Section 4
Project Cost Management
Define Project Cost Management.
ANSWER
Processes involved in planning, estimating, budgeting, and controlling costs so the project can be completed within the approved budget
[Planning and Monitoring and Controlling]
2 QUESTION
What is the key benefit of Plan Cost Management?
ANSWER
To provide guidance and direction on how the project costs will be managed throughout the project
[Planning]
Identify four organizational process assets used in estimate costs.
ANSWER
- Cost estimating policies
- Cost estimating templates
- Historical information
- Lessons learned
[Planning]
4 QUESTION
List three general financial management techniques when predictions and analyses are included in Project Cost Management.
ANSWER
- Return on investment
- Discounted cash flow
- Investment payback analysis
[Planning]
What is the BAC? What question does it answer?
ANSWER
Budget at completion. It is the total Planned Value for the project and constitutes the cost performance baseline.
What is the total job supposed to cost?
[Planning and Monitoring and Controlling]
6 QUESTION
What is the payback period?
ANSWER
The number of time periods up to the point at which cumulative revenues exceed cumulative costs and, therefore, the project has “turned a profit.”
[Planning]
How is the WBS used in determine budget?
ANSWER
As an input the process.
The WBS provides the relationships among all project deliverables and their various components.
[Planning]
8 QUESTION
What is the internal rate of return (IRR)?
ANSWER
The percentage rate that makes the present value of costs equal to the present value of benefits.
[Planning]
What is the AC? What question does it answer?
ANSWER
AC means actual costs or the actual cost incurred in accomplishing work on a WBS activity component or on the total project.
How much did the completed work cost?
[Monitoring and Controlling]
10 QUESTION
What is PV? What question does it answer?
ANSWER
Planned value.
It is the authorized budget assigned to the work scheduled to be accomplished for an activity or WBS component.
How much work should be done?
[Monitoring and Controlling]
List two enterprise environmental factors that can be used in estimate costs.
ANSWER
- Marketplace conditions
- Published commercial information
[Planning]
12 QUESTION
When do activity duration estimates affect project cost estimates?
ANSWER
- When “cost of financing” project activities is a reality
- When costs are based on the number of units of time estimated
- When costs are sensitive to time such as union labor rates increasing on a certain date
[Planning]
What is the EAC? What question does it answer?
ANSWER
Estimate at completion—the expected total cost of a schedule activity, a WBS component, or the project at completion.
What do we now expect the total job to cost?
[Monitoring and Controlling]
14 QUESTION
What is ETC? What question does it answer?
ANSWER
Estimate to complete the expected cost to complete a schedule activity, a WBS component, or the project.
What do we need to spend to complete the remaining work?
[Monitoring and Controlling]
What is EV? What question does it answer?
ANSWER
Earned value—the value of the work performed expressed in terms of the approved budget assigned to that work for a schedule activity or WBS component.
How much work is done?
[Monitoring and Controlling]
16 QUESTION
What is the “50-50” rule of progress reporting? What assumption underlies this rule?
ANSWER
When beginning a task, charge 50 percent of its PV to its account; when the task is completed, charge the remaining 50 percent to its account.
All tasks generally are of the same size.
[Monitoring and Controlling]
Identify ten estimate cost tools and techniques
ANSWER
- Expert judgment
- Analogous or top-down estimating
- Parametric estimating
- Bottom-up estimating
- Three-point estimating
- Reserve analysis
- Cost of quality
- Project management estimating software
- Vendor bid analysis
- Group decision-making techniques
[Planning]
18 QUESTION
How is schedule variance (SV) calculated?
ANSWER
SV = EV – PV
[Monitoring and Controlling]
If you are using the payback period to compare projects A and B, and project A has the shortest payback period, what does this mean?
ANSWER
Project A becomes profitable more quickly.
[Planning]
20 QUESTION
What are direct costs?
ANSWER
Costs incurred directly by a specific project.
[Planning]
Analogous estimating is most reliable when two conditions are met. Describe them.
