Knowledge Area Executive Summary
This Knowledge Area is about the processes for planning, estimating, budgeting, funding, financing, managing, and controlling costs in a project so it can be completed within the approved budget.
- Process Group Covered by Cost Management:
- Monitoring and Controlling
- Processes in this Knowledge Area
- Plan Cost Management
- Estimate Costs
- Determine Budget
- Control Costs
- Major or important ITTOs
- Project Charter
- PM Plan
- Project Documents
- Business Documents
- Project Funding Requirements
- Work Performance Data
- Data Analysis
- Estimating Techniques
- Cost Aggregation
- To-Complete Performance Index
- Cost Management Plan
- Cost Estimates
- Basis of Estimates
- Cost Baseline
- Critical concepts
A common trend among Project Managers is to tell the wonderful tales of how they completed ‘x-amount’ of projects on time and within budget. That’s all well and good, but I’d be more impressed to hear of the number of projects that were finished on time and within budget with no change requests to alter the budget. That’s impressive. Why such a skeptic you ask? Cost management is a small Knowledge Area by quantity of processes, but is one of the most vital on the project. Your organization is expecting you, the Project Manager, to act as their ambassador in the project. Cost is one of the three biggest areas to manage in Project Management. So much in fact, that PMI lists it as a side of the “Triple Constraint” triangle (shown below). In order to manage this area, you must use the processes appropriately.
The first process here is Plan Cost Management, which generates the Cost Management Plan. This plan is developed to provide guidance and direction on how the project costs will be managed throughout the project. It determines how project costs will be estimated, and subsequently budgeted, managed, monitored, and controlled. This plan is defined and guided by several different variables, not the least of which is your organization’s policies on dealing with project costs and budgeting. There may also be organizational requirements for changes, so this will also be captured in your plan.
Our next process, Estimate Costs, is where the real magic happens. In cases where the budget is insufficient for the project, this process can usually be called on as the root cause for our troubles. Estimating costs calls on many different Estimating Techniques as well as Data Analysis to give us as close to accurate estimates as possible. If this process is performed correctly, at the appropriate level for the project, and takes into account the Cost of Quality, you can save yourself a great deal of time in Change Requests later in the project.
After estimating the cost for all activities or Work Packages, we can move on to the next process, Determine Budget. This process is very important because it determines the Cost Baseline, which we will use for our monitoring and controlling process to measure cost performance. In this process, all estimates for activities and Work Packages are aggregated to create the overall project budget and create our Cost Baseline. The Cost Baseline is the approved version of the spending plan, including the Contingency Reserve, and it is time-phased. To learn more about the Contingency Reserve, make sure you check out the Risk Management blog post. Since the Cost Baseline is time-phased, you have to reconcile the spending plan against what the Sponsor can fund from the cash flows. This is called Funding Limit Reconciliation and as a result of this reconciliation, you may have to adjust the activities on the schedule to allow for the available funds.
Our last process in Cost Management is Control Costs. This is about analyzing Work Performance Data to determine the variances between our planned cost performance and the actual cost performance. The Control Costs process ensures that the Cost Baseline is maintained throughout the life of the project. In this process, we’ll use the 13 Earned Value Management (EVM) formulas, variance analysis, trend analysis, and Reserve analysis to determine how the project is performing in comparison to the plan. During this phase, the To-Complete Performance Index is used to determine the needed spending performance of the project in order to complete the project with the remaining funds. Variances found here will update several outputs such as the Cost Baseline and cost forecasts as well as the initiation of any needed Change Requests.
Knowledge Area Frequently Asked Questions
Q: What happens to if the Project Manager can complete project activities for less than the planned amount?
A: All unused monies from the budget can be calculated as profit for the project. This means that you’re responsible to your organization to perform the project with the idea of saving as much in the budget as possible. You must still consider the Cost of Quality, and shortcuts are not an option.
Q: What is the Cost of Quality?
A: The Cost of Quality is an analysis performed to determine the appropriate amount of money to spend on achieving quality metrics. This is the amount of money that will be used to prevent poor quality, appraise the quality of the product or service of the project, and the costs that will be incurred if there are failures or defects. This is discussed in further detail in Project Quality Management.
What to Memorize in this Knowledge Area
Some bullet points to memorize or add to your Brain Dump are below:
- Plan Cost Management gives us the Cost Management Plan
- Estimate Costs gives us the Cost Estimates and the Basis of Estimates (seeing a trend?)
- Determine Budget gives us the Cost Baseline (which is often called the budget)
- Cost Terminology Terms
- Life-Cycle Costing
- Value Engineering
- Indirect Cost
- Direct Cost
- Variable Cost
- Fixed Cost
- Sunk Cost
- Inputs to the Estimate Costs process and how to remember them…
- Quality Management Plan – Helps show the Cost of Quality and how it will affect the budget
- Project Schedule – Time = Money. The longer something takes, the more it is likely to cost us.
- Risk Register – Tells us the Contingency Budget and how much a triggered risk may cost us.
- Lessons Learned – Very helpful with estimating techniques like Analogous and Parametric Estimating
- Resource Requirements – Resources will cost money, and different resources will cost the project less or more depending on which is used. This is helpful for Alternatives Analysis
- PM Plan – An input to all Planning Process Group Processes
Knowledge Area Critical Reasoning & Testing Skills
Cost Management can be evaluated by PMI in a variety of ways. Often, you will be tested on Earned Value Management (EVM) techniques, however there is an entire section on this topic later that is a part of the Best PMP Study Plan. Below, the question will be focused on the Planning Process Group.
Q: You are the Project Manager on a project to develop a Records Management System including front-end customer User Interface for a Medical Insurance provider. You begin the project using a single-factor authentication for access the interface, but after researching, you find that this is not fully HIPAA compliant without a great deal of extra work for your developers. You decide it is early enough in the project to abandon this development and change to a two-factor authentication from a third-party identity verification service. Your developers have already spent 16-hours at $185/hr on the single-factor authentication. The costs associated with the developers efforts thus far could be BEST described as a/an:
- Life-Cycle Cost
- Indirect Cost
- Sunk Cost
- Variable Cost
EXPLANATION: This question asks us to have an understanding of cost terminology. Answer A (Life-Cycle Cost) is a term associated with the cost of ownership after a project has been transitioned of the life of the product or result of the project. Answer B (Indirect Cost) is a term that is associated with overhead costs or costs incurred for the benefit of more than one project. Answer C (Sunk Cost) is a term associated with money that has already been spent and cannot be recovered. Answer D (Variable Cost) is a term for costs that change with the amount of production or amount of work being done. In the scenario, the money has already been spent, but the work that has been completed must be abandoned. The money spent will not be recovered and we do not know if the work can ever be used in any other projects. The BEST answer here is C.
Knowledge Area Closing Summary
“Cost Management is one of the primary functions of Project Managers.” I didn’t say that. The Project Management Institute (PMI®) did. According to PMI, Cost Management, Scope/Quality Management, and Time Management create the core of Project Management. It only makes sense since one of the primary reasons that projects are abandoned is the fact that they run so far from the original budget and are no longer a viable business option. Cost Management requires strategy, an understanding of the processes, and an ability to create a detailed plan to estimate, budget, fund, finance, manage, and control costs in a project. Let the experts at PM-ProLearn guide you on the path to this very important Knowledge Area and PMP Certification Success!