estimating used: parametric (accuracy may vary)� Used to establish the funds required for the project (Development)� Also used to obtain approval for the project� Other terms: appropriations

� Definitive� Range: -5% + 10%� Typical method of estimating used: bottom up (WBS)� Prepared from well defined specifications, data, drawings, etc.� Used for bid proposals, bid evaluations, contract changes, extra work, legal

claims, permit and government approvals.

Cost Types:

� Sunk Costs: A historical or expended cost. Since the cost has been expended, we nolonger have control over the cost. Sunk costs are not included when consideringalternative courses of action.

� Fixed Costs: Nonrecurring costs that do not change based on the number of units,like expenses related to equipment required to complete a project.

� Variable Costs: Costs that rise directly with the size of the project, like expensesrelated to consumable materials used to accomplish the project.

� Indirect Costs: Costs that are part of the overall organization’s cost of doing businessand are shared among all the current projects. These include salaries of corporateexecutives, administrative expenses, any cost that would be considered part ofoverhead.

� Opportunity Costs: The cost of choosing one alternative and, therefore, giving up thepotential benefits of another alternative.

� Direct Costs: Costs incurred directly by a specific project. These include cost formaterials associated with the project, salary of the project staff, expenses associatedwith subcontractors.

Depreciation:

� Straight-line Method: Takes an equal credit during each year of the useful life of anasset.

� Accelerated Method: Writes off the expense even faster than straight-line. Examplesare double-declining balance and sum-of-the-years digits.

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Project Cost Management Concepts, continued

Estimate at Completion (EAC) Variations:

� EAC = Actuals to date plus a new estimate for all remaining work. (estimate tocomplete: ETC)� Most often used when past performance shows that the original estimating

assumptions were fundamentally flawed or no longer relevant to a change inconditions.

� Formula: EAC = AC + ETC.� EAC = Actuals to date plus remaining budget.

� The remaining budget can be obtained by subtracting the earned value from theBudget at Completion (BAC).

� Most often used when any current variances are seen as atypical and the projectmanagement team expectations are that similar variances will not occur in thefuture.

� Formula: EAC = AC + (BAC - EV).� EAC = Actuals to date plus the remaining project budget modified by a performance

factor, often the cumulative cost performance index (CPI). � Most often used when current variances are seen as typical of future variances.� Formula: EAC = (AC + (BAC - EV)/CPI)

Profitability Measures for Project Selection:

� Return on Sales (ROS)� ROS = NEBT/Total Sales � NEBT=net earnings before taxes

� ROS = NEAT/Total Sales � NEAT=net earnings after taxes

� Return on Assets or return on investment� ROA = NEAT/Total Assets� ROI = NEAT/Total Investment

� Present Value (PV)� A financial decision tool for accessing the value today of future cash flows based on

the concept that payment today is worth more than payment tomorrow.

PV = FV (1 + i)n

PV = present value of future moneyFV = future value of today’s moneyi = interest rate (also called discount rate)n = no. of periods over which interest is compounded

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Project Cost Management Concepts, continued

� Future Value (FV) � How much today's money will grow when compounded at a given rate� FV of money is calculated by compounding the present value with the prevailing

interest rates

FV = PV * (1 + i)n

PV = Present Value i = interest rate (also called discount rate) n = no. of periods over which interest is compounded

� Net Present Value (NPV) Method� A discounted cash flow (DCF) method of ranking investment proposals.� The NPV is equal to the present value of future returns, discounted at the

marginal cost of capital, minus the present value of the cost of the investment.� If NPV of an investment is negative or is Zero, there is no real profit coming out

of the investment� If NPV is positive, it means that the rate of return from the project more than

offsets reduction in the value of money over a period of time

NPV = Sum of Present value of future Cash flows - Sum of Investment Cost

� Benefit Cost Ratio (BCR)� Benefit cost ratio (BCR) provides a measure of the expected profitability of a project

by dividing the expected revenues by the expected costs

- BCR of 1.0 indicates that the project is break-even, expected benefits equalexpected costs

- BCR of less than 1.0 indicates that the project is not financially attractive,expected costs exceed expected benefits

- BCR of greater than 1.0 indicates that project is profitable, expected benefitsexceed expected costs

� Target Revenue should be at least 1.3X the cost. � Does not indicate when you make a profit or loss.

