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Chapter 5

Developing the Project Budget

The PMP® exam content from the Planning the project, and the monitoring and controlling the project permormance domains covered in this chapter includes the following:

• Task 3: Develop a budget plan based on the project scope using estimating techniques in order to manage project cost.
• Task 6: Develop a communication plan based on the project organization structure and external stakeholder requirements in order to manage the flow of project information.
• Task 6: Communicate project status to stakeholders for their feedback, in order to ensure the project aligns with business needs.
• Knowledge and Skills:
  • Requirements gathering techniques
  • Work breakdown structure (WBS) tools and techniques
  • Time, budget, and cost estimation techniques
  • Elements, purpose, and techniques of project planning
  • Elements, purpose, and techniques of communications planning

Two of the most important documents you’ll prepare for any project are the project schedule and the project budget. You’ll use the schedule and budget documents throughout the Executing and Monitoring and Controlling processes to measure progress and determine if the project is on track. I believe the budget is easier to prepare after the activities have been defined and the resource estimates calculated. So now that we have the schedule in hand, we’re going to spend our time in this chapter developing the budget.

There are two processes in the Planning group we’ll perform that will lead us to the cost performance baseline output that is the authorized budget. They are Estimate Costs and Determine Budget. There are several tools and techniques to cover in these processes that you’ll want to understand for the exam. Before we get into the details of these two processes, we’ll talk about the cost management plan and its importance in guiding the development of the budget.

Next, we’ll talk about how project information is documented and communicated. I’ve talked a lot about documentation so far, and I will discuss it more in this chapter. Documentation is something you will do throughout the remainder of the project, and the Plan Communications process details how to collect information, how to store it, and when and how to distribute it to stakeholders.

Creating the Project Cost Management Plan

You now have an exhaustive breakdown of project activities, and you have some pretty good duration estimates. Now here’s the question that’s forever on the mind of the executive management staff: how much is it going to cost? The purpose of the Estimate Costs process is to answer that question.

Every project has a budget, and part of completing a project successfully is completing it within the approved budget. Sometimes project managers are not responsible for the budget portion of the project. Instead, this function is assigned to a functional manager who is responsible for tracking and reporting all the project costs. I believe project managers will have more and more responsibility in this area as the project management discipline evolves. Keep in mind that if you, as the project manager, don’t have responsibility for the project budget, your performance evaluation for the project should not include budget or cost measurements.

Before diving into the Estimate Costs and Determine Budget process particulars, you should know that these processes are governed by a cost management plan that is created when you perform the Develop Project Management Plan process (we talked about that in Chapter 3, “Developing the Project Scope Statement”). You should know a couple of facts about this plan for the exam.

The cost management plan establishes the format and conditions you’ll use to plan for project costs. It also outlines how you will estimate, budget, and control project costs. Like all the other management plans, the cost management plan is a subsidiary of the project management plan.

According to the PMBOK® Guide, this plan includes, but is not limited to, the following elements:

Level of accuracy This refers to the precision level you’ll use to round activity estimates—for example, hundreds, thousands, and so on. Level of accuracy is based on the scope and complexity of the activities and the project itself.

Units of measure This refers to the unit of measure you’ll use to estimate resources—for example, hours, days, weeks, or a lump sum amount.

Organizational procedures links In Chapter 3, we talked about the WBS and the identifiers associated with each component of the WBS. These identifiers are called the code of accounts. A control account (CA) is a point where several factors such as actual cost, schedule, and scope can be used to determine earned value performance measures. (We’ll talk more about earned value in Chapter 10, “Measuring and Controlling Project Performance”). The control account is used in the Project Cost Management Knowledge Area to monitor and control project costs. The control account is typically associated with the work package level of the WBS, but there could be control accounts established at any level of the WBS. The control account also has a unique identifier that’s linked to the organization’s accounting system, sometimes known as a chart of accounts.

Control thresholds Most actual project costs do not match the estimate exactly. The control threshold refers to the amount of variance the sponsor or stakeholders are willing to allow before action is required. Document the threshold amount as a percentage of deviation allowed from the cost performance baseline.

Rules of performance measurement This component of the cost management plan refers to how you will set the earned value management measurements. It’s here you’ll document where the control accounts exist within the WBS, the earned value management (EVM) techniques you’ll use to measure performance, and the equations you’ll use for calculating estimate at completion forecasts and other measurements. We’ll talk about EVM and estimate at completion forecasts in detail in Chapter 10.

Reporting formats This refers to the types of cost reports you’ll produce for this project and how often they’ll be created.

Process descriptions This describes the Estimate Cost, Determine Budget, and Control Costs processes and how you’ll use these processes to manage project cost.

The key to determining accurate cost estimates (and accurate time estimates as we discovered in Chapter 4, “Creating the Project Schedule”) is the work breakdown structure (WBS). Next, we’ll look at how to determine cost estimates for the WBS components.

Estimating Costs

The Estimate Costs process develops a cost estimate for the resources (human and material) required for each schedule activity. This includes weighing alternative options and examining risks and trade-offs. Some alternatives you may consider are make-versus-buy, buy-versus-lease, and sharing resources across either projects or departments.

