You do not need to be a certified public accountant to successfully answer the Project Cost Management questions on the PMP® certification exam. PMI® addresses cost management from a project manager’s perspective, which is much more general than that of an accountant. However, these questions are not easy. Far from it! Exam takers find the Project Cost Management questions more difficult than most of the others because they address such a broad range of cost issues (for example, cost estimating, earned value, and creating and interpreting S-curves) and require a significant amount of study time.
You may find questions relating to contract cost management. Because cost considerations are heavily affected by contract type, and Project Procurement Management is one of the ten PMBOK® Guide areas on which you will be tested, time spent studying that area will help to prepare you for the cost questions on the exam and vice versa.
The exam may include several questions that require you to know and solve specific, albeit simple, formulas. You must have a thorough knowledge of earned value—what it is and how it is computed. Study Table 7-1 as it provides information on the formulas, how to calculate them, and how to interpret the results.
For additional information on project estimating, you may wish to review PMI®’s Practice Standard for Project Estimating, 2011. For additional information on earned value analysis from a PMI® perspective, you may also wish to consult PMI®’s Practice Standard for Earned Value Management—Second Edition, 2011.
PMI® views Project Cost Management as a four-step process comprising plan cost management, estimate costs, determine budgets, and control costs. See PMBOK® Guide Figure 7-1 for an overview of this structure. Know this chart thoroughly.
Important: PMI® allows the use of standard six-function (+, −, ×, ÷, √,%) business calculators. These calculators must be silent and have a self-contained power source. They are NOT to include a printing mechanism or a full alphabetic character set. Programmable calculators, which are instruments that can store mathematical formulas, are prohibited. The testing center will provide calculators for your use during the exam.
Following is a list of the major Project Cost Management topics. Use it to help focus your study efforts on the areas most likely to appear on the exam.
Project cost management
Life-cycle cost (LCC)
Cost management plan
Estimate costs
Cost risk and contract type
Determine budgets
Cost baseline
Control costs
Earned value management (EVM)
The most rudimentary building blocks
Earned value measurement techniques
Work performance measurements
INSTRUCTIONS: Note the most suitable answer for each multiple-choice question in the appropriate space on the answer sheet.
You are using earned value progress reporting for your current project in an effort to teach your software developers the benefits of earned value. You plan to display project results on the cafeteria bulletin board so that the team knows how the project is progressing. Use the current status, listed below, to answer questions 1 through 4:
PV = $2,200
EV = $2,000
AC = $2,500
BAC = $10,000
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SV is calculated as EV – PV (in this case, $2,000 – $2,200). A negative variance means that the work completed is less than what was planned for at that point in the project. [Monitoring and Controlling]
PMI®, PMBOK® Guide, 2013, 224
CPI is calculated as EV/AC (in this case, $2,000/$2,500). EV measures the budgeted dollar value of the work that has actually been accomplished, whereas AC measures the actual cost of getting that work done. If the two numbers are the same, work on the project is being accomplished for exactly the budgeted amount of money (and the ratio will be equal to 1.0). If actual costs exceed budgeted costs (as in this example), AC will be larger than EV, and the ratio will be less than 1.0. CPI is also an index of efficiency. In this example, an index of 0.80 (or 80 percent) means that for every dollar spent on the project only 80 cents worth of work is actually accomplished. [Monitoring and Controlling]
PMI®, PMBOK® Guide, 2013, 224
CV is calculated as EV – AC (in this case, $2,000 – $2,500). A negative CV means that accomplishing work on the project is costing more than was budgeted. [Monitoring and Controlling]
PMI®, PMBOK® Guide, 2013, 224
EAC is calculated as BAC/CPI (in this case, $10,000/0.80). It is now known that the project will cost more than the original estimate of $10,000. The project has been getting only 80 cents worth of work done for every dollar spent (CPI), and this information has been used to forecast total project costs. This approach assumes that performance for the remainder of the project will also be based on a CPI of 0.80. [Monitoring and Controlling]
PMI®, PMBOK® Guide, 2013, 224
A frequently used method of estimate costs, the analogous technique relies on experience and knowledge gained to predict future events. This technique provides planners with some idea of the magnitude of project costs but generally not within ±10%. [Planning]
PMI®, PMBOK® Guide, 2013, 204–205
Cost baseline is an output from the determine budget process. [Monitoring and Controlling]
PMI®, PMBOK® Guide, 2013, 212–213