ANSWER
- When the previous projects have similar characteristics as the current project
- When the person(s) preparing the estimates has the required expertise
[Planning]
22 QUESTION
What is parametric cost estimating, and how can it provide higher levels of accuracy?
ANSWER
It uses a statistical relationship between relevant historical data and other variables to calculate a cost estimate for the project work. Higher levels of accuracy are achieved based on the sophistication of the data in the model.
[Planning]
Describe bottom-up estimating.
ANSWER
Estimating and then summarizing or rolling up the cost of individual activities or work packages to get a project total.
[Planning]
24 QUESTION
What are management reserves? Are they in the cost baseline?
ANSWER
An amount of the total budget withheld for management purposes for unforeseen work or for “unknown unknowns”
They are not part of the cost baseline but are part of the overall project budget and funding requirements.
[Planning]
What are variable costs?
ANSWER
Costs that rise or fall directly with the size of the project.
[Planning]
26 QUESTION
List the five recommended types of supporting detail for activity cost estimates.
ANSWER
- The basis for the estimate
- The assumptions made
- The constraints
- An indication of the range of results (e.g., $5,000 ± 10%)
- An indication of the confidence level of the final estimate
[Planning]
How is the cost performance index (CPI) calculated?
ANSWER
CPI = EV / AC
[Monitoring and Controlling]
28 QUESTION
List nine items to be part of the cost management plan.
ANSWER
- Units of measure
- Level of precision
- Level of accuracy
- Organizational procedures link
- Control thresholds
- Rules of performance measurement
- Reporting formats
- Process descriptions
- Additional details
[Planning]
What does the cost management plan describe?
ANSWER
How the project costs will be planned, structured, and controlled
[Planning]
30 QUESTION
What is the variance at completion (VAC)? How is it calculated?
ANSWER
The difference between the total amount the job was supposed to cost (BAC), and the amount the job is now expected to cost (EAC).
VAC = BAC – EAC
[Monitoring and Controlling]
What is the status of this project?
ANSWER
Over budget (AC is higher than PV) and behind schedule (EV is less than PV).
[Planning]
32 QUESTION
What is determine budget?
ANSWER
Aggregating the estimated costs of all individual activities or work packages in the WBS to establish an authorized cost baseline.
[Planning]
What are fixed costs? Are they recurring or nonrecurring costs?
ANSWER
Costs that do not change based on the number of units.
Nonrecurring.
[Planning]
34 QUESTION
What is a rough order-of-magnitude estimate? When is it performed? What is its accuracy range?
ANSWER
An approximation without detailed data.
Often done early in a project when you need a “ballpark estimate.”
±50 percent.
[Planning]
What are the nine inputs to determine budget?
ANSWER
- Cost management plan
- Scope baseline
- Activity cost estimates
- Basis of estimates
- Project schedule
- Resource calendars
- Risk register
- Agreements
- Organizational process assets
[Planning]
36 QUESTION
What are indirect costs?
ANSWER
Costs that are part of the overall organization’s cost of doing business and are shared among (allocated to) all the projects that are under way.
[Planning]
How is a definitive estimate prepared? Give an example of one. What is its accuracy range?
ANSWER
From well-defined, detailed data.
A bottom-up estimate.
-5 to +10 percent.
[Planning]
38 QUESTION
What is the cost baseline?
ANSWER
Authorized version of the time-phased budget, excluding management reserve, which can only be changed through formal change control processes and is used for comparison to actual results.
[Planning]
How is the SPI calculated?
What does it tell us?
What does an SPI less than 1.0 mean?
ANSWER
SPI = EV / PV
As a progress measure it tells us how much work has been achieved compared to the plan.
Less work was completed than planned.
[Monitoring and Controlling]
40 QUESTION
How is CPI calculated?
What does it tell us?
What does a CPI greater than 1.0 mean?
ANSWER
CPI = EV / AC
Measure of work value completed compared to actual cost of completed work.
Cost under-run.
[Monitoring and Controlling]
What are the four organizational process assets used for the plan cost management process?