Let’s look at an example of trade-offs. Many times software development projects take on a life of their own. The requested project completion dates are unrealistic; however, the project team commits to completing the project on time and on budget anyway. How do they do this? They do this by cutting things such as design, analysis, and documentation. In the end, the project might get completed on time and on budget, but was it really? The costs associated with the extended support period because of a lack of design and documentation and the hours needed by the software programmers to fix the reported bugs weren’t included in the original cost of the project (but they should have been). Therefore, the costs actually exceed what was budgeted. You should examine trade-offs such as these when determining cost estimates.

When you are determining cost estimates, be certain to include all the costs of the project over its entire life cycle. As in the preceding example, software projects often have warranty periods that guarantee bug fixes or problem resolution within a certain time frame. This is a legitimate cost that should be included in your estimates.

Estimate Costs Inputs

Many of the inputs of the Estimate Costs process are already familiar to you. However, we’ll look briefly at each one so you can see the key elements that should be considered when creating the project budget. The inputs to this process are as follows:

• Scope baseline
• Project schedule
• Human resource plan
• Risk register
• Enterprise environmental factors
• Organizational process assets

Scope Baseline

It’s pop quiz time. Do you remember the elements of the scope baseline? They are the project scope statement, the WBS, and the WBS dictionary. You’ll want to consider a few key elements from the project scope statement in this process, including key deliverables, constraints, and assumptions. I can safely say that every project I’ve ever worked on had a limited budget, which is a classic example of a project constraint. You should also understand other constraints that have the potential to impact costs, such as required delivery dates or availability of resources.

The WBS, as we’ve discussed, serves as the basis for estimating costs. It contains all the project deliverables and the control accounts are typically established at the work package level. When you’re considering deliverables, think about those that may have contractual obligations that should be considered when determining cost estimates. Perhaps you have deliverables that have legal or governmental regulations that will require additional expense to fulfill. Health, safety, security, licenses, and environmental factors are some of the other elements of the scope baseline you should consider when estimating costs, according to the PMBOK® Guide.

Project Schedule

We determined the types and quantities of resources we needed in Chapter 4, “Creating the Project Schedule,” using the Estimate Activity Resources (this process is closely associated with the Estimate Cost process according to the PMBOK® Guide) and Estimate Activity Durations processes. Activity resource requirements and activity duration estimates are the key outputs you should consider when estimating costs.

Be aware that duration estimates can affect costs. For example, make certain you account for costs such as interest charges when you’re financing the work of the project. Also watch for duration estimates that are calculated for resources who are scheduled to work for a per unit period of time. Duration estimates can be incorrect (hopefully, not wildly incorrect) and can end up costing you more. For example, I recently bought a new home requiring a move of about eight miles. The moving company told me that the work was performed on a per-hour basis. The person providing the estimate assured me he had been doing this for over 25 years and his estimates were typically right on the money. Unfortunately, I swallowed that line and the estimate I was given was wildly incorrect. It took them almost twice the amount of time I was quoted, and you guessed it, the total ended up being almost twice the original estimate.

Human Resource Plan

We will look more closely at the human resource plan (an output of the Develop Human Resource Plan process) in Chapter 7, “Planning Project Resources.” For the purposes of the Estimate Costs process, understand that the human resources plan includes elements such as personnel rates, project staffing attributes, and employee recognition or rewards programs. All of these elements should be considered when determining cost estimates.

Risk Register

The risk register is an output of the Identify Risks process that we’ll discuss in Chapter 6, “Risk Planning.” You should consider the cost of mitigating risks (identified in the risk register), particularly those with negative impacts to the project, when developing project cost estimates.

Enterprise Environmental Factors

According to the PMBOK® Guide, the enterprise environmental factors you should consider in this process are market conditions and published commercial information. Market conditions help you understand the materials, goods, and services available in the market and what terms and conditions exist to procure those resources. Published commercial information refers to resource cost rates. You can obtain these from commercial databases or published seller price lists.

Organizational Process Assets

The organization process assets considered in the process are similar to those we’ve seen before. Historical information and lessons learned on previous projects of similar scope and complexity can be very useful in determining estimates for the current project—particularly if the past projects occurred recently. Your organization’s business office or PMO may also have cost estimating templates you can use to help with this process. You could use cost-estimating worksheets from past projects as templates for the current project as well.

Tools and Techniques to Estimate Costs

The Estimate Costs process has nine tools and techniques used to derive estimates:

• Expert judgment
• Analogous estimating
• Parametric estimating
• Bottom-up estimating
• Three-point estimate
• Reserve analysis
• Cost of quality
• Project management estimating software
• Vendor bid analysis

I covered analogous estimating, parametric estimating, three-point estimate, and reserve analysis techniques in Chapter 4. These are also tools and techniques of the Estimate Activity Durations process to help determine schedule estimates. All of the information we discussed in Chapter 4 applies here as well, except you’re using the tools and techniques to derive cost estimates. Three-point estimates are used in this process when you want to improve your estimates and account for risk and estimation uncertainty. In the case of reserve analysis, you’re adding cost reserves (or contingencies) during this process, not schedule reserves. You could aggregate these cost contingencies and assign them to a schedule activity or a WBS work package level.

