pmp exam preparation study guide - project cost management

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PROJECT COST MANAGEMENT

PMBOK 2000 based, Version 9

STUDY NOTES

In Preparation For PMP Certification Exam

IBM Education and Training Worldwide Certified Material

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Publishing Information This publication has been produced using Lotus Word Pro 96.

TrademarksThe following are trademarks of International Business Machines Corporation in the United States, or other countries, or both: IBM Lotus, Lotus Notes, Lotus Word Pro, and Notes are trademarks of Lotus Development Corporation in the United States, or other countries, or both. Microsoft, Windows, Windows NT, and the Windows logo are trademarks of Microsoft Corporation of the United States, or other countries, or both. 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 and trademark, PMI Logo and "PMBOK", are trademarks, PMP and the PMP logo are certification marks. Other company, product, and service names may be trademarks or service marks of others.Disclaimer PMI makes no warranty, guarantee, or representation, express or implied, that the successful completion of any activity or program, or the use of any product or publication, designed to prepare candidates 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 any financial 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 is distributed on an as is basis without any warranty either express or implied. The use of this information or the implementation of any of these techniques is a customer responsibility and depends on the customers ability to evaluate and integrate them into the customers operational environment. While each item may have been reviewed by IBM for accuracy in a specific situation, there is no guarantee that the same or similar results will result elsewhere. Customers attempting to adapt these techniques to their own environments do so at their own risk. Copyright International Business Machines Corporation 2002. All rights reserved. IBM and its logo are trademarks of IBM Corporation. This document may not be reproduced in whole or in part without the prior written permission of IBM. Note to U.S. Government Users--Documentation related to restricted rights--Use, duplication or disclosure is subject to restrictions set forth in GSA ADP Schedule Contract with IBM Corp.

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Project Cost Management

Project Cost Management Study Notes

Reference Material to study: A Guide to the Project Management Body of Knowledge (PMBOK Guide), Chapter 7 (2000 edition) Project Planning, Scheduling & Control, Lewis, James P., 1995, Chapter 10 Project Management, A Managerial Approach, Meridith, Jack R. 1995, Chapter 7, and Chapter 10, pgs. 457-459 The New Project Management, Frame, J. Davidson, 1994, Chapters 8-9, 11 PMP Exam Practice Test and Study Guide, 4th Edition, by Ward, J. LeRoy, PMP , 2001 PMP Exam Prep, 3rd Edition, by Mulcahy, Rita, PMP, 2001 ESI PMP Challenge!, 3rd Edition, Cost Section, Ward, J. LeRoy, 2001 What to Study? The PMBOK processes of Project Cost Management: Resource Planning, Cost Estimating, Cost Budgeting, and Cost Control (Be familiar with Inputs, Tools and Techniques, and Outputs for each process) Cost Estimates and Ranges: Order of Magnitude, Budgetary, and Definitive Earned Value Analysis: EV (BCWP), PV (BCWS), ACWP, EAC, BAC, ETC, CV, SV, CPI, SPI Cost Estimating Techniques: analogous (also called top-down), parametric modeling, and bottom-up Present Value and Net Present Value 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 other nations.

Copyright IBM Corp. 2002

Project Cost Management Course materials may not be reproduced in whole or in part without the prior written permission of IBM.

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Project Cost Management

Key DefinitionsActual Cost (AC) / Actual Cost of Work Performed (ACWP) Total actual costs incurred that must relate to whatever cost was budgeted within the planned value and earned value in accomplishing work during a given time period. Formerly called Actual Cost of Work Performed (ACWP), this is now referred to as Actual Cost (AC). The original approved plan plus or minus approved scope changes. The sum of the total budgets for a project. Replaced with the term earned value.

Baseline Budget At Completion (BAC) Budgeted Cost of Work Performed (BCWP) Budgeted Cost of Work Scheduled (BCWS) Chart of Accounts

Replaced with the term planned value.

Code of Accounts Contingency Planning Contingency Reserve

Control Account Plan (CAP)

Cost Performance Index (CPI)

Cost Variance (CV) Earned Value (EV)

Any numbering system used to monitor project costs by category (e.g., labor, supplies, materials). The project chart of accounts is usually based upon the corporate chart of accounts of the primary performing organization. Any numbering system used to uniquely identify each element of the WBS. The development of a management plan that identifies alternative strategies to be used to ensure project success if specified risk events occur. (used in Risk Management) The amount of money or time needed above the estimate to reduce the risk of overruns of project objectives to a level acceptable to the organization. A management control point where the integration of scope and budget and schedule takes place, and where the measurement of performance will happen. CAPs are placed at selected management points of the work breakdown structure. Previously referred to as a Cost Account Plan. The cost efficiency ratio of earned value to actual costs. CPI is often used to predict the magnitude of a cost overrun using the following formula: BAC/CPI = projected cost at completion, where CPI = EV/AC. Any difference between the budgeted cost of an activity and the actual cost of that activity. In earned value, CV = EV-AC. 1) The physical work accomplished plus the authorized budget for this work. 2) The sum of the approved cost estimates (may include overhead allocation) for activities or portions of activities completed during a given period, usually from the beginning of the project until now. Previously called the Budgeted Cost of Work Performed (BCWP).

4-4 Project Cost Management Course materials may not be reproduced in whole or in part without the prior written permission of IBM.

Copyright IBM Corp. 2002

Project Cost Management

Key Definitions, cont.Earned Value Management (EVM) A method for integrating scope, schedule, and resources and for measuring project performance. It compares the amount of work that was planned with what was actually earned with what was actually spent to determine if cost and schedule performance are as expected. An assessment of the likely quantitative result. Usually applied to project costs and durations and should always include some indication of accuracy. (e.g. +/- percent) Usually used with a modifier (e.g., preliminary, conceptual, feasibility) Some application areas have specific modifiers that imply particular accuracy ranges (e.g., order of magnitude, budget estimate, and definitive estimate.) The expected total cost of an activity, a group of activities, or of the project when the defined scope of work has been completed. Most techniques for forecasting EAC include some adjustment of the original cost estimate based on project performance to date. EAC = Actuals-to-date + ETC. (Also known as forecast final cost) The expected additional cost needed to complete an activity, a group of activities, or the project. Most techniques for forecasting ETC include some adjustment to the original cost estimate based on project performance to date. ETC = EAC - AC. Costs that do not change based on the number of units. These costs are nonrecurring. Costs incurred by an organization irrespective of the project such as security, personnel and payroll. Costs not directly tied to the project. The concept of including acquisition, operating, and disposal costs when evaluating various alternatives. Also known as the total cost of ownership. An estimating technique that uses a statistical relationship between historical data and other variables to calculate an estimate. The number of time periods up to the point at which cumulative revenues exceed cumulative costs and, therefore, the project has turned a profit. An estimate, expressed as a percent, of the amount of work that has been completed on an activity or group of activities. The physical work scheduled plus the authorized budget to accomplish the scheduled work. Formerly called Budgeted Cost of Work Scheduled (BCWS). A subset of project management that includes the processes required to ensure that the project is completed within the approved budget. 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 risk are meant to be mitigated. The specific definition of the modified term varies by application area.Project Cost Management Course materials may not be reproduced in whole or in part without the prior written permission of IBM. 4-5

Estimate

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