Benefit-cost ratio (BCR) = PV of revenue/PV of costs

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Project Cost Management Concepts, continued

� Internal Rate of Return (IRR)� Average rate of return earned over the life of the project, expressed as a

percentage� The discount rate that equates the present value of the expected future cash flows

to the present value of the costs of the project.

� Payback Period� Number of time periods required to return the original investment.� Calculates the duration taken to recover the investment by using predicted future

cash flows� Does not take into account factors like inflation and rate of interest, ignores the time

value of money

Payback period = Net Investment /Average Annual Cash Flow

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Project Cost Management Concepts, continued

The problem of reporting work completed without the associated cost is resolved by EarnedValue (EV). EV combines effort and time into a single dollar schedule. Financial data isimportant to a project manager because it can help manage a project to a successfulcompletion.

Earned Value Analysis:

Cost Performance Index (cost performance factor, measures efficiency) CPI = EV/AC, a value of less than 1.0 indicates less productivity thanexpected. This is a measure of the financial well being of the project.How efficient is the project? How fast are things getting done from afinancial point of view?

CPI

Variance at Completion. The difference between the total amount theproject was supposed to cost (BAC) and the amount the project is nowexpected to cost (EAC).VAC = BAC - EAC

VAC

Estimate to Complete (Estimate of the additional funds needed to completethe project). ETC = EAC - ACWhat is the estimate of additional funds needed to complete the project?

ETC

Estimate at Completion (Estimated Costs at Completion)Depending on the situation, EAC may be calculated by different means.1) EAC = AC + ETC when original assumptions are flawed2) EAC = AC + (BAC - EV) when variances are considered to be atypicaland not expected to occur again.3) EAC = AC + (BAC-EV)/CPI where CPI is a cumulative. Used whenvariances are considered typical.4) EAC = BAC/CPI ** Author’s note. This is the old formula used by PMI.Know this one and use it if the only information you have is BAC and CPIand you are asked to calculate EAC. **What is the total project expected to cost? How much will the project cost atcompletion?

EAC

Budget at Completion = Total Budgeted Costs. What is the project’s budget?

BAC

Actual Cost or Actual Cost of Work Performed. Equates to the physicalwork accomplished and the actual cost of this accomplished work. What has been completed and what is the actual cost of these items?

AC (ACWP)

Earned value or budgeted cost of work performed. Equates to the physicalwork accomplished and the associated budget for this accomplished work.What work has been completed and what measurement is used to establishthe accomplished value of these items? EV is the bridge between PV andAC. It is the key to relating three independent variables which can be usedto measure the performance of the project and obtain a forecast for thefuture.

EV (BCWP)

Planned value or budgeted cost of work scheduled. Equates to the physicalwork scheduled and the associated budget for the scheduled work. Whatwas the planned spending for a given period of time?

PV (BCWS)

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Earned Value Analysis (continued):

A percentage (%) of the value is assumed when a definitive milestone isreached.

MilestoneRule ofProgressReporting

100% credit is assumed when the activity starts. Used for activities thatare generally small and do not take much time to complete.

100-0 Rule ofProgressReporting

0% credit is taken when activity starts and 100% of the PV is credited whenactivity completes. Used for activities that are started and completed within1 accounting period.

0-100 Rule ofProgressReporting

50% credit of the PV is charged to the activity’s account; when the taskcompletes, the remaining 50% is charged to the account. Assumes alltasks generally are of the same size.

50-50 Rule ofProgressReporting

You can use indexes (CPI or SPI) to determine efficiency if you’vecompleted at least 20% of the project. Researchers have found that thecumulative CPI doesn’t change by more then 10% when 20% of a project isdone.

Rule ofThumb:20-80 Rule

To-Complete Performance Index (verification factor)TCPI = (BAC-EV)/BAC-AC) (a cost index). Values for the TCPI index ofless then 1.0 is good because it indicates the efficiency to complete is lessthan planned.How efficient must the project team be to complete the remaining work withthe remaining money?