The project management estimating software tool can help you quickly determine estimates given different variables and alternatives. Some systems are quite sophisticated and use simulation and statistical techniques to determine estimates, while others are less complex. A simple spreadsheet program can do the trick much of the time. We’ll look at the remaining tools and techniques next.

Bottom-Up Estimating

I discussed this technique in Chapter 4, but there are a few pointers to consider for this process. This technique estimates costs associated with every activity individually and then rolls them up to derive a total project cost estimate. You wouldn’t choose this technique to provide a cost estimate for the project during Initiating if one were requested because you don’t have enough information at that stage to use it. Instead, use the top-down estimating technique (analogous estimating) when a project cost estimate is needed early in the project selection stage. Bottom-up estimating will generally provide you with the most accurate cost estimates, but it is the most time-consuming estimating technique of all those mentioned here. However, the size and complexity of the project impacts the accuracy you can achieve using this technique.

Cost of Quality

The cost of quality (COQ) is the total cost to produce the product or service of the project according to the quality standards. We will talk more in depth about cost of quality in Chapter 7.

Vendor Bid Analysis

As the name implies, this is a process of gathering information from vendors to help you establish cost estimates. You can accomplish this by requesting bids or quotes or working with some of your trusted vendor sources for estimates. You should compare vendor bids when using this tool and technique and not rely solely on one vendor to provide you with estimates.

Estimate Costs Process Outputs

One of the outputs of the Estimate Costs process is activity cost estimates. These are quantitative amounts—usually stated in monetary units—that reflect the cost of the resources needed to complete the project activities. The tools and techniques I just described help you derive these estimates. Resources in this case include human resources, material, equipment, information technology needs, and so on, as well as any contingency reserve amounts and inflation factors (if you’re using them).

The remaining outputs of the Estimate Costs process are basis of estimates and project document updates. The basis of estimates is the supporting detail for the activity cost estimates and includes any information that describes how the estimates were developed, what assumptions were made during the Estimate Costs process, and any other details you think are needed. According to the PMBOK® Guide, the basis of estimates should include at least the following:

• A description of how the estimate was developed or the basis for the estimate.
• A description of the assumptions made about the estimates or the method used to determine them.
• A description of the constraints.
• A range of possible results. You should state the cost estimates within ranges such as $5,000 ± 10%.
• The confidence level regarding the final estimates.

The last output of this process is project document updates. Cost variances will occur and estimates will be refined as you get further into your project. As a result, you’ll update cost estimates and ultimately the project budget to reflect these changes. The risk register may also require an update after cost estimates are complete.

Estimate Costs uses several techniques to make an accurate assessment of the project costs. In practice, using a combination of techniques is your best bet to come up with the most reliable cost estimates. The activity cost estimates will become an input to the Determine Budget process, which allows you to establish a baseline for project costs to track against.

Establishing the Cost Performance Baseline

The next process concerns determining the cost performance baseline, which is the primary output of the Determine Budget process. The Determine Budget process aggregates the cost estimates of activities and establishes a cost performance baseline for the project that is used to measure performance of the project throughout the remaining process groups. Only the costs associated with the project become part of the authorized project budget. For example, future period operating costs are not project costs and, therefore, aren’t included in the project budget.

The cost performance baseline is the total expected cost for the project when using a budget at completion calculation, an earned value management technique. When you’re using earned value management techniques, the cost performance baseline is also known as the performance measurement baseline (PMB). We’ll talk about budget at completion and earned value management techniques in detail in Chapter 11. Remember that costs are tied to the financial system through the chart of accounts—or code of accounts—and are assigned to project activities at the work package level or to control accounts at various points in the WBS. The budget will be used as a plan for allocating costs to project activities.

Determine Budget Inputs

Outputs from other Planning processes, including the Create WBS, Develop Schedule, and Estimate Costs processes, must be completed prior to working on Determine Budget because some of their outputs become the inputs to this process. The inputs for Determine Budget are as follows:

Activity cost estimates These are an output of the Estimate Costs process. Activity cost estimates are determined for each activity within a work package and then summed to determine the total estimate for a work package.

Basis of estimates This is also an output of the Estimate Costs process and contains all the supporting detail regarding the estimates. You should consider assumptions regarding indirect costs and whether they will be included in the project budget. Indirect costs cannot be directly linked to any one project. They are allocated among several projects, usually within the department or division in which the project is being performed. Indirect costs can include items like building leases, management and administrative salaries (those not directly assigned full time to a specific project), and so on.

Scope baseline Scope baseline includes the scope statement, WBS, and WBS dictionary. The scope statement describes the constraints of the project you should consider when developing the budget. The WBS shows how the project deliverables are related to their components, and the work package level typically contains control account information (although control accounts can be assigned at any level of the WBS).

Project schedule The schedule contains information that is helpful in developing the budget, such as start and end dates for activities, milestones, and so on. Based on the information in the schedule, you can determine budget expenditures for calendar periods.

Resource calendars Resource calendars help you determine costs in calendar periods and over the length of the project because they describe what resources are needed when on the project.

Contracts Contracts include cost information you should include in the overall project budget. We’ll talk more about contracts in Chapter 7.

Organizational process assets The organization process assets that will assist you with the work of this process include cost budgeting tools, the policies and procedures your organization (or PMO) may have regarding budgeting exercises, and reporting methods.