Direct costs are incurred for the exclusive benefit of a project (for example, salary of the project manager, materials used by the project, and subcontractor expenses). Indirect costs, also called overhead costs, are allocated to a project by its performing organization as a cost of doing business. These costs cannot be traced to a specific project and are accumulated and allocated equitably over multiple projects (for example, security guards, fringe benefits, and electricity). [Planning]
PMI®, PMBOK® Guide, 2013, 202
A positive schedule variance indicates that the project is ahead of schedule. A positive cost variance indicates that the project has incurred less cost than estimated for the work accomplished; therefore, the project is under budget. [Monitoring and Controlling]
PMI®, PMBOK® Guide, 2013, 224
Bottom-up estimating is derived by first estimating the cost of the project’s elemental tasks at the lower levels of the WBS or for an activity and then aggregating those estimates at successively higher levels of the WBS for subsequent reporting and tracking purposes. [Planning]
PMI®, PMBOK® Guide, 2013, 205
The TCPI takes the value of work remaining and divides it by the value of funds remaining to obtain the cost performance factor needed to complete all remaining work according to a financial goal set by management. [Monitoring and Controlling]
PMI®, PMBOK® Guide, 2013, 224
CV is calculated by EV – AC, or $1,500(2/3) – $1,350 = –$350. [Monitoring and Controlling]
PMI®, PMBOK® Guide, 2013, 224
The management and control of costs focuses on variance thresholds. Certain variances are acceptable, and others, usually those falling outside a particular range, are unacceptable. They are typically expressed as percentage deviations from the baseline plan. The actions taken by the project manager for variances are described in the cost management plan. [Planning]
PMI®, PMBOK® Guide, 2013, 199
The information provided tells us that, as of the fourth month, more money has been spent than was planned. However, we need to know how much work has been completed to determine how the project is performing. In earned value terms, we are missing the EV. [Monitoring and Controlling]
PMI®, PMBOK® Guide, 2013, 218
Accurate project performance measurement depends on accurate cost and schedule information. The project schedule includes planned start and finish dates for all activities tied to work packages and control accounts. This information is used to aggregate costs to the calendar period for which the costs are planned to be incurred. [Planning]
PMI®, PMBOK® Guide, 2013, 210
Overhead includes costs such as rent, insurance, or heating, that pertain to the project as a whole and cannot be attributed to a particular work item. The amount of overhead to be added to the project is frequently decided by the performing organization and is beyond the control of the project manager. [Monitoring and Controlling]
Meredith and Mantel 2012, 301
This formula assumes that the estimate to complete is based on the same cost efficiency level. [Monitoring and Controlling]
Meredith and Mantel, 454
An order-of-magnitude estimate, which is referred to also as a ballpark estimate, has an accuracy range of –25% to 75% and is made without detailed data. [Planning]
PMI®, PMBOK® Guide, 2013, 201; Ward 2008, 295
Before a revised cost baseline leading to a budget update can be prepared, it is necessary to issue a change request, which may include preventive or corrective action. These change requests then are reviewed and processed through the Perform Integrated Change Control process. [Monitoring and Controlling]
PMI®, PMBOK® Guide, 2013, 225
Value engineering considers possible cost trade-offs as a design evolves. The technique entails identifying the functions that are needed and analyzing the cost effectiveness of the alternatives available for providing them. It helps optimize project life cycle costs, save time, increase profits, improve quality, increase market share, solve problems, and contribute toward more effective resource use [Monitoring and Controlling]
PMI®, PMBOK® Guide, 2013, 566
The CPI has been proven to be an accurate and reliable forecasting tool. Researchers have found that the 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. [Monitoring and Controlling]
Fleming and Koppelman 2000, 134
The undistributed budget is applied to project work that has not yet been linked to WBS elements at or below the lowest level of reporting. It is, therefore, part of the performance measurement baseline and is expected to be used in the performance of project work. [Monitoring and Controlling]
Fleming and Koppelman 2000, 169, 206
PMI®, PMBOK® Guide, 2013, 205, 549
Parametric estimating involves using statistical relationships between historical data and other variables to calculate or estimate for activity parameters, such as cost, budget, or duration. The example is representative of a simple parametric model. [Planning]
PMI®, PMBOK® Guide, 2013, 205
These costs are part of work performance data about project progress. In addition data include information about project progress such as which activities have started, their progress, and which deliverables have finished Updating the budget requires knowledge about the actual costs spent to date, and any budget changes are approved according to the Perform Integrated Change Control process. [Monitoring and Controlling]
PMI®, PMBOK® Guide, 2013, 216–217