TCPI

Percent Spent. Tells the PM how much of the BAC has been used to date. PS = AC/BACHow much of the budget at completion has been used to date?

PS

Percent Complete (real value of work accomplished). Tells the PM howmuch of the project has been completed.PC = EV/BACHow much of the project has been completed?

PC

Schedule Variance (valued in dollars). SV = EV - PV, a value of zero indicates that the project is on schedule.How far off schedule is the project from a financial point of view?

SV

Schedule Performance Index (schedule performance factor, measureseffectiveness). Indicates which portion of the planned schedule wasactually accomplished.SPI = EV/PV, a value of less than 1.0 indicates less has been completedthan was scheduled. How well is the project progressing in comparison to the expectedprogression?

SPI

Cost Variance (valued in dollars). This is a measure of the financial wellbeing of the project.CV = EV - AC, a value of zero indicates that the project is on budget.How far off are the scheduled cost of things to be completed from theactual amount spent?

CV

Project Cost Management

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Sample Problems

Earned Value Analysis:

Given the following problem:

Work Completion Budget Work Actual CostUnit Date (in $M) Performed ($M) (in $M)

A Jan. 31 10 10 12 B Feb. 28 5 4 5 C Mar. 31 6 8 8

D May 12 15 13 12 E June 30 20 20 30 F July 18 3 0 0 G Aug. 30 35 0 0 H Sept. 22 22 0 0 I Oct. 29 12 0 0 J Nov. 30 9 0 0

Today is June 30th.

1. What is the Cost Variance?2. What is the Schedule Variance?3. What is the CPI?4. What is the SPI?5. What is the EAC?6. What is the ETC?7. What is the Percent Complete?8. What is the Percent Spent?9. What can be said about this project?

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Sample Problems, continued

Present Value and Net Present Value:

1. What is the present value of $1000 at 12% at the end of 5 years?

2. What is the present value of an annual income flow of $1600 at 10% over the next 3years?

3. Management is considering buying a machine for $10,000 which is expected to save$4,000 over the next 3 years. If the desired rate of return is 15% per annum, should themachine be bought? May use the following table to simplify the calculations.

Yr 1/(1+.15)**t

1 0.870 2 0.756 3 0.658

4. For problem #3 above make the assumption that the company didn’t have to pay for themachine until the third year. Compute the net present value and determine if the companyshould buy the machine.

5. Given the following:

Yrs Revenue PV(r) Cost PV(c)

0 0 50,000 1 3,000 35,000 2 13,500 15,000

3 30,000 5,000 4 40,000 5,000 5 50,000 5,000

6 50,000 10,000 7 50,000 15,000

A. Calculate the present value of both revenue and cost assuming a 10% interest rate.B. Calculate the benefit-cost ratio.C. Based on the BCR and profitability alone, would you do this project?

Project Cost Management

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Sample Problem Answers

Earned Value Analysis:

Given the following problem:

Work Completion Budget Work Actual CostUnit Date (in $M) Performed ($M) (in $M)

A Jan. 31 10 10 12 B Feb. 28 5 4 5 C Mar. 31 6 8 8

D May 12 15 13 12 E June 30 20 20 30 F July 18 3 0 0 G Aug. 30 35 0 0 H Sept. 22 22 0 0 I Oct. 29 12 0 0 J Nov. 30 9 0 0

Today is June 30th. BAC = Sum of the Budgets for all of the work units = $137

1. What is the Cost Variance? Work Performed (EV) - Actual Costs $55 - $67 = -$12

2. What is the Schedule Variance? Work Performed (EV) - Budget (PV) $55 - $56 = -$1

3. What is the CPI? EV/AC $55/$67 = 0.82

4. What is the SPI? EV/PV $55/$56 = 0.98

5. What is the EAC? AC + (BAC - EV)/CPI $67 + ($137-$55)/.82 = $167 or BAC/CPI $137/.82 = $167

6. What is the ETC? EAC - AC $167 - $67 = $100

7. What is the Percent Complete? EV/BAC $55/$137 = 40%

8. What is the Percent Spent? AC/BAC $67/$137 = 49%

9. What can be said about this project? Over cost, a little behind schedule

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Answers, continued

Present Value and Net Present Value:

1. What is the present value of $1000 at 12% at the end of 5 years?

PV(5) = $1000/(1.12)**5 = $567.44So, if $567.44 is invested at a rate of 12%/year for 5 years, we will have $1000 at the endof the fifth year.