Determine Budget Tools and Techniques

The Determine Budget process has five tools and techniques, including two you haven’t seen before:

• Cost aggregation
• Reserve analysis
• Expert judgment
• Historical relationships
• Funding limit reconciliation

I’ve covered expert judgment previously. Let’s look at the remaining tools and techniques.

Cost aggregation Cost aggregation is the process of tallying the schedule activity cost estimates at the work package level and then totaling the work package levels to higher-level WBS component levels (such as the control accounts). Then all of the costs can be aggregated to obtain a total project cost.

Reserve analysis We talked about reserve analysis in Chapter 4 as it pertains to the project schedule. Reserve analysis works the same for the Determine Budget process, only you’re planning contingency reserves for unplanned project scope and project costs. Reserves are not included as part of the cost performance baseline (an output of this process) but should be included in the project budget. Reserves are also not considered when calculating earned value measurements.

Historical relationships Analogous estimates and parametric estimates can be used to help determine total project costs. Remember from Chapter 4 that analogous estimates are a form of expert judgment. Actual costs from previous projects of similar size, scope, and complexity are used to estimate the costs for the current project. This is helpful when detailed information about the project is not available or it’s early in the project phases and not much information is known.

Parametric estimates are quantitatively based and, for example, multiply the amount of time needed to perform an activity by the resource rate to determine total cost. This technique can be very accurate when the data you’re using is reliable.

Funding limit reconciliation Funding limit reconciliation involves reconciling the amount of funds to be spent with the amount of funds budgeted for the project. The organization or the customer sets these limits. Reconciling the project expenses will require adjusting the schedule so that the expenses can be smoothed. You do this by placing imposed date constraints (I talked about these in the Develop Schedule process in Chapter 4) on work packages or other WBS components in the project schedule.

Determine Budget Process Outputs

The goal of Determine Budget is to develop a cost performance baseline (an output of this process) for the project that you can use in the Executing and Monitoring and Controlling processes to measure performance. You now have all the information you need to create the cost performance baseline. In addition, you’ll establish the project funding requirements.

The following are the outputs of the Determine Budget process:

• Cost performance baseline
• Project funding requirements
• Project document updates

We’ve covered the project document updates in other processes. For Determine Budget, you may need to update the risk register, cost estimates, and/or the project schedule. Let’s look at the other two outputs next.

Documenting the Cost Performance Baseline

You develop the cost performance baseline, the first output of Determine Budget, by adding the costs of the WBS elements (remember, these costs were aggregated with the cost aggregation tool and technique) by time periods. This is also known as the project’s time-phased budget. Most projects span some length of time, and most organizations time the funding with the project. In other words, you won’t get all the funds for the project at the beginning of the project; they’ll likely be disbursed over time. The cost performance baseline provides the basis for measurement, over time, of the expected cash flows (or funding disbursements) against the requirements including contingency reserves.

Cost performance baselines can be displayed graphically, with time increments on one axis and dollars expended on the other axis, as shown in Figure 5-1. The costs shown on this graph are cumulative costs, meaning that what you spent this period is added to what was spent last period and then charted. Many variations of this graph exist showing dollars budgeted against dollars expended to date and so on. Cost budgets can be displayed using this type of graph as well, by plotting the sum of the estimated costs excepted per period.

The cost performance baseline should contain the costs for all of the expected work on the project. You would have identified these costs in the Estimate Costs process. You’ll find most projects’ largest expense is resource costs (as in labor costs). In the case of projects where you’re purchasing the final product, the purchase price is the largest cost.

You’ll revisit the cost performance baseline when you learn about the Cost Control process and examine different ways to measure costs in Chapter 10.

Gathering the Project Funding Requirements

Project funding requirements describe the need for funding over the course of the project and are derived from the cost performance baseline. Funding requirements can be expressed in monthly, quarterly, or annual increments or other increments that are appropriate for your project.

As I said earlier, spending usually starts out slowly on the project and picks up speed as you progress. Sometimes, the expected cash flows don’t match the pace of spending. Project funding requirements account for this by using a management reserve (usually a margin or percentage of the cost performance baseline) that’s released in increments with the project budget. Figure 5-2 shows the cost performance baseline, the funding requirements, and the expected cash flows plotted on the S curve. The difference between the funding requirements and the cost performance baseline at the end of the project is the management reserve.

We’ve now completed two critical components of the project plan, the project schedule and the project budget. Several times throughout the book I’ve mentioned the need for documenting, publishing, and communicating project information. As you can imagine, the PMBOK® Guide has a process for communications. We’ll discuss it next.

Communicating the Plan

I’ve talked a good deal about documentation so far, and this topic will continue to come up throughout the remainder of the book. “Is that documented?” should be an ever-present question on the mind of the project manager. Documentation can save your bacon, so to speak, later in the project. Documentation is only one side of the equation, though—communication is the other. You and your stakeholders need to know who gets what information and when.

The Plan Communications process involves determining the communication needs of the stakeholders by defining the types of information needed, the format for communicating the information, how often it’s distributed, and who prepares it. All of this is documented in the communications management plan, which is an output of this process.

