PMP: 6. Project Cost Management

-  Project Cost Management is primarily concerned with the cost of the resources needed to complete project activities
-  Recognize that different stakeholders measure project costs in different ways and at different times
-  In small projects with small scope, cost estimating and cost budgeting can be viewed as single process at performed by a single person
-  In agile environments lightweight estimation methods can be used to generate a fast, high-level forecast of project labor costs, which can then be easily adjusted as changes

Plan Cost Management (Planning Process Group)
Plan Cost Management is the process of defining how the project costs will be estimated, budgeted, managed monitored, and controlled.
Key benefit of this process is that it provides guidance and direction on how the project costs will be managed throughout the project
-  This process is performed once or at predefined points in the project
-  The cost management planning effort occurs early in project planning and sets the framework for each of the cost management processes so that processes performance will be efficient and coordinated

Plan Cost Management Inputs:
1- Project Charter
-  Provides the preapproved financial resources from which the detailed project costs are developed
-  Defines the project approval requirements that will influence the management of project costs
2- Project Management Plan
-  Includes (Schedule management plan and Risk management plan)
3- Enterprise Environmental Factors
4- Organizational Process Assets

Plan Cost Management Tools & Techniques:
1- Expert Judgment
2- Data Analysis
-  Alternative Analysis: Review strategic funding (self-funding, funding with equity or debt) and include considerations to acquire project resources (making, purchasing, renting and leasing)
3- Meetings

Plan Cost Management Outputs:
1- Cost Management Plan
-  cost management plan is a component of the project management plan and describes how the project costs will be planned, structured, and controlled.
Cost management plan can establish the following

Units of measure: Time measures (hours, days, weeks). Quantity measures (meters, liters, tons) or lump sum

Level of precision: Degree to which cost estimates will be rounded up or down

Level of accuracy: Acceptable range used in determining realistic cost estimates

Organizational procedures links: WBS provides the framework for the cost management plan, allowing for consistency with the estimates, budgets, and control of costs.

Control thresholds: Variance thresholds for monitoring cost performance may be specified to indicate an agreed-upon amount of variation to be allowed before some action needs to be taken and usually expressed as percentage

Rules of performance measurement: Earned value management (EVM) rules of performance measurement are set. Cost management plan may define WBS points which measurement of control will be performed, Establish EVM techniques (weighted, milestone) and specify tracking methodologies and EVM computation

Reporting Formats: Formats and frequency for the various cost reports are defined.

Additional details: Additional details about cost management activities include description of strategic funding choices, currency exchange rate and project cost recording

Estimate Costs (Planning Process Group)
Estimate Costs is the process of developing an approximation of the cost of resources needed to complete project work.
Key benefit of this process is that it determines the monetary resources required for the project
-  This process is performed periodically throughout the project as needed.
-  A cost estimate is a quantitative assessment of the likely costs for resources required to complete the activity
-  Cost estimates include the identification and consideration of costing alternatives to initiate and complete the project
-  Cost trade-offs and risks should be considered to achieve optimal costs for the project
-  Cost estimates are generally expressed in units of some currency or time measure units
-  The accuracy of a project estimate will increase as the project progresses through project life cycle
-  In project initiation phase have a rough order of magnitude (ROM) estimate in the range of (-25% to +75%). Later in projects when more information is known definitive estimate could narrow the range to (-5% to +10%)

Estimate Costs Inputs:
1- Project Management Plan
-  Includes (Cost management plan, Quality management plan and Scope baseline)
2- Project Documents
-  Includes (Lessons learned register, Project schedule, Resource requirements and Risk register)
3- Enterprise Environmental Factors
4- Organizational Process Assets

