Chapter 7: Managing Project Costs

Total amount spent to date

• Relies on historical information to predict the cost of the current project.
• AKA top-down estimating
• least accurate method

• Accounts for each component of the WBS to create a sum for the project.
• Most time consuming and most reliable

• Broad, early estimate
• Range can be from -10 to +25%

• Allowance for cost overruns
• Used at PM's discretion and with management approval to counteract cost overruns

• Costs are parallel to WBS work packages
• Each work package cost is aggregated to a corresponding control account

time-lapse exposure of when project monies are to be spent in relation to cumulative values of the work completed

Cost aggregation achieved by assigning specific dollar amounts to each activity or work package

Examines any changes associated with scope changes, cost of materials, cost of other resources, and associated impact on project cost

Dictates how cost variances will be managed

• Money spent to recover from not adhering to expected quality level.
• May include rework, defect repair, medical, loss of sales, loss of customers, etc.

• Money spent to attain the expected level of quality within a project
• Includes training, testing, safety, etc.

• Measures the project based on its financial performance
• CPI = EV/AC

• Difference of teh earned value and the cumulative actual project costs.
• CV = EV - AC

• Used late in the planning process
• One of the most accurate methods
• bottom-up estimate
• Range of variance is -5 to +10 percent

• Attributed directly to project work
• cannot be shared among projects

Physical work completed to date and the authorized budget for that work

Forecasting formulas predict teh likely completed costs of the project based on current scenarios

• formula that predicts how much funding the project will require to be completed
• There are 3 variations based on conditions the project may be experiencing

• Costs that remain constant through the life of the project
• ex: cost of a piece of rented equipment, a consultant, etc.

an organization's approach to managing cash flow against project delieverables based on a schedule, milestone accomplishment, or data constraints

• Costs that are representative of more than one project
• ex: utilities, facilities, software licenses, etc.

• Event that will likely happen, but the timing and degree are unknown
• These events are usually risk related

Assumes cost per unit decreases the more units workers complete because workers learn as they complete required work

Market is so tight that the actions of one vendor affect actions of all others

Total cost of an opportunity that is refused to realize an opposing opportunity

• Uses a parametric model to extrapolate project costs
• ex: cost per hour or unit

• Work scheduled and the budget authorized to complete that work.
• Reflects where the project should be at this point in time.

• Final variance, discovered only at the project's completion
• BAC-AC

• Statistical approach to predicting what future values may be, based on historical values
• Creates quantitative predictions based on variables within one value to predict variables in another
• Relies solely on pure math to reveal relationships between variables and predict future values

• Cost reserves are for unknown unknowns in a project
• Part of the project budget but not the project baseline

• rough estimate used during the initiating processes and in top-down estimates
• range can be from -25% to +75%

• Measures the project based on its schedule performance
• SPI = EV/PV

• the difference between earned value and planned value
• SV = EV - PV

Many vendors can provide an item, but you prefer to work with just one

• Only one vendor can provide something
• ex: specific consultant, specialized service, unique material

Monies that have already been invested in a project

• formula to forecast the likelihood of a project to achieve its goals based on what's happening in the project right now
• Using original budget: TCPI = (BAC-EV) / (BAC - AC)
• Using new estimate: TCPI = (BAC-EV) / (EAC - AC)

costs that change based on the conditions applied in the project (number of participants, etc)

difference between what was expected and what was experienced

• forecasting formula that predicts how much of a variance the project will likely have based on current conditions within the project
• VAC = BAC - EAC