Plan Communications Inputs

The inputs to the Plan Communications process will look familiar to you. They are as follows:

• Stakeholder register
• Stakeholder management strategy
• Enterprise environmental factors
• Organizational process assets

The stakeholder register and stakeholder management strategy should give you a lot of insight into the communication needs of the stakeholders. The stakeholder register is a list of all the project stakeholders and includes additional information including their potential influence on the project and their classification. The stakeholder management strategy defines the level of participation needed for each stakeholder and potential strategies you can use to gain their support or reduce the negative impacts or obstacles they could present to the project.

The PMBOK® Guide notes that all the elements described in the enterprise environmental factors and in the organizational process assets are inputs to this process. However, special note is made of the lessons learned and historical information elements of the organizational process assets input. Information you learn as you’re progressing through the project is documented as lessons learned. This information is helpful for future projects of similar scope and complexity. Historical information is also useful to review when starting the Plan Communications process. Either of these documents might contain information about communication decisions on past projects and their results. Why reinvent the wheel? If something didn’t work well on a past project, you’d want to know that before implementing that procedure on this project, so review past project documentation.

The project management plan is not an input to this process, but you’ll recall that it defines how the subsidiary plans will be defined and integrated into the overall project management plan. As such, it’s rich with constraints and assumptions that you should review as they pertain to stakeholder communication needs.

Tools and Techniques for Plan Communications

The Plan Communications process concerns defining and documenting the types of information you’re going to deliver, the format it will take, to whom it will be delivered, and when. The process consists of four tools and techniques to help determine these elements. They are communications requirements analysis, communications technology, communication models, and communication methods. You’ll look at each of these next.

Communications Requirements Analysis

Communications requirements analysis involves analyzing and determining the communication needs of the project stakeholders. According to the PMBOK® Guide, there are several sources of information you can examine to help determine these needs, including the following:

• Company and departmental organizational charts.
• Stakeholder responsibility relationships.
• Other departments and business units involved on the project.
• The number of resources involved on the project and where they’re located in relation to project activities.
• Internal needs that the organization may need to know about the project.
• External needs that organizations such as the media, government, or industry groups might have that require communication updates.
• Stakeholder information. (This was documented in the stakeholder register and stakeholder management strategy outputs of Identify Stakeholders.)

This tool and technique requires an analysis of the items in the preceding list to make certain you’re communicating information that’s valuable to the stakeholders. Communicating valuable information doesn’t mean you always paint a rosy picture. Communications to stakeholders might consist of either good or bad news—the point is that you don’t want to bury stakeholders in too much information but you want to give them enough so that they’re informed and can make appropriate decisions.

Project communication will always involve more than one person, even on the tiniest of projects. As such, communication network models have been devised to try to explain the relationships between people and the number or type of interactions needed between project participants. What you need to remember for the exam is that network models consist of nodes with lines connecting the nodes that indicate the number of communication channels, also known as lines of communication. Figure 5-3 shows an example of a network communication model with six channels of communication.

The nodes are the participants, and the lines show the connections between them all. You’ll need to know how to calculate the number of communication channels when you take the exam. You could draw them out as in this example and count up the lines, but there’s an easier way. The formula for calculating the lines of communication is as follows:

(number of participants * (number of participants less 1)) divided by 2

Here’s the calculation in mathematical terms:

n (n – 1) / 2

Figure 5-3 shows six participants, so let’s plug that into the formula to determine the lines of communication:

6 (6 – 1) / 2 = 15

Communications Technology

The second tool and technique of this process is communications technology. This examines the methods (or technology) used to communicate the information to, from, and among the stakeholders. Methods of communicating can take many forms, such as written, spoken, email, formal status reports, meetings, online databases, online schedules, and so on. This tool and technique examines the technology elements that might affect project communications. You should consider several factors before deciding what methods you’ll choose to transfer information. The timing of the information exchange or need for updates is the first factor. The availability of the technology you’re planning on using to communicate project information is important as well. Do you need to procure new technology or systems, or are there systems already in place that will work? Staff experience with the technology is another factor. Are the project team members and stakeholders experienced at using this technology, or will you need to train them? Consider the duration of the project and the project environment. Will the technology you’re choosing work throughout the life of the project, or will it have to be upgraded or updated at some point? How does the project team function? Are the members located together or spread out across several campuses or locations?

The answers to these questions should be documented in the communications management plan output. I’ll cover that in the next section.

Communications Models

Communication models depict how information is transmitted from the sender and how it’s received by the receiver. According to the PMBOK® Guide, a communications model includes the following key components:

• Encode
• Message and feedback message
• Medium
• Noise
• Decode

Encoding the message simply means putting the information or your thoughts or ideas into a language that the receiver will understand. The message is the result or output of the encoding.

The medium is the method you’ll use to communicate. This could be written, oral, email, and so on.

Noise refers to anything that keeps the message from either being transmitted or understood. Decode refers to translating the information that was sent.

The sender is responsible for the encoding of the message, the medium, and decoding the feedback message. The receiver is responsible for decoding the original message from the sender and encoding and sending the feedback message.

Communications Methods

Communication methods refer to how the project information is shared among the stakeholders. According to the PMBOK® Guide, there are three classifications of communication methods. We’ll briefly look at each of them.