Estimate Costs Tools & Techniques:
1- Expert Judgment
2- Analogous Estimating
-  Uses values, or attributes, of a previous project that are similar to the current project
3- Parametric Estimation
-  Uses a statistical relationship between relevant historical data and other variables to calculate a cost estimate for project work. It produces higher level of accuracy (e.g., square footage in construction)
4- Bottom-UP Estimating
-  Bottom-up estimating is a method of estimating a component of work.
-  The cost of individual work packages or activities is estimated to the greatest level of specified detail
-  Detailed cost is then summarized or “rolled up” to higher levels
-  The cost and accuracy of bottom-up cost estimating are typically influenced by the size or other attributes of the individual activity or work package.
5- Three-Point Estimating
-  Expected cost (cE) can be calculated using (Most Likely (cM), Optimistic (cO), Pessimistic (cP))
-  For Triangular distribution. cE = (cO + cM+ cP) / 3
-  For Beta distribution (PERT) cE = (cO + 4cM+ cP) / 6
6- Data Analysis
-  Alternative Analysis: technique used to evaluate identified options in order to select which options to use to execute and perform the work of the project
-  Reserve Analysis: Cost estimates may include contingency reserves (contingency allowances) to account for cost uncertainty. And intended to address known-unknowns
Contingency reserves are the budget within the cost baseline that is allocated for identified risks
Contingency reserves can be provided at any level from the specific activity to the entire project.
Contingency reserve may be a percentage of the estimated cost, a fixed number, or may be developed by using quantitative analysis methods.

When more information is available, the contingency reserve may be used, reduced or eliminated.
-  Cost of Quality: Assumptions about costs of quality may be used to prepare the estimates. Which includes evaluating the cost impact of additional investment in conformance versus the cost of nonconformance. It also may include looking at short-term cost reductions vs of more frequent problems later on in the product life cycle.
7- Project Management Information System (PMIS)
-  Spreadsheets, simulation software, and statistical analysis.
8- Decision Making
-  Voting

Estimate Costs Outputs:
1- Cost Estimates
-  Cost estimates include quantitative assessments of the probable costs required to complete project work and contingency amounts to account for identified risks, and management reserve to cover unplanned work
-  Costs are estimated for all resources that are applied to the cost estimate.
-  Cost estimates can be presented in summary form or in detail
2- Basis of Estimates
-  Supporting documentation should provide a clear and complete understanding of how the cost estimate was derived (assumptions, constraints, risks, estimate range and confidence level)
3- Project Documents Updates
-  Includes (Assumption log, Lessons learned register and Risk register)

Determine Budget (Planning Process Group)
Determine Budget is the process of aggregating the estimated costs of individual activities or work packages to establish an authorized cost baseline
Key benefit of this process is that it determines the cost baseline against which project performance can be monitored and controlled
-  This process is performed once or at predefined points in the project.
-  Project budget includes all the funds authorized to execute the project.

Determine Budget Inputs:
1- Project Management Plan
-  Includes (Cost management plan, Resource management plan and Scope baseline)
2- Project Documents
-  Includes (Basis of estimates, Cost estimate, Project schedule and Risk register)
3- Business Documents
-  Business case: identifies the critical success factors for the project like financial success factors
-  Benefits management plan: includes the target benefits, such as net present value calculations, timeframe for realizing benefits, and the metrics associated with the benefits
4- Agreements
5- Enterprise Environmental Factors
6- Organizational Process Assets

Determine Budget Tools & Techniques:
1- Expert Judgment
2- Cost Aggregation
-  Cost estimates are aggregated by work packages in accordance with the WBS. The work package cost estimates are then aggregated for the higher component levels of the WBS and ultimately for the entire project
3- Data Analysis
-  Reserve Analysis: Establish the management reserves for the project.
-  Management reserves are an amount of the project budget withheld for management control purposes and are reserved for unforeseen work that is within scope of the project
-  Management reserves are intended to address the unknown unknowns that can affect a project.
-  Management reserve is not included in the cost baseline but is part of the overall project budget
-  When an amount of management reserves is used to, it should be then added to cost baseline (require an approved change process)
4- Historical Information Review
-  Reviewing historical information can assist in parametric or analogous estimates
-  Historical information may include project characteristics (parameters) to develop mathematical models to predict total project costs
5- Funding limit Reconciliation
-  The expenditure of funds should be reconciled with any funding limits on the commitment of funds for the project
-  Variance sometimes necessitate the rescheduling of work and this is accomplished by placing imposed date constraints for work into project schedule
6- Financing
-  Financing entails acquiring funding for projects for long lasting projects. External funding may require certain requirements.

