PMP studies notes contain all the key points that helps of to understand the knowledge area, process and ITTO's.

Wednesday, May 27, 2009

PMP - Chapter 7 – COST Management

 

Knowledge Areas

Major Processes

Primary Inputs

Tools & Techniques

Primary Outputs

 

 

 

 

 

COST

EBC radio is free of cost.

 

 

 

Cost Estimating

Developing an approximation of the costs of the resources needed to complete project activities

1. Enterprise environmental factors

2. Organizational Process Assets

3. Project Scope Statement

4. Work breakdown structure

5. WBS dictionary

6. Project Management Plan

     Schedule Management Plan

     Staffing Management Plan     

     Risk Register

 

1. Analogous estimating

2. Determine Resource Cost Rates

3. Bottom-up estimating

4. Parametric estimating

5. Project Management Software

6. Vendor Bid analysis

7. Reserve analysis

8. Cost of Quality

 

1. Activity Cost estimates

2. Activity Cost Estimate Supporting detail

3. Requested Changes
4. Cost management plan (updates)

Cost Budgeting

Aggregating the estimated costs of individual activities or work packages to establish a cost baseline.

1. Project Scope Statement

2. Work breakdown structure

3. WBS dictionary

4. Activity Cost estimates

5. Activity Cost Estimate Supporting detail

6. Project Schedule

7. Resource Calendars

8. Contract

9. Cost management plan

1. Cost aggregation

2. Reserve Analysis

3. Parametric Estimating

4. Funding Limit reconciliation

 

 

1. Cost baseline

2. Project funding requirements

3. Cost management plan (updates)

4. Requested Changes

Cost Control

Influencing the factors that create cost variances and controlling changes to the project budget.

1. Cost baseline

2. Project funding requirements

3. Performance reports

4. Work performance information

5. Approved Change requests

6. Project management plan

1. Cost change control system

2. Performance measurement Analysis

3. Forecasting

4. Project performance reviews

5. Project Management software

6. Variance Measurement

1. Cost estimates (updates)
2. Cost baseline (updates)

3. Performance Measurements

4. Forecasted Completion

5. Requested Changes

6. Recommended corrective actions

7. Organization process assets (updates)

8. Project management plan  (updates)

 

Cost Estimating - Developing an approximation (estimate) of the costs of the resources needed to complete project activities.

Cost Budgeting – Aggregating the estimated costs of individual activities or work packages to complete project activities

Cost Control - Controlling changes to the project budget and influencing the factors that causes cost variance.

 

Life Cycle Costing – Broader view of Project Cost Management, which includes cost of resources needed to complete schedule activities along with effect of cost decisions on using, maintaining & supporting the product, service or result of the project. Life cycle costing together with value engineering can improve decision making and is used to reduce cost and execution time.

 

Cost Management Plan - It is created as part of the Develop Project Management Plan process. It can establish

  1. Precision Level ($100, $1000 etc)
  2. Units of Measure (Staff hours/days/lump sum etc)
  3. Organizational Procedure Links (Control Account, code or account number directly linked accounting system)
  4. Control thresholds (Agreed amount of variation allowed)
  5. Earned Value rules (1.Computation Formula 2.Earned Value Credit Criteria 3.WBS Level)
  6. Reporting Formats
  7. Process descriptions (Each of the three cost management Processes are documented.)

 

ROM – Accuracy of project estimate will increase as it progresses, project at initial stages can have rough order of magnitude (ROM) in the range of –50 to +100% later it will narrow to a range of definite estimate –10 to +15%.

 

Cost Management Plan – (from Cost Estimating) the action taken by the project manager for all variances are described in the Cost Management Plan.

 

Cost Estimating (Tools)

Analogous estimating - also called top-down estimating, means using the actual cost of a previous, similar project. It is given by management as an expectation. It is less costly and less precise.

Parametric modeling - mathematical model to predict project costs - per square foot of living space. It uses statistical relationship between historical data and other variables to calculate cost estimate. It can produce higher levels of accuracy depending on sophistication, resource quantity and cost data.

Bottom-up estimating - The cost of individual activities or work packages rolled up to get the estimate for whole component. It is more accurate and costly.

Reserve Analysis – Contingency Reserve are estimated to be used at the discretion of the project maanger to deal with anticipated but not certain events, called “known unknowns”. They are managed as a buffer kept at the end of the network path for that group of activities. As the schedule progresses, reserve is measure by resource consumption by the schedule activities. Management reserve: they are there to manage events called “unknown unknowns”. Since they are not distributed as budget to project hence they are not used for calculating earned values metrics.

 

Cost of Quality: cost of quality initiative in an organization like training, audits etc, cost of poor quality: warranty cost, claims

EV equals PV when the project is completed.

Cost Calculations - Costs are more practical to calculate at one level higher (Control Account) than work package level

 

Cost Budgeting Tools and Techniques

 

Cost aggregation

Funding Limit Reconciliation – Customer/sponsor will set limits on disbursement of funds for the project. Funding Limit Reconciliation will necessitate the scheduling of work to be adjusted to smooth or regulate those expenditures. It is accomplished by placing imposed date constraints for some work packages and compressing the schedule to reduce the estimated cost of the project. Conciliation happens for the cash flow of the project and with any cost constraint of the project.

Cost baseline (output)- The cost baseline is a time-phased budget that will be used to measure and monitor cost performance on the project. It is shown as an S curve. The difference between maximum funding and the end of the cost baseline is Management Reserve in the S curve.