Interactive communication Interactive communication involves multidirectional communication where two or more parties must exchange thoughts or ideas. This method includes videoconferencing, phone or conference calls, and meetings.

Push communications Push communications is one way and refers to sending information to intended receivers. It includes methods such as letters, memos, reports, emails, voicemails, and so on. This method assures the communication was sent but is not concerned with whether it was actually received or understood by the intended receivers.

Pull communications This is the opposite of push communications. The likely recipients of the information access the information themselves using methods such as websites, e-learning sites, knowledge repositories, shared network drives, and so on.

Plan Communications Outputs

There are two outputs to the Plan Communications process. They are communications management plan and product document updates. The updates that may be required as a result of performing this process are the project schedule, the stakeholder register, and the stakeholder management strategy. Let’s take a closer look at the details of the communications management plan.

All projects require sound communication plans, but not all projects will have the same types of communication or the same methods for distributing the information. The communications management plan documents the types of information needs the stakeholders have, when the information should be distributed, and how the information will be delivered. The answer to the pop quiz posed earlier in this chapter is the communications management plan is a subsidiary plan of the project management plan I talked about in Chapter 3.

The type of information you will typically communicate includes project status, project scope statements and scope statement updates, project baseline information, risks, action items, performance measures, deliverable acceptance, and so on. What’s important to know for this process is that the information needs of the stakeholders should be determined as early in the Planning process group as possible so that as you and your team develop project planning documents, you already know who should receive copies of them and how they should be delivered.

According to the PMBOK® Guide, the communications management plan typically describes the following elements:

• The communication requirements of each stakeholder or stakeholder group
• Purpose for communication
• Frequency of communications, including time frames for distribution
• Name of the person responsible for communicating information
• Format of the communication and method of transmission
• Method for updating the communications management plan
• Glossary of common terms

The information that will be shared with stakeholders and the distribution methods are based on the needs of the stakeholders, the project complexity, and the organizational policies. Some communications might be informal—a chat by the coffeemaker, for instance—while other communications are more formal and are kept with the project files for later reference. The communications management plan may also include guidelines for conducting status meetings, team meetings, and so on.

You might consider setting up an intranet site for your project and posting the appropriate project documentation there for the stakeholders to access any time they want. If you use this method, make sure to document it in the communications management plan and notify your stakeholders when updates or new communication is posted.

Understanding How This Applies to Your Next Project

The Estimate Costs process is something I have to do rather early in the project because of our long procurement cycle. The way our process works, I must have an estimated cost for the project before I can request funding. If funding is approved, the project is approved. If I’m not awarded funding, the project dies and we move on to the next one.

I rely on expert judgment and parametric estimating techniques to determine activity and total project costs. I often engage vendors and my own project team to help determine the costs. When I have a large project that must go out for bid, I have a well-defined scope and some idea of schedule dates and overall costs, but I won’t complete the schedule until after the contract is awarded. In an ideal world, I would prefer to create the schedule prior to determining cost estimates and budgets…but we don’t live in an ideal world and sometimes Planning processes have to be performed out of order.

The authorized project budget becomes one of the key measurements of project success. In a later chapter, we’ll talk about monitoring the budget to determine whether we’re tracking to our estimates.

The communications management plan is a must-have for every project. I can’t stress enough how often I’ve seen the root cause of project issues end up being communication problems. Never assume keeping the stakeholders informed is an easy job. Even if you know the stakeholders well, always create a communication plan. Document how you’ll communicate status, baseline information, risks, and deliverables acceptance. That way there’s no question as to how information will be relayed, who’s going to receive it, or when it will be delivered.

Summary

The Estimate Costs process determines how much the project resources will cost, and these costs are usually stated in monetary amounts. Some of the techniques used specifically for estimating costs are analogous estimating, parametric estimating, bottom-up estimating, three-point estimates, and reserve analysis. You can also use bottom-up estimating for total project cost estimates. This involves estimating the cost of each activity and then rolling these up to come up with a total work package cost. The output of this process is the activity cost estimates and the basis of estimates that details all the support information related to the estimates.

The tools and techniques of the Determine Budget process include cost aggregation, reserve analysis, expert judgment, historical relationships, and funding limit reconciliation. These tools together help you produce the final, authorized project budget known as the cost performance baseline, which is an output of this process. You will use the cost performance baseline throughout the remainder of the project to measure project expenditures, variances, and project performance. The cost performance baseline is graphically displayed as an S curve.

The cost performance baseline is also known as a performance measurement baseline (PMB) when you’re calculating earned value management formulas. PMBs are management controls that should change only infrequently. Examples of the performance measurement baselines you’ve looked at so far are the scope, schedule, and cost baselines. The completed project plan itself also becomes a baseline. If changes in scope or schedule do occur after Planning is complete, you should go through a formalized process (which I’ll cover in Chapter 10) to implement the changes.

The purpose of the communications management plan is to determine and document the communication needs of the stakeholders by defining the types of information needed, the format for communicating the information, how often it’s distributed, and who prepares it. This plan is a subsidiary plan of the project management plan.

Exam Essentials

Be able to identify and describe the primary output of the Estimate Costs process. Activity cost estimates are the primary output of Estimate Costs. These estimates are quantitative amounts—usually stated in monetary units—that reflect the cost of the resources needed to complete the project activities.

