PMP Exam Prep - Chapter 7

Cost Management

The cost management plan is also known as the "budget management plan" or the "budget plan" on the PMP exam. PMP Exam Prep provided the following list, "The cost management plan includes:"

• Specifications for how estimates should be stated (in what currency)
• The level of accuracy needed for estimates
• Reporting formats to be used
• Rules for measuring cost performance
• Whether costs will include both direct costs (those costs directly attributable to the project) and indirect costs (costs not directly attributable to any one project, such as overhead costs)
• Establishment of a cost baseline for measuring against as part of project monitoring and controlling
• Control thresholds
• Cost change control procedures

Life cycle costing involves looking at the cost of the entire life of the product. This means that when you are planning project costs, you must take into consideration, for example, the maintenance costs once the project is completed. If you create a product at a lower quality to save costs, it may be helpful during the project planning. Once the project is complete, the cost savings that were so helpful during the project, may become a hindrance once the project is complete. If you produce a lower quality product, the maintenance and repair costs are most likely going to be higher than if you had produced a higher quality product for a steeper price. In the end, the lower quality, lower cost product may end up costing the company more, than if you had budgeted for a higher cost, higher quality product. Taking into account the WHOLE life of the product is important and is remembered as life cycle costing. Value analysis involves finding the lowest overall cost, without performance loss, while cost risk involves finding the cost-related risk and involves risk, procurement, and cost management.

Following cost risk in chapter 7 is estimate costs. This process creates the cost estimates for each activity, individually. Two types of cost are variable costs and fixed costs. Variable costs include the cost of supplies, and wages, which are costs that change with production and work. Fixed costs include the cost of rent, and set up, which are costs that do not change throughout production. These two costs should be remembered in the same category. Not  only can a cost be variable or fixed, but it is either direct or indirect. Direct costs are, "directly attributable to the work on the project." according to PMP Exam Prep. These costs include recognition, costs of materials, etc. Indirect costs are "overhead items or costs incurred for the benefit of more than one project." defines PMP Exam Prep. Indirect costs would be something like taxes.
Inputs to estimating costs include scope baseline, project schedule human resource plan, risk register, policies and historical records relate to estimating, templates, processes, procedures, lessons learned, and historical information, company culture and existing systems that the project will have to deal with or can use, and project management costs. The scope baseline is used in estimating because you need to know what is out of scope and the constraints placed on the project. Project schedule is a key element in estimating costs because it contains the activities, the resources, and the timing of work. The human resource plan comes in to play in estimating cost because reward systems, labor rates, and the human resources intended for project use, are all cost items and must be estimated. As far as risk register goes, it is considered an estimating costs input, as well as an output. Historical records and organizational records should be considered in estimating costs because they provide information from other projects. Using company culture and existing systems as tools for estimating cost can be beneficial because they provide different sources of supply procurement. Lastly, project management costs should also be included in estimating costs because project management efforts do incur costs, through status reports, the project manager efforts, etc.
Not only can costs be estimated using one-point estimating, analogous estimating, parametric estimating, and three-point estimating, but you can also calculate using bottom-up estimating. Bottom-up estimating involves each part of an activity or work package and creating estimates for them.
Project management software, determining resource cost rates, reserve analysis, cost of quality, and accuracy of estimates are all used in the process of creating estimates. Project management software can be helpful in speeding up calculations and can be used for estimating. On the exam, it is important to remember that resources are not just internal human resources, like cost of labor. When determining resource cost rates, consider ALL resource costs, including work of suppliers and consultants, for example. As far as cost of quality goes, PMP Exam Prep suggests, "The cost of work added to the project to accommodate quality efforts should be included in the project estimate.". the accuracy of estimates will vary throughout a project. When the project is just beginning, you generally provide a wide range of estimates and as the project progresses you can narrow the estimates because you gain more information and are better able to do so. PMP Exam Prep states that the following three ranges are frequently seen on the exam, and should be memorized.

• Rough Order of Magnitude (ROM) Estimate: During project initiating. +/- 50 percent from actual is the typical range for this estimate.
• Budget Estimate: During project planning. -10 to +25 percent from actual range.
• Definitive Estimate: As the project progresses. Dependent on your preference, +/-10 percent or -5 to +10 percent from actual.

As opposed to calculating individual activities, when determining budget the project manager must calculate the total cost of the project. This is done in the planning process group. When determining the project budget, you must perform risk management activities and include reserves. Contingency reserves and management reserves are the two types of estimates that can be added to the estimate. "Contingency reserves address the cost impacts of the risks remaining during risk response planning." informs PMP Exam Prep. The contingency reserves are included in the cost baseline. "Management reserves are additional funds set aside to cover unforeseen risks or changes to the project." explains PMP Exam Prep. Management reserves plus cost baseline make up the cost budget.

PMP Exam Prep provides a diagram outlining the creation of a budget. I recreated it below. A budget is created like this:

Once everything is estimated, the project manager should then compare their estimates with one of three things: parametric estimates, expert judgement, or historical records. Determining which to compare against depends upon your industry and preference. Checking cash flow is next on the list. If you don't know the amount and availability of cash, how can you plan accordingly? Once the estimates are compared and the cash flow is reconciled, another reconciliation must take place. This reconciliation involves looking for any cost constraints and then resolving them. The cost baseline is established when the Determine Budget process is complete.


Progress reporting involves figuring out where the project is, and the perecent complete. Generally, a project manager will ask team members for an estimate of percent complete for the activities, individually. This method is time-consuming and unreliable because the team members are simply making a guess. Earned value is a much more realiable method of measuring the progress of your project. It measures project performance against the scope, schedule, and cost baselines. These three baselines combined are known as the performance measurement baseline. PMP Exam Prep provides a list of terms that need to be remembered on page 241. As well as formulas and interpretations to memorize for the exam on pages 241 and 242. PMP Exam Prep advises you to "understand and memorize the following:"

• EV comes first in every formula.
• If it is a variance, the formula is EV minus something.
• If it is an index, it is EV divided by something.
• If the formula relates to cost, use AC.
• If the formula relates to schedule, use PV.
• For variances interpretation: negative is bad and positive is good.
• For indices interpretation: greater than one is good; less than one is bad.