 

Project Funding requirement (output)

 

Project Performance Reviews (TT of Cost Control) – 1.Variance Analysis 2.Trend Analysis 3.Earned Value Technique

Performance Measurement Analysis (TT of Cost Control) – PV, EV, AC, ETC, CV, SV, CPI, SPI

 

 

Benefit Cost Ratio

Expected Revenues / Expected Costs. Measure benefits (payback) to costs; not just profits. The higher the better (if rating over 1, the benefits are greater than the costs)

Internal Rate of Return

Interest Rate which makes the PV of costs equal to PV of benefits 

Payback Period

Number of time periods up to the point where cumulative revenues exceeds cumulative costs. Weakness in this approach is the lack of emphasis on the magnitude of the profitability. Does not account for time value of money nor consider value benefits after payback.

Opportunity Cost

Cost of choosing one alternative and therefore giving up the potential benefits of another alternative: it is the value of the project not selected (lost opportunity).

Sunk Cost

Expended costs which should be ignored when making decisions about whether to continue investing in a project

Law of Diminishing Returns

Straight Line Depreciation

The point beyond which the marginal addition of resources does not provide a proportional amount of utility. Same amount each time period (e.g. 10 – 10 – 10).

Types 1. Straight Line 2. Accelerated   (1. Double Declining Balance 2. Sum of Years Digits)

Working Capital

Current Assets - Current Liabilities

Value Analysis

Cost reduction tool that considers whether function is really necessary and whether it can be provided at a lower cost without degrading performance or quality. Finding the least expensive way to do the scope of work.

Value Engineering Tool

Tool for analyzing a design, determining its function, and assessing how to provide those functions cost effectively.

50-50 Rule

At beginning, charge 50% of its BCWS to the account.  Charge remaining at completion.

Regression Analysis

Statistical technique graphically represented on scatter diagram

Learning Curve

Mathematically models the intuitive notion that the more times we do something, the faster we will be able to perform

Variable Costs

Costs rise directly with the size and scope of the project

Fixed Costs

Costs do not change; non-recurring (e.g. project setup costs)

Direct Costs

Incurred directly by a specific project. Project training to project team.

Indirect Costs

Part of the overall organization's cost of doing business and are shared by all projects. Usually computed as a percentage of the direct costs. General and administrative cost, allocated to the project by the project team as a cost of doing business.

Control accounts

Represent the basic level at which project performance is measured and reported. The purpose of control accounts is to monitor and report on project performance.

Cost Change Control Systems

Documented in the cost management plan, defines the procedures of the cost baseline change.  Includes the documentation, tracking systems, and approval levels needed to authorize a change and integrated with the integrated change control process.

Operating profit

Amount of money earned: Revenue – direct costs

Discounted cash-flow approach

Present value method determines the net present value of all cash flow by discounting it by the required rate of return.

Project Closeout

(output to cost control) Process and procedures developed for the closing or canceling of projects

 

 

 

                                   

Formulas

 

Expected Value

Present Value

Probability * Impact

FV / (1 + r)t

Cost Variance

CV

EV = BAC * (work completed/total work required)

EV – AC   (BCWP – ACWP)   Variance = planned – actual

Schedule Variance

SV

PV = BAC *(Total time passed /total schedule time)

EV – PV [BCWP – BCWS] (if <0;>

Cost Performance Index (CPI)

EV/AC [BCWP / ACWP]     I am getting  ____ out of each dollar. (>1 good; <1>

Schedule Performance Index (SPI)

EV/PV [BCWP / BCWS]     I am progressing at ____% of the rate originally planned

Estimate at Completion (EAC)

BAC / CPI 

AC+ETC (when original estimates are considered flawed)

AC+BAC-EV (when everything is OK and current variance will not occur in the future)

AC+((BAC-EV)/CPI) (when everything is OK and current variance will occur in the future)

Estimate to Completion (ETC)

EAC - AC or (BAC - EV) / CPI

Variance at Completion (VAC)

BAC – EAC

% Spent

AC/BAC

Cost Variance in %

CV/EV

Schedule Variance in %

SV/PV

To Complete Performance Index (TCPI)

(BAC-EV)/(BAC – AC)

BCWS (PV)

How much should be done?  This is the performance measurement baseline.

BCWP (EV)

How much work is done? (Progress) Budgeted cost of work performed. Value of the work completed in terms of what you budgeted (your baseline)

ACWP (AC)

How much did the “is done” work cost?

BAC

Budget at Completion – How much is budgeted for the total job? BAC would change every time there is a funded scope change approved for activity to be performed in the future.

EAC

Based on project performance and risk quantification

ETC

Estimate to Completion

CPI

Cumulative CPI does not change by more than 10% once a project is approximately 20% complete. The CPI provides a quick statistical forecast of final project costs.

AD

Work Quantity(scope of the activity) / Production rate

Slope

(crash cost - normal cost) / (crash time - normal time) ; if <0,>

 

5 comments:

  1. Thank you so much for sharing this informative post.. Stay blessed!!
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  2. This comment has been removed by the author.

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  3. This is very admiring idea. Thank you for sharing this cost managing. It is really useful for those are obtaining PMP certification. pmp certification requirements

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  4. I love to see this kind of post. Thanks for this idea. It is really useful for those who are planning to take pmp certification.

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  5. Nice Post! The PMP Certification establishes a common language among project managers and helps each other work within a common framework. Once you have the PMP, you need to consider how you're applying the processes, tools, and techniques to projects. I took a training course for my preparation in http://www.pmstudy.com and got ready for the exam on day 5!

    ReplyDelete