Chapter 6 Project Cost Management

In this post i have explained about Project Cost Management.

Chapter 6

Project Cost Management

A Comprehensive Guide for PMP Certification by Parag Pal

Chapter 6 focuses on **Project Cost Management**, which involves the processes required to plan, estimate, budget, finance, fund, manage, and control costs so that the project can be completed within the approved budget. It's crucial for financial success.

This guide will detail the four processes within Cost Management, from planning how to manage costs to controlling them, highlighting key concepts, inputs, tools & techniques, and outputs for each.

6.1 Types of Costs

Understanding different cost classifications is essential for accurate project financial management.

Fixed Cost

Stays the same regardless of project progress (e.g., location rentals, management wages).

Variable Cost

Changes as the project progresses (e.g., gas prices, airline tickets for the team).

Direct Cost

Directly incurred by the project work, included in the budget (e.g., materials, project team wages).

Indirect Cost

Not directly included in the project budget (e.g., sponsor's time, common office supplies).

Sunk Cost

Money already spent on the project; should NOT influence future decisions.

Value Engineering (Value Analysis)

Finding a less costly way of doing work while achieving the same goal/scope.

Exam Tip:

Know the different types of costs on a project and how they will affect the budget.

6.2 Project Cost Management Processes Overview

Project Cost Management includes the processes required to manage the timely completion of the project. This knowledge area is crucial for keeping the project on track and delivering within deadlines.

The 4 Cost Management Processes are:

• Plan Cost Management (Planning)
• Estimate Costs (Planning)
• Determine Budget (Planning)
• Control Costs (Monitoring & Controlling)

Cost Management Processes by Process Group

This chart shows how the 4 Project Cost Management processes are distributed across the Process Groups.

Note: All primary cost management planning processes occur during the Planning phase.

6.3 Plan Cost Management

This process defines how the project costs will be estimated, budgeted, managed, monitored, and controlled.

6.3.1 Inputs

• Project Management Plan
• Project Charter
• Enterprise Environmental Factors (EEFs)
• Organizational Process Assets (OPAs)

6.3.2 Tools & Techniques

• Data Analysis
• Expert Judgment
• Meetings

6.3.3 Outputs

• Cost Management Plan: Documents how the project costs will be managed.

6.4 Estimate Costs

This process develops an approximation of the monetary resources needed to complete project activities. Almost all other knowledge areas will affect cost in one way or another.

6.4.1 Inputs

• Project Management Plan (Cost Management Plan, Quality Management Plan, Scope Baseline)
• Project Documents (Risk Register, Lessons Learned Register, Resource Requirements)
• EEFs, OPAs

6.4.2 Types of Estimates (Accuracy)

• Rough Order of Magnitude (ROM): Most inaccurate, -25% to +75% variance. Mostly used in the initiating part of the project.
• Budget Estimate: Better than ROM, -10% to +25% variance. Usually done in planning.
• Definitive Estimate: Best estimate, -5% to +10% variance. Considered very accurate, done during later parts of planning.

Cost Estimate Accuracy Levels

The accuracy of cost estimates improves as the project progresses and more information becomes available.

Note: Accuracy increases as you move from initiating to detailed planning.

6.4.3 Tools & Techniques

• Expert Judgment
• Analogous Estimating (Top-Down): Based on previous projects; quick, but could be inaccurate if projects are not very similar.
• Parametric Estimating: Uses a mathematical algorithm based on historical data and variables (e.g., $2 per square foot to paint); can be very accurate.
• Bottom-Up Estimating: One of the most accurate methods; breaks down work to identify its pieces and then aggregates costs. Very detailed and time-consuming.
• Three-Point Estimating (PERT)
• Project Management Information System (PMIS)
• Decision Making, Meetings

Exam Tip:

Know the difference between analogous (top-down) and bottom-up. Analogous is quick but not accurate, and bottom-up is long, but very accurate.

6.4.4 Outputs

• Cost Estimates: The estimated cost for each individual activity (including labor, materials, equipment, technology, exchange rate, reserves, and inflation).
• Basis of Estimates: Explains how the estimates were developed, their ranges, and all assumptions and constraints made.
• Project Documents Update.

6.5 Determine Budget

This process aggregates all the activity cost estimates into the project cost baseline (budget). The project performance will be measured against this cost baseline when the project is executed.

6.5.1 Inputs

• Project Management Plan (Cost Management Plan, Resource Management Plan, Scope Baseline)
• Project Documents (Cost Estimates, Basis of Estimates, Risk Register)
• Business Documents, Agreements, EEFs, OPAs

6.5.2 Tools & Techniques

• Data Analysis
• Expert Judgment
• Cost Aggregation: Rolling up the activity costs into work packages, then into deliverables, to determine the cost of the entire project.
• Historical Information Review (a form of parametric estimating).
• Funding Limit Reconciliation: Adjusting project work or schedule if project funding is limited (e.g., due to year-end budgets).
• Financing: Acquiring money for the project, generally from an external source.

Cost Aggregation Flow

Costs are rolled up from the lowest level of detail to form the overall project budget.

Activity Costs

Work Package Costs

Deliverable Costs

Total Project Cost

6.5.3 Outputs

• Cost Baseline: The cost of the project, including all deliverables and contingency reserves. It is included in the project management plan and used to measure performance. Also known as Budget at Completion (BAC).
• Project Funding Requirements: Total funding needed, including management reserves.

Total Project Budget Components

The total budget for a project includes both the cost baseline and management reserves.

Cost Baseline

+

Management Reserves

=

Total Project Budget

Exam Tip:

The cost baseline represents the project cost, which includes the contingency reserves. The total budget of the project is the cost baseline + management reserves.

6.6 Control Costs

This process monitors the status of the project to update the project costs and manages changes to the cost baseline. It's very important to ensure the project stays on budget by comparing planned work and actual work.

6.6.1 Inputs

• Project Management Plan
• Project Documents
• Project Funding Requirements
• Work Performance Data
• OPAs

6.6.2 Tools & Techniques

• Data Analysis:
  • Earned Value Analysis: Series of calculations to numerically analyze project cost and time performance.
  • Reserve Analysis: Reviewing cost and time reserves to ensure sufficiency for risks.
  • Variance Analysis: Determines if there is a variance between planned work (Project Management Plan) and actual work (Work Performance Data) related to costs.
  • Trend Analysis: Used to determine if a cost trend is emerging (e.g., continuously staying on budget or going off budget).
  • To-Complete Performance Index (TCPI): Measures the level of work that needs to be done to finish the project within the budget.
• Project Management Information System (PMIS)

6.6.3 Outputs

• Work Performance Information.
• Cost Forecasts: A forecast of how much the project could cost in the end, based on the current rate of spending (calculated using Estimate at Completion - EAC).
• Change Requests (for corrective or preventive actions if variances occur).
• Project Management Plan Updates, Project Document Updates, OPA Updates.

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