2. What is the present value of an annual income flow of $1600 at 10% over the next 3years?

Yr 1/(1+.10)**t PV

1 .909 $1600*.909 = $1454.55 2 .826 $1600*.826 = $1322.31 3 .751 $1600*.751 = $1202.10

PV = $1454.55 + $1322.31 + $1202.10 = $3978.96

3. Management is considering buying a machine for $10,000 which is expected to save$4,000 over the next 3 years. If the desired rate of return is 15% per annum, should themachine be bought? May use the following table to simply the calculations.

Yr 1/(1+.15)**t

1 0.870 2 0.756 3 0.658

NPV = PV(1) + PV(2) + PV(3) - Sum of Investment CostNPV = $4000(0.87) + $4000(.756) + $4000(.658) - $10,000NPV = $3480 + $3024 + $2632 - $10,000 = -$864NPV is negative; therefore, this is not considered a good investment.

4. For problem #3 above make the assumption that the company didn’t have to pay for themachine until the third year. Compute the net present value and determine if the companyshould buy the machine.

NPV = PV(1) + PV(2) + PV(3) - Sum of Investment CostNPV = $4000(0.87) + $4000(.756) + $4000(.658) - $10,000(.658)NPV = $3480 + $3024 + $2632 - $6,580 = $2,556NPV is positive; therefore, this is considered a good investment.

Project Cost Management

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Answers, Cont.

5. Given the following:

Yrs Revenue PV(r) Cost PV(c)

0 0 0 50,000 50,000 1 3,000 2,727 35,000 31,818 2 13,500 11,157 15,000 12,397

3 30,000 22,539 5,000 3,757 4 40,000 27,321 5,000 3,415 5 50,000 31,046 5,000 3,105

6 50,000 28,224 10,000 5,644 7 50,000 25,658 15,000 7,697

148,672 117,833

A. Calculate the present value of both revenue and cost assuming a 10% interest rate.B. Calculate the benefit-cost ratio. BCR = PV(r)/PV(c)

BCR = 148,672/117,833 = 1.26 C. Based on the BCR and profitability alone, would you do this project?

Depends on who you ask. Should be 1.3 x cost before considering.

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Sample Problems, continued

Depreciation:

Given $100,000 depreciated over 4 years, what would be the depreciation per year for thestraight-line, double-declining, and sum-of-the-years-digits methods?

Year SL DDB SYD

1 $25,000 $50,000 $40,000 2 $25,000 $25,000 $30,000 3 $25,000 $12,500 $20,000 4 $25,000 $6,250 $10,000

SL: Same amount depreciated each year/period.

Accelerated

DDB: The depreciation rate is 2*(1/n) where n is the life of the asset. This gives adepreciation rate of 2*(1/4) = 0.5. Thus the asset depreciates 50% during the first year. Applythe same rate every year to the remaining balance. Thus, in year two the depreciation is0.5*$50,000 = $25,000, etc.

SYD: No. of years left/Sum of the years. Year 1: 4/10 or 40% Year 2: 3/10 or 30% Year 3: 2/10 or 20%

Year 4: 1/10 or 10%

Sum of the Years is arrived at in this example by adding the years, for 4 years you add 4 + 3 +2 + 1 to get the 10. You then take for the first year 4/10, the second year 3/10, the third year2/10, and the fourth year 1/10. If this was being depreciated over 5 years, you would add 5 + 4+ 3 + 2 + 1 and get 15. You would then take for the first year 5/10, the second year 4/10, thethird year 3/10, the fourth year 2/10, and the fifth year 1/10.

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Sample Questions

1. Which of the following are all considered processes of Project Cost Management? A. Resource Leveling, Resource Planning, Cost Estimating, Cost Budgeting, Cost Control B. Resource Planning, Schedule Development, Cost Budgeting, Cost Control C. Resource Planning, Cost Estimating, Schedule Control, Cost Budgeting D. Resource Planning, Cost Estimating, Cost Budgeting, Cost Control

2. Which of the following choices indicates that a project has a burn rate of 1.2?Hint: Burn rate is the same as the Cost Performance Index A. The PV is 100 and the EV is 120. B. The AC is 100 and the EV is 120. C. The AC is 120 and the EV is 100. D. The EV is 100 and the PV is 120.