ANSWER
- Financial control procedures
- Historical information and lessons learned knowledge bases
- Financial databases
- Existing cost estimating and budgeting-related policies, procedures, and guidelines
[Planning]
42 QUESTION
What are the four inputs to the control costs process?
ANSWER
- Project management plan
- Project funding requirements
- Work performance data
- Organizational process assets
[Monitoring and Controlling]
What is present value (PrV)? How is it calculated?
ANSWER
The value today of future cash flows based on the concept that payment today is worth more than payment tomorrow.
Mt = amount of payment t years from now
r = interest rate (or discount rate)
t = time period
[Planning]
44 QUESTION
When is rebaselining required?
ANSWER
When the cost variances are so severe that a complete revision of the project budget is needed to provide a realistic measure of performance.
[Monitoring and Controlling]
How are group decision-making techniques used in estimating costs?
ANSWER
To improve accuracy and commitment to the emerging estimates
[Planning]
46 QUESTION
List four ways to calculate EAC.
ANSWER
- EAC = BAC/CPI
- EAC = AC + BAC – EV
- EAC = AC + BottomupETC
- EAC = AC + [(BAC – EV)/(CPI × SPI)]
[Monitoring and Controlling]
What is the basis for a budget estimate?
When is it used?
What is its accuracy range?
ANSWER
This type of estimate is based on data that are more detailed than those used for an order-of-magnitude estimate.
Used to establish initial funding and to gain project approval.
-10 to +25 percent.
[Planning]
48 QUESTION
What is the to-complete-performance index (TCPI)?
What does it tell us?
Is it based on BAC or EAC?
ANSWER
- The ratio of the “remaining work” to the “funds remaining.”
- Tells us the cost performance that must be achieved on the remaining work to meet a specific goal.
- It can be based on either BAC or EAC. If BAC is viable, equation is:
BAC = (BAC – EV) / (BAC – AC)
If BAC is not viable, equation is:
EAC = (BAC – EV) / (EAC – AC)
[Monitoring and Controlling]
Why is the management reserve added to cost baseline?
ANSWER
To produce the project budget.
[Planning]
50 QUESTION
What is value analysis?
ANSWER
A cost-reduction tool that involves careful analysis of a design or item to identify all the functions and the cost of each one. It considers whether the function is necessary and whether it can be provided at a lower cost without degrading performance or quality.
[Planning]
How is cost variance (CV) calculated?
ANSWER
CV = EV – AC
[Monitoring and Controlling]
52 QUESTION
Which sections of the project management plan are used in the control cost process?
ANSWER
Cost management plan
Cost baseline
[Monitoring and Controlling]
When should EAC be calculated by: BAC/CPI?
ANSWER
If the CPI is expected to be the same for the remainder of the project.
[Monitoring and Controlling]
54 QUESTION
When should EAC be calculated by: AC + BAC – EV?
ANSWER
If future work will be accomplished at the planned rate
[Monitoring and Controlling]
When should EAC be calculated by: AC + Bottomup ETC?
ANSWER
If the initial plan is no longer valid
[Monitoring and Controlling]
56 QUESTION
What is the difference between variance analysis and trend analysis in project cost management?
ANSWER
Variance analysis is a technique that compares actuals to planned data to determine degree of variation to cost baseline.
Trend analysis looks at data over a specified time period to see if performance is improving or deteriorating.
[Monitoring and Controlling]
What drives the cost and accuracy of bottom-up estimating?
ANSWER
The size and complexity of the individual activity or work package.
[Planning]
58 QUESTION
Define control costs.
ANSWER
The process of monitoring project status to update the project costs and manage changes to the cost baseline
[Monitoring and Controlling]
What does the benefit–cost ratio not tell you?
ANSWER
The absolute value of the benefit or cost.
[Planning]
60 QUESTION
When should EAC be calculated by:
EAC = AC + [(BAC – EV)/(CPI × SPI)]?
ANSWER
If both the CPI and SPI influence the remaining work
[Monitoring and Controlling]