Be able to identify the tools and techniques of the Estimate Costs process. The tools and techniques of Estimate Costs are expert judgment, analogous estimating, parametric estimating, bottom-up estimating, three-point estimates, reserve analysis, cost of quality, project management estimating software, and vendor bid analysis.

Be able to identify additional general management techniques that can be used in the Project Cost Management Knowledge Area. Some of the general management techniques that can be used in this Knowledge Area are return on investment, discounted cash flow, and payback analysis.

Be able to identify the tools and techniques of the Determine Budget process. The tools and techniques of Determine Budget are cost aggregation, reserve analysis, expert judgment, historical relationships, and funding limit reconciliation.

Be able to describe the cost performance baseline. The cost performance baseline is the authorized, time-phased cost of the project when using budget-at-completion calculations. The cost performance baseline is displayed as an S curve.

Be able to describe project funding requirements. Project funding requirements are the output of the Determine Budget process. They detail the funding requirements needed on the project by time period (monthly, quarterly, annually).

Be able to describe the purpose of the communications management plan. The communications management plan determines the communication needs of the stakeholders. It documents what information will be distributed, how it will be distributed, to whom, and the timing of the distribution.

Key Terms

Here’s a list of the processes from the Planning process group we talked about in this chapter that you’ll need to help bring about a successful project:

Estimate Costs

Determine Budget

Plan Communications

Here is a list of some of the terms you came across in this chapter:

chart of accounts	cost performance baseline
communications management plan	lines of communication
control account	time-phased budget
cost of quality

Review Questions

1. All of the following are true regarding the Project Cost Management Knowledge Area processes except for which one?

A. The primary concern of the Project Cost Management Knowledge Area is determining the amount of resources needed to complete project activities.

B. The Estimate Costs and Determine Budget processes can be combined into one process for small projects.

C. The Estimate Cost process is closely linked with the Estimate Activity Resources process.

D. General management techniques such as ROI, discounted cash flow, and payback analysis can be used to help derive cost estimates.

2. This document is used to establish the criteria for planning, estimating, budgeting, and controlling costs.

A. Cost performance baseline

B. Performance management baseline

C. Project funding requirements

D. Cost management plan

3. You are a project manager working for iTrim Central and you’re preparing your cost management plan. You know that all of the following are true regarding this plan except for which one?

A. The WBS provides the framework for this plan.

B. Units of measure should be described in the plan usually as hours, days, weeks, or lump sum.

C. This plan is a subsidiary of the project management plan.

D. Control thresholds should be described in the plan as to how estimates will adhere to rounding ($100 or $1,000, and so on).

4. You are a project manager working for iTrim Central. Your organization has developed a new dieting technique that is sure to be the next craze. One of the deliverables of your feasibility study was an analysis of the potential financial performance of this new product, and your executives are very pleased with the numbers. You will be working with several vendors to produce products, marketing campaigns, and software that will track customers’ progress with the new techniques. For purposes of performing earned value measurements for project costs, you are going to place which of the following in the WBS?

A. Chart of accounts

B. Code of accounts

C. Control account

D. Reserve account

5. All of the following are inputs of the Estimate Costs process except for which one?

A. Resource calendars

B. Scope baseline

C. Project schedule

D. Human resource plan

6. You want to improve your activity cost estimates by taking into account estimation uncertainty and risk. Which of the following tools and techniques will you use?

A. Analogous estimates

B. Three-point estimates

C. Parametric estimates

D. Bottom-up estimates

7. You have received estimates for activity costs associated with one work package of the WBS. Additional contingencies have been added to the estimates to account for cost uncertainty. Which of the following tools and techniques of Estimate Costs does this describe?

A. Reserve analysis

B. Three-point estimates

C. Vendor bid analysis

D. Analogous estimates

8. You have received the following estimates for a complex activity that is critical to the success of your project. The most likely estimate is $42, the optimistic estimate is $35, and the pessimistic estimate is $54. What is the expected activity cost of this activity (rounded to the nearest dollar)?

A. 49

B. 39

C. 43

D. 41

9. You are the project manager for a custom home-building construction company. You are working on the model home project for the upcoming Show Homes Tour. The model home includes Internet connections in every room, talking appliances, and wiring for home theaters. You are working on the cost performance baseline for this project. All of the following statements are true except which one?

A. This process aggregates the estimated costs of project activities.

B. The cost performance baseline will be used to measure variances and future project performance.

C. This process assigns cost estimates for expected future period operating costs.

D. The cost performance baseline is the time-phased budget at completion for the project.

10. Your project sponsor has requested a cost estimate for the project. She would like the cost estimate to be as accurate as possible because this might be her one and only chance to secure the budget for this project because of recent cuts in special projects. You decide to use _______________.

A. Analogous estimating techniques

B. Bottom-up estimating techniques

C. Top-down estimating techniques

D. Expert judgment techniques

11. You are the project manager for a custom-home-building construction company. You are working on the model home project for the upcoming Show Homes Tour. The model home includes Internet connections in every room, talking appliances, and wiring for home theaters. You are working on the Determine Budget process. All of the following statements are true except which one?

