Project Cost Management
The Cost Management Plan establishes how cost on the project will be managed and is primarily concerned with the cost of the resources needed to complete project work. These costs can also include lifecycle costs which address recurring costs of using, maintaining, and supporting the product. The cost management plan usually establishes the following:
- Units of measure (e.g. days, weeks, months, liters, gallons, cubic yards, weight, etc.)
- Level of precision (e.g. 2 Decimal Pl. precision, 5 Decimal Pl. precision, rounding up/down, etc.)
- Level of accuracy (e.g. tolerances or acceptable ranges)
- Organizational procedure links which tie back to control accounts in the work breakdown structure
- Control thresholds – variance thresholds for measuring cost performance before action needs to be taken
- Rule of performance measurement – EVM (earned value management) rules of performance
- Reporting formats and process descriptions
There are a dozen questions or so on the exam relating to earned value. If you have never done this before, don't worry. We will address all the needed computations and formulas relating to cost management for the exam in the pages following. The process of cost management is generally documented in the cost management plan. According to PMI, the cost management plan establishes the following:
- Level of accuracy - activity cost estimates rounded to a prescribed precision
- Unit of measure - standard workweek, blended rates for resources and similar measurements are units of measure for the project
- WBS procedure links - the WBS component for project cost accounting is called the control account (CA)
- Control thresholds - levels of variance that are allowed before action needs to be taken
- Earned value rules of performance
- Reporting formats
- Process descriptions
PMP Certification Exam Tip
Understand the following concepts for the exam:
- Life cycle costing- another way of saying this is the 'total cost of ownership’. It is not only the cost of the car that you must consider, but also what it will cost to maintain the vehicle over its usable lifetime. Delivering the product of a project is no different.
- Value Engineering (from Define Scope)- also called value analysis, value management, or value methodology. It began at General Electric Co. during World War II. Due to shortages of skilled labor, raw materials, and component parts, Lawrence Miles of G.E. looked for acceptable substitutes. Frequently, the substitutions often reduced costs, improved the product, or both. What started out as a constraint was turned into a systematic process which he called “value analysis”.
Cost estimates are based on the analysis of activities that were created in the WBS and further elaborated in Define Activities (what we are doing) and Estimate Activity Resources (who is doing the work). Therefore, many of the elements that were required for estimating the schedule are also true for estimating cost:
- Obtaining historical information from past projects
- Coming up with your own estimates. If you are taking a project over from another project manager or there are management imposed constraints, your job is to assess the needs of the project and not take someone else's word for it
- Reviewing estimates to ensure they are reasonable and checking for cost padding and risks
- Looking for ways to reduce project costs through the mitigation, reduction, or elimination, of risks
- Basing the estimate on the WBS
- Ensuring that the resources who are actually performing the work (the subject matter experts) are delivering estimates, instead of a stakeholder who is telling you what they think the estimate should be
- Implementing a process to create the most accurate estimate possible
PMP Certification Exam - Project Cost Management - Memory Check
- ___Plan cost management
- ___Estimate costs
- ___Determine budget
- ___Control costs
A. The process of aggregating the estimated cost of individual activities or work packages to establish an authorized baseline
B. The process of monitoring the status of the project to update the project costs and managing changes to the cost baseline
C. The process that establishes the policies, procedures, and documentation for planning, managing, expending, and controlling project costs
D. The process of developing an approximation of the monetary resources needed to complete project activities
Materials in this course are based on the text,
A Guide to the Project Management Body of Knowledge (PMBOK® Guide), Sixth edition, Project Management Institute, Inc. 2018
Question 1: You have just completed your project activity, work package, and contingency reserve estimates. What have you created as a result of completing these estimates?
a. Bottom-up estimate
b. Cost budget
c. Cost baseline
d. Definitive estimate
Question 2: Several vendors have proposed solutions for your current project. Your organization has made it a requirement that the lowest price solution will be the one that is selected to deliver the project. The vendor was selected and the project was completed successfully and handed off to the maintenance organization for ongoing product support. A year into the product’s release, it has become apparent that the maintenance costs are much higher than what the organization had anticipated. What did the project manager probably forget to do?
a. Validate the vendor's credentials
b. Perform adequate quality testing
c. Earned value cost forecast
d. Life cycle costing
Question 3: You have just completed your project activity, work package, and contingency reserve estimates. What have you created as a result of completing these estimates?
a. Bottom-up estimate
b. Cost budget
c. Cost baseline
d. Definitive estimate
Answer: C – The cost baseline includes the contingency reserve. Cost budget additionally includes management reserve. Bottom-up estimate focuses on activities and a definitive estimate is a range
Answer: D – Life cycle costing includes the total cost + maintenance and support cost for the lifetime of the product
Answer: C – The cost baseline includes the contingency reserve. Cost budget additionally includes management reserve. Bottom-up estimate focuses on activities and a definitive estimate is a range