3. The inputs to Cost Budgeting includes all of the following except: A. Cost estimates B. Cost baseline C. WBS D. Project schedule

4. During the six month update on a 1 year, $50,000 project, the analysis shows that the PVis $25,000; the EV is $20,000 and the AC is $15,000. What can be determined fromthese figures? A. The project is behind schedule and over cost. B. The project is ahead of schedule and under cost. C. The project is ahead of schedule and over cost. D. The project is behind schedule and under cost.

5. Earned value is: A. Actual cost of work performed. B. Budgeted cost of work scheduled. C. Budgeted cost of work performed. D. Budget at completion.

6. Which of the following Cost Management processes are concerned with cost baseline? A. Cost estimating B. Cost budgeting C. Cost control D. B and C

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Sample Questions, continued

7. Cost control is concerned with:

A. Allocating the overall estimates to individual work packages in order to establish a cost baseline.

B. Influencing the factors which create changes to the cost baseline to ensure that changes are beneficial.

C. Determining that the cost baseline has changed. D. B and C

8. Which of the following statements concerning bottom-up estimating is true? A. The cost and accuracy of bottom-up estimating is driven by the size of the individualwork items. B. Smaller work items increase both cost and accuracy of the estimating process. C. Larger work items increase both cost and accuracy of the estimating process. D. A and B

9. Percent complete is calculated by: A. AC/BAC B. EV-AC C. EV/BAC D. EAC/BAC

10. Life cycle costing: A. Includes acquisition, operating, and disposal costs when evaluating various

alternatives. B. Includes only the cost of the development or acquisition of a product or service. C. Does not take into consideration the effect of project decisions on the cost of using the

resulting product. D. B and C

11. Analogous estimating: A. Uses bottom-up estimating techniques. B. Uses the actual costs from a previous, similar project. C. Is synonymous with top-down estimating. D. B and C

12. For a project with original assumptions that are no longer relevant to a change inconditions, Estimated at Completion is most likely determined by which technique? A. ETC + AC B. AC + BAC - EV C. AC + (BAC - EV)/CPI D. ETC + EV

Project Cost Management

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Sample Questions, continued

13. Parametric cost estimating involves: A. Calculating individual cost estimates for each work package. B. Using rates and factors based on historical experience to estimate costs. C. Using the actual cost of a similar project to estimate total project costs. D. A and B

14. A cost management plan is: A. A plan for describing how cost variances will be managed. B. A subsidiary element of the project charter. C. An input to the Cost Estimating process. D. A and C

15. Cost estimating: A. Involves developing an estimate of the costs of the resources needed to complete

project activities. B. Includes identifying and considering various costing alternatives. C. Involves allocating the overall estimates to individual work items. D. A and B

16. Which of the following inputs belongs to Resource Planning? A. Scope statement B. Resource pool description C. Historical information D. All of the above are inputs to Resource Planning

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Sample Questions, continued

Questions: 17 - 20

Task PV AC EV 1 9,500 10,000 9,5002 15,000 13,000 11,0003 13,000 13,000 13,0004 8,000 8,000 9,000

17. Which task is most over budget? A. Task 1 B. Task 2 C. Task 3 D. Task 4

18. Which task is ahead of schedule and under cost? A. Task 1 B. Task 2 C. Task 3 D. Task 4

19. Which task is on schedule with a cost variance of $0? A. Task 1 B. Task 2 C. Task 3 D. Task 4

20. Which task has the greatest schedule variance? A. Task 1 B. Task 2 C. Task 3 D. Task 4

Project Cost Management

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Sample Questions, continued

21. A Reserve is generally intended to be used for: A. Rework activities. B. Compensate for inaccurate project cost estimates. C. Reducing the risk of missing the cost or schedule objectives. D. Compensate for inaccurate project schedule estimates.