A. You document the funding limit reconciliation to include a contingency for unplanned risks.

B. You discover that updates to the risk register are needed as a result of performing this process.

C. You document that funding requirements are based on a quarterly basis and are derived from the cost baseline.

D. The performance measurement baseline will be used to perform earned value management calculations.

12. Which of the following is displayed as an S curve?

A. Funding requirements

B. Cost performance baseline

C. Cost estimates

D. Expenditures to date

13. All of the following are tools and techniques of the Determine Budget process except for which one?

A. Reserve analysis

B. Expert judgment

C. Historical relationships

D. Cost of quality

14. Your project sponsor has requested a cost estimate for the project on which you’re working. This project is similar in scope to a project you worked on last year. She would like to get the cost estimates as soon as possible. Accuracy is not her primary concern right now. She needs a ballpark figure by tomorrow. You decide to use ___________________.

A. Analogous estimating techniques

B. Bottom-up estimating techniques

C. Parametric estimating techniques

D. Three-point estimating techniques

15. You have eight key stakeholders to communicate with on your project. Which of the following is true?

A. There are 36 channels of communication, and this should be a consideration when using the communications technology tool and technique.

B. There are 28 channels of communication, and this should be a consideration when using the communications requirements analysis tool and technique.

C. There are 28 channels of communication, and this should be a consideration when using the communications technology tool and technique.

D. There are 36 channels of communication, and this should be a consideration when using the communications requirements analysis tool and technique.

16. All of the following are true regarding Plan Communications except for which one?

A. The communications management plan is a subsidiary plan of the project management plan.

B. This process should be completed as early in the project as possible.

C. It’s tightly linked with enterprise environmental factors and all organization process assets are used as inputs for this process.

D. Communications requirements analysis, communication technology, communication methods, and expert judgment are tools and techniques of this process.

17. You are preparing your communications management plan and know that all of the following are true except for which one?

A. Decode means to translate thoughts or ideas so they can be understood by others.

B. The medium is how the message will be conveyed.

C. Acknowledgment means the receiver has received and agrees with the message.

D. Encoding and decoding are the responsibility of both the sender and receiver.

18. This ensures that information is distributed but does not acknowledge or certify that it was understood by intended receiver(s).

A. Push communication

B. Interactive communication

C. Medium

D. Message and feedback message

19. You need to communicate information in a multidirectional fashion with several stakeholders. Which of the following is true?

A. This describes push communication, which is a communication model.

B. This describes interactive communication, which is a communication method.

C. This describes communication requirements analysis, which is a communication model.

D. This describes pull communication, which is a communication method.

20. Communication technology takes into account all of the following factors that can affect the project except for which one?

A. Urgency of the need for information

B. Project environment

C. Reasons for the distribution of information

D. Duration of the project

Answers to Review Questions

1. A. Determining the cost of resources (not the amount) to complete all the activities for the project is the primary concern of the Project Cost Management Knowledge Area.

2. D. The cost management plan is used to establish the criteria for planning, estimating, budgeting, and controlling costs.

3. D. Control thresholds are variance thresholds (typically stated as a percentage of deviation from the baseline) used for monitoring cost performance.

4. C. A control account can be placed at any level of the WBS and is used for earned value measurement calculations regarding project costs.

5. A. The inputs of Estimate Costs are scope baseline, project schedule, human resource plan, risk register, enterprise environmental factors, and organizational process assets.

6. B. Three-point estimates can improve activity cost estimates because they factor in estimation uncertainty and risk.

7. A. Reserve analysis accounts for cost uncertainty by including a contingency reserve, usually expressed as a percentage of the estimated cost.

8. C. The expected activity cost is calculated this way: (4 * most likely + optimistic + pessimistic) / 6. Therefore, the answer is (4 * 42 + 35 + 54) / 6 = 43.

9. C. Future period operating costs are considered ongoing costs and are not part of project costs.

10. B. Bottom-up techniques are the most time-consuming and generally the most accurate estimates you can use. With bottom-up estimating, each work item is estimated and rolled up to a project total.

11. A. Funding limit reconciliation concerns reconciling the funds to be spent on the project with funding limits placed on the funding commitments for the project.

12. B. The cost performance baseline is displayed as an S curve because of the way project spending occurs. Spending begins slowly, picks up speed until the spending peak is reached, and then tapers off as the project winds down.

13. D. Cost of quality is a tool and technique of Estimate Costs. The tools and techniques of Determine Budget are cost aggregation, reserve analysis, expert judgment, historical relationships, and funding limit reconciliation.

14. A. Analogous—or top-down—estimating techniques are a form of expert judgment. Because this project is similar to another recent project, you can use the cost estimates from the previous project to help you quickly determine estimates for the current project.

15. B. There are 28 channels of communication, which is considered when using the communications requirements analysis tool and technique.

16. D. Communications requirements analysis, communication technology, communication models, and communication methods are the tools and techniques of the Plan Communications process.

17. C. Acknowledgment means the receiver has received the message but does not mean they agree with the message.

18. A. Push communication assures that information is distributed to specific recipients but does not certify that it was understood by the intended recipients.

19. B. This describes interactive communication. It is a communication method, which is a tool and technique of Plan Communications.

20. C. Reasons for the distribution of information belong in the communications management plan.