Rules of earned value performance measurement are part of the cost management plan and may (1) define the points in the WBS where measurement of control accounts will be performed; (2) establish the EV measurement techniques such as weighted milestones, fixed-formula, percent complete, etc., to be used; and (3) specific tracking methods and EV equations for calculating the EAC forecasts to provide a validity check on the bottom-up EAC. [Planning]
PMI®, PMBOK® Guide, 2013, 199
EAC is a forecast of the most likely total value based on project performance and risk quantification. To calculate EAC, the AC of a project must be known and used in the calculation. Any calculation that relies solely on the EV will not yield an accurate measure of cost performance. [Monitoring and Controlling]
PMI®, PMBOK® Guide, 2013, 220–221
The scope statement, as part of the scope baseline, is a key input in the estimate costs process and should be reviewed. It provides the project description, acceptance criteria, key deliverables, boundaries, assumptions, and constraints about the project. It also notes one basic assumption that must be made as costs are estimated is whether the estimates will be limited only to direct project costs or whether they also will include indirect project costs. [Planning]
PMI®, PMBOK® Guide, 2013, 202
Cumulative cost curves, or S-curves, enable the project manager to monitor cost variances at a glance. The difference in height between the planned-expenditure curve and the actual-expenditure curve represents the monetary value of variances at any given time. [Monitoring and Controlling]
PMI®, PMBOK® Guide, 2013, 219
Control accounts represent a management control point where scope, budget (resource plans), actual costs, and schedule are integrated and compared to earned value for performance measurement. [Planning]
PMI®, PMBOK® Guide, 2013, 132, 199, and 533
Variance analysis focuses on cost and schedule to help explain the cause, issue, and corrective action. Trend analysis examines project performance over time to determine performance status. Earned value performance compares the performance measurement baseline to actual schedule and cost performance. [Monitoring and Controlling]
PMI®, PMBOK® Guide, 2013, 222–223
Often project cost estimates are prepared after budgetary approval is provided. However, activity cost estimates should be prepared before the budget is complete. [Planning]
PMI®, PMBOK® Guide, 2013, 210
Learning curve theory indicates that human performance usually improves when a task is repeated. Specifically, each time output doubles, worker hours per unit decrease by a fixed percentage. This percentage is called the learning rate. [Planning]
Meredith and Mantel 2012, 301–303
Past performance is indicative of future performance; therefore, EAC = BAC/CPI. [Monitoring and Controlling]
PMI®, PMBOK® Guide, 2013, 201
Payback period analysis determines the time required for a project to recover the investment in it and become profitable. A weakness of this approach is a lack of emphasis on the magnitude of the profitability. [Planning]
Kerzner 2009, 614–615; PMI® PMBOK® Guide, 2013, 195; Ward 2008, 305
After the CVs exceed certain ranges, the original project budget may be questioned and changed as a result of new information. [Monitoring and Controlling]
PMI®, PMBOK® Guide, 2013, 226
Lessons learned but not documented are “lessons lost.” The lessons learned knowledge database will help current project members, as well as people on future projects, make better decisions. Accordingly, the reasons for the variance, the rationale supporting the corrective action, and other related information must be documented. They require updates as part of updates to organizational process assets as an output of control costs in terms of corrective actions taken and why they wre selected. [Monitoring and Controlling]
PMI®, PMBOK® Guide, 2013, 226
The WBS provides the relationship among all the project deliverables and their components and should be reviewed before the budget is developed. As the budget is determined, the cost estimates for the activities should be aggregated by the work packages in the WBS. Then, later, they are aggregated for the control accounts and finally for the entire project. [Planning]
PMI®, PMBOK® Guide, 2013, 213
Cost curves for planned and actual expenditures are created by adding each month’s costs to the previous reporting period’s expenditures. By doing so, one can quickly see how the project is performing. [Monitoring and Controlling]
PMI®, PMBOK® Guide, 2013, 219
Because schedule performance index (SPI) and cost performance index (CPI) are expressed as ratios, they can be used to show performance for a specific time period or trends over a long-time horizon. Additionally, there is no need to disclose confidential financial data to convey the project’s status to one’s customers; they should not have a need to know such information, unless there is a contractual requirement to do so. [Monitoring and Controlling]
Kerzner 2009, 665–666
PMI®, PMBOK® Guide, 2013, 219
Schedule variance is calculated: EV – PV or $1,000 – $1,200 = –$200. Because the SV is negative, physical progress is being accomplished at a slower rate than planned. [Monitoring and Controlling]
Kerzner 2009, 648–649
PMI®, PMBOK® Guide, 2013, 218, 224
CPI = EV/AC and measures the efficiency of the physical progress accomplished compared to the baseline. A CPI of 0.84 means that for every dollar spent, you’re only receiving 84 cents of progress. Therefore, you should focus on improving the productivity by which work is being performed. [Monitoring and Controlling]
Kerzner 2009, 650–652
PMI®, PMBOK® Guide, 2013, 219, 224