22. Which of the following statements is true about the code of accounts ? A. It is a numbering system used to monitor project costs by category. B. It is based on the corporate chart of accounts of the performing organization. C. It is a numbering system used to uniquely identify each element in the WBS.

D. It is synonymous with chart of accounts.

23. Present Value measures: A. The value today of future cash flows. B. The rate of return on an investment. C. The current estimate of our project budget. D. The value of work completed.

24. If the schedule variance is negative, then: A. We have shortened the critical path. B. We are running the project in "fast track" mode. C. The cost has increased for critical path elements. D. We need more information to determine the cause of the variance.

25. You have calculated both the cost variance and schedule variance on your project andhave found that they are exactly the same; -$200. This indicates that: A. The value of the work completed is equal to the value of the work scheduled. B. The actual cost of work completed is $200 less than the value of the work scheduled. C. The value of the work scheduled is equal to the actual cost of the work completed. D. The value of the work scheduled is equal to the value of the work completed.

26. Which of the following is not a key input to cost budgeting? A. Project cost estimates B. Project schedule C. The WBS D. Staff availability

27. The cost change control system: A. Should not be integrated with the integrated change control system. B. Compensates for inaccurate project cost estimates. C. Defines the procedures by which the cost baseline may be changed. D. Describes how cost variances will be managed.

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Sample Questions, continued

28. The payback period of an investment is: A. The period of time required for the cash income to equal to the original investment plusthe required investment margin. B. The period of time required for the cash income to equal the original investment. C. The period of time required for the original investment to return an amount equal to the

cost of capital. D. The period of time required for the original investment to return an amount equal to theoriginal investment less applicable taxes and depreciation.

29. When using Earned Value Management, the difference between what has beenaccomplished and what was scheduled is called the: A. Cost Variance B. Schedule Variance C. Projected Variance at completion

D. Labor Variance

30. Which of the following is used to determine how efficient the project team must be tocomplete the remaining work within the remaining money?

A. Schedule Performance Index (SPI) B. Percent Complete (PC) C. To-Complete Performance Index (TCPI)

D. Cost Performance Index (CPI)

Project Cost Management

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Answer Sheet

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Answers

C30PMBOK Guide glossaryB29This is the standard definition of Payback Period . PV is not usedB28PMBOK Guide pg 91. Option D is part of the Cost Management Plan.C27PMBOK Guide pg 84D26

SV = EV - PV and CV = EV - ACIf SV = CV, then PV = AC since EV is the common variable in both equations.

C25

Schedule variance = EV - PV. If the variance is negative then PV > EV. Thisjust tells us that the project is behind schedule, but not the reason for the delay.

D24A23

PMBOK Guide glossaryC22PMBOK Guide glossary C21Check the schedule variances. B20Check cost and schedule variances.C19Check the schedule and the cost variance. CV = EV - AC; SV = EV - PVD18

Check the cost variance. CV = EV - AC A negative number means overbudget.

B17PMBOK Guide pg 84D16PMBOK Guide pgs 86-87D15PMBOK Guide pg 84A14PMBOK Guide pg 88B13PMBOK Guide pg 92A12PMBOK Guide pg 88D11PMBOK Guide glossaryA10(Option A is percent spent)C9PMBOK Guide pg 88D8PMBOK Guide pg 90D7

PMBOK Guide pg 84. Cost baseline is an output of Cost Budgeting and aninput to Cost Control.

D6Can verify through CV and SV or CPI and SPI.C5

D4PMBOK Guide pg 84 Cost baseline is an output of Cost BudgetingB3

CPI = EV/AC = 1.2 This means that for every dollar spent, the project isachieving $1.20 of value.

B2PMBOK Guide pg 83D1

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PMP® Certification Exam Preparation

What did I do wrong ?

_________Total

_________10. NOT rushed to finish

_________9. Reviewed my answer after reading the other questions

_________8 Used the PMI® rather than my own perspective

_________7. Checked the mathematics

_________6. Known the PMBOK® definition

_________5. Known the formula

_________4. Used a strategy of elimination

_________3. Read ALL the answers before answering the question

_________2. Read the answer properly and identified the keywords

_________1. Read the question properly and identified the keywords

NumberI would have answered a larger number of questionscorrectly if I had ___________.

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