Determine Budget Outputs:
1- Cost Baseline
-  Approved version of the time-phased project budget, excluding any management reserves. is used as a basis for comparison to actual results.
-  It is developed as a of the approved budgets for the different schedule activities
-  The work package cost estimates, along with any contingency reserves estimated for the work packages, are aggregated into control accounts. The summation of the control accounts makes up the cost baseline.
-  Time-phased view of the cost baseline is typically displayed in the form of an S-curve
-  For projects that use earned value management, the cost baseline is referred to as the performance measurement baseline

2- Project Funding Requirements
-  Total funding requirements and periodic funding requirements (e.g., quarterly, annually) are derived from the cost baseline.
-  Funding often occurs in incremental amounts, and may not be evenly distributed.
3- Project Management Updates
-  Includes (Cost estimates, Project schedule and Risk register)

Control Costs (Monitor and Controlling Process Group)
Control Costs is the process of monitoring the status of the project to update the project costs and managing changes to the cost baseline.
Key benefit of this process is that the cost baseline is maintained throughout the project
-  This process is performed throughout the project
-  Any increase to the authorized budget require an approved change

Control Costs Inputs:
1- Project Management Plan
-  Includes (Cost management plan, Cost baseline and Performance measurement baseline)
2- Project Documents
-  Includes lessons learned register
3- Work Performance Data
4- Enterprise Environmental Factors
5- Organizational Process Assets

Control Costs Tools & Techniques:
1- Expert Judgement
2- Data Analysis
-  Earned value analysis (EVA): compares the performance measurement baseline to the actual schedule and cost performance. EVM integrates the scope baseline with cost and schedule baselines to form the performance measurement baseline. It monitors three key dimensions
- Planned Value (PV)
- Earned Value (EV)
- Actual Cost (AC)
-  Variance Analysis: Cost and schedule variances are the most frequently analyzed measurements. Cost performance measurements are used to assess the magnitude of variation to the cost baseline and decide whether corrective or preventive action is required. Examples of variance analysis.

- Schedule Variance (SV)
- Cost Variance (CV)
- Schedule Performance Index (SPI)
- Cost Performance Index (CPI)

-  Trend Analysis: examines project performance over time to determine if performance is improving or deteriorating. Graphical analysis techniques are valuable for understanding performance and comparison to future performance goals in the form of BAC vs EAC. Example of techniques
- Charts: In earned value analysis, three parameters of planned value, earned value, and actual cost can be monitored and reported
- Forecasting: Project team may develop a forecast for the estimate at completion (EAC) that may differ from the budget at completion (BAC). Forecasts are generated updated, and reissued based on work performance data. And work performance information covers the project’s past performance and any information that could impact the project in the future.

Most common EAC forecasting approach is a manual, bottom-up summation
Bottom-up EAC builds upon the actual costs and experience incurred for the work completed, and requires a new estimate to complete the remaining project work
Manual EAC is quickly compared with a range of calculated EACs representing various risk scenarios. Manual forecast more accurate to determine remaining works

When calculating EAC the most common methods are
- EAC forecast for ETC work performed at the budgeted rate
- EAC forecast for ETC work performed at the present CPI
- EAC forecast for ETC work considering both SPI and CPI factors
-  Reserve Analysis: reserve analysis is used to monitor the status of contingency and management reserves for the project to determine if these reserves are still needed or if additional reserves need to be requested.

These reserve may be used as planned to cover cost of risk response. Conversely, when opportunities are captured and resulting in cost savings, funds may be added to the contingency amount, or taken from the project as margin/profit.
3- To-Complete Performance Index (TCPI)
Measure of the cost performance that is required to be achieved with the remaining resources in order to meet a specified management goal expressed as the ratio of the cost to finish the outstanding work to the remaining budget
4- Project Management Information System (PMIS)

Control Costs Outputs:
1- Work Performance Information
-  Includes information on how the project work is performing compared to the cost baseline
-  Variances in the work performed and the cost of the work are evaluated at the work package level and control account level
-  projects using earned value analysis, CV, CPI, EAC, VAC, and TCPI are documented for inclusion in work performance reports
2- Cost Forecasts
-  Either a calculated EAC value or a bottom-up EAC value is documented and communicated to stakeholders
3- Change Requests
4- Project Management Plan Updates
-  Includes (Cost management plan, Cost baseline and Performance measurement baseline)
5- Project Document Updates
-  Includes (Assumption log, Basis of estimates, Cost estimates, Lessons learned register and Risk register)